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

Saturday, March 20, 2010

week ending Mar 20

A Look Inside the Fed’s Balance Sheet — 03/16/10 Update - In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed. The Fed’s balance sheet expanded in the latest week, with rising to $2.265 trillion from $2.262 trillion. With direct bank lending continuing to decline and central bank liquidity swaps returning to zero, the bulk of the increase came from the Fed’s purchases of long-term securities. More than $23 billion in new purchases of mortgage-backed securities was added to the balance sheet. The Fed expects to wind down these purchase by the end of the month.

Fed May Seek to Avoid Lower Inflation as Officials Debate Exit - - Prices may move to the center of the debate over the timing of an exit from the most stimulative U.S. monetary policy in history. Low inflation will keep the benchmark interest rate unchanged until the middle of 2011, predicts former Fed governor Laurence Meyer. Policy makers meet today, and the Federal Open Market Committee will release its statement around 2:15 p.m. New York time.  The Fed’s preferred price gauge will slow to a gain of 1.2 percent this year, the lowest since 1962, according to a Bloomberg News survey of economists this month. Economists also forecast the Fed will raise rates by a half point to 0.75 percent in the fourth quarter, and unemployment will end the year at 9.5 percent, the survey shows.

FOMC Meeting: Rates Steady for an Extended Period, Asset Purchase Programs to End - The FOMC met today, and the news is that there is no news. The Committee intends to maintain “exceptionally low levels of the federal funds rate for an extended period,” as before, and to wind down and end its asset purchase programs by the end of the month as planned. Thus, the FOMC has not received any information since its last meeting that would cause it to change its assessment that the economy is on the slow road to recovery. The most notable part of the statement is the Fed’s confirmation of its intent to end its purchase of mortgage backed securities by the end of the month. Many analysts have credited this program with keeping mortgage and other long-term interest rates low, and the worry is that ending this program will cause long-term interest rates to increase harming the recovery.

Parsing the Fed: How the Statement Changed - The Fed’s statement following the March meeting was nearly identical to January’s remarks. The central bank continues to see economic improvement and expects to scale back emergency programs, but makes no signal that rates are going to rise in the near term. March included the second consecutive dissent over the language used to describe low rates. (Read the full March statement.)

Fed: Low rates will continue - The Federal Reserve left its key interest rate near 0% once again Tuesday and said rates should stay this low for the foreseeable future. Fed policymakers repeated their prediction that economic conditions are likely to result in "exceptionally low levels of the federal funds rate for an extended period." That promise of an easy-money policy has been in place since March 2009. Some economists, including Kansas City Fed President Thomas Hoenig believe the Fed needs to drop that promise. Hoenig voted against keeping this language in place for the second straight meeting. He and some Fed critics worry that the central bank could be creating new bubbles in financial markets by keeping rates so low for such a long time.

The Lone Dissenter: Kansas City’s Hoenig Stands Firm - Two meetings, two dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig is taking full advantage of his voting position on the Federal Open Market Committee this year, breaking from his colleagues for the second straight meeting.The FOMC voted 9-1 to keep its near-zero interest-rate target and maintain its guidance that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” That language will mark its first birthday this week, having been introduced into the statement last year on March 18.

Quantitative Easing at the Fed and the Bank of Japan - Taylor - Next Thursday March 25 the House Financial Services Committee will hold a hearing on how the Fed should exit from its quantitative easing. This past week I was in Japan discussing the Japanese experience with QE with traders and experts in the financial sector and in the Bank of Japan. A simple graphical comparison between QE at the Fed and at the BOJ puts the exit strategy in a useful perspective. The two graphs show the monetary base—currency plus bank reserves—in the United States and Japan as reported by the Fed and the Bank of Japan. (The BOJ reports units of 100 million yen; thus the monetary base in Japan is now slightly below 1,000,000 units of 100 million yen or 100 trillion yen).

Fed to End Mortgage Program - WSJ -  The Federal Reserve said it will end, as planned, one of its main supports for the U.S. economy—purchases of $1.25 trillion of mortgage-backed securities—allowing a nascent economic recovery to stand with less government support. Fed officials ended a meeting of their policy committee Tuesday noting the economy is improving, but signaled that it will be at least several more months before they raise short-term interest rates from near-zero levels. "Economic activity has continued to strengthen," the Fed said in a statement. "The labor market is stabilizing," it continued. "Inflation is likely to be subdued for some time."

What’s Next for the Fed and Mortgages? - Even Fed officials would acknowledge a reasonable amount of uncertainty about how the mortgage market will function once its biggest buyer — the central bank — steps aside. Many pension funds, insurers and other institutional investors fled the market once the Fed showed up as a giant noneconomic buyer. (To reach its target, the Fed bought up not only most of the new agency MBS but also existing securities held in portfolios.) As a result, some investors have suggested over the past year that mortgage rates could shoot up by a percentage point as the Fed program ended. But if that’s the case rates should’ve started rising already given the Fed’s signals. Mortgage rates probably will rise somewhat as Treasury yields move higher in the coming months, but the spread between mortgages and government securities may not necessarily expand.

Does the zero bound bind? - ONE part of the Paul Krugman column discussed this morning reads: Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.That the zero bound on interest rates represents the point at which central banks run out of gas is something that most pundits seem to accept. Not just pundits, really; chief IMF economist Olivier Blanchard recently argued that central banks should consider raising their inflation targets so that policy would hit the zero bound less often. Last spring, Greg Mankiw entertained oddball ideas for ways to make negative nominal interest rates a possibility. But really, is the zero bound actually a constraint?

Does the Zero Lower Bound matter? -   I want to compare the economies of Canada, Australia, and New Zealand over the last couple of years. I know I will get things wrong, and leave important things out. That's what comments are for. Especially comments from Australia and New Zealand. Why these three countries? Apart from any historical, cultural, and political similarities, all three are small open economies with an inflation targeting central bank. But there's one big difference between Canada and the other two. The Bank of Canada hit the notorious "Zero Lower Bound" on nominal interest rates (or felt it had). That's supposed to matter. A central bank that hits that constraint cannot loosen monetary policy enough to offset a decline in aggregate demand. The Reserve Banks of Australia and New Zealand didn't even come close to the lower bound. So seeing how the otherwise similar Australia and New Zealand did compared to Canada should tell us if the ZLB matters.

Zero Bound Smackdown - Paul Krugman argues in his latest column that monetary policy is out of gas because the policy interest rate has hit the zero bound. Not so says Scott Sumner, Ryan Avent, Ben Bernanke, Micheal Woodford, Gauti Eggerston et al., and Paul Krugman's alter ego. I couldn't agree more with them. Monetary policy can still meaningfully alter aggregate demand by modifying expectations. All it needs to do so is the desire. Ryan Avent makes this point well: I am increasingly convinced that it is the commitment of a central bank to continue stimulating that is important, rather than the room that central banker has to cut rates. The determined central banker doesn't blink at 0%, he or she simply switches policy tools.

Zero Bound Smackdown II - Paul Krugman, Janet Yellen, and other observers who still think that zero bound on the policy interest rate is a binding constraint for monetary policy should take a look at Josh Hendrickson's latest post. There, he provides a thoughtful discussion of why the zero bound constraint is nothing more than an artifact of simplifying assumptions made in the baseline New Keynesian model. Update I: Paul Krugman in a recent post concedes that the zero bound is not binding in theory, but is in practice since unconventional monetary policy is never pursued with enough vigor to make it fully effective. Fine, but why not then use his bully pulpit to encourage central bankers to fully utilize unconventional monetary policy?

Monetary Aggregates and Monetary Policy - In my previous post I attempted to shoot down the idea of the impotence of monetary policy at the zero bound. Given the issues raised in that post, there are two topics that need to be addressed. One issue is whether the interest rate is useful for monetary policy analysis, especially given its limitation at the zero bound. The second issue is whether there is a preferable alternative to the interest rate that should be used. I will answer these questions in reverse order. David Beckworth asked which monetary aggregate should be used to examine the current crisis. Following the suggestion of Gary Gorton, who suggests using M3, he plots the year-to-year percentage change in M1, M2, and M3. The plot yields different predictions for M3 than the other aggregates. So, which aggregate should we use? The answer is none of them — or at least as they are traditionally measured.

The end of gradualism? - Back in 2004, on the heels of the Fed’s tightening cycle, Ben Bernanke gave a speech in defense of “gradualism”—the idea that, under normal circumstances, economies are better served when central banks adjust their policy rates gradually, moving in a series of moderate steps in the same direction.Yet, current gossip has it that this thinking may be shifting.. in other words, the Fed may be open to the idea of what Bernanke called in that speech the “bang-bang” approach: Raising rates in a more aggressive manner, instead of a well-televised “measured pace”. Before I go any further, I should reiterate the word “gossip”, since I, at least, have yet to see a Fed speech expressing this view explicitly. But what I want to do here is to ask whether there is any reason to revisit the case for gradualism, esp. in the aftermath of the financial crisis.

The Fed Is Responsible for the Crash in the Money Multiplier ... And the Failure of the Economy to Recover - Greg Mankiw noted in January 2009: Econ prof Bill Seyfried of Rollins College emails me: Here's an interesting fact that you may not have seen yet. The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by $0.95 (OK, so banks have substantially increased their holding of excess reserves while the M1 money supply hasn't changed by much). Since January 2009, the M1 Money Multiplier has crashed further, to .786 in the U.S. as of February 24, 2010:  (Click for full image; underlying data is here) That means that - for every $1 increase in the monetary base - the money supply only increases by 79 cents. Why is M1 crashing?

The Correct Money Supply Measure for This Crisis - Mark Thoma points us to Gary Gorton's testimony for the Financial Crisis Inquiry Commission where, among other things, Gorton notes that an accurate measure of the money supply should include repurchase agreements because (1) they too are bank liabilities used as money and (2) they have grown increasingly important: This is a great point that started me wondering how M3 has behaved compared to M2 or M1 during this crisis. Based on Gorton's discussion it would seem that M3 would better reveal the impact of the crisis. As he notes, however, the Fed quit keeping track of M3 in 2006. Fortunately for us, though, John Williams at Shadow Government Statistics has been keeping track of M3 and this is what his data show (click on figure to enlarge):

Money Supply (M1, M2, M3: shadow stats chart)

The Implications of Velocity - This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed. The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. Over the next few years, we will get to see who is right about debt and stimulus, the velocity of money, and other arcane topics, as we come to the End Game of the Debt Super Cycle, the decades-long cycle during which debt has grown. I have very smart friends who argue that the cycle is nowhere near an end, as governments are clearly increasing debt. My rejoinder is that it is nearing an end, and we need to think hard about what that end will look like. It will not be pretty for a period of time.

The Fed is Painted Into a Corner - China and Japan have been reducing their purchases of US government securities, while US and (presumably) foreign banks have been increasing their holdings.  Since the beginning of the recession, banks have bought about $300 billion of Treasuries and reduced commercial and industrial loans by about $350 billion. Foreign purchases as of January were still running at a $60 billion monthly rate in January–about $195 billion during the last three months for which we have data. That’s an annual rate of nearly $800 billion, or about half the Treasury’s annual borrowing requirement. But the demand came not from foreign central banks, but rather from “other foreigners.” On a geographic basis, the main buyers are “United Kingdom” and the “Caribbean,” that is, banks and hedge funds. Raise rates and the carry trade comes crashing down. And so does the Treasury market and the mortgage market and the US economy. The Fed is stuck with loose money just as the Bank of Japan was during the 1990s,

AIG CDOs Sold to Fed May Be Downgraded by Moody's -- The largest collateralized debt obligations insured by American International Group Inc. and taken over by the Federal Reserve as part of AIG’s bailout may be downgraded by Moody’s Investors Service. The credit-ratings firm put $7.88 billion of slices of the two CDOs, underwritten by Deutsche Bank AG, under review because of downgrades to the underlying commercial-mortgage securities, New York-based Moody’s said today in a statement. The CDOs -- MAX CMBS I Ltd. Series 2007-1 and Series 2008-1 -- were created in October 2007 and June 2008, respectively, according to data compiled by Bloomberg.

The Associated Press: Bernanke to wage fresh battle for Fed powers -  Federal Reserve Chairman Ben Bernanke plans to wage a fresh battle against Senate efforts to scale back the Fed's role in supervising the nation's banks.In testimony prepared for a House hearing on Wednesday obtained by The Associated Press, Bernanke argued that the Fed factors in information it gets from its role as a regulator into its decisions on interest rates. And, Bernanke said its banking duties give the Fed insights into the health of the entire banking system."The insights provided by our role in supervising a range of banks, including community banks, significantly increases our effectiveness in making monetary policy and fostering financial stability," Bernanke said in his prepared remarks to the House Financial Services Committee.

Volcker to Tell Congress Fed Should Retain Supervision Powers…(Bloomberg) -- Former Federal Reserve Chairman Paul Volcker, now an adviser to the White House, said monetary policy and bank supervision are “inextricably intertwined” and that the Fed should retain its power to supervise banks. “Monetary policy and concerns about the structure and condition of banks and the financial system more generally are inextricably intertwined,” Volcker said, according to remarks prepared for a congressional hearing tomorrow and obtained by Bloomberg News. “Neither monetary policy nor the financial system will be well served if our central bank is deprived from interest in, and influence over, the structure and performance of the financial system.”

Bernanke Argues for Fed to Keep Its Bank Oversight - NYTimes -Officials at the Federal Reserve are trying to alter a Senate proposal that would focus the Fed’s regulatory attention on the nation’s biggest banks and strip away its powers over small and medium-size banks. The proposal, which was introduced on Monday by the chairman of the Senate Banking Committee, would make the Fed even more centered on New York and Washington and disrupt an institutional balance in place since the central bank opened its doors in 1914, officials said.  “It’s not the central bank of Wall Street,” Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, said in an interview. “It’s the central bank of the United States. Let’s not forget that.”  The Fed chairman, Ben S. Bernanke, made the same point in testimony to the House Financial Services Committee on Wednesday.

I'm Gonna Throw Up (Bernanke) - Does anyone remember me ranting at the time of the TARP's passage about an obscure little sentence that allowed Bernanke to set the reserve ratio on the banks to zero? Well, Bernanke's Congressional testimony yesterday garnered a footnote on the issue, specifically: Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system. Right.  The cost is that you have to actually have something called "capital" behind your loan book, and you had a velocity limiter as well. This is simply unbelievable.  To call such a thing a "distortion" is the worst sort of outrage to come from a central banker.

Oh no … Bernanke is loose and those greenbacks are everywhere - My RSS feed and E-mails have brought some shockers in the last few days from the financial markets – official bulletins from banks that don’t make any sense at all (US about to default-type arguments); hysterical Austrian school logic (from a large player in the Asian markets) and news commentary from a so-called business insider magazine. The latter should immediately close its doors and declare they are not competent to comment on matters relating to banking. “Bernanke about to kill the World” Michael Snyder wrote in horror that – Bernanke Wants to Eliminate Reserve Requirements Completely. He correctly notes that the US has maintained a “fractional reserve” banking system up until now although he doesn’t realise that this is just one of the many relics that remain from the gold standard/convertible currency era that ended in 1971. Everyone will catch up eventually. You can read about the fractional reserve system from the Federal Point page maintained by the FRNY…

Second Circuit Tells Fed If It Wants To Maintain Its Secrecy It Better Get Congress To Change America's Laws - Key selection from the Second Circuit's Fed FOIA appeal:  The requirement of disclosure under FOIA and its proper limits are matters of congressional policy. The statute as written by Congress sets forth no basis for the exemption the Board asks us to read into it. If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute. In other words: if the Fed wants to maintain its strict secrecy, it better get Congress to change the laws immediately. Of course, if that happens it will become very clear who controls not just the fiscal and monetary destiny of America, its executive control, but also the legislative. As for the judicial, we will know definitively when the Supreme Court overturns this decision.

Volcker Wants Second Vice Chair at Fed -  The latest Senate proposal to overhaul financial regulation includes a provision to create a second vice chairman of the Federal Reserve Board in Washington who would be directly responsible for bank supervision. It’s an unusual proposal that received little attention before draft Senate legislation was unveiled Monday. But it has a strong proponent: Former Federal Reserve Chairman Paul Volcker, who is an economic adviser to President Barack Obama. Testifying before a House committee, Mr. Volcker said he’s been an advocate of designating one of the Fed governors as a vice chair for supervision to elevate the importance of the role.

Janet as Number Two - Janet Yellen to #2 at Fed. I don't know enough about Janet Yellen to give an expert opinion, but there are two things I don't like about the choice. The first is her age -- 64 -- and no, it's not just because I'm biased against old people for important positions, although I do think that experience wins out over adaptability/intellect too much for positions such as this. I would rather they pick a younger, up-and-coming liberal Democratic economist who could use the position to augment her/his resume and gain experience for possible appointments to other offices later on, such as Fed Chair. Second knock against her is that, in the past year or so, I don't recall her disagreeing with Fed policy in the minutes. I felt very strongly last summer that the risks between inflation and unemployment were unbalanced, with continued high unemployment being a significant risk, and inflation being low risk. Janet Yellen was apparently more worried about inflation.

The Fed's curious culture - MARK THOMA collects a number of excerpts on new nominee for Vice-Chair of the Federal Reserve Janet Yellen which make for very interesting reading. I think one key takeaway from his post is that debates within the upper echelons of the central bank are carried out within an environment of overwhelming agreement. Central bank heretics aren't very heretical, and the gap between doves and hawks is really quite small. While there may be lively discussion within the central bank on topics like whether or not to use monetary policy to deflate asset price bubbles, that conversation will take place in an atmosphere of general conservatism and focus on stability. Which isn't necessarily a bad thing, given the power these individuals wield. Another key takeaway is that the culture within the Fed can be a little weird...

Will Obama's Fed Picks Change The Fed? - The retirement of Vice Chairman Donald Kohn and Obama's decision to replace him with Janet Yellen, as well as to appoint Sarah Bloom Raskin and Peter Diamond to vacancies on the Board of Governors raises the question of whether this means a shift in attitudes or decision making at the Fed. The answer is probably not too much, mostly because Yellen is already involved in FOMC meetings as San Francisco Fed president, while the othet two appointees lack experience with monetary economics, although Raskin, a lawyer by training, is currently Commissioner of Financial Regulation in Maryland, and Peter Diamond is a distinguished MIT economist, although an expert on social security and fiscal policy rather than monetary theory or policy. Yellen is viewed by most as "dove" in terms of favoring fighting unemployment more than inflation, although Mark Thoma has linked to Lawrence Meyer claiming that at least on one occasion in the mid-1990s when she was on the Board, Yellen was hawkish.

Likely Fed candidate known for practical savvy - He is often mentioned as a potential Nobel candidate. While he has not won, his collaboration with British professor Sir James Mirrlees on tax theory was cited by the Nobel committee when Mirrlees was awarded the prize in 1996.“No economist is smarter,’’ Mirrlees said in an e-mail. “His reasoning is amazingly accurate. The theories and models he uses are defined with the greatest precision. More than most economic theorists, he has always chosen his research topics and questions for their real importance.’’ Diamond, 69, was named by the White House last week as one of three contenders for nomination to the Fed’s Board of Governors, which oversees the system of 12 regional Federal Reserve banks and the central bank’s economic policies. The other candidates are Janet Yellen, president of Federal Reserve Bank of San Francisco, and Sarah Bloom Raskin, the Maryland commissioner of financial regulation.

Was it the “Considerable Period” or the “Measured Pace”? - John Taylor - In his recent review in The New York Review of Books of my book Getting Off Track, Roger Alcaly makes a very interesting point about the “too low for too long” hypothesis, according to which the Fed helped cause the housing boom. I hear that some policymakers at the Fed have been thinking the same way in recent weeks. If so, then when the Fed starts increasing the interest rate, it is likely to do so faster than in 2004-2005. But first consider Roger Alcaly’s argument. Alcaly agrees that the Fed held the federal funds interest rate too low for too long in 2003-2005, but he emphasizes the slow measured pace at which the Fed raised the rate (once it started raising it) rather than the long considerable period during which it held the rate low at one percent.

The recovery cannot be sustained - Just when we were wondering what to write about, the latest Global Strategy Weekly from Albert Edwards lands. The Soc Gen strategist has been poring over last week’s Flow of Funds report from the Federal Reserve……and comes to the following conclusion: US total credit continued to disappear down the plughole, despite the government’s best efforts to inflate us back to prosperity [see chart above]. The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate.  So far, so bearish then. But when will this process of deleveraging end? Unsurprisingly, Edwards thinks it won’t be quick, for several reasons.

Stiglitz, Sakakibara Say US Wants Weak Dollar to Spur Growth (Bloomberg) -- The U.S. wants a weaker currency to support its exporters, a possible departure from its “strong” dollar mantra, Nobel laureate Joseph Stiglitz and Japan’s former top currency official Eisuke Sakakibara said. There is a “contradiction between national interest and global, international interest here,” Stiglitz said at a forum in Tokyo today. “Right now, it’s not in the interest of the U.S. to have a strong dollar. We want a weak dollar and we want exports.” American officials have advocated that a strong dollar is in the national interest and defended the stance because of its status as a key global currency. Even so, a weaker greenback would bolster an economy where exports contributed more to growth in the past two years than any time since the 1940s. “If you are secretary of Treasury, you have to make a speech about believing in a strong dollar, but you know that no one believes you,” Stiglitz said.

Yuan Poised to Become Reserve Currency, Goldman's O'Neill Says - (Bloomberg) -- China’s yuan is destined to become a global reserve currency rivaling the dollar and the euro, as the nation’s economic power increases the currency’s allure, said Jim O’Neill, chief economist at Goldman Sachs Group Inc. The Chinese government will “eventually” allow the yuan, or renminbi, to trade freely on foreign-exchange markets, dropping the system under which it controls its value, O’Neill wrote in an essay that formed part of a report published today for Chatham House, a London-based foreign affairs research organization. “As China moves in this direction, other large emerging economies will presumably gradually move in the same direction and the end result will be something approximating to today’s Western monetary system,” London-based O’Neill wrote. “Under such a system, the renminbi, dollar and euro would all form the linchpin of the world’s currency markets.”

Think tanks urge SDR-led, multi-currency reserve system (Reuters) - The global economy should move toward a multi-currency reserve system from one dependent solely on the dollar and there should be greater use of the IMF and its unit of account, the Special Drawing Right, a think-tank study proposed on Friday. The report echoes calls over the past year from International Monetary Fund chief Dominique Strauss-Kahn and emerging powers such as China, Brazil and Russia for greater use of the SDR as a way to ease dependence on just one country as guardian of the world's reserve currency. The report, by UK-based think tank Chatham House and the ESRC World Economy and Finance Programme, said the recent credit crisis and global recession exposed serious shortcomings in the international monetary system.

Rating agency warns on US public finances - Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating. Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.” It projects that the federal borrowing is so high that the interest payments on government debt will grow to more than 15 per cent of government revenues, about the same by the end of the decade as the previous 1980s peak

U.S, U.K. Move Closer To Losing Rating, Moody's Says (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service. The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview. Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

Moody's fears social unrest as AAA states implement austerity plans - The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. It warned of "substantial execution risk" in withdrawal of stimulus. "Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion," said Pierre Cailleteau, the chief author.

Memo to Moody’s: It’s Accounting 101, Not Economics - Marshall Auerback explains why the rating agency needs a lesson in basic accounting — and how its REAL message is anti-private savings. It took an accountant to take down Al Capone. Perhaps the accountants will be the ones who finally take down the deficit terrorists? They seem to be the only ones who understand that policy makers cannot coherently examine fiscal policy options without analyzing their implications for the financial balances of other sectors. For all of the talk about Greek “rescues”, or the US reducing its “structural fiscal deficits”, few seem to understand that imposing an arbitrary fiscal deficit to GDP ratio (or fixing an exchange at an arbitrary level) reduces the room available to achieve private sector net saving.

More Empty Posturing Out Of Moody's - Rating Agency Once Again Threatens With US Downgrade -The rating agency, whose "objectivity" was recently fully exposed after it has been persistently the one rater who refuses to downgrade Greece, even after its peers S&P and Fitch have made Greek bond eligibility for ECB collateral contingent purely on Moody's lack of conscience, is pretending that it has some credibility after all, by doing a little extra posturing, and grumbling that if things get much worse, it may, just may, consider dropping the US AAA rating. This, of course, despite Tim Geithner's promise that the US would only be downgraded over his dead body, or something like that. Furthermore, as we have recently learned, the FRBNY has a "proactive" influence in rating agency decisions. To assume that Mr. Brian Peters of the New York Fed would return a Moody's call and say "yes, we agree with your assumption that the US is not really AAA-worthy, please go ahead and downgrade us" requires copious amount of prior consumption of LSD and other hallucinogenics.

What Happens If America's Credit Rating Is Downgraded? - The ratings agency Moody’s warned today that the United States’s top-notch credit rating, currently Aaa, is “substantially closer” to being downgraded. What exactly would a lower credit rating mean for the country? A credit rating downgrade affects more than American pride. The bigger risk would be to the country’s ability to keep borrowing money, and therefore to keep spending more than the tax revenue that  it takes in. A credit rating lets lenders and investors know how likely a borrower is to be able to pay back a loan. A sterling credit rating — which the United States currently has — means there is nothing for lenders to worry about. They can expect to get 100 percent of their money back, just as the borrower promised. A lower credit rating, however, indicates that the borrower might eventually default.

Will the US sell Manhattan? - Those who face insolvency, Mr. Schlarmann, a senior member of Germany's Christian Democrats, said, must sell everything they have to pay their creditors. Thus, he said, Greece, given its debt problems, should consider selling some of its uninhabited islands to cut its debt. The headline in the Bild newspaper took the argument a bit further, "Sell your islands, you bankrupt Greeks - and the Acropolis too!"  I guess we might call this the Andrew Mellon approach to sovereign debt crises- liquidate, liquidate, liquidate, on a national scale. It's a strategy which, if Niall Ferguson's argument-which contains the wonderful line, US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941- that the US, and other western nations, may soon follow Greece into crisis, proves prescient, might inspire calls for the US to sell some islands, like Manhattan. Why wait for the next financial crisis to go hat in hand to Asia. Let's sell Citibank at $4 instead of waiting for it to fall under a buck.

A Quick History of Foreign-Held U.S. Public Debt - Bruce Bartlett has an interesting article that traces the history of the U.S. public debt that is foreign held. Here is an excerpt: Until the 1970s foreigners owned less than 5% of the national debt. This began to change after the big run-up in oil prices. As oil exporters suddenly acquired vast financial resources they found it convenient to park them in Treasury securities, which provided liquidity and safety. By 1975 the foreign share of the national debt rose to 17%, where it stayed through the 1990s, when China began buying large amounts of Treasury bills. At the end of last year foreigners owned close to half of the publicly held national debt. Here is the table from his column:

America in the Red - The new issue of National Affairs includes an essay in which I summarize my thinking about our nation’s fiscal challenges. In “America in the Red” (pdf version), I describe our fiscal challenge, explain how deficits and debts may undermine our prosperity, and emphasize the importance of setting clear budget goals. I also argue that everything should be on the table in thinking about our budget future. Growth alone won’t set us free. Spending cuts alone won’t be enough. And tax increases alone won’t work either. We need to pull on all the levers–reducing spending, increasing revenues, and promoting growth–if we want to get our fiscal house in order.

Roubini Worried by 'Runaway Fiscal Deficits' - Exit policies pose a "damned if you do, damned if you don't" dilemma, as withdrawing stimulus too soon could push economies back into recession, while leaving it too long would push already high fiscal deficits even higher, Roubini, who predicted the 2007 financial crisis, explained. A near-depression was avoided through a "massive monetary and financial stimulus," but at the cost of doubling the public debt and now the main worry was "runaway fiscal deficits," he added. There is a gridlock in Congress over fiscal policy, as Republicans are vetoing raising taxes while Democrats veto cuts in spending, and this does not bode well for the deficit, according to Roubini.

U.S. states: Running with the PIIGS (Fortune) -- The term PIIGS has been coined to refer collectively to Portugal, Italy, Ireland, Greece, and Spain. Aside from being a cute acronym, the term describes the actions of these countries very aptly as they have acted "piggish" in issuing debt to support overzealous government budgets. While the American media has at times made light of these countries and their PIIGS moniker, the same mistakes are at play in creating domestic pigs. If PIIGS refers to nations that have overspent and are now overleveraging to pay for their deficits, the United States is feeding from the same trough.

Welcome to the United States of Iceland (Fortune) -- It's time to start paying attention to the financial sinkhole that Iceland is trying to climb out of -- the view from inside of it is eerily similar to our own.  An Icelandic savings bank, Icesave, had attracted billions in deposits from hundreds of thousands of British and Dutch citizens, due to the phenomenally high interest rates it offered. Icesave collapsed in 2008, for much the same reason Lehman Brothers, WaMu, and hundreds of local savings banks did: its bankers used their cash to make complicated, bad, leveraged investments, mostly on real estate.

We Can’t Inflate Our Way Out of the Debt Crisis … So What CAN We Do? -  I have previously noted, UBS economist Paul Donovan has demonstrated that governments can’t inflate their way out of debt traps, saying:The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked. Megan McArdle points out: It is a commonplace on the right that we’re going to have enormous inflation, not because Ben Bernanke will make an error in the timing of withdrawing liquidity, but because the government is going to try to print its way out of all this debt.Joe Weisenthal notes that it doesn’t quite work this way: As this chart shows, instances of declining debt-to-GDP rarely coincide with periods of inflation. If it did If it did, we’d see more dots in the lower right-hand quadrant.

Our Next Economic Plague: Japan Disease - Growing old is hard, but watching formerly vibrant economies choke on debt and wither away is downright ugly. Japan's nominal GDP fell 6 percent to 475 trillion yen last year, while its real GDP declined 5 percent. Meanwhile, nominal GDP in the United States decreased 1.3 percent to US$ 14.2 trillion and real GDP fell 2.4 percent.If you travel across Japan and the United States, you get the impression that America is in much worse shape: Americans cannot stop screaming about their woes, while the Japanese face economic sufferings quietly. Maybe this is due to cultural differences. Regardless, Japan is in dire shape. Its nominal GDP is now lower than it was in 1992 when the nation's property prices first began to decline

Newsweek: US in Terminal Decline - As a newspaper devoted to analyzing dominant social themes, the Daily Bell occasionally turns to Newsweek to mine some of the best promotional presentations available. Newsweek, long affiliated with the Washington Post – the crown jewel of establishment newspapers – never misses the opportunity to offer up elite memes with confident and robust prose. This article, commenting on an article in Foreign Affairs no less (perhaps the journal that stands at the forefront of elite promotional reporting), offers up all the expected talking points and then some. In fact, the idea of the US as a country/empire in terminal decline is itself a dominant social theme, in our opinion.Why would the Anglo-American power elite want to convince Americans that their country is on the way down? Because the elite is apparently after global consolidation and if Americans are convinced that the US is finished, they may be more amenable to joining forces with, say, Canada and Mexico in a super-state.

The Road to Hyperinflation - Inflationism is a slippery road – the road to hyperinflation. The inflationist Bernanke Fed behaves as if they would not be “dialling back” from Quantitative Easing any time soon. They talk the talk, but can’t walk the walk. The inflationary genie is out of the bottle. Taming it back will result in a crushing deflationary collapse. The Fed will never let this happen again. They did it once during the Great Depression, they won’t do it again. The government’s reaction is typical of a crisis associated with economic collapse and social unrest. Hemingway put it so aptly: “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin."

Kinsley’s Transcendental Deduction of Hyperinflation - Michael Kinsley has a very strange column alleging that we’re soon going to face hyperflation: “When everybody assumes 10 percent, all the forces that produced 10 percent push it to 20 percent, and then 40 percent, and soon people are lugging currency in a wheelbarrow, as in the famous photos from Weimar Germany.” What’s strange about the column is that I don’t know how I could possibly refute it. Kinsley freely acknowledges that “virtually every leading economist across the political spectrum” disagrees with him, and he doesn’t dispute the details of any of their analyses.

Stagflation Versus Hyperinflation - Paul Krugman - I’m a bit late to this, but Mike Kinsley has an odd piece in the Atlantic in which he confesses himself terrified about future inflation, even though there’s no hint of that problem in the real world. He’s not alone: there are a lot of voices predicting imminent hyperinflation in 2009, make that 2010 (and yes, I am keeping a record). What I want to take on, however, is this piece of analysis in Kinsley’s piece: Hyperinflation is when inflation feeds on itself and takes off beyond control. You can have stable 2 to 3 percent inflation. But you can’t have stable 10 percent inflation. When everybody assumes 10 percent, all the forces that produced 10 percent push it to 20 percent, and then 40 percent...Uh, no — at least not according to textbook economics, which makes a real distinction between the kind of inflation that bedeviled the 1970s and 1923 (or Zimbabwe)-type hyperinflation.

Parenteau: The Hyperinflation Hyperventalists - Think this is yet another rant against the “deficit errorists?” Think again. Paul Krugman treated this question in his New York Times column: Krugman locates the source of hyperinflation in what is termed the “monetization” of fiscal deficit spending. He then attributes its perpetuation to shifts in the liquidity preferences of people — that is, the share of their portfolio that households and firms wish to hold in cash or cash like investment instruments (think Treasury bills, or money market mutual funds, for example). Krugman’s logic means that even the liberal wing, or the saltwater contingent, of the economics world has a touch of deficit errorism. We would invite Paul to take a closer look at the UBS research on public debt to GDP ratios and inflation first released last summer, reprinted in a FT Alphaville note, and discussed on Naked Capitalism. The story of inflation and fiscal deficits is more ambiguous, or at least more complex than the deficit errorists would have you believe.

Inflation: God is the ultimate hedge - Today we have a guest contribution from one of our regular commenters, El Gallinazo, who weighs in on the dead horse of inflation vs. deflation, dissecting a John Williams Shadowstats paper. Just let me state two issues that are obvious to us before handing you over to the cantankerous vulture: 1) There is no way we'll get into hyperinflation BEFORE debt deflation has run its course. 2) There is no way the Federal Reserve (or ECB, Bank of Japan) can print enough money, electronically or physically, to fabricate hyperinflation, as long as the debt deflation train hasn't finished running over our economic systems. 3) After that train is done, it's anybody's guess; the damage done will be so severe there may not be a Fed left to inflate even a party balloon.

Deflation - I've written about deflation twice before: Deflation and Deflation 2. Third time's the charm? The common wisdom is that deflation of the currency is bad. When money deflates, it becomes more valuable, even when you do nothing. So the theory is that people won't spend their money, because it will become ever-more valuable. That theory cannot be true. Look at the PC market over the last 30 years. In each one of those years, the PC became more reliable, faster, came with more memory and storage. The original MDA display was one color and text only. The CGA had 16 colors and 640x200 bits. The price -- of the computer you really want to have -- has stayed constant, at about $5000. If the story told about deflation was true, then you would always be better off delaying your purchase of a PC by 6 months. You could be confident that the PC you would buy would be a more valuable PC.

Hyperdeflation, followed by rampant inflation - The title of the blog is a little misleading but was too good not to use. I get to that five-year forecast (2010-2015) later in the blog but the first part is material that sets the scene. Yes, I am writing about deficits and debts … again! But new nuances come out in the public debate which need to be addressed. The conservative assault on government support for their economies at present is multi-dimensioned and is being pushed along by two main journalistic approaches. The manic Fox new-type approach which I realise is influential but is so patent and ridiculous that I don’t care to comment on it often. Then we have the approach adopted by journalists in so-called credible media outlets such as the UK Guardian. They dress their deficit terrorism up in arguments that the middle classes, who think they are far above Fox new rabble intellectually, will find convincing. But when you bring both approaches down to basics – rubbish = rubbish.

US credit disappears down the plughole (borrowing by sector) (graph)

A Quick Reminder: Here's The Real Problem - Here's one of the only economic charts that really matters: Total U.S. debt to GDP (from John Mauldin). This chart shows the trend from the end of the Civil War until now.  Note two things: There may be a general upward trend, but there are two clear aberrations: One in the 1920s and early 1930s, and one now. The aberration now is vastly higher than the one in the 1920s and early 1930s, which preceded the Great Depression. Unless "it's different this time" (unlikely), the second aberration is going to end up the way the first one did--by returning to the mean.

Obama's $3,000,000,000,000 Tax Hike -WSJ - When he released his new budget proposal on February 1, President Barack Obama asserted that the government "simply cannot continue to spend as if deficits don't have consequences; as if waste doesn't matter; as if the hard-earned tax dollars of the American people can be treated like Monopoly money; as if we can ignore this challenge for another generation."[1]Yet the President's new budget does exactly that-- raising taxes by $3 trillion and federal spending by $1.6 trillion over the next ten years. If enacted, this budget would increase the 2010 deficit to more than $1.5 trillion, and leave a deficit of more than $1 trillion even after an assumed return to peace and prosperity. Overall, the President's budget would double the national debt over the next decade.[2]

Obama's Backbone Like Over-Cooked Spaghetti; So Where Are The Fiscal Conservatives? - Mish - Please consider 4 visualizations of Obama's Budget Cuts. $17 Billion Cuts In Context -  Obama Budget Cuts Visualization -  Obama's "Unsustainable Course" (And what he's NOT doing something about) - What Does The Federal Budget Freeze Look Like?  For more on budgetary math behind the freeze please see What Does the Federal Budget Freeze Look Like?

The Future of the Deficit - The Heritage Foundation has put together some good historical numbers on the kinds of spending that the federal government does. Those numbers appear alongside my column this week. If you want to get a sense for where spending is headed, have a look at this chart from the Center on Budget and Policy Priorities:  As you can see, the action is really in health care. That’s why the cost-control measures in the health reform bills, imperfect as they may be, are so important

Deficit Builds as Americans Pay Less and Get More - NYTimes - Citizens of richer societies generally prefer more government services, Adolf Wagner explained. With their basic needs met, they want a military to protect them, good schools for their children, comfortable retirement for the elderly, medical care even when it isn’t profitable and a strong social safety net. Sure enough, the United States followed this path for most of the last century. In 1900, federal taxes amounted to just 2 percent of gross domestic product. By 2000, the share had risen to 21 percent. Over the last couple of decades, though, we have repealed Wagner’s Law — or, more to the point, only partly repealed it. Taxes are no longer rising. They fell to 18 percent of G.D.P. in 2008 and, because of the recession, to a 60-year low of 15.1 percent last year. Yet our desire for government services just keeps growing. We added a prescription drug benefit to Medicare. Farm subsidies are sacrosanct. Social Security is the third rail of politics.

Budget Matters - For most people, deficit reduction is a side issue.  Oh, they say they care--especially when The Other Guys are in charge of the public purse.  But when it comes down to a choice between deficit reduction, and all the other stuff they want to do, deficit reduction almost never wins.  Nonetheless, it can be politically useful.  It is, as aforementioned, often a good way to stop The Other Guys from cutting taxes or increasing spending.  It can also be used to sell otherwise unpopular bills. However, it does have some drawbacks.  The CBO process can be gamed, but not infinitely.  And as Philip Klein reports, the deficit reduction instructions seem to be causing House Democrats some trouble:

Gallup: Federal Deficits and Debt Becoming Americans' Top Concern - As Congress and the President plan to create a new health entitlement for middle- and upper-middle income people during their working years, Gallup finds that Americans are well informed on what the long-term results will be on federal deficits and debt. In addition to asking about current problems facing the country, the March 4-7 poll also asked Americans to say what they think will be the most important problem facing the United States in 25 years. The federal budget deficit is mentioned most often in this regard, by 14% of Americans, slightly more than say the economy in general (11%) and the environment (11%).

Thank you for what, exactly? - Before you join Pete Davis, Brad DeLong, and Robert Waldmann in thanking Marjorie Margolies-Mezvinsky, look at this chart and think about it for a while. Now, go and read L. Randall Wray, Marshall Auerback, Paul Krugman, Dean Baker, Paul Krugman, and Brad Setser.

Saving Ryan's Privatization - Krugman - So, for a few weeks Rep. Paul Ryan was the toast of the punditocracy; his Roadmap was hailed as the serious Republican response to America’s fiscal problems. But it turns out, predictably, to have been a Potemkin plan: it wouldn’t balance the budget, even after two generations. What it would do is massively redistribute income upward, raising taxes and slashing benefits for most Americans, while providing huge tax breaks for the top 0.1 percent of the population. Naturally, Ryan’s response to these revelations has been a hissy fit. The Center on Budget and Policy Priorities — which has always, in my experience, been impeccably honest and careful in its work — does the point by point rebuttal. But I’d like to follow up on small but revealing point

Global Demand for U.S. Assets Slowed in January (Bloomberg) -- International demand for long-term U.S. financial assets weakened in January as China and Japan, the two biggest holders of Treasuries, reduced their positions. Net buying of long-term equities, notes and bonds totaled $19.1 billion, compared with net purchases of $63.3 billion in December, according to Treasury Department data released today in Washington. Including short-term securities such as stock swaps, total investment flows show foreigners sold a net $33.4 billion after net buying of $53.6 billion the previous month. China has been a net seller of Treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar’s role as a reserve currency and recently sought assurances about the safety of American government debt, as the U.S. budget deficit widens to a projected record $1.6 trillion this year...

 Canadian finance chief warns US, others on deficit - Canadian Finance Minister Jim Flaherty says other developed nations, including the United States, should come up with clearer plans on how they are going to get their weighty budget deficits under control. Flaherty also urged the Group of 20 leading and industrialized countries to step up work on financial reforms head of the annual spring meetings of the International Monetary Fund and the World Bank in Washington D.C. Flaherty said Greece's debt troubles were a timely reminder both that world leaders need to agree lasting international financial reform and that tackling big deficits is necessary to restore confidence.

 If taxes hurt less, would they be higher? - About taxation, Louis XIV’s finance minister, Jean-Baptiste Colbert, once said that the art is in “so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” As April 15 approaches, you the taxpayer may indeed feel like hissing. Taxes are so painfully complex that roughly 60% of Americans pay someone else to prepare their returns, at a cost of hundreds of billions of dollars per year. Still others rely on computer software. The rest pay in headaches and tears.But as you contemplate this annual toll in tears and treasure, it’s worth reflecting: Is the pain, perhaps, worth it? Is it a needless annoyance, or is it a needed reminder of the cost of government? Is the pain, in other words, one of the few things saving you from being plucked bare and converted into a down comforter?

Private equity - One select group of Americans, though, has a more pressing tax-season task on its mind: preserving a lucrative loophole in the I.R.S. code. The provision allows money managers at privately held partnerships—like hedge and private-equity funds—to treat most of the money they make as capital gains rather than as ordinary income. That means that their income is often taxed at fifteen per cent, a much lower rate than it otherwise would be. In December, the House of Representatives passed a bill closing this loophole, the third time it has done so in three years. But it’s an open question whether the Senate will even take up the bill, let alone pass it.

The Fed’s Responsibility - Congress passed legislation last year intended to protect consumers from the credit card industry’s most deceptive and unfair practices. The main provisions finally went into effect last month. But the Federal Reserve still has to write new rules intended to stop companies from bleeding customers dry with exorbitant fees for late payments, with charges for exceeding the credit limit, or with “any other penalty fee or charge.” Under the statute, the Fed must write rules to ensure that these fees and charges are “reasonable and proportional.”  The Fed has a long history of putting the credit card industry first and consumers far behind, and a draft of the rules released this month is disturbingly weak.

How bank credit-market funding helped spread the global crisis - VoxEU - How did a seemingly small shock to the US financial markets manage to spread so far, so quickly? This column argues that the heavy reliance on short-term wholesale funding is to blame. It follows that the discussions of regulatory reform should focus on the risks associated with the liability structure of banks.

Financial Reform Is About To Be Gunned Down In The Senate - Next Monday, Senate Banking Chair Chris Dodd (D-CT) will introduce his financial reform bill without Republican support, despite pledges of Senators Richard Shelby (R-AL) and Bob Corker (R-TN) to work with him. Our recent worst financial crisis since the Depression cries out for major changes, but our broken government may fail to enact them. Absent public outcry, heavily financed industry lobbying will gun down financial reform in the Senate this spring.  Why?

Senator Dodd's Financial Overhaul Bill to be introduced Monday From the NY Times: Dodd to Unveil a Broad Financial Overhaul Bill Here are the key points: The consumer financial protection agency would be part of the Federal Reserve. Creates a systemic risk council that would be headed by the Treasury Secretary and would include "representatives of the Fed, the new consumer agency, the F.D.I.C., the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Housing Finance Agency — along with an official appointed to monitor the insurance industry, which is largely regulated by the states." Regulate over-the-counter derivatives: "Standardized swaps and derivatives would have to be traded on exchanges or clearinghouses." The Federal Reserve would regulate bank holding companies with $50 billion or more in assets, and "systemically important nonbank financial institutions".

Sen. Dodd Interview Previews His Financial Overhaul Bill - Senate Banking Committee Chairman Christopher Dodd (D., Conn.) spoke with the Wall Street Journal on Sunday about the bill he plans to introduce Monday to rewrite financial market regulations. Mr. Dodd said the bill had been “well vetted, well thought out, and thoroughly explored. I’m not interested in setting up a regulatory structure that strangles anyone.” But he also vowed to push forward aggressively. “The idea we can somehow delay this to some later date is just totally unrealistic and wrong, because the American public rightly deserves answers to how we can address this set of problems,” he said

Factsheet: Senate Financial-Regulation Bill – WSJ - Sen. Christopher Dodd (D., Conn.) unveiled a sweeping financial regulation bill Monday. The following is the fact sheet for the legislation provided by Senate Banking Committee.

Full Highlights From Dodd's Financial Reform Bill - LOOKING OUT FOR THE NEXT BIG PROBLEM: ADDRESSING SYSTEMIC RISKS - The newly created Financial Stability Oversight Council will focus on identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms. It will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States.

Financial Regulatory Reform Update - For those interested, here is the text of the proposed bill. It is only 1,336 pages long ...Some overviews: From Sewell Chan at the NY TimesMr. Dodd said he believed there was substantial bipartisan agreement on 9 of the bill’s 11 provisions, the exceptions being consumer protection and corporate governance. From the WSJ: Finance Overhaul Sets Up Winners, Losers Among the winners, community banks and small credit unions would be financially able to compete, for perhaps the first time, against large competitors reined in by new restrictions on capital, complexity and size. From Elizabeth Warren, via Firedoglake: “Since bringing our economy to the brink of collapse, Wall Street has spent more than a year and hundreds of millions of dollars in an all-out effort to block financial reform. We’re now heading toward a series of votes in which the choice will be clear: families or banks.”

Will the Dodd Proposal Reduce The Power Of the Regional Feds? - Apparently Dodd wants to take away their power to regulate banks in their districts, although the power of the New York Fed and a body to be set up at the Board of Governors, although not under its control, would take over this supervisory role. Also, the New York Fed president would become a presidential appointee. I saw nothing altering the role of the regional bank presidents on the FOMC, where all of them report on conditions in their regions during the meetings, and five of them vote on policy. I am not impressed by this proposal. The argument of their defenders that they will have better knowledge of their regions if they supervise their local banks makes sense to me. Also, they are the ones that actually operate the discount windows that lend to the banks in their regions. Again, they will know better about this lending if they know what is going on with those banks. This proposal looks just plain silly to me, frankly.

Financial reform shifts Fed's authority away from regional banks - By altering the traditional balance of power, the bill put forward by the Senate banking committee's chairman Christopher J. Dodd (D-Conn.) would recast the workings of the Federal Reserve System, a unique structure set up a century ago to distribute authority and ensure the central bank was not dominated by the nation's political and financial capitals.  That is why the Senate bill is provoking dismay among many officials at the regional Fed banks even as the Fed, on the surface, appears to be a big winner. The legislation allows the Fed to maintain its role in overseeing the country's largest banks while awarding it even more power to protect consumers and monitor the financial system for emerging risks. The central bank would also continue its most prominent job of managing the nation's monetary policy.  The Fed, however, would be stripped of its role in regulating all but the few dozen largest financial firms. The oversight of almost 6,000 small and midsize banks, one of the major tasks carried out at the 12 regional Fed banks, would be taken over by other federal agencies.

Reform Bill From Senate Democrats Calls for More Oversight - NYTimes - The plan would create a nine-member council, led by the Treasury secretary, to watch for systemic risks, and direct the Federal Reserve to supervise the nation’s largest and most interconnected financial institutions, not just banks. But the bill, which would amount to the most sweeping change in financial rules since the Depression, would preserve much of the existing regulatory architecture, which has been criticized for being too fragmented. And it would rely on a new mechanism for seizing and liquidating a huge financial company on the verge of failure, one that would diminish, but not eliminate, the likelihood of future bailouts.  The proposal, which was put forward by Christopher J. Dodd, the chairman of the Senate Banking Committee, included significant concessions to Republicans, compared with an initial draft Mr. Dodd released in November. It also contained provisions urged by President Obama to restrict banks’ ability to engage in certain forms of speculative trading.

Dumb Regulation is Good Regulation — How to Regulate the Banks - Should regulation be dumb?  In one sense yes, in others, no.  It really depends on how well the regulators understand the risks involved, and how much they can encourage professionalism among profit center heads and risk managers.  As those two increase, regulation can be smart.  “Follow these detailed rules to calculate the capital you need to be solvent 99% of the time.” But when either of those two aren’t true, dumb regulation may be in order:

How Chris Dodd's FinReg proposal solves the problem of information, but not of regulators - Insofar as Dodd's proposal has a clear theory of the case and its solution, it's this: At every point in the chain of events that led to the financial crisis, there was a crucial information deficit. Consumers didn't understand the products they were buying. Regulators didn't understand the banks they were regulating (and, in some cases, not regulating). There were non-bank players such as AIG that had become central to the system but that few were watching. And no one understood what to do when the banks collapsed. At the most basic level, Dodd's bill is an effort to make sure the absence of information never leads to a financial crisis again. The question is whether that's enough.

What the S.E.C. Gets in Dodd’s Financial Bill - Senator Christopher J. Dodd’s financial regulatory bill would substantially expand government oversight of banks, hedge funds and the derivatives market. One of the winners in the regulatory shuffle is the Securities and Exchange Commission, which would gain the authority to regulate a portion of the market in derivatives, like security-based swaps, and put hedge funds under tighter oversight. Unlike the financial regulatory bill adopted by the House of Representatives in December 2009, however, this legislative proposal leaves out some of the enhancements provided to the S.E.C.’s enforcement efforts.

For Banks, Change is Coming -,Two years after the Federal Reserve's $30 billion rescue of Bear Stearns and 18 months after the market-churning bankruptcy of Lehman Brothers, Congress is lurching toward legislation to renovate the financial-regulatory system to reduce the risk of another devastating crisis. Finally. The unveiling of a 1,336-page bill by Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, was significant. The move showed he is determined to move a bill through the committee despite his inability to get even a few Republicans to sign on.

Don’t split up the banks: Outlining a new regulatory architecture - VoxEU - Policymakers and commentators have suggested that large banks should be broken up. This column argues that such an idea risks the very existence of a global financial system. It outlines an alternative framework in which deposit insurance should be covered by banks not taxpayers, banks should not be guaranteed a bailout, and regulators should be mandated to step in when the warning signs begin.

Credit Default Swaps: The World's Strangest Financial Instrument - Does it make sense to buy insurance against, say, a nuclear attack on Washington—if all the insurance providers' headquarters are inside the Beltway? Of course not. So why do investors buy insurance on U.S. government debt? As many of us learned painfully during the economic meltdown, credit-default swaps are a form of insurance on financial instruments. They're contracts that pay off in the event that an entity fails to make good on its debt. This brings us to the odd business of credit-default swaps on countries. In the sovereign credit-default swap market, investors can purchase (and trade) protection against the default of debt issued by governments, such as, say, Greece.  So why bother with credit-default swaps on nations? CDS are a way of hedging existing positions: The value of CDS rise when the value of the bonds they insure fall. They can also be a cheap way of expressing a pessimistic view on countries' financial prospects without going to the trouble of selling short the bonds issued by the national government. Many people buying CDS for a country don't expect to collect the insurance, they expect to sell the insurance policy to somebody else. For investors, sovereign default swaps are not buy-and-hold insurance policies. They are a form of casino chip.

Is there an alternative to exchange-traded CDS? - I just had an interesting conversation with a senior market participant about the optimal way to structure and regulate the CDS market, compared to the proposal which has now been put forward by Chris Dodd. Essentially, there are two options here: you can either consolidate all the different functions (trading, matching, confirmation, clearing, information warehousing) onto a handful of big global exchanges — or you can disaggregate those functions and allow competition in each of them separately. It’s pretty obvious that the exchanges, especially the big ones like the CME Group, would love to see everything consolidated with them. And they’re in luck: that’s exactly what we see in the Dodd bill. I’m sure that makes for happy pillow talk in the Dodd household: Dodd’s wife, Jackie Clegg, is a director of the CME, which paid her $153,219 in 2009; she also owns shares in the company worth about $235,000.

What Critics Don't Get About Credit Default Swaps -  In the run-up to the financial regulation bill that debuts today, financial writers have re-engaged their war against credit default swaps (CDS), slinging buzzwords to scare readers into thinking that these complex derivatives nearly toppled the global financial sector. The common take on the CDS market is that it is opaque and subject to rampant speculation that adversely affects asset prices throughout the financial industry. Below I respond to this theory, and show that not only is the CDS market relatively transparent, but also it actually generates more useful information than the bond market

Planet Money Podcast, Auto Lenders, and an Amazing GOP Machine - I was a guest on NPR’s Planet Money on Friday’s episode, Attack of the Special Interests, where I help explain some of the issues related to the CFPA, resolution authority, and derivatives reform coming out Monday, and how the special interests will try to weaken them.There’s a really awesome moment in it. They asked me about the House’s CFPA exemptions that have been carved out by special interests, and I mention how auto loans have been exempted. I told them that it was put in by a congressman from California who owned a bunch of car dealers, but I wasn’t sure of the congressman’s name. So they had two additional interviews lined up after me, Rep Brad Miller (D – NC) and Rep John Campbell (R – CA), congressmen they discuss issues with for Planet Money, and right before they start the interview with Campbell their producer figure out it was Campbell who put in the auto loan exemption! So if you listen you can hear him defend it after being called out as the pointman of the exemption I advised Planet Money to watch for. Heh.

Will consumers be protected? - Color me happily surprised by the consumer-protection rhetoric yesterday of both Chris Dodd and Barack Obama. HuffPo has the best single overview of the bill, along with Dodd’s reasonably compelling explanation of why housing the agency in the Fed doesn’t mean it isn’t independent — and in fact helps to insulate it from the kind of regulatory capture which is endemic to regulators who are funded by those they regulate.As I understand it, Dodd’s consumer protection agency can make rules for just about anybody; the constraints are on the entities where it’s allowed to enforce those rules. That’s a reasonably good start; if it gets beefed up in reconciliation, we could yet emerge from this process with a genuinely useful new agency.

Op-Ed - Why Consumers Can’t Trust the Fed - ON Monday, Senator Christopher Dodd unveiled his proposal to reform the nation’s financial regulatory system, including a new agency to protect consumers from predatory practices like teaser mortgages and misleading credit card contracts. It’s a great idea, save for a fatal flaw. As a sop to Republicans, Senator Dodd’s plan lodges the agency in the very organization that dropped the ball in America’s consumer finance crisis: the Federal Reserve.  The Fed has a long and largely undistinguished history of consumer protection.

FDIC's Sheila Bair Backs Consumer Agency, Defying Other Regulators -  In contrast to her fellow federal bank regulators, Federal Deposit Insurance Corp. Chairman Sheila Bair continues to back an independent consumer-focused agency to protect borrowers from predatory lenders. At a gathering of bankers held by the American Bankers Association, Bair reiterated her support for the consumer agency, though she acknowledged that the chances of it being a stand-alone agency -- free from interference by other regulators -- are waning.  "It's better to have a stand-alone agency, she said in response to questions from reporters. But, "it doesn't look like that's going to happen." The agency, vigorously opposed by bankers and lenders, has emerged as a hotly-contested issue

Taxpayers deserve sensible free marketplace - Leading Wall Street firms no longer think of themselves primarily as investment banks and commercial lenders, channeling money to growing companies and spurring free enterprise. Their big profits now come from trading, defined broadly to include the securitization of debt and simultaneous repurchasing of similar debt securitized by others. Washington has been slow to consider whether the furious level of trading activity, in addition to exacerbating America’s corrosive income disparities, is a result of ill-conceived policies. The public may see the realities more clearly than the policymakers, too many of whom are mired in the fallacy that boosting Wall Street profitability to its prior levels is both necessary and sufficient to bring the rest of the economy back to prosperity. It is neither necessary nor sufficient, and it is fair to inquire whether such a course may even be counterproductive.

Creating our Own Credit: The Growing Movement for Publicly-Owned Banks - As the states’ budget and credit crises deepen, four states have initiated bills for state-owned banks, and candidates in seven states have included that solution in their platforms.  Michigan has an unemployment rate of 14% and has been particularly hard hit by the nation’s economic downturn. Virg Bernero, mayor of the state’s capitol and a leading Democratic candidate for governor, proposes that the state relieve its economic ills by opening a state-owned bank. He says the bank could protect consumers by making low-interest loans to those most in need, including students and small businesses; and could help community banks by buying mortgages off their books and working with them to fund development projects.

Sanders Raises Concerns on Dodd’s Banking Bill - In a preview of what is likely to be a flurry of amendments from Democrats and Republicans on the bill to overhaul banking rules, Sen. Bernie Sanders (I., Vt.) on Wednesday said he would offer amendments on the Senate floor to “limit credit card interest rates and discourage” secrecy at the Federal Reserve, two populist issues that could roil the congressional debate.He said he would also push to create an independent Consumer Financial Protection Agency, as opposed to a proposal by Senate Banking Committee Chairman Christopher Dodd (D., Conn.), which would put a new consumer protection division within the Fed.

The Federal Reserve as Piggy Bank -- The Federal Reserve funds itself, making money on the buying and selling and holding of U.S. government and mortgage-backed securities, among other things. After paying its expenses, any profits go to the U.S. Treasury. It prizes this independence from the congressional appropriations process. It seems the Senate Banking Committee has discovered the advantages of what one might call off-balance-sheet financing. In the latest version of the financial-regulatory bill unveiled by Chairman Chris Dodd on Monday, the committee shifts the budgets of all financial consumer-protection activities from half a dozen federal agencies to the Fed –- and then makes explicit that the Fed would have little say over what the new consumer bureau, to be headed by a presidential appointee, would do.

Useless Regulation: Dodd Bill "Empowers" Fed To Do Nothing - Mish - In what amounts to a dog and pony show without dogs and without ponies, Dodd Bill Empowers Regulators to Limit Size of Financial FirmsU.S. Senator Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, speaks about overhauling U.S. financial regulation. Dodd, speaking at a news conference in Washington, unveiled a plan to overhaul financial rules and empower the Federal Reserve to break up large firms that pose a “grave threat” to U.S. economic stability.  Seriously, does anyone think Bernanke would act on this? Hell, Bernanke did not see a housing crisis or a recession. Bernanke thought he could put a floor on interest rates at 2% by paying interest on reserve. No one was more useless than Bernanke.

Reform Bill Adds Layers of Oversight - The 1,336-page bill to overhaul financial regulation that Senate Democrats put forward on Monday with the backing of the Obama administration calls for Washington to play a more active role in policing Wall Street.   The plan would create a nine-member council, led by the Treasury secretary, to watch for systemic risks, and direct the Federal Reserve to supervise the nation’s largest and most interconnected financial institutions, not just banks. But the bill, which would amount to the most sweeping change in financial rules since the Depression, would preserve much of the existing regulatory architecture, which has been criticized for being too fragmented. And it would rely on a new mechanism for seizing and liquidating a huge financial company on the verge of failure, one that would diminish, but not eliminate, the likelihood of future bailouts.

Industry Wants Risk Retention Exemption in Dodd Bill - Under the Restoring American Financial Stability Act of 2010, financial firms would be required to hold a portion of the credit risk inherent in certain loan products on their books. This “risk retention” is designed to make banks hold an interest in the financial products they create. The language is already earning the criticism of industry professionals that say risk retention could make origination and securitization prohibitively expensive.The Community Mortgage Banking Project (CMBP), the public policy organization representing independent mortgage bankers, said the bill needs a clear risk retention exemption for well underwritten, lower-risk traditional loans

Lobbyists Cleaning House, CFPA, FSOC composition - I’ll probably alternate between snarky and serious financial reform blogging to keep myself sane. And right now I’m trying to think of a good metaphor to watch next week’s lobbying and amendment efforts during the markup of Dodd financial reform bill. There’s going to be a massive lobbying effort, and since there’s little that is really worrisome in the bill that has to go the lobbyists can go after everything they want, and I’m sure whoever will be that 60th vote will give it to them. So what’s a good metaphor? Sopranos, Goodfellas, The Wire, Casino, etc.. And in many of these movies, there’s the cleaning house scene. The cops arrest the criminal boss, and in a back room the boss and his lieutenants make a list of everyone who is a threat to them and send the hitmen loose so they won’t be a liability

How To Think About Resolution Authority - A lot of people are grading resolution authority on a Pass/Fail binary spectrum. It is there, or it is not there? I want to help develop a language to understand, explain and critique resolution authority, not as a present/not present but as a practice. Specifically a practice of detecting problems in the system and as a way of deterring trouble ahead of time.  Think of resolution authority as a relationship between deterrence, detection and resolution.Ideally we’d like to be able to detect firms that are going to fail beforehand, and use the financial sector’s regulatory powers to push them back on a stable path. So resolution isn’t just about failing a firm, it’s about taking steps to tell a firm that they must take action to become safer before they are resolved. This is what regulation at commercial banks do all the time – they create limits and caps and explicit capital ratios. The fact that if they fail, the government will detect it and force changes acts as a deterrence – if they are going to get caught, why even bother?

Some Arguments on Resolution Authority - I wrote about how to think of resolution authority as a series of practices rather than an on-off switch. A few points are being made around the blogosphere about resolution authority, and I’d like to address them. Ezra Klein likes this language: "Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily." I do not. Notice how this strategy would look for FDA if we were creating the FDA now: “Drug companies will be required to submit the effects of their drugs that they market from internal studies that they’ve carried out. That is all.”

Bernanke Says Large Bank Bailouts 'Unconscionable,' Must End (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said government bailouts of large financial firms are “unconscionable” and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in the text of a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.” Congress is considering a resolution mechanism for financial firms that are so large or interconnected to other institutions that their failure could damage the financial system.

Getting the bankers out of the Fed - Pack up your bags, Jamie Dimon. The CEO of JPMorgan Chase currently serves as a Class A director of the Federal Reserve Bank of New York, which is awfully convenient, considering that the FRBNY is charged with supervising his bank. But if Sen. Chris Dodd's proposed "Restoring American Financial Stability Act" emerges from the legislative grinder intact, Dimon and other Wall Street bankers will no longer have a near-automatic seat on the regulatory body charged with watching over them. The Financial Times' dropped this intriguing bomb: The new proposal would bar appointments of Wall Street bankers as directors at the New York Fed. I hadn't seen this news elsewhere, and it took a little digging to find the relevant text in the bill. And having done so, it's unclear that the bill specifies exactly what the FT is reporting.

It Was a Wonderful Life - Quinn - Yves Smith: "This long typically long piece hits some sour notes (its Fed bashing could be a bit less conspiracy-theoritorical) but makes some good points re concentration in the financial services industry globally, as well as (implicitly) that banks need to remember their obligation to the community"

Goldman could be a bank, for better or worse - Goldman Sachs Group Inc could not hand back its banking charter and shake off Federal Reserve policing even if it wanted to, under the "Hotel California" provision of the financial reform bill unveiled this week. Since Goldman traded in its investment banking charter for bank holding company status during the darkest hours of the financial crisis, Wall Street's dominant firm has never looked like a bank or acted like a bank. It has been a bank in charter only.The charter at the time was a sign of safety to investors as Goldman would be regulated more strictly by the U.S. Federal Reserve. It also gave Goldman access to the Fed's credit window and cheap funding sources.

Bankers lobby against financial regulatory overhaul - If not for the sea of navy business suits and the hotel ballroom's chandeliers, the gathering Wednesday morning might have seemed more like a pep rally than a meeting of the American Bankers Association. But the 900 bankers were preparing to storm Capitol Hill, and they were getting revved up. "We have a lot of work cut out for us," David Bochnowski, an Indiana bank executive, said to the troops... "Our job is to have an impact on the Hill. Are we going to have that impact?"  "Yeah!" the bankers shouted, as applause broke out. ... And then came the blessing of a leading lawmaker. "You're all going to be lobbyists today," House Minority Leader John A. Boehner (R-Ohio), told the crowd. "I know that's a dirty word, but that's what you're doing." He told the bankers not to be afraid to stand up to members of Congress or "these little punk staffers," as he called them.

Reserves? We Don't Need No Stinkin' Reserves - This brings us to the next point - it makes perfect sense to have some reserves.  First, as we've proven over the past few years, the value of this collateral (the loans) can drop - we need some cushion.  Second, if you have reserves on hand, you have cash to pay back to depositors who want their money back without necessitating that you liquidate assets.   Which brings us to the Economic Collapse Blog: " So is Bernanke actually proposing that banks should be allowed to have no reserves at all? That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website.... The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

Financial Regulation -- not as ugly as it looks - I’ve been plowing through Senator Chris Dodd’s 1,300-page bill to overhaul financial regulation, and I’m surprised. At first glance, it is tougher and better than I had expected.   Readers beware: it’s not a pretty piece of work.  Kids! Do not read this at home. It makes the prospectus for a subprime mortgage-backed security look like a model of clarity The bill is full of murky exclusions, exceptions and hair-splitting -- usually a red flag that our elected representatives have capitulated to big-money interests and disguised the bombshells behind eye-glazing boilerplate.   But there are a lot of genuinely tough changes, and the bill is a lot less ugly than it first appears.  The big banks and Wall Street firms are already howling in protest. Front groups like the U.S. Chamber of Commerce, which claim to be looking out for mom-and-pop businesses, are throwing everything they have at it.   But here are a few key issues, and you judge for yourself.

Winding down - Regulators need to approach the notion of resolution with resolve. Few disagree with the idea that regulators need power to wind down big financial players, even if they aren’t banks. To avoid the next financial mega-collapse, like Lehman or American International Group, Senator Chris Dodd’s new bill for reforming U.S. financial regulation gives watchdogs powers to liquidate all big financial firms, not just banks. This resolution authority should be useful – if regulators aren’t tempted to keep firms afloat instead.

Does Meaningful Financial Reform Have Any Chance? - Senator Dodd’s financial reform bill will be introduced in the Senate Banking Committee today.  Unfortunately, on the major issue – too big to fail financial institutions that caused the 2008-09 crisis and that will likely trigger the next meltdown – there is nothing meaningful in the proposed legislation.The lobbyists did their job a long time ago.  Treasury sent up a weak set of proposals – Secretary Geithner apparently felt that to do otherwise would be just to seek “punishment” for past wrongdoings; there is too little concern at the top levels of this administration regarding what comes next.  And Senator Dodd was pushed hard by various interests to weaken all potentially sensible proposals – including anything that would bring greater transparency and safety to the derivatives market.  The Republicans have also demonstrated their mastery of delaying tactics; by emphasizing “procedural” issues, they have so far managed to conceal their fundamental opposition to real reform.

What would Goldman Lobbyists Hate About the Financial Reform Bill? - There’s a lot of coverage on the new Chris Dodd financial reform bill, and most of it is trying to find good things to say about the bill. Trying very hard in fact, with varying degrees of success. I want to approach it from a different angle: What would an investment bank hate about this bill, and lobby hard to change? I actually read this bill as if I was a Goldman Sachs lobbyist, looking for all the sections that I hated and made a list of what items I needed to lobby hard on to kill or modify. My final verdict, by the time I got to the end? If I was a Goldman lobbyist, I’d probably shrug and go “eh, pass it.” What’s there to object to? More practically, what’s this bill really going to do?

The truth about speculators: they are doing God's work - There’s a lot of claptrap going around right now about the way financial markets operate. That’s claptrap in the purest sense: words designed to win applause or impress the public. “Speculators” are in the frame. Every day, it seems, a politician or senior official from somewhere across Europe spits out the dirty word “speculators” and then proceeds to demand immediate action, retribution, or both. There’s never much detail in these attacks. No need for it. Speculation is bad, right? And if there is any detail, such as discussion of those dreaded credit default swaps, there’s usually some mix-up about who’s doing the buying or selling or shorting or snorting or whatever people do these days with mutated derivatives. No matter. Speculation is evil since speculators produce nothing of tangible value. Parasite Capital, LP. Case closed...

How We Got the Bad News - For of all the financial instruments that have tumbled from the cornucopia of modern finance – options, futures, forwards, repos, swaps, synthetics, exotics – the CDS market may be the one most worth knowing something about. Credit default swaps played a major role in precipitating the subprime mortgage meltdown in 2008. Last week they were in the news again, following the Greek sovereign debt crisis, with the leaders of Germany and France calling for a ban on their speculative trading. How you feel about credit default swaps is a pretty good litmus test for how you feel about financial innovation in general. As it happens, three books about the CDS market have appeared recently, each of them in the form known in the trade as a “character-driven narrative”

Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report

At Lehman, Watchdogs Saw It All - NYTimes - Almost two years ago to the day, a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York quietly moved into the headquarters of Lehman Brothers. They were provided desks, phones, computers — and access to all of Lehman’s books and records. At any given moment, there were as many as a dozen government officials buzzing around Lehman’s offices. These officials, whose work was kept under wraps at the time, were assigned by Timothy Geithner, then president of the New York Fed, and Christopher Cox, then the S.E.C. chairman, to monitor Lehman in light of the near collapse of Bear Stearns.  Similar teams from the S.E.C. and the Fed moved into the offices of Goldman Sachs, Morgan Stanley, Merrill Lynch and others.

Findings on Lehman Take Even Experts by Surprise - 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. Now government regulators have what some lawyers call a road map for further inquiry into former Lehman executives like Richard S. Fuld Jr. and the auditing firm Ernst & Young. Whether the Justice Department and the Securities and Exchange Commission will actually pursue their own legal actions is unclear. But legal experts said on Friday that the examiner, Anton R. Valukas, had provided plenty of material for civil regulatory action at the least with his findings of “materially misleading” accounting and “actionable balance sheet manipulation.”

A Few Words on Lehman (long post)  I have a trip coming up at the end of this week, and in the meantime I have two articles to write, and a section of a legal thingy,  So here are just some moderately quick thoughts.The report is great reading (I’ve read some sections of it). You can get the whole thing here, in nine separate PDF files. If you want to get an overview of the report, Volume I has a comprehensive table of contents. ...Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings. Of the blogs I read, naked capitalism is giving it the most coverage and discussion. Update: Andrew Ross Sorkin, the prince of the mainstream media when it comes to Wall Street, is getting on the case. In Dealbook, he points out that regulators saw everything that was going on at Lehman during the crucial months:

Lehman as Enron 2.0 - If you have a society where it becomes foolish not to steal, then only fools don't steal, and that society has not much of a future. The bankruptcy examiner's report on Lehman reveals the fraud behind too much that goes for business on Wall Street. The fact is nothing really is new, many of the transactions were exactly what Enron "innovated", validated by a major accounting firm with the active collusion of Tim Geithner's NY Fed. The Journal has a good piece on the scam, along with the FT. Yves Smith is on BNN here about Geithner NY Fed's culpability. And Eliot Spitzer was on Dylan Ratigan here(tx zh):The only question, when is someone going to jail? Begging the question, when is our government going to do something? Of course, when you have a Congress that has been bought and sold five times over, one shouldn't hold their breath.

“Not Only Repo 105″: Total Return Swaps Also Used for Window-Dressing - Yves Smith - A reader wrote to tell me his firm had been shown transactions at the end of 2007 from an investment bank (not Lehman) that he was confident were to tart up its balance sheet. This confirms the hardly shocking idea that window dressing was not limited to Lehman: Around Dec 2007 bank I work for was approached by XXX to transact a total return swap transaction. The underlying for the TRS would be a large portfolio of ABSes (and CDO tranches – name your toxic stuff, it was there). The deal was offered as “You do TRS with us, we sell you the portfolio and at the end of the deal we buy the portfolio back, no risk, hey?”. It was very clear to me that this was a balance-sheet dressing exercise, as they were very keen to do the transaction before their reporting date.

Lehman Brothers Scandal Rocks the Fed After a year-long investigation, court-appointed bank examiner Anton Valukas has produced a deadly 2,200 page report which details the activities that led to the Lehman Brothers bankruptcy. It is impossible to overstate the significance of Valugas's findings. The report exposes the opaque but central role of the repo market which provides essential short-term loans for financial institutions. (Lehman used repos to conceal the full extent of its collapse, by dint of the amount of leverage it was using, meaning the pitiful asset anchor tethered to a vast zeppelin of debt) More importantly, it shows the cozy and, very probably criminal relationship between the country's main regulatory bodies and the Wall Street behemoths. The activities of the New York Fed (NYFRB), which at the time was headed by Timothy Geithner, is particularly suspect in this regard. The report should trigger an immediate Congressional investigation, probing the whole affair and most importantly the role of the Fed.

How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility - Five months ago, Zero Hedge observed the nuances of the Federal Reserve's Primary Dealer Credit Facility (PDCF) and concluded that this artificial liquidity boosting construct was nothing more than yet another scam to allow banks to extract ever more money from taxpayers, with the complicit blessing of the Federal Reserve Board Of New York (as the original piece also provided an in-depth discussion of the triparty repo market which is now a parallel to the buzzword of the day in the form of Lehman's "Repo 105" off balance sheet contraption, it should serve as a useful refresher course to anyone who wishes to understand why while Repo 105 with its $50 billion in liability contingency may have been an issue, the true Repo market, with over $3 trillion of likely just as toxic assets, is where the real pain in the future will come from). The PDCF would allow assets of declining and even inexistent value to be pledged as collateral, thus making sure that taxpayer cash was funneled into sham institutions holding predominantly toxic assets, and whose viability was and is limited, yet still is backed by the Fed, which to this day continues to pour our money into them. Today, with a tip from the NYT's Eric Dash, we demonstrate just how grossly negligent the Federal Reserve was when it came to Lehman's abuse of the PDCF, and how the trail of slime of Lehman's increasingly obvious manipulation of its books goes to the very top of the Federal Reserve Bank of New York, and its then governor - a very much complicit Tim Geithner.

Lehman’s Repo 105: More Than You Ever Wanted to Know –– WSJ- With the initial hoopla over Lehman’s Repo 105, it’s time to get technical on the accounting “gimmick” Lehman Brothers used to move some $50 billion in assets off its balance sheet. The repo (or repurchase) transactions resulted in the investment bank’s leverage ratios look much more sensible to investors than they might otherwise had. We know how much our readers love complicated explications of accounting alchemy, but here is our quick and dirty explainer on repurchase agreements and Repo 105 that you can use to impress your friends and cow your enemies. Also, the formidable Paddy Hirsch gives Repo 105 the whiteboard treatment.

Macro Man: Repo 105 (excerpt)
A little bit of Treasuries out the door
Ring 'em up again and do some more
A little bit of repo'd GSEs
A little less mortgage-backed is what I see
A little bit of ABS is awfully fun
A hundred fifty billion though is way too long
A little bit of repo ain't a scam
A little bit more? Dick Fuld's your man

Lehman Hid Money With Help of Global Rules – NYTimes - Lehman Brothers‘ now notorious Repo 105 scheme depended on forum shopping, Reuters Breakingviews says. The investment bank wasn’t able to persuade its lawyers in the United States that the relevant repurchase agreements constituted real sales. So it routed them through its British subsidiary. That meant they came under the British legal system, and the law firm Linklaters was able to opine that the transactions counted as sales.  United States accounting standards apparently did the rest, allowing Lehman to shuffle $50 billion of assets off its balance sheet. Regulators in different jurisdictions need to cooperate to close all such gaps that they can.

Repo 105 part deux - Looks like I'm not on the only one struck by how the Lehman Examiner's report elides how the bank was insolvent. And I'm not talking about coming in under regulated capital ratios, I'm talking about a (massively) negative equity number.  Two unanswered questions stand out. The first is that even with the extensive Jenner & Block report, we still do not have even a rough sense of how big the shortfall in Lehman’s equity was at the time of its collapse. We know it was hiding $50 billion of liabilities at the end of its fiscal second quarter through its Repo 105 program, but that only tells us the size of one of the cover-up mechanisms. The focus of the report was on how Lehman was shut out of the overnight interbank lending market, and did not go to the discount window. It never explicitly states that the reason it was shut out of the repo market was because it had negative equity, and there was real counter party risk to extending what (by design) should be a riskless loan.

What's a repo? - Marketplace has a nice video on how Repo 105. Unfortunately, they completely miss the role repos play in the banking system. It actually took me a while to figure this out and I understand the banking system very well, so this may be confusing other people as well. Note that the repo market is not some shady thing, it is how the Fed has decided to enable payment settlement and set the FFR. If all banks closed long reserves, the Fed would intervene in the market until some were short, and force those banks to repo with other banks.

"A Repo Man Spends his life Getting Into Tense Situations": Repos and off-balance sheet financing: you don't want to know the details but I spent a good part of my academic life trying to understant this sort of thing. And here they are, the showcase item in the Examiner's Report re Lehman brothers... and no, I don't intend to read all nine volumes of the report: hey, what is retirement for, anyway? But so far as I can tell, we are looking at the crudest kind of accounting fiddle--far simpler to understand or explain than the Byzantine machinations of Enron. That is, I bet when the dust settles it will look like this: (i) Lehman transfers securities to theta, a third party. (ii) Theta pays cash. (iii) In a standard repo, Lehman has the obligation to buy back (repo) the security at a defined price. The repo price will amount to the original price plus interest.

A Whiff of Repo 105 - While hiding $50 billion off balance sheet is nothing to sneeze at, ‘Repo 105’ may be an unfortunate distraction. We should focus our attention on a far more mainstream and dangerous use of repurchase agreements backed by securitized bonds to grow balance sheets. This practice, enabled by a 2005 legal change, directly destabilized the financial sector and led to the ultimate credit crisis of 2008. In other words, the approximately $7-10 trillion repo financing market created what Gary Gorton and Andrew Metrick call the “run on repo” or what Gerald Epstein describes as a “run on the banking system by the banking system.”

Repo 105: No Laughing Matter - The SEC is investigating whether other Wall Street firms employed the deceptive accounting practice, used by Lehman Brothers in 2007 and into the second quarter of 2008, to mask its financial condition, according to a DealBook report in the New York Times. SEC Chairman Mary Schapiro confirmed on Wednesday that the regulator is looking more broadly beyond Lehman into other firms that may have used the same tactics, reported the NY Times. Lehman used the so-called Repo 105 tactic to remove $50 billion in debt from its balance sheet, at the end of the financial quarter to make its leverage level look lower, according to a bank examiner’s report. Then Lehman reportedly brought the assets back onto its balance sheet after it issued the earnings report.  But some pundits are skeptical that the SEC will find anything. There is even skepticism over whether Repo 105 is really a revelation. To me it sounds like déjà vu.

Repo 105: “Like, whatever”Max Abelson has talked to three former Lehman executives about the Valukas report, and you can see why they requested anonymity. Here are some of the gems from Senior Executive #2: “It’s just not that big of an event… They just want to be mad and don’t know what they’re talking about and want to be outraged.” “yappers who don’t know anything.” There was lots of talk in the early months of the Obama administration about whether Wall Street bankers really Got It or not — whether they had any comprehension of the amount of justifiable anger in the country and the world that was arrayed against them. Clearly, they don’t. These executives aren’t Erin Callan, retreating to a quiet life in the Hamptons to lick her wounds and ponder her possible criminal prosecution. My guess is that they’re all currently employed, at Barclays or elsewhere, making enormous amounts of money, and persuading themselves that everybody must therefore be rubes, ripe for ridicule.  But it’s important not to lose sight of the fact that what we’re seeing here is a corporate failing to an even greater degree than it is an individual one, and that it infects investment banks generally, not just Lehman Brothers. These shops deliberately go out to hire psychopaths, and then they fire the ones who go soft, while promoting the most aggressive assholes, keeping a few smooth-talking client-relationship types on hand to preserve some semblance of a respectable public face.

The Repo Men’s New Lehman Shrug - The New York Observer - There are two ways to react to the biblically proportioned report that Lehman Brothers’ bankruptcy examiner released last Friday, which over its 2,209 pages (not counting appendices) has echoes of Grisham, Orwell and Ayn Rand. The first is to lose faith in man. As it reveals, Lehman turns out to have used a secretive and dazzling accounting trick to fluff up appearances as it tumbled toward a violent end in September 2008. That month’s gruesomeness still reverberates: Moody’s not only warned this week that it may downgrade the American government’s triple-A credit rating, but it said that maintaining it will require “adjustments of a magnitude that, in some cases, will test social cohesion.” The second reaction is to shrug. Two former senior Lehman executives did just that this week, telling The Observer that the examiner’s autopsy, especially its news that about $50 billion was quietly scooted off the firm’s balance sheet for each of the first two quarters of 2008, was simply not a big deal. “If Valukas went into Goldman Sachs, what do you think the report would look like?” the first asked

The Jenner & Block Lehman Report and Lack of Financial Reform - First of all why don’t we take the rest of the money for the FCIC (“Financial Crisis Inquiry Commission”) and just give it to Jenner & Block to keep investigating and writing? Their 9 volume study of what went wrong at the NY Fed and Lehman is our crisis’ Pecora Commission. People should be reading this and getting pissed off. James Kwak has an overview. Like Ryan Chittum, I’m amazed at how well the blogosphere is covering it and the mainstream media is not.. One thing that I’m finding surprising is that the President and the Treasury Secretary aren’t out there beating the hell out of this story. For financial reformers, this report should be like a “Get 2 Free Financial Reforms” monopoly-style card falling out of the sky. Why isn’t the administration thumping the hell out of this story?

Lehman: Regulators Chose to Deny, Extend and Pretend - Yves Smith - The Lehman Examiner’s report gives an unintentionally damning portrayal, both of the the structure of financial regulation in the US and how regulators failed to use the powers they had effectively. Government shows that even with its imperfect grasp of the situation, the authorities recognized Lehman had a large negative net worth. Yet rather than move decisively towards an unwind, they proceeded inertially. They urged Lehman CEO Dick Fuld to find a rescuer (who would invest in that garbage barge, particularly when Andrew Ross Sorkin’s account makes clear that Fuld’s moves were so obviously desperate and clumsy as to be certain to fail) and also promoted the notion of an LTCM-style “share the pain” resolution. Yet with the rest of the industry weak, and the magnitude of hole in Lehman’s balance sheet a mystery, these courses of action had low odds of success from the outset (indeed, the “Lehman weekend” in which the authorities almost bulldozed through a deal, seemed designed to avoid sober analysis of how bad things were at the failing investment bank).

Collapse of Lehman Brothers: What Did  Geithner Know and When Did He Know It?  Lehman Brothers managed to conceal from the outside world a multi-billion-dollar mess that was years in the making, according to an audit investigation released last week. But the size and scope of Lehman’s manipulative accounting has led some Wall Street critics to wonder what the New York branch of the Federal Reserve—led then by current Treasury Secretary Timothy Geithner—knew about the scheming that eventually led to the venerable bank’s collapse in 2008.

Wray: Timmy-Gate: Did Geithner Help Hide Lehman Fraud - Just when you thought that nothing could stink more than Timothy Geithner’s handling of the AIG bailout, a new report details how Geithner’s New York Fed allowed Lehman Brothers to use an accounting gimmick to hide debt. The report, which runs to 2200 pages, was released by Anton Valukas, the court-appointed examiner. It actually makes the AIG bailout look tame by comparison. It is now crystal clear why Geithner’s Treasury as well as Bernanke’s Fed refuse to allow any light to shine on the massive cover-up underway.

The Lehman Report: Is It Time for a Special Prosecutor? - After a slow start, commentators and media outlets are finally cottoning onto the implications of a devastating new report on the collapse of Lehman Brothers. Andrew Ross Sorkin, my fellow chronicler of the financial crisis and frequent co-panelist, has a good column in today’s Times which takes to task the regulators who ignored, or possibly even condoned, the accounting shenanigans that Lehman was getting up to during its final months. Meanwhile, Eliot Spitzer and Bill Black, two lawyers who know a lot about Wall Street wrongdoing, are calling on Congress to launch its own inquiry into the matter. If I am right, this is only the beginning

Time for Truth: Three Card Monte is for Suckers  - Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman’s accounting deception and the release of relevant emails and internal documents: In December, we argued the urgent need to make public A.I.G.’s emails and “key internal accounting documents and financial models.” A.I.G.’s schemes were at the center of the economic meltdown. Three months later, a year-long report by court-appointed bank examiner Anton Valukas makes it abundantly clear why such investigations are critical to the recovery of our financial system. Every time someone takes a serious look, a new scandal emerges. The damning 2,200-page report, released last Friday, examines the reasons behind Lehman’s failure in September 2008. It reveals on and off balance-sheet accounting practices the firm’s managers used to deceive the public about Lehman’s true financial condition. Our investigations have shown for years that accounting is the “weapon of choice” for financial deception.

Rep. Bachus demands hearing on Lehman report, says Fed, SEC may have ‘turned a blind eye’ on fraud - Representative Spencer Bachus, the top Republican on the House of Representatives Financial Services Committee, said the report highlighted regulators' failure to act on evidence of accounting gimmicks used to hide Lehman's insolvency. "Either the SEC and the New York Federal Reserve failed to discover the ongoing accounting fraud at Lehman, or they turned a blind eye to the ongoing fraud," Bachus said in a letter to the committee's chairman, Barney Frank, requesting a hearing. He said the hearing would be especially important given legislative proposals to expand the Fed's regulatory powers.

DODD CALLS FOR DOJ TASK FORCE TO INVESTIGATE CRIMINAL ACTIVITIES AT LEHMAN & ELSEWHERE - WASHINGTON – Today, Senate Banking Committee Chairman Chris Dodd (D-CT) sent a letter to Attorney General Eric Holder asking that he commission a task force to investigate activities at Lehman Brothers and other companies that may have engaged in similar accounting manipulation with a view to prosecution of those who broke of the law. Below is the text of the letter:

Federal Reserve Must Disclose Bank Bailout Records (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said. The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.  The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

Bread and Games - Ben Bernanke says the Fed didn't know about Lehman's Repo 105 creative accounting. Even though the Fed (the New York Fed under Tim Geithner, to be precise), already alarmed over Bear Stearns' demise, had people, supposedly "experts", inside Lehman's offices, who, again supposedly, had access to all relevant books. Maybe they didn't find the quarterly reports relevant to Lehman's situation? The Fed was not alone: the SEC also had placed a team inside Lehman's organization. And the SEC also claims it had no knowledge of Lehman's repos.

Has Bernanke Perjured Himself? - Remember, Bernanke said under questioning the other day that "they hid it" in response to a question about whether or not The Fed knew about the Lehman "105" repo arrangements, which appear to have been structured to intentionally mislead the public (and investors) about its liquidity position. But in the deep of the night Financial Times published an article that resoundingly calls "BS" on that claim: Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say. Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less ­liquid than Lehman.

Lehman chicanery is tip of the iceberg -  -The Lehman insolvency examiner's report once again shows that the public should be sceptical of the audited accounts published by giant corporations. Accountants disarm journalists, critics, regulators and the general public by claiming that the accounts are fairly presented in accordance with some generally accepted accounting principles (GAAP), but the Lehman report shows that they are based in carefully rejigged accounting practices (CRAP).

Another Disturbing Finding in Lehman Bros. Report - Frank Partnoy, a University of San Diego law school finance professor (and former derivatives structurer) points out that Lehman also couldn’t reliably and consistently confirm the value of its holdings – revelations buried deep within a blistering 2,209-page report  by the U.S. bankruptcy court examiner investigating the collapse. Thus the company lacked any internal check on prices set by its numerous trading desks, each with its own methodology and the incentive to set optimistic prices on securities to be traded or held. Theoretically, Lehman’s “Product Control Group” was supposed to do this job of managing the firm’s risk. But the staff couldn’t keep up with the volume. They often failed to rigorously test the prices set by Lehman traders, signing off with a simple “OK” notation. And even when they did check, they often understated the value, in some instances by one-thirtieth –

Frank Partnoy: Lehman Examiner Punted on Valuation - The buzz on the Lehman bankruptcy examiner’s report has focused on Repo 105, for good reason. That scheme is one powerful example of how the balance sheets of major Wall Street banks are fiction. It also shows why Congress must include real accounting reform in its financial legislation, or risk another collapse. (If you have 8 minutes to kill, here is my recent talk on the off-balance sheet problem, from the Roosevelt Institute financial conference.) But an even more troubling section of the Lehman report is not Volume 3 on Repo 105. It is Volume 2, on Valuation. The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

Could Lehman be Ernst & Young's Enron? | Ever since the fraud at U.S. energy trader Enron Corp brought down accounting firm Arthur Andersen eight years ago, global auditing firms have worried that a major misstep could be fatal.Over the past few years, the firms have pushed for liability caps on litigation and settled dozens of cases, all amid concerns that each of the "Big Four" accounting firms faces potential litigation from undetected frauds at large public companies that could destroy them.Ernst & Young became the latest auditor to come under fire this week after the court-appointed examiner in the Lehman Brothers Holdings Inc bankruptcy said the audit firm did not challenge accounting gimmicks that allowed Lehman to hide some $50 billion in assets in 2008, while claiming it had reduced its overall leverage levels

De[constructing/functing] Ernst & Young - Ultimately the biggest loser from the whole Repo 105 scandal may not be the perpetrators, i.e., Fuld, the firm's numerous CFOs, Tim Geithner and Mary Schapiro, but the alleged "fact-checkers" - auditors Ernst & Young. So to facilitate a decision on E&Y culpability, we present a candid look at Ernst & Young's Financial Services Office, the company's presentation on Paragraph 10 of IAS 39 overseeing Repo agreements, E&Ys analysis of FAS 140 "Accounting for Financial Transfers and Repurchase Financial Transactions", the Examiner's conclusions on the firm's breach of conduct, the firm's soon to be dwindling banking client base, and last, and most certainly least, a snapshot of E&Y's Lehman co-lead partner, Hillary Hansen, against whose negligent actions, as part of the Lehman E&Y practice, the Examiner concludes "that sufficient evidence exists to support a colorable claim for malpractice."

Lehman balance sheet massaging may not be unusual - (Reuters) - On Wall Street, massaging the balance sheet is a time-honored practice. But did Lehman Brothers Holding Inc cross a line in the routine manipulation of its balance sheet, as described by an independent examiner? That is the central question to emerge from the examiner's report, released late on Thursday by the bankruptcy court in Manhattan, which details examples of Lehman concealing assets and liabilities through accounting techniques. Banks have wrestled with this issue for years. The old Bankers Trust, for instance, struggled to fend off bank clients that wanted to use BT to help conceal assets, said Ray Soifer, a consultant who previously worked at BT and sat on a task force designed to reduce that business."Reducing leverage is something that banks do. It's cosmetic,"

Blogs Beat the Press on the Lehman Brothers Scandal - And just like that the Lehman Brothers scandal drops off the front pages. And not just the front pages—the section fronts, too. Say, we just learned about a $50 billion fraud on Thursday. Think there might be some newsworthy follow-ups here? Actually there are, and both The New York Times and Wall Street Journal have them, but they stuff them inside. The Journal, posts a Reilly news article looking at the culpability of Lehman auditor Ernst & Young. The paper dumps it on C7. The NYT has on the same angle—a very good one to examine closely—and slides it inside on B2. Somehow the Times thought more people would care about Sorkin’s scoop on a $3 billion deal for Tommy Hilfiger or that it was more important than an auditor approving accounting fraud. They don’t and it’s not.

Further Lehmans revelations blocked by Barclays - Further damaging revelations about the collapse of Lehman Brothers are being held up in the US courts by Barclays.  A 2,200-page examiner’s report into the collapse of the 158-year old institution, published last week, uncovered in forensic detail evidence that Lehman used “balance sheet manipulation” to mislead investors and regulators. It is expected to fuel a series of lawsuits that former Lehman executives and their auditors are already facing in the US courts. The scathing report was described as “one of the most extraordinary pieces of work product I have ever encountered”, by Judge James Peck, who commissioned it as part of his handling of the Lehman bankruptcy. Judge Peck added that the report, by New York City attorney Anton Valukas, “reads like a bestseller”.

Lehman Whistle-Blower's Fate: Fired - WSJ - Lehman Brothers Holdings Inc. ousted a whistle-blower just weeks after he raised red flags about the securities firm's accounting in 2008. Matthew Lee, a 14-year Lehman veteran, was let go in late June 2008 amid steep losses at the firm as it tried to maneuver through the global financial crisis. Earlier that month, he had raised concerns with Lehman's auditor, Ernst & Young, that the securities firm was temporarily moving $50 billion in assets off its balance sheet.

Lehman whistleblower lost his job weeks after raising alarm - A worried accounting executive at Lehman Brothers, who raised the alarm about what he saw as dubious number-crunching at the doomed Wall Street bank, lost his job barely a month after alerting the auditor Ernst & Young, his lawyer claimed yesterday, in a case prompting calls for tighter protection for corporate whistleblowers. Matthew Lee, a senior vice-president in Lehman's finance division, outlined six allegations of unethical accounting in a memo sent on 16 May 2008 to Lehman's senior managers, who asked Ernst & Young to investigate. In discussions with partners at Ernst & Young, he highlighted controversial "repo 105" transactions that artificially boosted Lehman's balance sheet by $50bn (£33bn). But the London-based accounting firm took "virtually no action", according to an official report into Lehman's demise and Lee's lawyer, Erwin Shustak, said his client lost his job in late June 2008

Problems in an NYT Column - There are some real journalistic lapses in a New York Times column Tuesday that quoted anonymous sources about a Lehman Brothers whistleblower who tried to warn about the failing bank’s questionable accounting maneuvers, including one known as Repo 105. The Times’s DealBook editor Andrew Ross Sorkin, who wrote the column, quotes the sources saying the whistleblower came forward only after “it became clear” he was to be replaced in his job. Times story gives no indication that Lee was called for comment. In fact, he wasn’t called, according to Lee’s lawyer, Erwin Shustak, whom I talked to yesterday. “That comment was made not based on any reality or fact that I’m aware of,” Shustak says. “He couldn’t possibly be accurate because I know that until Mr. Lee wrote these letters, he had not been notified that he was part of any layoffs.”

Leeway for Lehman Brothers – CJR - I suppose we shouldn’t be surprised that John Carney thinks “We Should Not Criminally Prosecute Lehman Executives.” After all, this is someone who is a fan of insider trading, which he says “harms no one” and ought to be legalized, and who thinks the Community Reinvestment Act played a significant role in causing the crisis. Despite his concern for Lehman executives, however, he’s not above, putting together a slideshow on “The People Who Are Going To Get Nailed In The Lehman Examiner Fallout.” Lots of clicks to be had for Clusterstock wasting people’s time with unnecessarily frequent page jumps, after all! But his argument on why not to prosecute is an even bigger mess, as you might imagine. Skip the first nine paragraphs of throat-clearing and start with this gem:

Dick Fuld? Not a bad guy (and other contrarian takes on LEH) - While it was inevitable, FT Alphaville is nonetheless impressed at the speed with which the contrarian camp has come out in defence of Lehman Brothers, post Valukas. First up, Chazzer “Crazy Like a Fox Business Anchor” G, moonlighting at The Daily Beast: Valukas, a former U.S. attorney, works for the Lehman estate. It’s his job to get money for the estate to make creditors whole. In doing so, it’s his job to make Fuld & Co. look as culpable as possible in the way they handled the firm’s finances as it slid into bankruptcy. Next up, Chris Clair at HedgeWorld’s Alternative Reality blog, in a post titled ‘The Lehman Examiner’s Report: Yeah…So?‘: I mean, are these revelations really so shocking?

He’ll Go Free - Dick Fuld may be “grossly negligent” in his role in Lehman Brothers’ historic implosion, but he and other top Lehman executives probably won’t go to jail, according to a long-awaited autopsy released late Thursday.  I’ll be the first to tell you that Fuld was a good CEO who over time became arrogant and delusional, and with that allowed his firm to embrace risk in astronomically absurd ways, particularly as Lehman became more successful. Increasingly, he appointed yes men and yes women to senior posts, including Erin Callan, who in my opinion was grossly unqualified to be the chief financial officer of a major Wall Street firm that was rolling the dice on esoteric bonds.

Lehman Brothers’ golden girl, Erin Callan: through the glass ceiling – and off the glass cliff - A hundred miles from Manhattan in the swanky beachside enclave of East Hampton, the so-called Greta Garbo of Lehman Brothers has gone to ground. The bankrupt bank's former chief financial officer, Erin Callan, lives quietly in a wood-shingled house, attends spin classes at a local gym and is dating a New York fireman. Smart, sassy, young and charismatic, Callan was briefly the golden girl of Wall Street. In multiple television appearances, Callan adopted a plain-speaking patter in the spring of 2008 to reassure investors over the future of the 158-year-old investment bank. A fashionable figure, she seemed a refreshing change from the middle-aged men around her. The only problem was that she got things desperately, spectacularly wrong.

Enron and Merrill, Greece and Goldman - Did big banks break the law during our recent global debt-fuelled boom?  The usual answer is: no – they just took advantage of loopholes and captured regulators.  The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.But is this really true?  The new Valukas report on Lehman suggests there are grounds for civil action, i.e., people can sue for damages.  News reports give no indication of potential criminal charges, but this may change soon.  The hiding of Lehman’s true debt levels – through the so-called “Repo 105” structure – is strikingly reminiscent of how Enron’s balance sheet was disguised through fake asset “sales” (as Senator Kaufman now points out). And, of course, the people who ended up facing criminal charges and – in some prominent cases – going to jail...

Bernanke Asked by Congress About Friedman’s Goldman Sachs Stake (Bloomberg) -- A House committee requested that Federal Reserve Chairman Ben S. Bernanke turn over documents related to Stephen Friedman’s purchase of Goldman Sachs Group Inc. shares while he was on the boards of both the Wall Street firm and the Federal Reserve Bank of New York. “At a time when Mr. Friedman was prohibited from owning Goldman Sachs stock, he bought over a million dollars more of it without notifying the Federal Reserve,” said Representative Edolphus Towns, chairman of the Oversight and Government Reform Committee, in a statement today. “This raises serious questions about transparency, fairness and the appearance of a cozy relationship between Wall Street and the government.”

What is a Punk Staffer? - A punk staffer is a staffer who laughs when you say “A repo man spends his life getting into tense situations.” - John Boehner makes it clear. He agrees with Senator Durbin that, frankly, bankers own that place. However, he thinks that’s the way it should be. Why the constitution says right in article 1 of the constitution that congress may ”regulate trade between the several states so long as the masters of the universe approve of the regulations.” Boehner told bankers to protect the constitution and not let congress aka “punk staffers” deprive them of their legitimate authority to legislate. Extensive efforts at achieving inter-generational communication follow the jump.

Financial Accounting and Decency - As the term implies, the central idea of fiduciary accounting is that individuals to whom resources have been entrusted — in this case, corporate managers — report to their owners on how those resources were used, and with what results.Because managers make mistakes and the firms they manage can be buffeted by negative forces outside of their control, there will be many occasions when bad news has to be delivered. On those occasions there arises the temptation to lie.The Generally Accepted Accounting Principles (GAAP) promulgated by the accounting profession and sanctioned by the government are intended to fence in the degree of lying that would otherwise take place among adults in the business world. But those principles can never stop the lying altogether. In the end, we must rely on plain decency among corporate executives.

Michael Lewis: Wall Street Collapse A Story Of 'Mass Delusion (VIDEO) - It may be tempting to think Wall Street is full of criminals who got off easy during the financial crisis. But bestselling author Michael Lewis cautions against such an easy conclusion. "I think the story is much more interesting than that," he said during an interview on CBS's 60 Minutes. "I think it's a story of mass delusion." The former bond trader is releasing a book this week called The Big Short: Inside the Doomsday Machine. According to CBS, the result of his 18-month investigation attempts to explain, "how some of Wall Street's finest minds managed to destroy $1.75 trillion of wealth in the subprime mortgage markets.", "The incentives for people on Wall Street got so screwed up, that the people who worked there became blinded to their own long term interests. And because the short term interests were so overpowering. And so they behaved in ways that were antithetical to their own long term interests."

Broken Incentives – “People See What They’re Incentivized to See. If You Pay Someone Not to See the Truth, They Won’t See the Truth” -  Bestselling financial writer Michael Lewis said: Wall Street is able to delude itself because it’s paid to delude itself. That’s one of the lessons of this story. People see what they’re incentivized to see. If you pay someone not to see the truth, they won’t see the truth.As Lewis makes clear, the broken incentive system causes the heads of the Wall Street giants to act in ways which are not only destructive to the economy as a whole and to American jobs, but to the long-term health of their own companies.If the broken incentive system were fixed, Wall Street big shots could suddenly be able to “see” the destructive effects of fraudulent and risky behavior. That would take politicians getting out of bed with Wall Street for a couple of minutes, which is unlikely, given how warm and cozy it is Unfortunately, that’s probably not politically feasible.

"The Big Short" Is A Bit Short In Missing The Reasons for The Financial Crisis - It’s the number one book in the county. Every day, Michael Lewis’s the Big Short is getting B I G G E R, no doubt because he is so mediagenic, conversational and likes to laugh with the hosts who interview him about his findings. ..Lewis has criticized those who criticize Goldman Sachs, according to Bloomberg, writing earlier, "bashing Goldman Sachs is Simply a Game for Fools."  Which side is he on I would guess, his side? On 60 Minutes, TV’s top newsmagazine, he was described as a former trader. Not according to Janet Takakoli who runs her own financial firm:"Imagine my surprise to see him billed as a trader on 60 Minutes, since he was actually a junior salesman, she writes on Huffington Post, "Well-heeled male peacocks strutted the trading floor, and junior salesmen were girlie-men, mere eunuchs serving their pashas."

Michael Lewis’s ‘The Big Short’? Read the Harvard  Thesis Instead! - WSJ - Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.” While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? Now that piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank.

SEC: Regulatory Capture Hard at Work - The WSJ is reporting that back in 2003, the SEC tried to remove the restrictions on compromised security analysts that tried to prevent them from whoring out recommendations for banking business. Similar to the prostitution of the ratings agencies, the SEC somehow thought it was okay for iBanks to fuck their stock buying investors, just so long as they got paid enough in banking fees to justify the screwing. WSJ:

SEC: Defective by Design? - Our earlier post noted the regulatory capture of the SEC by Wall Street. Later in the WSJ piece we referenced, SEC Chairman Mary Schapiro hinted that the issue might be even worse. She blamed the agency’s ineffective oversight of Lehman Brothers was partly due to insufficient staffing. So that set me off looking for how the SEC staff and funding levels have changed over the past few decades relative to their workload .What I found was deeply disturbing: Over the past 30 years, the financial world has grown exponentially in size, breadth and complexity of products, trading volume, and total assets under management.  In terms of personnel, assets under management, numbers of trader, managers, sales  people,  and mathematical PhDs., who work on the street increased dramatically.The SEC did not.

Guest Post: The CDOs That Destroyed AIG: The Big Short Doesn't Quite Reveal What They Knew And When They Knew It… It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it? "What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured.  "They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings.  "When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.

Federal Reserve Must Disclose Bank Bailout Records (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said. The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.  The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

Support for a Way to Avoid a Repeat of Bank Bailouts - NYTimes -The idea of requiring giant banks to develop contingency plans that would spell out their orderly demise in afinancial crisis gained support on Thursday from major international regulators. The Basel Committee on Banking Supervision, a forum for international cooperation on financial regulation, endorsed the idea, while Lawrence H. Summers, the director of the National Economic Council, and Daniel K. Tarullo, the Federal Reserve governor who oversees the central bank’s regulatory duties, spoke in favor of it. The endorsements come as the Senate debates a sweeping overhaul of financial regulation aimed, among other things, at buffering the economy from the kind of systemic threats that companies like Lehman Brothers and the American International Group posed in 2008.

Latest TARP Price Tag: $109 Billion - In the latest update of its cost estimates for Troubled Asset Relief Program, the $700-billion kitty Congress created in 2008 to bolster the banking system, the Congressional Budget Office says the ultimate cost to taxpayers — including investments, grants, and loans completed, outstanding, and anticipated — will be $109 billion. Much of that stems from aid to American International Group (AIG) — about $36 billion — and the auto industry — about $34 billion. CBO estimates a very small net gain to the government from the Treasury’s purchase of more than $200 billion in shares of preferred stock from hundreds of financial institutions.

The Troubled Asset Relief Program - CBO Director’s Blog -CBO currently estimates that the cost to the government of the TARP’s transactions—including investments, grants, and loans—completed, outstanding, and anticipated will amount to $109 billion. Much of that estimated cost is associated with the assistance provided to American International Group (AIG)—at a cost of about $36 billion—and the automotive industry—at a cost of about $34 billion. CBO estimates a very small net gain to the government from the capital purchase program, in which the Treasury purchased more than $200 billion in shares of preferred stock from hundreds of financial institutions. The Office of Management and Budget (OMB) estimates that the total cost of the TARP’s transactions will amount to $127 billion. OMB’s estimate is $18 billion higher than CBO’s estimate principally because of differences in the estimated cost of assistance to AIG and in the amount expected to be disbursed by the Home Affordable Modification Program

More on Bank Reserves, and their Potential MeaninglessnessMy post about bank reserves generated a lot of discussion. Well, I guess it was really more of an anonymous commenter trying to explain it to me than a discussion, but anyway, the comment thread is worth a read.  I also have two more reserves related links today (one of which is from David, another commenter in that thread).  I think it's important for people to realize that 99% of Americans, me included, really have no idea how the banking system works.  We (we the ones who don't understand) think that when we master the concept of fractional reserve lending (which, in itself, 90%+ of Americans probably don't understand) that we have it figured out.  There's a big problem though, in that fractional reserve lending really doesn't illustrate how the system actually works anymore.  You can check out a piece from John Hussman that's a few years old for some more thoughts:

FRONTLINE: the warning - We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?

Ban Naked CDS - In a credit default swap (CDS), the buyer contracts to pay the seller a regular premium in return for a commitment that the seller will pay out in the event of a default on a specified financial instrument, typically a bond. The market began in the late 1990s as a pure insurance market that permitted bondholders to hedge their credit exposure – an excellent innovation.  But then market participants realised that they could buy and sell ‘protection’ even if the buyer did not hold the underlying bond. This is a ‘naked’ CDS, which offers a way to speculate on the financial health of an issuing corporate or sovereign without risking capital, as short-selling would do. That was so attractive that soon the market was dominated by naked CDS, with a volume an order of magnitude greater than the stock of underlying bonds.

Credit Default Swaps Are Not The Problem - The OTC derivatives market had a rough two years in the press. It started off with simply blaming the entire crisis on the OTC market. That was fashionable for a while, but it turned out to be total nonsense. So the new face-saving gloss is to distinguish between causation and severity: you see, the OTC market didn’t cause the crisis, but it did made things worse.  It seems this equally ridiculous claim isn’t enough for the press, given the latest hail storm of nonsense accusations. For after all, there is still plenty of ad revenue to be generated with rabble rousing, uninformed commentary on buzz words. So what’s the latest theory? It’s two fold. First, the CDS market is “opaque.” Second, speculation is rampant, rampant I say! And it’s adversely affecting asset prices outside the CDS market. Below I address the first prong of this theory, and show that not only is the CDS market relatively transparent, but that it generates more useful information than the bond market.

‘Swap Tango’ – A Derivative Regulation Dance - Based on surveys conducted by the Bank of International Settlements ("BIS"), the global derivative market as at June 2009 totalled US$605 trillion in notional amount. This is a large increase in size from less than US$10 trillion 20 years ago. The bulk of the activity takes place in the Over-the-Counter ("OTC") market where derivatives are traded privately and on a bilateral basis between banks and clients. The OTC market should be contrasted with the exchange traded market where relatively standardised products are traded on formalised, regulated exchanges.The outstanding amount compares to global Gross Domestic Product ("GDP") of around US$ 55-60 billion. As author Richard Duncan points out in his 2009 book The Corruption of Capitalism, the outstandings in the global derivatives market at its peak in June 2008 (US$760 trillion) was equal to "everything produced on earth during the previous 20 years."

Goldman Sachs derivative liability = 33,823% of assets- I have spoken at length here about the insidiousness of derivatives and Credit Default Swaps.  So this new statistical reference frankly awed me.  It is from a Levy paper on the recent shift over the last 50 years to a shadow banking system, that has largely replaced bank balance sheet lending with Money Managers.  As I read this paper there is little to feel good about in the apparent economic rebound that the government keeps telling us about. The data on derivatives is impressive. JPMorgan Chase, for example, held derivatives worth 6,072 percent of its assets at the peak of the bubble in 2007. The other two giants, Citigroup and Bank of America, although still far behind Chase, had 2,022 percent and 2,486 percent respectively. Goldman Sachs, the other giant, had an astonishing amount of derivatives on its balance sheets: 25,284 percent of assets in 2008 and 33,823 percent as of June 2009. Citigroup and BOA now have more of this risk on their books than before the crisis

Wall Street Dominance of Swaps Clearing Must End, Brokers Say (Bloomberg) -- MF Global Holdings Ltd., Jefferies Group Inc. and at least 19 financial firms want regulators to force swaps clearinghouses to lower entry barriers that restrict competition in a $605 trillion derivatives market dominated by the world’s biggest banks.  Brokers formed an association last month that hired a Washington-based law firm to pursue the issue with lawmakers and regulators, said Mike Hisler, a partner at New York-based Hexagon Securities LLC, a member of the group. They also seek tougher rules to ensure banks trading derivatives don’t try to sway clearinghouse decisions to shut out new competitors. The debate about access takes place as Congress seeks to empower regulators to dismantle failing financial firms deemed to pose a systemic threat to the economy.

On Hedging, Speculation and Financial Instability - Over on the Aleph Blog, David Merkel has promised a "long set of irregular posts" about what he calls "the rules." Here's an extract from the second in this series: 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.  This rule is pretty simple.  There are few places in the financial markets where there are naturally offsetting exposures that have not been remedied by an institution created for that very purpose, such as a bank.  In most cases with derivatives, the one that wants to reduce exposure relies on a speculator.  There are rare cases where the risk of one is the benefit of another, but situations like that tend to create new firms to internalize the trade.  The trouble occurs when the speculator can’t make good on his obligations.

Deutsche Bank, JPMorgan, UBS Charged With Derivatives Fraud - Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan.The banks allegedly misled the city on swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of borrowings. Prosecutors across Italy are probing banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher “Kit” Taylor.

Psychiatric Help 5¢ – The Doctor Is In - Stephen Gandel has a post up at The Curious Capitalist about the inherent biases of financial planners. In addition to the already widespread suspicion that planners pad their paychecks in preference to meeting their clients' needs, he reveals that a new study appears to indicate they only tell their clients what their clients want to hear:  So the problem that the study points out is that when individuals hire people to give them advice, the advisers they have a strong incentive to tell you what you want to hear. If they don't do that, then you probably won't hire them. In other words, Mr. Gandel worriedly concludes, financial planners and advisers of every stripe in our capitalist society are Yes men. My reaction to this bit of news was twofold: 1) this is news?; 1 and 2) Oh Christ, some knucklehead is going to try to apply this to investment bankers. So, before number 2 has a chance to come true, I thought I would head that stagecoach off at the pass with the following ruminations.

Avalanche of Maturing Junk Bonds Looms for Markets - NYTimes - When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.  Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.  With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies

Banks Face a Mark-to-Market Challenge - The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses.  The result, if the proposal flies, would be big changes to bank balance sheets, the shape of income statements and some of the metrics investors use to evaluate financial institutions.

U.S. Banks' Q4 Trading Revenue Down 66% Sequentially - The Office of the Comptroller of the Currency or OCC said that U.S. commercial banks reported trading revenues of $1.9 billion in the fourth quarter, sharply down 66% from $5.7 billion in the third quarter. Fourth-quarter trading revenue, which is usually the lowest in a year on a seasonal pattern, also suffered from changes in the credit adjusted value of derivatives payables and receivables.  OCC noted that the uncertainty in the fourth quarter over potential legislative changes to the derivatives market hampered client demand beyond the normal seasonal effect. Also, OCC stated that the net effect of changes to the credit-adjusted fair values of derivatives payables and receivables adversely impacted trading revenues.

 Big Bailout Banks Slashed Lending In January -The Treasury Department said Monday that new lending plummeted in January at the nine largest banks that have yet to repay their taxpayer bailouts. Treasury's monthly survey of bank lending shows overall new loan origination dropped 35 percent from December's level. Treasury says the drop "may be partially explained by large increases" in late 2009. The survey also shows that average loan balances at the nine banks were 2 percent higher than in December – bringing them to their highest level since September.The nine banks are: Citigroup Inc., Comerica Inc., Fifth Third Bancorp, Hartford Financial Services Group Inc., KeyCorp, Marshall & Ilsley Corp., PNC Financial Services Group Inc., Regions Financial Corp. and Suntrust Banks Inc.

U.S. Lenders May Lose $65 Billion on Bad Loans, Report Says (Bloomberg) -- Bank of America Corp., Wells Fargo & Co. and U.S. lenders may face as much as $64.8 billion in losses on delinquent mortgages that Fannie Mae and Freddie Mac can ask them to buy back because they are fraudulent loans, Compass Point Research & Trading LLC said. The estimate is the worst-case scenario for lenders including JPMorgan Chase & Co. and Citigroup Inc., which may lose as little as $11.9 billion in repurchase demands from Fannie Mae and Freddie Mac and other loan buyers, according to the Washington-based broker-dealer and investment banking firm.

Banking Mechanics - Take 3 - Believe me - it's not that I really enjoy talking about the mundane theoretical mechanics of the banking system -it's just that it's driving me crazy.  So I'll try to get my questions answered here.  Let's put aside reserves for a second - for the purposes of the questions in this post, let's simplify and pretend that reserve requirements do not exist - they are zero. There are frequently repeated mantras from "those who understand."  The first of these mantras is "banks don't need deposits to make loans."  What I still haven't been able to get a good answer to, is, "If I open up the Bank of Kid Dynamite, how do I give my loan customers the money that I loan them if I don't have any deposits?" I still have to give them (the borrower) the money.  So, does it come out of my equity - my startup capital?  OR, do I borrow (the loan amount - not reserves, remember) it from the Fed, using my equity as collateral? (see comments)

US CMBS delinquencies tick ever upwards - A never ending story, this. Data released by Moody’s on Friday showed CMBS delinquencies ticked up again in February, climbing by 31bp to 5.73 per cent. The data are based on based on all loans in US conduit and fusion deals issued in 1998 or later which have a current balance greater than zero. Still, if you’re looking for reassurance of the second-derivative type: “This month”s increase was relatively mild compared to the 44 basis point increase the DQT averaged over the previous five months,”  The following charts however, are less than reassuring:

Banks Just Ignored $3 Of Commercial Real Estate Losses For Every $1 They Reported - While U.S. banks reported a whopping $59 billion in bad-loan charge-offs in the fourth quarter of 2009, research firm Audit Integrity believes they conveniently ignored another $3 - $4 dollars of further loan losses for every dollar loss they reported. That's because most of the $59 billion reported came from losses on home loans, not commercial real estate. Yet nearly 3,000 commercial banks are classified as having a high commercial real estate concentration according to the Congressional Oversight Panel, and AI believes that there's a lot of commercial real estate loans out there which are in trouble.

Dr. William Black Lecture on Mortgage Fraud -  Dept of Economics, University of Missouri-Kansas City.  The title of Dr. Black's talk is: Why Elite Frauds Cause Recurrent, Intensifying Economic, Political and Moral Crises.

Fannie/Freddie/FHA Loan Volume Falling Fast - Don't you just love Q1 of each year, when everyone suddenly revises their full year forecast?  Fannie Mae took a big scissors to its forecast for residential investment (mortgage funding) this quarter. A month ago they thought the it would rise 2.8 percent in Q1, but now they're saying it could drop 17.2 percent. That's some change.  On top of that they slashed their forecast for mortgage originations for 2010 to 1.31 trillion from 1.97 trillion in 2009 (a 33 percent plunge!). That forecast is also a drop from their February forecast of 1.34 trillion.

Fed's Bernanke sees US backing Fannie, Freddie debt (Reuters) - Current Fannie Mae and Freddie Mac mortgage-backed securities are likely to retain U.S. government backing should Congress create a new system for financing U.S. homes, Federal Reserve Board Chairman Ben Bernanke said on Wednesday.The comments follow speculation earlier this month bondholders in the mortgage funding giants seized by the government could ultimately lose some of their investment."My assumption is the mortgage backed securities which are already outstanding will be grandfathered and will retain the U.S. government backing that they currently have," Bernanke told lawmakers on the U.S. House Financial Services Committee.

Politics, shaky economy create no rush to restructure Fannie and Freddie - The federal government has spent the past half year seeking to roll back its emergency efforts at propping up the financial markets -- with the notable exception of its involvement in mortgage giants Fannie Mae and Freddie Mac. As the government has pledged more and more money to cover the companies' losses, it has assured the public that planning was underway for overhauling the firms so the bailouts would end. As recently as December, the Obama administration said it expected to release a preliminary report on how to remake Fannie Mae and Freddie Mac around Feb. 1. But no plan was produced, and in response to questions from lawmakers, Treasury Secretary Timothy F. Geithner clarified last month that it would be another year before the government proposes how to restructure the firms.

Countdown: Fed MBS Purchase Program 99.2% Complete - Almost finished ... For a discussion on how trades settle, and the coming associated expansion of the Fed's balance sheet over the next few months, please see my post last week. From the Atlanta Fed weekly Financial Highlights released today (as of last week):This graph shows the cumulative MBS purchases by week. From the Atlanta Fed:  The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 10. This purchase brings its total purchases up to $1.23 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 98% complete).  The NY Fed purchased an additional net $10 billion in MBS for the week ending March 17th. This puts the total purchases at $1.240 trillion or 99.2% complete. Just $10 billion and two more weeks to go - and I don't expect any fireworks

The New Road to Serfdom -- In reading through some of the commentary about Friday's report(.pdf) containing the latest data for the government's Home Affordable Modification Program (HAMP), the item circled in red below sort of "popped out at me" as being one of the more important reasons why this program will, ultimately, be an even bigger failure than it already is. Even after mortgage payments were reduced to a maximum of 31 percent of gross monthly income, the median total debt service each month is almost twice that amount, which almost guarantees a high rate of default down the road.

February HAMP Update: 1.8 Million Eligible For HAMP Out Of 6 Million 60+ Day Delinquent 1st Lien Mortgages …The main program the government has instituted to curb foreclosures and evictions, the Making Homes Affordable Program, is ramping up and has reached a whopping 170,000 permanent mods: this means that about that number of homeowners will be guaranteed a lower mortgage payment for five years. This is truly terrific news. This means that of the 6 million in 60 day delinquent 1st lien mortgage outstanding, a whopping 2.8% have gotten relief. Score one for the Obama administration. This doesn't even touch upon the bigger question: just who are these idiots who are stupid enough to still pay their mortgage? Paying mortgage is so pre-Repo 105. Full details from the site:

Update of HAMP ulitmate success rate -- perhaps 3% -Last month we pointed out that, on current trends, about 2% of seriously delinquent mortgages would be saved from ultimate default by HAMP. Updating the calculation with this month's numbers gives an estimate of 3%. Here is the revised calculation: On 12 Mar 2010 the Treasury reported that 170,207 permanent modifications had been started through Feb. This is 21% of the 822,075 trial modifications that had been started 3 months (the length of the trial period) earlier. Here is the Treasury's summary of the main numbers (click for larger image):

REOs or Short Sales? - Paul Jackson has a great post at HousingWire: Housing Recovery is Spelled R-E-O On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage. Ahhh ... the "Squatter Stimulus Plan" - live mortgage free (but not worry free).But Paul thinks foreclosures (REOs) will be the answer, not short sales:  For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived ... He gives two main reasons for foreclosures over short sales: 1) 2nd liens, and 2) that HAFA has the same qualifications as HAMP. I agree that 2nd liens pose a serious problem, but on the qualifications, Paul writes:  The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far.

HAMP Debt-to-income Ratios of "Permanent" Mods - Last night I mentioned the astounding DTI (Debt-to-income) of HAMP modification borrowers who were converted to a permanent modification: 2010: REOs or Short Sales? Click for larger image in new window. If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) before modification was 45%, and the back end DTI was an astounding 76.4%! Just imagine the characteristics of the borrowers who can't be converted! Here is a table putting the numbers in dollars:

Government mortgage plan aids 16% of borrowers - The Obama administration's mortgage relief plan has helped only about 16% of borrowers who signed up since its launch last year, while hundreds of thousands of homeowners remain in limbo.The Treasury Department says that as of last month, about 170,000 homeowners had completed the application process and had their loan payments reduced permanently. That compares with nearly 1.1 million homeowners who have enrolled since the plan started.The program is designed to lower borrowers' monthly payments by reducing mortgage rates to as low as 2% for five years and extending loan terms to as long as 40 years. To complete the process, homeowners need to make three payments and provide proof of their income, plus a letter documenting their financial hardship.

Mortgage-modification program has major flaws - HAMP does have a fundamental flaw: The $75 billion program gives enormous discretion over whether to modify a mortgage to the parties least interested in doing it -- lenders and loan servicers. And although HAMP sought to establish uniform modification standards and established extensive reporting requirements for participating servicers, enforcement of those rules is lax.  There are other disincentives. Most mortgage servicers specialize in processing borrowers' monthly payments. They aren't set up to modify mortgages or offer foreclosure counseling. And they're often reluctant to absorb the personnel and other costs associated with expanding into loan modification. As a result, mortgage firms tend to favor quick, lower-cost ways to deal with overdue mortgages -- such as foreclosure.

Treasury hopes new rules send short sales to the rescue of underwater mortgages  …With new Treasury Department rules designed to expedite short sales set to take effect April 5, relief can't come soon enough for some area buyers, sellers and real estate agents who have waded through a long and arduous process to get short sales approved by the bank. In a short sale, a homeowner sells the property for its current market value, which is less than what's owed on the mortgage, and the lender agrees to accept the lower amount. The new rules that offer participating lenders cash incentives to get them to approve more short-sale deals also allow them only 10 days to approve or reject short-sale purchase offers, said Treasury spokeswoman Meg Reilly.  Incentive payments written into the Home Affordable Foreclosure Alternatives Program are designed to help offset some of the financial pain that banks experience when they agree to settle for less than they are owed on a home loan. Mortgage servicers (the companies that accept and process homeowners' mortgage payments) may receive up to $1,000 for the successful completion of a short sale. Treasury will also pay up to $1,000 to those holding second liens and home equity loans.

David Rosenberg: You Think Housing Is Recovering? Check Out These Charts - David Rosenberg evidently agrees with Meredith Whitney that you should be pessimistic about housing. He takes a look at the recent data in this morning's Breakfast With Dave note.

REO: Agencies vs. Private Label - Last month I showed data on trends in the REO inventories of Fannie, Freddie, and FHA, highlighting how while total REO inventory estimates appear to have fallen, REO at “the F’s” has increased notably over the last year. A few folks questioned how there could be reports of sharply lower REO inventories in many parts of the country if the F’s REO’s were up so much. Well, the answer mainly in REO inventories in the “non-agency” space, and especially REO inventories held by trusts for private-label mortgage-backed securities. Here is a chart (courtesy of Amherst) showing REO inventories for private-label securities tracked by LoanPerformance, which folks estimate accounts for about 85-90% of the private-label market.

MBA: Mortgage Applications Decrease, Mortgage Rates Fall - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, decreased 1.9 percent on a seasonally adjusted basis from one week earlier. ... The Refinance Index decreased 1.7 percent from the previous week and the seasonally adjusted Purchase Index decreased 2.3 percent from one week earlier. ... The refinance share of mortgage activity increased to 67.3 percent of total applications from 67.2 percent the previous week. ... This graph shows the MBA Purchase Index and four week moving average since 1990. Even with mortgage rates below 5%, the 4 week average of the purchase index is still at the levels of 1997.

WSJ: Supply of Foreclosed Homes Increases - WSJ writes about a Barclays Capital report: Supply of Foreclosed Homes on the Rise Again  Hagerty notes that the analysts at Barclays Capital estimate that various lenders held 645,800 REO (Real Estate Owned) in January, up 4.6% from 617,286 in December. Also Barclays estimated the peak supply was in November 2008 at 845,000, and then declined through 2009. Barclays is projecting the supply will increase to 733,000 in April 2010, and then gradually decline. The current supply is similar to the analysis from Tom Lawler that I posted yesterday. These number from Barclays are a little higher.

Housing Starts decline in February - Total housing starts were at 575 thousand (SAAR) in February, down 5.9% from the revised January rate, and up 20% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for nine months. Here is the Census Bureau report on housing Permits, Starts and Completions. This level of starts is both good news and bad news. The good news is the excess housing inventory is being absorbed - a necessary step for housing (and the economy) to recover.  The bad news is economic growth will probably be sluggish - and unemployment elevated - until residential investment picks up.

Comparing New Home Sales and Housing Starts - A frequently asked question is how do new home sales compare to single family housing starts (both series from the Census Bureau). This graph shows the two series - although they track each other, the two series cannot be directly compared. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. From the Census Bureau: Comparing New Home Sales and New Residential Construction. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The Q4 quarterly report showed that there were 71,000 single family starts, built for sale, in Q4 2009, and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA).

Home Builders $2.3 Billion "Gift" from Taxpayers - Last year, included in the "Worker, Homeownership and Business Assistance Act of 2009" that extended the popular unemployment benefits were two unpopular and ineffective tax credits: the home buyer tax credit, and a net operating loss carryback extension to allow businesses to write off current losses against profits up to 5 years ago - the profitable years for home builders. Zach Fox at SNL Financial has an update on the carryback: Builders record $2.30B in tax benefits In all, homebuilders recorded $2.30 billion in income tax benefits during their most recent quarters, according to SNL Financial. ... The tax benefit was so large that it might have been the only reason two builders did not go under...

Is Home Construction Bottoming? -This morning the Census Department released its latest look at housing activity. The headlines are that housing starts fell by 5.9% in February, mostly because of weakness in the Northeast and the South (which may well reflect February’s terrible weather). Most of the decline was in multi-family; single-family starts were essentially unchanged. Although starts and permits usually grab the headlines, I think it’s also useful to look at another measure of housing activity: the number of houses under construction:

Mortgage Delinquencies At Historic Highs - The state of the housing market has long reached a point where it's good news to hear, "It's not getting worse." Unfortunately, according to a firm that tracks borrowers behind on their mortgages, you can conclude at best, "It's getting worse, but less quickly."Rising sales, largely spurred by first-time buyer credits, have given people hope that the beleaguered housing market has finally hit bottom and is even showing signs of life. It's been impossible, however, for me to get excited about this, considering that the number of people falling behind on their loan payments is growing, not shrinking. Unemployment continues to produce new delinquencies, and it's been many quarters now since we were talking only about subprime mortgages. No, delinquencies are hitting regular old fixed-rate mortgages to borrowers with good credit, too.

Pace of Mortgage Delinquency Slowing: LPS - The pace of mortgage delinquency slowed in recent months, but the rate remains at an all-time high, threatening the fragile recovery seen so far in the housing market. The total loan delinquency rate of US mortgages is 10.25% as of January 2010 — a 2% increase from December 2009 and a 22.1% increase from January 2009, according to mortgage performance data and analytics provider Lender Processing Services. Another 3.3% of foreclosure inventory brings the total non-current rate to 13.5% in January. Current loans continue to default at “significant rates” despite the recent slowing trend over the last quarter, LPS said, seen in the cumulative monthly count of current loans as of Dec. 31, 2008 that are now at least 60 days delinquent

Underwater Second Liens - Mike Konczal did some more great work earlier this week in two posts on the not-so-exciting topic of second liens. I don’t have much in the way of new insight or analysis to provide, so let me just summarize. Konczal’s first point was that in the stress tests almost a year ago, the big four banks held $477 billion of second liens and estimated that these assets were worth 81-87 cents on the dollar, so they would take $68 billion in losses (under the “more adverse” scenario). Konczal estimated that they were instead worth 40-60 cents on the dollar, implying $191-286 billion in losses. After Ryan Avent questioned whether second liens were really in such bad shape, Konczal came up with this great chart from Amherst Securities:

Mortgages – Even High-Score Borrowers at Risk of Mortgage Default – NYTimes -A HIGH credit score won’t necessarily insulate borrowers from the home-foreclosure crisis, according to a new study from FICO, which creates the credit-scoring formula used by most lenders. In fact, the report, which was released in late February, suggests that these premium borrowers might be more likely to default on their mortgages than their credit card debt should they encounter financial difficulties. From May through October 2009, the mortgage default rate for borrowers with credit scores of 760 to 850 was 0.32 percent, versus 0.12 percent for credit cards, according to the report. (FICO considers loans 90 days or more past due to be in default.)  Of course, that mortgage-default level is still far lower than the 4.5 percent rate for all mortgage borrowers during this period.

More homeowners are opting for 'strategic defaults' - Time was when Americans would do almost anything to hang on to their homes. But that commitment appears to be fraying as more people fall behind on their loans while watching the banks and lenders that helped trigger the financial crisis return to prosperity. Nearly one-quarter of U.S. mortgages, or about 11 million loans, are "underwater," i.e. the houses are worth less than the balance of their loans. While home values are regaining ground -- median prices rose 10% in Southern California last month to $275,000 compared with a year earlier -- they remain far below the July 2007 peak of $505,000. Many homeowners are just coming to grips with the idea that prices will take years to reach the pre-crash peak: as long as 14 years in California, according to economist Chris Thornberg. Stuck with properties whose negative equity won't recover for years, and feeling betrayed by financial institutions that bankrolled the frenzy, some homeowners are concluding it's smarter to walk away than to stick it out.

Strategic default: In come the waves again - John Hussman notes that the very large non-subprime Alt-A and Option ARM cohort interest-rate resets lie ahead of us and not behind us in his latest weekly market commentary. In my view, this is a very big problem for the US banking sector and economy because of the credit writedowns these resets will generate. For his part, Hussman says: I should note parenthetically that as you read reports about the mortgage and credit markets during the next few months, it will be extremely important to pay attention to the time period being discussed. For example, we are seeing articles with very recent datelines that are drawing conclusions based on relatively pleasant data from the fourth quarter of last year, which reflects the end of the reset lull that was completed with the low in September...

Housing: Price-to-Rent Ratio - Here is an update on the price-to-rent ratio using the First Amercican CoreLogic price index released yesterday for house prices through January. In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. The following graph uses the First American data ...This graph shows the price to rent ratio (January 2000 = 1.0). This suggests that house prices are still a little too high on a national basis. But it does appear that prices are much closer to the bottom than the top.

Dick Bove: Housing Market Will Fall 10%-15% When Fed Stops Subsidizing Home Prices - Even if the Fed stops buying mortgage-backed securities at the end of March, Bove says, some of the impact of the subsidy will still be felt through June.  Also, for a while at least, Fannie and Freddie will continue to buy mortgages.  So there won't likely be a sudden change to the housing market or mortgage rates. Over the longer term, though, we'll begin to find out where house prices would be if the housing market were less subsidized.  And Dick Bove expects that that level is 10%-15% below today's prices.

More Americans live with multiple generations of family – More people than ever before are bunked together in multigenerational households across the USA as a record 49 million (16.1% of the population) share close quarters either permanently or temporarily, a report today by the Pew Research Center shows. Since 1980, the share of Americans living in such households jumped 33%. That represents a sharp reversal from earlier recent trends in which children grew up, left home and didn't return except for a visit, and grandparents retired to sunny spots or stayed put in their own homes.  From 1940 to 1980, Pew found that the proportion of people living in multigenerational households had declined by more than half — from 25% in 1940 to 12% in 1980.

US sprawl is not a market outcome, by Richard Green: A discussion is going around the internet about John Stossel's "libertarian" piece on the virtues of sprawl. John Norquist, on the other hand, labels sprawl a "communist plot," and Matthew Yglesias notes how bulk zoning requirements promote sprawl. A point John likes to make is sprawl is at least in part the result of government housing finance policy. The New York Times this morningI.R.S. requirement keeps the agency from acquiring mortgages made in buildings where more than 20 percent of the square footage is commercial — space that is used for, say, a hotel or a doctor’s office.Mixed use development is not going to happen if it can't get financed. Most of Paris, London, large swaths of San Francisco (i.e., some of our best urban places) would not qualify for US housing finance rules. And of course, single use zoning would ban them all. But most insidious is that zoning is used as a tool to keep low-to-moderate income people out of suburbs.

Forward or Crash - There may be no better example to express our upcoming reality than the fact that the Bank of England simultaneously 1) begins to roll down quantitative easing measures (by lowering or even halting its government bond purchases), and 2) warns the British population that living standards are about to take a major hit. In the US, the Federal Reserve is about to quit buying up mortgage-backed securities (all $1.25 trillion of which were steeped in insanity, if you ask me, just watch what happens next), but it hasn't issued a similar austerity warning. It’s probably just less politically palatable in America to say these things; and that's the only difference. There are suggestions floating out there that private capital is ready to jump back into the MBS market. Makes you wonder what all that capital has been waiting for. It's impossible from where I'm sitting to be sure what plans, if any, exist to prop up the housing finance markets once the Fed retreats, and there's no way I’d ne surprised to see more of the same -flavor of- insanity.

Middle Class Money Angst Still Apparent in Data - Fed's Flow of Funds numbers again show average Americans' net worth gaining more by mortgage defaults than asset appreciation.  If there is a recovery in Americans' finances, they don't see it. The Federal Reserve reported Thursday that the net worth of U.S. "households" increased at about a 5% annual rate in the fourth quarter, a good deal slower than the blistering 20% pace over the two previous quarters, but still a solid increase. Not long after the news was posted on the Wall Street Journal's Web site early that afternoon, the vituperative comments began to flow. Many simply dismissed the data as inaccurate or worse. The numbers simply didn't jibe with what they were seeing in their own finances or those around them. Most of the gain in wealth has come from the rebound in the stock market, which drove a 15.4% annual rate of gain in households' equity holdings in the period. For the year, their equity holders increased 30.9%.

Social Immobility: Climbing The Economic Ladder Is Harder In The U.S. Than In Most European Countries   Is America the "land of opportunity"? Not so much. A new report from the Organization for Economic Co-Operation and Development (OECD) finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries.  So if you want your children to climb the socioeconomic ladder higher than you did, move to Canada.The report finds the U.S. ranking well below Denmark, Australia, Norway, Finland, Canada, Sweden, Germany and Spain in terms of how freely citizens move up or down the social ladder. Only in Italy and Great Britain is the intensity of the relationship between individual and parental earnings even greater.

Does GDP Understate Depth of the Recession? - In a paper being presented Friday at the Brookings Panel on Economic Activity, Fed economist Jeremy Nalewaik examined the differences in GDP and a closely-related measure, gross domestic income. GDP measures the output of the economy as the sum of expenditures — consumption, plus investment plus government spending plus net exports. GDI measures total income in the economy.In theory, the two measures should equal one another, in practice they don’t quite, and Mr. Nalewaik argues that GDI is the better of the two.He finds that when the Commerce Department’s Bureau of Economic Analysis revises its national income and product accounts, GDP figures move more closely inline with GDI. GDI also appears to have a stronger correlation with other economic indicators, and its recent movement around turning points suggests it more closely tracks the economy.

Bad by any measure - macroblog - A few weeks back, The Economist published a story touting the well-known fact that the "American economy just had its worst decade since the 1930s." Whether looking at gross domestic product (GDP), consumption, income, or nonfarm payrolls, the decade from 2000 to 2010 generally looks bad from an economic perspective. During this decade, of course, the nation has experienced two recessions—the latter being the most severe since the Great Depression. (See the graphs below, reproduced from the February 25 article in The Economist titled "Back to The Crash.") But given that decades are rather arbitrary economic demarcations, why not examine other time periods? So here's another approach: Using the yearly trough-to-trough periods according to National Bureau of Economic Research (NBER) recession dating, the charts below have replicated the ones shown above from The Economist.

Robert Shiller: A Crisis of Understanding - Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either. Of course, we all know the proximate causes of an economic crisis: people are not spending, because their incomes have fallen, their jobs are insecure, or both. But we can take it a step further back: people’s income is lower and their jobs are insecure because they were not spending a short time ago – and so on, backwards in time, in a repeating feedback loop. It is a vicious circle, but where and why did it start? Why did it worsen? What will reverse it? It is to these questions that economists have been unable to offer clear answers.

U.S. Consumers’ Debts Get More Affordable - Economists and investors are justifiably concerned about U.S. consumers’ weighty debt burdens, with some saying it could take years before they’ve shed enough debt to put them in a spending mood again. By one measure, though, they’re looking as financially sound as they have in almost a decade. The Federal Reserve’s financial obligation ratio tracks how much the average American must cough up every month for rent and payments on credits cards and mortgages, as a percentage of disposable income. The ratio fell to 17.51% in the fourth quarter of 2009, down from a peak of 18.87% in early 2008 and the lowest level since the third quarter of 2000. The falling ratio isn’t all good news: In large part, it reflects the extent to which people have been defaulting on mortgage and credit-card debt. But it also suggests that U.S. consumers’ mountain of outstanding debt — which stood at 122.5% of annual disposable income as of the end of 2009 — might be more sustainable than its sheer size suggests, particularly if people have used this period of low long-term interest rates to refinance into fixed-rate mortgages.

MaxedOutMama: Nobody Reads The Reports - That describes so much about our country's problems... Bloomberg: Sales at U.S. retailers unexpectedly climbed in February as shoppers braved blizzards to get to the malls, signaling consumers will contribute more to economic growth. Purchases increased 0.3 percent, the fourth gain in the past five months, What a remarkable vision - desperate shoppers climbing over three feet snowdrifts to get to their local mall. Does it have anything to do with reality? Now let's look at the Titanic graph which breaks down that 3.4% (nominal) gain by category: Start humming "Nearer My God To Thee", because over 60% of the increase was in gasoline sales, which are pretty much flat in real terms.

American factories operating near record low utilization - Economic Policy Institute - The U.S. manufacturing sector has been hit hard in the latest economic downturn, but has also suffered a steady decline for the past decade. The Figure tracks capacity utilization, or the share of manufacturing capacity in use, since 1973. Capacity utilization measures the difference between how much the country’s manufacturing sector is producing and how much it could be producing. In December 2007 at the start of the recession, capacity utilization stood at 80.6%. By June of 2009 it had fallen to 68.2% and today it is at 72.6%.

Unemployment Likely to Remain Elevated - WSJ. -Treasury Secretary Timothy Geithner and other top Obama administration officials Tuesday called the U.S. unemployment rate unacceptable and urged lawmakers to support the president's efforts to spur job creation and overhaul the financial-regulatory system. In testimony before the House Appropriations Committee, Mr. Geithner and other top officials said they don't expect to see job growth "substantially over 100,000 per month" for the rest of the year, and that "the unemployment rate is likely to remain elevated for an extended period."  "The current unemployment rate of 9.7% is unacceptable by any metric," Mr. Geithner said

Recession Hits All Black Workers Harder -A new report from Congress’s Joint Economic Committee looks deep into the Labor Department data and highlights the disparity. Here are some key takeaways:

  • The current jobless rate for blacks was 15.8% in February, compared to an overall rate of 9.7%. The broader unemployment rate — the U-6 rate that includes workers who are underemployed and discouraged — shows an even bigger gap. The U-6 rate for whites in February (not seasonally adjusted) was 17.9%, for blacks it was 24.9%.
  • College-educated workers with an unemployment rate of just 5% have fared better in this recession than most. But white college graduates face a 4.5% unemployment rate, while 8.2% of black college graduates are unemployed.
  • Black men have been hit harder than women, but female heads of household, who bear the sole financial responsibility for their families, face a 15% unemployment rate, compared to 11.6% for all women heads of household.
  • Young blacks have the highest unemployment rate of any demographic group. More than 2 out of 5 African American teenagers are unemployed, compared to an overall teen unemployment rate of slightly over 25%.

Nearing Retirement and Unemployed or Underemployed - One of the groups seriously impacted by the great recession is the "pre retirement" generation - currently the "Baby Boomers" - the workers between the ages of 45 and 64. This graph shows the unemployment rates for two groups: 45 to 54 (seasonally adjusted), and 55 to 64 (only NSA data is available). The unemployment rate for these age groups hit an all time high during the great recession (highest since WWII).Michael Winerip at the NY Times has a story about the plight of several "Boomers" who he has tracked for the last year: Time, It Turns Out, Isn’t on Their Side

Unemployment Rate Doubles For Older Women - This recession has been called the "mancession" by some because men have suffered the largest number of job losses. But it hasn't been easy for women either — especially those of the baby-boom generation. The Labor Department says the number of women ages 45 to 64 who are long-term unemployed — out of work for more than six months — has more than doubled in the past year. The number is now 900,000, and it is growing.

Teen Unemployment and the Minimum wage -- Recently the Wall Street Journal editorial page and numerous conservative/libertarian bloggers have shown charts comparing the last few years spike in the teen age ( 16-19 year olds) unemployment rate with the rise in the minimum wage in an attempt to blame rising teen unemployment in 2008 and 2009 to the minimum wage hike. But more detailed data from the BLS shows that teen employment at the minimum wage rose 46.1% in 2008 and 50.1% in 2009. This detailed data implies that the rise in the teen unemployment rate from around 15% in 2007 to over 25% in late 2009 was entirely due to the great recession, not the rising minimum wage. This data is so compelling that I think at a minimum these conservative/libertarian at least owe us an explanation as to why it does not disprove their argument.

Wage differentials - Coincidentally, two regional Federal Reserve banks released papers today examining wage differences across groups. Nothing earth-shattering, but interesting, none-the-less. The first paper, published by the Federal Reserve Bank of St Louis, looked at the reasons income per worker differ world wide and find that the regulatory costs of starting a business (as measured as a per cent of per capital GDP) have a significant negative impact on income. The second paper, released by the Federal Reserve Bank of Dallas, looked at the relative earning power of Latino workers in Texas, compared to white workers. Native-born Latinos, even after accounting for education, age, sex, and marital status, earn 15 per cent less than their white counterparts.

Unemployed wait longer and longer for jobs - The current jobs crisis is unusually severe not only for the high level of unemployment, but also for the amount of time it is taking workers to find new jobs. Today, the median length of time a laid-off worker spends unemployed is almost five months, longer than any other time on record. The Figure tracks the median duration of unemployment since the Bureau of Labor Statistics began keeping records in 1967. By contrast, the almost 20 weeks it is now taking unemployed workers to find jobs, means that many on the higher end of that range will exhaust the standard 26 weeks of unemployment benefits before they find work. Although Congress has passed several extensions of additional emergency benefits for the long-term unemployed, the latest extension passed earlier this month lasts for only 30 days. By the end of March, without another extension, 200,000 workers will lose their benefits each week. 

Census Tilt  - We just got our Census form in the mail.  I was slightly tilted by the warning on the front of the envelope: "YOUR RESPONSE IS REQUIRE BY LAW,"  but Mrs. Dynamite was on bajungi tilt because she couldn't fill the form out online.  I tried explaining to her the argument that a part of the census was intentional stimulus - they (the government) pay to get it printed, they pay to get it mailed, tabulated, counted etc.  That money goes to people.   She understands that, but is furious at the blatant "waste" of money here - the money clearly doesn't need to be spent like this.  The government should be paying people to get the Census web-ready instead.   It always comes back to make-work projects... Dig holes and fill them in - print forms, mail them, and count them.  It's completely unnecessary.  Of course, they also spend tons of money advertising for the census - and sending out pre-notices like the one last week that said we'd be receiving the census the following week.

9 months after the most economically atrocious piece of legislation in 2009 (Cash for Clunkers) - So, according to this measure, there has been NO additional auto sales created since CFF; no new jobs, no new spending, no aggregate benefit. There was some confusion about the CFF start date, so including July 2009 retail auto sales were up 1.1%. This is positive growth, but still nothing to call home about. To be sure, consumer autos and trucks production has grown 23% since the program's initiation, but the growth was more than accounted for in the two months after the July CFF start. Basically, since September 2009, the industrial production numbers show essentially flat growth in new auto production. Third - and this is the most deleterious side effect of the program - used car prices are up 13.7% since July 2009.

Costly benefits? - AS SOME economists have pointed out during the course of the recession, there is a slightly troubling incentive effect associated with the provision of unemployment benefits, namely, by making unemployment less painful they encourage the jobless to stay jobless for longer. Now, during recessions, this incentive effect tends to be far less important than the beneficial effects of unemployment benefits. The fact that the newly jobless don't have to drastically cut back spending prevents pro-cyclical amplification of the downturn, and human suffering is alleviated, given that falling labour demand is driving rising unemployment. But during this recession, Congress has extended benefits for historically long periods. JPMorgan's Michael Feroli argues in a new research note that these extensions of emergency benefits—a total of 47 weeks' worth of which have been passed in this recession—have significantly added to the unemployment rate:

The Associated Press: Analysis: Note to Washington: Voters say talk jobs - There's a gaping disconnect between what Americans care about and what President Barack Obama and Congress, Democrats and Republicans are actually doing. A new Associated Press-GfK poll tells the story: contempt for lawmakers, a bare majority approving what Obama's doing.Or just listen to Robert Watson. He backed Obama in 2008. He lost his job at a direct mail company in the Great Recession. And he's been looking for work ever since. Neither Obama nor Congress, Watson says, is addressing what really matters: He wants Obama to focus more on creating jobs, Congress to stop the partisan games and both to remember who sent them to Washington.

Why the "Jobs Bill" Won't Create Jobs -  The NYT article on the jobs bill passed by the Senate yesterday included the views of economists Timothy Bartik and John Bishop as to why the bill will likely create few jobs. It would have been helpful to include the fact that the private sector adds roughly 4 million jobs a month, most of which are replacing jobs lost due to either workers quitting or being laid off.  The jobs bill would allow firms to take the credit for any of the workers that they would have hired anyhow, as long as the workers has been employed less than 40 hours in the last sixty days. Since the credit provided in the bill is relatively small (6.2 percent of wages for the rest of 2010 and $1,000 if the worker stays on the payroll for 1 year), the vast majority of workers for whom the credit is claimed almost certainly would have been hired even without the credit. In other words, it is money for nothing.

"Make 'em Filibuster, Jobs Edition" - Legislation designed to stimulate job creation has been under discussion for months, but so far there hasn't been any action. It was an emergency when the big banks were about to fail, and we managed to put legislation into place relatively quickly in response. But when millions of individual households are failing, households that in total are every bit as important to the economy as a large bank, the sense of urgency isn't there. The fact the these households are struggling to get by until jobs reappear, and that every day that goes by without a job is another day of hardship, doesn't seem to register with legislators who seem more interested in playing political games than in helping people. Now, after all this time -- when it's nearly too late -- a meager, $15 billion dollar jobs bill (and only part of it is devoted to job creation) is about to move forward, but Republicans are threatening to hold it up even longer.

Obama Administration Lowers Expectations for Jobs Growth - A joint statement by Treasury Secretary Timothy Geithner, Budget Director Peter Orszag, and Council of Economic Advisers Chairwoman Christina Romer, to be delivered to the House today, puts job growth at about 100,000 a month this year, positive but not enough.“We do note expect substantial further declines in unemployment this year, the statement continues. “Indeed, the rate may rise slightly over the next few months as some workers return to the labor force.”But private-sector forecasters are considerably more bullish. Goldman Sachs expects a net payroll increase in March of around 275,000, the best number in four years. Morgan Stanley economists put the figure at 300,000, boosted by hiring for the 2010 Census and a snap-back from last month’s winter storms, which depressed hiring.

What's the Optimal Level of Unemployment Benefits? - Given all the recent discussion implying that unemployment compensation increases job search time, and that is an unequivocal bad, I've been meaning to write about the benefits of unemployment compensation. That job search time goes up as a result of unemployment compensation is not necessarily bad if it leads to better matches between workers and employment. And there are other benefits of unemployment compensation as well, but Raj Chetty has this covered already in an interview from the January 2009 AEA meetings on Vox EU so I'll turn it over to him:  Public finance: theory, evidence and policy, Raj Chetty Interviewed by Romesh Vaitilingam, Vox EU

Is there a signalling role for public wages? - VoxEU - Do public sector wages have an influence on private sector wages? This column presents new evidence from the Eurozone in the 1990s suggesting that the relationship changes over time and across countries. Within a particular year, however, public sector wages play a “signalling role” in influencing private sector wages.

A Ruinous Meltdown - A story that is not getting nearly enough attention is the ruinous fiscal meltdown occurring in state after state, all across the country. Taxes are being raised. Draconian cuts in services are being made. Public employees are being fired. The tissue-thin national economic recovery is being undermined. And in many cases, the most vulnerable populations — the sick, the elderly, the young and the poor — are getting badly hurt. Arizona, struggling with a projected $2.6 billion budget shortfall, took the drastic step of scrapping its Children’s Health Insurance Program. That left nearly 47,000 low-income children with no coverage at all. In New Jersey, the newly elected governor, Chris Christie, has proposed a series of budget cuts that, among other things, would result in public schools receiving $820 million less in state aid than they had received in the prior school year. Some well-off districts would have their direct school aid cut off altogether. Poorer districts that rely almost entirely on state aid would absorb the biggest losses in terms of dollars. They’re bracing for a terrible hit.

States Hope for a Rich Uncle - Strapped states, facing up to $180 billion in budget deficits in the next fiscal year, are going hat in hand to Washington. California wants $6.9 billion in federal money for the next fiscal year, and Republican Gov. Arnold Schwarzenegger says he'll have to eliminate state health and welfare programs without it. Illinois, facing a $13 billion deficit that equals roughly half of the state's operating budget, has what it dubs a stimulus team and a group in Washington pressing for additional state aid. Among other things, Illinois is hoping the federal government will keep paying a higher share of Medicaid costs. "That's $600 million we desperately need," said Kelly Kraft, a spokeswoman for Democratic Gov. Pat Quinn's budget office. Those funds already are counted in the governor's budget proposal.

Mayors Seek $50 Billion to Upgrade U.S. Water, Sewer Systems (Bloomberg) -- Congress must provide local governments an additional $5 billion a year over the next decade, more than twice what it spent in 2008, to avert breakdowns in water and sewer systems nationwide, the U.S. Conference of Mayors said in a report. The average U.S. household’s water and sewer rates may double or even quadruple by 2028 without additional federal grants and loans, the mayors said in a statement today, without providing specifics. Americans are likely to face more service disruptions as rising population, urbanization and aging equipment all help to intensify the burden on municipalities, according to the report.

Saving U.S. Water and Sewer Systems Would Be Costly - Today, a significant water line bursts on average every two minutes somewhere in the country, according to a New York Times analysis of Environmental Protection Agency data.  In Washington alone there is a pipe break every day, on average, and this weekend’s intense rains overwhelmed the city’s system, causing untreated sewage to flow into the Potomac and Anacostia Rivers.  State and federal studies indicate that thousands of water and sewer systems may be too old to function properly.  For decades, these systems — some built around the time of the Civil War — have been ignored by politicians and residents accustomed to paying almost nothing for water delivery and sewage removal. And so each year, hundreds of thousands of ruptures damage streets and homes and cause dangerous pollutants to seep into drinking water supplies.

Schwarzenegger Will Veto $1.1 Billion Gasoline-Tax Swap Measure - California Governor Arnold Schwarzenegger will veto a measure to swap the state’s gasoline tax with an excise tax that would have redirected $1.1 billion toward shrinking a resurgent budget deficit. The Republican executive faulted the bill for failing to reduce the price of gasoline at the pump, his press secretary, Aaron McLear, said today. The measure sent to his desk was a revision of Schwarzenegger’s original plan to lower consumer prices while simultaneously helping close a budget gap estimated at $20 billion for this year and next.The legislation would have eliminated the current 6 percent sales tax on gasoline and replaced it with a 17.3-cents-a-gallon excise tax. That would have allowed California to move a revenue stream that had been dedicated to local transit agencies, and use it instead to pay interest on its general obligation bonds.

Quinn's budget counts on lawmakers’ help - We’re all in this together. Unfortunately, lawmakers don’t necessarily agree. And that means Quinn’s plans to ease Illinois’ budget trauma are in doubt. The fiscal plan he outlined Wednesday involves borrowing, postponing bill payments, slashing spending and raising taxes to close the estimated $13 billion budget gap. But he can do little without lawmakers’ aid. Nearly every area of his proposal requires separate legislation, essentially forcing lawmakers to share in the painful decisions. So not only must they approve the budget, they have to change state law to make it work. In an election year.

Paterson warns of late NY budget as deadline nears (AP) - Gov. David Paterson warned Monday that New York's budget is likely to miss the April 1 deadline, in part because the Legislature isn't scheduled to be in Albany the week before the due date. The Legislature is scheduled to observe the Passover and Easter holidays March 26-April 6. Paterson said there is just too much to do and too little negotiation to get it done with just two weeks left before the 2010-11 fiscal year begins. He said the budget - expected to be about $130 billion with a $9.2 billion deficit to address - may be settled by the end of April. But the Democratic governor said he can't tell how likely the Assembly and Senate are to change his proposed budget because he has yet to receive basic budget proposals from them.

NY state comptroller warns against more borrowing (Reuters) - New York should avoid borrowing as a way to plug the state's deficit because the state already has too much debt, the comptroller said on Wednesday, as he sounded the alarm on talks in Albany already under way on more borrowing. "More borrowing would become part of the problem, not the solution," state Comptroller Thomas DiNapoli said in a statement." "Lieutenant Governor Richard Ravitch said earlier this month that the state could use short-term borrowing of about $2 billion a year to help close a five-year deficit that is expected to total $60 billion. Other states that have used deficit borrowing to plug budget holes include Illinois, which in January sold $3.46 billion of taxable five-year bonds to make a fiscal 2010 payment to state pension funds.

NY's outstanding debt per resident jumps nearly 25% - New York state has $3,089 of outstanding debt per resident—almost a 25 percent jump in four years, according to a new report from state Comptroller Thomas DiNapoli. The increase is one of many signs DiNapoli pointed to as proof the state is dangerously hooked on borrowing, particularly to fund operations and cover budget deficits. The state faces at least a $9 billion budget gap in its 2010-11 fiscal year, which starts April 1. “New York state is addicted to unaffordable borrowing,” DiNapoli said. “Our per capita debt is through the roof. It’s alarming that discussions have already begun to focus on more state borrowing to balance the budget. More borrowing would become part of the problem, not the solution.”

Larger Cash Shortfall Is Projected in Albany as Fiscal Year Nears End— New York will end the fiscal year on March 31 with at least $2 billion less in cash on hand than originally projected, the state’s comptroller said Wednesday, burdening lawmakers with another headache and making the prospect of achieving a budget agreement before the next fiscal year begins even more dim.The estimate by the state comptroller, Thomas P. DiNapoli, adds half a billion dollars to Gov. David A. Paterson’s own projection for the current shortfall, issued a little over a month ago. Mr. DiNapoli said the state could no longer count on two large infusions of cash that were expected by the end of the month: a $300 million fee from the winning bidder on the Aqueduct video-lottery franchise and $200 million from the coffers of the Battery Park City Authority

New York will delay income-tax refunds - State income-tax refunds will be delayed by several weeks as the state struggles to manage its cash flow amid growing budget deficits, officials said Tuesday. The move will save the state about $500 million by delaying income-tax refunds until April 1. The state stopped paying the refunds on Monday. It means that taxpayers who filed for refunds in late February and early March will have to wait a few extra weeks to get paid, officials said. Usually it takes three to four weeks to process a state tax return; people who filed within that period will have to wait about six weeks

U.S. sales tax rates hit record high - Forbes - While President Barack Obama's push to raise federal income taxes for the wealthy gets lots of attention, the continuing upward creep in the sales tax rates imposed by state and local governments has gotten less notice. But Vertex Inc., which calculates sales tax for Internet sellers, reports that the average general sales tax rate nationwide reached 8.629 percent at the end of 2009, the highest since the company started tracking data in 1982. That was up a nickel on a taxable $100 purchase from a year earlier and up nearly 40 cents for the decade. The highest sales tax rate in the country now stands at 12 percent.

Christie Seeks to Suspend N.J. Tax Rebate, Skip Pension Payment - New Jersey Governor Chris Christie proposed a $29.3 billion budget that would suspend property-tax rebates, skip the state’s $3 billion pension contribution and fire 1,300 workers next year. The plan would reduce aid to schools by $820 million, towns by $446 million and higher education by $173 million. Christie, a Republican who took office Jan. 19, also called for a constitutional amendment that would limit annual growth in the state’s highest-in-the-nation property taxes to 2.5 percent.

Christie Seeks Spending Cuts to Close Gap in New Jersey - To close a deficit that he asserted was approaching $11 billion, Governor Christie called for the layoffs of 1,300 state workers, closings of state psychiatric institutions, an $820 million cut in aid to public schools, and nearly a half-billion dollars less in aid to towns and cities. He also suspended until May 2011 a popular property-tax rebate program, breaking one of his own campaign promises. Democrats were quick to characterize Mr. Christie’s proposal as falling disproportionately on the backs of the middle class, the poor, the elderly, schoolchildren, college students and inner-city residents, while leaving largely unscathed the wealthy and most businesses.

Chris Christie:'This is the moment' to fix state finances - Blunt and unapologetic about the consequences of his cuts, Gov. Chris Christie hit the road Wednesday to peddle his first state budget. He said an $820 million reduction in aid to school districts will force them to choose between "givebacks or layoffs" for teachers and other employees. He took on their union with relish, saying the "800-pound gorilla" New Jersey Education Association will also face a choice: "Do they want to lose members or do they want to reopen contracts?" "This is it. We’re in the middle of a crisis, I’ve got everyone’s attention, this is the moment to fix it," the governor said.

Will Los Angeles Go Broke? - CNBC -Today California Treasurer Bill Lockyer is holding a much-advertised $2 billion bond sale to help fund voter-approved infrastructure projects, and in a sign of growing confidence that the Golden State will not default, investors are pouring in. Part of the reason for that confidence is the Legislature has given Chiang flexibility in doling out cash. On the losing end of that flexibility may be cities and counties, as the state could delay monies owed to those smaller governments in an effort to calm any concerns by bondholders. That's not good for Los Angeles. The City of Angels is facing a $200 million budget deficit in the current fiscal year which will grow another half billion next year. The city will owe $399 million next year just in debt service, and it faces about $6 billion in underfunded pensions and healthcare costs for its retired employees.

L.A. becomes a test case in battle to undo interest rate swap deals - "I can pay. I just don't want to." That's the unapologetic position of the "walkaways" -- homeowners who have no equity in their houses and who no longer see the point of paying their mortgages, even though they're financially fully capable of doing so. Now comes the Service Employees International Union with a variation on that walkaway idea, but for states and municipalities. The union wants government officials to demand that banks tear up a type of insurance policy many municipalities bought from the banks a few years ago.The SEIU says these long-term deals may be legal, but it asserts that they're now costly and unfair when local governments face such dire budget straits and are slashing jobs, union and non-union.

Detroit Family Homes Sell For Just $10 - The once thriving industrial city has suffered a dramatic decline following the global economic crisis. According to Tim Prophit, a real estate agent, the crisis has led to a unprecedented portfolio of homes, but they are failing to sell.  He said there were homes on the market for $100 (£61), but an offer of just $10 (£6) would be likely to be accepted.  Speaking on a BBC 2 documentary, Requiem for Detroit, to be screened on Saturday, Mr Prophit said: "This part of town has got a lot of bad press in the media because it featured in Eminem's film 'Eight Mile', but that particular road is fifteen minutes up the road and that is a long way in Detroit."  Homes offered in viewing brochures as early 1920s example of colonial architecture would once have made handsome homes but are no longer sought after.

The Mayor Of Detroit’s Radical Plan To Bulldoze One Quarter Of The City - How do you save a city that is dramatically declining like Detroit? Well, for the mayor of Detroit the answer is simple - you bulldoze one-fourth of the city.  Detroit finds itself having to make some really hard choices.  Detroit was once a booming metropolis of approximately 2 million people, but now young people have left in droves and the current population is less than a million. The true unemployment rate for those still living in Detroit is estimated to be somewhere around 45 to 50 percent, and poverty and desperation have become entrenched everywhere. In many areas of the city, only one or two houses remain occupied an an entire city block. In fact, some areas of Detroit have so many vacant, burned-out homes that they literally look like war zones. And yes, it is true that there are actually some houses in Detroit that you can actually buy for just one dollar. According to one recent estimate, Detroit has 33,500 empty houses and 91,000 vacant residential lots. So what can be done when an entire city experiences economic collapse?

'I Borrow Money to Buy Food,' Says City Employee as Mayor Dave Bing's Cut Threatens to Push Working Families Onto Welfare Rolls in City of Detroit - City employees today urged Detroit Mayor Dave Bing to consider the plight of working families before making draconian pay cuts that will push them below the federal poverty level guidelines. "I borrow money right now to buy food," says Jackita Muhammad, a teller in the city's finance department. "I try to buy beans and other staples so I don't have to ask family for money, but the truth is that if the mayor cuts my pay, I will have to declare bankruptcy."

Workers threaten to shut Detroit at hearing - Chants of "Strike! Strike! Strike!" rose from the crowd of City of Detroit workers Wednesday as members of the American Federation of State, County and Municipal Employees filled the 13th floor auditorium in the Coleman A. Young Municipal Building to address the City Council. "We have no choice but to shut the city down this time because we are not going to take these concessions," said Michael Mulholland, AFSCME Local 207 secretary-treasurer, halfway through a public hearing hosted by the City Council's Internal Operations Committee. Hundreds of the roughly 3,500 AFSCME workers attended the hearing, speaking out against Mayor Dave Bing's proposed 10% salary cut -- which comes in the form of 26 furlough days -- and additional benefit cuts

Detroit: Taking charge of our story - - New Detroit (link) and Wayne State University are putting on a major and significant conference on how the story of Detroit is being told today. Detroit is getting a lot of press these days --and it's mostly about crisis, decline, and despair. It is hard for a city to move forward in the context of such a negative picture. And many in Detroit find this national story to be superficial and misleading. So how can we do a better job of understanding and presenting our story? (Here is a link: Ourdetroitstory.) There is a persistent feeling in the region that the national press is writing the story of Detroit in ways that retell the myths about the past and sensationalize the present. And it makes a difference. We need more nuanced stories, and today's conference is an important effort in that direction.

Falling enrollment may force Detroit to shut 44 schools - More than one-quarter of Detroit's 172 public schools may close in June as the district fights through steadily declining enrollment and a budget deficit of more than $219 million, an emergency financial manager said Wednesday. Three aging, traditional and underpopulated high schools would be among the 44 closures. Another six schools are to be closed in June 2011, followed by seven more a year later, said emergency financial manager Robert Bobb. Detroit already closed 29 schools before the start of classes last fall and shuttered 35 buildings about three years ago.

Bobb: Close 45 Detroit schools - Robert Bobb, the emergency financial manager for Detroit Public Schools, asked parents Monday night to get behind his academic plan, an ambitious road map to the future that envisions a smaller district with the closing of 45 more schools this year and sets dramatic targets for student achievement. The number of school closures Bobb noted was five more than he had announced earlier. It would bring total school closures to 140 since 2005 -- more than half the district.

School closure plan dovetails with Detroit's downsizing effort - A massive closure plan by Detroit Public Schools calls for shutting Osborn, Kettering and Cooley high schools while preserving as many K-8 schools as possible on the city's outskirts to prevent more students from fleeing to the suburbs. The plan to be announced today will mean about 45 building closures this year and a savings of $31 million. In choosing which schools to close, district planners consulted with the city to try to mesh the plan with efforts to retain population in stable areas or those targeted for revitalization.

U.S. schools in ‘category 5’ budget crisis (MSNBC) Now, many states have nearly exhausted their windfalls from the federal economic stimulus plan, and with falling housing values shrinking property tax revenue — the largest source of public school funding — the question for state and local officials planning budgets for the next school year is: Will it be bad — or horribly bad? Cuts that have been announced this year are staggering: The Kansas City, Mo., School District is closing nearly half its 61 schools, with almost 300 teachers among those losing their jobs once 29 campuses go dark.  The Montgomery, Ala., Public School Board voted last week to lay off more than 600 employees, including 415 teachers, in what it said was just the first phase of staff reductions.  In the northwest suburbs of Chicago, the Illinois 46th District school board this week approved a proposal to lay off more than 1,000 employees — about 25 percent of the  district’s staff — to help make up a projected deficit of $44 million. More than 700 teachers would lose their jobs, including all first-, second- and third-year instructors. etc...

Gov. Chris Christie plans to cut N.J. school aid by $800M - Gov. Chris Christie's budget includes an across-the-board cut in state aid to school districts that will equal up to 5 percent of their budgets for the current fiscal year, a move the administration expects to be challenged in court, according to three state officials familiar with the plan. By basing the aid calculation on districts' budgets, the overall reduction of about $820 million is at odds with New Jersey's school funding formula, which dictates that more money go to districts with the neediest children, officials said. That formula, which survived a Supreme Court challenge last spring, replaced the longstanding "Abbott" system that sent the bulk of the aid to 31 poor urban districts.

Senate Democrats Report: Illinois Owes Schools Nearly $730 Million - $728,591,449.56. That is the amount of money that Illinois schools are waiting to receive from the State as of March 11, 2010.   This week the office of the Senate President released a detailed report that shows line-by-line each and every voucher that awaits payment from the State.  Some requests go as far back as October 2009.The report reveals millions of dollars owed to school districts for mandated services such as transportation, nutrition and special education.  In large part, the overdue funds are used to pay for the personnel who manage, implement and maintain these services.Senate Democrats issued the report to expose the grim reality and impact of the long economic recession facing Illinois and virtually every other state in the Union.  Checks have not been issued to schools because revenues have dropped significantly and state bank accounts do not have the cash flow to make the payment on vouchers as they come in.  As a result, the backlog of bills due has reached into the billions of dollars.

Governor Accused of Holding Education Captive In Exchange for Tax Increase (Illinois) The governor's proposed budget -- carrying a $1.2 billion cut in education funding -- faced a room of skeptical lawmakers Thursday. Members of both parties on the House Appropriations-Elementary and Secondary Education Committee said for the record what a lot of people around the Capitol have been saying: Gov. Pat Quinn is asking schools to take a big hit to make a case for an income tax increase. During last week's budget speech, Quinn said the state could avoid education cuts -- including 17,000 teacher layoffs -- if the legislature approves a 1 percentage point increase in the icome tax. That would bring the state's flat income tax to 4 percent

Union Projects Up To 5000 Teacher Layoffs -- The Indiana State Teachers Association predicts up to 5,000 teachers could lose their jobs in the wake of state budget cuts. Union Mark Shoup said Friday the union forecasts that about 8 percent of public school teachers statewide could have their positions cut. State schools Superintendent Tony Bennett said he believed districts should be able to reduce spending without layoffs when he and Gov. Mitch Daniels announced the $300 million funding cut in December. But Shoup said that isn't realistic because salaries and benefits make up the largest chunk of the school budget

More than 23,000 layoff notices issued to teachers statewide – Education budget cuts have prompted school districts across the state to send out more than 23,000 pink slips, notifying teachers and other certificated employees they may not have jobs next year. In a morning news conference, state Superintendent for Public Instruction Jack O'Connell said 21,905 pink slips had gone out from districts, which had to meet a state-mandated Monday deadline to notify staff they may not have jobs next year. "While I understand the governor and the Legislature have tough decisions to make, these budget cuts are devastating our schools and impacting our ability to do the most important job in our society, that is, to teach our children," O'Connell said in a statement.

California's public schools send out 22,000 pink slips - Faced with another year of potentially deep budget cuts, California's public schools have sent out 22,000 pink slips to teachers and school employees, according to the state's superintendent.  "Our state budget crisis has forced districts to lay off thousands of teachers over the past few years," said Jack O'Connell, the state superintendent of public instruction. "The governor has proposed cutting another $2.4 billion from public education. While the education community opposes these cuts, our schools are forced to prepare for this potential outcome by issuing a massive wave of potential layoff notices." According to figures provided by O'Connell's office, more than 16,000 teachers lost their jobs in 2009. The latest round of pink slips do not guarantee that these 22,000 school employees will be laid off. Final staffing decisions will be based on the budget passed by lawmakers this summer. But school districts had until Monday to notify anyone who may be laid off before the next school year begins.

Why Teachers Unions Matter - Nowadays a newspaper cannot be opened — or a TV turned on — without one being subjected to anti-teacher misinformation.  The anti-teacher hysteria looks diverse on the surface, but underneath, this public controversy seeks to dislodge teachers unions: the right-wing trashes teachers’ unions outright, while the “liberal” media takes a more subtle, sophisticated approach, blaming the state of public education on “bad teachers” who must be fired and replaced.  Both styles are the same in essence.        The bi-partisan goal is to undermine and dismember public education, so that public funds may be instead channeled into paying debts racked up by multiple wars and corporate bailouts. Also, as public education is gutted, rich investors parasitically benefit from it by opening for-profit “charter schools,” curriculum corporations, or the bevy of new companies that "certify" teachers for a fraction of the cost or time of universities, ready to serve at the new corporate McEducation institutes.

Child Nutrition Reauthorization - You have probably already been enjoying the Fed Up With Lunch blog, a photographic journal of a year of school meals. If you think school lunch should be better, a lot depends on Child Nutrition Reauthorization in Congress this Spring. Here is a sampling of blog and new media coverage. Tom Philpott at Grist:Obama's proposed increase would boost the current daily per-lunch outlay by less than 20 cents -- not enough to buy an extra apple a day for every kid. Now Blanche Lincoln (D.-Ark), the agribiz-friendly chair of the Senate Ag committee proposes doing is slashing Obama's proposed increase by more than half, to $4.5 billion over ten years.

Arizona Drops Children’s Health Program - NYTimes - Arizona on Thursday became the first state to eliminate its Children’s Health Insurance Program when Gov. Jan Brewer signed an austere budget that will leave nearly 47,000 low-income children without coverage. The Arizona budget is a vivid reflection of how the fiscal crisis afflicting state governments is cutting deeply into health care. The state also will roll back Medicaid coverage for childless adults in a move that is expected to eventually drop 310,000 people from the rolls. State leaders said they were left with few choices because of a $2.6 billion projected shortfall next year. But hospital officials and advocates for low-income people said they were worried that emergency rooms would be overrun by patients who had few other options for care, and that children might suffer enduring developmental problems because of inadequate medical attention.

Obama to push 'No Child Left Behind' overhaul - CNN - The Obama administration plans to send a wide-ranging overhaul of the No Child Left Behind education law to Congress on Monday, arguing that the current legislation has pushed schools to lower their standards to meet federal requirements.The 8-year-old law was one of the signature policies of the Bush administration. It set up a regimen of state reading and math tests for students in third through eighth grades, intended to identify failing schools. But critics have said the Bush administration never properly funded the effort and that states needed more flexibility in meeting those goals.

What went wrong with No Child Left Behind? “Who would want to leave any child behind?” Diane Ravitch says that was the logic that initially led her to support the policies of No Child Left Behind, requiring all public schools to measure student performance through standardized tests. In the eight years since the act took effect, however, Ravitch said she has come to understand that the policies and the punitive measures put in place for schools failing to meet proficiency requirements were as unrealistic as requiring all cities to become crime-free by a target date, and then shutting down police departments that failed to achieve that impossible goal. On March 15, she spoke on a panel at EPI, How Testing and Choice are Undermining Education,  about the damage that has resulted from a heavy focus on standardized tests.

Stupid In America; What's Wrong with the U.S. Education System? - Mish - The following video should be required viewing for every member in Congress, every teacher in the United States, and every parent with children in public education. The video is 40 minutes long but I assure you that watching it will be time well spent. The video compares the U.S. public education system with that in Europe, and with magnet and charter schools vs. districts where there is no competition. The results are shocking. Please watch ....

For-Profit Schools Cashing In on Recession and Federal Aid - NYT - One fast-growing American industry has become a conspicuous beneficiary of the recession: for-profit colleges and trade schools. At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition that can exceed $30,000 a year. But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of financial aid. Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pell grants awarded to low-income students.

For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program - Mish - If president Obama gets his way, still more money, up to $50 billion, will be thrown at the failed Pell Grant system. Pell Grants are based on a means test and the funding comes with no strings attached. The money does not have to be repaid. That alone should tell you the program is rife with fraud. And it is. Regardless of grades, ability, or likelihood to graduate, students can apply for the money, take it and run, without ever attending one day of class. Many do. Those who do use the money for education, as apposed to partying and drugs, frequently waste it on useless degrees that leave students deep in debt after graduation, assuming of course the students even graduate.

Is It Fair for Education to Be Cheap - DeLong:  This current cohort of white, male, native-born twenty-year holds will–for the first time in American history–have no more education than their predecessors of a generation ago. This is extraordinary, given that this is a generation during which the college salary premium has risen from 30% to 70%. The returns to college are much greater than they were a decade ago? So why aren’t more people attending. The answer is that lots of people fear college because it is expensive: they would have to go into debt to attend, and they fear to do so. So our dilemma: if we don’t keep college cheap–and publicly-funded–we find it next to impossible to increase educational opportunity; if we subsidize college with public money, we are transferring from the not-so-rich to the relatively rich.

What if a college education just isn't for everyone? - The case is compelling: As good jobs increasingly require more education, college is widely seen as the ticket to personal economic security and to global competitiveness. And the message has gotten through: The percentage of students who went on to college or trade school within a year of high school climbed from 47% in 1973 to 67% in 2007, Census data show. And yet, there's an undercurrent of concern about a group of students — sometimes called "the forgotten half," a phrase coined 22 years ago by social scientists studying at-risk young people — who, for whatever reason, do not think college is for them. It's expressed by soul-searching parents such as Crave, whose son doesn't thrive in the classroom. It's also expressed increasingly by educators, economists and policy analysts, who question whether it's realistic and responsible to push students into college even if the odds of academic success seem low.

Public pensions underfunded by $9.4 billion - The promises that Rhode Island and its cities and towns have made to their current and future retirees without putting money aside carry a dollar figure that is big enough to buy 345,588 Ford Mustang GTs, 47,000 houses priced at the state median or several hundred of the finest mansions along the state’s coast. Put another way, the state’s unfunded retirement obligations add up to about $9,400 per Rhode Island resident.All told, those promises come with a price tag of $9.4 billion — a number revealed for the first time in a report to be released Wednesday by the Rhode Island Public Expenditure Council

Nevada's Public Employee Pension Plan Has $9.1 Billion Unfunded Liability - Nevada’s political leaders have emphasized repeatedly in recent months that the state faces a huge funding shortfall in 2011, perhaps as much as a $3 billion hole that will make the recent special session battle over cuts and new revenues pale by comparison. But the state faces another financial challenge that some suggest may be even more difficult to address: a public employee pension system that has an unfunded liability of $9.1 billion as of June 30, 2009.A recent study of state and local government pension funds identified Nevada as one of 19 states where “serious concerns” exist about the long-term health of the retirement plan.

State will dip into pension fund, repay with 7.5% interest - Virginia is taking away more than $620 million that would have been paid toward state employee and teacher pensions, but the state is leaving an IOU.Beginning in 2013, the state will have to repay the money to the Virginia Retirement System over 10 years, with 7.5 percent interest. The provision, sought by the state Senate and included in the joint budget adopted by the General Assembly yesterday, is aimed at easing jitters over the decision to defer state and local payments to pension plans for the portion of future retirement liabilities that aren’t funded by the system.

CalPERS continues to face severe budget shortfall - The California Public Employees' Retirement System (CalPERS) is the largest public pension system in the country with current assets of about $205 billion. They fund pensions and health plans for retired California state and municipal employees. However, they (and many other public pensions) now face serious financial problems.Consider these facts. 1) In 2007, CalPERS had assets of $260 billion. That dropped to $160 billion last March and has recovered to $205 billion, still down 22%. But their game plan assumes a return of about 7% a year to keep their funding levels stable. Obviously they are nowhere near that.  2) By law, California public pensions must be funded at 100%. CalPERS has the power to force municipalities to pay more to make up any funding shortfall at CalPERS.  You can see the problem. Taxes may rise because CalPERS is mandating others to make up for their losses.

As the burden of ever-increasing pension costs rests heavy on state and beach cities’ coffers, one question is on everyone’s minds — how will we pay for it? -  CalPERS is bleeding. The economic meltdown of 2008 gouged a hole in the nation’s largest public pension fund, drying up the investments the California Public Employee Retirement System relies on to stay afloat. Local cities will be the bandage, shoring up millions in the next two years to help CalPERS recoup. Redondo Beach could cough up $24 million in the next two years for its retirees, while El Segundo faces layoffs and lower wages as it attempts to turn up more than $15 million. CalPERS saw its investment earnings peak at $260 billion in 2007 and plummet to $160 billion last March. Critics have thrashed CalPERS actuaries for making poor investment decisions and unrealistic predictions on interest returns. Others have directed their fury to the public employees who are guaranteed more than $100,000 in retirement regardless of the market, while private sector employees wait on bended knee for their 401(k)s to be replenished.

Connecting the Dots: Social Security Edition - Only unpleasant decisions lie ahead that will stun the second half of a Baby Boom generation of which some two-thirds essentially have no retirement savings other than the income they think their children and grandchildren will be willing to forego in future years to provide those promised Social Security benefits.  (Spoiler Alert: That isn't going to happen, although not without a protracted fight which will descend into an ugly inter-generational conflict as income-strapped Millennials, Gen-Xers, Gen-Yers and Echo Boomers refuse to pony up more of their diminishing wages that their savings-strapped parents and grandparents can recline at home beginning at age 62 and watch reruns of Dallas and Knot's Landing. Late Boomers, born between 1954 and 1964, you heard it hear first: Get ready to be employed, in some fashion, until at least age 72, maybe age 75, maybe until you are carried out feet first, whichever occurs earlier. Can you say "Welcome to Wal-Mart?")

Fact Check: Has Social Security begun tapping its trust funds? - Economic Policy Institute - A recent Associated Press story said that Social Security will need to “start cashing Uncle Sam’s IOUs” because the recession is adding to the system’s financial problems. The article said “the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn’t be worse.” This is simply not true. According to the Congressional Budget Office -- the source cited in the article -- Social Security will continue to run a surplus for years to come, with the combined old age and disability trust funds projected to grow from $2.5 trillion in 2009 to $3.8 trillion in 2020. See Figure.

The New York Times Doesn't Like Social Security - The reference to Social Security appears in a statement telling readers that: "many economists" are advocating cuts in these programs "to avert a fiscal calamity in the coming decade." It is also worth noting that many economists, citing extensive evidence, ridicule the "many economists" who make assertions about "fiscal calamity" without any evidence to support their position.  It is also worth noting that Social Security is funded by a designated tax that is projected to keep the program fully funded until 2044. It appears that the NYT is unaware of the funding mechanism for Social Security. Given this designated tax it would make as much sense to cut Social Security as it would to cut interest payment on government bonds (i.e. default on the government debt), especially since interest is in fact a much more rapidly growing category of entitlement spending.

Pension Fund Cashes in Treasury Bonds: AP Screams "Crisis" - Okay, it's not exactly a pension fund, it's the Social Security trust fund that is cashing in some of the government bonds that it holds to pay benefits. This is the way the trust fund was designed to work, but AP somehow cannot find a reporter (or editor) who understands even the most basic facts about Social Security or for that matter Treasury bonds, which get called "IOUs" in the headline and four times in the article.

Looking Ahead: 2011 Social Security Cost of Living Adjustment - This year (starting in December 2009) was the first time since the automatic cost of living adjustments (COLA) were adopted in 1975 that Social Security benefits did not increase. This was also the first year the contribution base (currently $106,800) did not increase. There is a reasonable chance that there will be little or no increase in benefits in 2011 (starting in December 2010). The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the proceeding year Q3 months. Note: this is not the headline CPI-U.

More Retirement Disasters - I can’t believe the number of frightening retirement stories I’ve seen in just the last week. They suggest that the vast majority of our country’s citizens are completely unprepared for life after work. They point to a governmental backup system that is getting ever more desperate. And they suggest that other traditional sources of retirement income — such as corporate pensions — are in grave danger of imploding.Let’s start with a truly mind-blowing fact …43 percent of American Workers Have Less Than $10,000 in their Retirement Accounts! Pension Pressure -

Driving retirement for seniors – Public safety should win against personal choice especially when it comes to elderly seniors who shouldn't drive, states an editorial in CMAJ (Canadian Medical Association Journal).  Seniors can be the safest drivers but that decreases with age as a growing number of medical conditions can lower a person's ability to drive. By 2025, one in four Canadians will be 65 or older. "Just as planning for job retirement is the social norm, we should be planning for driving retirement by creating programs to help seniors drive safely as long as possible and when they can't, to help them get around," states Dr. Noni MacDonald, Section Editor and Dr. Paul C Hebert, Editor-in-Chief, CMAJ.

Insurance Company Intentionally Targeted, Dropped HIV Patients  If you're not familiar with the concept of rescission, it's a lovely business practice of health insurance companies in which they examine patients records to find a reason to "rescind" coverage after finding out that a customer has a life-threatening illness. This saves them money. That's not news. What is news is that according to new documents revealed in a court case, one insurer "Fortis" (now known as Assurant Health) specifically targeted people who were newly diagnosed with HIV.

Demons And Demonization -The usual suspects have been attacking Obama for “demonizing” insurance companies; but saying that people do terrible things isn’t demonization if they do, in fact, do terrible things. And health insurers do, because they have huge financial incentives to act in an inhumane way — most obviously, by revoking coverage when people get sick, using whatever rationale they can devise.  Read this report by Murray Waas on Assurant Health (previously called Fortis), which used a computer algorithm to identify every client with HIV, then systematically revoked coverage on the flimsiest of grounds — and appears to have systematically hidden any paper trail showing how it made its decisions

Are Health Insurers Worth Bashing? - I am getting thoroughly frustrated with a facet of the health care debate – the singular focus on health insurers, with total disregard of other contributors to health care costs.  Yes, I am in total agreement with the concept of providing health insurance to folks who currently cannot afford it, or who do not have access at any cost (because of pre-existing conditions).  I also believe that the rate of increase of health spending needs to be significantly reduced.  But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.

Ex-Pfizer Worker Cites Genetically Engineered Virus In Lawsuit Over Firing - Medical experts will be watching closely Monday when a scientist who says she has been intermittently paralyzed by a virus designed at the Pfizer laboratory where she worked in Groton opens a much anticipated trial that could raise questions about safety practices in the dynamic field of genetic engineering. Organizations involved in workplace safety and responsible genetic research already have seized on the federal lawsuit by molecular biologist Becky McClain as an example of what they claim is evidence that risks caused by cutting-edge genetic manipulation have outstripped more slowly evolving government regulation of laboratories. McClain, of Deep River, suspects she was inadvertently exposed, through work by a former Pfizer colleague in 2002 or 2003, to an engineered form of the lentivirus, a virus similar to the one that can lead to acquired immune deficiency syndrome, or AIDS. Medical experts working for McClain believe the virus has affected the way her body channels potassium, leading to a condition that causes complete paralysis as many as 12 times a month.

Pharma faces a character count conundrum - There’s growing concern over how pharmaceutical companies use social media and the Internet to market their products. Last November, the US Food and Drug Administration held a hearing on the topic, and many were worried over how marketing mediums such as Twitter — which has a 140-character limit on text — can sufficiently disclose drug risks. The FDA asked for comment, and several pharmaceutical companies, advocacy groups and members of the public have since spoken up. While many of the commenters submitted lengthy reports with their ideas, we’ve condensed the information into — you guessed it — Twitter-size summaries. The snippets below are paraphrased and condensed versions of the actual comments; for details, click on the commenter’s name and check out their full submission to the FDA.

Walgreens: no new Medicaid patients as of April 16… Effective April 16, Walgreens drugstores across the state won't take any new Medicaid patients, saying that filling their prescriptions is a money-losing proposition — the latest development in an ongoing dispute over Medicaid reimbursement.The company, which operates 121 stores in the state, will continue filling Medicaid prescriptions for current patients.In a news release, Walgreens said its decision to not take new Medicaid patients stemmed from a "continued reduction in reimbursement" under the state's Medicaid program, which reimburses it at less than the break-even point for 95 percent of brand-name medications dispensed to Medicaid patents.Walgreens follows Bartell Drugs, which stopped taking new Medicaid patients last month at all 57 of its stores in Washington, though it still fills Medicaid prescriptions for existing customers at all but 15 of those stores.

Experts say US doctors overtesting, overtreating - Is it doctors practicing defensive medicine? Or are patients so accustomed to a culture of medical technology that they insist on extensive tests and treatments? A combination of both is at work, but now new evidence and guidelines are recommending a step back and more thorough doctor-patient conversations about risks and benefits. As a medical journal editorial said this week about Obama's recent checkup, Americans including the commander in chief need to realize that "more care is not necessarily better care." Obama's exam included prostate cancer screening and a virtual colonoscopy. The PSA test for prostate cancer is not routinely recommended for any age and colon screening is not routinely recommended for patients younger than 50. Obama is 48. Earlier colon cancer screening is sometimes recommended for high-risk groups - which a White House spokesman noted includes blacks. Doctors disagree on whether a virtual colonoscopy is the best method. But it's less invasive than traditional colonoscopies and doesn't require sedation - or the possible temporary transfer of presidential power, the White House said.

The Dead Don’t Want - Robin Hanson recently said that we should count satisfying the preferences of the dead as a benefit in cost benefit analysis. I disagreed, arguing 1) that it would lead to horrible outcomes, and 2) the dead don’t know whether their preferences have been satisfied, so satisfying them benefits nobody. In response, Robin has offered some comments. First he states that efficiency is not morality, so we should not be surprised that using efficiency criteria would deliver us outcomes that are not moral. That’s fine, but the conclusion I draw then is when efficiency would have us select obviously highly immoral outcomes -like, say, slavery, holocausts, and orphan eating- we reject efficiency in that circumstance. Robin, in contrast, bites the bullet: bring on the orphan eating!

Bizarro Health Reform Arguments - Krugman - As health reform moves to its final, make or break vote — I think it’s going to go through, but I’ll be hanging on by my fingernails all week — Republicans are still denouncing it as a vast, evil government takeover. But they have a problem: Obamacare is very much like the Massachusetts health reform, which was not only implemented by a Republican governor, but by a governor who is a serious contender for the 2012 presidential nomination. So they insist that the two plans have nothing in common — but the only real difference they can point to is that Massachusetts didn’t fund its plan in part out of Medicare savings.Of course, it couldn’t. But think about this a bit more: Republicans are saying that what makes Obamacare a socialist takeover, whereas Romneycare wasn’t, is the fact that unlike Romney’s plan, Obama’s plan cuts government spending.

Does Universal Health Care Discourage Abortions? - T.R. Reid, author of “ The Healing of America” (and a former professor of mine), argues yes: No one could argue that Germans, Japanese, Brits or Canadians have more respect for life or deeper religious convictions than Americans do. So why do they have fewer abortions?… The cardinal said that there were several reasons but that one important explanation was Britain’s universal health-care system. “If that frightened, unemployed 19-year-old knows that she and her child will have access to medical care whenever it’s needed,” Hume explained, “she’s more likely to carry the baby to term. Isn’t it obvious?”

The Mason-Dixon Line in Health Care Reform: Economists Edition - The WSJ Real Time Economics blog has posted the letters for and against the health care reform bill winding through Congress. The most interesting thing about the lists of signatories is the geographical divide. It was so interesting, I did a fast tabulation (so, don't quote me on it), and what one finds is that of the list in favor, only 2 of 41 economists are affiliated with institutions in the South (defined using the most restrictive definition in this Wikipedia page -- so to be completely accurate, I haven't used the actual Mason-Dixon line). Of the 131 signatories to the against letter, 40 are affiliated with institutions in the South, i.e., essentially 30% of the total. A list of affiliations is below:

House may try to pass Senate health-care bill without voting on it - After laying the groundwork for a decisive vote this week on the Senate's health-care bill, House Speaker Nancy Pelosi suggested Monday that she might attempt to pass the measure without having members vote on it.  Instead, Pelosi (D-Calif.) would rely on a procedural sleight of hand: The House would vote on a more popular package of fixes to the Senate bill; under the House rule for that vote, passage would signify that lawmakers "deem" the health-care bill to be passed. The tactic -- known as a "self-executing rule" or a "deem and pass" -- has been commonly used, although never to pass legislation as momentous as the $875 billion health-care bill. It is one of three options that Pelosi said she is considering for a late-week House vote, but she added that she prefers it because it would politically protect lawmakers who are reluctant to publicly support the measure.

Did Democrats ever support the public option? -- The public option’s death has been officially announced. The trajectory of this debate has become one of the strangest political sequences I’ve seen (and I’ve been follow health care obsessively for about a year now). The pieces just don’t fit. The Democratic Party’s rhetoric doesn’t match its actions.Democrats had us believe they wanted the provision when they had 60 senate votes, but just didn’t want to “go there” with reconciliation. But now they have to, and as Ryan Grim points out, enough Democrats have gone on record declaring their support for it, making it “a matter of will, not votes.” Yet they’re not even holding a vote on it. What’s the harm? You put forth an amendment, get them all to go on record, and if it has the votes you move forward with it; if it fails, so what? Move forward with the rest of it.

Democrats Want to Buy Now, Pay Later With Health Care? - I don't want to be overconfident in my predictions, as obviously I'm rather invested in the health care issue.  I don't know what's going to happen in November, and to the extent that I do know, it's because I think the broad macro forces simply aren't going to improve much in the next six months.  Maybe Obama will even get a bump out of the polls--and maybe Republicans will unleash their publicity push, and the tea party will go nuts, and he'll fall (a possibility progressives seem curiously unwilling to entertain, even to dismiss it).  I think the latter is more likely than the former, but I just don't know; we're in uncharted territory. But this I am confident of: they're not going to "pass this bill and then fix it,"

Health Care Nightmares - I can't make heads or tails of the various whip counts floating around. Friends who report on politics assure me that Nancy Pelosi still has plenty of leverage to twist arms . . . but what? It doesn't seem all that likely that Ms. Pelosi is going to be in charge after November, so what exactly does she have to hand out to wavering members? And if this thing passes on some controversial procedural maneuver, the Republicans in the Senate will go into full meltdown mode, meaning that there isn't going to be any more legislation to take home to your constituents anyway. (How much pork can you cram into one financial reform bill?)   Meanwhile, Pelosi and the leadership have to sound 100% absolutely sure of themselves

Health Care Reform: Is the expedient the enemy of the best? - The Hobson’s choice before us with regard to health care reform is to hold out for something that has fewer sops to Pharma and the health insurance industry or to accept a second-best alternative that would start the US on the road to something that delivers over time universal access to affordable health insurance and health care.  There is no reason to think that the path from this starting position could not lead where we want to go. Not having a reliable crystal ball, I honestly don’t know what is the right thing to do. But I do know that in the presence of uncertainty, the optimal path is almost always from where you are, not from where you would like to be.

Now for the Slaughter - Excuse me, but it is embarrassing—really, embarrassing to our country—that the president of the United States has again put off a state visit to Australia and Indonesia because he's having trouble passing a piece of domestic legislation he's been promising for a year will be passed next week. What an air of chaos this signals to the world. And to do this to Australia of all countries, a nation that has always had America's back and been America's friend.  How bush league, how undisciplined, how kid's stuff. You could see the startled looks on the faces of reporters as Press Secretary Robert Gibbs, who had the grace to look embarrassed, made the announcement on Thursday afternoon. The president "regrets the delay"—the trip is rescheduled for June—but "passage of the health insurance reform is of paramount importance." Indonesia must be glad to know it's not.

A look at the health care overhaul bill -- Congressional Democrats have released a final version of President Barack Obama's health care overhaul bill in advance of a House vote planned for Sunday. Some features of the legislation, which makes changes to the bill the Senate passed on Christmas Eve:  COST: $940 billion over 10 years, according to the Congressional Budget Office.  HOW MANY COVERED: 32 million uninsured. Major coverage expansion begins in 2014. When fully phased in, 95 percent of eligible Americans would have coverage, compared with 83 percent today. INSURANCE MANDATE: Almost everyone is required to be insured or else pay a fine. There is an exemption for low-income people. Mandate takes effect in 2014.  INSURANCE MARKET REFORMS: Major consumer safeguards take effect in 2014.

Health-Care Bill Faces Delay as Democrats Struggle With CBO… (Bloomberg) -- Congressional Democrats, racing to finish work on an overhaul of the U.S. health system, are facing delays as they strive to meet deficit-cutting targets. The Democrats, who had expected a final cost estimate from the Congressional Budget Office as early as last week, have to show that a bill amending legislation the Senate passed in December will reduce the federal budget deficit by $2 billion over the first five years and not add to the deficit afterward. House Speaker Nancy Pelosi said she also wants the two measures together to cut the deficit by $100 billion over the first decade and $1 trillion over the second decade.

Guilty Of Practicing Good Government - When a government actuary predicted that the program would cost a lot more than its proponents claimed--a prediction that quite likely could have alienated enough conservative votes in Congress to stop the bill from becoming law--the Bush Administration ordered the actuary to say nothing and threatened to fire him. Here, instead, we have President Obama and the Democrats confronting truly difficult trade-offs, in order to convince skeptical government accountants that health care reform will reduce government spending by even more than the accounts predicted it would already. We hear a lot about the corrupt bargaining and backroom deals in health care reform. -There are valid reasons for that. But this is an instance where the Democrats are guilty of something else: Trying to practice good government

Preliminary Cost Estimate for Pending Health Care Legislation - CBO Director's Blog - CBO and the staff of the Joint Committee on Taxation (JCT) have just completed a preliminary estimate of the direct spending and revenue effects of the reconciliation proposal that was made public on March 18, 2010. (Direct spending is spending that would result from enactment of this proposal without any further legislation. The estimate does not encompass discretionary spending, which would be subject to future action in appropriation bills.)

First Thoughts on the CBO Score - I think this is a fiscal disaster waiting to happen.  But no one on the other side cares, so I'm not sure how much point there is in saying that any more. 1)  Thanks to reconciliation instructions, they needed to improve the budget impact by at least $1 billion in the sidecar.  They improved it by exactly $1 billion.  Which goes back to what I've now said several times: the CBO process has now been so thoroughly gamed that it's useless.2)  The proposed changes increase spending dramatically, most heavily concentrated in the out-years.   3)  As I expected, the size of the magic asterisk--the modern equivalent of David Stockman's infamous "savings to be named later" in the Reagan budgets--has had to be beefed up to offset the new spending.4)  Medicare Advantage is being effectively outlawed--in some areas, the reimbursements will actually be below those of the fee-for-service programs. 5)  A disturbingly high percentage of the revenues still come from insurance premiums for other programs.  6)  Ultimately, this rests on the question: are we really going to cut Medicare?  If we're not, this gargantuan new entitlement is going to end up costing us about $200 billion a year next decade, which even in government terms is an awful lot of money. 

Uncertainty in Estimates for Health Care Legislation - CBO -Yesterday CBO and the staff of the Joint Committee on Taxation (JCT) completed a preliminary estimate of the direct spending and revenue effects of the reconciliation proposal that represents one component of the health care legislation being considered by the Congress. The other component is a bill, H.R. 3590, that the Senate passed in December. CBO and JCT estimate that enacting the combination of the reconciliation proposal and H.R. 3590 as passed by the Senate would reduce federal budget deficits by $138 billion between 2010 and 2019. Although CBO does not generally provide cost estimates beyond the 10-year budget projection period, many Members have requested our analysis of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. Therefore, we have developed a rough outlook for the decade following the 2010-2019 period.

The second health bill contains billions in stimulus funding for 16 States & DC - The two pending health bills are about health care and expanding health insurance coverage.  They’re not about fiscal stimulus, nor about building highways, hiring teachers, or cutting State taxes. Right? Then why does the second health care bill provide sixteen States and DC with billions of dollars in unrestricted funding, spending which would produce no change in health insurance enrollment? According to the description of the new second health bill just released by Congressional Democratic Leaders, sixteen States and DC will receive billions of new dollars that they will be able to use for any purpose.  This funding is, in effect, fiscal stimulus, and will not expand health insurance enrollment.

Understanding the new health reconciliation bill - Congressional Democratic leaders just released their summary of Bill #2, the health bill they intend to move through the reconciliation process. Here is their description document.  I caution you that this is a sales pitch aimed at Congressional Democrats. Here is the preliminary CBO analysis. Here is the legislative text, on which I am just now about to begin chewing. Since things are moving quickly, I’m going to repeatedly update this post.  You might want to bookmark it and return for updates.  The following notes are fairly technical.  Most will be interesting only to policy practitioners.

Reconciling Reconciliation - "Reconciliation has been used with increasing frequency. That was bad enough. But at least for the Bush tax cuts or the prescription drug bill, there was significant bipartisan support. Now we have pure reconciliation mixed with pure partisanship." via Op-Ed Columnist – The Spirit of Sympathy – Correct me if I’m wrong, but wasn’t one of the Bush tax cuts only passed when Dick Cheney broke a tie in the Senate?

A new $29 B gimmick in the reconciliation bill - A knowledgeable friend pointed out a $29 B Medicaid gimmick in the reconciliation bill that has so far, to my knowledge, not been publicly discussed.Both the huge amount of hidden spending and the irresponsible policy should offend responsible policymakers.  The reconciliation bill would create a new funding cliff for doctors in Medicaid, parallel to the Medicare doctor funding cliff in current law that fouls Congress up each year.  By creating this funding cliff the bill’s authors were able to shave $29 B off the CBO score and once again make the bill appear less expensive than it really is.

The economics of managed care - Here is my latest NYT column and these are some relevant excerpts: Conceived in its broadest form, managed care can be run by the government, as in Britain, or left in the hands of a regulated private sector. Because the United States already has substantial private-sector capacity, and because many Americans are suspicious of government controls, the private route is the most likely option. Individuals would choose among competing providers — and those providers would try to offer the most appealing bundles of services, relative to cost. The current tax exemption for health insurance benefits could be modified to encourage more cost-effective delivery systems, including forms of managed care that meet quality standards. For the elderly, the current Medicare fee-for-service method could be transformed into voucher programs for managed care treatment. Of course, people could go outside their network for additional services, if they were willing to pay.

Managed Care: Get Used to It, by Tyler Cowen, NY Times: We may soon know whether Congress will approve some version of President Obama’s health care plan. No matter what the outcome, there will be an unacknowledged monster lurking in the room: managed care. The concept embodies many modes of delivering medicine, ranging from the nightmarish bureaucratic encounter to the highly professional clinic. Some forms of managed care — health maintenance organizations like Kaiser Permanente, for example — have been accepted by broad segments of the population. But the obvious downside of managed care is that a provider may be stingy with service and access... In the 1990s, many patients rebelled, objecting to bureaucratic decision-making and long delays for “optional” services. To this day, managed care is criticized in many circles. It is still with us, however, and its role is certain to grow. The fundamental appeal is financial. All managed care plans have a built-in incentive to limit costs...

Reintroduction of House Calls - The first thing I would outline is Patient loads for Doctors; a situation where to maintain their license to treat Patients, they had to treat a certain number of Patients per year as set by Government regulation. It would change the nature of the market; forcing Doctors to accept a set number of Patients, no matter What their ability to pay. Medical Schools would be mandated to graduate a set number of Doctors per year, allowing for full Coverage of all medical Patients; failure to graduate this number of Doctors would lead to withdrawal of certification for the medical faculty. The level of proper medication for the total medical population would be determined, along with the Average medication deployment for each Doctor. A new Tax would be assessed on medical practice, with Doctors charged a tax on each proscribed issuance of a dosage of medication; something that could range in variance to amount like Personal Income, from maybe 15 Cents per Pill for normal issuance to maybe $3 per Pill or dosage for excessive proscriptions. There could also be a mandatory limitation of Doctor fees per Patient per year; I being Mean, and suggesting a limit of $1000 per Patient per year. I would grant Clinics an amount of no more than $3000 per Patient per year, and hospitals no more than $5000 per Patient per year. I would simply tell all health care Providers that they had to operate within their parameters, or lose their license to practice medicine anywhere under our Government’s jurisdiction

Almost 1 out of 3 Physicians May Leave Medicine - From a survey of physicians conducted by The Medicus Firm in December 2009, and appearing in the latest issue of the New England Journal of Medicine:"If health reform passes without the public option, 7.4% of physicians stated that they would quit practicing medicine, unless they were nearing retirement, in which case an additional 21.8% of the responsdents said they would retire early, bringing the total loss of physician workforce to nearly one-third of physicians leaving medicine."What many people may not realize is that health reform could impact physician supply in such a way that the quality of healthcare could suffer," states Jim Stone, Managing Partner at The Medicus Firm's Dallas office. "Based on the physicians' responses to the survey, health reform could significantly intensify the effects of the physician shortage. Depending upon which version of the health reform bill passes, the reality is that there may not be enough doctors to provide quality medical care to all of these newly insured people." Over 50% of physicians who responded predict that health reform would cause the quality of medical care to deteriorate in America

Unfortunately Ironic Statement About Paying for Organs - In an article in the Philadelphia Inquirer today about a new study on selling organs, George J Annas, a professor of health law, bioethics, and human rights who opposes compensation, had this to say about whether donors should be allowed to be compensated: “I think it is out of bounds,” Annas said. “We know we can live with the system we have now. We have no idea about what another system would do.” A few paragraphs earlier came these statistics: Last year, 6,453 people in the United States died waiting for an organ. Nearly 92 percent of them died waiting for organs that living donors could have supplied – 4,456 needed a new kidney and 1,452 a liver. I think Dr. Annas needs to modify his statement: some of us can live with the system we have now, but last year 6,453 could not.

How to drive down health-care costs: treat people like dogs - There's a piece by a veterinarian in the current issue of Newsweek that makes the case for structuring the human health-care system more like the one we have for animals. That doesn't sound like a completely ridiculous idea to me. While pet insurance exists, only roughly 3 percent of owners carry it; even then, clients pay a substantial portion of costs themselves. That means they usually want to know the rationale behind each test. I explain what I think is going on, what I want to look for, and which tests I need to perform to find it. I rank the diagnostics from most to least essential and lay out approximate costs. My clients then choose what they want done, with an understanding of the relative importance, risk, and cost of each option. This step-by-step approach may seem time-consuming, but it dramatically reduces the number of expensive, unnecessary tests. And the process is more gratifying.

Fight for single-payer health care will continue after bill passes …One of the most trusted progressive voices in the senate said Monday evening the effort to improve health care in America will not be over once the Democratic bill passes. In fact, he declared, it's just the beginning."I believe that at the end of the day, what we need is a Medicare-for-all, single payer system," Sen. Bernie Sanders (I-VT) said on MSNBC's The Ed Show. "This is far from that. But that fight continues. So, this is a step forward. And let us not underestimate the good in this bill, let's continue to fight." After a year of extensive debates, the resulting legislation has drawn the ire of many progressives, who are upset that it does not expand public alternatives for consumers. But according to Sanders, that isn't enough of a reason to strike it down.

Healthcare Costs Around the World (graphic)

Drug resistant tuberculosis spreads across the globe - Drug-resistant tuberculosis is going to get all the headlines tomorrow, quite understandably. The World Health Organisation has produced a report showing the spread of multi and extremely drug-resistant forms of the disease (MDR and XDR-TB) across the globe, although in truth we only know about those countries capable of collecting statistics on the cases. So far, that's around 40, although over 50 have acknowledged at least one case. But where drug resistance is most alarming, in parts of Africa where HIV rates are high and people are extremely vulnerable to infections, we can't yet know what's happening. If the death rates among people with HIV start to climb, though, it's not unlikely that drug-resistant TB will be the reason. Drug-resistant TB costs 50 to 200 times more to treat than the ordinary kind (and it's a two-year course), but frankly that's only an issue in countries that have the right drugs. In most of Africa, they don't, and XDR or MDR-TB is a death sentence.

Promises, Promises - My piece on bank reform will have to delay until Monday evening.  I am still working on it.  Tonight’s piece is on entitlements and pensions globally and locally. I asked recently if anyone had data on other countries of the world to analyze where other countries were in terms of debt plus unfunded liabilities as a percentage of GDP.  I got a few good suggestions, but then I stumbled across this article in the New York Times that providedthe graph to the left.The article is about Greece, but the graph covers all of Europe and the US.  I am not sure where the author got the 5x GDP estimate for the US, but I have e-mailed him.  My own estimate was 4x GDP.

The Legacy of the Economic Crisis - In its recent Going for Growth report, the OECD concludes that the economic and financial crisis will leave an unwelcome legacy: a permanent reduction in economic activity. This loss averages about 3% of potential GDP across the 20 member countries for which the OECD was able to make these estimates. As the following chart shows, those losses differ greatly across countries:  Ireland and Spain are the clear losers, with the crisis cutting economic activity by more than 10%. Despite being a catalyst for much (but by no means all) of the crisis, the United States faces one of the smallest losses. The 2.4% reduction in potential U.S. GDP is a sobering hit, but is less than that faced by 16 of the other nations. Why does the United States appear to be on track for comparatively moderate output losses? Because of its resilience.

Mancessions, Around the World - We’ve written before about how men have borne the brunt of the job losses in this recession in the United States. This is largely because they are more likely to be employed in industries that are sensitive to the business cycle (like manufacturing and construction). Women are more disproportionately employed in industries that generally withstand downturns better (like health care, education and government work). Turns out the “mancession” story looks the same elsewhere in the developed world. In most other industrialized countries, unemployment among men has risen much higher than unemployment among women from the first quarter of 2008 to the third quarter of 2009, according to the Organization for Economic Cooperation and Development.

Shipping Market Is Worst Since World War II, James Fisher Says (Bloomberg) -- The world shipping market is mired in its biggest slump since World War II, said James Fisher & Sons Plc, a U.K. hauler of oil products.  “This is the worst shipping recession since the war,” Chairman Tim Harris said today in a telephone interview.. Prospects for a rebound at its shipping unit hinge on the timing of any increase in industrial output in northwest Europe, Harris said. Demand to haul cargoes has plunged because of the global recession, sending charter rates lower and spurring carriers to take vessels out of service. BW Gas Ltd., the world’s biggest shipper of liquefied petroleum gas, said last week it idled four tankers because rates plunged so low that each vessel was losing the company about $25,000 a day.

LA Area Port Traffic in February - Note: this data is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of the nation's container port traffic. Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported. Loaded inbound traffic was up 33.8% compared to February 2009. (up 9.5% compared to last year using three month average).

Migration in Latin America: Answering old questions with new data - VoxEU - The economic effects of immigration are often controversial. This column introduces the preliminary findings from a new database on immigration in Latin America and the Caribbean. While immigrants do not seem to displace domestic workers, they are often working in sectors unsuitable for their skills. Better policy could help the destination countries as well as the immigrants themselves.

Where does foreign aid go? (graph of the day)

Greece: not a simple fable about ants and crickets  EMPATHY is always in short supply in recessions, even within the European Union where we are all supposed to understand each other instinctively. But really, the cross-border debate on Greece is depressingly simplistic. From German news magazines talking about "Swindlers in the Euro family" to senior Greek politicians talking about wartime reparations, it is easy to conclude that beneath a veneer of rationality, cartoonish stereotypes lurk just below the surface of all Euro-debates. I have lost count of the number of references I have seen to the fable of the ant and the cricket: with people thinking of either the Æsop version or (in French newspapers) the version by Jean de La Fontaine, I suppose. Well here is the thing…

The proposed EU Greek bail-out cannot simply bypass German law - Does nobody read German any more? Nearly all the reports on Europe’s bail-out for Greece appear to be coming from Paris, or Madrid, or sources within the Brussels apparatus determined to seize on the EMU crisis to advance the “Project”, this time by leaps and bounds towards fiscal federalism.This cannot possibly be done without German backing, so it is academic what these people think or want. As of today, German finance minister Wolfgang Schauble has not yet agreed to anything beyond a last resort rescue “if insolvency were imminent” and if there were to be a threat to the “financial stability of the euro area as a whole”. That raises the bar very high.

Germany backtracking on IMF involvement in Greece - News reports are now surfacing that the Germans are open to IMF involvement in the Greece sovereign debt crisis.  This is a 180-degree turn for the German finance minister who has expressed vocal opposition to the IMF’s involvement in ‘internal’ European Union affairs. Bloomberg reports Germany is making the shift to avoid being boxed in by a bailout pledge. The position the Germans seem to be taking is the one I outlined back in February (see The Germans will not bail out Greece).  However, the situation is still fluid and there is widespread resistance to the IMF’s involvement. My sense is that the Germans do want to move forward with a European Monetary Fund going forward and are now laying the groundwork even if that means involving the IMF.

More evidence that there is no bailout deal - This is a extraordinary story. Here was the European Council making a political declaration that they would be ready to stand by Greece, and now Germany wants Greece to turn to the IMF for aid. We reported yesterday that Germany wants a bigger role in the rescue by the IMF, but it looks that the dispute with France and others is not about the IMF’s technical expertise, but about IMF money. Germany wants the IMF to make, or lead, the loan to Greece. Bloomberg spoke to Michael Meister, the CDU’s influential finance spokesman, who has been a lead sceptic on a bailout all along, as saying: “We have to think about who has the instruments to push for Greece to restore its capital-markets access... Nobody apart from the IMF has these instruments.” He adding that attempting a Greek rescue without the IMF “would be a very daring experiment.”  Bloomberg interprets the statements as a sign that Angela Merkel wants to stay clear of a bailout – in contradiction to the political statement she signed on February 11.

Greek bailout chart of the day - Do you find the latest news from Greece a mite confusing? After saying that Greece “cannot sustain the deficit reduction that these hard measures aim to achieve” if its borrowing costs remain in the 6.3% range (which doesn’t seem so high to me), Greece’s prime minister went on to say that he had not asked for any money from the IMF or anybody else. Thankfully, Izabella Kaminska is here to explain exactly what Greece is seeking from the IMF, with this helpful chart: It seems that Greece is going back to fluttering its eyelashes at the IMF, after playing very hard to get as recently as March 12. Yes, this chart shows how confusing the whole thing has been. But I also think that the ups and downs do make a weird amount of sense, in their own fashion.

Martin Feldstein: The Greek Austerity Measures Will  Fail, And The Country Will Quit The Euro - Yesterday S&P came out and said it would not be downgrading Greece, providing the biggest piece of evidence yet in support of our thesis that the crisis is over (for now).  But of course this is just a short-and-medium call, and doesn't reflect anything about the long-term reality, as structural problems remain unfixed and untenable.Among Greece's doubters is Harvard's Martin Feldstein, who predicts that ultimately the worst fears of the beginning will be realized, and that Greece will have to quit the euro. He told Bloomberg that the austerity measures will ultimately fail, saying: “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy... The alternatives are to default in some way or to leave, or both.”

The Associated Press: Greece: Will ask for IMF help if EU fails… - Greece warned Thursday that it will be forced to turn to the International Monetary Fund if the EU can't agree to a bailout plan next week that will help reduce its market borrowing rates.Greece is paying a high price to sell bonds because investors fear its massive budget gap this year could cause it to default on debt payments. It needs to borrow some euro54 billion ($74 billion) this year and euro20 billion of that in April and May.Prime Minister George Papandreou said he expects European Union leaders to decide at a March 25-26 summit on a blueprint of aid from the 16 eurozone countries.He said he wasn't asking for money but a clear mechanism for financial help in case Greece can't afford to borrow from markets.

Wait A Second - I Thought Greece Was Done? - Weren't we told Greece was "bailed out", "backstopped", or whatever you care to use?  That's all I've heard all week on ToutTV. So what's this about? Greece could seek IMF funding to help overcome its debt crisis if its EU partners do not provide "clear support" next week, a government spokesman said Wednesday George Petalotis said the March 25-26 European Union summit on how to deal with a potential bailout for Greece will be crucial, as the country struggles to reduce a bloated budget deficit and public debt. Doesn't sound "done" to me! Oh wait - what's this?The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, an adviser to U.S. presidents since Ronald Reagan, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”  Of course it's a fantasy. 

The Pain in Spain ... And What It Means for Europe and Beyond - Spain's rapid decline from one of Western Europe's fastest-growing economies to one of its most troubled has left many looking for blame. How could the country, a poster child for the benefits of European economic and monetary integration, suddenly find itself lumped together with smaller, more sickly economies like Greece, Portugal and Ireland?  Because of its size, Spain's success in reversing its fiscal deterioration is critical for the future of the euro, the European Union and, ultimately, the global economy. "The unfolding of Greece's fiscal imbalances and Dubai's episode represented a first sign of how quickly investors can become risk-averse," – Investors shun Europe as sovereign risk weighs - Investors are turning away from Europe equities and shifting attention to the US and Japan, according to a survey carried out by Bank of America Merrill Lynch. Although the survey showed that investors have returned to a bullish outlook towards equities in March following the negative sentiment towards the asset class last month, 21 per cent of asset allocators are underweight European equities in March, up sharply from 2 per cent overweight in January.  “Investors’ concerns about Greece are easing but European country risk remains a key constraint to optimism over economic recovery,”

Towards a European Monetary Fund - VoxEU - Europe was caught totally unprepared for the pressure on public debt that followed the global crisis. This column outlines a proposal for a European Monetary Fund with which, it argues, the EU would be much better prepared to face these difficult times.

In defence of one IMF VoxEU - Discussions over a European Monetary Fund have gained momentum over the last week. This column argues that regionalising the IMF is sub-optimal. But discussions over a European Fund offer an opportunity for a complementary fund, which can offer a reference for Asian countries.

Sarkozy Opposes IMF Greek Loan, Widens German Rift (Bloomberg) -- President Nicolas Sarkozy opposes Germany’s push for an International Monetary Fund loan to Greece, pitting the euro area’s biggest members against one another over a rescue plan.  A French government official, who declined to be named under government ground rules, said today France backs a European solution to help Greece and said the monetary union must act to restore investor confidence and shrink Greek borrowing costs.

Europe’s macro mess: Dysfunctional diversity that gets the job done - VoxEU - As the debate over a European Monetary Fund continues, this column argues that Germany’s enthusiasm for the new fund lies in its desire to impose fiscal discipline on countries it didn’t want in the Eurozone in the first place. The EU is not Germany and despite its dysfunctional diversity, the avoidance of a currency crisis in Greece shows that it works.

EU Says Deficits May Exceed Target as Nations Optimistic on GDP (Bloomberg) -- The European Union cast doubt on some EU governments’ budget-deficit targets, saying countries including Spain, Ireland and France may be basing their budget plans on optimistic growth forecasts.Belgium, Germany, Italy, the Netherlands, Slovakia and Finland also are using “favorable” economic forecasts to draw up deficit-cutting projections, the European Commission said today in Brussels as it asked several countries for more specifics on how they will bring the shortfalls back within the EU limit of 3 percent of gross domestic product.The euro area’s budget gap will more than triple in the two years through 2010, according to EU forecasts, after governments pumped billions of euros into their economies to fight the worst recession in six decades.

Are sovereign debt crises inevitable? - Thanks to the ongoing debacle in Greece, we've become all too aware about the dangers of the rapid build-up of government debt throughout the developed world in the wake of the financial crisis. The potential consequences of that trend are made ever more frightening in a new study by economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University (authors of the book This Time is Different: Eight Centuries of Financial Folly). They conclude that there is a “strong link” between banking crises and sovereign defaults. In fact, they state, banking crises can help predict sovereign debt crises. Their study spans two centuries and 70 countries, in both the developed and developing world, and makes for some nail-biting reading. Here are their main conclusions:

The Use of the Expression 'Sterling Crisis' Increases Day by Day - It seems to be that jury is still out on the prospects for the UK economy; there are still a few analysts that believe that the UK might suddenly motor ahead. However, increasingly the commentators, analysts, and even some politicians, are coming to the view that the UK is in deep, deep trouble. For regular readers of this blog, this will come as no surprise, as they will know that the brewing crisis in the UK was apparent many years ago, and that the government's action has only served to increase the scope of any coming crisis. When I first started this blog, I suggested that the UK was already bankrupt, and that it was just a question of time before this was accepted. I proposed that it would be necessary for either the UK to print money or default on debt and, lo and behold, the money printing solution appeared from nowhere with the Bank of England inventing justifications for the policy.

Brussels warns UK government over budget deficit - The government’s plans to cut back the budget deficit are 'not sufficiently ambitious' and need to be 'significantly reinforced', a European Commission report is expected to warn this week.  In what could be a major embarrassment for Labour just a week before the critical pre-election Budget, tomorrow’s report will say the government needs to do more spell out exactly where spending cuts and tax rises will hit. A draft of the report, leaked to Reuters, says: ‘The fiscal strategy in the convergence programme is not sufficiently ambitious and needs to be significantly reinforced. A credible timeframe for restoring public finances to a sustainable position requires additional fiscal tightening measures beyond those currently planned.’

Britain rejects EU calls for more fiscal cuts (Reuters) - The British government rejected on Tuesday calls by the European Commission for it to do more to cut its ballooning budget deficit in the medium term, saying such action would damage public services. "We think the plan that they've set out would require us to take something like 20 billion pounds ($29.98 billion) more out of the economy by 2014-15 and we think that would do irreparable damage to public services or to taxpayers."

The Great British Economy Disaster… Fanfares, ticker-tape parades and pompom-wielding cheerleaders failed to greet the news that the UK economy grew by 0.1 per cent in the quarter-year to December. That’s as it should be, because this is as fragile as a recovery can possibly be, after six quarters of economic contraction. This is assuming we can trust the figures, which we almost certainly can’t, not because of government fiddling but because the data come in over time, and retrospectively alter the GDP estimate. The number goes on changing for months, indeed years. It may well be that the position is worse than it looks.

Quarter of adults out of work, official figures show - More than one in four adults in Britain are not working, after a record number left the workforce in recent months, official figures indicated. A total of 10.6 million people either did not have a job, or have stopped looking for one, according to figures from the Office for National Statistics, which indicated that more people than ever before had abandoned the workplace – choosing instead to study, go on sick leave or just give up searching for a job.

Record numbers contact debt charity - A record number of people contacted a debt charity during 2009 but in a third of cases their financial situation was so dire they could not be helped, research showed today.  The Consumer Credit Counselling Service (CCCS) said its helpline received 335,323 calls during the year, 25pc more than in 2008.  A further 150,000 people also sought help online, nearly two-thirds more than a year earlier and double the number for 2007.  But the charity said only a quarter of the people who came to it for help had the means to go on to a debt repayment plan or take out an Individual Voluntary Arrangement, under which regular repayments are made to creditors.  Instead an increasing proportion of people were not even able to meet their daily living costs, let alone have enough income left over to repay their debts; but they also did not qualify for any type of insolvency, including bankruptcy. 

Marshall Auerback: Britain Not Part of Any Greek Tragedy - They certainly know what “schadenfreude” means in Germany. But the attempt by the German paper, Der Spiegel, to link the UK to the travails of Greece, takes the concept to a malicious and irrational extreme:The British pound is tottering. The economy finds itself in its worst crisis since 1931...Sounds pretty, grim, especially given that Britain’s budget deficit is even higher than that of the “corrupt” Greeks, whom the Germans also seem so intent on abusing in print and punishing for their alleged fiscal profligacy. But the article itself is rife with intellectual dishonesty. You cannot mindlessly conflate EMU states — Germany included — which operate with no real fiscal authority as sovereign states in the full sense — with countries, such as the United Kingdom, which fortunately has a government with currency issuing monopolies operating under flexible exchange rates.

Britain warns China against protectionism – Britain has warned China against protectionist behaviour, as British businesses complain of being forced out of the Chinese market. The mood among foreign businesses operating in China has soured dramatically, with many complaining that they are facing the worst conditions for decades.  David Miliband, the Foreign secretary, met with British companies in Shanghai and admitted that some had complained that "there are problems here".

Serious Problems Emerge For The F-UK-DE Group of Countries -Daniel Gros, in a well meaning, but I feel fatally flawed, move to get us all away from talking about some of the members of our own community as PIGS, has decided to tell us, that they are not pigs at all, they are merely GIPSYs. Of course, depending on which way you look at it, such forms of reference could be taken as a compliment (”you sure do eat like a pig”), or not, but with due regard with the kind of controversy which has been provoked by the arrival of large numbers of Roma in Italy, perhaps it may not be the best move to get debate going to start by telling the countries which lie of Europe’s periphery that the best way to conceptualise them is as a bunch of “gitanos”. Nor is it the nest way to tell the members of core Europe that they way things stand they are essentially F-UK-DE. But there it is. That’s just how things are these days.Guest Post:

ECB’s Stark Sees Sovereign Debt Crisis Risk Unless Deficits Cut (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said the euro region may face a sovereign debt crisis unless governments reduce budget deficits. There is “a clear risk that we will enter a third wave,” which is “a sovereign debt crisis in most advanced economies,” Stark told lawmakers in the European Parliament in Brussels today.Any undue delay in reducing budget gaps will “have serious negative side effects on confidence and economic welfare,” he said. “The situation in Greece shows how important it is to strictly apply credible fiscal rules.” Greece’s soaring budget deficit has roiled financial markets since late last year and pushed up bond yields. European leaders yesterday laid out the groundwork for a possible financial lifeline to Greece, having already discussed the establishment of a lender of last resort similar to the International Monetary Fund.

States of Risk - Roubini - While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels. By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector’s losses, there is now a massive re-leveraging of the public sector. Deficits in excess of 10% of GDP can be found in many advanced economies, and debt-to-GDP ratios are expected to rise sharply – in some cases doubling in the next few years. In countries that cannot issue debt in their own currency (traditionally emerging-market economies), or that issue debt in their own currency but cannot independently print money (as in the euro zone), unsustainable fiscal deficits often lead to a credit crisis, a sovereign default, or other coercive form of public-debt restructuring. In countries that borrow in their own currency and can monetize the public debt, a sovereign debt crisis is unlikely, but monetization of fiscal deficits can eventually lead to high inflation. And inflation is – like default – a capital levy on holders of public debt, as it reduces the real value of nominal liabilities at fixed interest rates.

Japan – Defying Gravity? - Popular myth and, allegedly, the laws of aerodynamics have it that the bumblebee should not be able to take flight. Yet still, our good bumblebee refuses to be pulled down by such details and year after year it takes flight as if nothing has happened. This allegory applies, with some imagination, to Japans economy too. Year after year it consequently appears able to simply ramp up domestic debt to cover the shortfall of domestic demand at the same time as low investment demand, a savvy export sector, and a strong net foreign asset position mean that Japan does not have to rely on foreign investors to finance government debt outlays. Together with a central bank stuck in perpetual QE mode due to persistent deflation this has so far constituted the core of Japan’s bumblebee moment

Japan Eases Monetary Policy to Fight Deflation - NYTimes - In a bid to shore up a deflation-plagued economy, Japan’s central bank eased monetary policy further on Wednesday by boosting a bank-loan program, setting the world’s second-largest economy on a divergent path from other industrialized nations.  Central banks around the world have in recent weeks mulled rolling back stimulus steps put in place during the global economic crisis, gradually shrinking excess liquidity in their banking systems. The U.S. Federal Reserve said Tuesday it will let a mortgage-security purchase program expire at the end of March.

Output gap shows Japan still deep in deflation - Japan's output gap, a gauge of price pressures, was deeper in negative territory than initially reported in the fourth quarter of 2009, the government said, showing that supply was outstripping demand and weighing on prices.The output gap stood at minus 6.4 percent for the final quarter of last year, against a preliminary reading of minus 6.1 percent and nudging towards the record minus 8.0 percent seen in the first quarter of 2009 amid the financial crisis. It was the seventh straight quarter of negative readings.The output gap measures how much gross domestic product deviates from potential GDP, or the volume of activity when the economy is running at full capacity.A negative reading means supply capacity is ahead of demand, leading to deflationary pressure.

FT - Martin Wolf - China and Germany unite to impose global deflation: “Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.... Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291bn this year and Germany, with a forecast surplus of $187bn... these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses. Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.... Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly. The core of Mr Schäuble’s argument was... combining emergency aid for countries running excessive fiscal deficits with fierce penalties; suspending voting rights of badly behaving members within the eurogroup; and allowing a member to exit the monetary union, while remaining inside the European Union. Suddenly, the eurozone is not so irrevocable: Germany has said so. Three points can be drawn from this démarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone.... Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!

The politicization of economic problems - The two starkest battle lines being drawn are between the Greeks and the Germans and the Chinese and the Americans. Last month, there was enough clear headedness that I could post a parody of the madness that has overtaken Europe in Video: The Germans take on the Greeks. But, no more. It is clear, the political nerves are frayed. You’ve got ‘Italy’s worse, and the Germans stole our gold’ and German Leader Says Euro Zone Should Consider Expelling Countries That Threaten Regional Stability. That pretty much sums the battle lines up. On the Chinese – US front, I have been warning for some time that protectionist rhetoric has a slippery way of turning into trade war reality. Some people seem to think the U.S. isn’t risking a trade war, and that ‘the Chinese started this anyway’ or something to that effect.

Is the Chinese Yuan Too Cheap? - So here we are, once again, in a nasty round of political bickering over China's currency, the yuan (also known as the renminbi). There is a widespread belief around the world that Beijing has been setting the value of the yuan at an artificially cheap level, which gives Chinese exports an unfair advantage in international  markets. Just a few days ago, President Obama called on China to move towards a more “market-oriented” exchange rate.  Premier Wen Jiabao himself made some of China's strongest protests yet. In a defiant press conference, Wen insisted that the yuan is not undervalued, then went on to blast: What I don't understand is the practice of depreciating one's own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one's own exports. This kind of practice I think is a kind of trade protectionism. I have to give Wen special kudos for having the sheer chutzpah to make such a comment, since it's exactly what the world accuses China of doing...

How will an RMB revaluation affect China, the US, and the world…Of course regular readers of my blog won’t be surprised by any of this.  The logic behind a prediction of trade war is almost unchallengeable, and the two countries are simply the two most visible in a world in which trade tensions must inexorably rise.  Just ask the Germans and their European partners.  Trade relationships will continue to get much worse, largely because the cost of trade war for high-deficit countries is so much lower than for high-surplus countries, and there seems to be no real attempt on either side to tone down aggressive actions or rhetoric. We seem to be caught in a downward spiral, and the longer it goes on the harder it is for anyone not to participate.

China's Water Pistol - Krugman - Dean Baker gets upset by this line in today’s very useful Keith Bradsher articleChina is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt. As I said, this was a very good article about China; the debt line was probably inserted because it’s considered obligatory to say this in any article about US-China relations. As it happens, however, while it’s part of what everyone knows, it’s also completely false. Why don’t people get this?

Taking On China - Krugman - Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion. Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

Israel, China, America - Krugman - In debates over what to do about China’s currency manipulation, one constantly hears the refrain that we don’t dare alienate the Chinese, because they own so much of our debt. What would happen if they took their dollar holdings, equal to around 10% of US GDP, and switched them into other currencies? Well, we don’t have to speculate. Consider the case of Israel, which in the face of the economic crisis engaged in massive foreign currency intervention to weaken the shekel. What happens in a foreign currency intervention is that the central bank buys foreign securities while selling domestic securities — that is, the Bank of Israel was doing, as a deliberate policy, exactly what we’re supposed to fear the Chinese doing.

Dollar Dollar Bill - Paul Krugman posted an item laying out his view of the renminbi issue in more detail that I found very helpful. I don’t, however, totally understand his proposed remedy: As I’ve wondered before, I don’t understand what kind of a world it is we’re living in when a great nation can’t think of a way to devalue its own money. The Chinese economy is large, but the American economy is much larger. If they can pursue large currency interventions to bolster the value of the dollar, can’t we pursue large currency interventions in the other direction to reduce it? The Chinese might try to compete with us for a while in a game of international currency chicken, but when the time is up our government will accrue a large capital gain and they’ll incur a massive loss.

Chinese Currency Discussion - Krugman - Mark Thoma has the video of Fred Bergsten, yours truly, and Robert Scott discussing the renminbi. I explain there the magnitude of the impact: by running an artificial current account surplus that is 1 percent of the combined GDPs of liquidity-trap countries, China is in effect imposing an anti-stimulus of that magnitude — which plausibly means 1.5 percent of GDP. This is not a small issue.

China fact of the day - This is from Scott Sumner: I’d like to point out that there are many commonalities between China and 5 other East Asian economies; Japan, Taiwan, HK, Singapore and South Korea.  One of those similarities is that they all have huge stocks of foreign reserves.  In per capita terms China’s CA surplus is by far the smallest of any of the six East Asian powerhouse exporters.  The most recent data I could find in The Economist shows China’s CA surplus as $284.4 billion whereas the other five economies combine for a $286.7 billion surplus.  So if Krugman is right, those five economies actually are doing more damage to the world economy than China, which has 7 times the population and a modestly larger (PPP) GDP than other other five economies. The entire post is worth reading.  By the way, Matt Yglesias also offers comment

This is the problem with China’s currency peg -  reading Scott Sumner’s take on the China currency peg dilemma, I see that both he and Paul Krugman hit on the fundamental problem in the debate: reserves. Everyone is talking about the peg as if relaxing the peg will be the magic bullet to America’s current account problem. But this is clearly not the case.  If China were to unilaterally revalue it’s currency, the Chinese would start buying fewer dollars incrementally. Part of the benefits of revaluation would accrue to Chinese export competitors in Europe (principally Germany) and in Asia (depending on their currency policy response). As US economic policy would be unchanged, US imports would switch from China to its competitors without any benefit accruing to the US.

It’s China’s world, we just live in it (Krugman, round two) - One day after striking back at Ryan Avent, Paul Krugman posted another essay on the Chinese yuan, and this one’s actually very thoughtful.  In the end I still don’t agree, but I think he makes his case much more effectively.  We seem to mostly differ on how we interpret two issues: 1. Nominal GDP determination (or AD if you prefer that terminology) in the US, and in particular what should be held constant when thinking about policy options. 2. The disparity between East Asian and American savings rates, and who’s to blame. Let me start with where we agree.  Krugman says:

How Much Of The World Is In a Liquidity Trap? - Krugman - As I’ve written many times in various contexts since the crisis began, being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies. But what’s the definition of a liquidity trap? How much of the world is in one? There’s a lot of confusion on that point; here’s how I see it.

Of liquidity traps and surpluses - PAUL KRUGMAN continues to push back against my criticism of his get-tough approach to the Chinese dollar peg. New posts on the subject are here, and here. The first concerns the question of how much of the world is in a liquidity trap, which is important because:We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.To take this apart a little...

On China’s currency peg and potential policy actions - In reading Scott Sumner’s take on the China currency peg dilemma, I see that both he and Paul Krugman hit on the fundamental problem in the debate: reserves. Everyone is talking about the peg as if relaxing the peg will be the magic bullet to America’s current account problem. But this is clearly not the case. If China were to unilaterally revalue it’s currency, the Chinese would start buying fewer dollars incrementally. Part of the benefits of revaluation would accrue to Chinese export competitors in Europe (principally Germany) and in Asia (depending on their currency policy response). As US economic policy would be unchanged, US imports would switch from China to its competitors without any benefit accruing to the US.

The return of the "get tough" approach to China - Paul Krugman continues to be very upset with the Chinese government over its currency policy. He has written another column declaring that China's dollar peg is damaging to the global economy, and that America should get tough with the leadership in Beijing. This still makes no sense to me. As our Leader points out this week, it is probably in everyone's interest for China to allow the renminbi to appreciate at this point, though I'm sympathetic to Scott Sumner's argument that during the depths of the global recession, China's peg was highly stimulative to the Chinese economy and helped to end the global economic freefall. But while appreciation of the RMB would be good for mostly everyone:[I]t would not be a magic bullet, either within China or outside. Rebalancing China’s economy will require big structural reforms, from tax to corporate governance, as well as a stronger currency. A stronger yuan would not suddenly bring back millions of jobs to America.

X-change Rate, Trade, and China - Ryan Avent continues to find new ways to lose the debate with Paul Krugman, making two questionable arguments -- first, that if China revalues its exchange rate, it would be "good" for China, and, secondly, that America should just let China have its way with us.  And, I'm at a complete loss for why economists such as Ryan Avent or Greg Mankiw think that tariffs are the worst thing in the world and should be fought at ever turn, but that an artificially undervalued exchange rate is A-OK. Thing is, both have roughly the same implications for trade.

Senators back bill to pressure China on currency -- A group of 14 U.S. senators unveiled legislation Tuesday that seeks to increase pressure on China to let its currency to rise in value against the dollar, saying Chinese "currency manipulation" is hurting the U.S. economy. The bill calls for stiff trade sanctions if China does not act. "We are sending a message to the Chinese government," Schumer said in a statement. "If you refuse to play by the same rules as everyone else, we will force you to." He said the issue is of critical importance at a time of high unemployment in the United States."There is no bigger step we can take to promote U.S. job creation, particularly in the manufacturing sector, than to confront China's currency manipulation," Schumer said.

Are Rising US-China Tensions Pointing to a Rupture? - Yves Smith - Relations between the US and China have been deteriorating. Although both sides have poked each other in various ways (Obama meeting with the Dalai Lama, China dissing Obama in Copenhagen by standing him up for a meeting, some tit for tat on tariffs), the major, unresolved bone of contention is China’s pegging of its currency, the renminbi, at a level most experts deem to be undervalued. This has widespread ramifications: a continuation of global imbalances (one of the causes of the financial crisis) and preserving Chinese employment at the expense of its trading partners. The US has strengthened its push for China to Do Something about the renminbi, meaning revalue it, with Obama calling for a “more market-oriented exchange rate”. Some analysts have forecast a rise of 5% this year. But the noise out of Beijing suggests otherwise

Currency spat reveals a nervous Chinese autocracy - The latest U.S.-China spat is all the more extraordinary because it is unnecessary. For years, Chinese economists have advocated liberalizing the exchange rate and allowing it to rise, weaning the country off its addiction to exports. But when President Obama suggested that last week, China's leadership reacted with a furious snarl. The central bank's vice governor accused Obama of "politicizing" the currency issue; never mind that his own boss had hinted at liberalization a week earlier. Then China's premier, Wen Jiabao, weighed in. Clearly referring to Obama's unremarkable remarks, Wen growled, "This is a type of trade protectionism."  What to make of this outburst? It is not right on the merits. If any country is responsible for protectionism and for politicizing the exchange rate, it is China:

Senate May Force Obama to Take Tougher Yuan Stance - Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina introduced legislation yesterday to make it easier for the U.S. to declare currency misalignments and take corrective action. Even if the bill stalls, it may have “ripple effects” that lead the Treasury Department to declare China a currency manipulator, William Reinsch, president of the National Foreign Trade Council, said. Obama’s goal of doubling U.S. exports in five years depends on his ability to get China to raise the value of its currency, said Sherrod Brown, an Ohio Democrat and co-author of the legislation. China’s intervention in currency markets to keep the value of the yuan, or renminbi, at a set value acts as a subsidy to exports and tax on imports, Brown said at a news conference yesterday.

US-China trade war talk heats up - A new bill introduced in the United States Senate is adding to tensions between Washington and Beijing. It attacks China's trade practices and proposes legislation that would push the Barack Obama administration to charge China with currency manipulation and could lead to unilateral action against Chinese imports.  The bipartisan group of senators emphasized what they considered to be unfair trade practices by China, and also the domestic economic conditions that created incentives for protectionist trade policies by the US "We are sending a message to the Chinese government: if you refuse to play by the same rules as everyone else, we will force you to. China's currency manipulation would be unacceptable even in good economic times,'' said Senator Charles E Schumer, when announcing the legislation on Tuesday.

The more America huffs about the yuan, the less China will do about it – Telegraph - When sub-prime first hit, Hank Paulson, then US Treasury Secretary, said "this financial crisis was caused to a large extent by a failure to address the rise of the emerging markets and the resulting global imbalances". Last autumn, European Central Bank boss, Jean-Claude Trichet, argued that "imbalances have been the root of present difficulties". Even Barack "Change We Can Believe In" Obama has stooped to play the blame game. "We cannot follow the same policies," the President said on a recent trip to Asia, "that have led to global imbalances." The implication is that sub-prime, and the deepest Western recession in generations, wasn't our fault. It was entirely unrelated to widespread financial fraud, political myopia and lax regulation. Central banks kept interest rates too low for too long, Western consumers went on a debt-binge and our governments spent like crazy – but all that was nothing to do with us.

Obama is 'playing with fire' over yuan - US President Barack Obama's pressure on China over its currency's exchange rate is a manifestation of hypocrisy from the West and will not work, a British economist has said. "The president is playing with fire... Obama really should tread carefully. At the same time, the United States is now at risk of sparking what could be an all-out trade war," said Liam Halligan in an article carried by this week's Sunday Telegraph. Halligan, chief economist at Prosperity Capital Management, predicted that China will not yield to US pressure on the issue. "Beijing will eventually allow the yuan to rise, but in its own time and in order to tackle inflation and not because of US pressure." Chinese inflation is now at 2.7 percent, close to the official 3-percent control target, he noted.

China unyielding on yuan as U.S. raises pressure (Reuters) - China on Wednesday rejected criticism of its exchange rate policies and said it was being made a "scapegoat" after the U.S. Congress threatened to slap duties on Chinese goods unless it revalues its yuan. Many U.S. lawmakers, with strong backing from economists, believe the yuan is undervalued by at least 25 percent, giving Chinese companies an unfair edge in trade -- one seen as more critical now that the U.S. economy is struggling to recover from the worst downturn since the 1930s. The heat is rising quickly in the long-running dispute over China's exchange rate regime, with a bipartisan bill introduced on Tuesday in the U.S. Senate that aims to press Beijing to let its currency rise in value. With key committees of the U.S. Congress setting hearings this month on the currency issue, the bill's co-author, Democratic Senator Charles Schumer, said his move to "wake up this administration" enjoyed broad support in Congress.

How is this supposed to work?- PAUL KRUGMAN has responded to my disagreement with his column on a "get tough" approach to China regarding its currency policy. Unfortunately, he spends all his energy on the Iraq War analogy: Ugh. This is extremely disappointing, because it ignores the substance of my criticism and because it so wildly distorts the analogy I drew. I never said Mr Krugman was using false data. I never said he was relying on faulty sources. I never implied anything like that. What I suggested was that he seemed to be ignoring the potential for things to go badly wrong with his plan, overestimating the potential that they may go right, and misreading the net benefit of both of those potential outcomes. His response basically sidesteps all of these issues.

Roach Rebuffs Krugman Call to Pressure China on Yuan (Bloomberg) -- Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.  “We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.  “I’m a little surprised at Steve for saying that,” said Krugman, the Princeton University professor and Nobel laureate in economics, in a telephone interview when asked to respond to Roach. “What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued.”

Net Import Quotas and Tariffs: China and Paul Krugman - Here's another way to think about what Paul Krugman is saying: it is as if China has a quota on net imports. An ordinary import quota means that the government places a ceiling on the value of imports. In this case, it's not a ceiling on gross imports, but on net imports (imports minus exports). And that ceiling happens to be negative. Since net imports are the same as minus net exports, another way of saying the same thing is that China has placed a floor on net exports. And that floor is positive. An ordinary import quota means you need a licence to import goods, and there's a binding constraint on the value of licences issued. That restricts the volume of trade. A net import quota means that (once exports pass a certain level) every additional increase in exports creates an additional import licence of the same value.

Stephen Roach Says It's Time To "Take Out The Baseball Bat On Paul Krugman"- The Chairman of Morgan Stanley Asia is about as direct as one can be in the following Bloomberg interview: "We should take out the baseball bat on Paul Krugman -- I mean I think that [his] advice [to push China to revalue the Renminbi] is completely wrong.” Well, somebody had to finally say it. So instead of pointing the scapegoating finger somewhere else, which seems to be the norm these days (cue G-Pap and his quadrillionth repetition that Greece is perfectly solvent and that unless somebody bails him out (ignore the lack of logic for a second), he will start playing Russian roulette with a fully loaded gun), Roach looks in the mirror: "America does not have a China problem. America has a savings problem. America has the biggest savings shortfall of any leading country in modern history, When you don't have savings you have to run current account deficits to import surplus savings from abroad and run massive trade deficits to attract the capital... Isn't it the height of hypocrisy that America can articulate a particular position in its currency but the Chinese are not allowed to do that."

Steve Roach Goes Batty - Krugman -  Ahem. (Bloomberg) — Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances. “We should take out the baseball bat on Paul Krugman — I mean I think that the advice is completely wrong,” Roach said. I really don’t understand Roach’s argument here; he seems to have subscribed to the Underpants Gnomes theory of trade balances: 1. Increase savings 2. ????? 3. Exports! To be honest, sometimes I feel that I’ve spent most of my adult life knocking down the same misunderstanding, over and over again. I wrote about more or less the same issue more than 20 years ago:

Chimerica's Monetary Management: China Has a Plan, America Does Not … - America has been squandering money it borrowed from the Chinese. Instead of criticizing China's monetary policy, US President Barack Obama should acknowledge the financial skill being displayed by the new world power and learn a few useful lessons. The US is the world's biggest debtor and therefore not in the best position to get its way with the People's Republic of China. Of each dollar that Obama wants to spend in 2010, over 30 cents are borrowed. And a large part of the loan comes from China. It might be smarter for the US to stop with the reproaches and to learn from the Chinese instead. When compared to the Americans, their financial situation is more than rosy. And their monetary policy is highly sophisticated.

China's Wen pushes back against yuan rise calls - Chinese Premier Wen Jiabao on Sunday spurned foreign calls for the yuan to rise and showed no let up in scolding the United States over recent bilateral tensions. Wen said calls from the United States and other big economies for China to lift the value of its yuan currency were unhelpful, even protectionist, and vowed that Beijing will steer its own way on currency reform through a risk-filled economic landscape. "We oppose mutual accusations between countries, and even using coercion to force a country to raise its exchange rate, because that's of no help to reforming the yuan exchange rate," Wen told a two-hour news conference at the end of China's annual parliament meeting. "We don't believe that the yuan is undervalued."

Parsing Premier Wen - Krugman - So, here’s what I understand from Wen Jiabao: America must avoid a double-dip recession while also eliminating its budget deficits and, of course, doing nothing to weaken the dollar — because unlike China, we only want a weak currency so as to increase our exports. After we’ve done all that, we’ll make the Screaming Yellow Zonkers disappear.

China’s Wen Rebuffs Yuan Calls, Opposes ‘Finger Pointing’ (Bloomberg) -- Chinese Premier Wen Jiabao rebuffed calls for the yuan to appreciate and sought assurances that the U.S. will protect the value of China’s dollar assets.  “I don’t think the yuan is undervalued,” Wen said at a press conference in Beijing marking the end of China’s annual parliamentary meetings. Dollar volatility is a “big” concern and “I’m still worried” about China’s U.S. currency holdings, he said. Wen urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit. Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion.

US-China Currency War Worries Korea - As the United States and China are poised to clash over exchange rates, Korea is scrambling not to become sandwiched behind the world's two largest economies.  Prime Minister Chung Un-chan told a state policy coordination committee meeting Friday that the Seoul administration must be prepared for any aftermath in the brewing tension over China's fixed exchange rate. "Seeking an economic recovery through exports, the U.S. is currently stepping up its push to make China appreciate the yuan, with tension expected to rise further," Chung said."Since they are the two most important trade partners for Korea, we are concerned that the conflict between them might exert a negative influence on Korea both directly and indirectly."

Is China's Politburo spoiling for a showdown with America…China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand. Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.

Tensions escalate over China’s currency - China and the US traded barbs on Friday over the economy and human rights, raising the temperature ahead of a possible showdown over currency policy next month.  Su Ning, a deputy governor of the Chinese central bank, said the US should not “politicise” China’s currency policy, a day after Barack Obama, US president, urged China to adopt a “more market-oriented exchange rate”.“We always refuse to politicise the yuan exchange rate issue and we never think that one country should ask another for help in solving its own problems,” Mr Su said on Friday. Mr Obama’s comments on Thursday came ahead of a decision the US Treasury department must make by April 15 on whether to label China as a “currency manipulator”. Political pressure is beginning to mount again in the US for action against China if it does not abandon the peg to the US dollar it has held since mid-2008.

The currency play - Act 1, Scene I - Okay, Rebecca here for real (exit character, and I'm not a currency trader). Don't let anybody tell you that they know what the Chinese government will do with the yuan because they don't. If you are interested in the pros and cons of yuan revaluation, some time ago Michael Pettis wrote a nice article worth revisiting. Basically, all signs economic point toward yuan appreciation. The fact is, that nobody in the entire world, except for a handful of people of course, knows the plan for the yuan. Markets have become more and more convinced that the yuan will appreciate over the next year... But ex post, markets have no clue.

China Drawing High-Tech Research From U.S. - XI’AN, China — For years, many of China’s best and brightest left for the United States, where high-tech industry was more cutting-edge. But Mark R. Pinto is moving in the opposite direction. Mr. Pinto is the first chief technology officer of a major American tech company to move to China. The company, Applied Materials, is one of Silicon Valley’s most prominent firms. It supplied equipment used to perfect the first computer chips. Today, it is the world’s biggest supplier of the equipment used to make semiconductors, solar panels and flat-panel displays. In addition to moving Mr. Pinto and his family to Beijing in January, Applied Materials, whose headquarters are in Santa Clara, Calif., has just built its newest and largest research labs here. It is hardly alone. Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.

China Toughens Rules for Foreign Companies – WSJ - Foreign businesses say their relationship with China is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals. Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business—epitomized by the changes it made to join the World Trade Organization in 2001—and tilting toward promoting dominant state companies.

Cyber Warriors - When will China emerge as a military threat to the U.S.? In most respects the answer is: not anytime soon—China doesn’t even contemplate a time it might challenge America directly. But one significant threat already exists: cyberwar. Attacks—not just from China but from Russia and elsewhere—on America’s electronic networks cost millions of dollars and could in the extreme cause the collapse of financial life, the halt of most manufacturing systems, and the evaporation of all the data and knowledge stored on the Internet.

China wants US reassurance over dollar (AP) -- China's premier expressed concern about the U.S. dollar and called on Washington on Sunday to take "concrete steps" to reassure Beijing about the safety of its huge Treasury bond holdings. "Any fluctuation in the value of the U.S. currency is a big concern for us," Premier Wen Jiabao said at a news conference. "We cannot afford any mistake, how slight it is, when running our financial assets," he said. "I would like the United States to take concrete steps to reassure investors."China has pressed Washington to control its yawning budget deficit and prevent inflation that would erode the value of the dollar and China's holdings.

China’s Wen Rebuffs Yuan Calls, Is ‘Still Worried’ About Dollar  (Bloomberg) -- Chinese Premier Wen Jiabao rebuffed calls for the yuan to appreciate and sought assurances that the U.S. will protect the value of China’s dollar assets. “I don’t think the yuan is undervalued,” Wen said at a press conference in Beijing marking the end of China’s annual parliamentary meetings. Dollar volatility is a “big” concern and “I’m still worried” about China’s U.S. currency holdings, he said. Wen urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit. Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion.

China and the Double Dip Recession — Further to my last post about Stephen Roach turning more sanguine on China and her property bubble, a number of items have created further concerns about the risks of a double-dip recession.First, the WSJ reports that Premier Wen Jiabao warned that the world economy might face a double-dip recession, given financial-system risks and continued high unemployment in some countries. Meanwhile, there are more and more stories about the Chinese property bubble. Consider this tidbit about the Miami-like parabolic move in property prices in Haikou. Click images to enlarge

Chinese premier warns double-dip recessionChina's premier Wen Jiabao says the world could still fall into a  - China's premier Wen Jiabao says the world could still fall into a double-dip recession and is warning against complacency. At his annual press conference, China's number two leader has warned that the world has not yet escaped the clutches of the global financial crisis. Mr Wen said some of the major problems which caused the crisis have not been fully resolved. He said there is still a possibility of a double-dip global recession and many Chinese companies are being kept afloat by emergency stimulus measures.Given the possible danger ahead, Mr Wen indicated China was not ready to allow its currency to appreciate.

China: The Coming Costs Of A Superbubble - The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears. In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us.

Bubble or not, China’s rise is real - The book that captured the declinist spirit of the late 1980s was The Rise and Fall of the Great Powers, written by Paul Kennedy, a Yale historian, who introduced readers to the notion of “imperial over-stretch”. His argument was that America was staggering under the burden of its global commitments and was now in relative decline – following the path of the British, Napoleonic and Spanish empires. Prof Kennedy’s book caused a sensation when it was published in 1988. But just a year later, the Berlin Wall fell and the Japanese stock market bubble went pop. By the mid-1990s the “Kennedy thesis” was itself in relative decline.. Now America’s financial and military troubles – coupled with the rise of China – raise the question of whether Prof Kennedy was right, after all. Perhaps America’s post cold-war dominance was just a blip before the resumption of relative decline.

Success of Secret Two Child Policy - A secret experiment allowing families in a rural Chinese county to have two children could herald the beginning of a social revolution after years of the notorious one-child-only rule.  Details of the experiment were reported for the first time in the Southern Weekend newspaper in Guangzhou — and the results are sure to call into question the viability of the official family planning policy.  According to the paper, the population of the county has grown over the 25-year period of the scheme by 20.7 per cent, which is nearly five percentage points lower than the national average, despite families being allowed two children. The experiment also appears to have redressed the imbalance between male and female births in China: the national average is 118 males to every 100 females, but in Yicheng the ratio was in line with the natural norm at 106 to 100.

China May Face ‘Massive’ Bank Bailouts After Stimulus Program (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 yesterday.  “The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities.

China's Property: Bubble, Bubble, Toil and Trouble - As he threads his taxicab every day through the epic traffic jams in and around Shanghai, jabbering on his cell phone and muttering under his breath, Yang Jinyu seems an unlikely real estate mogul. But when the government asked him to move out of his central Shanghai home so that the land it was on could be sold for redevelopment, he took the compensation payment and bought an apartment on Shanghai's outskirts. Eight years later, after cleverly parlaying that first asset, the cabbie owns three apartments in the city and has his eyes on something bigger: a lovely five-bedroom, riverfront suburban house, owned but never occupied by a coal magnate from Shanxi province. "How much does he want for it?" he asked a local real estate agent in late February. When told the answer was $735,000, Yang didn't blink. "I'd like to make an offer." 

China's Hidden Local Debt - In recent days China’s central officials have stated they will nullify all guarantees that had been issued by local governments to support loans to special purpose financing vehicles.  China’s Budget Law prohibits Chinese provinces and lower-tier governments from borrowing. To get around the restriction, local officials established more than 3,000 companies to borrow, with their loans typically supported by governmental promises in some form. The Budget Law also prohibits this maneuver, but it has been practiced openly for years. Until recently, few paid attention to these government obligations accumulating outside Beijing. Now everyone is talking about them, and local debt has become a “hot topic” at the ongoing annual meeting of the National People’s Congress in Beijing.

Sorting the waste crisis - Yang's concern about the amount of garbage being generated by the city began in 2009, the year Beijing officials revealed that all the city's 13 landfills would reach their limit by 2015, and the year the government announced its plan to build more waste treatment facilities, incineration plants in particular, as the way to tackle Beijing's garbage crisis. A plan vigorously opposed by residents living near existing or planned waste incineration projects. So which is worse - a city surrounded by garbage in noxious landfill sites, or the possibly toxic air pollutants emanating from incineration plants? Meanwhile, the clock is ticking and the garbage is still piling up.

China Economic Growth Forecast Revised Upwards - The Guardian (story here) has reported that China’s growth is forecast to be 9.5% this year, rather than the 8.7% predicted previously. The Guardian describes how China’s growth rate is set to almost reach 10%, continuing the trend of double digit growth seen since Deng Xiaoping’s economic reforms opened up the once planned economy.  Economics students would expect that growth figures such as those to put inflationary pressure on the economy in the absence of similarly large increases in aggregate supply. However, the Beijing government’s policies of investing in public works and infrastructure have mitigated this pressure to an extent. It is also clear that capital widening and deepening policies on the mainland are further ameliorating the demand-pull inflation. The World Bank has predicted inflation of 3.7% which, though would be viewed as excessive in the Eurozone, is a manageable figure in a LEDC.

China in Midst of ‘Greatest Bubble in History,’ Rickard… (Bloomberg) -- China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP. The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc. “As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.” Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied.

China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part I - We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the first part of a three-part series on this topic. We are told that China has huge housing needs, that demand will continue for decades, and that prices have nowhere to go but up. But that’s not how economics works for housing or for any other product. It may be true for China’s long term, but the short run can kill you.

Don't Look Now, But Chinese Economic Indicators Are Starting to Roll Over…China has been and remains the strongest leg of the economic recovery.  While most other countries remain entangled in a weak recovery or no recovery at all, China’s economy appears to have surged back to its pre-crisis growth rates.  But as the old saying goes, if it seems too good to be true it probably is.At the beginning of the year we described China as one of our “5 biggest risks” of 2010.  Last week we mentioned (see here) the risks in the Chinese economy appear to be mounting as property prices surge and inflation begins to rear its ugly head.  Well, it looks as though we’re not the only ones who are concerned about the sustainability of the Chinese economic recovery.  According to Westpac Bank in Australia the leading economic indicators in China are beginning to roll over:

Untenable, unsustainable, indefensible, unsound - We don’t much trust statistics that come from China, just like we didn’t trust information that came from behind the Iron Curtain back in the Cold War days. But there’s been a lot of news from China in the past few weeks, and it has painted a picture of economic recovery and strength. At 8.7%, GDP growth was faster than expected in 2009. Production, exports and fixed-asset investment in urban areas are up 20.7%, 31.4% and 26.6%, respectively, in the first two months of 2010 versus the same year-ago period. M2 money supply grew at a 25.5% clip and consumer prices rose 2.7% in February. Believe those numbers at your peril, haircut them as you see fit, but there is one number with regard to China that is unassailable and that makes their growth miracle possible: 6.83. The pegging of the yuan at this artificially low exchange rate is the cornerstone of the Chinese economic miracle.

What’s Happening to China’s Migrant Workers? A New Generation Coming and Going – The China Sourcing Blog - In 2008, about 130 million people worked as rural-to-urban migrants in China's cities, making up around a third of the total urban labour force. As they are heavily active in exporting sectors that were impacted by the downturn in the last two years, around 15% of the migrant workers (or 20 million people) are said to have lost their jobs in 2008 based on a survey carried out in 15 provinces by the Ministry of Agriculture in January 2009.  But that was then. Now in 2010, various media reports in February highlighted a shortfall of a many as a million migrant workers in Guangzhou and Dongguan. People's Daily has published statistics collected by Guangdong's human resources and social security departments stating that by February 22 this year, more than 3 million migrants had returned from other provinces to Guangdong, much less than the almost 7 million migrant workers who had originally left for the Spring Festival holiday. Guangdong's enterprises, the report stated, currently lack the services of about 900,000 workers, of which most are needed in labour-intensive industries, although technical workers are said to make up 32% of the shortfall. In Dongguan, more than 20% of migrant workers are not expected to return to work now that the Spring Festival is over, according to one survey.   So what happened to China's migrant workers? Much of the reason for the current shortages is being put down to the explanation that the pressures forcing migrant workers to industrial zones in the big cities are just not so intense, at least not now. Due to gradually increasing incomes in rural areas and the growth of second- and third-tier cities, many workers no longer have to make the trek to Shanghai for menial labour, or they can go somewhere else closer to home.

China’s Exporters Hanging by a Thread? - Yves Smith - Has the Chinese export sector become hostage to WalMartization, the ability of powerful retailers to squeeze vendor profit margins? Reader Michael Q called our attention to a key remark in a Wall Street Journal story: Vice Commerce Minister Zhong Shan, in an exclusive interview Thursday ahead of a visit to the U.S., said that the profit margin on many Chinese export goods was less than 2%. Most exporters absorbed the appreciation in the value of the yuan that followed its revaluation in 2005 by boosting innovation and cutting costs, but many were forced to close, he said. A further rise in the currency’s value would endanger more exporters’ survival, which China can’t afford, he said.

Searching for demand - WRITING at Triple Crisis, Jayati Ghosh discusses the potential emergence of strong domestic demand in emerging markets, and posts an instructive chart: Several things to point out. First, China's household consumption level has long been extraordinarily low, even relative to other emerging markets, currency movements aside. That speaks to the structural issues in the Chinese economy that are contributing to persistent imbalances. A change in the RMB's value wouldn't make those issues disappear. Second, notice how similarly consumption patterns in China and India behave over the past decade. Is the RMB peg also holding down consumption in India?

As economy booms, China faces major water shortage -The source of the water predicament is China's own economic success. A bigger economy means more factories and power plants, all prodigious users of water for processing and cooling. Big cities are getting bigger, using more drinking, shower and sewage water. People are eating better, and growing more food requires more water. They crave entertainment, too; the Beijing area has 100 golf courses and a dozen ski resorts with man-made snow. The result has been a scramble for water that is pitting downstream communities against upstream ones, farmers against factories, and people concerned about the country's environment against those worried that water shortages might be the mighty Chinese economy's Achilles' heel. Unlike oil needs, which can be supplemented with imports, water needs pose a much more intractable threat to China's rise.

Deceptive arguments are being made in California's water wars… Who needs absinthe, vodka or even a six-pack of beer? Judging from the quality of our debate on natural resource policy, all it takes to addle the political mind in California is water. We're talking about the water that flows to us from the mountains and the rivers, via canal or aqueduct, irrigating our fields, maintaining our aquatic habitats, and sustaining daily life in the cities and suburbs.  There isn't enough of it to be exploited with abandon as we've done in the past, and nothing we do will increase the raw volume we receive from nature.

China Planning to Connect High Speed Rail Lines To Europe - China already has the most advanced and extensive high speed rail line in the world, and soon that network will be connected all the way to Europe and the UK! With initial negotiations and surveys already complete, China is now making plans to connect its high speed rail line through 17 other countries in Asia and Eastern Europe in order to connect to the existing infrastructure in the EU. Additional rail lines will also be built into South East Asia as well as Russia, in what will likely become the largest infrastructure project in history.China hopes to complete this massive infrastructure project within 10 years, which will include three major rail lines running at speeds of 320 km/hour. The first will go from King’s Cross Station in London all the way to Beijing (8,100 km as the crow flies) and will take approximately two days. This line will also then extend down to Singapore. A second HSR line will connect into Vietnam, Thailand, Burma and Malaysia. The last line to be built will connect Germany to Russia, cross Siberia and then back into China. The exact routes have yet to be determined.

Chinese firms to bid on US high-speed railways - Chinese companies plan to bid for contracts of building high-speed railways in the United States as China is willing to share its advanced technologies, a senior official said on Saturday. "We have organized related companies to take part in bidding, and we have signed memorandum of cooperation with the railway authority in California,"said Wang Zhiguo, vice-minister of railways on the sidelines of the annual session of the National People's Congress, the nation's top legislature. US President Barack Obama pledged in January to spend $8 billion for rail projects including the high-speed systems in California, Florida and Illinois. China currently has about 3,300 kilometers of operational high-speed railways, the world's longest, on which bullet trains gallop at an average speed of 350 kmph, and it plans to expand the network to 13,000 kilometers by 2012, according to the Ministry of Railways (MOR).

China hints at curbing exports of Lithium and other rare earth compounds - The Chinese government indicated over the weekend at the National People's Congress (NPC) in Beijing that it would curb the export of lithium and other rare earth compounds, opting instead to build a strategic reserve. Hu'ercha, a deputy to the NPC from north China's Inner Mongolia Autonomous Region, said on the sidelines of the legislative body's annual session on Friday that China should set up a national reserve of rare earth resources and work out development strategies for rare earth-related new and high-tech industries "as soon as possible."

Report says China is squeezing U.S. firms out of massive wind-power market - U.S. companies are getting squeezed out of the big Chinese wind-power market even as Dallas investors are bringing Chinese firms here via a big wind farm in Texas, according to a new industry report.  "They've used every measure you could possibly think of to enhance production of renewable energy equipment in China,"  U.S. Trade Representative Ron Kirk won a pledge from the Chinese last fall to drop rules giving preference to Chinese makers of wind-power equipment. But Kirk's office hasn't seen any evidence that the pledge has been carried out, said spokeswoman Carol Guthrie.

China finds itself awash in wind turbine factories - China’s massive investment in wind turbines, fueled by its government’s renewable energy goals, has caused the value of the turbines to tumble more than 30 percent from 2004 levels, the vice president of Shanghai Electric Group Corp. said yesterday. There are now “too many plants,” Lu Yachen said, noting that China is idling as much as 40 percent of its turbine factories. The surge in turbine investments came in response to China’s goal to increase its power production capacity from wind fivefold in 2020. The problem is that there are power grid constraints, Currently, only part of China’s power grid is able to accept delivery of electricity produced by renewable energy.

Wind resistance: Analysis suggests generating electricity from large scale wind farms could influence climate - Wind power has emerged as a viable renewable energy source in recent years -- one that proponents say could lessen the threat of global warming. But a new MIT analysis may serve to temper enthusiasm about wind power, at least at very large scales. Ron Prinn, TEPCO Professor of Atmospheric Science, and principal research scientist Chien Wang of the Department of Earth, Atmospheric and Planetary Sciences, used a climate model to analyze the effects of millions of wind turbines that would need to be installed across vast stretches of land and ocean to generate wind power on a global scale. Such a massive deployment could indeed impact the climate, they found, though not necessarily with the desired outcome.

China, Not UN, Controls Supply for CO2 Offsets, Stanford Says (Bloomberg) -- China’s power to set prices for electricity from windfarms is dictating the supply of tradable emission credits in the UN carbon market, the world’s second biggest, according to a report from Stanford University. The regulatory board for the United Nations carbon market is forced to rely on data from China to judge when windfarms qualify for emissions credits, said Richard Morse, a Stanford University research associate and co-author of the report. The board, established to channel funds to greenhouse-gas projects in developing nations, rejected 16 Chinese windfarms since November, including proposals backed by Paris-based EDF SA, Netherlands-based Essent NV and New York-based Goldman Sachs Group Inc.Only submissions that can show they need outside funds to be economically viable are eligible for credits under UN rules designed to weed out projects that don’t add to overall emission reduction. Questions in China and India, where governments set prices and data can’t be independently verified, threaten investments in sustainable energy, Morse said. 

Increased solar radiation requires an extra reduction in CO2 emissions - The recently observed reduction in air pollution implies that more solar radiation reaches the Earth's surface. This could lead to a far more rapid increase in the Earth's temperature in the coming decades. These are the claims of econometricians Jan Magnus, Bertrand Melenberg, and Chris Muris from Tilburg University (The Netherlands) based on unique solar radiation data collected from weather stations between 1959 and 2002. Their calculations show that in order to prevent an increase in global temperatures of more than two degrees we will have to reduce CO2 emissions by an additional 50 million tonnes to compensate for the increased solar radiation reaching the Earth's surface.

White House Officials Link Economic Recovery to CO2 Bill - Senior Obama administration officials say the nation’s economic recovery could stall if Congress doesn’t pass a climate bill this year. The officials warn that investors are so uncertain about the future cost of emitting greenhouse gases that they are sitting on capital rather than pouring it into “clean” technology, new power plants or energy-intensive manufacturing. The administration has for months been moving away from advocating climate legislation primarily as an environmental issue and toward a jobs-creation argument. But the comments are a marked shift to a stronger rhetoric: fears of prolonging the recession. The White House says spurring “clean,” or low-greenhouse-gas-emitting energy, can help lay the foundation for the 21st-century U.S. economy.

CO2 at new highs despite economic slowdown (Reuters) - Levels of the main greenhouse gas in the atmosphere have risen to new highs in 2010 despite an economic slowdown in many nations that braked industrial output, data showed on Monday.Carbon dioxide, measured at Norway's Zeppelin station on the Arctic Svalbard archipelago, rose to a median 393.71 parts per million of the atmosphere in the first two weeks of March from 393.17 in the same period of 2009, extending years of gains. "Looking back at the data we have from Zeppelin since the end of the 1980s it seems like the increase is accelerating" Johan Stroem, of the Norwegian Polar Institute, said of the data compiled with Stockholm University.

M.S.Climate change and the media: Journalistic malpractice on global warming - For example, a week ago Phil Jones, the director of the Climatic Research Unit at the University of East Anglia, gave an interview to the BBC that was widely described as a debacle. The main reason was that the BBC reporter asked Mr Jones whether he would concede that global warming since 1995 has not been statistically significant. Mr Jones replied: "Yes, but only just," and went on to note that there was a measured global warming of 0.12°C per decade since then, and that it tends to be harder to get statistical significance out of shorter time samples. This led to a Daily Mail headline reading: "Climategate U-turn as scientist at centre of row admits: There has been no global warming since 1995."

Sorry, it's Malignant: Why Scientists Need a New Approach on Climate Change - You're sitting in the doctor's examining room, on one of those absurd benches. The doctor comes in and gives you the worst possible news, that you have cancer.The doctor takes the time to explain why she thinks you have cancer, and the level of confidence she has in the test results. She explains the biological process of cancer, what's known about how it starts and how it spreads. Don't let your senses deceive you, the doctor warns. You may feel okay now, but this disease will kill you if nothing is done, and we've got to start fighting this right now. Then she walks out without telling you what your treatment options are. This is essentially what the scientific community has been doing to the public about climate change.

Reframing the debate on climate science - The international consensus on global warming has seemingly experienced a spectacular slow-motion train wreck over the last few months, with “climategate” reports piling up in public debate like derailing rail cars filmed in freeze frame. The fascination for on-lookers, however, is that the science itself is largely blameless. Instead, the pile-up stands as a case study in how not to wage a political battle. And make no mistake; the attacks on climate science are pure politics. We have seen attacks on science before, just pick your favorite example: smoking, toxic pollution, seat belts, etc. However, until there is a fundamental reframing of the climate science debate, one that illuminates the politics, the current round of attacks will continue to enjoy success.

The municipal cost of beach erosion - All told, the homes on the nuisance list account for $6.36 million of lost tax valuations, $26,000 in annual local property taxes according to Nags Head Town Manager Cliff Ogburn. Add to those figures $720,000 (assuming $30,000 per house) in gross rents and $91,800 in occupancy and other taxes. Over a decade, this tallies to over $1.1 million in lost taxes and $7.2 million in gross rental receipts. These totals do not include the dollars and sales taxes spent by the renters while on vacation here.  The nuisance list includes houses that are about to be washed away by the ocean.

Sea level at N.C. coast could be 7 feet higher by 2100 - The current sea level rise of about one-eighth inch per year is not perceptible to the casual observer. And because it's not visible, it doesn't impress. But anyone who frequents the coast can see much evidence of recent sea level change. For example, entire island communities have disappeared from parts of the Chesapeake Bay. The Cape Hatteras National Seashore in North Carolina is a chain of thin, low barrier islands with a low sand supply. Sea level rise is already narrowing the width of the islands (by shoreline erosion on both sides). Thanks to a lifetime of studies by Stan Riggs, professor of geology at East Carolina University, these may be the best understood barrier islands in the world. Riggs believes the islands may "collapse" or disappear, possibly within the next few decades.

Global Temperatures This Year - Paul Krugman writes: Hot Stuff: [H]ere’s global temperatures so far this year. The yellow line shows 2005, the warmest year to date. 1998 used to be the "warmest year to date."

Global climate change: "Must we, the US, always be last?" I believe that effective action against global warming will begin when three of the four potential twenty-first century superpowers regard forward motion on energy and environmental issues as in their vital interest. Western Europe already does. The U.S., at least the U.S. political system, does not. At the moment China and India do not. But they will. There are still two billion near subsistence farmers living in the great river valleys of East and South Asia: Yellow, Yangtze, Mekong, Brahmaputra, Ganges, Punjab, and Indus. Global warming means other more of less rain and snow in those watersheds. If it means more, some fraction of two billion people will see their homes washed away and their relatives drowned, If it means less, some fraction of two billion people will start to starve. Neither is something that governments in Beijing or Delhi can ignore. And when China and India realize that they are on the front lines of global warming’s impact on human populations because of the vulnerability of their poor who don’t have many options, they will swing into line. And when they do, the U.S. will concur.

Jean-Baptiste Sallée: Southern Annular Mode -- winds over the Southern Ocean increasing in strength, shifting closer to Antarctica in recent decades - Australian and US scientists have discovered how changes in winds blowing on the Southern Ocean drive variations in the depth of the surface layer of sea water responsible for regulating exchanges of heat and carbon dioxide between the ocean and the atmosphere. The researchers' findings -- published in Nature Geoscience -- provide new insights into natural processes which have a major influence on the rate of climate change. The surface-mixed layer is a crucial pathway between the atmosphere and the deeper layers of the ocean. Changes in the depth of the mixed layer can affect air-sea exchange, carbon and heat storage in the ocean, and the rate at which water sinks from the surface ocean into the deep ocean. Changes in the mixed layer also affect biological productivity, by altering how much light and nutrients are available to support growth of plankton at the base of the food chain.

Impacts of Changing Climate on Ocean Biology - A three-year field program now underway is measuring carbon distributions and primary productivity in the Northwest Atlantic Ocean to help scientists worldwide determine the impacts of a changing climate on ocean biology and biogeochemistry. The study, Climate Variability on the East Coast (CliVEC), will also help validate ocean color satellite measurements and refine biogeochemistry models of ocean processes. Researchers from NOAA, NASA and Old Dominion University are collaborating through an existing NOAA Fisheries Service field program, the Ecosystem Monitoring or EcoMon program. The EcoMon surveys are conducted six times each year by the Northeast Fisheries Science Center (NEFSC) at 120 randomly selected stations throughout the continental shelf and slope of the northeastern U.S., from Cape Hatteras, N.C., into Canadian waters

Climate Quick Fix Could Create Toxic Algae Blooms - Pouring iron into oceans may combat global warming by feeding carbon dioxide-gobbling algae, but those algal blooms could become fountains of neurotoxin. According to a small-scale test, iron-enriched waters favor the growth of Pseudonitzschia, an algae that pumps out brain-damaging domoic acid.“The toxin per cell increases, and there’s an increased success against other species,” said oceanographer William Cochlan of San Francisco State University, co-author of the study, published March 15 in the Proceedings of the National Academy of Sciences. Pseudonitzschia “is out there in the most pristine environments. They produce low levels of toxin, so they’re not harmful. But if you add iron, and these cells proliferate, and produce more toxin per cell, then you have a problem.”

Methane May Be Building Under Antarctic Ice - Microbes living under ice sheets in Antarctica and Greenland could be churning out large quantities of the greenhouse gas methane, a new study suggests. In recent years scientists have learned that liquid water lurks under much of Antarctica’s massive ice sheet, and so, they say, the potential microbial habitat in this watery world is huge. If the methane produced by the bacteria gets trapped beneath the ice and builds up over long periods of time — a possibility that is far from certain — it could mean that as ice sheets melt under warmer temperatures, they would release large amounts of heat-trapping methane gas.

Ozone Hole Healing Could Cause Further Climate Warming  The hole in the ozone layer is now steadily closing, but its repair could actually increase warming in the southern hemisphere, according to scientists at the University of Leeds.The Antarctic ozone hole was once regarded as one of the biggest environmental threats, but the discovery of a previously undiscovered feedback shows that it has instead helped to shield this region from carbon-induced warming over the past two decades. High-speed winds in the area beneath the hole have led to the formation of brighter summertime clouds, which reflect more of the sun's powerful rays. If, as seems likely, these winds die down, rising CO2 emissions could then cause the warming of the southern hemisphere to accelerate, which would have an impact on future climate predictions.

Northern Canadian First Nations declare state of emergency on melting ice roads - Enough supplies usually are trucked in on ice roads to many First Nations to last for a year. But without the shipments, stockpiles of fuel and food in dozens of communities are dwindling, chiefs have said. Both aboriginal leaders and the province have called on the federal government to pay to airlift supplies into affected reserves. Mild weather shut the roads down after just under a month, which cut off more than 30,000 people from the south. Normally, the 2,200 kilometres of temporary routes over frozen swamps, muskeg and lakes are open for up to eight weeks. About 2,500 shipments of fuel, groceries, construction materials and general freight are brought in at a reasonable cost using winter roads. Otherwise, goods have to be flown in at great expense.

High Arctic species on thin ice - A new assessment of the Arctic's biodiversity reports a 26 per cent decline in species populations in the high Arctic. Populations of lemmings, caribou and red knot are some of the species that have experienced declines over the past 34 years, according to the first report from The Arctic Species Trend Index (ASTI), which provides crucial information on how the Arctic's ecosystems and wildlife are responding to environmental change. While some of these declines may be part of a natural cycle, there is concern that pressures such as climate change may be exacerbating natural cyclic declines.

Bluefin Tuna Stocks have crashed by 85%: Monaco warns... Monaco has proposed adding the bluefin tuna to CITES Appendix I, which brings an automatic ban in trade. The giant fish can grow to 3 meters and weigh more than half a tonne. Much sought after as a delicacy and for sushi, a single fish reportedly sold earlier this year for $120,000. Populations in the Atlantic and Mediterranean have crashed in recent decades and there is no sign that efforts to introduce more sustainable fishing practices have slowed the decline. Scientists say stocks are about 15% of what they were before industrial fishing began. The proposed change is backed by the US and Europe, which wants a 12-month delay on any trade ban. Japan has indicated it may opt out from CITES controls if it is passed.

Sushi and the End of the Southern Bluefish Tuna - In our chapter, Public Goods and the Tragedy of the Commons, we discussed  the 75% decline in the catch of southern bluefish tuna, which is highly prized as sushi.  60 Minutes has a great episode on this issue which covers the fascinating Tsukiji fish market in Tokyo, the biggest wholesale fish and seafood market in the world, the Mediterranean fishermen who are losing their livelihood as fish stocks decline, the industrialization of fishing (including tuna ranches!) and finally the decline of the tuna stock. An interesting puzzle is that tuna is relatively inexpensive.   The answer points directly to the tragedy of the commons – the low price is possible because the purse seiners are scooping up enormous quantities of tuna which pushes today’s price down but too few fish are left to breed so future stocks are imperiled.  An entrepreneur who owned the stock of tuna–like Frank Purdue owns his chickens–would not do this but tuna are not owned until they are caught.  In other words, the current tuna boom is like “eating the capital stock,” you get a big party today but a tragedy tomorrow.

Berkeley Scientist's Herbicide Studies Raise Corporate Hackles -Accusations are flying over the latest University of California, Berkeley study on the effects of a widely-used weed killer on amphibian sexuality.The study was conducted by Tyrone Hayes, a professor of Integrative Biology, and found that feeding atrazine to tadpoles reshaped their sexuality as they grew to adults. Ten percent of the 80 males he tested for the study had become anatomically female and capable of mating with other males, while three-fourths of the remainder were sterile, The San Francisco Chronicle reported last week.The study opens a new chapter in the controversy over the safety of the herbicide, which is being reviewed by the federal Environmental Protection Agency. Farmers spray atrazine on half of all corn grown in America, according to Syngenta, the major manufacturer of the herbicide.

US proposal to ban polar bear trade voted down at UN wildlife meeting - A US-backed proposal to ban the international trade of polar bear skins, teeth and claws was defeated today at a UN wildlife meeting over concerns it would hurt indigenous economies and arguments the practice didn’t pose a significant threat to the animals.The US argued at the 175-nation Convention on International Trade in Endangered Species, or CITES, that the sale of polar bears skins was compounding the loss of the animals’ sea ice habitat due to climate change. There are projections that the bear’s numbers, which are estimated at 20,000 to 25,000, could decline by two-thirds by 2050 because of habitat loss in the Arctic.

Green Irreversible Investment Under Uncertainty and the Big Chill - I make my comeback as an environmental economics teacher. To prepare for this big day (and the 200 registered students), I'm vanishing and heading up to Berkeley for 10 days of solar panels and Prius watching and no blogging. I will be thinking about this WSJ piece that debates the consequences of the Congress' refusal to pass credible anti-carbon legislation. The article argues that there is a huge amount of "green investment" sitting on the sidelines and not happening because of the fundamental uncertainty about what are the "rules of the game".  This is a key application of the deep ideas of investment under uncertainty. Robert Pindyck outlines these ideas in this very nice survey piece. In a nutshell, when uncertainty about the direction of public policy increases --- a business will delay making an irreversible investment and wait until the uncertainty is resolved. While this is individually rational, it can be socially costly if there is a core challenge (i.e climate change) that grows more dangerous with further delays in battling it.

Maintaining green balance - GREEN marketing of certain products could potentially have an appreciable effect on human behaviour. Labelling of products as green (assuming the labels are accurate) may influence buying decisions, particularly since consumers may be willing to pay extra to associate themselves with good or green decisions. But those decisions may be offset elsewhere, as consumers seem to keep a kind of mental balance of altruism: This would seem to point to another advantage for price-oriented environmental policies like carbon taxes. They're likely to be more effective, because they rely on price signals rather than altruism to generate reductions in the environmental impact of consumer purchases. And because they don't rely on altruism, consumers may be less likely to compensate for their greenness by being more ethically indulgent elsewhere. 

Production of Chemicals from Wood Waste Made More Environmentally-Friendly and Cheaper - Researchers from Delft University of Technology in the Netherlands have succeeded in making a significant leap forward in the production of biochemicals and biofuels from waste wood. They discovered that the bacterium Cupriavidus basilensis breaks down harmful by-products which are produced when sugars are released from wood. They also managed to incorporate the degradation process in bacteria which are in common industrial use. This breakthrough does away with the need to resort to costly and environmentally unfriendly methods for removing by-products, thereby boosting the appeal of waste wood as a sustainable resource. The research results were published on 2 March in the US journal Proceedings of the National Academy of Sciences.

Impending Environmental Disaster: Uranium Mining Begins Near Grand Canyon - Grand Canyon, AZ — In defiance of legal challenges and a U.S. Government moratorium, Canadian company Denison Mines has started mining uranium on the north rim of the Grand Canyon. According to the Arizona Daily Sun the mine has been operating since December 2009. Denison plans on extracting 335 tons of uranium ore per day out of the “Arizona 1 Mine”, which is set to operate four days per week. The hazardous ore will be hauled by truck more than 300 miles through towns and communities to the company’s White Mesa mill located near Blanding, Utah. After being pressured by environmental groups, U.S. Secretary of Interior Ken Salazar initially called for a two-year moratorium on new mining claims in a buffer zone of 1 million acres around Grand Canyon National Park, but the moratorium doesn’t include existing claims such as Denison’s. The moratorium also doesn’t address mining claims outside of the buffer zone.

Electric cars jostle for position on the power grid -  Plug-in cars come in two forms: electric vehicles fully reliant on a battery and the electricity grid, and plug-in hybrids that combine a smaller battery with a conventional engine. But over the next 12 months plugs will be increasingly appearing on production models from the world's biggest car makers. And as they do, electricity providers and governments will be scrambling to prepare for the as-yet-unknown effects of shackling our transport power needs to the electricity grid. When they start to appear in significant numbers, electric cars have the potential to drastically alter the demand patterns that our electricity infrastructure has been built around (see graph) . The Nissan Leaf, a fully electric family car, will start to roll off production lines in October with a 24-kilowatt-hour battery pack. That sort of capacity is not far short of the average American household's daily consumption of electricity - 30 kWh, according to 2008 figures from the US Department of Energy.

Global warming's grand bargain takes shape - -In the next couple of weeks, lawmakers are expected to unveil an unprecedented climate change proposal that may open up more areas for offshore drilling and cut emissions through a cap on greenhouse gases and a tax on gasoline. Details on the proposal, put forth by Sens. John Kerry, D-Mass., Joe Lieberman, I-Conn., and Lindsey Graham, R-S.C., are scant - the actual bill isn't expected until at least the end of the month.   The oil, utility and manufacturing industries will all be affected by the new law -- the challenge is to craft something they'll all feel comfortable with.

Summer gas prices will have senators ‘clamoring’ for energy bill -White House press secretary Robert Gibbs yesterday said he expects the Senate energy and climate bill will get a much-needed push this summer after gasoline prices start their annual climb. During his daily briefing, Gibbs said President Obama “absolutely” wants Congress to pass an energy and climate bill this year. And he predicted the measure would soon get some momentum. “Energy has made it through the House, and my guess is there will be a clamoring for an energy bill when gas prices go up, as they normally do, as we get closer to more driving as we get closer to the summer,” Gibbs said.

Coal Beats Solar as Analysts Favor Peabody Amid Shrinking Green Subsidies (Bloomberg) -- Wall Street’s contribution to the debate on how to curb global warming: Buy coal, sell solar.  Peabody Energy Corp., the biggest coal producer, is rated a “buy” by 79 percent of analysts, while 44 percent recommend First Solar Inc., the largest maker of thin-film solar panels. While investors including T. Boone Pickens and Warren Buffett are pushing cash into green technologies, the tilt toward Peabody and away from First Solar is the widest in two years. It reflects a sense that government support for reducing air pollution may be waning, said Kevin Landis, whose Firsthand Alternative Energy Fund outperformed the solar index this year. “Until government policies favor renewable energy over dirty coal, solar may seem too risky now for some investors,” said Landis, whose $260 million fund include SunPower Corp. and Suntech Power Holdings Co. “Coal may make sense short term.”

Rising energy costs fuel a return to heating homes with a fire - Soaring energy prices are rekindling Britain's love affair with the warm glow of a open fire. Householders are ripping out gas devices and installing wood burners or opening chimneys to make a traditional blaze with coal. Sales of wood burners are increasing by 40 per cent a year, says the Solid Fuel Association, which represents the industry. "It began more than 12 months ago when gas prices rose and there was a shortage from Russia. People realised our energy supply was in the hands of other people in unstable countries and they also didn't want to pay those prices. They thought, 'I've got a chimney here, why don't I use it?' "

New man-made species could solve energy problems - With the financial backing of companies including Exxon Mobile, Vetner has produced a microalgae which he has "tricked" into pumping out lipids - fats and oils. The algae converts sunlight and carbon dioxide - of which there is plenty - into the "biocrude". The dream is to one day scale this laboratory-only experiment up to farms, square kilometres in area, which supply the world's petrochemical needs. With similar DNA tinkering, he could also create microbes that pump out medicines, decontaminate water, and clean up oil spills. The idea of biocrude is not new. Scientists have been aware of algae's ability to create oils in their photosynthetic process for years. It's similar to how sunflowers and canola produce oil, but unlike those crops, algae is more oil-rich and takes less space to grow. The difference with Venter's pond slime is that he has manipulated the DNA so that it actually excretes the oil, rather than keeping it inside. That way, the algae does not need to be harvested to obtain the oil. Like a cow that is milked, the algae keep grazing on air and sunshine and producing the goods.

Unconventional gas: This changes everything -The three conventional forms of fossil carbon—oil, coal and gas—differ both in the way the Earth stores them and the way its people use them. ...Now new drilling technologies pioneered in America are allowing gas to be extracted from more types of rock—most notably shales, but also so-called “tight” sands and some coal formations—and thus from much more widespread sources. Other innovations, such as producing liquefied natural gas from offshore sources and shipping it to its destinations directly, and technologies that might allow exploitation of the natural gas that is frozen into some permafrosts, further increase the scope for new production. All told, this transition to more plentiful, diverse and widespread reserves in effect makes gas a bit more like coal, and a bit less like oil.

Interview with David Shields - Update on Mexico and Oil - I think a large amount of it is already used up. As a ballpark figure, roughly 70% of Mexico’s proven reserves have been consumed. So I think there is an awareness at Pemex that the future is about secondary oil recovery, enhanced oil recovery, and about finding more reserves, which is easier said than done. And also, peak water is an issue for Mexico going forward, but it’s an area in which we have no experience. And so it will be hard to do that unless the ways of working in Mexico are changed quite substantially which is political out of bounds right now.

Journey to the Center of the Earth  - From the window of a helicopter 1,500 feet above the Gulf of Mexico, oil platforms look like Tinkertoys in a swimming pool. Dozens dot the horizon stretching south from New Orleans and continuing out as the water deepens and turns a darker blue. Then, about 50 miles offshore, the platforms stop, and for the next hundred miles there's nothing. This is the deepwater Gulf of Mexico, where the ocean floor is 8,000 feet down and covered in a heavy layer of muck. Below that is an ancient salt bed several miles thick, and hidden under that, trapped tens of thousands of feet down, there's oil—billions and billions of barrels of it.

Trouble ahead - JAMES HAMILTON always has interesting things to say about oil and the macroeconomy. Like:The surprise to markets in 2008 was that even $100 oil wouldn't be enough to prevent world demand from growing above 85 million barrels a day, and much more than 85 million barrels a day simply wasn't going to be produced at that time. What's even more interesting is the new paper (PDF) to which he refers, by Joyce Dargay and Dermot Gately, which seems to show that the demand for petroleum has actually become less elastic since the oil shocks of the 1970s: [C]ompare two decades in which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the 1970's, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past decade, with oil price increases similar to those of the 1970's, per-capita demand fell only 3% in the OECD; worldwide it actually increased, by 4%.

Nigeria is falling apart, says Nobel prize-winning author - Nigeria is close to breaking up and its leadership has descended into a "theatre of the absurd", according to the Nobel prize-winning playwright Wole Soyinka, who has been leading protests against the nation's political crisis. The veteran writer and civil rights activist told The Independent that his home country was now a "failed state" where ordinary people's "anger has peaked", with potentially lethal consequences. "Nigeria is looking at its last chance in the next year," he said. Africa's most populous country and leading oil producer is beset by multiple crises, from attacks by armed militants in the Niger Delta to sectarian massacres in its central region and a protracted struggle for the presidency in the capital, Abuja.

Why Nigeria Just Did Major Damage To The Oil Market, And Why It Will Be Tough To Undo - Nigeria's controversial oil industry bill is expected to eventually pass but the government may find it tough to later shift gears as international oil firms targeted under the legislation scale back their investments. The Nigerian parliament is debating the Petroleum Industry Bill, an attempt at oil-sector reform in which Abuja can negotiate “downward” a foreign firm's share of profits and impose higher royalties and taxes, said Peter Pham, director of the Africa Project at the New York-based National Committee on American Foreign Policy   Despite potentially spending billions of dollars, a firm not seen as “fully exploiting” an oil block may risk having it turned over to a Nigerian upstart instead, Pham added.

World Bank is warning Eastern Europe of an energy crunch - The demand for energy in Eastern Europe and Central Asia is expected to increase fifty-percent by 2030…demand for electricity by 90 percent. But without substantial new oil discoveries, the region’s energy production could peak in the next ten to fifteen years. Combine this with an aging infrastructure, and widespread energy disruptions may become more common. Russia and Central Asia are major energy suppliers to both Eastern and Western Europe.  But even so, the region as a whole will face an energy crunch that will slow economic growth.   A 10 percent shortfall in energy availability could lead to a 1 percent reduction in economic growth, and a bigger shortfall could have a bigger negative impact.

Matthew Simmons' Awesome Presentation On The Coming Oil & Water Shortage - slide show

Saudi Power, Water Sectors Occupy Center Stage - Estimates about the amount of investment needed to enable Saudi Arabia's power and water sectors to grow fast enough for the next decade quite easily stretch into the hundreds of billions of riyals. Keeping investments in utilities infrastructure high is far from a luxury for a country where power demand outpaces supply in many areas during peak summer months, and natural renewable water resources are among the sparsest in the world.

OPEC's Next Challenge: Production Targets - WSJ - As the Organization of Petroleum Exporting Countries prepares to meet for the first time in three months, a debate is brewing within the 12-nation oil cartel over what its post-recession production might look like. Members such as Nigeria, Angola and Venezuela have indicated in the past weeks and months that they want higher targets within the group's quota system in order to accommodate new drilling projects that represent significant potential cash flow. Angola alone is expected to add about 100,000 barrels a day in production capacity this year.

Water Insecurity is Becoming Critical for the Arab Region - A combination of population growth, lack of pricing policy reforms, an increases in household incomes, droughts and in many cases the absence of adequate water treatment facilities has greatly reduced the availability of water suitable for consumption and agricultural purposes throughout the Arab region. In some cases water use is as much as 1.5 times higher than the natural recharge rate. According to the World Bank the Middle East and North African regions are by far the driest and most water scarce regions in the world. The global per capita average water availability is close to 7,000 cubic meters per capita, per year. The regional average for the Middle East and North Africa is 1,200 cubic meters per year. Throughout this region, however, the averages ranges between 1,800 cubic meters per person in Iran to less than 200 cubic meters per person in Jordan, West Bank/Gaza, and Yemen. The regional average of available water per capita, per year is expected to plummet to only 500 cubic meters by 2025.

China looks to 'combustible ice' as a fuel source ‎- Buried below the tundra of China’s Qinghai-Tibet Plateau is a type of frozen natural gas containing methane and ice crystals that could supply energy to China for 90 years. China discovered the large reserve of methane hydrate last September, and last week the Qinghai Province announced that it plans to allow researchers and energy companies to tap the energy source. Although methane hydrate is plentiful throughout the world, the key challenge for China and other nations will be to develop technologies to excavate the fuel without damaging the environment.

China now largest oil and gas investor in Iraq - China has become the biggest single investor in Iraq's oil and gas sector, with nearly one fifth of the reserves that have been auctioned over the past year under its control, Meed has reported. China is spending a total of $577m in signing on fees to give it access to an estimated 24 billion barrels, or about 18% of the reserves on offer, the magazine said, citing its own data. Chinese investment doubles the US' signing on fees, which has committed $296m to control about 12 billion barrels, the magazine added.

China could scrap Iraq's $8.5b debt - China may write off all of Iraq's $8.5 billion (Dh31.2 billion) of debt accrued under the rule of Saddam Hussain, Iraqi finance minister Baqer Al Zubaidi said yesterday."The Chinese government expressed readiness to write off $8.5 billion of debts owed by Iraq," Al Zubaidi said in a statement posted on the ministry's website yesterday. Iraq is keen to see China play even a bigger role in the reconstruction of the war-torn country, the country's top envoy to Beijing told the China Daily in an interview last week. "After 2003, China has supported us very much and reduced Iraqi debts by 80 per cent, which is greatly appreciated," Iraqi Ambassador to China, Mohammad Sabir Esmail, told the paper, referring to a $6.8-billion debt cut announced by China last month. Esmail also invited Chinese companies to invest and operate in the country.

Iran-Pakistan pipeline inches nearer reality -  
Islamabad and Tehran have signed an operational agreement on the Iran-Pakistan (IP) gas pipeline project, a month after the signing was delayed because Pakistan was unable to arrange funds for the project. The countries signed a "heads of agreement" and certain "condition precedents" to make the gas sales purchase agreement (GSPA) signed last June effective. The signing of these agreements was required for the flow of Iranian gas towards Pakistan to begin in three to four years.  The pipeline as initially mooted was to carry gas from Iran to Pakistan and on to India. India withdrew from negotiations last year over disagreements on price and transit fees, but it is still open for the country to joint the agreement. The United States, Pakistan's largest aid donor, is reluctant to help Islamabad proceed with the multi-billion dollar pipeline because of the participation of Iran

Brazil Economy Drives Lula Bid to Ease Iran Tensions (Bloomberg) -- When Brazilian President Luiz Inacio Lula da Silva defends Iran’s right to a nuclear program and makes plans to visit Tehran in May, he is following the path of Venezuelan President Hugo Chavez. The similarities only go so far.  Lula’s motivation is less ideological than strategic, say analysts in Brazil and the U.S. His policy is aimed at converting Brazil’s economic muscle into global clout by pushing “south-south” trade and political ties with developing countries, they say. Iran’s 74 million consumers make it an attractive market, and Lula’s resistance to Iran sanctions helps safeguard Brazil’s civilian nuclear program from outside interference.

Brazil to Break Patents on U.S. Films, Books, Drugs (Bloomberg) -- Brazil will seek to break intellectual property rights on U.S.-made prescription drugs, music, books, software and movies in a bid to force the U.S. government to end cotton subsidies that violate global trade rules.  Brazil’s government submitted a list of products that may have royalties, copyrights and patents suspended as part of $829 million in retaliatory sanctions authorized by the World Trade Organization, according to a statement published today in the country’s official gazette.

Shortcomings Exposed in Oil Data - The U.S. government faces shortcomings in producing its oil-inventory data, according to internal Department of Energy documents, casting doubt on figures that affect the production and prices of the world's most important industrial commodity. The documents, obtained through a Freedom of Information Act request, expose several errors in the Energy Information Agency's weekly oil report, including one in September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors.

Forecasts Underestimate Oil Demand, Study Says - Official forecasts may be underestimating the future demand for oil by 30 million barrels a day, according to a research paper by Joyce Dargay of the University of Leeds and Dermot Gately of New York University. If so, the next oil crisis is going to be a whopper. Dargay and Gately base their logic on the observation that the demand for oil no longer appears to respond to price. While price increases in the 1970s hammered worldwide demand for the fuel, the heftier oil prices we’ve witnessed over the past decade had no such effect. Instead, worldwide demand for oil increased by 4% during that time.

The challenges ahead for world oil - University of Leeds Professor Joyce Dargay and New York University Professor Dermot Gately have a new research paper suggesting that projections from the DOE, IEA, and OPEC are underestimating the challenges ahead for meeting world oil demand. Research by Baumeister and Peersman and Hughes, Knittel, and Sperling, among others, has documented that oil demand appears to have been much less responsive to price over the last decade than it had been in the 1970s. My recent study in the Brookings Papers on Economic Activity (published version here, working paper version here) concluded that this decrease in the elasticity is one of the key factors behind the oil-price run-up of 2007-2008. The surprise to markets in 2008 was that even $100 oil wouldn't be enough to prevent world demand from growing above 85 million barrels a day, and much more than 85 million barrels a day simply wasn't going to be produced at that time.

Do Oil Price Moves Signal Trouble Ahead for the U.S. Economy? - Crude oil futures traded below $80 a barrel Monday for the first time since the beginning of March, with many analysts attributing the sell-off to concerns about the health of the global economy. But do those analysts have the relationship between energy prices and the economy the right way around? It has long been known that higher costs for gasoline, for example, can have an adverse effect on growth. The reason is that while rising prices at the pump may deter some buyers from filling their tanks, the demand for gasoline tends to be somewhat inelastic. In other words, many people must buy gas -- to get to work, for example -- unless prices reach the point where it becomes totally unaffordable.

Big Oil uses fake “Americans” to attack fake “energy taxes.” The American Petroleum Institute is using fake “Americans” to defend billions in tax subsidies, as WonkRoom’s Brad Johnson explains in this repost.  API is running full-page ads in Politico and Roll Call that attack Congress for “new energy taxes” — using stock photos: The target of this ad is the Obama administration’s effort to remove $36 billion in loopholes and subsidies for the oil industry. As it turns out, the “Americans” presented in the ad are stock photos from Getty Images:

The U.S. No Longer Controls the Price of Oil -  Back in the days when US oil demand controlled the price of oil, a massive recession in the United States would have sent oil to 12.00 dollars a barrel. That era, which ended last decade, was defined by ongoing spare capacity in OPEC, low-cost oil in Non-OPEC, and nascent demand for oil in the developing world. That was then, and this is now. And so it’s rather quaint that the energy analysts from that previous era still gather each week on American financial TV, to discuss the inventories at Cushing, Oklahoma. Inventories at Cushing, Oklahoma?  Get these analysts off TV. Please. We need analysis of diesel demand in Guangdong, and Uttar Pradesh.

US Energy Consumed - EIA Data (graph - 25 years breakdown)

Peak Oil In Four Years? Last week, a report was put out by a Kuwaiti research institution (chart above) forecasting global peak oil production by 2014. This follows a report last month by a broad-based British industry group that also predicted a global "oil crunch," or shortage of supply, by the same period. Very few metro regions, cities or businesses are prepared for the impact of these potential global issues on their economies or finances, operating budgets and mobility. I asked Richard Heinberg, author of numerous books about peak oil and other peaking resources (freshwater, fisheries, soil, etc.), if he agreed with the British industry report, which was partially backed by Richard Branson and the Virgin Group. Heinberg said that it appeared credible, and added that having a billionaire transportation industry CEO assert that we better get ready should make people at least take more notice.

Transitioning Away From Declining Petroleum Production - While we are not in the habit of frequently firing out news articles, there are three relatively recent articles that strike home the fact that conventional oil production is inescapably on the verge of declining (if it hasn’t already). The first is an admission by none other that the Wall Street Journal:… listen to warnings about a different crisis that is looming and that could cause massive disruption. A shortage of oil could be a real problem for the world within a fairly short period of timeWe must plan for a world in which oil prices are likely to be both higher and more volatile and where oil prices have the potential to destabilize economic, political and social activity.

China’s Cnooc Buys Bridas Stake for $3.1 Billion to Gain Fields (Bloomberg) -- Cnooc Ltd., China’s biggest offshore oil explorer, agreed to buy a 50 percent stake in rival Argentine producer Bridas Corp. for $3.1 billion, adding 318 million barrels of reserves as Chinese fuel demand surges. Bridas, controlled by Argentine businessman Carlos Bulgheroni, owns a 40 percent stake in Pan American Energy LLC, the country’s largest oil exporter, and also has oil and gas assets in Chile and Bolivia, according to a Cnocc statement sent yesterday to Hong Kong’s stock exchange. BP Plc, Europe’s largest oil company, owns the remainder of Pan American.

India Said to Propose Sovereign Fund to Acquire Energy Assets - (Bloomberg) -- India, with $254 billion of foreign-exchange reserves, may create a sovereign wealth fund to help state companies compete for overseas energy assets with China, a government official said.  The oil ministry has formally asked the finance ministry to set up a fund using a part of the reserves, the official said, declining to be identified because a decision hasn’t been reached. The size of the fund is yet to be determined, he said. “Such a fund would be very, very welcome if we are to compete with the Chinese,” R.S. Sharma, chairman and managing director of state-run Oil & Natural Gas Corp., India’s biggest energy explorer, said. China, with $2.4 trillion of reserves and a $300 billion sovereign fund, has outpaced India in the global quest for resources to feed the world’s fastest-growing major economies.

India ramps up infrastructure spending to sustain growth - Rapid growth has put India’s creaking infrastructure under tremendous pressure. The Indian government has sharply increased investment spending on infrastructure with ambitious projects such as adding 20km of new roads each day! Can the spending projects deliver? This BBC India Business Report looks at the rise in investment spending.

Food Prices Push Indian Inflation Up To 9.9% Since October, when the government began reporting monthly - instead of weekly - data, headline inflation has increased nearly seven-fold. That's been driven by spiralling food prices due to drought and rising rural incomes, but it has begun to spill over into non-food areas as India's economy picks up and global commodities prices rise, putting pressure on margins of manufacturers. Food inflation for February was 17.8 percent, up from 17.4 percent in January, the Ministry of Commerce said. Fuel and power inflation was 10.2 percent in February, up from 6.9 in January. Inflation in manufacturing was 7.4 percent, up from 6.6 in January.

Is Food the New Distressed Asset? - During the sixties, new dwarf varieties, irrigation, fertilizer, and heavy duty pesticides tripled crop yields, unleashing a green revolution. But guess what? The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050.  Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Australia, Africa, and China, soil is exhausted, and global warming is shriveling yields.  Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring.  Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork demand rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. To produce one pound of beef, you need 16 pounds of grain and over 2,000 gallons of water. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the food supply.

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