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

Saturday, April 10, 2010

week ending Apr 10

U.S. Fed's balance sheet steady in latest week - The size of the U.S. Federal Reserve's balance sheet was little changed in the latest week, Fed data released on Thursday showed. The Fed's balance sheet -- a broad gauge of its lending to the financial system -- was steady at $2.290 trillion in the week ended April 7 compared with the week ended March 31. The balance sheet reached a record large $2.296 billion in the week ended March 24.The central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was $168.99 billion, steady from a week ago.  For a graphic on the Fed's balance sheet click on:

Minneapolis Fed President Expects Fed's Balance Sheet To Normalize... By 2020; The Parable Of The Fed And Sarah - Minneapolis Fed president Narayana Kocherlakota gave a presentation before the Minnesota Chamber of Commerce earlier today. While still following the party line, Kocherlakota continues to demonstrate out of the box type type thinking, which hopefully will push him into the Hoenig camp before it is too late. His biggest warning, which is inline with prevailing common sense arising out of the fact that the Fed's SOMA has a $1 billion DV01, is that Bernanke will have to sell "a nontrivial amount of its MBS holdings if it is to be able to normalize its balance sheet in the next two decades. Such sales might cause untoward jumps in interest rates unless the Federal Reserve is able to credibly commit to a sufficiently slow pace." Yet even Narayana does not see any normalization in the monetary picture until 2020: "I am optimistic that we will be able to normalize our balance sheet by the end of the teens." Which means, no rate hike until 2015 theearliest, and possibly later. And you all thought the Maestro was bad.

Oh Really? (Kocherlakota on CNBS) The Fed's Kocherlakota said in an interview on CNBS today that The Fed could sell $15-25 billion in mortgage securities a month, implying that this would normalize the balance sheet by 2020.  2020 eh?  Ten years into the future? Mr. Kocherlakota seems to have forgotten history - and not only recent history.  We've yet to go a decade without a serious financial "upset" of some sort; we had the early 1990s recession, the 2000 tech wreck and of course the 2008 meltdown.  Before that there was 1987, the early 1980s recession and then the 1970s oil embargo and inflation scare. Notice that there hasn't been a ten-year uninterrupted period where The Fed could have "unloaded" what's on its balance sheet.

Fed Ends Meeting Without Discount-Rate Move - The U.S. Federal Reserve on Monday said its Board of Governors met to discuss the interest rate it charges banks on emergency loans, but the Fed made no announcement of a discount-rate increase.When the Fed at the end of last week said its board would discuss the discount rate at the regular meeting, some analysts speculated that an increase would be announced Monday. But the meeting likely wasn’t indicative of that, as the Fed holds many routine meetings to formally review the discount rate.When the Fed last raised the discount rate, by a quarter-point to 0.75% on Feb. 18, it had prepared financial markets for what was coming. That hasn’t happened this time.

Fed Says "Extended Period" May Last A Long Time - The Federal Reserve could keep interest rates ultra-low for even longer than investors expect if the economic outlook worsens or inflation drops, minutes from the central bank's last meeting suggested. The minutes of the Fed's March 16 gathering, released on Tuesday showed lingering concern about the economy's prospects, with policymakers indicating they were in no hurry to raise interest rates. "The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further," the minutes said.

What’s Worse: High Unemployment or Inflation? - The Wall Street Journal has a story today pointing out another long-term problem of high unemployment: it affects not just the finances of the unemployed, but potentially can reduce the future earnings power of their children as well. If Mom and Dad don't have a job, then they can't save for college. If they can't save for college, junior either doesn't go to college or will have to take on debt. Studies have shown that graduating deep in debt can lead to financial instability for years. Invariably, when we start debating jobs programs and stimulus spending, people start talking about the long-term problem of government spending. It raises our national debt, and could cause inflation down the road. But what is often overlooked when inflation is brought up, is that not doing anything about high unemployment can have really bad long-term ramifications for the economy, perhaps even worse than inflation.

Asymmetry in monetary policy - Ever heard of asymmetrical risk? Well, it may be a key reason why Federal Reserve policymakers are keeping interest rates “exceptionally low” for an “extended period”.In the minutes from the Federal Open Market Committee meeting of March 16, released Tuesday, “a few members” spoke out to signal their concern that hiking interest rates too early was more dangerous than hiking rates too late.“At the current juncture the risks of an early start to policy tightening exceeded those associated with a later start, because the committee could be flexible in adjusting the magnitude and pace of tightening in response to evolving economic circumstances; in contrast, its capacity for providing further stimulus through conventional monetary policy easing continued to be constrained by the effective lower bound on the federal funds rate.” Outside Fed-speak, this means one thing: tighten too late, and you can always catch up by hiking rates quickly.

Kansas City Fed's Hoenig Urges Raising Fed Funds Rate "soon" - From Kansas City Fed President Thomas Hoenig: What about Zero? Under [an alternative] policy course, the FOMC would initiate sometime soon the process of raising the federal funds rate target toward 1 percent. I would view a move to 1 percent as simply a continuation of our strategy to remove measure that were originally implemented in response to the intensification of the financial crisis that erupted in the fall of 2008. In addition, a federal funds rate of 1 percent would still represent highly accommodative policy. From this point, further adjustments of the federal funds rate would depend on how economic and financial conditions develop.

Fed’s Hoening: Room to Raise Rates Without Hurting Recovery - The Federal Reserve could increase key rates toward 1% from near zero as a ward against inflation and possible bubbles in financial markets without hurting the nascent economic recovery, a Fed official said Wednesday.The lone dissenter on the rate-setting Federal Open Markets Committee said 1% rates, which the Fed could move toward “sometime soon,” would still represent “highly accommodative” monetary policy.“This would require initiating a reversal of policy earlier in the recovery, while the data are still mixed but generally positive,” said Thomas Hoenig, the president of the Reserve Bank of Kansas City.

A Deeper Look at the Fed’s Inflation Debate - As the Wall Street Journal reported today, the Federal Reserve is going through an intensifying debate about whether inflation is receding even as the economy recovers. Analysts at the San Francisco Fed and New York Fed jump into the fray today, with a rebuttal directed at officials who say inflation isn’t slowing down.The researchers say the inflation slowdown is widespread. They examine fifty goods and services tracked in the Fed’s preferred measure of inflation, the personal consumption expenditures price index excluding the volatile food and energy sectors, or core PCEPI. The researchers find that the inflation rate has slowed in most of the fifty categories in the past year and a half, relative to the previous 3.5 years. Disinflation — which is a slowdown in the inflation rate — “has been a widespread phenomenon,” they conclude. Deflation in some of these categories — like electronics — has deepened.

In Minutes, Fed Expects Inflation to Remain Low - NYTimes - Continued low inflation has strengthened the hand of Federal Reserve officials who believe that monetary policy should not be tightened anytime soon, minutes from the Fed’s latest policy meeting show. The minutes also disclosed that the Fed’s commitment to keep short-term interest rates low was based on economic conditions rather than a particular time frame, suggesting that officials were trying to tamp down market speculation that its references since last May to an “extended period” meant at least six months. According to the minutes, released on Tuesday, the extended-period language should not limit the Fed’s ability “to commence monetary policy tightening promptly” if economic activity or underlying inflation were to suddenly accelerate.

Dallas Fed’s Fisher: Inflation Low on List of Worries -   Richard Fisher, president of the Federal Reserve Bank of Dallas, built a reputation as an outspoken inflation fighter in the summer of 2008, when he lobbied the Fed to push interest rates higher to combat rising consumer prices even though the financial crisis was still raging. Today, inflation is low on his list of worries. In fact, he says there is small risk that deflation, or falling consumer prices, could become a bigger problem for the Fed in the months ahead than higher inflation. That puts him on the side of those who want to keep interest rates near zero for at least several more months — if not much longer — to help the recovery get on stronger footing.

Disinflation: Is it all housing? I think not—and I'm not alone - Atlanta Fed macroblog - Yesterday, the Federal Open Market Committee minutes contained this observation: While the ongoing decline in the implicit rental cost for owner-occupied housing was weighing on core inflation, a number of participants observed that the moderation in price changes was widespread across many categories of spending. This moderation was evident in the appreciable slowing of inflation measures such as trimmed means and medians, which exclude the most extreme price movements in each period. A few weeks ago, Laurel Graefe posted a nearly identical sentiment in this blog using data from the January consumer price index (CPI).To that evidence I would add a recent issue of the Federal Reserve Bank of San Francisco Economic Letter.

The Inflation Project Federal Reserve Bank of Atlanta - Tracking inflation and its effects is a vital component of the Federal Reserve's monetary policy. The Inflation Project compiles links to data releases, reports, research, and international inflation updates.

Deflation on the prowl as Bernanke shuts down his printing press - The most audacious monetary experiment in modern history ended on April Fools' Day. America must walk without crutches, on gangrenous legs.  The US Federal Reserve has completed its purchase of $1.7 trillion (£1.1bn) of mortgage securities, agency debt and US Treasuries, the conjuring trick of "credit easing" that allowed Ben Bernanke to create stimulus equal to 12pc of GDP.  The Fed's money creation has been more or less the size of Washington's borrowing needs for the last year, as Beijing notes with suspicion.

Quantitative Easing And Its Effect On Inflation And The Economy - The Fed's response to the financial meltdown was twofold: Interest rates were effectively set at zero, and the monetary base was increased 140%. While it is not known exactly what formula the Fed used to arrive at the 140% increase of the monetary base, the expansion from roughly 800 billion to 2.2 trillion roughly correlates with the asset backed securities since purchased by the Fed. Quantitative easing is nothing new, as between 2001 and 2006, Japan used QE to gradually increase the monetary base by about 70% in an attempt to spur loan growth and promote inflation. The extra liquidity provided by the Bank of Japan did increase lending and promote inflation, but once the liquidity was withdrawn, the deflationary pattern resumed. Apparently liquidity alone did little or nothing to promote long-term price stability.

Do not stay the Course! - I found this Post which I do not believe at all, though I am great distance from doubting either the information or the integrity of it. I know there is not disinflation, but how do you explain the hidden inflation? This is the real problem! I know, as should every economist, that we will have to endure a burst of inflation prior to a return to normal Production; people simply cannot return to a normal purchase pattern without such a burst. What the second graph in the Post needs is an expression of the line of production since the Recession began; not in monetary terms, but in real production of physical units. It would also be indicative if there was a red line expressing where Production would have to be to maintain a previous Consumption pattern from prior to the Recession. My contention is that to get from the current Production line to the red line of necessary production would require a high level of consistent inflation.

FOMC Lying Reaches A New Zenith - Things that make you shake your head....Members noted the importance of continued close monitoring of financial markets and institutions--including asset prices, levels of leverage, and underwriting standards--to help identify significant financial imbalances at an early stage. At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risk-taking. Really?  A couple of charts.  First, what Government has done: No misalignment there!  Heh, it's totally normal for the government to replace on a two-year running basis more than 20% of GDP, and to have a current replacement rate of almost 12% of GDP.

Fed’s Dudley Calls for Action on Bubbles - Federal Reserve Bank of New York President William Dudley said Wednesday the damage caused by financial market bubbles should bring about a sea change in the way the central bank acts, with the Fed needing to move toward active efforts to reign in financial market excess. “There is little doubt that asset bubbles exist and they occur fairly frequently,” and when they burst the economy frequently suffers, Dudley said. And while it can frequently be difficult to discern the existence of a financial market bubble, the problems these imbalances create means “uncertainty is not grounds for inaction” on the part of central bankers.

LOL Fed - I mean what else can you say about this headline: "Fed keeps eyes out for speculative bubbles." - It's like I'm living in a dream world where every day is April Fools and every story is from The Onion... only neither of those conditions apply. I am starting to wonder if I'm surfing some hacked version of the internet where someone is trying to f*@k with my head. Dear Federal Reserve:  the entire market is an asset bubble - driven by speculative mania searching out returns as a result of your Zero Interest Rate Policy!

Let traders call the next bubble - So here's a paradox to ponder: By now everyone has heard about traders who saw the housing crash coming -- and made millions betting on it. Yet most economists agree that central bankers won't prevent the next bubble from inflating. One group sides with Alan Greenspan, who argues that regulators can't know when a strong market has crossed into bubble territory. Another sides with Paul Krugman, who thinks that regulators can know -- but that they may choose to shirk their duty. Either way, what's up? Why can't regulators preempt bubbles if the hedge-fund crowd is smart enough to short them? The answer tells you something big about the financial reform brewing in Congress. There is a reason private traders beat public servants when it comes to anticipating crashes, and it points to the difference between a good reform package and a missed opportunity.

FOMC Minutes on Housing - Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices.

Housing Bailout Nears $2 Trillion And Still Growing - The U.S. government housing rescue program is on target to spend more than $2-trillion on bail out efforts, according to a review of government allocations. The effort marks the largest amount spent on record to aid real estate markets in a downturn, and is intended to help push the economy in the direction of a recovery. The Treasury Department and the Fed have purchased $1.4-trillion in mortgage backed securities , and other government agencies are on schedule to spend more than $600-billion, most of which will be spent before the end of 2010. The efforts are being made to heal housing markets damaged by reckless mortgage lending practices and a series of manipulative maneuvers on Wall Street.

LSAPs: A Tale of Overkill Gone Too Far  -With the Fed’s quantitative easing (QE) completed last week, I thought it might be a good time for stock-taking: Did QE achieve its intended objectives? And could the Fed have done things better?By QE I mean of course the “Large-Scale Asset Purchases” (or LSAPs) of GSE debt, mortgage-backed securities (MBS) and US Treasuries. These were first announced in November 2008, expanded in March 2009 and concluded in March 2010.So let’s start with the intended objectives first. In the case of the purchases of MBS ($1.25 trillion) and GSE debt ($200 billion), the objective was clearly stated at the November 2008 Fed statement: “[..] to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets”In other words, at the height of the crisis, the Fed decided to provide enormous support to a specific sector (housing), in the context of its efforts to “improve conditions in financial markets more generally.”

Fed in Same Boat as Banks on Soured Real Estate Assets - Last week, the Federal Reserve Bank of New York released details of the three portfolios it inherited from the two Wall Street giants. The records include 131 pages of holdings the Fed acquired from Bear Stearns in order to sweeten the deal for JPMorgan Chase to take over the failing behemoth, and 30 pages listing assets picked up from AIG as part of the federal government’s attempt to clean up the “too-big-to-fail” insurer. As the Wall Street Journal described it, the documents show a complex hodgepodge of souring commercial property loans, securities backed by U.S. subprime loans, credit insurance written on troubled bond and mortgage insurers, loans tied to struggling hotels in Georgia and California, and credit-default swaps on bonds issued by the states of Nevada, California, and Florida. Analysis by the research firm SNL Financial puts the total fair market value of the three different portfolios at $65 billion as of December 31 – that’s about equal to the fair value of assets held by the nation’s sixth largest bank, PNC Financial Services

Thoughts on Maiden Lane III- After losing their court cases to keep bailout data secret, the Federal Reserve has finally complied with the minimum of what is lawful, and published PDFs of the Maiden Lane Portfolios.  The data is minimal – principal amount, deal/tranche description, and CUSIP (if any).  Out of the goodness of their hearts (not), the Fed locked the PDFs, making it impossible to copy the data into Excel easily. I printed the documents and scanned them in using OCR, and pasted them into Excel.  Even with 99% accuracy, it took a while to scrub the data of the smallest portfolio, Maiden Lane III, which was the bailout of AIG.  I hope to do a similar analyses of II (likely) and I (maybe, tall order).

Thoughts on Maiden Lane II  Aside from two privately placed interest only securities, the rest of Maiden Lane II could be modeled.  Here are the credit metrics:...(table)...The average credit rating is B-, with a downward tendency.  56.7% of the portfolio is rated CCC and below, and 71.2% of the portfolio is rated B and below.  But what types of collateral are in the portfolio? The average vintage is mid-2006, which is lousy for any debt portfolio on residential real estate in the US.  I would expect bad performance from a portfolio with these characteristics. Compared to ML III, ML II has better collateral, but worse vintage years.  Both are messes.  I am not saying that the Fed will necessarily lose money on either one, but I question the valuations on the assets.  If Blackrock is doing the valuations, maybe I should be quiet — who has more knowledge than they do?

The FOMC’s minutes get political - Shahien Nasiripour finds a nugget in the latest FOMC minutes: for the first time since 2002, they mention the Fed’s “supervisory staff” as part of the way that the Fed conducts monetary policy. The idea is that bank supervisors help to keep an eye on leverage and other risks in the financial sector, and that the FOMC uses that information when setting interest rates. Shahien talks to former Fed governor Laurence Meyer, who reads this as a protective move by the Fed: the regional Fed banks, in particular, would have a much harder time justifying their existence as large institutions if they lost their supervisory role. And Meyer is surely right. Yes, information from bank supervisors can be used in FOMC meetings — but the Fed could have people supervising any sector of the economy and then use that information in its meetings. The point of supervising banks is to supervise banks, not to set monetary policy.

The Politics of Monetary Policy - In this paper we critically review the literature on the political economy of monetary policy, with an eye on the questions raised by the recent financial crisis. We begin with a discussion of rules versus discretion. We then examine the issue of Central Banks independence both in normal times and in times of crisis. Then we review the literature of electoral manipulation of policies. Finally we address international institutional issues concerning the feasibility, optimality and political sustainability of currency unions in which more than one country share the same currency. A brief review of the Euro experience concludes the paper.

Federal Reserve Gets Political, Sends Congress Veiled Message -  Facing perhaps the biggest loss of power in the institution's nearly 100-year history, the Federal Reserve fought back today with a little-noticed move that seemed to send a message to Congress: we use our oversight authority over banks to help us shape the direction of the economy.So, Senate Banking Committee Chairman Christopher Dodd, don't take it away.In the wake of the biggest financial crisis and most severe economic downturn since the Great Depression, many in Washington have blamed the Fed. Partly to punish it for past failures and partly to help it concentrate on the biggest financial and economic issues, Dodd took away the Fed's regulatory authority over banks in the November draft of his bill to reform the financial industry. Last month, he offered a new draft of his bill, this time giving the Fed authority over the nation's biggest financial firms.

What Do We Have to Show After a Year of “Extend and Pretend”? - - In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. These assets were clustered around CDO’s, mostly in the real estate and commercial real estate markets.  To relieve the credit crunch that peaked in September, 2008, the Federal Reserve Board opened the money spigots—all kinds of lending windows were opened, with a dizzying array of acronyms, all of them doing basically the same thing: Lending out wads of cash at zero interest to the American banking system, all in an effort to keep it from going broke. Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.  So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.  However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books.

EXTEND & PRETEND: U.S. High Yield Debt Hitting the Maturity Wall  - How long can the government continue to extend & pretend? How long can public policy endlessly ‘kick-the-can’ down the road without addressing the underlying causes? Such a critical point is often academically referred to as a ‘Tipping Point’ or what newsletter writer John Mauldin refers to as a ‘Finger of Instability’.  I am more pragmatic and as an investor, who is forced to call the timing, I refer to it as the Maturity Wall.In a recent article entitled "Sultans of Swap: Fearing the Gearing!" I outlined the growing amount of debt that will need to be refinanced and rolled over in the coming years. Since releasing that analysis the amount may now have reached a level where it may be too high to be scaled and we will hit the Maturity Wall.

The Shell Game cmartenson - The shell game has continued this long without the bond market calling the bluff, and I am baffled by the extent to which the other world central banks have both enabled and participated in this game. Part of the explanation behind this unwavering support for the dollar and US deficit spending by other central banks lays in the fact that other Western and Eastern governments are equally insolvent. It's possible that they feel they really have no choice but to play along, because the alternative would be to inflict a vicious and deeply unpopular austerity program on their own country, while everybody else is partying on thin-air money. Who's going to be the first to do that? Nobody, that's who.

A Word for Chris Martenson: The Funding Hole – Who’s Buying Treasuries? - Chris Martenson has produced many interesting articles and media presentations so it’s about time I put in a good word for him. His latest comment, The Shell Game Continues, is particularly disturbing. Chris is great at simplifying what could be regarded as confusing arguments for most of us. I truly recommend you take time to read this article but if you want a gross simplification on this, effectively what he says is that there is a gap somewhere in the funding of Federal Debt. Put simply, debt can be bought by domestic demand (US savers) and foreign demand (other country’s savers). But what Chris has found out is that there is a curious hole widening: the summation of domestic and foreign demand does not add up to the total amount of Federal Debt – there’s something missing. He presumes that this hole is effectively being plugged by The Federal Reserve itself (albeit via a game of smoke and mirrors which he calls “The Shell Game”)

Fed's Bernanke: US Must Plan Now For Public Debt Cuts - The U.S. must start to prepare now for the challenges posed by an aging population with a credible plan to gradually reduce a soaring public debt, Federal Reserve Chairman Ben Bernanke said Wednesday. Health spending is set to increase over the long term as the U.S. population grows older, posing challenges on the country's already strained finances, the Fed chief warned.  In response to a question on whether the rising fiscal deficits could bring higher inflation, Bernanke said his real concern was that budget imbalances could lead investors to lose faith in the U.S.'s ability to meet its debt obligations, leading to higher rates on U.S. Treasurys. In turn, that could drive up other key rates that can influence the economy, such as mortgage rates.

Bernanke: In the Long-Run, We’re All on Social Security, Medicare - The following is an excerpt on the issue from the chairman’s remarks in Dallas today: The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today he might say that, in the long run, we are all on Social Security and Medicare. That brings me to two interrelated economic challenges our nation faces: meeting the economic needs of an aging population and regaining fiscal sustainability. The U.S. population will change significantly in coming decades with the combined effect of the decline in fertility rates following the baby boom and increasing longevity. As our population ages, the ratio of working-age Americans to older Americans will fall, which could hold back the longrun prospects for living standards in our country...

Pray For Inflation -- It's Our Only Hope - Everyone thinks the Fed's job is to fight inflation, but right now the Fed is actually doing everything it can to cause inflation. Why? It part to help the economy get cranking again.  Inflation provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly. Inflation also helps solve another problem, though--our debt problem.  The more inflation we have, the less our dollars will be worth.  Because our debts are based on a specific number of dollars and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.

Rising yields could turn toxic for US dollar -The recent jump in Treasury yields has been a boon to the US dollar, but that could change rapidly should higher rates bring US debt worries to the fore and threaten the nascent economic recovery. Yields on benchmark 10-year Treasuries edged near four per cent last week after tepid demand for $118 billion debt auctions stoked fears over the burgeoning US deficit. Rising rates typically benefit the dollar as they make US assets more attractive. Indeed, the dollar-yen pair hit a seven-month high last week as yields rose again.  But perception is key here. The economy is still fragile, and the federal government is set to borrow $1.6 trillion this year.Another jump in yields could turn toxic for the greenback, especially if it coincides with a rise in the price of US credit default swaps, which would suggest a growing discontent with the US fiscal situation.

WaPo Worries That The End May Be Near! -- Today the Washington Post had a story all worried about ten year interest rates going from around 3.5% on March 4 to nearly 4.0% yesterday. They note that this might reflect expectations of growth, but also worry that it might reflect expectations of rising inflation and dangers of collapse due to rising indebtedness. They did not bring up the earlier worrying that this was due to the Chinese not buying US bonds to punish us since they ran a trade deficit in March and did not have much money to buy foreign bonds with. They also worried about associated increases in housing mortgage interest rates, which tend to track the ten-year bond rate. Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year.

Explanation of How a Zero Boundary Causes a Steep Yield Curve ...  This post will hopefully explain Paul Krugman's great interpretation of the yield curve... it's caused by the zero bound on the front-end of the curve. First to Paul... As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates. Short-term rates, in turn, tend to reflect the state of the economy: if the economy improves, the Fed will raise short-term rates, if the economy worsens, the Fed will cut. So long-term rates can be either above or below short rates.Except that now they can’t. If the economy improves, short rates will rise; but if it worsens, well, they’re already zero, so there’s nowhere to go but up. At first this confused me and apparently I was not alone. Crossing Wall Street details their personal misunderstanding:

Certificates of confiscation: Of bonds and bondage - Indenture: Agreement containing the terms under which money is borrowed. That's what they call bond contracts. Indenture. According to the dictionary, or in this case a convenient google search, Indenture refers to a type of contract in the past that forced a servant or apprentice to work for their employer for a particular period of timeWhat struck me was how true this is, not referencing past shenanigans, but present day reality. Society as we know it is indentured, we are virtual debt slaves, servants of our corporate and political elites.  Every time a sovereign, municipal or corporate bond is sold somewhere, every time you hear the national debt going up, that's a piece of you being sold off. There's nothing more to the bond market, nothing less. Human beings are being lined up on the chopping block, sold to the highest bidder, for a price.The future of their children and their hopes and dreams sold at a price determined by a large market for human debt slaves. A modern day global debt gulag if you ask me.

Pimco continues to snub UK gilts, US bonds (Reuters) - Pimco, which operates the world's largest bond fund, continues to avoid UK gilts and U.S. Treasury bonds because debt levels in the two countries pose a serious threat to investors' returns, Bill Gross, Pimco's co-chief investment officer, said on Monday."".Investors in 30-year Treasuries should be aware that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, which is four times the United States' current outstanding debt, he said. "That may be a primary reason why 30-year bonds yield 4.6 percent whereas two-year debt with the same guarantee yields less than 1 percent,"

A Math Primer on Sovereign Debt - NY Times - How can a country support debt of more than 100 percent of its gross domestic product for many years and then suddenly start descending toward insolvency? That question of sovereign debt arithmetic isn’t merely academic. It’s highly relevant to the likes of Greece and Italy. The answer is that size of the sovereign debt burden is not everything when it comes to keeping up with interest payments. No matter how high the ratio of debt to G.D.P. may be, it does not need to increase as long as the government has two factors going its way: the “primary” budget balance — the balance before interest payments — and the growth rate of nominal G.D.P. To see how these play out, consider two hypothetical countries.

A "Bloodbath" In U.S. Bonds? - Are the markets losing patience with US government debt? Last week three US government bond auctions met with unexpectedly lacklustre demand. The yield on the ten-year Treasury jumped to a nine-month high of 3.9%. In a further sign of market stress, the ten-year yield rose above the ten-year swap rate for the first time in living memory. The swap rate measures the cost of interbank borrowing. So this move implies the US government is a bigger credit risk than banks. The worry is that investors are now balking at the record debt sales needed to cover this year's deficit of $1.4trn and imposing a sustained rise in yields (via falling bond prices). In short, they want higher interest rates to compensate for the huge supply increases. The trouble is Treasury yields are the benchmark for interest rates across the economy. That's a nasty cocktail..

 Collapse Competitively - We are heading toward economic, political and social collapse, and every day that passes brings it closer. But we just don't know when to stop, do we? Which part of "the harder we try, the harder we fail" can't we understand? Why can't we understand that each additional dollar of debt will drive us into national bankruptcy faster, harder and deeper? Why can't we grasp the concept that each additional dollar of military spending further undermines our security? Is there some sort of cognitive impairment that prevents us from understanding that each additional dollar sunk into the medical industry will only make us sicker? Why can't we see that each incremental child we bear into this untenable situation will make life harder for all children? In short, what on earth is our problem?

Federal Budget Deficit Totals $714 Billion in the First Half of Fiscal Year 2010 - CBO Director's Blog -  The federal government incurred a budget deficit of $714 billion in the first half of fiscal year 2010, CBO estimates in its latest monthly budget review, about $67 billion less than the shortfall recorded in the same period last year. That improvement stems largely from a net decline of $223 billion in outlays for the Troubled Asset Relief Program (TARP), from $115 billion in outlays in the first six months of last year to net receipts (that is, negative outlays) of $109 billion so far this year. The amount this year is negative because the Treasury is expected to report a reduction of $114 billion in outlays for that program in March, reflecting a significant decline in its estimate of the net costs that will ultimately result from that program’s transactions. Also contributing to the smaller deficit so far this year was a $69 billion decline in spending for federal deposit insurance, reflecting in part the prepayments by financial institutions of future years’ assessments.

What Would You Do If You Were A Member Of Congress Facing This Situation? Take a deep cleansing breath before looking at this just-released poll from the Economist/YouGov and ask yourself what you would do if you were a member of Congress facing this situation.In question 23, almost two-thirds -- 62 pecent -- of those responding said that they wanted to cut spending to reduce the budget deficit rather than raise taxes. But just three questions later, the only area of federal spending that a majority -- 71 percent -- was willing to cut was foreign aid.  More than 70 percent were against cutting every other of the areas mentioned and more than 80 percent were against cutting 9 of them.  Reductions in the 2 programs where cuts could have the largest impact on the federal government's bottom line -- Social Security and Medicare -- were only supported by 7 percent of those responding and, therefore, were opposed by 93 percent

Polling the Budget - Stan Collender blogs a tricky situation facing politicians: voters consistently say they'd rather cut spending than raise taxes to reduce the deficit. But when you ask them what they want to cut, the only program there is strong support for cutting is foreign aid . . . which is like trying to pay off your credit cards by slashing your chewing gum budget.  What I'd really like to see is a poll which reads off a list of the major areas in the federal budget, names the percent of the federal budget they compose, and then asks people which of these areas they think should be cut in order to close the deficit. Obviously, you couldn't get too deep with this, since people can't remember more than five or six numbers at a time. But the answer would be more interesting than noting that people with a poor command of the federal budget think we should cut the enormous fantasy programs they think are wasting all of our tax dollars.

So what is 'fiscal responibility'? - There has been some arguing about the dangers of federal deficit spending (little said about the huge private sector debt levels except on econoblogs), but Kevin Drum on Mother Jones notes in a post how the argument appears to be framed in the public's mind no matter which party or movement is involved: Ah, the American public. God love 'em. The Economist asked if they'd rather tackle the federal deficit by cutting spending or raising taxes, and the runaway winner was cutting spending, by a margin of 62% to 5%. So what are we willing to cut? Answer: pretty much nothing." I suppose one of these days everyone's going to have to figure this out. Apparently no time soon, though.

Fiscal Fantasies - Krugman - David Frum is startled by Larry Kudlow’s ignorance about the federal budget; Kudlow imagines that a pay cut for federal employees could have a huge impact on the deficit, when in fact it would be trivial.Two things: it should have been obvious on general principles that Kudlow was talking nonsense. The basic picture of the federal government you should have in mind is that it’s essentially a huge insurance company with an army; Social Security, Medicare, Medicaid — all of which spend the great bulk of their funds on making payments, not on administration — plus defense are the big items. Salaries aren’t. But the Kudlow picture is nonetheless a key part of conservative imagery; the idea of vast rooms full of government employees doing nothing productive is central to their vision of painless spending cuts. The fact that it’s not remotely true is irrelevant; they want it to be true, and that’s enough.

Volcker: Taxes likely to rise eventually to tame deficit (Reuters) - The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday. Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax "was not as toxic an idea" as it has been in the past and also said a carbon or other energy-related tax may become necessary.Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. "If at the end of the day we need to raise taxes, we should raise taxes,"

Club Wagner — our (fictional) club of policy makers, pundits and others willing to acknowledge that taxes must rise in order to pay for Medicare, Social Security, the military and other popular government programs? Not quite. But both Mr. Bernanke, the chairman of the Federal Reserve, and Mr. Volcker, who held that job in the 1970s and ’80s, came close this week. (The man who held the job between them, Alan Greenspan, is already a member of the club.)

Is the VAT a money machine? - This is a very useful paper, full of facts and figures on VATs around the world.  Here is one bit: As shown in the first column, all OECD members other than the U.S. have adopted the VAT over the last 30 years or so, beginning with France continuing through adoption by Australia in 2000. The (unweighted) average standard rate of VAT is about 17 percent, but with considerable variation. Within the EU, it varies between 15 percent (the minimum permissible under the union’s rules) in Luxembourg, and 25 percent (the maximum) in Denmark and Hungary. And several non–EU countries apply far lower standard rates than this, the most striking being the fi ve–percent rate in Japan. Most also apply a reduced rate to some commodities, with domestic zero–rating being quite widespread.

Me, Paul Volcker, and the VAT - A few right-wingers are very excited today by some comments Paul Volcker made yesterday about the need to raise taxes and why a value-added tax may need to be considered.Volcker’s views are no surprise to me for two reasons. First, he is a smart guy who knows how to read a budget projection and draw the obvious conclusion that it is impossible, practically, to bring the budget deficit down to a manageable level without raising taxes significantly. Second, I had some correspondence with Volcker a few years ago after I wrote about the need for a VAT in my Impostor book. I can’t share his response, but I don’t see why I can’t share my letter to him since I still believe everything I wrote and have said more or less the same thing publicly on many occasions.

The Rich Can Pay Higher Taxes Right Now. Today. - From Dana Milbank in today's Washington Post:"Tea partiers, eat your hearts out: A group of liberals got together Tuesday and proved that they, too, can have a tax rebellion. But theirs is a little bit different: They want to pay more taxes."I'm in favor of higher taxes on people like me," declared Eric Schoenberg, who is sitting on an investment banking fortune. He complained about "my absurdly low tax rates." "We're calling on other wealthy taxpayers to join us," said paper-mill heir Mike Lapham, "to send the message to Congress and President Obama that it's time to roll back the tax cuts on upper-income taxpayers."

Nearly half of US households escape fed income tax -- Tax Day is a dreaded deadline for millions, but for nearly half of U.S. households it's simply somebody else's problem. About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization. Most people still are required to file returns by the April 15 deadline. The penalty for skipping it is limited to the amount of taxes owed, but it's still almost always better to file: That's the only way to get a refund of all the income taxes withheld by employers. In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will owe no federal income tax for 2009, as long as there are two children younger than 17, according to a separate analysis by the consulting firm Deloitte Tax.

Is it Wrong that Half of Americans Pay No Fed Income Tax… Some criticize the fact that half the country is effectively exempt from the scourge of April 15, but there is a political and economic component to this Zero-FIT (federal income tax) phenomenon. If the Zero-FITs are a political problem, they are also a political creation. When moderate and conservative pols are reluctant to announce new spending programs for fear they will look like socialists, they execute these spending programs  through the tax system. If most of these programs flipped to the spending side of the ledger, suddenly millions more Americans would owe federal income taxes. For example, the EITC -- President Ford's initiative -- is now a $50 billion program, maybe the largest component of our welfare system, and yet our politicians don't even have to call it spending. (The exemptions and deductions carved into our Swiss cheese tax regime are called tax expenditures. When the government spends a dollar, it's an expenditure. When it leaves a dollar in the hands of private earners, it's a tax expenditure.)

Lucky Ducky Redux - So the right is now apparently outraged at the fact that many Americans pay no income taxes — a true observation that is elided into the utterly untrue assertion that many Americans pay no taxes. (Almost everyone pays payroll taxes, everyone pays state and local sales taxes, etc.) This isn’t new; remember the famous WSJ editorial about the lucky duckies who have the great good fortune to not pay income taxes because they’re, um, too poor to be above the minimum. I guess luck is in the eye of the beholder. The thing to bear in mind is that overall, the US tax system isn’t actually that progressive: the payroll tax is regressive, as are most state and local taxes, which largely offsets the progressivity of the income tax. So the right likes to pretend that the income tax is the only tax; it isn’t

Reagan's Tax Increases - Alan Simpson, co-chair of the deficit reduction commission, is angry with anti-tax fanatics for saying that he supported tax increases while in the Senate. Without checking his voting record, I think it's reasonable to assume that Simpson, like almost all Republicans in the Senate in the 1980s, probably voted for the many tax increases supported and signed into law by Ronald Reagan, which eventually took back half of the 1981 tax cut (see below). It may come as a surprise to some people that once upon a time in the not-too-distant past Republicans actually cared enough about budget deficits that they thought raising taxes was necessary to bring them down. Today, Republicans believe that deficits are nothing more than something to ignore when they are in power and to bludgeon Democrats with when they are out of power.

A Movie About Our Tax System -- It's a Real Good Horror Flick… So why did Ronald Reagan reform the tax code and cut income tax rates? Because he was a big right-wing nut, right? No. Because he was a crazy Republican, right? No, and before he was a Republican he was a Democrat. Because he hated big government. Well, maybe, but he was head of a really big government for eight years and seemed to enjoy himself. Actually, Ronald Reagan thought the federal income tax system was unfair. Why? Because he was an actor. People make fun of Reagan and his Bonzo movies, but he was quite successful as an actor and made good money. He was paid per film. And after a while, his combined income would push him into the highest marginal income tax rate.

The politics of Basel III - It’s long past time, I think, to introduce a Basel III tag on this blog, since in terms of financial regulation it’s clearly the area where there’s the biggest gap between its importance, on the one hand (high) and the amount of reporting going on around it (very little). One thing I haven’t really seen is a 30,000-foot view of how Basel III Is being put together, so I’m going to take a stab at it. The key thing to note is that it’s basically being driven by national regulators — not just substantially every central bank, but also people like the FSA in the UK and the alphabet soup of regulators in the U.S. (OTS, OCC, FDIC, etc). In this country, it seems that Treasury, and its subsidiaries, are taking the lead in the discussion; Fed officials are more involved in the details, dotting i’s and crossing t’s when it comes to actually drafting highly complex regulations. Very few of these regulators, it seems unnecessary to say, are on exactly the same page. Many of them think that they’re doing their own jobs perfectly well, thankyouverymuch, and that they neither want nor need to be bigfooted by overarching rules emanating from Basel.

Lending is capital- not reserve-constrained - I have been reading up on the new proposals from the Basel Committee to tighten the capital requirements and introduce new liquidity rules as a further strengthening of the regulatory framework on banks. There is a mountain of literature to get through on all of this. But I came across two divergent views on the new proposals. Some commentators are arguing that these requirements hinder the banks’ ability to create credit and hence put a regulative drag on growth. If they are tightened then growth will be lower than otherwise. The other view expressed by a noted “progressive” economist disputed this view but then got confused in a mainstream macroeconomics labyrinth. It brought home the fact that people often confuse capital adequacy requirements and reserve requirements.Reserve requirements are an artefact of the old gold standard and are irrelevant in the current monetary system.

Capital can’t be measured -- Simon Johnson and James Kwak are absolutely right. Sure, “hard” capital and solvency constraints for big banks are better than mealy-mouthed technocratic flexibility. But absent much deeper reforms, totemic leverage restrictions will not meaningfully constrain bank behavior. Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

Bernanke Credits the Fed With Avoiding a Worse Downturn - NYTimes - The Federal Reserve artfully avoided a second Depression by being open to generating and testing new ideas, the central bank’s chairman, Ben S. Bernanke, said Thursday evening.  In an address here at the Center for the Study of the Presidency and Congress, Mr. Bernanke drew comparisons between the financial crisis of 2008 and the financial collapse of the 1930s with greater precision than he had in the past.

I Saw the Crisis Coming. Why Didn’t the Fed? - NYTimes -ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”  But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

Financial Crisis Hearings: Notable Points - Former Federal Reserve Chairman Alan Greenspan urged U.S. policy makers Wednesday to place significantly higher capital and collateral requirements on the financial-services industry, warning of the likelihood of future financial crises if steps aren't taken to address "too big to fail" firms and the inability of the private market and regulators to predict major risks.  This is the same Alan Greenspan that consistently put forward positions that did exactly the opposite. Let's go back and revisit history:

Greenspan: Love Him, Hate Him - Alan Greenspan is just as maddening in his retirement as he was during his nineteen-year reign over the global economy. Today in his appearance before the Financial Crisis Inquiry Commission (extensive coverage by Shahien Nasiripour and Ryan McCarthy here), Greenspan seems primarily concerned with passing the buck and preserving the remaining shreds of his legacy, a pathetic quest epitomized in his “I was right 70 percent of the time” remark. At the same time, however, he does make some very blunt statements about the financial industry and financial regulation that policymakers should ignore at their peril. Greenspan’s prepared testimony begins with a massive attempt to pass the buck. The first two pages of his account of the financial crisis have to do with rapid economic development overseas and the accumulation of the fabled global glut of savings. But he reaches even farther back to . . . the fall of the Berlin Wall and the discrediting of communism.

Greenspan’s Delusions Get Much Worse With Age (Bloomberg) -- In case you missed the first legacy tour, former Federal Reserve Chairman Alan Greenspan is back for Part II. Starting with an academic paper presented at the Brookings Institution on March 19 and followed by several TV interviews, “Dr. Greenspan,” as his interviewers politely refer to him, has acquired the clairvoyance he lacked at the Fed. Asked in a Bloomberg TV interview about a possible bubble in China, Greenspan said there were “significant bubbles in Shanghai and along the coastal provinces” and “some of that in the hinterlands.”  He of the Can’t-See-a-Bubble-In-Advance School now recognizes region-specific bubbles halfway around the world?

Robert Reich: Greenspan, Summers, and Why the Economy Is So Out of Whack If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin. In 1999 they advised Congress to repeal the Glass-Steagall Act, which since 1933 had separated commercial from investment banking. By 1999, Wall Street was salivating over such a repeal because it wanted to create financial supermarkets that could use commercial deposits to place bets in the financial casino. That would yield the Street trillions. At the same time, Greenspan, Summers, and Rubin also quashed the efforts of the Commodity Futures Trading Corporation to regulate derivatives, when its director began to worry that derivative trading already was getting out of control.

National Journal - Summers' Ego Massage - Lawrence Summers can be very high maintenance. Brilliant, bullying, and packing an ego the size of the national debt. Even President Obama has been frustrated with Summers a time or three. All of the exhaustion of Obama's first year, coupled with the toxicity of wrestling with Summers, may soon send some staff members out the door or into new posts, informed sources report. Summers' legendary self-regard worsened last August, when the president reappointed Federal Reserve Board Chairman Ben Bernanke to a second term. Many Fed-watchers -- Summers chief among them -- thought that Obama might turn to his economic adviser instead of retaining the Republican academic whom President George W. Bush appointed and who presided over the Great Recession.So peeved was Summers that he buttonholed Chief of Staff Rahm Emanuel for some personal perks he wanted to add to his position in the West Wing. First, Summers asked to play golf with the president...

Speculation about Larry - The media is abuzz with stories that Larry Summers is unhappy and may be leaving the Obama administration: click here, here, here, and here.  I have no idea if any of this speculation is true.  (The only way I would know is if Larry said something to me about it, and then I wouldn't be talking about it on my blog.  But he hasn't, so I can.)  What I do know is that it would be unfortunate for the country if Larry left.  I am obviously not privy to internal discussions at the White House, but I bet that, more often than not, Larry is pushing policy is a more moderate and more sensible direction. On the hand, a loss for the nation could be a gain for ec 10 students.  Before he left for the White House, Larry was a regular and popular guest lecturer.  We would be delighted to have him back.

Yes, Larry Summers is Leaving - One angle in my recent profile of Tim Geithner concerned his relationship with Larry Summers, his former mentor and the director of the National Economic Council. I contend that Geithner, not Summers, has emerged as Obama's key adviser on financial matters, and that Summers isn't happy about it. (Not everybody was convinced.) Since my piece appeared, the buzz that Summers is looking to leave--or is being pushed out--has picked up. Earlier today, my colleague Marc Ambinder wrote about this, defending Summers against his critics while leaving open the possibility that he may, indeed, leave. My own view is a bit less sanguine. I think Summers is going to leave sooner rather than later, possibly before the mid-term elections, and if not then, soon afterward.

Brooksley Born Raises an Important Question, But Answers are Weak - video - Have you ever wondered what a synthetic CDO is, or whether it contributed to the housing bubble? At a recent hearing held by the Financial Crisis Investigation Commission, Brooksley Born asked questions designed to get answers for you. A complete answer would lead to a fuller understanding of the role of credit default swaps in the housing bubble. The panelists are from Citibank: Murray Barnes, was involved in risk management, and Nestor Dominguez, who worked in CDOs are the speakers. There is a brief description of CDOs at the end of this post. A synthetic CDO issues credit default swaps on other entities, including CDOs and real estate mortgage backed securities. A hybrid CDO issues credit default swaps and holds other debt instruments, such as securities of other CDOs and subprime mortgages

Economic Views - a Thought Brought About by Yves Smith's (Excellent Book) Econned - Smith talks about how economists have built up a practice that makes a fetish of using fancy and elegant math. However, doing so often requires crazy, unrealistic assumptions, which might be OK, except that the predictions usually have very little to do with the real world either. Thus, GIGO. However, Smith notes that somehow, economists whose models are based on silly assumptions and produce unrealistic outcomes are nevertheless very respected and have a seat at the policy table - a seat, incidentally, that is denied to those who don't understand the math & models, or even other economists who think that unrealistic outcomes are a problem.

Another Great TAL Episode on the Financial Crisis - ProPublica has a long and detailed story of Magnetar, the hedge fund that helped fuel the subprime bubble by providing the equity for new subprime collateralized debt obligations — precisely so that it could then go and short the higher-rated tranches. In other words, Magnetar wanted to short some really, really toxic CDOs. But either there weren’t enough toxic CDOs to short, or they weren’t toxic enough. So they provided the equity necessary to manufacture more toxic CDOs. Then they shorted them. Yes, the math works out. Yves Smith told the story of Magnetar in her book ECONned. The ProPublica story adds a bunch of details. But the best part is that This American Life is doing a story on Magnetar in this weekend’s radio show, which I’m sure will be great.

“False Profits” by Dean Baker - Making a change from the usual run of the genre (ie, books about the “financial crisis” by people who didn’t tell you that there was a bubble while it was going on, but who nevertheless expect you to be interested in what they have to say about it now that it’s been and gone). A book about the bubble in the US, written by someone who was absolutely right about it, provably, ahead of time and in writing, and who is a lot more angry about the whole mess than those authors who just regard it as a great big game in which some entertaining characters made money at the expense of their dumb counterparties. Despite the comparatively microscopic size of his promotional budgets, I think Baker might have caught the spirit of the times a bit better than Andrew Ross Sorkin or Michael Lewis[1].

How Washington Abetted the Bank Job - A FEW weeks ago, two Republican House members asked Ben Bernanke, the chairman of the Federal Reserve, whether the Fed knew — before Lehman’s bankruptcy examiner revealed it — about the bookkeeping scam at Lehman known as “Repo 105.” This scam allowed Lehman to disguise how much debt it was carrying, right up until it collapsed. Lehman got new loans to pay off old loans, pretended the new loans were “sales,” and through a complicated series of steps made both the old and new loans disappear just in time for its quarterly reports. Mr. Bernanke said the Fed had known nothing about this. After all, he explained, the Fed wasn’t Lehman’s regulator — the Securities and Exchange Commission was. The Fed had placed some people at Lehman — not as many as the S.E.C. had — but they were there only to ensure that Lehman paid back money it was borrowing from the government. Can’t lay this on him.

The original sin of Repo 105 - Amid the consternation and finger wagging over Lehman Brothers Holdings Inc.'s creative use of the now-infamous Repo 105 accounting rule to hide risk on its balance sheet, one wonders: Why is the rule there in the first place? The question, in fact, reveals fundamental tensions inherent in accounting regulation: Should it be based on specific rules or on broad principles? Repo 105 refers to the accounting treatment that allowed Lehman in late 2007 and 2008 to temporarily remove billions of dollars from its balance sheet by using repurchase agreements, a short-term financing technique in which a borrower "sells" collateral to a lender and promises to buy it back later. Repos are normally accounted for as liabilities of the borrower, but Lehman used Repo 105 to characterize its borrowing as a sale.

The Lehman bankruptcy examiner report - What are the broader implications of the report on Lehman Brothers issued by the bankruptcy examiner? The report details the effort to conceal Lehman’s true debt levels through the so-called “Repo 105” structure. It finds “credible evidence” to back a claim that the failure of Dick Fuld, Lehman chief executive, to disclose the transactions was “grossly negligent”.Anton Valukas, the report’s author, also found that there was sufficient evidence to back a claim that Mr Fuld and other executives breached their fiduciary duties by “allowing and certifying the filing of financial statements that omitted or misrepresented material information”. Further, as discussed in great detail in the examiner’s report, Lehman’s own corporate audit group, together with Ernst & Young, investigated allegations about balance sheet substantiation problems made in a “whistleblower” letter sent to senior management on May 16 2008.

Now We Are “Ill-Informed and Under-Educated”- A couple of weeks ago, Max Abelson got some investment bankers who used to work at Lehman to say what they really think about ordinary people: “[Lehman]’s just not that big of an event. When I read this, I giggle a little bit. Because $50 billion is a s—load of money, but in the grand scheme of things, $50 billion is a drop in the ocean.”“Yappers who don’t know anything.”Well, the commercial bankers are not taking this lying down. They are out trying to prove that they can be just as offensive. Speaking of the proposed Consumer Financial Protection Agency, bank president Robert Braswell, president of Greensboro-based Carolina Bank. had this to say, . .“There is no consideration to (whether it’s duplicative); there’s no consideration as to cost,” he said. “Those who are behind this legislation are absolutely ill-informed and under-educated . . . They refuse to consult with anyone who does possess the requisite knowledge.”

Klein: Don't Trust the Financial Regulators - Here's my problem with the financial-regulation package that Sen. Chris Dodd has proposed: it hands the very regulators who failed us in 2005 and 2006 and 2007 and 2008 the responsibility for saving us next time. If you tried to work backward from the bill to an account of the meltdown that produced it, you'd come up with something like "We have a wise and brave class of regulators who did not have quite as much information or power as they needed to stop the financial crisis."

8 Ways of Saying 1 Thing on Financial Reform: We Need Hard Rules - Last week the Wire brought you a roundup of ideas on how to prevent the next financial crisis. The Dodd bill, a set of reform measures under consideration in the Senate, proposed by Democratic Senator Chris Dodd of Connecticut, does't incorporate all of those ideas. As always, of course, bloggers can find plenty to pick at: some don't like the restrictions on startup investing, while others want a bill that specifically addresses the "too big to fail" problem. But there's one thing in particular that's bothering a lot of people: the lack of clear rules for what banks can and cannot do, and what regulators must do. In other words, there would be more oversight under the Dodd bill, but there would be a lot of wiggle room and discretion given to the regulators.

Updates on the battle for financial reform - How goes the battle for financial reform? Noam Scheiber has an update on the situation that is a must-read for the current situation. A few things: It looks like Republicans are weakening on opposing a strong consumer protection agency. This comes after the OCC is changing directions as well. Derivatives reform is looking to become a stronger piece of what people are demanding. Here is Michael Greenberger's chapter on necessary derivatives reform from the Roosevelt Institute's Make Markets Be Markets conference, along with a video of his presentation. From the derivatives point of view, there are two methods of lobbyist attacks: One is to expand the "end-user exemption" so that huge amounts of the market is exempt from the rules that govern clearinghouses and exchanges. The second is to attack the notion of what an exchange is, a success for the lobbyists in the House bill that I outlined here.

Making Financial Reform Fool-Resistant, Krugman - NY Times: The White House is confident that a financial regulatory reform bill will soon pass the Senate. I’m not so sure, given the opposition of Republican leaders... But in any case, how good is the legislation on the table, the bill put together by Senator Chris Dodd...?  Not good enough. ... Now, it’s impossible to devise a truly foolproof regulatory regime — anyone who believes otherwise is underestimating the power of foolishness. But you can try to create a system that’s relatively fool-resistant. Unfortunately, the Dodd bill doesn’t do that.

Krugman on Financial Regulation - Several people have asked us to comment on Paul Krugman’s op-ed yesterday (both by email and in our bookstore event yesterday), in which he contrasts the Paul Volcker school (“limiting the size and scope of the biggest banks”) with the other school (“the important thing is to regulate what banks do, not how big they get”). Krugman says he is in the latter group. But Mike Konczal* beat me to it:“For me, it’s not an either/or but a both/and question. I think we should do both (a) and (b), impose a hard size cap of $400 billion to $500 billion and then expand regulation over all the broken-up shadow banks. If you look at the conclusion of 13 Bankers, I think Simon Johnson and James Kwak are in a similar boat.” The short answer is what Mike said. We don’t think limiting size and scope is a sufficient solution.

Alice Rivlin on Financial Reform and Deficits - Then she named the two central issues to ensuring growth (she didn't say "broad-based growth" regretably)--financial reform and deficit reduction.  And her solution to these? On deficit reduction, she claimed that the "budget scolds" have to be listened too, and that health care and social security entitlements have to be reduced.  "Taxes aren't enough, and cannot be the whole solution." On financial reform, she listed three key reforms:

  1. Re-instituting better standards/controls on lending and establishment of an indepedent consumer protection agency
  2. INstituting controls on leverage through the Fed
  3. Finding a way to deal with the "too big to fail" problem so that big financial institutions can be disbanded when necessary without disrupting the entire financial system

The tyranny of bond markets - Credit rating agencies played a big role in creating the financial crisis. Now they are slowing the recovery. Financial regulatory reform legislation in the US has finally put the agencies on the radar screen, but the proposals don't go far enough.It is now legendary that the mortgage-backed securities structured in the shadow banking system all had AAA stamps of approval by the rating agencies. In addition to getting the prices wrong and triggering crises (credit rating agencies were behind the Asian and Enron crises as well), there isn't a competitive market for rating agencies. Just three US-based agencies, Standard & Poors (S&P), Moody's, and Fitch have all but a tad of the market. What's more, the agencies are paid by the owners of assets that ask to be rated, creating conflicts of interest. The US government was quick to take the most toxic of these assets off the balance sheets of the banks that were too big to fail. Households who held pensions that were stamped by the agencies weren't as lucky.

Financial Reform? The Foxes Are Guarding The Henhouse Again - Before I get into Financial Reform, I will issue an Extreme Sarcasm Alert. If you are among the deluded who believe there should be a "debate" on this issue, you can stop reading now. The Good Guys, most notably Simon Johnson, Bill Black, Elizabeth Warren, Paul Volcker and Fred Hoenig, have already figured out what needs to be done. Oh, sure, you can quibble about details, such as what exactly the capital requirements of the banks should be, but the Big Picture is clear. If you are still lost in the dark, here are Hoenig's views

Ring Around the Regulators - In order to ameliorate risk and avoid bank runs, federal regulators set certain rules for banks: how much they can borrow relative to their assets (leverage), how much capital they need to set aside to pay their debts, what forms that capital can take, even how large they can be. Some of these rules are set by international agreements, but mostly they require the discretion of U.S. officials. These rules, known as prudential standards, were ridiculously lax prior to the crisis. Regulators allowed some banks to borrow $32 for every dollar they had and turned a blind eye to accounting tricks -- like the infamous "Repo 105" at Lehman -- that masked risk. When the system blew up, even technocrats like those who make up the Obama administration's economics team decided enough was enough. While they weren't interested in breaking up the banks, they promised to make big banking safer and less profitable (that's essentially what less leverage and more capital means) to protect the economy and encourage bankers to take their risk to smaller institutions. Strangely, though, the administration won't specify what those standards should be.

Dylan Ratigan - Regulating Wall Street and the economy (video)

Street Fight -- Last week, Alabama Republican Richard Shelby, the ranking member of the Senate Banking Committee, floated a compromise on the consumer financial protection agency that’s currently stalled in the Senate. Under the bill Chairman Chris Dodd moved through the committee in March, the consumer agency would effectively have its own budget and an independent, White House-appointed director. It would also have significant (but not unchecked) authority to write and enforce rules protecting consumers from abusive bank practices, like deceptive mortgages. Until now, the banks and the GOP have largely tried to eviscerate these provisions. But, according to one person familiar with the discussions, Shelby’s proposal took a big step in the direction of the Dodd approach. (Spokesmen for both senators declined to comment)

Financial Reform: Obama, GOP Far from a Deal in Congress -  It's funny how fast the Beltway consensus can change. A few months ago, health care reform was dead. Then it got undead. Financial regulatory reform was supposedly dead too, but now that Republicans have supposedly learned that pure obstructionism is a losing play, it's being treated as a done deal. Democrats like Obama's economic adviser Larry Summers and Senate Banking Committee chairman Christopher Dodd are saying it's going to pass, perhaps as early as next month. So are key Republicans like Senator Judd Gregg of New Hampshire, who recently put the odds of passage at "100%." Let's just say that seems high.

Fix The Dodd Bill – Use The Kanjorski Amendment - By Simon Johnson - At the heart of the currently proposed legislation on financial reform (e.g., the Dodd bill and what we are expecting on derivatives from the Senate Agriculture committee), there is a simple premise: Key decisions about exact rules going forward must be made by regulators, not Congress.  This is obviously the approach being pushed for capital requirements, but it is also the White House’s strong preference for any implementation of the Volcker Rule – first it must be studied by the systemic risk council (or similar body) and only then (potentially) applied. Treasury insists that Congress is not capable of writing the detailed rules necessary for a complex financial system – only the regulators can do this.   This is either a mistake of breathtaking proportions, or an indication that the ideology of unfettered finance continues to reign supreme.

 Complexity and doom - Clay Shirky is talking about media, but might as well be talking about finance: Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.Meanwhile, Steve Waldman makes the case that banks are far too complex, these days, for notions of “capital” to mean anything any more. What we need, he says, is to get simpler: “we are doomed,” he says, “unless and until we simplify the structure of the banks.”Which, if true, is to say that we are doomed. We have reached a level of institutional complexity which renders radical simplification impossible, short of outright collapse.

A kinder, gentler finance - IF THE bodies of the lords of finance contained a little more oestrogen would the financial crisis have happened? One lingering question post-crisis is how things might be different if more women worked in finance. Perhaps to address this issue, several women who’ve worked in academia and who now work in government sat on a Treasury panel show last week, to show solidarity with women who work in the finance industry. It is impossible to know if more women would have led to a different outcome. New York Magazine reckons so. It considers the hormones coursing through the veins of traders. Male traders tend to be young, aggressive, and full of testosterone. A toxic combination?

Breaking up big banks: As usual, benefits come with a side of costs - macroblog - Probably the least controversial proposition among an otherwise very controversial set of propositions on which financial reform proposals are based is that institutions deemed "too big to fail" (TBTF) are a real problem. As Fed Chairman Bernanke declared not too long ago: As the crisis has shown, one of the greatest threats to the diversity and efficiency of our financial system is the pernicious problem of financial institutions that are deemed "too big to fail."The next question, of course, is how to deal with that threat. At this point the debate gets contentious. One popular suggestion for dealing with the TBTF problem is to just make sure that no bank is "too big." Two scholars leading that charge are Simon Johnson and James Kwak. They make their case in the New York Times' Economix feature...Paul Krugman has noted one big potential problem with their line of attack:

Why we must break up the banks - It's not often that I disagree with Paul Krugman, but there are occasions where at least one of us is wrong. And the treatment of too big to fail (TBTF) banks is one of them. Krugman argued in a column last week that breaking up the TBTF banks is not a necessary part of financial reform. Krugman pointed to the example of Canada as a country with a well-regulated financial system. Canada did not experience a financial crisis in 2008 in spite of the fact that five big banks essentially account for the whole of the Canadian banking system. On the other side, Krugman noted that the collapse of large numbers of small banks can also create a crisis, pointing to the chain of bank collapses at the start of the Great Depression.

The Oracle of Kansas City - Many of you have probably already seen Shahien Nasiripour’s interview with Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the most prominent advocate of simply breaking up big banks. (Paul Volcker is more prominent, but his views are more nuanced; the famous Volcker limit on bank size, it turns out, would not affect any existing banks, at least as interpreted by the Treasury Department.) It largely elaborates on Hoenig’s positions that we’ve previously applauded in this blog, so I’ll just jump to the direct quotations:

Ending "Too Big To Fail" - Simon Johnson - What would prevent any bank or similar institution from being regarded — ultimately by the government — as so big that it would not be allowed to fail?If you are “too big to fail” (T.B.T.F.), credit markets see you as lower risk and as a more attractive investment — enabling you to obtain more financing on cheaper terms, and thus become even larger.Everyone agrees, in principle, that this is a bad arrangement.  It’s an unfair distortion of markets, giving huge banks the opportunity to grow bigger, because they have implicit government guarantees.  It is also manifestly unsafe, because it encourages reckless risk-taking: If things go well, the T.B.T.F. bank gets the upside; if there is mismanagement of risk, or just bad luck, the downside falls to the taxpayer and to society more broadly.  These costs can be huge: eight million jobs lost since December 2007.

The Rhetoric of "Ending" Too Big To Fail - From both right and left the theme of the recent days has been the need to end too big to fail. The left seems to think this can be done by breaking up financial institutions, the right thinks it will be done by simply throwing financial institutions into chapter 11, Lehman style. They're both wrong.Breaking up financial institutions does very little to solve the real problem of too big to fail, which is really too interconnected to fail. The horizontal relationships between financial firms make them unlike other firms, and it really does not matter how big these firms are. So unless we are going to regress to some sort of Jeffersonian paradise without financial firms, breaking them up is at best an indirect solution to the problem. Remember that Long Term Capital Management was not actually that big, compared to the likes of Lehman or AIG. 

Too big to fail in two dimensions - I want to lay out why I think size caps are an important supplement to the resolution authority as it is currently written in the Dodd bill in two posts. The first will be thinking about "too big to fail" in two dimensions, as if on a graph. There is one popular argument that says that there is a myth of too big. This argument goes that the problem isn't that banks are too big, it is that we have these shadow banks, bank-like financial firms that are subject to liquidity runs. (See here if you are unfamiliar with the idea of a shadow bank run.) Even the smallest firms could be subject to a shadow bank run, and the largest firms could hold entirely cash and not be a worry at all. It's this liquidity risk that should worry us. I want to plot out our ability to resolve a firm on two axes. The first is size of assets, the second is how risky the firm is in terms of a liquidity run. Let's plot Wells Fargo and Lehman Brothers, and then draw a green circle around them assuming that the Dodd Bill can resolve them both now

Breaking up big banks: As usual, benefits come with a side of costs - Atlanta Fed macroblog: Probably the least controversial proposition among an otherwise very controversial set of propositions on which financial reform proposals are based is that institutions deemed "too big to fail" (TBTF) are a real problem. As Fed Chairman Bernanke declared not too long ago: As the crisis has shown, one of the greatest threats to the diversity and efficiency of our financial system is the pernicious problem of financial institutions that are deemed "too big to fail." The next question, of course, is how to deal with that threat. At this point the debate gets contentious. One popular suggestion for dealing with the TBTF problem is to just make sure that no bank is "too big." Two scholars leading that charge are Simon Johnson and  James Kwak (who are among other things the proprietors at The Baseline Scenario blog). They make their case in the New York Times' Economix feature:

Largest Money Transfer in Recorded History: $4.6 Trillion Spent on the Bank Bailout to Date …Today, the Real Economy Project of the Center for Media and Democracy (CMD) released an assessment of the total cost to taxpayers of the Wall Street bailout. CMD concludes that multiple federal agencies have disbursed $4.6 trillion dollars in supporting the financial sector since the meltdown in 2007-2008. Of that, $2 trillion is still outstanding. CMD’s assessment demonstrates that while the press has focused its attention on the $700 billion TARP bill passed by Congress, the Federal Reserve has provided by far the bulk of the funding for the bailout in the form of loans amounting to $3.8 trillion.Little information has been disclosed about what collateral taxpayers have received in return for these loans, sparking the Bloomberg News lawsuit covered earlier. CMD also concludes that the bailout is far from over as the government has active programs authorized to cost up to $2.9 trillion and still has $2 trillion in outstanding investments and loans.

AIG Gets Away With It  - CBS NEWS has learned that former AIG executive Joseph Cassano - the prime focus of the investigation into its collapse - will meet with Department of Justice attorneys next week in what will likely be an end to the two year criminal investigation into the company. Sources tell CBS News that the criminal case against Cassano - once called "the Man who Crashed the World" - has "hit a brick wall" - meaning that it is likely no one will be held criminally liable for the downfall of the company that triggered a $182 billion dollar federal bailout.

Exclusive: Is Goldman Sachs Playing Fair? - CBS News Investigates the Business Practices of the Most Profitable Investment Banking Firm

Goldman Sachs: Don't Blame Us - The bankers at Goldman Sachs (GS), by traditional measures, ought to be on top of the world. Eighteen months removed from the depths of the financial crisis, Goldman posted a $13.4 billion profit in 2009, a Wall Street record. When Chief Executive Officer Lloyd Blankfein went on a recruiting trip to Stanford, he was greeted by an overflow crowd. Goldman cast off its Troubled Asset Relief Program yoke and proceeded to pay its employees more than $16 billion. The firm is moving into a new $2.1 billion headquarters on the Hudson River.  Goldman's reputation with its clients—who must have at least $10 million to open an account—has never been better. Among the general public, however, the perception is that Goldman is the toxic epicenter of everything wrong with Wall Street.

Lawmakers blast 2 former top executives at Citigroup - — Members of a bipartisan commission investigating the financial crisis blistered former top Citigroup executives Thursday for failing to understand the risks they ran as the U.S. housing bubble neared collapse."I'm particularly struck by how much the two of you did not know about what was going on within the organization. At the end of the day, you were the head guys," said Phil Angelides, the panel's chairman. "... The two of you in charge of this organization did not seem to have a grip on what was happening."

Citi ‘Negative’ On Subprime Mortgages As Early As 2006, Yet Firm Continued To Pump Out Subprime Mortgage Products (VIDEO) - A top Citigroup official testified Wednesday that the firm was reducing its risk to subprime mortgage products as early as 2006, fully expecting housing prices to decline. Yet a review of industry figures shows that in 2007 Citi was still underwriting billions in subprime mortgage securities and was the nation's top lender of subprime mortgages. It also purchased insurance on those holdings in 2007 in the form of credit default swaps in case they soured, regulatory filings show.

Citi's Fallen Gurus Repent - Citigroup's bygone masters of the universe—Charles Prince, former CEO and chairman, and Robert Rubin, the former chair of Citi's board (and Treasury Secretary under Bill Clinton)—have come to Washington to tell us all something: They were wrong. And they're sorry.That was among the opening highlights of Prince and Rubin's appearance today before the Financial Crisis Inquiry Commission (FCIC) , the Congressionally-mandated panel investigating the root causes of the recent financial meltdown. "I can only say that I am deeply sorry that our management—starting with me—was not more prescient and that we did not foresee that lay before us," said Prince

Americans Still Not Confident in Banks - Even as the economy, and the financial sector, have shown rapid recovery, Americans’ confidence in banks remains at a historic low, according to Gallup.  Just a fifth of Americans polled reported having a “great deal” or “quite a lot” of confidence in American banks, a portion that has remained about the same over the last year. The survey organization also found, however, that most Americans (58 percent) say they have a “great deal” or “quite a lot” of confidence in their own main bank. This echoes similar disconnects in how people evaluate Congress versus their own local congressman, the educational system versus their own local school, etc.

A World Without Banks - Yes, there is a country without banks as we know them, where no one knows the meaning of subprime, Alt-A, securitization, HFT, prop desks, insurance---portfolio or otherwise---CDS’, CDO’s, CDO^2’s, CLO’s or Too Big to Fail.  There is a country where the financial crisis went almost unnoticed, where no bank assets went toxic because there are no bank assets.  No depositors faced loss because there are few depositors.  Mortgages did not take a hit because there are no mortgages.  No car loans, student loans, or HELOC’s went bad.  The country is the Union of Myanmar, known to many in the West as Burma.  It is also called the Golden Land, which is entirely apropos given its wealth of natural resources.

What are you worth to your bank? - There's whatever you pay in fees. Whatever you having in your checking and savings account is lent out, and the spread is going to be at least 2.5 percent, so they make a ballpark 2.5 percent off whatever you keep in your accounts. And whenever you pay with a credit card or a debit card, your bank is making at least 1.7 percent of the transaction, paid for by the merchant.

Ban All CDS! (Except the “good” stuff) - Those that are looking for a ban on CDS should consider where this takes us. The mother of all CDS providers in the US is the FDIC. Throwing stones at the evolving CDS market should be done with an eye to where the stones might fall. The FDIC does not provide much detail on its current status. The last annual report was from 2008. From this we get the Insured Deposit number on 12/31/2008 of $4.5T. I don’t have a more recent number but I think the 4.5t is still a reasonable estimate +/-5%. In November of 2009 the FDIC finalized a $45 billion three-year prepayment of insurance premiums. The link to the FDIC re the details. Put this together and you get an estimate on the pricing of the FDIC insurance. $4.5T divided by $45b equals 1%. Divide again by three and you have 33 Basis Points a year.

On Sheila Bair's Lies It just never ends with Sheila, does it? The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation. It does? The FDIC has a law called "Prompt Corrective Action" (USC 12 Chap 16 Section 1831o) which the FDIC and other regulators have absolutely ignored for the last three years.This law applies to all insured depository institutions, including the "too big to fails" such as Wells, Citibank and JP Morgan.  This law begins with: Each appropriate Federal banking agency and the Corporation [that's the FDIC - ed] (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

State Regulators Urge FDIC to Extend Deposit Insurance Guarantee - State regulators are urging the Federal Deposit Insurance Corp. to extend its unlimited deposit insurance program for low-interest business accounts. The Transaction Account Guarantee Program was created during the financial crisis as a way to stop a flight of depositors from community banks. The program is set to expire June 30, but the FDIC’s board is meeting on Tuesday to discuss whether to extend it. The Conference of State Bank Supervisors said in an April 6 letter the program should be extended until Dec. 31, 2012. “While the worst of the crisis appears to be behind us, this program is still needed to provide assurance to consumers and small businesses and ensure a stable source of funds for community and regional banks,” said the letter.

With Demand for Failed Banks Building, FDIC Tries New Tools to Lower Losses – - As the distressed-asset market begins to stabilize, the Federal Deposit Insurance Corp. (FDIC) is shaking up the way it handles failed banks and their assets. The vast majority of failed-bank resolutions to date have followed a pattern in which the FDIC sells the bank's assets and deposits to another bank and pledges to cover the bulk of the buyer's losses. But as the economy stabilizes and a growing pool of investors compete with banks for failed assets, observers said the agency is trying new tactics to reduce its losses. "What you're seeing is the whole process opening up away from plain-vanilla transactions,"

Big Banks Move to Mask Risk Levels - WSJ - Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

The Most Dangerous Man in America: Jamie Dimon -There are two kinds of bankers to fear.  The first is incompetent and runs a big bank.  This includes such people as Chuck Prince (formerly of Citigroup) and Ken Lewis (Bank of America).  These people run their banks onto the rocks – and end up costing the taxpayer a great deal of money.  But, on the other hand, you can see them coming and, if we ever get the politics of bank regulation straightened out again, work hard to contain the problems they present. The second type of banker is much more dangerous.  This person understands how to control risk within a massive organization, manage political relationships across the political spectrum, and generate the right kind of public relations.  When all is said and done, this banker runs a big bank and – here’s the danger – makes it even bigger. Jamie Dimon is by far the most dangerous American banker of this or any other recent generation.

Catastrophe thinking - This willingness to believe in catastrophe was necessary because believing the subprime market was a fraud meant believing that we were hurtling toward a global financial crisis. That's hard to wrap your mind around, and most people shy away from such conclusions. But the pessimists were right. So there's something to this mode of analysis. The obvious question worth asking is what else this mode of analysis can tell you. Where do the numbers and the historical evidence point one way, but the system seems oddly complacent?

'Wall Street' sequel an omen of U.S. collapse - Yes, Oliver Stone is suddenly America's hottest market timer, as well as the voice of the inner "American Soul," warning investors of a collapse. Remember the Crash of 1987? One-day 23% drop. Happened just before his 1987 "Wall Street" film hit the theaters.  He says he can't predict the future. Don't believe him: Even if he's unaware of his "source," it's stirring again, rising from deep in what Carl Jung would call the "collective unconscious" of the "American Soul," warning us again of a collapse, using Stone as a stock trader's "alert."

Pssst: Wall Street Is Hiring Again - TIME - After nearly two years of layoffs, investment banks and brokerages are adding to their ranks. Recruiters say this is the busiest hiring season in two years, and not just of top employees. A recent survey from financial training company 7city Learning found that 75% of all Wall Street firms planned to add more recent graduates to their ranks in the next few months than they did a year ago. "At the end of last year there was a lot of hiring talk but firms were still reluctant," says top Wall Street recruiter Gary Goldstein of Whitney Group. "Now there is activity. Employers seem much more secure that the market is in recovery."

CMBS Delinquencies Now Above 7 Percent: Reports - According to Trepp’s monthly delinquency report TreppWire, the percentage of loans 30 or more days delinquent, in foreclosure, or REO jumped 89 basis points in March to 7.61 percent — the highest monthly increase since the summer of 2009. Fitch, a ratings company also based in New York, reported the same upward trend, saying CMBS delinquencies soared 85 basis points in March to 7.14 percent. Both companies agreed that the data was inflated by the fact that New York City’s $3 billion Stuyvesant Town (Stuy Town) is now considered “in foreclosure.”

Reis: Strip Mall Vacancy Rate Hits 10.8%, Highest since 1991 - From the WSJ: Shopping-Center Malaise Vacancies at shopping centers in the top 77 U.S. markets increased to 10.8% in the first quarter ... according to Reis. It is the highest vacancy rate since 1991, when vacancies reached 11%. This is up from 10.6% in Q4 2009 and 9.5% in Q1 2009. Vacancy rates at malls in the top 77 U.S. markets rose to 8.9% in the January-to-March period ...The 8.9% is the highest since Reis began tracking regional malls in 2000. Lease rates fell for the seventh consecutive quarter.

Office vacancy rate hits 16-year high (Reuters) - The U.S. office vacancy rate in the first quarter reached its highest level in 16 years, but the decline in rents eased and crept closer to stabilization, according to a report by real estate research firm Reis Inc. The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter, according to the report released on Monday. The U.S. vacancy rate inched up 0.2 percentage points from a quarter earlier and was 2 percent higher than a year ago. "As labor markets stabilize, we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate," . "Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros."

Reis: U.S. Office Vacancy Rate Highest Since early '90s - This graph shows the office vacancy rate starting 1991. Reis is reporting the vacancy rate rose to 17.2% in Q1 2010, up from 17.0% in Q4, and up from 15.2% in Q1 2009. The peak following the previous recession was 16.9%. From the Financial Times: Signs that worst is over for commercial property "We expect less of a bloodbath in fundamentals in 2010 versus 2009, but rents will still decline and vacancies will still continue to rise," said Victor Calanog, director of research at Reis. ... During the first quarter, asking rents and effective rents, which include special offers and concessions, both fell by just 0.8 per cent.

Office Vacancy Rate hits 17.7% in San Francisco - The following article makes a couple of key points: 1) office vacancy rates are still rising as leases expire, and 2) new construction has essentially stopped - and there will probably be little new office construction for a number of years. That is also what the Architecture Billings Index, a leading indicator for commercial real estate (CRE) suggests ...From the San Francisco Chronicle: Office vacancy rate rises in San Francisco - Boston's commercial district has a vacancy rate of 18.4 percent and Chicago's is 16.3 percent, according to Jones Lang LaSalle.  Boston's commercial district has a vacancy rate of 18.4 percent and Chicago's is 16.3 percent, according to Jones Lang LaSalle.

The problem of empty office space - Even as other parts of the economy show signs of life, the commercial real estate market in Boston will remain depressed, with a vicious cycle of falling rents and foreclosures preventing construction of new buildings that would create jobs. The ongoing slump threatens to keep a broader recovery in check, as the industry is a significant contributor to the overall economy. New buildings bring additional property taxes to beleaguered municipalities, income to vendors that provide construction materials or office supplies, and wages that construction workers in turn cycle through the economy. “It’s going to be a long process for the market to come back,’’ said Gus Faucher, director of macroeconomics with Moody’s “The economy can still plug along if commercial real estate doesn’t turn around right away, but it’s certainly going to be a big drain on growth.’’

Empty office buildings make for suite deals - It may be a tough time to get a loan to start or expand a business. But if you’re looking for office space, there are some suite deals out there.  The U.S. office vacancy rate in the first quarter hit 17.2 percent — the highest level in 16 years, according to a report released Monday by real estate research firm Reis Inc. Just as the job market and overall economy seem to be stabilizing, there are early signs that the market for office space is hitting a bottom. After dropping by as much as a third, the rents seems to be leveling off, according to Reis director of research Victor Calanog.

Empty Commercial Real Estate Owners Have No Idea How Worthless Their Properties Are - As commercial real estate values are highly dependent on the income they generate (they aren't too productive as empty shells), vacant complexes are shocking their owners right now with selling prices far below what people thought were worth not too long ago. Thus it's probably a great time to buy empty commercial real estate disasters... if you somehow can also bring in tenants as well, or be the tenant.  Case in point, the 100,000 square-foot ghost building just snatched up by the University of New Mexico: REIS: The University of New Mexico has a contract to buy the empty, 99,033-squarefoot building at 1650 University NE for $4.6 million, a steep 44 percent discount from the asking price of $8,250,000 just one-and-a-half years ago. The property had gone into foreclosure.

The commercial real estate boomlet - We saw yesterday that indiviuals across America seem to have learned nothing from the housing bust — and now Dana Rubinstein has a great piece in the NYO showing that exactly the same is true in the world of commercial real estate as well. That’s certainly what Newmark Knight Frank president Jimmy Kuhn thinks: “There already seems to be a lot of capital out there that thinks that just because it cost $1,000 a foot a few years ago that $500 a foot is cheap,” said Mr. Kuhn, referring to office building prices, which, during the heady boom years, routinely exceeded $1,000 a square foot, even, and most egregiously, for a comparatively modest office building in Soho. “There are a lot of people starting again to underwrite office buildings with aggressive projections for growth in rents.”

US government a big commercial real estate player  Evidence of the federal government’s growing influence on Washington area commercial real estate is illustrated in big deals it is working on both sides of the table: auctioning a 127,000-square-foot Bethesda building previously occupied by the National Institutes of Health and moving to snatch up vast spaces in buildings on the private market that have been vacant for months.The General Services Administration is seeking to unload the 10-story building that the NIH vacated in 2002 when it consolidated offices into other buildings in Bethesda. The recommended opening bid for the online auction, which runs from April 30 to July 2, is $14 million. At the same time, federal leasing activity is expanding, according to Jones Lang LaSalle, the real estate firm representing the government. The government signed deals for 750,000 square feet of space in the District in the first quarter of 2010, compared with 670,000 square feet in the city for all of 2009.

Equifax: Denver 5th in U.S. for commercial bankruptcies - The Denver-Aurora area ranked fifth in the country in the fourth quarter for commercial bankruptcy filings, according to a new report. Commercial bankruptcies in the U.S. increased by almost 52 percent from 2008 through 2009, according to a report released Thursday by Equifax Inc. Atlanta-based Equifax (NYSE: EFX) said total U.S. commercial bankruptcies rose from 77,638 in 2008 to 117,659 in 2009, and the numbers reflect a consistent increase from the all-time low of 32,293 filings in 2006. Equifax said it analyzed Chapter 7, 11 and 13 filings for its analysis.

California Hotel Foreclosures Continue To Climb - The number of foreclosed hotels in California continued to climb in the first three months of 2010, according to the most recent survey from Atlas Hospitality. Since the end of 2009 to March 31, the number of foreclosed hotels statewide increased 27.4 percent to 79 properties. But lenders stuck between a distressed hotel loan and the prospect of investing more to keep a hotel open have, in some cases, opted to sell the loan to investors rather than foreclose, according to the president of a Southern California hotel brokerage firm.

Apartment Vacancy Rate stays at Record Level, Rents increase Slightly - From the WSJ: Apartment Rents Rise as Sector Stabilizes Nationally, the apartment vacancy rate stayed flat at 8%, the highest level since Reis Inc., a New York research firm, began its tally in 1980.... Nationally, effective rents, which include concessions such as one month of free rent, rose 0.3% during the quarter compared with a 0.7% decline in the fourth quarter of last year and a 1.1% drop in the first quarter of 2009. ...Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a near record 10.7% in Q4 2009.

Homebuying push blamed for GSE failure - Daniel Mudd, former chief executive of Fannie Mae, said on Friday that the mortgage finance company was faced with an impossible situation when the housing market collapsed and denied that it was seeking profits ahead of its mission to promote home ownership. “I wish that I could have maintained the delicate balance of the roles assigned to Fannie Mae and I am sorry that I could not,” Mr Mudd said in prepared testimony to the Financial Crisis Inquiry Commission. Mr Mudd said that when home prices plunged nationally by 30 per cent, the government-backed entity (GSE) was faced with a “Pit and the Pendulum” scenario of horrible alternatives. He pointed to aggressive home ownership goals pushed by the US government that encouraged lending to more lower income borrowers and explained that Fannie had to move toward more complex financial products to keep up with trends in the market. “It became clear that the movement towards non-traditional products was not a fad but a growing and permanent change in the mortgage marketplace, which the GSEs could not ignore,”

Fannie Mae Official: Hoocoodanode? - From MarketWatch: Fannie Mae official: We were surprised by extent of crisis. First the obligatory "no one saw it coming" comment: "Few if any predicted the unusual and rapid destruction of real estate values that occurred," Robert Levin, former Executive Vice President and Chief Business Officer of Fannie Mae told a financial crisis inquiry panel.  "In hindsight, if we and the industry as a whole had been able to appreciate the nature and extent of the crisis, it is clear we all would have conducted our business differently during this period, but we like everyone else were surprised by the unprecedented extent of the economic crisis." It is the one year anniversary of the comment section called "Hoocoodanode?" - (Who could of known?) - a running joke on this blog for several years. Try it out!

Fannie Mae National Housing Survey (Fannie Mae PDF)

At 5.21%, Freddie Mac 30 Year Fixed Rate Mortgage Jumps To Highest Since August - Yesterday we reported that the MBA announced the highest average 30 year FRM rate since August: a jump from 5.04% to 5.31%. Today this deterioration in mortgage rates was confirmed by Freddie Mac, whose 30 year Fixed Rate Mortgage jumped from 5.08% to 5.21%. Whether this is a function of the recent surge in 10 Year yields (subsequently ameliorated by Chinese purchases during yesterday's auction) or of the end of QE finally being felt is uncertain, although it is probably a combination of the two. This implies a loss in household net worth of billions of dollars in just one week. Of course, that is money that was already spent to bring you last month's fantastic retail store data, which was driven purely by everyone doing the moral hazard jingle, and refusing to pay for anything already purchased. Wholesale government justified theft is now a way of life in America, but it's cool - the banks on the hook for these billions in losses will keep getting back door bailouts in perpetuity.

You’re All Wrong. Blame The APPRAISERS For The Mortgage Crisis - For two years, person after person has told us who or what caused the mortgage crisis. Problem is, none of these really hit the bullseye. They've all missed the target. So, right here and now, I'm going to tell you who single-handedly caused the mortgage crisis: It was the appraisers. Let's say you want to buy a piece of real estate, a house. If there is a bank involved, you will most likely be asked to get an appraisal done. It's your responsibility to pay for it. Here's the good part: when that appraiser accepts your check, he/she is now bound by a "fiduciary responsibility" to give the you an accurate appraisal. Even if the appraiser isn't highly trained and licensed, he still has to follow National guidelines known as Uniform Standards of Professional Appraisal Practice...

Housing Predictor Poll Shows Mortgage Rescue Plan to Fail - A new opinion poll developed to provide consumers with housing forecasts shows the housing rescue plan by the Obama administration to aid real estate markets will fail. In a recent press release the results of a new Housing Predictor opinion poll shows most of those surveyed believe it will not succeed. The Housing Predictor is a poll used to assess housing forecasts and that provides news about real estate and housing markets in all 50 states. Obama's plan to help homeowners who owe more than their home is worth will not work, according to the opinion poll, which evaluates public sentiment about the plan. The FHA program has the intent of working with homeowners who are facing the loss of their homes and is intended to stem the growing foreclosures that continue to grip the country. It would involve the government stepping in and paying bankers double what they have been paying in order to give them additional incentives to cut the amount of mortgage principal owners have on their properties.

Let the Short Sales Begin - Today the Administration's Home Affordable Foreclosure Alternative Plan takes effect, offering incentives to borrowers, servicers, investors and second lien holders to push short sales through the system. Yep, everyone gets a cut of government funds to get these troubled borrowers out of their homes and get them sold, even if the sale price is less than the value of the loan. I find it interesting that before the plan even went into effect today, the Administration upped the incentives a week ago, doubling the amount of cash to $3000 offered as borrower "relocation expenses" and juicing the payoffs to the others as well. Of course they want to push short sales because of course they know that their modification program isn't working as planned.

CNBC'S Olick: Foreclosure Wave about to hit with "Thunderous roar" - From Diana Olick at CNBC: Let the Short Sales Begin I'm ... starting to hear rumblings among the number crunchers that the wave of foreclosures we keep hearing about is about to hit with a thunderous roar. Servicers are ramping up the mod process and pushing those who don't qualify out the door more quickly than ever. I don't know about a "thunderous roar", but I do think we will see more distressed sales soon. Most trustee sales seem to be "postponed" each month, and perhaps the lenders were just waiting for the HAFA short sales program to begin. That program started today and anyone considering a short sale should ask their lender if they qualify.

CNBC's Olick: Foreclosure "Pig in the python is showing its face" - From Diana Olick at CNBC: Foreclosures Are Rising Yes, banks are ramping up loan modifications and ramping up short sales and ramping up deeds in lieu of foreclosure, but the plain fact is that as the systems are oiled, the loans are moving through faster, and the pig in the python is showing its face.We won't get the [foreclosure] numbers until next week, but sources tell me they will likely be a new monthly record. The foreclosures are coming! The foreclosures are coming! I don't think there is any question that foreclosures will pick up. And now is a good time to get properties on the market. As an example, Freddie Mac just announced an auction of homes: Freddie Mac, New Vista to Auction Hundreds of Homes on April 24

A Texas mystery - KEVIN DRUM is wondering how Texas managed to avoid a housing bubble. I've said this before, but it hasn't sunk in so I'll say it again. The bubble was not, repeat not, a Sunbelt phenomenon. Not. A Sunbelt phenomenon. Here is a chart: Have a look at the above image, of seasonally adjusted home price indexes for nine different housing markets (the dotted line is the 20-city average), and tell me which set of lines contains Sunbelt markets. Have you guessed? It's a trick question! They all are! The red lines correspond to Miami, Los Angeles, Washington, Las Vegas, and Phoenix. The blue lines correspond to Charlotte, Atlanta, and Denver. The black line is Dallas. Thinking of the bubble as a Sunbelt phenomenon is a bad idea because it's not correct, but also because it generates confusion over what characteristics were important in driving bubble inflation.

Home equity horror - By now everyone knows that big banks have A LOT of second lien loans on their balance sheet. But how much is at risk of being written off? CreditSights put out a report that helps answer that question (no link). In the meantime, regulators may dust off a shelved capital rule so that they’ve more capital to deal with the problem. (Click here to expand) Total home equity exposure at banks is pretty big. Amherst Securities has said commercial banks hold approximately $767 billion of the total $1.05 trillion of second mortgages outstanding, with the Big 4 holding over $400 billion alone. But the key issue is what portion of these are at risk of writedowns.

Bank of America to Increase Foreclosure Rate by 600% in 2010 The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.After his surprising statement, two questioners from the audience asked questions to verify the numbers. Bank of America is projecting a 600% increase in its already large number of monthly foreclosures. This isn't unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America's OREO department (yes, that really is what they call it). It appears they have too many properties already.

More trouble for the housing market? - This is not a good sign. (Click on the chart to make it larger.) There's long been a worry that after last year's various foreclosure moratoria lifted, we'd see a fresh surge of trouble in the housing market. The latest figures on distressed sales, from First American CoreLogic, lend some weight to that argument. As you can see in the chart above, distressed sales—which include sales of bank-owned properties and short sales—are again on the rise. In January, such sales accounted for 29% of all existing homes sold. That's the highest level since April 2009. The peak came in January 2009, when distressed sales accounted for 32% of all existing homes sold.

Report: Distressed Home Sales Increasing - First American Corelogic released their first distressed sales report this morning: Distressed Sales Again on the Rise, Reaching 29% in January First American CoreLogic today released its first monthly report on distressed sales activity. The report below indicates that distressed home sales – such as short sales and real estate owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009. The peak occurred in January 2009 when distressed sales accounted for 32 percent of all sales transactions (Figure 1). After the peak in early 2009, the distressed sale share fell to 23 percent in July, before rising again in late 2009 and continuing into 2010. Here are a couple of graphs from the report: Distressed Sales Report April 2010

It’s Good to Live in a Government Town - As is the case around Washington, D.C., it seems that the economy isn’t so bad around some state capitals and, if you happen to have colleges nearby (as they do in Harrisburg, PA, not far from where your humble scribe grew up), things may be even better.  A quick check of the Case-Shiller Home Price Indexes from the other day shows that the nation’s capital kept its title as the best housing market since 2000. Recall that, after trailing areas like Los Angeles, Miami, San Diego, and New York for much of the last decade, when government hiring ramped up to manage all the bailout money flowing from Washington, the local housing market held onto its price gains better than any other area.

Rising rates signal end to era of low mortgage rates – MSN Money - The era of record-low mortgage rates is over. The average rate on a 30-year loan has jumped from about 5% to more than 5.3% in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market, threatening the fragile recovery in the housing market. And if you wanted to refinance at a superlow rate, you may have missed your chance. Mortgages under 4% are still available, but only for loans that reset in five or seven years, probably to higher rates. Rates are going up because of the improving economy and the end of a government push to make mortgages cheaper.

Rising Mortgage Rates: The End of the Refi mini-Boom? - The Ten Year treasury yield hit 4.0% this morning for the first time since Oct 2008. Mortgage rates are moving up too and that probably means that refinance activity will decline sharply.Refinance activity picks up when mortgage rates fall (for obvious reasons), and this graph shows the monthly refinance activity (MBA refinance index) and the 30 year fixed mortgage rate and one year adjustable mortgage rate (both from the Freddie Mac Primary Mortgage Market Survey) - and the Fed Funds target rate since Jan 1990.

Mortgage Rates on 30-Year U.S. Loans Jump to 5.21% (Bloomberg) -- U.S. mortgage rates jumped to the highest level in almost eight months, increasing borrowing costs for buyers and signaling a threat to the housing market’s recovery as government efforts to spur demand end.Rates for 30-year fixed loans rose to 5.21 percent for the week ended today from 5.08 percent, mortgage finance company Freddie Mac said in a statement. That’s the highest rate since the week ended Aug. 13. The average 15-year rate was 4.52 percent, according to the McLean, Virginia-based company

The National Housing Survey and the real-estate bear market - There’s a huge amount of information in Fannie Mae’s National Housing Survey; I’d recommend downloading the full 117-page presentation here. It confirms what I’ve been hearing anecdotally: that people still believe in housing as an investment, and that the enormous nationwide housing crash has done much less to alter Americans’ attitude towards homeownership than we might have hoped. For instance, check out the huge majority of all segments of the population which believes that a high rate of homeownership is important to the economy; more than half of Americans believe it’s “very important”.

Why Your House's Value (Probably) Won't Rise - In principle, declining construction costs could also lead homes to become more affordable year after year.Declining construction costs have not always led to declining home prices because homes have two other crucial ingredients: land and permits.   When those factors aren’t scarce — and they aren’t in much of America — construction prices dominate and price should be expected to stay flat or fall. Indeed, there are plenty of major metropolitan areas where real housing prices barely rose between 1980 and 2000. Even Census Self-Reported Home Values, which don’t adjust for generally increasing housing quality, suggest that prices stayed flat between 1980 and 2000 for many of America’s fastest-growing cities, like Las Vegas and Miami. In expanding Houston, prices dropped dramatically.

Why Your Home Will Lose 13% Of Its Value In 2010 - The New Observations quarterly forecast of property values estimates a loss in values this year of 13 percent – a slight uptick from the 12% loss forecast at the beginning of the year.The average of four major nationwide indexes measuring prices also continues to suggest we hover right around a middle point of the total loss expected. Our current loss by the average of four indexes from the peak in 2006/2007 is 20 percent. The total loss forecast by the blend of indexes is 33 percent.The losses for this year projected in the four indexes vary widely and range between 3 percent and 24 percent. The indexes predicting large losses this year are biased by quicker and deeper losses which they registered following the peak. The variance between the indexes is demonstrated by a tally of current losses: It is only nine percent according to the Federal Housing Finance Agency (FHFA), but it is 30 percent at Case Shiller

27 Million People with Mortgages Believe They Owe More than Their Homes Are Worth - A new Harris Poll provides some unpleasant numbers about the housing crisis and the collapse of the house price bubble. Fully 24% of people with mortgages believe they owe more on their mortgages than their homes are worth. One in nine homeowners (11%) with mortgages report having "a great deal of difficulty" in paying off their mortgage. Another 18% are having "some difficulty." This comes at a time when two-thirds of all adults (65%) are concerned that their families' incomes "will not be enough to cover all their costs and expenses this year." These are some of the results of The Harris Poll of 2,320 adults surveyed online between March 1 and 8, 2010 by Harris Interactive.

Hold Your Breath: Borrowers Could Stay ‘Underwater’ For Years… - So-called “underwater” homeowners who owe more than their homes are worth could be holding their breath for much of the next decade. A new study by First American CoreLogic finds that it could take until late 2015 or early 2016 for the typical underwater borrower to have positive home equity, and that homeowners in some of the nation’s hardest hit markets, such as Detroit, could be underwater until as late as 2020.Of the 10 markets examined in the report, Atlanta, Dallas and Washington, D.C., are the first markets to return underwater homeowners back to positive equity in 2015, followed by Boston and California’s Inland Empire one year later. Pittsburgh, Las Vegas, Fort Myers, Fla., and Lancaster, Pa., aren’t projected to return to positive equity until 2019.The study notes that even markets where fewer borrowers have negative equity could take a long time to recover “because the few borrowers that are upside down are deeply in negative equity and these are typically not high appreciation markets.”

Boom-Era Prices Won't Return Until 2025 for Some Markets: Study - For many U.S. markets, the return to peak home prices will be a long, slow road, according to Fiserv, Inc. The Wisconsin-based financial services technology company says markets that experienced the biggest price bubbles, including certain metro areas in California, Florida, Arizona, and Nevada, won’t see home prices return to pre-crisis levels until 2025 or later. That represents an unprecedented market cycle that will last a full generation from the top of the market in 2006 and 2007. Many other markets, including major urban centers in the Northeast and industrial Midwest, may need to wait a decade or more until prices return to their earlier peaks, Fiserv’s analysis indicates.

Fifteen Percent Say it’s OK to Walk Away - When asked if financial distress makes stopping payments on an underwater mortgage acceptable, 15 percent of respondents said yes in Fannie Mae’s National Housing Survey, a remarkable level of public acceptance for homeowners who walk away from their mortgages in light of the growing number of defaults in Fannie Mae’s portfolio.Both delinquent mortgage borrowers and those current on their mortgage payments are more than twice as likely to have seriously considered stopping their payments if they know someone who has already defaulted, according to the survey released today.Underwater borrowers were more than twice as likely to be behind on their mortgage payments and were more than twice as likely to believe stopping payments was acceptable than borrowers who were not underwater. Only 33 percent of respondents cited their moral qualms as a factor motivating them to pay their mortgage.

Is Debt Repudiation a Good Thing or a Bad Thing? - This essay rounds up arguments for debt repudiation, because that side is rarely heard. But feel free to post comments on why debt should not be repudiated – the issue is still an open question in my mind. As I noted in November: Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this. Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced.  She says that – if the bank can’t produce the mortgage papers – then the homeowner can stay in the house. Portfolio manager and investment advisor Marshall Auerback argues that a debtor’s revolt would be a good thing. And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show. Walking away from home mortgages has actually become mainstream, being trumpeted by: CBS - CNBC - The New York Times (and New York Times Magazine) - The Wall Street Journal - MSN - NPR - The Arizona Republic - Many others

Demographics: The growth factor | The Economist - I mused on the possibility of a migratory stimulus, in which workers leaving bubble markets for places with better prospects caused housing and labour markets in the destination cities to tighten, supporting new investment and touching off recovery. Of course, you could also take things in a different direction. Ed Glaeser has written that because housing is durable, its supply does not adjust with broader economic decline and out-migration. And so in cities like Detroit, you have a constant housing supply with a falling population, which leads to steady declines in home prices. These declines lead, in turn, to underinvestment, which continues the cycle of decline. One way to avoid this problem, then, might be to destroy surplus housing, in order to artificially tighten housing markets (and reduce the fiscal burden on local governments of maintaining underused infrastructure).Mr Sumner takes yet a different direction, connecting the decline in asset prices in 2007 with reduced expectations for housing demand growth, associated with tighter restrictions on immigration. And obviously some pundits have argued that America should grant a visa to any would-be immigrant willing to purchase a home in the inland empire

From “The It’s Different This Time” Desk: Avg Vancouver Home Price Hits $1m - The average price of a Vancouver BC home – always an expensive place – has now hit $1-million. One million dollars. Average. People are in full panic, right? Talk of an imminent meltdown? Street corner displays showing real estate busts of days gone by, like … 2008? Nah. It’s okay, say local realtors and the like. Because of the economic rebound. And the Olympics. And the warm winter there. Vancouver is different.

US Apartment Rents Decline as Vacancies at Record, Reis Says (Bloomberg) -- U.S. apartment rents dropped in the first quarter and the vacancy rate remained at a record as unemployment near a 26-year high limited tenant demand. Actual rents paid by tenants, known as effective rents, declined 1.5 percent from a year earlier, Reis Inc. said in a report today. Asking rents fell 1.6 percent, according to the New York-based property research firm. Vacancies were unchanged at 8 percent, the highest level since 1980, when Reis began tracking the number, said Victor Calanog, director of research. U.S. rental demand has slumped as employers cut 8.4 million jobs since the start of the recession in December 2007. The bigger drop in asking rents than effective rents in the first quarter signals that landlords are pricing their properties lower at the outset and minimizing concessions, Calanog said.

Rental Prices Stabilize - This is the first real good news I've seen in the housing market:  rental rates finally seem to be stabilizing.  Rents rose in 60 of the 79 metro areas tracked by Reis, a real-estate research firm. Obviously, if you are looking to rent a place, this is not great news, and DC, my metro area, posted one of the highest growth rates.  But as Felix Salmon, among many others, has pointed out, the buy-to-rent price ratios remain out of whack in most places.  That was one of the most pressing signs that there was a housing bubble, and the fact that ratios remain high by historical standards is troubling. However, as many people have also pointed out, the Federal government has been intervening very heavily in the housing market in order to keep prices from falling.  You can go back and forth on whether this is a good policy, or whether we should let prices collapse in a sort of modern day "purge the rottenness" strategy.  Either way, what it means is that instead of a sharp fall, you're going to see a long period of stagnant prices, as markets slowly seek a more normal level.

Manhattan Apartment Renters Winning Price Cuts From Landlords…(Bloomberg) -- Manhattan apartment rents dropped 6.1 percent in the first quarter from a year earlier as landlords cut prices to lure tenants. The median rent fell for all sizes of property except one- bedroom units, broker Prudential Douglas Elliman Real Estate and appraiser Miller Samuel Inc. said today. An analysis by broker CitiHabitats Inc. showed the average monthly price declined as much as 7 percent. The company didn’t report median prices. New York City lost 67,500 private sector jobs last year and 5.4 percent of its finance industry positions in the 12 months ending in February, according to the state Labor Department. Fallout from the recession and credit crisis are still rippling through Manhattan, where 75 percent of the housing stock is rental.

Southern California apartment rents are expected to keep falling - Apartment rents are expected to fall as much as 3.5% in Los Angeles County this year, according to a study released Wednesday, as landlords compete for tenants in a market battered by stubborn joblessness and saturated with freshly constructed housing units.For apartment dwellers, falling rents have been the housing bust's thin silver lining: During the boom, rents had climbed in tandem with housing prices.Southern California's high number of foreclosures and the rampant overbuilding during the housing bubble has resulted in a glut of rentals as demand has slackened with high unemployment, according to the Casden Real Estate Economics Forecast.Meantime, many struggling young adults have moved back in with their parents, and older people who have lost their homes have started living with relatives, according to a separate study for the Mortgage Bankers Assn.

Rental Prices … Up or Down? -There are many factors which affect rental prices, including: (1) the general health of the economy; (2) demographics; (3) housing strength; (4) population growth; (5) migration patterns; and (6) wealth distribution. (complete analysis with charts)

1.2 Million Households Disappear, Putting Downward Pressure on Home Prices and Rents - As I wrote Monday: In really bad times, people who are evicted from their houses will not rent. Instead, they will move in with friends or family for some time. As the Wall Street Journal explained last October: Driving the change [i.e. large numbers of rental vacancies and lower rents] is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% — a 26-year high — more would-be renters are doubling up or moving in with family and friends during periods of job loss.As Zack’s Investment Research writes: A smaller percentage of Americans owned their own homes in the 4th quarter of 2009 than at any time since 2000.As the first graph below shows (from Calculated Risk) …: So where have all these people gone who are no longer homeowners? It does not appear that they are moving into apartments or rental housing. As the second graph shows (also from Calculated Risk), the rental vacancy rate is now at 10.7%.

1.2 million households lost to recession - Brown represents one of the more than 1.2 million households lost to the recession, according to a report issued this week by the Mortgage Bankers Association that looked at data between 2005 and 2008. That number doesn’t include information from 2009, when job losses and foreclosures continued to rise.So it's likely that the full impact of the 8.4 million jobs lost and nearly three million homes foreclosed on since the recession began has taken an even bigger toll on the number of American households. The study also shed some light on what happens to the people in those "lost" households. It’s widely assumed that many who lose a home to foreclosure become renters. But since the recession began, there has been a five-fold increase in “overcrowding” of remaining households — defined as more than one person per room, according to the study. That doubling-up is happening as families who lose their homes move in with friends or family. In other cases, younger people have delayed moving out on their own, instead staying with their parents until the economy improves. Others who fail to find work after graduating from college move back home.

1.2 Million Fewer Households, More Overcrowding - During the initial years of the housing downturn, optimists sometimes offered the following argument: “Everyone has to live somewhere. If a family loses their home to foreclosure, they will become renters. Their new residence might be smaller and less desirable than their former home, but from the perspective of housing units it’s a wash: their former home becomes vacant, but a previously empty rental becomes occupied. That should limit downward pressure on housing overall.” That argument contains an element of truth: many foreclosed homeowners do indeed become renters (some even become homeowners again). But I’ve always wondered how many former homeowners follow a different path and instead move in with their parents, friends, or roommates, rather than getting their own place to live. On Wednesday, the Mortgage Bankers Association released a study by Gary Painter (sponsored by the Research Institute for Housing America) that examines this question. His answer? America lost 1.2 million households from 2005 to 2008, despite ongoing population increases. Oh, and we likely lost even more households in 2009.

The End Of Suburbia — Really! - As Bill Bonner would say, 98% of everything you hear (about housing, retail spending, etc.) is merely noise. Only the underlying trends are important, if you can identify them. I believe we can spot one: It's The End of Suburbia. I'll return to this hypothesis at the end of this post. The housing market is still unraveling, as foreclosures and delinquencies on underwater properties continue to rise. This a direct consequence of the collapse of the Housing Bubble, yet it's been nearly 4 years since home prices first started to fall (graph below). This is why I think the Empire deteriorates gradually—it takes time for these disasters to become apparent. I don't believe there's a sudden panic-in-the-streets collapse as Gerald Celente does.

Bernanke Says Joblessness, Foreclosures Pose Challenges to U.S. Recovery - “We are far from being out of the woods,” Bernanke said today in a speech in Dallas. While the financial crisis has abated and economic growth will probably reduce unemployment over the next year, the U.S. faces hurdles including the lack of a sustained rebound in housing, a “troubled” commercial real estate market and “very weak” hiring, he said. The remarks reflect concerns by Fed officials at their meeting last month that the job market and tight credit would restrain consumer spending. At the session, Bernanke and his colleagues reiterated interest rates will stay very low for an “extended period.” He didn’t repeat that in today’s speech, while saying the Fed’s “stimulative” rates will aid growth.

The Housing Bust and Construction Employment - This graph shows the percentage of construction payroll jobs in three areas of California: San Diego, Riverside (Inland Empire), and Sacramento. The California percentages exclude the three metropolitan areas. Sure enough, generally the areas with the largest price declines and total lost jobs, were the areas with the highest percentage of construction employment during the boom. As an example, total employment in the Inland Empire is off 14.3% compared to 10.4% for all of California. I also took a look at some of the Case-Shiller cities. The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices (NSA).

Housing Starts and the Unemployment Rate - This graph shows single family housing starts through February and the unemployment rate through March (inverted). You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. Housing starts (blue) are moving sideways.The second graph shows construction payroll employment. Unfortunately the BLS didn't start breaking out residential specialty trade construction employment until 2001 - so this graph shows total construction. Usually residential leads both into and out of a recession, and non-residential lags a recession. But we can't see that here.

For Consumers, Time to Shop (Until the Mortgage Drops) - Here’s a provocative thought: what if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending? It’s not as far-fetched as the idea might initially sound, and it might help explain some interesting data we’ve seen as of late — and it also might explain why the statistical recovery we’re seeing now doesn’t really feel like a recovery to most Americans. And, if I’m right, it also explains why we may very well slip right back into the throes of recession all over again as we head into 2011. Let’s start with what we know. We’ve got 7.4 million non-current loans in this country, according to data source Lender Processing Services, Inc. - that’s an awful lot of households still living in a house, without a mortgage or rent payment draining their available disposable income. And the mortgage or rent borne by most households has historically been one of the most significant capital commitments any household makes, relative to other purchases.

Consumer Spending Has Held Up Because People Aren't Paying Their Mortgages - I've been somewhat perplexed by how well consumer spending has held up, at least on a relative basis, given that 1) "underemployment" is above 20 percent and the number of long-term employed is at a record; 2) income has not kept pace with consumption; and, 3) the housing industry is nowhere near a recovery (and the foreclosures just keep on coming). No doubt the government has played an important role in underpinning demand, especially through its emergency unemployment benefits programs and certain other stimulus efforts. But that didn't seem to explain matters fully. Then I read the following post, "How Obama's 'Extend & Pretend' Mortgage Policy Explains The Apparent Disconnect Between Housing And The Consumer,"  (citing the excellent HousingWire blog) and, suddenly, it all made sense. The reason why no small number of Americans can afford to keep on spending is because they've got one less (big) bill to pay...

The Age of Frugality takes a holiday - That whole Age of Frugality thing didn’t last long, did it? U.S. real personal consumption grew in February at a respectable 0.3 percent clip, the fifth straight such monthly rise, a fact widely greeted as news that the recovery is on course. The fly in this tasty soup, however, is income, which in real terms didn’t increase at all, not even by one tenth of a percent.American’s did this neat trick — spending more while earning the same — the old fashioned way: they cut back on luxuries … like saving. Savings as a percentage of disposable personal income fell to 3.1 percent from 3.4 percent the month before and down from a recent peak of 6.4 percent in May 2009. In fact, the last time the savings rate was lower was October 2008 when a market maelstrom was convincing so many people, apparently falsely, that something rather dangerous and important was wrong with the economy. In real terms, consumption is only very slightly below where it peaked in 2007. Astounding.

Usury, Vampires And Orwell - So-called "developed" economies do not have Debtor's Prison. During the early years of the United States, up to the mid 1800s, you could get tossed in prison for failing to pay back your debts. Many people died in the debtor gaols [jails]... Some prisoners in nearby jails were held, under these conditions, for debts as little as fifty cents...Although it is still possible to be imprisoned for a few kinds of debt, credit card debt is not one of them. Today, we are far more "civilized" about such things. A bank will issue a credit card, arbitrarily raise interest rates to usurious levels——and then sue you or garnish your pay when you find it impossible to pay off the loan at those rates, as the New York Times reports:

Consumer Spending Rests On Shaky Foundation - After seeing this week's announcement that February consumer spending increased 0.3% the pundits were elated and used the number as proof that the consumer was back and that this virtually assured a typical post-war recovery. What the "experts" failed to do however, was examine the underlying data to determine where all this new-found spending power was coming from. True, consumer spending has risen in eight of the last nine months and has climbed 3.7% in that span. Although those results are far from robust it is, at least, an increase. The question is how this happened in the face of lackluster employment, weakness in housing, flat income and tight credit. The answer is surprisingly simple once you look at the savings rate. As we mentioned, consumer spending has climbed 3.7% since May; that amounts to $373 billion of increased spending in the period. During the same span consumer savings declined by almost the same amount---$374 billion-while disposable income was basically flat, dropping by 0.1%. It is therefore easy to see that the entire increase in consumer spending for the nine months was due to reduced savings.

Reducing household financial leverage: the easy way and the hard way - In case you haven’t noticed, I have become slightly less “optimistic” about the prospects of a sustainable U.S. recovery. I’m far from ready to call a double-dip (that goes against every optimistic bone in my body), but the labor market has really got me worried. Some unemployment benefits are expiring, and job creation is just fast enough to keep the unemployment rate steady at 9.7%. What differentiates this recovery from every other cycle since 1929 is the lingering debt deflationary pressures. There is a very large overhang of U.S. household financial leverage that’s going down one of two ways: the easy way, through nominal income growth, or the hard way, by default. Unfortunately, the hard way is rearing its ugly head.

Incomes Decline, Debt Increases: Why the Credit Bubble Cannot Be Reflated - My esteemed blogger colleague Edward Harrison, author of the Credit Writedown blog (link in my blog list), recently summarized the rotten core of the U.S. economy in his recent analysis, Three potential explanations for the continued fall in US savings rate: At the heart of America's problems is an economic policy which is designed to keep wages down but consumption up. That necessarily means more bubbles, more debt, more wealth and income inequality, and consequently more strife and social unrest when the gravy train ends. You cannot expect to hollow out a country's manufacturing base, set up a bunch of McJobs to replace it, and still have consumers spend to support the economy. This is what we are now starting to realize. Voila. This is why the Fed and Treasury's "recipe" for "renewed prosperity"-- leveraging more debt off stagnant or declining incomes--cannot succeed.

Consumer Borrowing Fell by $11.5 Billion in February - Consumer borrowing fell again in February, reflecting weakness in credit cards and auto loans. It marks a setback to hopes that consumers are beginning to feel more confident and will start spending more.  The Federal Reserve said Wednesday that borrowing declined by $11.5 billion in February, surprisingly weaker than the small $500 million gain that economists had expected. The February decline was the 12th decrease in the past 13 months as consumers slash borrowing in the face of a deep economic recession and high unemployment.  In January, borrowing rose by $10.6 billion, a gain that had broken a record 11 consecutive declines.  In percentage terms, the January increase represented a rise of 5.2 percent at an annual rate while the February decline marks a drop of 5.6 percent.

Consumer Credit: OUCH! - So much for the "expected" -500 million print: - Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010.  Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent. As is my usual practice I've grabbed the data updates and put them into year/over/year graphical format, thereby removing the seasonal impacts.  Here we are! No increase of materiality here in the second derivative (that is, households are still de-levering on the plastic side, and effectively flat on a non-revolving.)

Consumer credit unexpectedly falls in Feb (Reuters) - U.S. consumer credit unexpectedly tumbled in February, reversing the prior month's surprise increase, as households refrained from taking on new debt in favor of deleveraging. February's total consumer credit outstanding dropped $11.51 billion or at a 5.62 percent annual rate to $2.45 trillion, the Federal Reserve said on Wednesday. January's figures were sharply revised upward to show a $10.64 billion increase, previously reported as a $4.96 billion rise. Analysts polled by Reuters had forecast consumer credit would rise by $0.5 billion in February. Analysts said households' continued reduction of their debt load was unlikely to have an impact on consumer spending, which normally accounts for 70 percent of U.S. economic activity.

Consumer Credit Declines in February -The Federal Reserve reports: Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 4.0% over the last 12 months.  Consumer credit has declined for 12 of the last 13 months - and declined for 13 of the last 14 months and is now 5.2% below the peak in July 2008. Note: The Fed reports a simple annual rate (multiplies change in month by 12) as opposed to a compounded annual rate. Consumer credit does not include real estate debt.

Consumer's Balance Sheet (graphs)

NBER’s Hall Says Payrolls Make It ‘Pretty Clear’ Recession Over  (Bloomberg) -- The biggest increase in employment in three years makes it “pretty clear” the deepest U.S. recession since the 1930s has ended, said the head of the group charged with making the call.  Payrolls rose by 162,000 workers last month, the third gain in the past five months and the most since March 2007, figures from the Labor Department showed yesterday in Washington. “I personally put lots of emphasis on employment,” Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview. “I would say ‘pretty clear’ is a good description” for whether the economic contraction has ended, he said.

What, Exactly, Is Over? - So the recession is over, yada, yada, yada, just some bad egg salad, go back to waiting for Dow 36,000. Really, I’m supposed to be excited that the recession is “over?” I’m supposed to be excited because 162,000 jobs were added to a work force of something like 134 million, and roughly two-thirds of them were temp assignments? Look, the glass half full thing is just fine, it’s what we do in America. It’s that plucky resolve to push forward no matter what, Redcoats, hostile Indians, raging rivers, floods, explosions, a bigger frontcourt, whatever. It’s what makes America America. I get it, I even admire it. I just won’t be suckered in by it.

Mauldin: Is This A Recovery? - pdf - First, we are in a nascent recovery from the depths of the Great Recession, but the question is "what kind of recovery?" Many suggest that we will see a typical recovery, like we have seen with every recession since World War II. As regular readers know, I don’t think we’ve gone through a typical, garden-variety recession, and to expect a typical recovery is more faith-based than factual. We had a deleveraging recession and we are still deleveraging. The process, as shown in studies I have written about, takes years to conclude. I think we are in for yet another Muddle Through period, at least for 5-7 years and maybe for the decade, depending on a few scenarios I will come to in a minute.

Welcome to the false recovery - The one economic indicator that seems to point toward long-term hope for businesses is the increase in the U.S. household savings rate—the portion of income that wage earners aren’t spending. Savings were close to nil until the economic collapse but have been rising ever since. As of this writing, the rate stands at about 4.8%.  And if consumers don’t return to their old borrowing-and-buying habits, the argument goes, one day they’ll go out and spend all this saved-up cash, and businesses everywhere will reap the benefits.But in fact, the rising savings rate is telling us something very different. It’s not reflecting an imminent recovery but rather a drawn-out malaise that will soon become something like a lost decade. Because of the way the government measures household savings, the increase doesn’t signify more money in people’s wallets; instead, it suggests that consumers are paying off their mounting debt during a period of reduced borrowing. That’s no harbinger of growth.

How to manufacture a recovery - Last Friday the Bureau of Labor Statistics (BLS) announced that for the month of March, employers added 162,000 jobs. This would be fantastic news… if it were true. Let’s have a look at these 162,000 jobs. Right off the bat, we know that 48,000 of them came from hiring census workers.Then there are the +81,000 via birth/death adjustments.  Then, of course, there are the weather adjustments. So, here we are, three years into the recession (really a Depression) and the only way we can get the monthly employment numbers into positive territory is because of blizzards, economic adjustments, and the hiring of census workers.

Hopes for avoiding a second (fatal) credit crisis - For the majority of us, the credit crisis we are living through has come rather unexpectedly. And because it has been both a surprise to many and a traumatic experience to yet many more, we are all trying to contextualize it using past economic and historical periods. Unfortunately, this is a tricky exercise because it risks conflating the root causes and outcomes of the historical period with those of the present. But, we are going to still do it because the need to explain is so great (something I covered in The politics of economics in November).For me, it is the Great Depression where I see the greatest lessons for us today, particularly given the parallels in complacency today and that witnessed in 1930 and 1931. So let me say a few words about where I think we are in this crisis and what this should mean to policy makers and citizens alike.

Not Gone Away - It's hard being a bear these days. In fact, what I'm experiencing right now reminds me of the frustration and pain I felt back in 2007, when clueless Pollyannas were enchanting the masses (and the media) with talk of a neverending Goldilocks economy and the wonderful job that policymakers were doing to keep things on an even keel.In the end, my belief that reckless borrowing, speculation, and risk-taking, myriad unsustainable imbalances, and mindless complacency would end badly helped me survive the onslaught of propaganda, lies, and delusion.Of course, just because I was right before doesn't mean I will be this time around. In fact, after the nightmare of the past few years, I hope I am wrong. Unfortunately, I think the odds of a happy ending are remote. For one thing, many of the problems that caused the crisis to begin with have not gone away.

Mutual Manipulation -  Front page headline on Friday’s Wall Street Journal proclaimed a big up-tick worldwide in the manufacturing sector. According to the paper, everybody is making more and more stuff.  This helps assure that the recovery “has legs". Auto sales, too, came in stronger than expected in March.  So it sounds like the recovery has wheels too. What we want to know: does it have a brain?  Who’s buying this stuff and where are they getting the money? At least the economic model of the bubble era made sense.   The producers produced.  The consumers consumed.  That worked great until the consumers ran out of money.  Then, they had to borrow from the producers.  And eventually, the whole thing blew up when it became clear that the spenders had borrowed and spent too much, while the producers had expanded and produced too much.

Giving Up on Policymakers - Because monetary policy loses effectiveness in a deep recession -- something I've been teaching for decades -- I was among the first to call for aggressive fiscal policy. Fiscal policy creates demand directly, it does not rely upon incentives and the hope that people will respond to them. When the crisis hit, we needed fiscal policy right away. Given the lags between changes in policy and actual effects on the economy, which were known to be lengthy, and given that monetary policy was not going to be enough, there was no time to "wait and see" (as many people I respect were calling for). But the reality is that fiscal policy didn't get put into place until much, much later, far too late to stop the worst of the downturn (and it wasn't big enough anyway). The way too slow policy process, and the way too small policy that came out of it, was frustrating to watch.

Throwing in the towel on policy makers -  Earlier today, I had a brief e-mail exchange with Marshall Auerback in which I said that I had basically thrown in the towel on US (and global) policy makers. Early on in this crisis, I had advocated a number of policy paths which I think would have been infinitely superior to the ones actually chosen by the Bush and Obama Administrations, especially in regards to limiting the socialization of losses. I am talking about massive fiscal stimulus, big bank pre-privatization, a move away from the asset-based economy and the accumulation of debt, and a reallocation of resources.  Quite frankly, none of these suggestions have been taken on. As I discussed in March when making a few comments on this blog’s harsher tone about the credit crisis, the prevailing view in policy circles seems to be that we are in full recovery mode now, the remedies we put in place having been highly effective. Therefore, we can put in a few minor tweaks to the financial system, use our propaganda machine to tout them as the largest regulatory changes since the Great Depression, and then return to business as usual.

How can we tell (if fiscal policy worked)? -The patient is ill. The doctor gives him the medicine. He recovers. Did the medicine work? From a sample of one, you can't tell. He might have recovered anyway. Maybe he would have recovered more quickly without the medicine. Or maybe his wife's chicken soup is what cured him. Canada is a sample of one. We can't tell whether fiscal policy helped or hindered recovery by looking at one data point. If we had two identical Canadas, gave them each a different fiscal policy, and made absolutely sure that everything else stayed identical, then we could tell what difference fiscal policy made to the recovery. But we don't.

The Income Rollercoaster: Rising Income Volatility and its Implications - Brookings - Millions of U.S. households have suffered devastating income disruptions as a result of the recent economic downturn. These short-term swings in income have occurred against a backdrop of equally notable long-term trends. A growing literature has explored longer-term trends in household income fluctuations, and although not every study agrees, many suggest that U.S. households have seen a significant rise in income volatility over the past several decades. For the most part, this increase occurred even as the volatility of aggregate economic activity appeared to be moderating.

Food Stamp Usage Hits Record 39 Million, 14th Consecutive Monthly Increase - Food stamp usage is up again except the program is now called SNAP Supplemental Nutrition Assistance Program.Inquiring minds are looking at a SNAP Participation Table that shows a record 39,430,724 receive SNAP benefits, a 22.4% increase from a year ago. Household SNAP participants increased from 12,728,981 in Fiscal Year 2008 to 15,232,105 in fiscal year 2009, a 16.4% increase. For comparison purposes, watch the growth in household participation. Household and cost numbers are as of March 30, 2010.

Regarding the Decline in Birth Rates - The NY Times reported the link between recession and reduced birth rate: American births fell in 2008, updated government figures confirm, probably because of the recession. The one exception was the birth rate among women in their 40s, who perhaps felt that they did not have the luxury of waiting for better economic times.  Paul Krugman questions the link: Doesn’t it take nine months from conception to birth? Abortion aside, to reduce births in the first three quarters of 2008 in response to a recession that started in Dec. 2007 would have taken pretty impressive rational expectations. What are we missing? First the data, then the missing piece.

Percent Job Losses During Recessions, aligned at Bottom - This graph shows the job losses from the start of the employment recession, in percentage terms - but this time aligned at the bottom of the recession (ht Tom). This assumes that the 2007 recession has reached bottom. The current recession has been bouncing along the bottom for a few months - so the choice of bottom is a little arbitrary (plus or minus a month or two).Notice that the 1990 and 2001 recessions were followed by jobless recoveries - and the eventual job recovery was gradual. In earlier recessions the recovery was somewhat similar and a little faster than the decline (somewhat symmetrical). If the current recovery was similar to the earlier recessions, the economy would recovery the 8+ million lost payroll jobs over the next 2 years. I think that is very unlikely ...

Nice job, sorry about the pay - It was the strongest U.S. employment report in three years and yet just beneath the surface was plenty of evidence that inflation pressure from the labor market is more of a fond hope than a real threat. Nonagricultural payrolls rose in March by 162,000, the most in exactly three years and for only the third time since the recession began later that year. Of course, the United States probably needs about 200,000 new jobs a month just to bring unemployment down by a point in a year’s time. No sooner do jobs become available than sidelined would-be workers start seeking employment again. That kept the unemployment rate at 9.7 percent, while the key broader measure of the unemployed, the underemployed, the discouraged and the marginally attached — those game for work but unable to find it, get to it or find child-care while they go — hit a whopping 16.9 percent. And that, ladies and gentlemen, is why, in an economic recovery with a growing job market, average hourly earnings actually fell by two cents an hour, or 0.1 percent from the month before.

What Do the New Unemployment Numbers Mean? - What do the new BLS numbers - 162,000 nonfarm payroll jobs added in March - mean? Barry Ritholtz provides a very useful summary...Stone-McCarthy points out that - if we subtract the temporary hiring of census workers, better weather and birth-death model adjustments - we're left with a net loss of 67,000 jobs. Indeed, Goldman Sachs attributes the job gain as "due mainly if not entirely to census hiring and weather rebound", finds "little underlying improvement", and says that "productivity gains have diminished sharply".Gallup puts underemployment at 20.3%

Expected Returns: Unemployment Rate Steady But Internals Still Weak… Temporary government hirings for the Census accounted for 48,000 of the 162,000 jobs added in March. Overall, more than half of the newly created jobs were temporary jobs. Although a spike in temporary hirings usually precedes full-time hirings, we are still not seeing the transition from temporary to full-time work. The civilian participation rate ticked up in March to 64.9% from 64.8% in February. We are still well below normal levels of labor participation. As people start looking for jobs again and the labor participation rate increases, the unemployment rate will also likely rise.

Creating 162,000 Jobs Without a Drop in the Unemployment Rate Is Not a Paradox - In the middle of an article telling readers about Alan Greenspan's (yes, the guy who couldn't see an $8 trillion housing bubble) assessment of the economy, the NYT refers to the "paradox" that the Labor Department reported that the economy created 162,000 jobs in March but the unemployment rate remained fixed at 9.7 percent. This is hardly a paradox. The labor force is growing at the rate of about 125,000 workers a month. This means that March's job growth was just a little faster than what is needed to keep the unemployment rate from rising.

Unemployment: More Than 3 Million Americans Jobless For Longer Than A Year, An All-Time High (Charts) - More than three million Americans have been out of work for at least a year, according to a new analysis of unemployment data. That represents 23 percent of the roughly 14.8 million Americans out of work and looking for a job -- a post-World War II high. For those 3.4 million Americans, the consequences from such a long time out of work -- a cost of the Great Recession -- can be calamitous."[T]he likelihood of finding a job declines as the length of unemployment increases," . "People who are unemployed for a long time can lose their job skills. A long unemployment spell can mark them as undesirable, making it more difficult to compete against other job candidates. [Federal] data suggests that workers who are jobless for the longest duration incur the largest reductions in weekly earnings upon returning to work."

Actually, The Unemployment Ratio Is 41% - The broadest measure of unemployment is the Civilian Employment-Population Ratio, which is exactly what it sounds like: the ratio of employed civilians to the total population. It stands right around 59%, which is the lowest its been since the early 80s.Fortunately, the recent end of layoffs seems to have staunched the fall. But even if the economy rebounds, don't expect this measure to jump back to old highs.For one thing, the recovery could very well be jobless.

American joblessness: Still stuck | The Economist - NEW data on weekly jobless claims came out today, and initial claims rose back to 460,000 last week, while the four-week moving average ticked upward as well. Here's the longer run picture: Claims seem to have stabilised. Unfortunately, they've done so at a level well above pre-recession norms. The March payroll employment figures generated a lot of optimism about a potential turnaround in the labour market, but it's difficult to reconcile sustained strong gains with this kind of performance. Next, Mark thoma posts a chart from the Atlanta Fed: These data only go through the end of 2009, but the deterioration in the hiring rate during the recession indicates the nature of the growth in unemployment. Sackings rose, but the biggest problem was that the rate of exit from unemployment was so low. And because unemployment was mainly driven by a large decline in the hiring rate, the end to heavy lay-offs hasn't meant a substantial decline in the unemployment rate.

Jobless rate may rise as many are drawn back to labor force… The increase in jobs highlighted in the nation's most recent unemployment report carried the sound of economic promise, but Obama administration officials said Sunday that the public shouldn't expect any dramatic improvement in the jobless rate, largely because of the effect of thousands of "discouraged" unemployed people who have resumed their search for work. Some economists assert that the unemployment rate, which held steady at 9.7 percent in March, is likely to be driven higher as many more such people are lured into looking for work by signs of recovery. The number of people looking for jobs rose by more than 200,000 last month compared with February, according to the Economic Policy Institute -- and that's a good sign, economists say. It means that Americans are seeing more jobs being created and that they're optimistic about their prospects.

Meredith Whitney says unemployment will rise again – So, retail sales are up. Unemployment is down. And the Dow is near 11,000. That doesn't mean that all is right with the world. So says Meredith Whitney. The analyst who brought down the bank stocks in 2007–by shining the light on their capital shortfalls–came by Fortune's offices Wednesday afternoon to explain why she's still a bear. I asked her: Will unemployment, now at 9.7%, likely go back up? "I think it has to," she told us. Pointing out that banks are still cutting credit lines (to the tune of $2.7 trillion by 2011, she predicts) and states are strapped financially (implying tax increases and service cuts to come), Whitney is betting against a bona-fide recovery. The ranks of the "un-banked"–Americans who can't get credit cards or bank accounts–are rising. Wal-Mart (WMT) is serving that population, building a big business in prepaid payment cards.

Rosenberg Sees 10% U.S. Unemployment Rate as Credit Contracts (Bloomberg) -- The U.S. jobless rate may rise above 10 percent at the end of the year and the contraction in consumer credit will persist, said David Rosenberg, chief economist of Gluskin Sheff & Associates Inc. in Toronto. “I think we’ll finish the year above 10 percent,” Rosenberg said in an interview with Tom Keene on Bloomberg Radio. “The credit contraction continues unabated in the household sector.” Economic growth is being fueled by the government’s $787 billion stimulus program, which has been offsetting slumping demand, Rosenberg said. “Final sales lag far behind,” he said. “There’s been no income growth in the personal sense in the past year.”

ISM Non-Manufacturing Index Shows Expansion in March - March ISM Non-Manufacturing index 55.4% vs 53.0 in February.  This shows further growth in the service sector, although employment contracted for the 27th consecutive month. From the March 2010 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in March for the third consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

Job Openings in U.S. Decrease to 2.72 Million (Bloomberg) -- Job openings in the U.S. fell in February for the first time in three months, a sign employers will be slow to expand staff even as firings subside. Openings decreased by 131,000 to 2.72 million, the Labor Department said today in Washington. Fewer people were hired and the number of workers fired also decreased, the report also showed.  “Conditions in the labor market will continue to be tenuous as firms look for a pickup in sales activity before increasing employment opportunities,”

BLS: Low Labor Turnover, Fewer Job Openings in February - From the BLS: Job Openings and Labor Turnover Summary There were 2.7 million job openings on the last business day of February 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.1 percent. The hires rate (3.1 percent) and the separations rate (3.1 percent) were also little changed in February. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, aka household survey) is for people.

Kids Feel Pinch of Parents' Unemployment - WSJ - Many families such as the Johnsons—upper-middle-class professionals—are suddenly downwardly mobile. For years, they used rising family wealth to help foot the bill for college, down payments for houses and start-up cash for children's careers. But pay cuts, layoffs and the decade long flatlining of the stock market mean many families can no longer help their children. This comes as young adults could use a financial helping hand more than ever. The unemployment rate for workers ages 16 to 29 was 15.2% in March, the highest rate since 1948, according to the Bureau of Labor Statistics.

The Kids Aren’t Alright—A Labor Market Analysis of Young Workers - Unemployment does not equally affect all workers. Different segments of the population often have different rates of unemployment, whether the distiction is made by race, gender, education, or age. While the national unemployment rate has yet to meet the dismal 10.8% benchmark set in 1982, certain subgroups have, since the start of the recession in December 2007, reached post-War unemployment highs. One of these groups is workers age 16-24, whose unemployment rate peaked at 19.2%. Though young adults represent only 13.5% of the workforce, they now account for 26.4% of unemployed workers. This Briefing Paper will discuss the severity of the unemployment crisis facing young adults, its historical context, and the implications for their future wages and skills. EPI Briefing Paper #258 Print-friendly PDF version - Press release

Teens, Young Adults Disproportionately Gain in Jobs in March 2010 - As expected, with no further increases in the federal minimum wage scheduled to take place in the near future, we find that both teens and young adults fared disproportionately well in the BLS' March 2010 employment situation report. We confirm that result in our chart showing how the employment situation of both teens (Age 16-19) and young adults (Age 20-24) have fared with respect to those Age 25 or older since total employment levels peaked in November 2007, prior to the beginning of recession in December 2007.  Here, in looking at the transition from February to March 2010, we see that the total number of jobs lost in the U.S. economy since the recession began declined by 254,000 overall, from 7,842,000 jobs lost through February 2010 to 7,578,000 jobs lost in March 2010. Or rather, there was a net gain of 254,000 in the number of employed individuals counted as being employed from February to March 2010.

Older, young U.S. workers jostle for scarce jobs - (Reuters) - Young adults in the United States are being squeezed out of the labor force as older workers either delay retirement or seek jobs to rebuild nest eggs destroyed by the recession, a study showed on Wednesday.The size of the labor force fell 6.3 percent for young workers, but increased 8.5 percent for workers 55 years and older between December 2007 and January 2010, according to the study by the Washington-based Economic Policy Institute (EPI)."This is a troubling development, young adults are less prepared to deal with unemployment than other age groups. Without significant prior full-time work experience, many may not qualify for unemployment insurance, or the social safety net," the EPI said.But the AARP -- a nonprofit organization focused on people 50 years and older -- disagreed with the EPI study. It argued that the employment situation had deteriorated more for older workers than for their younger counterparts since the recession struck in December 2007.

Older America Made Recession Look Better - If you adjusted the jobless numbers for the change in  America’s demographics over the years, the recent recession would look far worse. That’s the conclusion of a new paper by Marianna Kudlyak, Devin Reilly and Stephen Slivinski of the Federal Reserve Bank of Richmond. The country’s unemployment rate barely surpassed 10 percent in the fourth quarter of last year, which was painful but not a post-war record. In the fourth quarter of 1982, the rate averaged 10.7 percent. America’s work force has changed a lot in the last three decades, however. In particular, the nation has gotten much older. This matters because older people generally have a lower unemployment rate than their younger counterparts.

Facing New-Job Jitters After a Long Bout of Unemployment… As the economy recovers, out-of-work Americans have begun finding work. Many are surprised, however, by aftershocks from a job loss that could crimp their success in the new workplace. Persistent ill effects include damaged self-esteem, fears about repeating job mistakes, concentration difficulties and insomnia. "All those things are detrimental to performance on the new job," says John P. Wilson, a psychology professor at Cleveland State University. "Stress-related symptoms from being unemployed will carry over into the new job for a significant number of people."With good reason: The median duration of joblessness has exceeded 19 weeks every month since October. That's the highest level since the U.S. Bureau of Labor Statistics commenced tracking it in 1967.

“Job Creation”–Stupid Is as Stupid Does - No one can seriously doubt that the huge amounts of borrowed federal dollars poured into the economy since Barack Obama became president has prevented even more jobs from being lost than might otherwise have been the case in the current devastating recession. It’s impossible, however, to come up with a “real” number, because no economist has a good enough handle on matters to sort out all the variables at play, including readjustments due to the fall of housing prices, low interest rates, a slightly improved export environment, rebounding of depleted inventories, new highway construction resulting from stimulus spending, etc. Still, let’s look at some facts about the current so-called “recovery”:

Obama's unemployment opportunities - As President Obama comes off a month of grand accomplishments – passage of healthcare and student loan reforms, the negotiation of an arms reduction treaty with Russia – his advisers are telling him to pivot to job creation. After all, nationally the unemployment rate stands at just shy of 10%; in many industrial mid-western states, as well as California, it is far higher; and under-employment (a figure that includes those who are involuntarily working part-time) is upwards of 15%. The US treasury secretary, Timothy Geithner, has just announced that unemployment in the US will remain "unacceptably high for a very long time". Next week, on 8 April, it will be the 75th anniversary of passage of the Emergency Relief Appropriation Act. The act funded the Works Progress Administration and allowed the federal government to directly employ millions of out-of-work Americans on public works projects that, ultimately, transformed America.

Reviving the Labor Market with Middle-Skill Jobs - The importance of worker education and skills to labor market success in the U.S. has never been clearer than it is now. The current economic downturn has hit all groups quite hard, but especially those with the least education and fewest skills. And as the labor market slowly begins to recover this year, we will be reminded of a basic fact of economic life: Workers increasingly need meaningful postsecondary education or training to find jobs that pay enough to sustain a middle-class lifestyle. (contine reading or Download the report.)

Your Job In 2020 - Forbes - The greatest economic challenge the United States faces in the coming decade will be reversing its dismal unemployment situation. The past decade has been an unmitigated disaster for job creation. To keep pace with population growth and prevent the unemployment rate from rising, the economy needs to consistently create between 1 million and 2 million new jobs per year. Yet private-sector employment has actually fallen over the last 10 years; the U.S. now employs at least a million fewer people than it did in 1999.  What are the prospects for turning things around by 2020? Some analysts are sanguine. A recent report sponsored by the MetLife Foundation predicts that due to a gradually aging workforce, the U.S. may in fact actually face an overall worker shortage as early as 2018.

Critics Say Firm Weakens Safety Net as It Fights Jobless Claims - Talx, which emerged from obscurity over the last eight years, says it handles more than 30 percent of the nation’s requests for jobless benefits. Pledging to save employers money in part by contesting claims, Talx helps them decide which applications to resist and how to mount effective appeals.  The work has made Talx a boom business in a bust economy, but critics say the company has undermined a crucial safety net. Officials in a number of states have called Talx a chronic source of error and delay. Advocates for the unemployed say the company seeks to keep jobless workers from collecting benefits. “Talx often files appeals regardless of merits,”  “It’s sort of a war of attrition. If you appeal a certain percentage of cases, there are going to be those workers who give up.”

More than 200,000 to lose jobless benefits Monday with Congress out, - Starting Monday Apr 5, more than 200,000 unemployed Americans won't see jobless benefits they're expecting because Congress failed to act. The interruption in benefits will last two weeks at a minimum, according to Judy Conti of the National Employment Law Project (NELP), since lawmakers return from spring break on April 12. As the two-week recess began, Congress was at an impasse over how to extend the emergency unemployment insurance program and other expiring provisions, including increased COBRA health insurance subsidies for the unemployed, the Medicare doctor payment rate and federal flood insurance.

Unemployment benefits and GOP principles… So our old pal the US Senate left town without extending unemployment benefits. As a result, somewhere around 200,000 Americans will lose those benefits starting today. You may remember a few weeks ago that it was Republican Senator Jim Bunning who held up extension of these benefits because the Senate wasn't coming up to any way to pay for them and make the extension deficit neutral thereby. This time around it's Oklahoma's Tom Coburn:  The cost is $10 billion, so I can see that if you're concerned about the deficit it's a fair point. But here's the thing that gets me. Somehow, Republicans don't manage to raise these objections about deficit neutrality when the question involves tax cuts heavily weighted toward the rich. The Bush tax cuts of 2001 and 2003 increased the deficit. I don't remember many Republican protestations about that.

33 States Out of Money to Fund Jobless Benefits -With unemployment still at a severe high, a majority of states have drained their jobless benefit funds, forcing them to borrow billions from the federal government to help out-of-work Americans.A total of 33 states and the Virgin Islands have depleted their funds and borrowed more than $38.7 billion to provide a safety net, according to a report released Thursday by the National Employment Law Project. Four others are at the brink of insolvency. Debt-challenged California has borrowed the most, totaling more than $8.4 billion, followed by Michigan and New York, which have loans worth more than $3 billion. Nine other states have borrowed at least $1 billion from the federal government.

Nevada spends $2.86 billion on jobless claims - Out-of-work Nevadans have received $2.86 billion in unemployment benefits in the past 20 months. Since July 2008, Nevada has paid benefits of $1.66 billion in state funding and $1.2 billion in federal money, according to Cindy Jones, employment security administrator. The state has spent all unemployment tax revenues collected in that time and drained an unemployment insurance trust fund of more than $700 million. In addition, the state has had to borrow more than $340 million from the federal government to cover the jobless claims.

Saving States from Themselves - In the new issue of the New Yorker, James Surowiecki has an article comparing the debt problems of our states to the member states of the EU. Surowiecki points out that unlike European states, our states get "automatic fiscal stabilizers" from the federal government, which eases the problems. But for all that, I think he's rather too sanguine about the fortunes of American states. For one thing, while it's true that the US government has greater institutional capacity to transfer money from feds to states, Europe may have a larger incentive.Perhaps more importantly, I think he dramatically underweights the risk of moral hazard

NY state masks deficit by shuffling money | Reuters - For over a decade, New York state has papered over budget deficits and over-spending by "shuffling" money among accounts, siphoning cash from dedicated funds and "abusing" temporary loans, according to a report released on Monday.The general fund is the main one that credit analysts scrutinize because it excludes federal aid and some dedicated revenues from taxes or fees, such as dollars that flow into environmental or transportation funds, for example. New York's Democratic Comptroller Thomas DiNapoli said in the report that "the general fund is increasingly providing a distorted view of the state's financial health because money is shifted in and out of this account."This strategy obscures the state's deficit, he said. The current budget deficit for New York state now stands at $9 billion.

Grab Bag of Gimmickry Hides State Deficit -  How big, really, is the state’s budget deficit? The state budget office, along with the finance staff at the State Senate and Assembly, puts the number at north of $9 billion, give or take a few hundred million. State Comptroller Thomas P. DiNapoli has an even more disturbing answer: Nobody really knows. “The state’s real fiscal condition,” Mr. DiNapoli said in a report issued this week, ”is impossible to pin down.”The reasons go to the heart of New York’s severe fiscal problems, which are so bad that Gov. David A. Paterson and the Legislature have blown nearly a week past the state’s March 31 budget deadline in their efforts to negotiate a new budget.For years, governors and legislators used a grab bag of fiscal gimmicks to cover up the growing gaps between revenue and expenditures. Those gimmicks are now so widespread and so embedded in Albany budgeting, Mr. DiNapoli said, that they have essentially rendered the state’s balance sheet immaterial.

NY Budget 'Shell Game' Hides Deficits, Report Finds (Bloomberg) -- The state of New York’s history of budget manipulation is contributing to its chronic deficits and cash squeeze, Comptroller Thomas DiNapoli said. “New York needs to stop playing games with the deficit,” DiNapoli said in a statement. By shifting money between accounts in a “fiscal shell game,” state officials and lawmakers “cover cash shortfalls and avoid making the difficult decisions needed to align spending with revenues,” DiNapoli said. In the year ended March 31, the state used $6.4 billion of funds shifted and borrowed between accounts, and rolled $3 billion of payments into the current year, which began April 1, the report said. Lawmakers haven’t agreed on a plan to close a deficit of more than $9 billion this year in a $135.2 billion budget proposed by Governor David Paterson.

Thousands May Lose Rental Vouchers - Because of a $45 million deficit, the New York City Housing Authority may have to revoke rental-assistance vouchers from up to 10,500 low-income tenants, an unprecedented move that could cause families to lose their apartments. The federal government gave the housing authority less money for the voucher program, known as Section 8, than it expected. But the authority made matters worse by continuing to issue new vouchers until December, eight months after the government warned it to stop doing so because the program was likely to run a deficit.

Missouri revenues down 13 percent through March -  Missouri's revenues are down 13.2 percent through the third quarter of its budget year. Figures released Friday by the Office of Administration show that Missouri's sales tax collections now have fallen for 10 straight quarters. Individual income tax collections also remain down for the year, although they picked up some in March. Missouri's fiscal year began last July and runs through June 30.  March revenues plunged 17.8 percent compared with March 2009.

N.J. Taxes Said to Be $250 Million Below Governor’s Estimate (Bloomberg) -- New Jersey will get about $250 million less revenue than Governor Chris Christie projected for this fiscal year and next because of lagging retail sales taxes, according to a copy of a legislative analyst’s report provided by a person who received it before its release.  In the budget year ending June 30, New Jersey will collect $27.6 billion, about $82 million less than Christie projected March 16. The state will receive $28.1 billion, or about $168 million less than the governor anticipates in his $29.3 billion budget for next fiscal year, according to the forecast by David Rosen, legislative budget and finance officer. Revenues in New Jersey, the second-wealthiest U.S. state by per-capita income, will start rebounding from their worst decline in four decades during the upcoming fiscal year, the report says. At the state’s average growth rate of 5 percent annually, revenues won’t return to 2008 levels until 2014, according to Rosen.

Pennsylvania reports revenue collections fall - Pennsylvania’s budget situation worsened in March, with revenue collections for what is typically one of the state’s most flush months coming in millions of dollars below expectations. The state collected $3.9 billion in General Fund revenue in March, about $243 million less than anticipated, despite better-than-expected collections of personal income taxes. The personal income tax brought in $811.9 million last month, but is about 2 percent behind for the year. State sales tax receipts totaled $569 million for March, about $51 million below estimates. Budget Secretary Mary Soderberg said March’s collections were unusually low because February snowstorms hurt retail sales.  Sales tax revenue to date is 5.1 percent, or about $316 million, less than anticipated.

Could debt send California the way of Greece? - Another year, another crisis. If we spent last year worried that big banks were going to fail, the fear of the moment is that entire governments may go under. The anxieties about “sovereign debt” have been most acute in Europe, where the infelicitously named PIIGS countries—Portugal, Ireland, Italy, Greece, and Spain—have huge debt burdens, and where Greece in particular is in dire need of assistance. (It owes four hundred billion dollars, against an annual G.D.P. of around three hundred and forty billion and shrinking.) And now people are wondering if American state governments are headed for their own Greek tragedy. Last week, the Times suggested that the states could be plunged into a debt crisis, and the Wall Street Journal asked, “Who Will Default First: Greece or California?” It’s not an outlandish question.

L.A. to Run Out of Cash in a Month, Controller Says  (Bloomberg) -- Los Angeles will run out of cash on May 5, city Controller Wendy Greuel said today in a release in which she requested a $90 million transfer of reserve funds to pay bills. The controller said she received a letter from the Los Angeles Department of Water and Power today indicating the utility wouldn’t send an anticipated $73 million payment to the city’s general fund. That money is part of an annual contribution of 8 percent of power revenue that the utility makes in lieu of paying taxes to the city, according to Ben Golombek, a spokesman for the controller. “The question I have been asked most often during the budget crisis is, ‘When will the city run out of money?” Greuel said in the e-mailed release. “Unfortunately, we finally have the answer.”"

Los Angeles Mayor Asks for City Service Closing Two Days Weekly - Los Angeles Mayor Antonio Villaraigosa called for shutting down “nonessential” city services two days a week, after Controller Wendy Greuel said the municipality’s cash may run out next month. The plan would target services that don’t generate revenue, the 57-year-old mayor said in a press conference today. He also said the Department of Water and Power is on a path to a negative credit rating watch. The City Council voted to block a proposed electricity rate increase last week.

Los Angeles Rating Cut to Aa3 by Moody's on $3.2 Billion Bonds (Bloomberg) -- Los Angeles had the credit rating on $3.2 billion of debt cut to Aa3 from Aa2 by Moody’s Investors Service a day after Mayor Antonio Villaraigosa called for a twice-a-week shutdown of “nonessential” services.The one-level downgrade for the nation’s second-largest city by population cited the difficulty of quickly rebalancing its budget. Moody’s maintains a negative outlook on the city’s debt, meaning the rating could be lowered further. Aa3 is the company’s fourth-highest investment grade."

Los Angeles Inches Closer to Bankruptcy - Los Angeles continues to face a possible bankruptcy if the city’s politicians can’t come to an agreement on the budget. Wednesday on Varney & Company,L.A. Chamber of Commerce CEO Gary Toebben confirmed the reality of a possible bankruptcy. The city council has considered everything from raising utility bills to cutting cultural programs in an effort help fill L.A.’s half a billion dollar deficit – but no firm plan has risen out of the fiscal crisis.State worker furloughs have recently been shot down by courts in California, but L.A. mayor Antonio Villaraigosa has proposed a similar plan to help stem the crisis by temporarily closing down select non-essential departments. However, contractual agreements with those workers often prohibit the government from delaying or denying payment. “Well if that is the case here then there will be a bankruptcy,”

Los Angeles Faces Threat of Insolvency—A bitter political dispute between this city's elected leaders and its powerful municipal utility threatens to push the city into insolvency as early as next month. Los Angeles City Controller Wendy Greuel warned this week that the city's general fund could run out of money and fall $10 million into the red by May 5 unless the Los Angeles Department of Water & Power transfers a planned $73.5 million payment it has so far said it would withhold. Without the payment, the city would need to dip into its reserve fund, leaving that contingency dangerously low in the event of other emergencies. The Los Angeles utility, the nation's largest municipal utility, said it wasn't making the payment because the city council earlier this month failed to approve substantial increases in electricity rates.

LA mayor backs down, says shutdown a last resort - Mayor Antonio Villaraigosa backed down from his hardline stance over the budget crisis Wednesday, admitting he cannot shut down city services without the City Council's approval and requesting $20 million from the power utility to keep the city solvent. The mayor's plan to shut down services that don't make money, such as parks and libraries, for two days a week starting Monday is a "plan of last resort," said his deputy chief of staff, Matt Szabo. "We understand that we need to work with the council if, in fact, we would need to implement such a plan," Szabo said. "But we have to have a final contingency plan that we're not going to run out of money."

City leaning on taxpayers to pay $12 billion in pension funds - The City and County of San Francisco is swimming in a sea of red ink. An official budget report issued last week projects San Francisco’s municipal government will face three years of severe and escalating deficits beginning with $483 million this coming fiscal year, followed by a staggering $712 million in 2011 and $787 million in 2012. While most of us have learned to live within our means, San Francisco is still paying for a government infrastructure it can no longer afford to maintain. Local public employee salaries and health benefits make up much of these costs, but an even larger cost-driver is The City’s growing public employee pension obligations. In 2014, San Francisco taxpayers will need to contribute $692 million towards city employee pensions. That amounts to roughly half of The City’s entire discretionary general fund, siphoning away money that would otherwise go towards providing services like public safety, street repair, parks and schools. Residents already face continual fee increases and service reductions as The City struggles to pay its pension obligations — but if left unchecked, the escalating costs will soon leave The City unable to provide even the most basic services.

The Municipal Market - So, where to look next. To see other potential sources of crisis, let’s first recount the lessons learned from this crisis: Well, guess where we have a market that is (1) leveraged and opaque, that is (2) very big and tied to the credit markets; and is (3) viewed by investors as being diversifiable by holding a geographically broad-based portfolio; with (4) huge portfolios where assets and liabilities are apparently matched; and with (5) questionable analysis by rating agencies; and where (6) there are many entities, entities that may not approach default with business-like dispatch, and that have already mortgaged sources of revenue that are thought to support their liabilities? Answer: The municipal market

Next 'Big Crisis' Is Unfolding in Muni-Bond Market (Bloomberg) -- Look to municipal bonds for the next big disaster.That’s the advice of Richard Bookstaber, a senior policy adviser at the Securities and Exchange Commission. Writing on his blog this past week, Bookstaber said the next big crisis looked a lot like the last big crisis, in housing and credit.Conditions in the municipal-bond market match almost exactly the conditions that existed for the blowup that sparked the worst recession since the Great Depression, he said. I would agree with him up to this point. What he then predicts seems rather unlikely to happen.

Deutsche’s $1 billion financing for Riga increases scrutiny on muni derivatives use – A financing transaction arranged for Riga by Deutsche Bank shows how local authorities can lay their hands on spending money without reporting it as debt. When the Latvian government told Riga it couldn't borrow the equivalent of $1 billion to build a bridge over the river Daugava in 2005, Deutsche Bank stepped in. Its solution – enhanced vendor financing (EVF) – would provide the money in a series of payments, allow the city a five-year grace period before repayments start this year and not need to be reported as debt, the bank claimed. The downside was the expense: 46% of the total 567 million lati bill for the bridge was interest.

Ashtabula County: Judge Tells Residents to Arm Themselves - In the ongoing financial crisis in Ashtabula County, Ohio, the Sheriff’s Department has been cut from 112 to 49 deputies. With deputies assigned to transport prisoners, serve warrants and other duties, only one patrol car is assigned to patrrol the entire county of 720 square miles. “I did the best with what they (the county commissioners) gave me. If it wasn’t enough, don’t blame me, don’t blame this department,” said Sheriff Billy Johnson. Ashtabula County Common Pleas Judge Alfred Mackey was asked what residents should do to protect themselves and their families with the severe cutback in law enforcement.“Arm themselves,” the judge said. “Be very careful, be vigilant, get in touch with your neighbors, because we’re going to have to look after each other.”

Michigan Ranks Second In Nation For Worst Roads - According to Overdrive Magazine’s Highway Report Card, Michigan’s roads are once again ranked high on the list of the worst in the nation – snagging second place this year, up from third in 2009. While the ranking will not come as much of a surprise to Michigan motorists, forced daily to navigate the unsafe cement and asphalt obstacle courses we call roads, the message this sends to the nation’s leading businesses and job creators is alarming.

Report: Detroit bankruptcy looms without drastic change -- Mayor Dave Bing and the City Council must reduce the size of government and slash the city's budget deficit to stave off bankruptcy or state receivership, according to a report released Monday. Without draconian cuts and changes aimed at downsizing government, the city could end up with a "possible" general fund deficit between $446 million and $466 million to its $1.6 billion budget.  "Detroit city government must be restructured," according to the report from the Citizens Research Council of Michigan, a nonprofit that has studied Detroit finances for decades. "The new structure must reflect both the reduced tax base and the limited ability of state government to provide shared revenues."

Detroit schools: running on credit card-like debt, risking financial collapse -  The Detroit Public Schools has taken on new debt to pay off old debt and make its payroll this spring, creating a dangerous precedent for other Michigan school districts and causing bigger problems for itself. The district and state should quickly resolve this untenable situation. Much like using a new credit card to pay off an old credit card's debt, last week Detroit Schools' Emergency Financial Manager Robert Bobb took out a short-term loan for $256 million to meet the schools' payroll and other expenses, and pay off another short-term note taken out last August for more than $250 million, state officials confirmed. That Bobb took out the new loan reflects the district's increasingly precarious condition. For some months this year, it means about 80 percent of Detroit's state aid will go to debt repayment instead of classrooms. That is extraordinary, given the students' dire academic needs.

As state defers payments, some school districts take out loans - The state in general sends fewer dollars to California schools these days – a total of $18 billion less over the last two years. And much of the money districts do receive is coming late – sometimes as much as five months after the payments originally were scheduled. Instead, when the due date comes for state payments, districts are getting only a percentage of what they are owed. For example, $2 billion of the amount that the state was supposed to send public schools in February won't show up until July. An additional $1.7 billion due in April and May will show up in August. The bulk of the June payment has been pushed off until July, the beginning of the 2010-11 fiscal year."What happened with the state over the years is they've started a habit of borrowing from the next year and they've imposed that on school districts," said David Gordon, schools chief for Sacramento County. "It's a dysfunctional way of operating."

Another CA School District Set to Eliminate School Libraries - School libraries are set to disappear in California’s Belmont-Redwood Shores School District as it plans to close all media centers, raise class sizes, demand six furlough days from staff, and remove the fourth and fifth grade music programs to stem its deficit for the 2010–2011 academic year. The cuts are set to save $2.5 million for next year—but as a result students will reportedly no longer be allowed to check out school library books. While the grim news in this Northern Californian town is similar to that being told across the state, as 23,000 pink slips have been handed out to educators in the state this year, with school librarians in particular being hit very hard, says the California Teachers Association.

Death of Public Education - THE NEWS says we are watching the death of public education before our eyes. Detroit is closing more than 40 schools, Kansas City wants to close more than 40 percent of its school buildings. Other cities have been closing schools over the last decade. Boston avoided closings in its most recent budget deliberations, but still must slash custodial staff and postpone building repairs. It is no secret that American education is at a great divide, unrivaled in most of the developed world. The United States spends $9,800 per public primary and secondary education student, which is technically high by global standards.But meanwhile, children of the wealthy are being trained at private schools at more than triple the expenditures. In the Boston area, day school tuition rates are closing in on $35,000.Our investment in public school teachers is paltry for the wealthiest country in the world. According to the National Center for Education Statistics, the United States ranks in some measures behind England, Italy, Japan, Scotland and way behind Germany in starting teacher pay. The average expenditure on college students in the United States amounts to $24,400 per college student, two and a half times more than the $9,800 per-pupil spending in the public schools.

College loans, no middleman - The primary obstacle for young adults seeking to complete a college degree isn't that their public schools failed to prepare them or that their colleges somehow alienated them to the point of dropping out. It's money. Even solidly middle-class families can seldom cough up the more than $160,000 that private college will cost over four years. Working-class families must struggle to send their children to public colleges, which cost anywhere from several thousand dollars a year for live-at-home commuters to $25,000 a year for students at the University of California.The federal government has spent extraordinary sums each year for student loans that helped put more Americans through college. But much of that money, it turns out, has been wasted

The Rise of For-Profit Colleges - Six years ago, there were almost three times as many students enrolled in private nonprofit colleges as there were at for-profit institutions. By 2008-9, that ratio had slipped to about 2 to 1. That’s the takeaway from a new report from the Department of Education, as written up by Inside Higher Ed. In autumn 2008, for-profit schools represented 9.2 percent of all postsecondary students. The share is probably higher now, given the masses of unemployed workers pursuing heavily advertised technical training in the last year. Graduation rates are significantly lower at for-profit institutions, the report found (p. 17), but there may be confounding differences in the types of students who enter for-profit versus nonprofit schools.

College Grads' Outlook Grim - WSJ - Despite signs of life in the job market, the outlook for newly minted college graduates remains grim and many are trying new strategies for landing positions. Students are starting their job hunts months earlier than usual, while others are looking into short stints at positions outside their major.  Meantime, the job opportunities that are available aren't spread evenly—either by sector or region—and can be hard to spot. And unlike previous years, employers are making offers, and students are accepting them, early in the fall to lock in specific candidates.  Usually, graduating students have held off until the spring to accept positions.

An Empirical Analysis of the Gender Gap in Mathematics -  We document and analyze the emergence of a substantial gender gap in mathematics in the early years of schooling using a large, recent, and nationally representative panel of children in the United States. There are no mean differences between boys and girls upon entry to school, but girls lose more than two-tenths of a standard deviation relative to boys over the first six years of school. The ground lost by girls relative to boys is roughly half as large as the black-white test score gap that appears over these same ages. We document the presence of this gender math gap across every strata of society. We explore a wide range of possible explanations in the U.S. data, including less investment by girls in math, low parental expectations, and biased tests, but find little support for any of these theories. Moving to cross-country comparisons, we find that earlier results linking the gender gap in math to measures of gender equality are sensitive to the inclusion of Muslim countries, where in spite of women’s low status, there is little or no gender gap in math.

Illinois' unpaid bills could top $5.5 billion by summer -- The volume of Illinois' unpaid bills will likely increase by $1 billion in the next three months, according to a new report. By the end of June, the backlog of unpaid bills could exceed $5.5 billion "absent any other developments," noted Comptroller Dan Hynes, in a quarterly report on the state's finances. Now, the state's 200,000 unpaid bills total $4.5 billion. The report warned the increase in unpaid bills could lead to "further erosion of the state service infrastructure." Many providers will be unable to continue at current state funding, affecting vulnerable citizens across the state."The ability to operate state programs for children, seniors, and the disabled will become increasingly impaired," the report said.

Broke Cities (including this one) - Those euro-zone countries get everything backward — working to live instead of living to work. That’s what we smug Americans think. But let’s not get too overconfident in our own country, as the New York Times pointed out in a March 12 story. Jagadeesh Gokhale, economist with the Cato Institute, noted in that story that officially Greece’s debt is 113 percent of its total annual economic output. But if its pension obligations were included, Greece’s debt would be 875 percent of output. Bad, huh? Yes. Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern say that the funding gap for state pension plans alone might be more than $3 trillion. Take a deep breath: these professors say that state pension funds as presently set up have only a 1 in 20 chance of paying their obligations 15 years from now, according to Barron’s.

States Skip Pension Payments - State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public-employee pension plans. The moves could help ease today's budget pressures, but will make tomorrow's worse. New Jersey's governor, a fiscal conservative, has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap "Yes it's wrong," said New Jersey Republican State Sen. Robert Singer. "But the governor "has no other choice."

Pension Funds Fail to Reap Rewards in Private Equity -- Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good. But some of their biggest investors, public pension funds, are still waiting for the hefty rewards they were promised. The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns. But few big public funds ended up collecting the 20 to 30 percent returns that private equity managers often held out to attract pension money, a review of the funds’ performance shows.

Pension proposals draw fire from employee groups - State lawmakers are again looking to streamline Louisiana’s retirement systems, a move opposed by the groups representing current and retired employees. Though more than 100 bills filed this session seek to alter parts of the state’s retirement system, widespread opposition has emerged against two particular proposals. One would consolidate four state-employee retirement systems into one and create a single oversight board. Just as controversial is the plan to convert retired employees’ systems from defined-benefit, like a pension, to defined-contribution, like a 401(k).

Automaker Pensions Underfunded by $17 Billion - NYTimes - The pension plans at General Motors and Chrysler are underfunded by a total of $17 billion and could fail if the automakers do not return to profitability, according to a government report released Tuesday. Both companies need to make large payments into the plans within the next five years — $12.3 billion by G.M. and $2.6 billion by Chrysler — to reach minimum funding levels, according to the report, prepared by the Government Accountability Office. Whether the companies will be able to make the payments is uncertain, the report concluded, though Treasury officials expect the automakers will become profitable enough to do so.

GM: More Troubles Coming Down the Road - The Government Accountability Office has a report out today on the unfunded liabilities of the GM and Chrysler pensions.  The most controversial aspect of the bankruptcy reorganizations orchestrated by the Obama administration is that the companies reaffirmed their obligation to their retirement plans, which are often terminated when a company undergoes a bankruptcy. A lot of people--including me--regarded this as a gift to the UAW, at the expense not only of the bondholders who had lent the firms money, but also of the company's future chances at profitability. The GAO report offers a rather dour picture of the plans' funding status:

Auto Pension Liabilities Could Hit PBGC For $42 Billion - That's what the Government Accountability Office reported today. Auto workers would eat another $35 billion because the Pension Benefit Guaranty Corporation covers only just over half of what the GM, Chrysler, Delphi, and other auto industry firms promised their workers. GAO notes the complicated role played by the federal government, which guaranteed those pensions and now owns GM and Chrysler. GM and Chrysler bought union peace by overpromising pension benefits, knowing that the taxpayers stood behind those promises. Now what should the government do, take it out on the auto workers or hit the taxpayers to benefit the auto workers? Your elected officials will have little difficulty making this decision, invariably hitting future taxpayers to benefit favored constituents, like the auto workers. When the government guarantees future benefits and bails out favored firms, it doesn't ask those who will bear the cost of those decisions their opinion because many of them haven't been born yet.

The shock of the old: Welcome to the elderly age - Of all the people in human history who ever reached the age of 65, half are alive now. Homo sapiens is ageing fast, and the implications of this may overwhelm all other factors shaping the species over the coming decades - with more wrinklies than pimplies, more walking frames than bike stabilisers, more slippers and pipes than bootees and buggies, and more grey power than student power. The longevity revolution affects every country, every community and almost every household. It promises to restructure the economy, reshape the family, redefine politics and even rearrange the geopolitical order over the coming century.

Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess, by Robert Reich - Sixty years later, we boomers have a lot to be worried about because most of us plan to retire in a few years and Social Security and Medicare are on the way to going bust. I should know because I used to be a trustee of the Social Security and Medicare trust funds. Those of you who are younger than we early boomers have even more to be worried about because if those funds go bust they won’t be there when you’re ready to retire. It’s already starting to happen. This year Social Security will pay out more in benefits than it receives in payroll taxes. ... And it adds new urgency to reforming Social Security — a task the president’s commission on the nation’s debt is focusing on. So what’s the answer?

Gaming the Individual Mandate in Massachusetts - Today Kay Lazar reported in the Boston Globe that thousands of Massachusetts residents are purchasing health insurance only when it is needed and dropping it and paying the relatively low penalty when it is not. In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and … [paid a monthly premium of] $400, but [had] average claims [that] exceeded $2,200 per month. …Consumer advocates said they aren’t convinced that a lot of people are gaming the system, and they said that many of the individuals buying on the open market are likely those who are between jobs, new to the state, or have some other legitimate reason to buy coverage for a short period

Health Insurers Stop Offering New Coverage to Small Businesses and Individuals in Massachusetts in Battle Over Rates - The battle over health care costs in Massachusetts has intensified. Insurers want to hike rates while the regulators say no. In a showdown on regulatory power, Health insurers sue to raise rates. A half-dozen health insurers yesterday filed a lawsuit against the state seeking to reverse last week’s decision by the insurance commissioner to block double-digit premium increases — a ruling they say could leave them with hundreds of millions in losses this year. The proposed rate hikes would have taken effect April 1 for plans covering thousands of small businesses and individuals. Insurers wanted to raise base rates an average of 8 percent to 32 percent; tacked on to that are often additional costs calculated according to factors such as the size and age of the workforce. Yesterday’s legal action sets the stage for a showdown between state regulators and the health insurance industry.

Massachusetts Health Insurance “Market” Just Failed, And There’s Worse to Come - Jon Walker writes about the decision of private health insurers in Massachusetts to withhold offers for new plans in the state’s Health insurance "Connector." That follows the Boston Globe report of a decision by Massachusett’s insurance regulator to deny most of the requests by insurers to raise their insurance premiums. The short version is that Massachusetts appears to be inadvertently fostering an artificial shortage in health insurance. And they’re doing it for the same reasons that California authorities inadvertently created or exacerbated artificial shortages in electricity that repeatedly caused blackouts during the 2000-2001 crisis. We’ve seen this before, and unless Massachusett’s Governor and regulators are smarter than California’s Governor and Public Utility Commission, this is not going to turn out well. So what’s going on?

Not Enough Known About Massachusetts’ Uninsurance Rate - One of the arguments I’ve made that gaming the individual mandate in Massachusetts is not likely to be pervasive is that the uninsurance rate is very low. But, as I admitted, it depends exactly how that uninsurance rate is measured. In fact, no publicly available measure of it allows one to draw the strongest possible conclusion about gaming. That’s because the data to compute the right measure–month-by-month insurance status for a representative sample of the population–are not available. The best we have come from surveys that don’t quite ask the right questions.* This lack of data to address a fundamental question about health reform in Massachusetts is a troubling harbinger of data limitations as health reform rolls out nationally. A paucity of data reduces the scope of what can be assessed, which establishes a poor environment for promotion of policy improvements.

Tennessee Removes 100,000 From Medicaid Rolls : NPR - About 100,000 people — mostly elderly or disabled residents — have been dropped since January 2009, including approximately 37,000 who had relied on the state program for all their health care needs. Coverage for 8,000 children was also reassessed, but a TennCare spokeswoman said the number of children ultimately cut from the program could not be verified.The state's actions follow the resolution of a long-running court case involving people who receive Supplemental Security Income (SSI), a federal assistance program for low-income residents who are aged, blind or disabled and some infants hospitalized for long periods with major medical problems. SSI recipients are automatically eligible for TennCare, but the state had sought to discontinue coverage for those who lost the SSI benefits.

Pro-reform attorneys general on the offense…While the GOP repeal drive continues to crumble, some pro-reform state officials are now stepping up to defend the legal status of the Affordable Care Act. In states such as Georgia and Kentucky, Democratic attorneys general who support reform are now at loggerheads with state governors bent on joining the lawsuit against the federal government over its constitutionality. But there are pro-reform state officials who are becoming even more aggressive about getting out front and defending the bill. On Friday, Politico published an op-ed by Ohio Attorney General Richard Cordray and Iowa's attorney general, Tom Miller, explaining why they refused to file anti-reform lawsuits and why Congress "has ample power" to legislate under health care. And they don't shirk from defending the constitutionality of the mandate: "We live under mandates every day. Without them, society as we know it would disintegrate."

Efforts to Nullify Health Reform Likely to Fail, But Could Interfere With Law’s Implementation - CBPP - The new health care reform law, known as the Patient Protection and Affordable Care Act (PPACA),[1] requires most people to have health coverage or face a penalty. This requirement, most often referred to as an individual mandate, is an essential component of the new law. Without it, reforming insurance markets to require coverage of treatment for pre-existing conditions and to prohibit higher charges based on health status or gender is simply not possible — many healthier people would forgo coverage until they needed it, and insurance pools consequently would consist overall of sicker-than-average people, which would cause insurance premiums to rise substantially. [2]Despite the central role that the individual mandate plays in health care reform, proposals have been introduced in over 35 state legislatures to prevent the individual mandate from taking effect.[3] In addition, two lawsuits have been filed to challenge the individual mandate, one by the attorney general of Virginia and another by the attorneys general of 13 states.

Insurance Industry Already Finding Ways to Game New System…The insurance industry's attempt to weasel out of one of the few provisions of the new health care reform law that took effect immediately is a harbinger of what's to come. In this case, the companies that were balking at covering sick children quickly relented under media, congressional and White House pressure. But far from being satisfied with a windfall of new customers and massive government subsidies, the nation's insurance companies appear to already be busy devising ways to game the new system. Their goal, as ever: Maximizing profits by paying out as little on actual health care as possible. "This is what you're going to see as each element in this plan comes up for implementation,"

This is Not an Argument for Employer Dumping - Gene Steuerle of the Tax Policy Center writes,It appears that the new law will make it beneficial for many employers to drop their insurance coverage. …[A] worker earning [$60,000] …  who receives employer-provided insurance would receive a subsidy around $3,500 from the exclusion of health benefits from his taxable wages, leaving him more than $3,000 worse off than his counterpart whose employer offers no insurance.  This pattern holds until compensation reaches about $84,000, at which point the two subsidies are about the same.  But this is not a convincing argument that employers will drop their offers of coverage. A firm is not composed entirely of $60,000 workers. Management and the CEO make more and they want insurance that comes with the big employer tax subsidy. A firm can’t offer coverage to one worker and not another so if the CEO gets the offer so does the entry-level clerk.

The Recent Health Care Bill - I’ve stayed quiet during the recent health care debate, primarily because the bill under discussion was so long and complicated that I wasn’t sure I understood the issues well enough to weigh in intelligently.  For people who are interested in my views on health care — I’m not sure there is anyone who falls into that category in the first place — my suggestion is to read Gary Becker’s excellent blog post on the subject.  His conclusions are remarkably similar to my own, but his views have the virtue of being anchored in a careful analysis of the specifics of the legislation. First, it seems to do little or nothing to deal with the single most important shortcoming of our current system: the fact that people pay very little on the margin for the medical care that they receive.  Imagine that you could show up at a car dealership and have any car you wanted, and as many cars as you wanted, for no marginal cost.  The market for cars would be in complete chaos, and people would have too many cars, and the ones they had would be too nice.

To Cut Health Costs, U.S. Needs to Learn to Say No - NYTimes - How can we learn to say no? The federal government is now starting to build the institutions that will try to reduce the soaring growth of health care costs. There will be a group to compare the effectiveness of different treatments, a so-called Medicare innovation center and a Medicare oversight board that can set payment rates. But all these groups will face the same basic problem. Deep down, Americans tend to believe that more care is better care. We recoil from efforts to restrict care.

Squeezing Doctors vs Squeezing Hospitals II - Some time ago, I noted the difference between the provision of the Affordable Care Act (ACA) which reduces the scheduled generosity of payments to hospitals, nursing homes and home health care agencies and the formula in a 1997 bill which was supposed to reduce the generosity of payments to doctors and which is waived once each year by the now traditional annual doc fix. The difference is that many doctors with office practices refuse to treat Medicare patients and, as far as I could tell with a half hour of googling, no hospitals refuse to tread Medicare patients. My view is that the new provision will actually be applied, because institutional care providers just can’t afford to say no to the CMS.

Doctors with ownership in surgery center operate more often, U-M study finds: When doctors become invested in an outpatient surgery center, they perform on average twice as many surgeries as doctors with no such financial stake, according to a new study from the University of Michigan Health System. "Our data suggest that physician behavior changes after investment in an outpatient facility. Through what some have labeled the 'triple dip,' physician owners of surgery centers not only collect a professional fee for the services provided, but also share in their facility's profits and the increased value of their investment. This creates a potential conflict of interest," "To the extent that owners are motivated by profit, one potential explanation for our findings is that these physicians may be lowering their thresholds for treating patients with these common outpatient procedures,"

Prescription Drug Overdoses Increase 65% - More and more Americans are landing in the hospital due to poisoning by powerful prescription painkillers, sedatives and tranquilizers, according to a report released today. City-living middle-aged women seem particularly vulnerable. "But the fact of the matter is we are seeing, across the country, very significant increases in serious overdoses associated with these prescription drugs," Coben warned. Between 1999 and 2006, US hospital admissions due to poisoning by prescription opioids, sedatives and tranquilizers rose from approximately 43,000 to about 71,000. That increase of 65 percent is about double the increase observed in hospitalizations for poisoning by other drugs and medicines, Coben and colleagues found.

Saying No to Back Surgery - The latest Journal of the American Medical Association has another example of the downsides of too much medical care: back surgeries that bring more complications and no better results. The article, by Dr.  Richard A. Deyo of Oregon Health and Science University, and others, reports:More complex procedures were associated with greater complications, mortality, hospital charges, and other measures of health care use, even after adjustment for patient demographic and clinical characteristics. Age was less predictive than comorbidity or type of surgical procedure… It is unclear why more complex operations are increasing. It seems implausible that the number of patients with the most complex spinal pathology increased 15-fold in just 6 years. The introduction and marketing of new surgical devices and the influence of key opinion leaders may stimulate more invasive surgery, even in the absence of new indications

Do Strikes Kill People?  A new NBER paper from Jonathan Gruber and Samuel Kleiner argues that hospital strikes are deadly:Controlling for hospital specific heterogeneity, patient demographics and disease severity, the results show that nurses’ strikes increase in-hospital mortality by 19.4% and 30-day readmission by 6.5% for patients admitted during a strike, with little change in patient demographics, disease severity or treatment intensity. I don’t have time to read this closely right now, and the endogeneity problem here is probably pretty tricky, so caveat lector. In any case though, the implications here are interesting. Many public sector unions regarded as essential are forbidden from striking. Should the same rules apply to nurses? Or should hospital unions be outlawed altogether?

Why we need a world social health insurance -- We are in need of a social security fund on a global scale. That is what scientists of the Institute of Tropical Medicine Antwerp (ITM) argue in a Viewpoint in the leading medical journal The Lancet. Such a 'Global Fund for Health' would make the use of international donor money a lot more transparent and efficient. Today, 44% of international health aid money cannot be traced in the budgets of the receiving countries. This doesn't necessarily mean it has disappeared in somebody's pockets, but it is unclear when nor on what it has been spent. For convenience's sake it often is assumed that governments trim down their own health expenditure in proportion to the aid they receive.

Small Farms Balk at Food-Safety Bill - WSJ - Congress's food-safety fight is nearing an end but small farmers still have a bone to pick with the legislation.  The Senate version of a food-safety bill has attracted broad bipartisan support and is expected to pass easily soon after Congress returns from recess next week. Iowa Democratic Sen. Tom Harkin, a co-sponsor, predicted it would be "on the president's desk by May." But small farmers worry the measure's fees and inspection requirements would be ruinously expensive and are pushing for exemptions. "I know people who have been small farmers for 25 to 30 years who are looking to get out of the business because food safety is becoming so alarmist,"

Disaster filmmaker declares situation in Haiti out of control- Angeli recently returned from Haiti following a 7-day circuit in which he met with medical teams from Delaware's Alfred I. DuPont Hospital for Children. Since Angeli is an emergency medical technician with 30 years experience, he rolled up his sleeves and went to work with others to help the victims of the devastating earthquake that hit Haiti three months ago, claiming an estimated 250,000 lives. What Angeli describes is a grim scene of severely ill and injured people with terrible complications who are clinging to life and hope with minimal support. The medical team Angeli is involved with is seeing not just the victims of the earthquake disaster but other patients with unrelated injuries, victims that have burn injuries, injuries from falls or who have been shot in acts of violence that still grip the city in some quarters.

New CAFE Standards Good, but Hardly Best Climate Policy - - Cars and trucks sold in the U.S. will have to be a little more efficient, according to new Corporate Average Fuel Economy (CAFE) standards released last week by the Environmental Protection Agency (EPA) and the Department of Transportation. The new standards are largely a product of a compromise between states, the federal government and auto manufacturers last year. (Is it still a compromise if one party—the feds—owns a big chunk of another—the U.S. auto industry—and has Supremacy Clause powers over another—the states? Just asking.) They are also the end product of the Supreme Court’s Massachusetts v. EPA decision requiring the EPA to address impacts of greenhouse gases under the Clean Air Act. The requirements appear relatively modest: the existing requirement of 35 mpg fleet average fuel economy by 2020 is moved up to 2016 and increased by 0.5 mpg.

It's the Battery, Stupid! - Those of us who love smooth, silent, energy-efficient volt-powered vehicles would love to see them capture a major share of new-car sales ASAP. Only one thing stands in the way: The battery. Lithium-ion batteries appear to be on track to power growing numbers of electric vehicle (EVs) from mainstream makers beginning when Nissan's electric Leaf and Chevrolet's range-extender Volt hit the road later this year. Li-ion carries four times the energy of lead-acid (pbA) and twice what nickel-metal hydride (NiMH) can carry. But li-ion is young and unproven in vehicle-size packs, competing chemistry variations offer different trade-offs, and it's expensive.

EPA may try to use Clean Water Act to regulate carbon dioxide: The Environmental Protection Agency is exploring whether to use the Clean Water Act to control greenhouse gas emissions, which are turning the oceans acidic at a rate that's alarmed some scientists.  With climate change legislation stalled in Congress, the Clean Water Act would serve as a second front, as the Obama administration has sought to use the Clean Air Act to rein in emissions of carbon dioxide and other greenhouse gases administratively.Since the dawn of the industrial age, acid levels in the oceans have increased 30 percent. Currently, the oceans are absorbing 22 million tons of carbon dioxide a day. Among other things, scientists worry that the increase in acidity could interrupt the delicate marine food chain, which ranges from microscopic plankton to whales. ... The situation is especially acute along the West Coast.

Life flashing before your eyes? It's just raised CO2 levels - The phenomenon known as "near-death experience" could be caused by raised levels of carbon dioxide, researchers suggest.People who say they have experienced the phenomenon describe sensations such as their life flashing before their eyes, feelings of peace and joy, and supernatural encounters. Scientists in Slovenia studied 52 patients who had suffered cardiac arrest, using questionnaires to determine if they had had near-death experiences (NDEs). They also looked at data including carbon dioxide levels. According to the study, published in Critical Care, 11 patients reported NDEs, with more incidences among those with a higher concentration of carbon dioxide in the breath and arteries.It concluded: "As much as one fifth of out-of-hospital cardiac arrest patients report NDEs during cardiac arrest. Higher initial petCO2 [carbon dioxide in air exhaled from the lungs] and higher arterial blood pCO2 [the pressure of dissolved carbon dioxide in the blood] proved to be important in the provoking of NDEs.

On Plains, concern about another Dust Bowl - Seventy-five years have passed since the worst of the Dust Bowl, a relentless series of dust storms that ravaged farms and livelihoods in the southern Great Plains that carried a layer of silt as far east as New York City. Today, the lessons learned during that era are more relevant than ever as impending water shortages and more severe droughts threaten broad swaths of the nation. The storms, made worse by insufficient crop rotation and other farming practices that eroded the soil, unleashed one of the biggest migrations in American history, as thousands fled from Texas and Oklahoma to places such as California. Interior Secretary Ken Salazar, whose department oversees America's land and other natural resources, says another period of mass "relocation" is possible in the 21st century — especially if rain patterns and temperatures change as some expect.

Weathermen, and other climate change skeptics - Joe Bastardi, who goes by the title “expert senior forecaster” at AccuWeather, has a modest proposal. Virtually every major scientific body in the world has concluded that the planet is warming, and that greenhouse-gas emissions are the main cause. Bastardi, who holds a bachelor’s degree in meteorology, disagrees. His theory, which mixes volcanism, sunspots, and a sea-temperature trend known as the Pacific Decadal Oscillation, is that the earth is actually cooling. Why don’t we just wait twenty or thirty years, he proposes, and see who’s right? This is “the greatest lab experiment ever,” he said recently on Bill O’Reilly’s Fox News show. Bastardi’s position is ridiculous (which is no doubt why he’s often asked to air it on Fox News). Yet there it was on the front page of the Times last week. Among weathermen, it turns out, views like Bastardi’s are typical.

From promoting acid rain to climate denial — over 20 years of David Koch’s funding of the Climate Denial Machine and its polluter front groups - The corporate-backed front group Americans for Prosperity (AFP) is again leading the charge for industry against environmental protections.The founder and chairman of Americans for Prosperity is oil baron David Koch, who is one of the richest men in the world because of his oil, chemicals, and manufacturing conglomerate Koch Industries. Koch Industries is a major polluter with an atrocious record of sloppy operations. According to the EPA, Koch Industries is responsible for over 300 oil spills in the US and has leaked three million gallons of crude oil into fisheries and drinking waters. They were fined a record $35 million dollars and an additional $8 million in Minnesota for discharging into streams. But AFP’s recent crusade against the EPA is just the latest in Koch’s twenty-year campaign to have unrestricted power to pollute. Below is a timeline with snapshots of Koch’s long running campaign to distort science, orchestrate fake grassroots campaigns, and defeat environmental protections.

Climate Denial Industry Costs Us $500 Billion a Year- The International Energy Agency (IEA) has announced in its latest World Energy Outlook that every year of delayed action to address climate change will add $500 Billion to the price tag of saving the planet. The climate denial industry should foot the bill, since they are responsible for causing the delay. In the run-up to the Copenhagen climate summit, a growing number of government leaders from around the world - and even high level United Nations representatives - have suggested that an ambitious, legally binding agreement is all but impossible to achieve in Denmark this December

Climate Change - Building a Green Economy - Paul Krugman - If you listen to climate scientists — and despite the relentless campaign to discredit their work, you should — it is long past time to do something about emissions of carbon dioxide and other greenhouse gases. If we continue with business as usual, they say, we are facing a rise in global temperatures that will be little short of apocalyptic. And to avoid that apocalypse, we have to wean our economy from the use of fossil fuels, coal above all.  But is it possible to make drastic cuts in greenhouse-gas emissions without destroying our economy?

Krugman on Environmental Economics  - This is a really nice article by Krugman on the economics of climate change. There's not much new here for wonks who follow this stuff closely. But it's the nicest summary of issues that I know of written in a way that anyone can understand. I'll be making this required reading for my principles of economics class (ARE 201). What I would liked to have seen in the article but didn't:
(1) Some discussion of carbon emissions besides burning of fossil fuels. Land use change, mainly deforestation, comprises about 20% of emissions worldwide. It's a lot harder to price sequestrations from trees, but that form of emission reductions is cheap.
(2) Some discussion of how unequal the likely costs of inaction will be. The DICE model and nearly all others obscure distributional issues which is where a lot of the action is likely to be.
(3) A fleshed out argument for how Weitzman's doomsday scenario might actually play out.

Let’s Not Do Climate Policy Like Johnny Cash - (Johnny Cash, One Piece At A TIme) - Ryan Avent at the Economist argues with Matt Steinglass, also at the Economist, about whether “leave it in the ground” is a desirable way to reduce global warming. Here is Avent: In the end, reduction of fossil fuel consumption and carbon emissions is all about the demand side—the supply of fossil fuels on earth is more than sufficient to turn the planet into an oven, and so demand must be rationed. So either you commit yourself to disrupting enough of currently available fossil fuel supply to raise fossil fuel prices, or you quit worrying about supplies and focus on demand-side measures. The former seems to me to be utterly impossible and not that economically desirable, and so I’d urge my colleague to concentrate on the latter…

Plants flower five days earlier for every degree of global warming - In an example of "citizen science", researchers looked at more than 400,000 records collected by Victorian vicars, dog walkers and the viewers of the BBC series Springwatch.  The records, that go back to 1753, were divided into 25 year periods in order to compare the average flowering time as the weather changed from year to year. More than 400 species were recorded, from spring blooms like daffodils to summer plants like ivy.  In recent times, from 1985 to 2009, flowers came up on the 20th May, earlier than during any other period. In the coldest 25-year period, from 1835 to 1859, plants bloomed almost two weeks later around 3rd June. In even the warmest period compared to today, from 1910 to 1934, plants came up two days later on 22nd May.

Off the Shelf - ‘Green Gone Wrong’ - Can Capitalism Save the Planet? - IT may seem quaint to recall this now, but on the eve of the financial crisis, one of the biggest business stories was how large corporations were going to save the planet and make billions of dollars for their shareholders at the same time. The global economic collapse pushed the rise of green capitalism off business magazine covers, but it will surely resurface. After all, Wal-Mart and G.E. are still pushing it. In a recession, they need all the good publicity they can get.  Now, along comes Heather Rogers, who warns about the dangers of buying into this mind-set with “Green Gone Wrong: How Our Economy Is Undermining the Environmental Revolution” She says green capitalism is actually undermining ecological progress.

Kalamazoo Cleanup Delayed After Lyondell Bankruptcy - About 47,000 hazardous waste sites were fouling U.S. air, land and water at the end of 2007, the latest EPA figures show. States, reeling from $196 billion in deficits this year, can’t handle the cleanup costs. And the federal Superfund, created by Congress in 1980 to go after polluters at the worst sites and foot the bill when they couldn’t pay, fell to about $1.3 billion in 2007 from about $1.5 billion in 1999.  Companies navigating the worst economy in generations say they’re strapped, too. Lyondell, part of Rotterdam-based LyondellBasell Industries AF, became one of the 60,837 businesses filing for bankruptcy in the U.S. last year, a 40 percent jump from 2008, according to the American Bankruptcy Institute.

Economic Growth And Climate Change — No Way Out? - Humankind has reached a fork in the road. The business-as-usual path implies robust economic growth with a rise in the carbon dioxide emissions that contribute to anthropogenic climate change. The other path, whatever its actual form turns out to be, shuns business-as-usual in an attempt stabilize greenhouse gas levels (mainly carbon dioxide CO2) in the Earth's atmosphere (e.g. at 450 ppmv, parts-per-million-by-volume) to avoid catastrophic warming (e.g. > 2°C). Considered alternatives invariably lay out a vision of the future in which emissions steadily decline while economies continue to grow. Is such a vision realistic? This essay questions standard assumptions underlying this "have your cake and eat it too" view.

Expert fiddling - Are academics telling porkies? Are drugs really less dangerous than horse-riding? Are Himalayan glaciers really melting? Politicians are beginning to wonder – which can do little for their faith in evidence-based policy.Of course, academics never could give straight answers to such questions. Modulation is inherent in any answer and is amplified by transfer to the political arena, which should hardly shock politicians.Can it really be that academic experts fiddle the peer review and publication system, the very system that certifies their expertise?Academic expertise is confirmed by publication in top journals, publication approved by peer review. ‘Twas ever thus. But the UK Research Assessment Exercise expects this system to serve another function as well. It is to provide the primary performance indicator by which academics, their departments and their universities, are judged – and funded.

2 more glaciers gone from Glacier National Park -– Glacier National Park has lost two more of its namesake moving icefields to climate change, which is shrinking the rivers of ice until they grind to a halt, the U.S. Geological Survey said Wednesday. Warmer temperatures have reduced the number of named glaciers in the northwestern Montana park to 25, said Dan Fagre, an ecologist with the agency.He warned the rest of the glaciers may be gone by the end of the decade. "When we're measuring glacier margins, by the time we go home the glacier is already smaller than what we've measured,"

Ice Sheet Melt Identified as Trigger of 'Big Freeze'— The main cause of a rapid global cooling period, known as the Big Freeze or Younger Dryas -- which occurred nearly 13,000 years ago -- has been identified thanks to the help of an academic at the University of Sheffield.A new paper, which is published in Nature on April 1, 2010, has identified a mega-flood path across North America which channelled melt-water from a giant ice sheet into the oceans and triggering the Younger Dryas cold snap.The research team discovered that a mega-flood, caused by the melting of the Laurentide ice sheet, which covered much of North America, was routed up into Canada and into the Arctic Ocean.This resulted in huge amounts of fresh water mixing with the salt water of the Arctic Ocean. As a result, more sea-ice was created which flowed into the North Atlantic, causing the northward continuation of the Gulf Stream to shut down.

Alaskan peatlands expanded rapidly as ice age waned -  A rapid expansion of Alaskan peatlands at the end of the ice age was fueled by highly seasonal climate conditions, a new analysis suggests. The finding raises the possibility that future warming could decrease or reverse carbon storage in peatlands and thereby further aggravate climate change.The study, published online the week of April 5 in the Proceedings of the National Academy of Sciences, shows that most of Alaska’s peatlands formed at a time when the region experienced warmer summers and colder winters than today. Paleoecologists Zicheng Yu and Miriam Jones of Lehigh University in Bethlehem, Pa., analyzed core samples from peatlands, as well as data collected by other teams, to trace the expansion of peatlands in Alaska since the peak of the most recent ice age. The oldest of these prodigious storehouses of carbon first appeared about 18,000 years ago, a couple of millennia before such boggy areas appeared in Siberia and other high-latitude areas.

Arctic Thaw Frees Overlooked Greenhouse Gasses (Reuters) - Thawing permafrost can release nitrous oxide, also known as laughing gas, a contributor to climate change that has been largely overlooked in the Arctic, a study showed on Sunday. The report in the journal Nature Geoscience indicated that emissions of the gas surged under certain conditions from melting permafrost that underlies about 25 percent of land in the Northern Hemisphere. Emissions of the gas measured from thawing wetlands in Zackenberg in eastern Greenland leapt 20 times to levels found in tropical forests, which are among the main natural sources of the heat-trapping gas. "Measurements of nitrous oxide production permafrost samples from five additional wetland sites in the high Arctic indicate that the rates of nitrous oxide production observed in the Zackenberg soils may be in the low range," the study said.

Arctic Seabed Methane Stores Destabilizing? - I have long thought that the fact that there have been a bunch of ice ages recently when the world was significantly colder than it is now is evidence that there are powerful multiplier mechanisms in our climate on the downward side: as I think I understand it, small solar forcings produced by the evolution of the earth's orbit are powerfully amplified by changes in albedo and thus produce much larger swings in temperature. I had, however, thought that this was not true on the upside: that the absence of recent episodes in which the earth was a bunch warmer than it is now tells us that positive-feedback multiplier amplification on the warming side is limited. There is growing evidence that I am wrong. Matthew Yglesias tells us... 't’s a good thing this is all part of some giant conspiracy, because if I thought scientists at the University of Alaska were undertaking good-faith scientific research I’d be really worried...'

How methane leaks through permafrost - Recently a team from Russia, the US, and Sweden found that the East Siberian Arctic Shelf (ESAS) is releasing around 8 teragrams of methane from subsea sediments each year. Now team member Natalia Shakhova and colleague Dmitry Nicolsky have come up with a new model for the Dmitry Laptev Strait region of the shelf to explain exactly how the methane is escaping through the permafrost layer above it."Our results suggest that degradation of subsea permafrost in the ESAS currently very likely occurs on a wider scale than was previously thought," Natalia Shakhova told environmentalresearchweb. "Specifically, it was [previously] considered that in the areas of the ESAS shallower than 60–70 metres subsea permafrost is stable, continuous and impermeable for gases. We have shown that areas of the ESAS affected by thermokarst [permafrost melting], submerged taliks and some other processes could serve as migration pathways for methane to escape to the water column and further to the atmosphere."

Ecosystems Under Threat from Ocean Acidification— Acidification of the oceans as a result of increasing levels of atmospheric carbon dioxide could have significant effects on marine ecosystems, according to Michael Maguire presenting at the Society for General Microbiology's spring meeting in Edinburgh.Postgraduate researcher Mr Maguire, together with colleagues at Newcastle University, performed experiments in which they simulated ocean acidification as predicted by current trends of carbon dioxide (CO2) emissions. The group found that the decrease in ocean pH (increased acidity) resulted in a sharp decline of a biogeochemically important group of bacteria known as the Marine Roseobacter clade. "This is the first time that a highly important bacterial group has been observed to decline in significant numbers with only a modest decrease in pH," said Mr Maguire.

Aral Sea Almost DRIED UP: UN Chief Calls It 'Shocking Disaster… The drying up of the Aral Sea is one of the planet's most shocking disasters, U.N. Secretary-General Ban Ki-moon said Sunday, as he urged Central Asian leaders to step up efforts to solve the problem. Once the world's fourth-largest lake, the sea has shrunk by 90 percent since the rivers that feed it were largely diverted in a Soviet project to boost cotton production in the arid region.The shrunken sea has ruined the once-robust fishing economy and left fishing trawlers stranded in sandy wastelands, leaning over as if they dropped from the air. The sea's evaporation has left layers of highly salted sand, which winds can carry as far away as Scandinavia and Japan, and which plague local people with health troubles.

World's 4th Largest Lake is Now 90% Dried Up (Pics & Video)… Not so long ago, the Aral Sea was the 4th largest freshwater lake in the world. Now, it's only 10% of its former size. In what the UN Secretary General Ban Ki-moon is calling one of the most shocking disasters on the planet, the Aral Sea has literally all but dried up. So how does one of the most massive bodies of water in the world vanish? A giant, Cold War-era Soviet project comes to town, that's how. A project intended to boost cotton production in an arid region of Uzbekistan diverted the rivers that feed the Aral Sea away from their natural source. Without the rivers feeding into the lake, it has simply and steadily dried up over the years. And now, 90% of the entire Aral Sea is gone.

BOB, America’s Biggest Sodium Sulfur Battery, Powers a Texas Town - BOB, short for “Big-Old Battery,” began charging up this week. The giant sodium sulfur powerhouse, which is literally the size of a house, can store four megawatts of power for up to eight hours. BOB is the first sodium sulfur battery in Texas and the biggest one in existence in the US. Electric Transmission Texas ponied up $25 million to build the battery, and will add $60 million to build a second transmission line by 2012. Batteries like BOB are useful for towns like Presidio, but they can also be used by utilities themselves. In America’s archaic grid system, electricity generation and usage must occur simultaneously, a huge problem for renewables like wind and solar, which generate power sporadically. Bringing on giant batteries to store power can ensure more renewables are brought online before a smart grid can be put in place.

Hacking the Smart Grid - - Components of the next-generation smart-energy grid could be hacked in order to change household power settings or to spoof communications with a utility's network, according to a study of three pilot implementations.  The problems were highlighted in a presentation given last week by security researcher Joshua Wright of InGuardians, a consulting firm with many infrastructure companies among its clients. Vulnerabilities discovered by Wright could let attackers remotely connect to a device or to intercept communications with the managing power company.

Search engines' dirty secret - The term search "engine" is apt. Searches are powered by millions of computers packed into warehouses, all wired together to function as a single system. Like any system, it obeys the laws of thermodynamics, and therefore wastes energy. The first law says it takes energy to do work, even if that work is only to move electrons across silicon wafers. The second law says that no engine is perfect, meaning some of the input gets lost as heat. This is the entropy, or disorder, arising from your search. Whatever you search for, it boils down to the same cycle: move atoms, then cool atoms. Both these steps consume energy. How much? Let's run through some numbers, using the leading search engine as our guide. Google's data centres contain nearly a million servers, each drawing about 1 kilowatt of electricity. So every hour Google's engine burns through 1 million kilowatt-hours. Google serves up approximately 10 million search results per hour, so one search has the same energy cost as turning on a 100-watt light bulb for an hour.

Tata Air Car Powered Entirely by Compressed Air. Blow Me Down! - Tata Motors, once derided as the company with a name that sounds like it ought to be spread on a Fillet-o-Fish, has been making some serious forward movement in the past year or two.Now, hot on the heels of its recent acquisition of Land Rover and Jaguar, and news of the impending assault on the European market with the Tata Nano, the Indian company is set to release a car powered entirely by air. But is it all hot air? (You see what I did there.) Turns out it's very much a legitimate prospect. Sure, it looks bloody ordinary, but let's look beyond the styling for the moment. The MiniCAT (Compressed Air Technology), invented by French madman and ex-F1 engineer Guy Negre and his company Motor Development International (MDI), is a lightweight fibreglass urban car built around a tubular chassis which is glued together rather than welded. More importantly than that, and as you've no doubt gathered, it's powered entirely by compressed air.

Wind power or hot air? - Ohio officials outlined plans this week to put Lake Erie, the shallowest of the Great Lakes, at the forefront of offshore wind-power development. Gov. Ted Strickland and U.S. Sen. Sherrod Brown joined industry and education leaders to detail tax-cut and regulatory measures to jump-start wind-power development on Lake Erie. The lake’s comparative shallowness is seen as an advantage for erecting towers to produce wind power.Strickland said Monday that his proposal to eliminate the tangible personal property tax on wind- and solar-generation equipment would make Ohio competitive in developing wind power.

Do informed voters make better choices? Not necessarily. - - Knowledge is power -- except maybe when it comes to voting on ballot initiatives. Then it doesn't seem to matter so much.  That's the conclusion of an intriguing new study, "The Dilemma of Direct Democracy," by researchers. In exit polls after the 2008 election, they asked 1,002 voters in San Diego how they had voted on Proposition 7 -- a measure that would have required public utilities to generate at least half their energy from renewable sources by 2025. They also asked about the basic facts of the initiative, whether in general voters preferred that utilities produce more renewable energy and whether they knew if gas or electric companies had opposed or supported the initiative.  "Surprisingly, we discover that knowledge does not matter," the authors write. Regardless of whether voters were familiar with the facts of the initiative or knew the utility companies' positions, they tended to cast their votes in a manner consistent with their own underlying preferences. "We find no support for the expectation that better-informed voters . . . are more likely to make reasoned decisions than those who are, by our measure, uninformed," the researchers write.

Dead tree disaster turns into biofuel opportunity - A biofuel firm has developed an innovative way to recycle dead trees to produce biobutanol. Cobalt Technologies, based in California in the United States is to produced the green fuel using trees that have been killed off by an infestation of pine beetles. It will be the first time the fuel has been produced from dead trees- usually the production of the fuel uses healthy, living trees. In the States, pine beetles are killing off thousands of trees each year. Whilst not solving a growing pest problem-thought to be exacerbated by climate change-the production of fuel from the trees will at least create a use for the destroyed forests. 

Of Biofuels, Land Grabs and Food Prices - ActionAid, an antipoverty group, has stepped up a campaign against European Union policies aimed at encouraging consumers to use fuels grown from crops to power their cars. “Land is quickly becoming the new gold and right now the rush is on,” Fatou Mbaye, a biofuels officer for ActionAid in Senegal, said in a statement issued by the group. “Poor communities are being pushed off their land to meet the demand for biofuels in Europe.”

Should Biodiesel Producers Get a Tax Credit? -  From the Des Moines Register:A leaing biodiesel producer, Renewable Energy Group of Ames, is appealing to a key House Democrat to pass a bill that would revive the industry's lapsed tax subsidy..I'd like to make two points:.  The subsidy probably leads to some gross jobs creation, but what are the unseen effects?  A $1-a-gallon subsidy is paid for by taxes of an equal amount and/or by borrowing. Second, if your good meets the definition of a private good (it is excludable and it is rival) and needs a subsidy to exist, it probably isn't worth all that much to society in the first place.  In other words, the resources necessary to produce biodiesel have higher value in other industries.

Brazil Eliminates 20% Import Tariff on Ethanol - One of the main arguments that pro-ethanol lobby groups like the Renewable Fuels Association (RFA) and Growth Energy make in defense of the generous Congressional subsidies to U.S. corn ethanol producers is that Brazil unfairly competes by slapping a 20% tariff on imported ethanol, effectively locking out U.S. ethanol exports. Well, so much for that argument.   Brazil announced this week that it is eliminating the import tariff until the end of 2011 -- and potentially forever.  Brazilian sugarcane ethanol has several economic advantages compared to U.S.-grown corn ethanol, including the capacity to co-generate electricity by burning the sugarcane bagasse, lower wage workers, and cheaper feedstocks in the form of sucrose.

Monsanto GM-corn harvest fails massively in South Africa - South African farmers suffered millions of dollars in lost income when 82,000 hectares of genetically-manipulated corn (maize) failed to produce hardly any seeds.The plants look lush and healthy from the outside. Monsanto has offered compensation. Monsanto blames the failure of the three varieties of corn planted on these farms, in three South African provinces,on alleged 'underfertilisation processes in the laboratory". Some 280 of the 1,000 farmers who planted the three varieties of Monsanto corn this year, have reported extensive seedless corn problems. However environmental activitist Marian Mayet, director of the Africa-centre for biosecurity in Johannesburg, demands an urgent government investigation and an immediate ban on all GM-foods, blaming the crop failure on Monsanto's genetically-manipulated technology.

Sparks Fly as China's Hunger for Coal Grows - Australia is already the world's top coal exporter and its industry is dominated by global heavyweights, led by BHP Billiton, Xstrata, Rio Tinto and Anglo American. But the combined might of that quartet cannot get coal to the ports quick enough.The battle for Australian coal mines comes as China last year became a net importer of thermal and coking coal for the first time. Beijing bought about 100m tonnes of coal overseas in 2009, a dramatic change from sales of 80m tonnes five years ago. China's move to the status of importer follows a clampdown on illegal and unsafe mining, forcing the closure of hundreds of small mines in Shanxi province, the country's key coal-producing area, and reducing domestic production.

Great Barrier Reef at Risk as Coal-Ship Traffic May Jump 67% (Bloomberg) -- The corals, whales and giant clams of Australia’s Great Barrier Reef are in the path of a “coal highway” to China that may see shipments jump 67 percent by 2016, increasing the threat of an ecological disaster after a coal carrier ran aground last week.Trade at Gladstone port in Queensland may rise to about 140 million tons, mostly coal, in six years from 84 million tons in the year ending in June, Gladstone Ports Corp. Chief Executive Officer Leo Zussino said in an interview. The port was the loading point for the Shen Neng 1, which hit a sand bank on April 3 at full speed carrying 68,000 metric tons of coal and 975 tons of fuel oil.“It’s only a matter of time before a serious oil spill occurs unless we have a better system for regulating the traffic,”

Pick Your Poison: CO2 from Coal or No Lights in Africa - Suppose that the World Bank said to African nations; "You can have a $X dollar coal fired power plant that will produce 100 units of power but consider this alternative. The coal fired power plant will produce 200 units of carbon each year. For every ton of carbon you choose not to produce, we will give you $50. So, if you build a wind turbine system rather than the coal fired power plant, we will give you 200*$50" each year." Now, I'm making up the "200" number but not the $50 number. In cap and trade discussions, serious people say that the price per ton of carbon should start at $35 a ton but suppose that we paid African nations $50 per ton of carbon avoided. This would provide them with a strong incentive to choose the "green option". This is like the "nega-watt" that Amory Lovins would champion.  Note that under my offer, the African nations could still build the coal fired power plant but they would lose out on the payment for not polluting. So this isn't a carbon tax, it is a "carbon subsidy". I'm giving the African nation the property rights to pollute but they have the opportunity to sell this right (at a price of $50 per ton) back to the World Bank.

People in Niger Heading Toward Capital in Search of Food - Relief officials say nearly 60 percent of families in Niger are facing food shortages because of poor rains. Some people are now leaving their villages, heading toward the capital in search of food. In the village of Begorou Tondo, people are loading their possessions on to donkey carts for the 100-kilometer walk to the capital looking for food. This young woman says there is simply nothing left to eat at home. She says her family has no choice but to eat the leaves of plants growing on the side of the road, because there is nothing left to eat. They have no food, she says, and her parents have not received help from anyone.

UN appeals for more funds to assist people facing food crisis in Niger  – United Nations aid agencies and their partners in Niger today appealed for an additional $132 million to fund humanitarian programmes in the West African country, which is facing a severe food crisis following poor harvests caused by inadequate rainfall last year. Food shortages and malnutrition have affected an estimated 4.7 million people, the UN Office for the Coordination of Humanitarian Affairs (OCHA) reported in a revised emergency humanitarian action plan prepared to support the Government’s efforts to quickly mobilize additional funds.

Famine Africa stereotype porn shows no letup - The UN takes the photographer to the “hungriest place on earth”, Akobo, South Sudan (HT Wronging Rights). Then The aid groups Save the Children and Medair have canvassed the Akobo community over the last week, searching for the hungriest children. And surprise: you get the most horrific images possible of starving children, to be featured prominently on the Huffington Post, which reinforces the Western stereotype of “famine Africa.”   An equivalent procedure would represent New Yorkers by the most horrific images possible of the homeless. But we don’t do that because we don’t have the stereotype that typical New Yorkers are homeless

Severe Drought Dries Up Thai Crops -Thailand farmers say the second rice crop in the northern province of Chiang Rai is already perishing from water shortages caused by a severe drought.  Farmers expected the dry season to come late this year, but it started earlier instead. Officials say that the drought may become the worst in decades.  According to the U.N. Food and Agriculture Organization, the El Nino phenomenon is most likely responsible for this season’s dryness in the Indochina region. Local farmers usually take water from the Kam River to irrigate 40,000 acres of land, but the river has already started to shrink.

Devastating Drought in Shangri-La - Rare is the year that goes by without reports of a flood or drought somewhere in China.  But without a more specific sense of place and context, it’s hard to evaluate the significance of such calamities, or their impact on business and the economy.  The “Nine Nations of China” framework can often be helpful in getting a handle on the situation. The part of China most often afflicted by both flood and drought is the Yellow Land, an arid, densely populated region dependent on the turgid and unpredictable Yellow River for its water supply.  The news these past few weeks, however, has been dominated by reports of a devastating drought affecting an entirely different area, the southwest provinces of Yunnan, Guizhou, and Guangxi — the region I call “Shangri-La.”  Those who have read my description of Shangri-La may recall my mentioning, among its key resources, its plentiful supplies of water.  Normally that’s true, but this year is different.  According to news reports, Shangri-La has gotten barely a drop of rain since September — over seven months. 

Drought causes thermal coal shortage in central China province - About 300,000 tonnes of thermal coals were needed in central China's Hubei Province as lingering drought in the upstream region has cut the hydropower, local officials said Sunday.About 30 percent of Hubei's electricity capacity comes from hydropower generation, but the drought in southwest China has lowered the water level in the Three Gorges reservoir by six meters against the same period last year. This caused a shortage of 500 million kilowatt hours of hydropower which could be met by burning 300,000 tonnes of thermal coals, according to the Hubei Electric Power Company. The province's plan to supply power to the Shanghai Expo was suspended. The electricity consumption of the first quarter this year in Hubei saw a year-on-year increase of 30 percent. The shortage was expected to worsen as the consumption would surge in summer, company officials said

Sometimes water can cost way too much —- The multibillion dollar proposal by the aptly named Aaron Million to pump water from the Green River in Wyoming, and then pipe it to the Front Range of Colorado by way of a privately funded project he calls the Regional Watershed Supply Project, may never overcome the many objections to it. But if it does, one thing is certain: The water it would provide for Denver-area consumers won't be cheap. Now the U.S. Army Corps of Engineers is poised to begin an environmental impact study to examine whether Million's still-incomplete project design has any major flaws.  One issue the Corps must take into account is whether anyone can pay for this water at the prices the project would have to charge to cover its costs and produce a profit. I think it's clear that the answer is no.

Nasa 'could prevent water wars' - Dr Heggy, a member of Nasa’s Jet Propulsion Laboratory, told the UN water conference in Alexandria, the Egyptian coastal city, that the scarcity of water could trigger potential water-related conflicts throughout the region.  He said that the technology could detect water up more than half a mile beneath the dense deserts that cover much of the Middle East and North Africa. Scans taken by NASA showed an especially arid region of Darfur in Sudan sat on top of 6,000-year-old valleys and lakes.  As global warming continues to wreck havoc on earth over the next century, experts say arid land will threaten to consume more land. The technology, he added, could eventually help ward off conflict.

Biofuel Production Puts Pressure On Water - In the aftermath of 9/11, biofuels were touted as a magic bullet of national energy independence. The calculations were computed, the studies were done, the lobbyists lobbied and Congress passed the Energy Independence and Security Act of 2007. The act mandates a fivefold increase in domestic ethanol production by 2022, with about half that goal met by 2015 with corn-based ethanol. The U.S. began subsidizing biofuel plant construction throughout the cornbelt.  Also in the time since 9/11: Snowpacks diminished. Droughts threatened. Fires burned. The water levels in the Great Lakes and countless smaller ones dropped, a trend recently (and temporarily?) reversed by the unusual weather of the last two years. Meanwhile, the climate modelers firmed up their predictions that the water supply in the American heartland is on a downward trend.

Easter Island: A Case Study In The Response To Resource Depletion - “What did the Easter Islander who cut down the last palm tree say while he was doing it?” For a several years, I have been intrigued by this question which Jared Diamond asks us to consider in his book ‘Collapse’. In fact, the question can be asked more broadly: “What were the thought processes and discussions amongst the inhabitants of Easter Island leading up to the removal of the last remnants of forest?” This could be seen, perhaps, as a hypothetical exploration, rooted in a real historical event, of “the psychology of resource depletion denial.” I can’t help feeling that this is highly relevant to us today where the world seems shrunk to the size of a small island in the vast ocean of space. How could the islanders so knowingly have destroyed the life-blood of their island and their own future? How do you imagine the Easter Islanders behaved in those last few years before the last tree was felled?

U.S. Natural-Gas Data Overstated - Expect a big revision from the EIA on natural gas production data soon. Apparently, the margin of error has widened on production estimates over the past several months. An examination revealed errors that overstated production. As you can see from the graph below, which shows un-adjusted nat gas production, rising production since 2007 has helped suppress prices. Revising the production picture could be bullish for natural gas prices, which have taken a massive hit lately.

Man arrested at Large Hadron Collider claims he’s from the future - A would-be saboteur arrested today at the Large Hadron Collider in Switzerland made the bizarre claim that he was from the future. Eloi Cole, a strangely dressed young man, said that he had travelled back in time to prevent the LHC from destroying the world.The LHC successfully collided particles at record force earlier this week, a milestone Mr Cole was attempting to disrupt by stopping supplies of Mountain Dew to the experiment's vending machines. He also claimed responsibility for the infamous baguette sabotage in November last year.Mr Cole was seized by Swiss police after CERN security guards spotted him rooting around in bins. He explained that he was looking for fuel for his 'time machine power unit', a device that resembled a kitchen blender.

U.S. And Australian Funds Join BP Rebellion On Oil Sands - Pension funds from the US and Australia say they will back a resolution at BP's annual general meeting next week that calls for the oil group to publish a report on the financial and environmental risks involved in developing oil sands. The California Public Employees' Retirement System (CalPers), the California State Teachers' Retirement System (CalStrs), and the Vermont Pension Investment said yesterday they will vote in favour of the resolution – which BP management is opposing – as will AMP Capital Investors and Christian Super in Australia.

Uranium nations flout nuclear mandate - Years after a six-month deadline passed, dozens of nations, including uranium producers, remain potential weak links in the global defense against nuclear terrorism, ignoring a U.N. mandate on laws and controls to foil this ultimate threat. Niger, a major uranium exporter, and the Democratic Republic of the Congo, the source of the uranium for the first atomic bomb, are among the states falling short in complying with Security Council Resolution 1540, a key tool in efforts to block nuclear proliferation. Uncontrolled freelance mining in the Congo has long worried international authorities that the raw material for a bomb might fall into the wrong hands.

Russian Oil Production Rises to Post-Soviet Record - Russia, supplier of about 12 percent of the world’s oil, increased crude production in March to a post-Soviet record as TNK-BP tapped deposits and OAO Bashneft’s new owners squeezed more crude from older fields.  Crude output reached 10.12 million barrels a day, a gain of 3.3 percent from the same month last year and 0.4 percent from February, according to preliminary data released today by the Energy Ministry’s CDU-TEK unit. Exports rose 3 percent on the month to 5.38 million barrels a day.

Moscow forks over bonus for Venezuelan oil - (UPI) -- Moscow agreed to pay Caracas $1 billion in bonuses to tap some of the largest oil fields outside of the Middle East, the Russian prime minister said in Moscow."Our partners have said they are ready to expand our partnership in the energy sector," said Prime Minister Vladimir Putin. "If an agreement is reached, Russia will pay Venezuela an additional $1 billion bonus for oil field development." Chavez told the visiting prime minister that a joint Russian-Venezuelan venture, the National Oil Consortium, would help his country develop petroleum products in order to stave off a regional energy crisis, Russia's state news agency RIA Novosti reports.

Chavez Says Russia Offers Venezuela Nuclear Help - Russia has agreed to help Venezuela draw up plans for a nuclear power plant, President Hugo Chavez said Friday. Atomic energy was one of many areas of cooperation discussed as Russian Prime Minister Vladimir Putin made his first visit to the South American country.Chavez had announced plans to turn to Russia for nuclear help in the past. He did not give details on how much Venezuela is prepared to invest, or how long it might take. Russia and Venezuela also launched a joint business to tap vast oil deposits in eastern Venezuela, and Chavez said Moscow has offered to help Venezuela set up its own space industry including a satellite launch site.

China Oil Buys from Saudi, Iran, Drop; Libya, Angola, Up (Reuters) - China imported less crude oil from Saudi Arabia and Iran in January from a year earlier, but raised purchases from African exporters such as Angola and Libya and smaller MidEast producers Kuwait and Iraq, customs data showed. But traders familiar with Saudi and Iranian supplies to China said the data could be skewed due to the Lunar New Year holiday and warned against interpreting them as evidence of weakening Chinese demand.Top exporter Saudi Arabia shipped in 2.91 million tonnes, or 685,000 barrels per day (bpd) last month, a level 7 percent lower than January 2009 but tumbled nearly 500,000 bpd from December's peak at about 1.18 million bpd, customs said.

Saudi Arabia, Abu Dhabi State Suppliers Raise Crude Oil Prices… (Bloomberg) -- Saudi Aramco, the world’s largest state-owned oil company, raised official selling prices for light crude grades for customers in the U.S. and Asia for May. Abu Dhabi raised its retroactive March prices on all grades. The state-owned Saudi Arabian producer increased the formula price of its Arab Super Light crude to Asia the most, by $1 a barrel to $2.10 more than the Persian Gulf benchmark, according to an e-mailed statement late yesterday. Abu Dhabi National Oil Co., or Adnoc, the state-owned producer from the United Arab Emirates capital, raised March crude selling prices more than 5 percent, to the highest since November.

Corporate Coup: Shell And Goldman Sachs Execs Become Ministers In Nigeria's New Cabinet - Nigeria's acting President Goodluck Jonathan has appointed a Shell employee and an ex-Goldman Sachs executive as cabinet members in an apparent "corporate coup" of the country. Diezani Allison-Madueke, who previously worked for Shell in Nigeria, has been made Petroleum Minister and charged with shepherding the country's burgeoning oil industry, which is the number 3 supplier of oil to the U.S., according to the AP. Former Goldman Sachs executive Olusegun Olutoyin Aganga has also been appointed as the country's Finance Minister. The country has recently been taken under control by Acting President Goodluck Jonathan, who has refused to yield power back to sick President Umaru Yar'Adua, even though he has come back to Nigeria.

U.S. Forecasts LNG Imports to Increase 42% in 2010 (Bloomberg) -- U.S. imports of liquefied natural gas may rise 42 percent in 2010 to approximately 1.76 billion cubic feet per day, the Energy Department forecast today in its monthly Short-Term Energy Outlook. The latest estimate for 2010 imports was 2.2 percent lower than the previous forecast. The department’s Energy Information Administration last month predicted imports of 1.8 billion cubic feet per day. “While EIA currently expects U.S. LNG imports to increase by about 0.5 Bcf/d this year over last, the failure of global demand to keep pace with increased global supply could lead to even higher U.S. LNG imports than currently forecast,” the department said in the report.

The API Opposes New Fuel Standards, EPA Deluded - As a subscriber to the Oil & Gas Journal, lots of email alerts roll into my inbox. But sometimes there's a missive startling enough to actually get my attention. This is one of those times. The API is the American Petroleum InstituteAPI strongly opposes latest CAFE standards . Good God! Let me be blunt. There are so many layers of confusion here that it's hard to straighten them all out.  I'm not sure who is more deluded, the EPA or the API. The odds that humankind will take serious steps to mitigate anthropogenic climate change are a million to 1 against. For Homo sapiens, such as it is, the probability of such events is effectively zero. As in indistinguishable from nada, zip, zilch, nil, goose egg. As in 3 strikes and you're out. As in not going to happen. Forget about it!

Gasoline Still Has Some Advantages as Fuel -The attention being paid to the electric vehicle industry rankles some in the biofuel industry, whose own hype was abruptly halted by a glut of production in 2007, subsequent bankruptcies and a fall from grace after a link was drawn — which they dispute — between biofuels and higher food prices. Yet gasoline-powered cars may trump both alternatives for decades as the least-worst option, with wider adoption of more efficient conventional cars helping to curb carbon emissions and oil dependence. The uncertainty is striking for a $5 trillion global auto and fuel supply market where there is agreement only that the number of cars will keep rising, perhaps doubling to two billion by 2050.

IHS CERA: Big, But Potentially Limited, Output Growth in Iraq - Iraq's current "highly ambitious plans" to expand oil production are unlikely to be fully realized given political, security, operational and infrastructure challenges, according to a new report, Fields of Dreams: The Great Iraqi Oil Rush -- Its Potential, Challenges, and Limits by IHS Cambridge Energy Research Associates (IHS CERA). Iraq currently plans to expand production to as much as 12 million barrels per day (bpd) in the next six to seven years. Achieving levels around half that in the next decade would be more likely and would still constitute "a significant expansion," the report emphasizes. IHS CERA's current outlook for Iraq is 4.3 mbd in 2015 and 6.5 mbd in 2020 -- still big growth numbers

Oil Reserves Overstated by 33% - As the Obama administration plots out their political strategy for 2010 and 2012, concentrating on healthcare, taxes, financial reform and immigration, the one area that could destroy our current way of life is completely ignored. There is no plan for the onset of peak cheap oil. Denial is the plan. It won’t go back on the radar screen until oil crosses $100 a barrel. We’ve done nothing for decades. We’ve done nothing since the spike to $147 a barrel. That was just speculators. Do you wonder why oil is still $83 a barrel when we supposedly have a glut of supply? It must be those evil oil companies. The economy is still in the gutter and oil has gone from $35 a barrel to $83 a barrel. Take a look around you on the expressway. What is the ratio of SUVs and pickup trucks to hybrids? There are 255 million vehicles in the US. SUVs and Pickups make up 100 million of these vehicles. There are 1.6 million Hybrid vehicles. Yes we are certainly ready for Peak Oil. Fill er up cowboy.

Why does OPEC lie about its oil reserves? - OPEC, since the 80's, began determining production quotas based on the proven oil reserves of its member countries. And, in the same decade there was ridiculously large leaps in numbers: In 1983, Kuwait increased its reserves from 76 billion barrels to 92 billion barrels. Come 1987, Iraq's reserves went from 47 billion barrels to 100 billion barrels, Iran's reserves soared from 49 to 93 barrels, and the UAE oil reserves tripled from 31 billion barrels to 92 billion barrels in 85-86. Suspiciously, all the countries had either discovered new oil fields or their existing fields began producing more.  In 2006, PIW (Petroleum Intelligence Weekly) broke the news, in a leaked memo from the Kuwait Oil company (KOC) that Kuwait's proven reserves were only half of the reported figures. In the same year, Dr. Samsam Bakhtiari, then a senior expert of the (NIOC) National Iranian Oil Company said that the oil reserves in the Middle-East were "about half, or even less than what the respective national governments claim".

Faith-based economics in two graphs - It took a French newspaper to unearth information put out by the U.S. government more than one year ago that provides a worrisome projection for world oil supplies from an agency that for years said such supplies would be no problem for the foreseeable future. Glen Sweetnam of the U. S. Energy Information Administration acknowledged in an interview that total liquid fuel supplies could actually fall between 2011 and 2015 "if the investment [in new capacity] is not there." While this report has been circulating on peak oil sites in the last week, it is a graph which accompanied Sweetnam's 2009 presentation (PDF) which I found particularly illustrative. (See below.) It reveals in stark relief the dangers of running the world using the ideas of what I call faith-based economics.

Worlds Liquid Fuel Supply (20 years out graph)

Land Grab By the Federal Government? - Government is staging a full-fledged control assault on this country and, as much as I wish this weren't true, we are the ones left to fight it. Because apparently there aren't enough on the inside willing to do so. Look at this: It's a map of how much land is owned in America by the federal government. They own nearly 650 million acres of land — almost 30 percent of the land area of the United States. But look at how it's distributed: It's overwhelmingly in the West. Nevada is almost 90 percent federally owned land. Alaska is nearly three quarters federally owned. Compare that to the East. States are in the single digits. Even Texas is only 2 percent federally owned land. Let me show you this: our national resources in comparison to federally owned land. It seems the land we are protecting is also the most oil and natural resource rich land. Here's another map: Shale oil is found around the world but the largest deposits by far are in Colorado, Utah and Wyoming. Last year, government went after 9 million acres of land in the West in the name of saving the wild horses and stopping any activities that "would destroy the area's special character."

Peak oil man shifts focus to peak price, demand - Retired petroleum geologist Colin Campbell, who worked for major oil companies as well as smaller firms, has long been associated with the belief the world's oil supplies are dwindling.He does not waver from that and dismisses the argument of the so-called optimists that technology will manage to keep eking out more and more oil to keep pace with rising demand.What has changed is his opinion of the price impact and implications for fuel consumption after the spike of July 2008 to nearly $150 a barrel was followed by world economic recession.

Oil could give kiss of death to recovery - This week oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again in the offing. This was after a period of eight months when oil traded between $70 and $80, a narrow band that pleased oil producers without hurting consumers too much. The latest surge seems to have been prompted by rising confidence in a global economic recovery, even if most traders and bankers are still cautious about supply and demand fundamentals.  Worries about the Greek economy have pegged prices back over the last couple of days but the more bullish Wall Street banks see prices climbing further, with Barclays Capital forecasting $97, Goldman Sachs $110 and Morgan Stanley $100 next year.  But the higher prices go, the deeper the concerns that they will stifle global growth. Jeff Rubin, a former CIBC chief economist and author of a book on oil and globalisation, says: “Triple-digit oil prices are going to threaten a world recovery.”

Industries brace for peak water as peak oil hits - As though businesses didn't have enough on their plates dealing with peak oil in their strategic planning, production practices, and business models, now researchers from GlobeScan, after conducting a survey of 1,200 sustainability experts, have concluded that peak water is upon us and will worsen over the coming decade making every production process employed in creating the amenties of modern life more expensive. The function of the survey is not to state that individuals will go thirsty in the future, but rather it serves as an indication of the importance of water issues that businesses will need to rely on when deciding production plant placement or conservation methods for production.

Jeff Rubin: New U.S. drilling will prove meaningless - Maybe it’s a gesture to the American right, which is still seething over the recent passage of Barack Obama’s national heath care package in Congress. Or maybe it’s just soma for increasingly anxious American motorists, so they can sleep at night without wondering how long their petroleum-based lifestyles can possibly last.  But either way, President Barack Obama’s sudden reversal of the ban on new oil and gas drilling in protected U.S. waters is nothing more than a public relations exercise that will still leave Americans facing the daunting reality that they must learn to consume less, not more, of the one substance they have grown so overwhelmingly dependent on.

Richard Heinberg Interview: How Much Oil Is Left? - One of the world’s foremost educators on Peak Oil, Richard Heinberg, in an exclusive interview for MMNews: “We are currently seeing the end of economic growth as we have known it.” He is the award-winning author of nine books including:

An Uncomfortable Fact About Oil - America is mired in recession. Europe is in turmoil. Banks are reducing lending. Families are selling their extra vehicles. Yet, the price of oil is up. This strange dichotomy is an overlooked warning sign that America would do well to heed. Last Wednesday, President Barack Obama cleared the way for deep-water oil drilling along thousands of miles of America’s eastern seaboard and parts of Alaska. The announcement reversed his election promise, in which he said drilling would “only worsen our addiction to oil and put off needed investments in clean, renewable energy.” Why the change of heart?

The Pentagon also expects an imminent oil shock - A report from the American Joint Forces Command published March 15 predicts that in 2015, the world capacity for petroleum prouction could be 10 million barrels per day less than the demand. The report of the American Department of Defense (DoD), titled Joint Operating Environemnt 2010 indicates (page 29):"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015. the shortfall in output could reach nearly 10 MBD." 10 million barrels per day (MBD), that represents the production of Saudi Arabia, the world's leading petroleum producer. Such a shortfall, if it should come, would be more than 10 percent of the world demand for crude, which is today 86.5 MBD, and ought to reach 90 MBD in 2015.

Peak Asphalt: The Return Of Gravel Roads - If it is bitumen that we need, there is plenty of it. Just the Canadian tar sands are made mostly of bitumen and are said to contain at least one trillion barrels of it - probably more. To this amount, we can add Venezuela's tar sands, with at least half a trillion barrels. With tar sands, the main problem is to obtain liquid fuels, but if it is bitumen that we want, it is much easier. At present, bitumen doesn't seem to be lacking in the world market and some projections for asphalt indicate that production may be rising in the coming years.  The problem, as usual, is not one of quantity, but one of energy . With minerals, we are not running out of anything except of the energy needed for extraction. It is the principle that I called the universal mining machine. Bitumen doesn't seem to be an exception; we are not running out of bitumen, but we have increasing problems in being able to afford it; just as with a lot of other minerals.

Growth: Good news | The Economist - As of the first full week of the second quarter of 2010, it seems possible that yet another economic hurdle has been leapt, and a self-sustaining recovery appears within reach. The latest data releases from the Institute of Supply Management show that the manufacturing sector grew in March for an eighth consecutive month, and at the fastest pace since 2004. Service sector activity expanded in March for a fourth consecutive month, and at the fastest pace since 2006. Meanwhile, equities, commodities, and interest rates have all ticked upward in recent weeks, a fairly good indicator that markets are increasingly confident about the state of recovery. But while growth in commodities prices is a positive sign, it's also a potential threat: That's the price of a barrel of oil over the past year. As the global economy has continued to move away from the abyss, the price of crude has climbed back to near $90 a barrel. Increases much beyond that will begin to squeeze household budgets in places heavily dependent on oil.

Steel mills told to halt production - Small steel mills with steel blast furnaces less than 400 cubic meters in size are being told by the central government to shut down production by the end of next year. The State Council, China's cabinet, published a document on Tuesday, saying all steel blast furnaces in this size class will be closed to rein in overcapacity and force upgrades in the industry. "It is hard to calculate how many of these steelmakers there are, but the new move will help rein in overcapacity in the steel industry," Du said. The industry has been facing oversupply problems which have weighed on steel prices and squeezed profit margins, China's steel lobby China Iron and Steel Association warned.

Steel price may rise by 50% due to high production costs - The average price of steel products in the international market may increase by about 50 percent to US$900 per ton in June from $600 in January due to higher production costs. Irvan Kamil, the marketing director of state steel company PT Krakatau Steel said that steel producers had no choice but to pass the higher production costs on to consumers to cope with the sharp increase in the prices of raw materials.According to him, the price of raw materials had increased by about 90 percent during the past several months although demand is still relatively stable.“The price of steel products rose to $700 per ton in March from about $600 in January. It is expected to further increase to $900 per ton in June,” he told reporters."

Inflation Warning Etched In Steel - If last Wednesday you reached for a copy of that day's Financial Times, would you have expected to see the following headline -- "Steel prices set to soar: Everyday goods will cost more" -- in large print above the fold? I don't think so.  The newspaper went on to say: "Global steel prices are set to rise by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers yesterday agreed to a ground-breaking change in the iron ore price system." All along, as I've talked about money printing, I have said it was not possible to explain in advance which goods would climb in price (or when). I just knew that as the new money was put into circulation, prices would ultimately rise.

Work and Leisure in the U.S. and Europe: Why so Different? - Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe... we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.

Growth and taxes: A quick reply to Scott Sumner | The Economist - SCOTT SUMNER has replied to the post I wrote yesterday, and I just want to make a few additional points. He writes: At no time did I argue that tax rates drove the disparity between the incomes of all countries.  Indeed I cited the Congo and Afghanistan as examples of how that could not possibly be true in all cases.  I also contrasted Italy and France.  Rather I suggested that the disparity between Western Europe and the US might be largely driven by different tax rates. But he hasn't begun to explain why this should be the case. Japan and France are both highly developed countries, with a high level of technological and institutional congruence. Their levels of per capita output are nearly identical. But France raises much, much more revenue as a share of output than does Japan. Why should revenue share have, apparently, very little effect on that output relationship but a comparatively enormous effect on the relationship between outputs in western Europe and America?

The Rise of the New Paternalism - For as far back as memory reaches, people have been telling other people what’s good for them — and manipulating or forcing them to do it. But in recent years, a novel form of paternalism has emerged on the policy stage. Unlike the “old paternalism,” which sought to make people conform to religious or moralistic notions of goodness, the “new paternalism” seeks to make people better off by their own standards. New paternalism has gone by many names, including “soft paternalism,” “libertarian paternalism,” and “asymmetric paternalism.” Whatever the name, it arose from the burgeoning field of behavioral economics, which studies the myriad ways in which real humans — unlike the agents who populate most economic models — deviate from pure rationality. Real people suffer from a variety of cognitive biases and errors, including lack of self-control, excessive optimism, status quo bias, susceptibility to framing of decisions, and so forth. To the extent such imperfections cause people to make choices inconsistent with their own best interests, paternalistic interventions promise to help them do better.

BBC News - New 50% tax rate comes into force for top earners… - A new 50% tax rate for top earners has come into force at the start of the financial year. The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax. It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year. The 600,000 people who earn more than £100,000 a year will have their personal tax allowance eroded too, raising £1.5bn for the government. Together with increased tax on pension contributions, which starts next year, the UK's top 600,000 earners are expected to be paying an extra £7.5bn a year in tax.

Banks write down €40bn in loans - THE 11 banks and building societies operating in Ireland have written down almost €40bn of bad loans over the past two years of property and economic crisis, according to figures compiled by the Irish Independent.The figure represents 7.5pc of a Bloxham Stockbrokers estimate of a total of €533bn of lending outstanding by the six state-guaranteed banks and the country's five main foreign-owned lenders.  It also equates to almost a quarter of the size of Ireland's economic output last year.

UK household savings lowest in 40 years say ONS - People in the UK are saving less than at any time in the past 40 years, according to the Office for National Statistics (ONS). The household saving ratio in the UK in 2008 was 1.7% of total resources, the lowest recorded since 1970, and well below the 7.6% average for that period. The ONS Social Trends survey reveals that housing, water and fuel now represent the biggest area of spending. In 1970 the highest proportion was spent on food and non-alcoholic drinks.

UK Gas Hits $9.19/Gallon and It's Headed Higher - "Unleaded hit an average of 119.9p a litre for the first time ever, breaking the previous July 2008 record of 119.7p. But some forecourts are already charging 131.9p a litre – just a penny short of the £6 gallon ($9.19). This is a dark day for Britain’s hard-pressed motorists,” said the RAC. And there is worse to come, warned experts last night. A ­perfect storm of rising wholesale costs, the weak pound and more Government tax hikes will propel fuel costs even higher. Drivers were warned to brace themselves for a 5p-a-litre surge in the next three months, pushing unleaded prices to a 125p a litre average by the summer holidays."

UK government accused of failing to control consumer debt The UK government has today come in for severe criticism from a committee of MPs who have highlighted issues regarding consumer debt and the UK government's inability to tackle this problem. A number of projects have been introduced by the Department for business costing around £600 million since 2004. However, despite the fact that significant money has been invested in the area of controlling consumer debt, total consumer debt in the UK has risen from £1 trillion to £1.4 trillion in just six years.These debt figures are absolutely enormous and there is serious concern that many consumers in the UK could be paying off their substantial debts for many years to come. The report also suggests that the UK government has failed to monitor the impact of various initiatives and is therefore unable to confirm the level of assistance getting through to those in real need. While it is easy to suggest that the UK government has made mistakes the fact is that consumers have taken on debt of their own accord and any blame in this area should in reality be spread amongst various parties.

UK national debt picture is unclear: Evercore - Mr Redwood, who is chairman for Evercore Pan Asset Capital Management, said at that the government's stated borrowings were £850bn. However, government figures do not include other liabilities, according to Mr Redwood, including: unfunded pensions obligations of more than £1 trillion; £300bn of private finance initiatives and public private partnerships; and gross and net banking liabilities of less than £2 trillion, and the government that comes in after the general election has to deal with these debts. Mr Redwood said that the UK plans to borrow £1 in every £4 it spends this year, taking borrowing to 12.5 per cent of national income.

British Interest Payments Will Spiral Out of Control And Hit 27% Of GDP, Higher Than Greece, Says BIS - The Bank for International Settlements (BIS) in Switzerland has joined the growing chorus of criticism over Britain's current financial direction. The bank is warning that without far more harsh austeriry measures than are currently being considered, interest payments will become a crushing burden for the economy.They forecast that interest costs for the U.K.'s debt could go from 5% of GDP now to 10% in ten years.But here's the real econometric kicker... even under a 'baseline scenario' the BIS thinks interest payments could shoot up to 27% of GDP by 2040. Greece even looks better under their forecasts.They're certaintly pulling out all the stops to sound the crisis alarm

UK Needs 'Drastic Austerity Measures' To Prevent Debt Explosion - Britain will need "drastic" austerity measures to prevent public debt exploding out of control, the Bank for International Settlements (BIS), has declared.  Interest payments on the UK's public debt will double from 5pc of GDP to 10pc within a decade under the bank's "baseline scenario" before spiralling upwards to 27pc by 2040 – by far the highest among the OECD club of developed countries. Greece fares better, while Britain's interest burden is far worse than Italy's. The BIS said that Labour's plan to consolidate the budget deficit by 1.3pc of GDP annually for the next three years did not go far enough.

Europe Economy Unexpectedly Stalled in Fourth Quarter – (Bloomberg) -- Europe’s economy unexpectedly stagnated in the fourth quarter as companies cut spending more than previously estimated. Gross domestic product in the 16-nation euro region remained unchanged compared with the third quarter, when it rose 0.4 percent, the European Union’s statistics office in Luxembourg said today. It had previously reported a fourth- quarter expansion of 0.1 percent. Corporate investment dropped 1.3 percent instead of the 0.8 percent estimated earlier. The European economy is now showing signs of rebounding from its end-of-year relapse as the global recovery prompts companies to step up investment and offsets some concerns that Greece’s fiscal crisis will hurt the euro region. While unemployment is at an 11-year high, economic confidence improved in March and the region’s services and manufacturing growth accelerated to the fastest pace since August 2007.

IMF Fed E. Europe Crisis to Get Work: Czech C. Banker - The International Monetary Fund fueled the economic crisis in emerging Europe last year to create a situation in which it would be asked to help bail out the region, a Czech central banker was quoted as saying on Friday. The Fund, which led the rescue of former Communist Hungary, Latvia, Ukraine and Romania, misinterpreted data as it was seeking a task under its new management, Czech deputy governor Mojmir Hampl told Austrian daily Der Standard in an interview."It's ridiculous that it was the IMF, of all people, who accelerated the crisis," Hampl said."This was an apparent attempt to bring about a bailout of an entire region."Before this crisis, (the IMF had) virtually no clients," he added. "With this crisis and the new leadership under Dominique Strauss-Kahn, the Fund found a new job and got more funds."

Sovereign debt crisis at 'boiling point', warns Bank for International Settlements - The Bank for International Settlements does not mince words. Sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis at the heart of the global economy.The aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to the boiling point", said the Swiss-based bank for central bankers -- the oldest and most venerable of the world's financial watchdogs. Drastic austerity measures will be needed to head off a compound interest spiral, if it is not already too late for some. The risk is an "abrupt rise in government bond yields" as investors choke on a surfeit of public debt. "Bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,"

The World’s Safest and Riskiest Sovereign Debt (Table - Update)

FACTBOX-Key political risks to watch in Italy (Reuters) - Italy has weathered the financial crisis better than many of its peers but some economists say that because of its huge debt mountain and traditionally weak growth it is not immune from a Greek-style debt crisis.The eurozone's third largest economy, Europe's biggest bond market, has been one of the most sluggish in the 16-nation currency bloc for well over a decade, due to low productivity and competitiveness.Although its debt ratings do not appear at risk in the short term, analysts warn that unless it can push through long-delayed, unpopular structural reforms, it will struggle to achieve a strong and lasting reversal of its high public debt and the costs of servicing it. Following are some of the key factors to watch:

Greek deputy PM says Portugal may be next victim: report  (Reuters) - The sort of debt problems seen in Greece are likely to spread further in the euro zone and Portugal could be the next victim, Greek Deputy Prime Minister Theodoros Pangalos was on Monday quoted as saying. Portuguese newspaper Jornal de Negocios also quoted Pangalos, who earlier this year accused Germany of not properly compensating Greece for World War Two occupation, as saying Germany's hard line in talks with Greece was based on a "moral, racial approach" and the idea that Greeks don't work enough. In an interview with conducted last Tuesday, Pangalos said Portugal should not remain neutral on the issue of European Union help for troubled members after leaders agreed on a financial safety net for Greece on March 25.

Trichet: Some Euro Zone Countries May Need to Accept Deflation - European Central Bank President Jean-Claude Trichet says some countries in the euro zone might have to accept a period of deflation to restore long-term economic growth prospects.“Some countries, to regain competitiveness, will have to keep inflation below the EU average,” Mr. Trichet told the Italian paper Il Sole 24 in an interview published Friday.Asked by the paper whether this means “even accepting a period of deflation, with all the possible social consequences this might have?” Mr. Trichet replied: “Yes.” “It is normal that some regions, after growing above the EMU average for some time, and after having accumulated high national inflation, experience a correction and therefore a period of negative inflation, as it is currently happening in Ireland,” Mr. Trichet said.

The Fate Of The Euro Is Decided - The whole Greek thing seems like an ongoing financial and political soap opera! Just where to next? Perhaps we can answer that question by sounding out what options the European Union have up their sleeves to deal with Greece and other rogue spend thrift states? I think there are only two realistic options:  1) Greece could be offered assistance conditioned on strict conditions. This assistance might be in the form of a loan with guarantees from either the EU itself or from the International Monetary Fund. The IMF is not particularly favoured by EU members because it would mean that Greece would have to surrender fiscal authority to a U.S. dominated organisation. 2)The Greeks (willingly or otherwise) could float their own currency, in essence bringing back to life the good old Drachma. Of course with this they would be free to depreciate against the Euro. Now this will make the Greek economy more competitive (in the short run at least) and would accomplish a devaluation of the Greek government's debts.

Greece wants to amend EU aid deal, bypass IMF: report (Reuters) - Greece's government, concerned that the IMF would impose tough conditions in exchange for aid, wants to amend a deal struck at an EU summit last month to bypass an IMF financial contribution, senior government sources in Athens told Market News International. "The reason is that since the summit, (Greek) Prime Minister (George Papandreou) has been receiving information from the IMF about the possible measures and reforms it would be asking in exchange for financial support," MNI quoted one unidentified senior official as saying. "The measures are tough and might cause social and political unrest. After that, various cabinet members voiced their opposition to the IMF contribution."

Bundesbank Attacks Greek Rescue As A Threat To Stability - The Bundesbank document offers a withering critique of the deal agreed by EU leaders two weeks ago, saying the plan had been cobbled together without consulting central banks and will lead to monetisation of debt. "It brings problems in respect to stability policy that should not be underestimated."  The joint rescue between the IMF and the EU would turn the Bundesbank into a "money-printing machine" for the purchase of Greek bonds, according to Rundschau. This would breach the EU's 'no-bail clause'.

The German menace - THE OECD has released its latest economic outlook for member nations. It includes this interesting chart: Just looking at that, with which country would you guess American leaders are most concerned, so far as global imbalances go? Focusing on the bigger picture, the OECD report is generally positive. Recovery is likely to be sluggish across much of the OECD, and debt issues loom, but inflation is well in hand, financial conditions are generally good, and global trade has recovered nicely. The aggressive global response to what was, remember, a Depression-like shock to the economy has averted a Depression-like outcome.

Greek banks hit by wealthy citizens moving their money offshore - Wealthy Greeks and companies have been clamouring to move their cash deposits to banks such as HSBC or France's Société Générale, which operate large branches in the country. They are among those to have received several billion euros of new money in recent weeks. HSBC's private banking in the country is understood to have been flooded with business, while the local operations of several other major international banks have already seen large inflows of money. A spokesman for HSBC declined to comment

The Greek bank deposit plunge… From IHS Global Insight senior economist Diego Iscaro on Thursday, a chart of the total deposits held at Greek financial institutions: As Iscaro notes, the chart is inspired by the fact that four Greek lenders asked the government for access to the country’s support fund on Wednesday to counter falling deposit levels in the first two months of the year. The chart itself only provides data up until December, but presents a worrying  picture considering the zero per cent mark was seemingly penetrated at the end of last year. And according to the FT story, which cited central bank data:local savers transferred about €10bn of deposits – equal to about 4.5 per cent of the total in the banking system – out of Greece in the first two months of the year

Greek banks plead for more aid in debt crisis - Greek banks, hit by a series of credit rating downgrades linked to the country's debt crisis, have asked the government for more financial support, Finance Minister George Papaconstantinou said on Wednesday."The banks have asked to use the remaining funds of the support plan," he told reporters, referring to a package first agreed by the previous conservative government in 2008.

Greek-out! - It’s a bank run! Or at least, it’s an outflow. Is Jean-Claude Trichet watching? The European Central Bank president is due to give what some commentators have called “one of the most important communications by the ECB in its short existence” later today. Many are hoping the outlining of changes to ECB collateral criteria for its liquidity operations will help calm market jitters. In the meantime though, the market has to contend with stuff like the below, via the FT:

A Daring Proposal To Rescue Greece –- Forget about Greece for a moment. Just think about country X, which has lived well beyond its means for years thanks to loans from inattentive or foolishly optimistic lenders. When the financial crisis comes, the people of the country will have to cut back on spending. And the country’s lenders will generally suffer from the famous rule of banking: “Can’t pay, won’t pay.” If Herman Van Rompuy, the president of the European Council, has his way, Greece is not going to be country X despite its weak government, bloated civil service and poor trade position. Mr. Van Rompuy recently said that a vague new support agreement should “reassure all the holders of Greek bonds that the euro zone will never let Greece fail.” This default taboo may need reconsideration. True, the Greeks might manage to tough it out. But it won’t be easy, even if the European Union, the International Monetary Fund and foreign investors help.

Greek bonds break records, mostly just break…- Ooh, this is grisly.  Greek 5-year CDS, meanwhile, had reached 400bps by 14:45 UK time, according to Markit — the highest since early February. (That, by the way, was meant to be the height of the Greek crisis, in which CDS scaled 440bps)Quite the battering all round, in short.As to why? Perhaps the reason was this story, via BusinessWeek, that the Greek government would really rather not have the IMF involved in any rescue plan, after all? Or this Daily Telegraph piece, claiming that wealthy Greeks have begun moving their money out of the country? (NB – stories of Greek bank runs have been proven wrong before, so caveat lector). You could even cite the FT’s own report over the weekend about Germany and Greece being unable to agree on the emergency loan rates Athens should pay in a refinancing crisis.

Greece's borrowing costs hit new record  - A Greek government spokesman has said the country does not need to activate an EU-IMF debt rescue mechanism 'at this time'. The comments from George Petalotis came amid growing speculation that Greece would have to seek help to resolve its debt and deficit problems. ECB chief says default not an issuePressure grew on the country today as its borrowing costs reached record heights and its shares plummeted on rising doubt that the EU would provide urgent help. The yield on Greece's key 10-year bonds soared to a record high of 7.5%.

Greece's deepening debt crisis: The wax melts | The Economist - PAPANDREOU may have spoken too soon. On April 6th, just three days after the Greek prime minister claimed “the worst is over,” the yield on Greek ten-year government bonds leapt from 6.5% to above 7%. Yields remain at alarming levels, rising above 7.5% at one point on April 8th. The president of the European Central Bank, Jean-Claude Trichet, told a press conference that “default is not an issue for Greece.” But the D-word is increasingly on the lips of analysts. The cost of insuring Greece’s bonds surpassed that of Iceland’s this week; Greek banks have asked to tap a government liquidity scheme. Far from coming to an end, the Greek debt crisis seems scarcely to have begun.On the face of it, this week’s renewed bond-market jitters were caused by growing doubts that an emergency-aid package patched together by European Union leaders last month offers Greece much help. Under the terms of the EU deal, any short-term support would have to be approved by all of the 16 countries in the euro zone. German anger at Greece’s profligacy could easily delay the cash it would need should bond markets close.

Greece's budget deficit revised up to 12.9% on wider contraction -George Papaconstantinou said Greece's budget deficit for 2009 is gong to be revised up to at least to 12.9% from 12.7% after the economy contracted 2% last year. The announcement is expected to raise concerns especially as Greece should sell more than 30 billion euros by the end of 2010 to cut the largest deficit in the EU. However, Papaconstantinou said a slight upward revision is not concerning and will not affect his country's plan to reduce debt to 8.7% by the end of the current year.

So Much For Austerity: Greece Has Already Overspent In Just The First Two Months Of The Year - For one reason why Greece thought that the EU and the IMF were just keeeding about all that austerity mumbo jumbo, here is one explanation, from Kathimerini (via Eurointelligence), according to which three of the Greek "ministries have already disbursed more funds than they should in the first two months of the year." Shockingly, the department of health insurance for the self-employed has already disbursed almost 50% of the allotted funds in just the first two months of 2010! One can see why Greece may suddenly be worried that Europe, and especially the IMF, were actually quite serious about all those spending cut threats. And if Greece already had violent demonstrations, general strikes and bombings without in fact having instituted any austerity, then one can see why John Taylor sees civil war as one of the most unpleasant, yet realistic implications of a Greek bailout (as well as lack thereof, hence the Catch 22).

Why Greece will default - So, does last week’s agreement mean an end of the Greek crisis, as some of the optimists claim? Let us start with some simple back of the envelope analysis of Greek debt sustainability. This will show that default - under any realistic political and social assumptions - must now be the most probable outcome. Greece currently has a primary deficit (before interest payments) of 7.9%. On the assumption of 2% nominal growth during the adjustment period, a marginal interest rate of 6% on future debt, the primary balance Greece needs to achieve debt sustainability is a surplus of almost 5%[i]. This is in line with this week’s bond auction, the first after Thursday’s agreement, in which Greece raised €5bn for 5.9%. It is worth taking a look at different outcomes under different growth and interest rate scenarios – also to assess why insisting on “market interest rates” as Germany has done for a backstop loan will essentially drive Greece into insolvency.

Greece won’t go Argentine - Landon Thomas today, in the lead story on, comes out and uses the A-word with respect to Greece:The sharp rise in rates has spurred increased talk of some form a debt restructuring. In such a situation, analysts said, holders of Greek debt could perhaps be forced to accept a loss of 20 percent or more on their bonds. That would be similar to what happened after Argentina defaulted on $93 billion in debt in 2001. Like Argentina, Greece has suffered from a fixed currency, fiscal deficits and a growing lack of industrial competitiveness. OK, hang on a minute here. It’s bad, but it’s not that bad. Paul Krugman says that “there are no good answers here — actually, no nonterrible answers"...

Why Greece won’t go Argentine - John Hempton of Bronte Capital sent me a pushback note in response to my post on Greece this morning: Flatly I think you are wrong. Argentina is the right word as far as capital markets are concerned. He’s in good company: Peter Boone and Simon Johnson actually think that Greece is in worse shape than Argentina was pre-default.Still, I’m not convinced. There’s another option here, which I haven’t seen mentioned: rather than Argentina 2001, why not go Uruguay 2002? Or at least somewhere in the middle, like Ecuador 1999? Given the choice — and of course they have the choice — I think that pretty much all politicians in Europe, including the Greeks, would opt to avoid the Argentine precedent.

‘This might just be one of the most important communications by the ECB in its short existence -’The pressure is on Jean-Claude Trichet. On Thursday at 13.30BST, the ECB president is due to explain the euro central bank’s new-fangled collateral policy, which is of some relevance to Greece and its stressed banks.Erik Nielsen, Goldman Sach’s Europe economist, has been banging on for ages about how the collateral system needs reforming so as to avoid a situation where a rating agency downgrade can render the sovereign debt of a eurozone member ineligible. Here’s his Trichet primer:

Oh Oh - Greece Going SupercriticalI told you so..... . Based on a reliable source in the recent past, foreign banks have applied to withdraw repo with Greek banks even offer powerful bonus.If repos are being yanked from Greek banks they're finished.  This is the overnight lending market and that, coupled with depositor runs (which, as soon as Greeks figure this out, will accelerate dramatically) will drive a stake through the heart of these institutions.The simple fact of the matter is that Greece, like Lehman and Bear, came out into the market and lied about both their position and ability to manage what was going on. The lies of past years become the inevitable consequences of the present time.

Goldman on Greece: Could Turn Into Endgame - Its not been a good week for Greece.  Most seriously, the news yesterday that the four biggest banks are seeking help from the government following a drop in deposits of some EUR10bn pushes them into the danger zone which could turn into the end-game unless properly addressed.  While the EU Summit spelled out how the crisis will be addressed (an IMF-led program co-financed by the Europeans), important uncertainties remain, including (1) whether the Greek government will agree to IMF conditionality; (2) how and when the European money will be disbursed and at what interest rate; and (3) whether the IMF/EU package will be big enough.

Well, where does Greece go from here? -Having watched Greek bonds plunge to new lows on Thursday, as credit default swaps on Greece set new records it was practically de rigueur to consider this as some soft of tipping point. But a tipping point to what? Analysts stepped in to comment on Thursday — mostly in favour of a new EU-IMF rescue plan. Fitch’s Greek analyst swung his weight behind Greece going for support, in a Reuters interview on Thursday. The rating agencies are in a particularly influential position here – even Fitch. Nick Kounis of Fortis Bank also set out the case for financial support in a note to clients:

EU agrees on Greek rescue terms, Fitch downgrades (Reuters) - Euro zone officials agreed on Friday on the terms of a possible financial rescue for Greece as a ratings agency downgraded its debt by two notches citing a worsening economy and rising borrowing costs. Deputy finance ministers and central bankers of the 16 countries sharing the European single currency decided that any emergency loans would be made on terms almost identical to standard International Monetary Fund bailouts if Greece needed them, an EU source said. But the news brought only momentary relief to credit markets because Fitch Ratings cut Greece's credit rating to BBB-minus, its lowest investment-grade rating, and signaled further downgrades are possible.

Fitch Downgrades Greece -Fitch Ratings cut its rating for Greece to the lowest investment-grade rating and said the outlook remained negative, adding to the pressure on the country to find a solution to its financial problems. Yields on Greek debt have soared this week as worries have grown about the country's ability to finance its heavy debt load, with some analysts saying the likelihood of the country needing to accept aid from the European Union and International Monetary Fund is growing. Fitch cited the recent jump in Greek debt yields in its downgrade of the country by two notches to triple-B-minus, from triple-B-plus."

Learning From Greece, by Paul Krugman, Commentary, NY Times: The debt crisis in Greece is approaching the point of no return. As prospects for a rescue plan seem to be fading, largely thanks to German obduracy, nervous investors have driven interest rates on Greek government bonds sky-high, sharply raising the country’s borrowing costs. This will push Greece even deeper into debt, further undermining confidence. At this point it’s hard to see how the nation can escape from this death spiral...  It’s a terrible story, and clearly an object lesson... But an object lesson in what, exactly? ... The Greek tragedy also illustrates the extreme danger posed by a deflationary monetary policy. And that’s a lesson one hopes American policy makers will take to heart. ... Greece’s predicament is ... not just a matter of excessive debt. Greece’s public debt,... Why? Because of the euro...

Krugman Strikes Again - In a commentary two weeks ago, I rebutted dangerously silly arguments put forward by New York Times columnist Paul Krugman about how the United States should pressure China to drop its support for the U.S. dollar (click here to view). Although there is far more happening in the world outside of Mr. Krugman's brain than within it, fresh drivel from the acclaimed Nobel Prize winner compels me to turn my focus there once again.  In today's column, Krugman analyzes the Greek debt crisis, arguing that the best solution for Athens would be to simply inflate away its debt burden with printing press money. Krugman laments that this sensible option is being foreclosed by the monetary priggishness of the German heavyweights in the European Union, who are 'foolishly' seeking to prevent inflation and impose fiscal discipline.

Trichet Thwarted as Greece Erodes ‘Mr. Euro’ Status (Bloomberg) -- Mounting speculation that Greece will default on 304.2 billion euros ($405.2 billion) of debt is depriving European Central Bank President Jean-Claude Trichet of the stable markets needed to bring Europe out of its worst post- war recession. Since early February when politicians began squabbling over how to rescue Greece from Europe’s largest deficit as a percentage of gross domestic product, the euro has lost 4.1 percent against the dollar and the extra yield demanded by investors to hold Greek debt rather than German bunds increased as much as a record 4.43 percentage points as traders saw a greater risk of default. Trichet, who was supposed to spend his final year in office nurturing the region’s nascent recovery, finds himself powerless to resolve the crisis because he has no control over fiscal policy.

The Coming European Debt Wars - Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive.  Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private-sector debts to foreign banks, not to finance a domestic budget deficit as in Greece.All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression.

North-South Divide May Hurt Euro Region More Than Greek Crisis - Such diverging expectations show the gulf within the group of 16 countries sharing the euro. As growth prospects diminish in the south, the single currency may become an economic and political straightjacket, executives and analysts said.  Finland, Germany, France and the Netherlands are the euro area’s most competitive countries, according to the World Economic Forum’s competitiveness report for 2009. Greece, Italy, Portugal and Spain are the laggards. Measures to make them more productive could generate “popular discontent” that would ultimately push them from the union, said Stuart Thomson, chief economist at Ignis Asset Management in Glasgow, Scotland.  “It’s a massive problem for Europe because it means that a third of the euro zone is effectively in economic permafrost,”

Greece And The Fatal Flaw In An IMF Rescue - The IMF ended up drawing tough conclusions from its Argentine experience – the Fund should have walked away from weak government policy programs earlier in the 1990s.  Most importantly, IMF experts argued that from the start the IMF should have prepared a Plan B, which included restructuring of debts and termination of the currency board regime, since they needed a backstop in case the whole program failed.  By providing more funds, the IMF just kicked the can a short distance down the road, and likely made Argentina’s final collapse even more traumatic than it would otherwise have been.Sadly, the Greeks are today in a similar situation: the government’s macroeconomic program is not nearly enough to calm markets, or put Greece’s debt on a sustainable path.  By 2012 we estimate Greece’s debt/GDP ratio will rise from 114% of GDP to over 150%.  The interest payments alone on this would amount to 9% of Greek’s incomes at current rates, and almost all those funds are transferred to the German, French, and Swiss debt holders.   

Meet Greece’s New Saviour - Many have asked why all the consternation about the IMF bailing out Greece. After all as Bob Pisani claims it is headed by some woman called Dominique Strauss-Kahn? That name sure doesn't sound like it came from Alabama. So what is the big deal?  Exhibit A - the headquarters of the International Monetary Fund: Exhibit B - A listing of all the parties that make up the IMF's lending capacity

From CDOs to EMs – what could go wrong? File this under ‘looking bubblicious’: according to a Reuters report on Monday, “displaced credit experts” have shifted their focus away from CDOs and other structured products to emerging markets in South America and Asia. The newswire attributed the trend to an expectation that “a corporate bond boom [in those markets] will replace jobs lost in the securitization business.” On the other side of the pond, headhunters in London are also doing a brisk trade in EM-focused recruitment, according to an FT story: But it’s not all fun, games and bonuses in emerging markets. The outlook for the UAE, for instance, is not quite as bright, as the FT reported in March

Who Controls Bank of Japan? - When Japan’s finance minister says jump and the Bank of Japan responds, does that mean its independence is a sham? Or is the real show being directed by the bank itself?Influential economist Richard Koo says that the BOJ’s recent move to double the size of its short-term financing program after Finance Minister Naoto Kan called for action against deflation was more for show than anything else. ‘With quantitative easing under the circumstances we have now, you can double and triple the liquidity in the system but there will be no takers,’ Koo says. ‘But there’ll be no harm done, and if certain parts of the political spectrum are happy as a result, then, you know, why not?’ In other words, while the Bank of Japan appears to have done something, pleasing certain sections of the DPJ in the process, it hasn’t really done anything at all.

Current account surplus up 30% | The Japan Times - The nation's current account surplus in February rose 29.6 percent from a year earlier to ¥1.471 trillion, underpinned by growing demand for Japanese products overseas, Finance Ministry data showed Thursday.  It marks the seventh straight month of year-on-year improvement in the current account balance.  Many economists predict the economic recovery will continue in the months ahead on brisk exports, especially to China.  Japan has seen a current account surplus for 13 straight months. The balance of trade in goods and services posted a surplus of ¥693.4 billion, up from ¥69.3 billion a year before, the Finance Ministry said in a preliminary report.

Japan's debt-ridden economy: Crisis in slow motion - Japan’s government will eventually have a disaster on its hands if it fails to tackle the deep-seated problems of debt and deflation IF CHINA is the workshop of the world, Japan is the pristine, state-of-the-art laboratory in its backyard. You can see that by the sort of products shipped through the East China Sea in ever-greater quantities from Japan ever since China led a recovery in world trade last year. Paradoxically, however, the belief that there is no imminent crisis brewing may be Japan’s biggest problem. Without it, there may be nothing to force Japan’s policymakers out of a deep paralysis. The scale of the institutional lethargy in Japan is at times breathtaking. Everyone, it seems, puts the blame for deflation and rising debt elsewhere.

A chat with Japan's Prime Minister - I had the honor last week to interview Japan's new Prime Minister, Yukio Hatoyama, in Tokyo. My full story on Hatoyama appears in the April 19th magazine, and you can also read the full text here. But I thought I'd add some more details from the interview on Curious Capitalist. I only had 40 minutes with Hatoyama so it's hard to get a real sense of a person, but my initial impression is that he's an intelligent and thoughtful man who truly wants to shake up the Japanese establishment – and, with the pathetic state Japan has been in for so long, it's an establishment that really needs a good shaking. Yet unfortunately, the odds that he's going to be able to implement much of his agenda are dwindling by the day. His popularity is sinking, and there's already talk he'll be forced to resign in coming months.What's going wrong?

Japan Rethinks Relations With US - The Hatoyama government is keen to end the US military presence in the country and chart a new foreign policy course with focus on Asia. After the ouster of the long-ruling Liberal Democratic Party (LDP) from power last year, relations between Japan and the United States do not seem as cosy as they used to be. The new Prime Minister, Yukio Hatoyama, and his Democratic Party of Japan (DPJ) swept to power on the promise of reorienting the country’s domestic and foreign policy. On the campaign trail, the opposition focussed particularly on the continued presence of the US military on Japanese territory and the continuance of unequal treaties dating to the Second World War.

On the bubble in China: When the markets doubt government, government loses – After the success of its US$600 billion fiscal stimulus policy, the Chinese government (PRC) currently needs to dial down the property boom the stimulus package has inflated. All through 2009, residential developers in cities across China made money hand over fist, filling their coffers as first, second, and third-time buyers all found plenty of cheap mortgages available. This is one direct consequence of the stimulus that the PRC is really going to struggle to unwind, and if it can’t or won’t then its chances of avoiding a mega property bubble look slim.  In a very readable and closely argued article first published in the South China Morning Post, Andy Xie, an independent economist, points out that this “winding back” exercise is proving to be a bit more difficult than an “all-powerful” central government might wish (no government is all-powerful when it comes to the market—the occasions when the PRC has told the market in a commanding tone to go left, only to find it veering sharply right, and vice versa, are numerous indeed).

Revaluing China - It’s odd that I’ve ended up something of a China dove. My entrée into the fin/econ blogosphere was as a commenter at Brad Setser’s website, where some of my rantings verged on sinophobic. But somewhere along the line, I came to the conclusion that faulting China for America’s problems is a bit pathetic. While the jury is still out on the long-term wisdom of its dash to wealth, there’s a solid case that the China’s economic policies have served it well. The United States was and remains the world’s most powerful nation, not a fainting virgin. If China’s economic choices were indirectly harmful to the United States (they were and are), it was within the United States’ power to craft a response that would neutralize those effects. It is not China’s fault that the US did not look after its own interests. The United States’ self-destructive tolerance of unbalanced trade was relentlessly pushed by domestic groups — Wall Street and Wal-Mart — and was given plenty of cover by the economic establishment prior to the “Great Recession”.

U.S. to Delay Report on Chinese Currency - NYTimes -The Obama administration said Saturday that it would delay a decision on whether to declare China a currency manipulator, but it vowed to press Chinese leaders on the politically charged issue of its currency valuation during a series of meetings through June. The Treasury’s action seemed intended to send a reassuring message both to China and to Congress. It signaled to China that the administration prefers to resolve the dispute diplomatically, rather than force a showdown, but also pressed the case for a change in China’s policy, a position advocated by many United States lawmakers in both parties. “China’s inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate,” Treasury Secretary Timothy F. Geithner said in a statement. “A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.”

Geithner Statement on Delay of Report on China Currency Policies - I have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15. There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time.

5 Points - Tim Geithner should consider changing his name to "Stradivarius", because the Chinese have played him like a fiddle. A week of Chinese no-shows at Treasury auctions, and Tim is left scrambling to placate Beijing. His decision to delay the release of the "currency manipulation" report in favour of bilateral discussions left Macro Man literally laughing out loud. If a one week buyer's strike is all it takes to save face and buy the Chinese a few more weeks/months of piss-taking, well, let's just say that Timmy Strad is in over his head. The US Treasury would do well to demand that the Chinese not intervene except when their notional daily fluctuation limits of 0.5% per day are met. Macro Man would like to show those limits on the chart below, but alas, the total range of USD/RMB since late February has only been 0.1%.

Not-so-tough talk on China - - Just when Treasury Secretary Tim Geithner is enjoying a rare patch of fairly positive press coverage, the Treasury resorts to one of the oldest and hoariest ruses in the PR handbook for announcing something in a way to attract a bare minimum of public attention. The WSJ just posted Geithner's announcement that Treasury is delaying its semi-annual report on currency manipulation, which must either accuse or acquit China of manipulating its currency, the renmimbi, to boost exports.  But really.  Making the announcement on SATURDAY between Passover and Easter?  Washington was already almost shut down on Friday as people took an unofficial semi-religious three-day weekend.   As if that wasn't enough, Treasury has not, as of this writing, even posted the statement on its website.

Geithner Tests G-20 Power With Push for Firmer Yuan (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner is putting the Group of 20’s enhanced power to the test as he tries to prod China into revaluing the yuan.  Seven months after the G-20 replaced the G-7 as the steering committee to rebalance the world economy, Geithner is calling such bodies “the best avenue for advancing U.S. interests” on China’s currency. G-20 finance chiefs meet in Washington in two weeks. The tactical shift away from bilateral campaigning forces exchange-rate policy onto the G-20’s agenda for the first time since its leaders began meeting in November 2008. Success or failure may determine whether the forum can make the global economy more crisis-proof, with splits over bank regulation already suggesting it is too unwieldy to achieve consensus.

No Time for a Trade War, by Joseph E. Stiglitz - The battle with the United States over China’s exchange rate . When the Great Recession began, many worried that protectionism would rear its ugly head. ... But ... protectionism was contained, partly due to the World Trade Organization. Continuing economic weakness ... risks a new round of protectionism. In America, for example, more than one in six workers who would like a full-time job can’t find one. These were among the risks associated with America’s insufficient stimulus, which was designed to placate members of Congress as much as it was to revive the economy. With soaring deficits, a second stimulus appears unlikely, and, with monetary policy at its limits and inflation hawks being barely kept at bay, there is little hope of help from that department, either. So protectionism is taking pride of place.

Immaculate Transfer Strikes Again - Krugman - Oh, dear. Via Mark Thoma, I see that Joe Stiglitz has fallen victim to the doctrine of immaculate transfer: Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings. America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more …OK, first of all: right now we’re up against the zero lower bound, with a depressed economy. Under these conditions, if a rise in the renminbi made US exports more competitive, the US trade deficit would fall. Yes, this would have to be matched by a rise in saving — but that rise would happen precisely because the trade improvement would lead to economic expansion, raising private incomes (with some of the increased income saved) and to rising government revenues, reducing the deficit.But what really gets me is that Joe is thinking of savings as an independent determinant of the trade balance. I tried to clear this up 23 years ago; here we go again. Imagine that US savings rise and China’s savings fall, holding the exchange rate constant. Does this painlessly reduce the US trade deficit? No, it doesn’t.

More On The Exchange Rate And The Trade Balance - Krugman - A bit more on the fallacy — which both Steve Roach and, I’m a bit shocked to say, Joe Stiglitz — have fallen into: the belief that appreciating the renminbi can’t reduce the US trade deficit unless US savings increase. As Brad DeLong says, this is one-equation economics — and what it misses is the fact that savings are not a given, but depend among other things on the level of GDP, which is affected by the trade balance. Here’s one way to think about it: the argument that a rise in the renminbi can’t improve the US trade balance, because US savings are fixed, is, if you think about it, the same as the argument that a temporary increase in government spending can’t raise output and employment, because savings equal investment and therefore investment must fall by the same amount.

Evaluating the renminbi manipulation, by Martin Wolf - Financial Times: The incumbent superpower has blinked in its confrontation with the rising one: the US Treasury has decided to postpone a report due by April 15 on whether China is an exchange-rate manipulator. ...Is China a currency manipulator? Yes. ...China has controlled the appreciation of both nominal and real exchange rates. This surely is currency manipulation. It is also protectionist, being equivalent to a uniform tariff and export subsidy. Premier Wen Jiabao has protested against “depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism”. The Chinese pot is calling the US kettle black.Yet some economists deny this, offering four counter-arguments: first, while the intervention is huge, the distortion is small; second, the impact on the global balance of payments is modest; third, global “imbalances” do not matter; and, finally, the problem, albeit real, is being resolved. Let us consider each of these points in turn.

Wal-Mart Guilty of Currency Manipulation? Its New Low Prices Make the Dollar Artificially High - "Wal-Mart Stores is cutting prices on thousands of products in an aggressive campaign to reinforce its reputation as a discount leader, as the company seeks to reverse months of slowing U.S. sales. The company says it believes that, despite increasing consumer optimism, many Americans will continue to struggle in the months ahead. So, it is cutting prices this week on roughly 10,000 items, mostly food and other staples."  In other words, Wal-Mart is engaging in a new round of currency manipulation by cutting its retail prices, which makes the U.S. dollar artificially overvalued in relation to Wal-Mart's goods. This attempt to manipulate the currency and lure customers into buying more of its products with an overvalued dollar will create job losses at Target and other retailers, and should be investigated by the government.

Current account imbalances and exchange rates - Are exchange rate misalignments the main cause of current account imbalances? Here are two Nobel prize winners who disagree: Stiglitz says no and Krugman says yes. I will not resolve the debate here but there is something that I cannot understand in Krugman's argument. His argument is that current account imbalances cannot be corrected without an exchange rate change. While he does not say so, he almost implies that current account imbalances are always the result of exchange rate misalignments. This position is too extreme. The current account is the difference between national saving and investment. It is true that saving and investment will react to relative prices (which are determined by the exchange rate). But we can observe changes in saving and investment that are driven by many other factors and that have minimal impact on relative prices. Krugman's argument is that an increase in Chinese consumption will not reduce its current account surplus unless this consumption will translate into imports, and for this to happen we need a relative price change.

What can revaluation do? - LAST week, Joe Stiglitz wrote a piece arguing that confronting China over the dollar peg would be a bad idea, as it would risk a trade war over a policy change with uncertain benefits. Regarding the benefits of appreciation, he said: Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings. America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more... The meaning of this passage seems very clear to me. The first sentence indicates that exchange rates do affect trade balances, but are just one of many factors influencing that balance. The last sentence suggests that while an RMB revaluation will likely narrow the deficit, but it won't eliminate it until other structural factors change. Nowhere does he say, or even hint, that it is impossible for an exchange rate shift to influence trade balances. But Paul Krugman refers to: ...the fallacy — which both Steve Roach and, I’m a bit shocked to say, Joe Stiglitz — have fallen into: the belief that appreciating the renminbi can’t reduce the US trade deficit unless US savings increase. Mr Stiglitz never expresses any such belief! He's not "getting it wrong".

Should China Revalue Its Currency? Becker: NO- Nobel economist Gary Becker on China's currency policy: I doubt the wisdom of the US for complaining against China's currency policy and of China for its response. On the whole, I believe most Americans benefit rather than being hurt by China's long-standing policy of keeping the yuan at an artificially low exchange value. The policy makes the goods imported from China, such as clothes, furniture and small electronic devices, much cheaper than they would have been if China revaluated its currency substantially. The main beneficiaries of China's current policy are poor and lower middle class Americans and people in other countries who buy made-in-China goods at remarkably cheap prices in stores such as Wal-Mart that cater to cost-conscious families....

Fiddling with China's yuan while the U.S. burns - Look what happened while America whined about currency manipulation: An amazing high-speed railroad network   From the archives: On Tuesday, China's premier, Hu Jintao, arrived in the United States, en route to a summit meeting with President Bush. One of the likely areas of their conversation: pressure on China to upwardly revalue the yuan. The date of that post: April 19, 2006. Now, almost exactly four years later, Premier Hu's arrival back in the U.S. to attend President Obama's nuclear summit is imminent, and, surprise, surprise, The New York Times reports, "The Chinese government is preparing to announce in coming days that it will allow its currency to strengthen slightly and vary more from day to day." Deja vu all over again.

China's yuan reform: Keep your pants on - Everyone's gotten themselves all hot and bothered at the prospect that China's leadership may actually loosen up policy on their currency, the yuan, and allow it to appreciate against the U.S. dollar. Optimism was sparked by U.S. Treasury Secretary Tim Geithner's unexpected pit stop in Beijing for a meeting with China's vice premier. But I wouldn't get your hopes up. If the Chinese do make a move on the yuan, it's highly unlikely the change will have any meaningful impact, at least in the short term. First of all, whatever China chooses to do, it won't be dramatic. Beijing is deathly afraid of rapid movements in the value of the yuan and the consequences that might have on exports. That means any appreciation will be slow and incremental. Barclays Capital said in a report this week that it expects the yuan to appreciate 5% against a basket of currencies over the next year. That's a very common view.

From China, a Hint That Its Currency May Rise - NYTimes - It is the number that lurks behind much of modern economic life, a figure that helps shape the fortunes of nations and the price of nearly everything. The number hovers around 6.827. It is the nearly fixed rate of exchange between China’s currency, the renminbi, and the United States dollar. And members of Congress say it is proof that Beijing manipulates its currency to keep its exports cheap — at the expense of American exports and jobs. They want the government to label China a “currency manipulator,” which would allow Washington to retaliate against China economically. But the announcement by Chinese authorities on Thursday that President Hu Jintao will be visiting Washington in two weeks is being seen as the beginning of a possible easing of the friction over the renminbi. China experts said it was unlikely that China would have agreed to the visit unless there was at least an informal assurance by the Treasury Department that it would not be named a currency manipulator either on or around April 15 — the deadline for the Obama administration to submit one of its twice-a-year reports on foreign exchange to Congress.

China hints at readiness to let yuan rise - U.S. Treasury Secretary Timothy Geithner will hold talks in Beijing on Thursday against a background of fresh signals from Chinese policymakers that they might be paving the way to let the yuan resume its rise. ( Watch ) The National Development and Reform Commission (NDRC), the nation's top economic planner, said China would monitor exchange rate risks facing exporters, while an economist from the agency said Beijing should edge towards a more flexible yuan.  "We should keep the yuan basically stable at a balanced and reasonable level, while strengthening analysis and monitoring and making announcements about risks in a timely manner to reduce exporters' risks and losses," the NDRC said in a policy overview issued on the central government's website,

China Is Reportedly Set to Revise Currency Policy - The Chinese government is preparing to announce in the coming days that it will allow its currency to strengthen slightly and vary more from day to day, people with knowledge of the emerging consensus in Beijing said on Thursday. The move would help ease tension with the Obama administration about the United States’ huge trade deficit with China.  China’s exports have been bolstered by its policy of keeping its currency, known as the renminbi or yuan, pegged at a nearly fixed rate to the dollar. Many members of Congress and economists say that by spending several hundred billion dollars each year to hold down the value of the renminbi, China has made its exports extremely competitive in foreign markets and taken away sales from manufacturers in the United States and other countries.

Show Me The Money – Krugman - Actually, show me the numbers. I won’t pass judgment on the apparent agreement about the renminbi until I get some sense of what magnitude of adjustment we’re talking about here. I fear that it will be cosmetic — a tiny rise and bit of flexibility, just to silence the Obama administration for a while. But let’s hope I’m wrong. Oh, and just to add: the US very much has the upper hand here — the only question is whether it’s willing to use it.

More Dependent Than Ever - Paul Krugman recently claimed we should not be concerned about whether China will continue to finance U.S. budget deficits since they are being funded by U.S. private savings: The US private sector has gone from being a huge net borrower to being a net lender; meanwhile, government borrowing has surged, but not enough to offset the private plunge. As a nation, our dependence on foreign loans is way down; the surging deficit is, in effect, being domestically financed. The evidence Krugman showed at the time was that private sector borrowing had declined and was being offset by increased public sector borrowing. While this evidence was consistent with his view, it did not directly show the actual saving rate from each sector or the national saving rate. Consequently, I had some lingering doubts as to whether the U.S. budget deficit was being entirely financed by increased U.S. private savings. Yesterday I had the chance to reexamine this question while I was putting together some graphs on U.S. saving rates for my class

China’s March Trade Deficit — What Does It Mean? - Today I was on Al-Jazeera, responding to questions about China’s latest announcement that it ran a $7.2 billion trade deficit for the month of March — its first in six years.  This is essentially what I had to say: Today’s news must strike people as surprising, given all they’ve heard about China running chronic trade surpluses.  But you need to put it in context.  China’s exports every year are highly seasonal — they peak in the fall, when Christmas orders are being shipped, and drop in the spring.  So China’s trade surplus usually declines in the spring, and it’s not unprecedented for it to run a one-month deficit even in a year when it ends up running a sizeable trade surplus.  The last deficit took place in April 2004, a year in which China went on to rack up a then-record $32 billion surplus. What tipped this month’s figure from a marginal surplus to a deficit was a surge in imports, up 66% from last year.  But it going to be important to drill down and take a closer look

Gray Swan? Chinese Bill Auctions Fail - Market News reports that the Chinese Ministry of Finance was unable to sell all of its planned issuance of 91- and 273- day bills. The bond failures were attributed to increasing concerns of monetary tightening which, of course, would impact short-term rates and make investors skittish about locking up capital. Although being unable to fill a 3 Month order book is stunning - Chinese bond vigilantes are now officially on the prowl, and their (in)action guarantees either a hike, or much more serious liquidity withdrawal over the next 91 days, which would spell doom for stocks which trade now only on the combined efforts of the PBoC and the Fed to drown the world in colored pieces of paper. Throw in the unpredictable events of CNY revaluation, and the training wheels of the biggest reliquification experiment are about to come off. We caution readers not to be surprised if in light of these failed auctions, any overtures toward a CNY hike are indefinitely postponed.

Who will pay for China’s bad loans? - Since this is a very long post, it may make sense first to provide a quick summary of what I am going to argue.  As I have discussed often in earlier posts, pessimists are starting to worry about excessive debt levels in China, about which they are very right to worry, and many are predicting a banking or financial collapse, which I think is much less likely.  Optimists, on the other hand, are blithely discounting the problem of rising NPLs and insisting that they create little risk to Chinese growth.  Their proof?  A decade ago China had a huge surge in NPLs, the cleaning up of which was to cost China 40% of GDP and a possible banking collapse, and yet, they claim, nothing bad happened.  The doomsayers were wrong, the last banking crisis was easily managed, and Chinese growth surged.

China Inflation Seen at 15% With Wen Jiabao Losing Boom Control (Bloomberg) -- “Look at the scale of this,” said Li Chongyi, an engineer, as he watched a 4-kilometer line of trucks and earth movers busy quadrupling the size of Chongqing’s Jiangbei International Airport. “This will take years.” Jiangbei, which begins work on a third terminal when the second is done next year, is one of 15 trillion yuan ($2.2 trillion) in projects begun in 2009, almost twice the economy of India. Most were started by local governments as China’s stimulus package sparked a record 9.6 trillion yuan of loans. The projects and their loans are stymieing efforts by Premier Wen Jiabao to curtail investment as inflation rose to 2.7 percent in February, a 16-month high. Failure to rein in local government spending could push inflation to 15 percent by 2012, said Victor Shih, a political economist at Northwestern University who spent months tallying government borrowing."

China on 'Treadmill to Hell' Amid Bubble, Chanos Says (Bloomberg) -- China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos. The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

China's car sales rocket almost two-thirds - China's passenger car sales continued to soar with higher-than-expected 63.2 per cent growth in March from a year earlier, official data showed on Friday, as buoyant consumer sentiment continued to bolster spending on big-ticket items in the world's third-largest economy.But growth will likely slow from the second quarter, when year-ago figures become much higher due to strong sales starting in the spring of 2009 after China unrolled a raft of incentives to boost consumption in conjunction with a 4 trillion yuan ($634 billion) economic stimulus plan. A total of 1.26 million passenger cars were sold in March, compared with 942,900 units sold in February, a 55.3 per cent increase from a year earlier, according to data provided by the China Association of Automobile Manufacturers.

Chongqing Airport, Railways Mean Hard Landing for China’s Wen – BusinessWeek -- “Look at the scale of this,” said Li Chongyi, an engineer, as he watched a 4-kilometer line of trucks and earth movers busy quadrupling the size of Chongqing’s Jiangbei International Airport. “This will take years.”Jiangbei, which begins work on a third terminal when the second is done next year, is one of 15 trillion yuan ($2.2 trillion) in projects begun in 2009, almost twice the economy of India. Most were started by local governments as China’s stimulus package sparked a record 9.6 trillion yuan of loans.The projects and their loans are stymieing efforts by Premier Wen Jiabao to curtail investment as inflation rose to 2.7 percent in February, a 16-month high. Failure to rein in local government spending could push inflation to 15 percent by 2012, said Victor Shih, a political economist at Northwestern University who spent months tallying government borrowing.

China Offers High-Speed Rail to California - Nearly 150 years after American railroads brought in thousands of Chinese laborers to build rail lines across the West, China is poised once again to play a role in American rail construction. But this time, it would be an entirely different role: supplying the technology, equipment and engineers to build high-speed rail lines.  The Chinese government has signed cooperation agreements with the State of California and General Electric to help build such lines. The agreements, both of which are preliminary, show China’s desire to become a big exporter and licensor of bullet trains traveling 215 miles an hour, an environmentally friendly technology in which China has raced past the United States in the last few years.

BBC News - China soya ban angers Argentina - Argentina has complained to the Chinese government about a planned boycott of its soya oil exports amid a growing trade dispute.  China's ambassador to Argentina was summoned on Monday after a Chinese trade body told traders not to buy Argentine soya oil. China says it will ban imports because the oil fails to meet quality standards.  But it is also seen as the latest move in a long-running trade dispute. In recent months, Argentina has sought to restrict imports of some Chinese goods in order to protect its domestic industries.

...And Now for a China-India Free Trade Agreement  Ah, yes, good ol' FTA mania in alive and well in Asia. It seems that two of the so-called BRICs economies are contemplating an arrangement to ink yet another FTA (and give Jagdish "Termites in the Trading System" Bhagwati more nightmares). A few weeks ago, I posted my presentation slides on how China has engendered an FTA race in the region via the deal it signed with ASEAN post-Asian financial crisis. It appears the Chinese have not yet diminished their appetite for such deals as they are now approaching the South Asian powers-that-be in New Delhi with an offer. China believes that an FTA would help allay Indian concerns about its rather sizeable trade deficit with the PRC. That is, it could lower tariffs on exports where India is strong such as information technology, entertainment (Bollywood), and other software 'n' services type trade. From the Financial Times:

Geithner hails economic partnership with India - India and the United States have launched a new economic partnership that offers "huge opportunities" for both countries, U.S. Treasury Secretary Timothy F. Geithner said Tuesday during a two-day visit to India. The trip is part of the Obama administration's efforts to strengthen relations with one of the world's fastest-growing economies. Although few specifics were disclosed, Indian Finance Minister Pranab Mukherjee invited U.S. companies to invest in the country's booming construction industry, which is building airports, railroads and a planned 4,400 miles of highway a year in an effort to make freight traffic more efficient while spreading wealth to India's rural areas.

India: Growth complacency? - The pre-budget Economic Survey of the government, published at the end February, exudes optimism on economic growth: “Indian gross domestic product can be expected to grow at 8.5 +/- 0.25 per cent (in fiscal year 2010/11), with a full recovery breaching the 9 per cent mark 2011/12.” In his budget speech, Pranab Mukherjee, India’s finance minister, said “With some luck, I hope to breach the 10 per cent mark in the not too distant future”. Government statements at budget time are expected to be optimistic. But it is surely time to sit up and take notice when normally hard-nosed commentators such as Martin Wolf write “I have little difficulty in imagining that India can sustain growth of close to 10 per cent a year for a long time“. How justified is such exuberance on growth expectations?

India: 30% Mall Vacancy Rate in Cities, Falling Rents From the Indian Express: Sprawling Malls, empty spaces According to reports, the average vacancy across malls in major cities rose to over 30 per cent last year. ... Jones Lang LaSalle Meghraj (JLLM), a global property consultant, says that out of 17.3 million sq ft supply of retail space across the country in 2010, only 9.3 million sq ft is expected to be absorbed. ... [T]here has been a continuous fall in retail rentals. A Cushman & Wakefield (C&W) survey revealed that certain pockets of Delhi, Gurgaon, Chandigarh, Kolkata, Hyderabad, Mumbai, Pune and Bangalore are witnessing severe decline in rentals. The NCR, which received the highest quantum of mall space last year, saw a rental correction of approximately 30 to 60 per cent in locations such as Noida and Gurgaon. It appears there was a commercial real estate bubble in India too.

Russian Report: US Weapon Against Iran Caused Haiti Earthquake - An unconfirmed report by the Russian Northern Fleets suggests that the devastating Haiti earthquake was caused by a United States Navy "earthquake weapons" test, which was intended to be used against Iran.On Thursday, Digital Journal reported that Venezuelan President Hugo Chavez accused the United States of causing the Haiti earthquake, which killed more than 100,000 people, through a tectonic weapon. Chavez also accused the US of trying to use the deadly earthquake to occupy Haiti.According to an unconfirmed report by the Russian Northern Fleets, the tragic earthquake in Haiti was caused by a US navy earthquake weapon that went "horribly wrong," reports Press TV. The weapons test was originally supposed to be used against Iran but caused the cataclysmic earthquake in the Caribbean country.

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