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

Saturday, April 17, 2010

week ending Apr 17

U.S. Fed's balance sheet hits record (Reuters) - The U.S. Federal Reserve's balance sheet rose to a record high in the latest week, Fed data released on Thursday showed, as the last of the U.S. central bank's mortgage support efforts came to a conclusion.The Fed's balance sheet -- a broad gauge of its lending to the financial system -- increased to $2.322 trillion in the week ended April 14 from $2.290 trillion in the week ended April 7. For a graphic of the Fed's balance sheet double click on: The Fed's program of buying mortgage securities came to a conclusion on March 31, though the figures suggest it was still taking delivery of some of those purchases. The Fed's holdings of mortgage-backed securities rose to $1.102 trillion from $1.069 trillion a week ago.

 Interest Payment on Excess Reserves Smackdown - Thomas Palley provides a critique of the Fed's policy of paying interest on excess reserves: This paper argues it is a bad policy that (1) has a deflationary bias; (2) is costly to taxpayers and that cost will increase as normal conditions return; and (3) establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed’s power to pay interest on bank reserves. Second, the Fed should repeal regulation Q that prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change. Lastly, the paper argues the new policy of paying interest on reserves reveals the troubling political economy governing the actions of the Federal Reserve and policy recommendations of the economics profession. Read the rest here.

Fed’s Bullard: Policy Future Depends on Coming Data  “Everything depends on how the economy performs,” said Federal Reserve Bank of St. Louis President James Bullard. While the Fed has for some time officially stated its inclination to keep interest rates very low for an extended period, Bullard said that pledge is “conditional.” When it comes to saying when interest rates might rise from their current zero% range, the official said, “I can’t.” He is a voting member of the interest-rate-setting Federal Open Market Committee. He spoke a day after Fed Chairman Ben Bernanke told congress he expects the economy to recover slowly, in testimony that appeared to suggest the Fed leader has no greater appetite to raise interest rates.

Lockhart Says ‘Strong Medicine’ of Low Rates Needed - (Bloomberg) -- Federal Reserve Bank of Atlanta President Dennis Lockhart said low interest rates are still needed to nurture an economic recovery that remains vulnerable to setbacks. “There is risk associated with starting a process of tightening too soon,” Lockhart said today in a speech in Pensacola, Florida. “The strong medicine of low rates should remain in place to facilitate adjustment processes that are by their nature gradual". He said the recovery will be “lackluster” and that most price gauges indicate inflation is slowing. The Atlanta Fed chief said the economy is susceptible to “shocks or setbacks,” and he listed risks that include housing and commercial real estate, the Greek fiscal crisis, strained state and local government budgets, and the low levels of consumer spending.

Dallas Fed Backed Discount-Rate Increase - The Federal Reserve Bank of Dallas was in favor of raising the rate charged to banks on emergency loans last month, but it found little support from others in the U.S. central bank.Minutes of the latest discount rate meetings, released Tuesday, showed that the Fed board members in Washington on March 15 were all in favor of keeping the discount rate at 0.75%. The board, which includes Chairman Ben Bernanke, has the final word on the rate.“The directors of the Federal Reserve Bank of Dallas had voted on March 11 to establish a rate of one percent,” the minutes from the March meetings showed. However, the other 11 Fed district banks were in favor of maintaining the rate at 0.75%.

Fed Watch: Stuck in the Middle - Yes, there are indeed enough warts on the US economy to make uncharitable comparisons to the skin of a toad. Chief among those, in my mind, is the ability to make a smooth pass off from federal stimulus to other sectors later in the year. Add to that list still tight credit conditions, ongoing deterioration in commercial real estate, and a housing market that looks to remain subdued by another wave of foreclosures (although I tend not to fear foreclosures so much in general, viewing them as an effective mechanism to clean household balance sheets). But even putting all those things together, what appears to be emerging is an economy reverting back to trend growth, maybe a little above, maybe a little below.

Fed Watch: What Could Derail the Recovery? - To derail the recovery at this juncture, look for factors that are not merely weights on the outlook, but will actually reverse the positive momentum. For example, it is not enough to say that lending is constrained. To reverse momentum, one needs a story by which lending actually tightens further from the current situation (really, how many more ways can your local banker say "No"?). What are such stories? Some floating in the background:1.) Renewed surge of foreclosures. Mounting anecdotal evidence points to a renewed surged by lenders to get failing mortgages off their balances sheets, and the ensuing fire sales will stop the housing recovery in it tracks. 2.) Waning fiscal stimulus. No doubt about it, a significant concern, but one that is already built into most forecasts for the second half of this year and next year 3.) Energy price shock. Jim Hamilton ably handles this issue, noting that the current rise in oil prices does not look sufficient to derail the recovery.

Fed Watch: Consumers Come to Life - Today's retail sales report should dispel any lingering concerns that American consumers remain huddled in their basements, clutching a bar of gold with one hand and a loaded shotgun with the other. Indeed, even a relative pessimist like me has to admit that recent trends (log differences) look pretty good:  Yes, at current rates of growth it will be a long time to hit the old trend. And it is clear that the consumer has suffered - the gap between the old trend and the actual level of retail sales less gas is now just about a trillion dollars of foregone spending. Something of a disaster, at least for retailers The data appears to have left Federal Reserve Chairman Ben Bernanke's outlook intact: On balance, the incoming data suggest that growth in private final demand will be sufficient to promote a moderate economic recovery in coming quarters.

Fed Shouldn’t Reveal Crisis Loans, Banks Vow to Tell High Court - (Bloomberg) -- The biggest U.S. commercial banks will take their fight against disclosure of Federal Reserve lending in 2008 to the Supreme Court if necessary, the top lawyer for an industry-owned group said. Continued legal appeals will delay or block the first public look at details of the central bank’s $2 trillion in emergency lending during the 2008 financial crisis. The Clearing House Association LLC, a group that includes Bank of America Corp. and JPMorgan Chase & Co., joined the Fed in defense of a lawsuit brought by Bloomberg LP, the parent company of Bloomberg News, seeking release of records related to four Fed lending programs.

Bernanke to Unemployed: Drop Dead -  Ben Bernanke’s economic forecast indicates a dire future for the currently unemployed and also for young Americans who’ll be graduating from school this spring and next: But in describing his view of the economic outlook to the Joint Economic Committee, Bernanke sounded the same restrained tone in describing his expectations that he did in testimony back in the winter. “if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8 1/2 million jobs that were lost during the past two years.” That sounds right to me. And if Congress asked me to give my forecast, that’s what I would give. But if Congress asked me to serve as chairman of the Federal Reserve and give my forecast, I’d be saying that I’m going to be implementing what I can of Joe Gagnon’s plan for global economic recovery and urging my colleagues at the world’s other central banks to be doing the same.

Bernanke's Dilemma: It's His Low Rates Funding Washington's Enormous Deficit… Yes, most economic numbers are getting better, and various Fed governors are starting to use more optimistic language, leading many to speculate that the central bank will imminently (but slowly) begin the process of easing us off 0% interest rates. First it will start with a language change. That's the first step. But while traditional monetary rules (and increasing evidence of inflation) would probably suggest that Bernanke needs to raise, he has a problem.It's his low rates that are funding the gigantic deficit. Indirectly, of course. Bank ownership of government securities has gone parabolic. Image: St. Louis Fed.  Banks, as has been known for months, are making a mint playing the spread, borrowing cheap from the Fed on the short end, and lending to the Federal government at much higher rates. This is not just convenient for the banks, it's crucial to Washington's ability to borrow, especially as foreign demand begins to wane (supposedly).

Jeffrey Lacker Says The Fed Will Not Erode The Real Value Of Sovereign Debt Through Inflation - "The government's debt cannot grow indefinitely at a rate much faster than the economy itself grows, so ultimately, something has got to change — either taxes are raised, spending is reduced, or the real value of the debt is eroded through an increase in inflation, an outcome the Federal Reserve is committed to preventing." - Jeffrey Lacker, Richmond Fed

Bank of International Settlements' Tough Assessments Don't Bode Well for World Economy - In a new report, the Bank for International Settlements (BIS) - often called the "central banks' central bank" - points out that Western debt is much higher than officially reported (since contingent liabilities and pension debts are excluded from official numbers), and that the recovery of the world economy may be crushed by fiscal problems. The report states:According to the OECD, total industrialised country public sector debt is now expected to exceed 100% of GDP in 2011 – something that has never happened before in peacetime. As bad as these fiscal problems may appear, relying solely on these official figures is almost certainly very misleading. Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. For background on the effect of aging populations on the economy, see this.

IMF warns high public debt "tremendous" challenge (Reuters) - IMF chief Dominique Strauss-Kahn said on Saturday that public debt in the advanced economies is set to increase significantly and reversing the rise would be a "tremendous" challenge.Strauss-Kahn, managing director of the International Monetary Fund, also said that global economic recovery is still sluggish and uneven and needs continued policy support in many advanced economies.

Debt Is Ballooning Into Global Crisis -The debt crisis that has taken root in Greece, sparking an investor panic and talk of a national default in the heart of Europe, is at the leading edge of a problem expected to roll through the economically developed world as government borrowing rises into uncharted territory. This mounting government debt poses a painful choice for developed countries such as Britain, Japan and the United States: either a deep reordering of public expectations about everything from the retirement age to tax rates, or slower growth as record levels of borrowing crimp economic activity. Economists at the International Monetary Fund project that the amount of government debt held in the world's advanced economies will soon be so great that it surpasses the value of what they produce in a year.

ECB Official Warns of Potential Sovereign Debt Crisis - The global economy may be on the verge of a “sovereign debt crisis” following a severe financial crisis, a key member of the European Central Bank’s Executive Board warned Thursday. “We may already have entered into the next phase of the crisis: a sovereign debt crisis,” Juergen Stark said at a Transatlantic Dialogue event in Washington. The German economist also said risks to the global inflation outlook “seem to be tilted to the upside” given the prospects of a “multi-speed recovery” of the world economy.“There is no doubt that the crisis will leave us a heritage of severe macroeconomic imbalances,” Stark said. “Dealing with them will represent one of the most daunting challenges for policymakers in modern history.”

Death-Spiral Intercept - In essence, White was saying: "it’s the debt, stupid."  When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.  This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.

U.S. Debt Headed To Possible 'Crisis' -  The U.S. debt has been growing for decades, during Democratic and Republican administrations. Everyone has recognized the problem. No one has made a serious effort to resolve it.  Now some economists are applying the word "crisis" to what lies ahead.  Last month the Congressional Budget Office issued a report showing that, within a decade, President Obama's budget will propel the national debt to a figure approaching 90 percent of gross domestic product.  Some economists say a 90 percent debt-to-GDP ratio could touch off a crisis in which the government could not sell bonds and would have to offer higher interest rates.  That would create a ripple effect, boosting the cost of borrowing and making interest payments an even larger part of the national budget.

Mapping World Debt - This map, by Benjamin Hennig of the University of Sheffield’s SASI Research Group, shows the debt load around the world. The size of each country represents the total external debt of that nation (using 2010 World Bank estimates). The color of each country, on the other hand, shows the size of national debt relative to the size of each country’s economy.Note the giant red balloon that represents Ireland, Great Britain and Western Europe, versus the thin blade of green that represents much of East Asia. This contrast might help you understand why the West is getting fidgety about Eastern tigers like China.You can find many other maps scaled to adjust for different economic factors — like life expectancy, physicians working per 100,000 people, and trade union membership rateshere.

The Debt Death Trap - Nouriel Roubini - The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Indeed, the OECD now estimates that public debt-to-GDP ratios in advanced economies will rise to an average of around 100% of GDP. The International Monetary Fund has recently put out similar estimates. Within the PIIGS, the problems are not just excessive public deficits and debt ratios (in different degrees and measures in the five countries). They are also problems of external deficits, loss of competitiveness, and thus of anemic growth. These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor-intensive and low value-added exports.

Coffee with Joe – Debt Saturation (video) Joe and Pete, from the site Economic, discuss “The Chart of the Century” and debt saturation. Joe is also on top of the fact that our debt money system is not sustainable and that we are entering the end game in regards to this version of our money system.

Deflation And Inflation — Damned Either Way-  Chairman "Helicopter" Ben Bernanke and his colleagues at the Fed are desperate to create some inflation. Experts don't generally agree what "inflation" actually means, but we can usefully view it as a measure of the purchasing power of your dollars.Henry Blodget and Aaron Task had an interesting discussion of the inflation versus deflation question in Pray For Inflation — It's Our Only Hope. In a time of deflation, we get a swelling dollar, meaning that prices for goods & services are declining. This creates a disincentive to spend money, for your dollars will purchase more tomorrow than they do today. On the other hand, inflation creates an incentive to spend money because the purchasing power of your dollars is shrinking. For a heavily indebted nation like the United States, deflation has the effect of swelling the debt, whereas inflation shrinks it in what economists call "real" (inflation-adjusted) terms. If dollars have less value over time, then the dollars you are using to pay off the debt are worth less than the dollars you acquired when you incurred the debt, even if they are not yet worthless.

Trillions Pumped In And Little to Show For It - The move toward eventual deflation is underway. It won’t happen tomorrow, but it is underway. The situation regarding the credit crisis has never been solved, unless you want to keep two sets of books in perpetuity and mark-to-model until the end of time. De-leveraging is in part still in process. The banks have a long way to go. In fact, one has made toxic garbage attractive to banks and bottom fishers. Banks and investment houses as owners and buyers will get taken off the hook by government via loans. This program is supposed to take underwater homeowners on to dry land, when in fact it’s another banking and Wall Street giveaway you will get to pay for.

Expert urges China to stop further piling up greenbacks: newspaper -- Yu Yongding, president of the China Society for World Economics, said China should stop further piling up greenbacks massively so as to build a more balanced economy.The losses incurred in financial transactions between China and the U.S. could be trivial compared with the capital losses China may suffer in the future, Wednesday's China Daily quoted Yu as saying. China has parked its savings in the U.S. treasures while U.S. fiscal debt ratio has been surging. A very big question for China is: When it needs to redeem its treasuries, can America honor its debt obligations?In response to U.S. economist Paul Krugman's calling on the U.S. government to take on China in recent months. Yu said that Krugman was a respected economist, but his campaign was not only counter-productive in terms of solving the China-U.S. trade dispute but also based on flawed economics."

China trims holdings of US Treasury debt by 1.3 percent in February, fourth straight drop - China trimmed its holdings of U.S. Treasury debt 1.3 percent in February, the fourth consecutive decline. Those reductions are raising concerns that the U.S. government could face higher interest rates to finance its soaring budget deficits.The Treasury Department said Thursday that China's holdings dropped $11.5 billion to $877.5 billion. That still left China as the largest foreign holder of U.S. Treasury debt. Japan retained the No. 2 spot with $768.5 billion, a drop of 0.4 percent from the January level

The U.S. Economy: Riding the Debtors' Merry-Go-Round- Japan buys U.S. Treasuries, the U.S. buys British bonds, and the UK buys Japanese bonds. All these auctions are “covered,” which means these Three Amigos have no problems with their massive debts – right? Wrong.The whole point is that playing this debt “shell game” solves nothing. The paper of all three of these nations is worthless, or is rapidly approaching that point, since none of the three is capable of repaying a penny of all this new debt. “Buying” worthless IOU's using worthless IOU's (the fiat currency of an insolvent economy) is a transparent sham which even the comatose, market sheep will ultimately notice, eventually. For any who would choose to dispute this, please explain how it would be any different if these three debtors simply “bought” all of their own bonds? The fact is that nothing changes. Simply putting different “labels” on worthless bonds doesn't change the fact they are worthless. Clearly, China has seen through this scam.

Prospectus For The United States - Would You Invest? - We talk a lot about the economy in abstract terms. On the other hand, many of us are well-versed at going over a prospectus and Jim Grant of the Interest Rate Observer has put one together for the United States of America as it seeks to raise $16Bn for 30-year Treasury Notes. According to the prospectus: "The Bonds will mature on April 15, 2040. Interest on the bonds is payable semiannually on April 15 and October 15, beginning October 15, 2010. Before giving effect to the offering of the Bonds and the securities to be issued concurrently, the United States had approximately $12,500,000,000,000 of indebtedness subject to the statutory debt limitation."

Can US dollar remain world's currency? Can US dollar remain world's currency? Pt.2 (video interviews w/ transcripts)

US Bond Yields May Jump Like Greece's Did, L&G's Drayson Says (Bloomberg) -- U.S. bond yields may jump like Greece’s did in its recent crisis if President Barack Obama’s administration fails to tackle the budget deficit in coming years, Legal & General Investment Management economist Tim Drayson said. “The fiscal position is totally unsustainable,” Drayson, a former economist at the U.K. Treasury, said at an event in London today." "Ultimately, a crisis of confidence in the dollar may lead it to being dropped as the world’s reserve currency, he said. Investors may look to invest in precious metals or emerging market currencies, Drayson said. “This crisis will be different; it’s going to be a U.S. dollar crisis,” Drayson said. “You’re going to have to find some other safe haven. It could lead to a lot of volatility. You’re struggling to find a decent fiat currency"

Bond Market Vigilantes No Check on Fiscal Excess -  I have an op-ed in today’s SMH questioning whether higher inflation and interest rates are the most likely outcome from the fiscal policy excesses that have followed the global financial crisis.  Classical liberals fret about rising inflation and interest rates, but this is not entirely consistent with their view that the expansion of the state is bad for long-run growth prospects, which could be expected to depress both.  This is not necessarily good news for bonds, as it points to an environment of depressed returns across all asset classes.

Nation's soaring deficit calls for painful choices - Erskine Bowles realized how tough his task will be leading President Obama's war on the federal budget deficit when he told his 90-year-old mother of his appointment. She was proud of him. Then she said, "Don't mess with my Medicare." It won't be the last threat Bowles gets this year as he directs an 18-member, bipartisan commission through an ocean of red ink that has never been deeper or more foreboding. Under Obama's budget plan, the USA's debt in 2020 would be nearly the size of the entire economy then. Interest costs would be $900 billion, five times today's level. The White House, Congress, budget experts and typical Americans are growing anxious about the nation's mounting debt, which is helping to fuel the rise of the anti-tax, anti-big government Tea Party movement.

NYT Goes Off the Deep End On Budget Deficits - The NYT notes that interest rates have recently risen and are generally predicted to continue to rise. It then told readers: "That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession." Okay, what are they smoking there? We have just been through a period of extraordinarily low interest rates. Interest rates fell to their lowest levels in more than 50 years. This was a deliberate policy response to the worst downturn since the Great Depression. Once we are out of the worst of this downturn, everyone expected that interest rates would rise even if we had a balanced budget and moderate inflation, the latter of which is predicted by almost all economists

The Effects of Health Reform on the Federal Budget - CBO -This morning I made a presentation to the World Health Care Congress on the effects of the recently enacted health reform legislation on the federal budget. Everything that I said was drawn from cost estimates and other letters that CBO has released. I began by reviewing the budget estimates done by CBO and the staff of the Joint Committee on Taxation (JCT): Then I discussed a number of challenges to those estimates: In addition, some observers believe that, whether CBO and JCT’s estimates of the effects of the health reform legislation are accurate or not, the law misses critical opportunities to reduce future deficits.Of course, CBO does not make policy judgments or recommendations. However, we have frequently noted the long-run unsustainability of the nation’s current budgetary policies and indicated that using savings in existing programs to finance new programs would necessitate even stronger policy actions in other areas.

Attack Wall Street, not social security - Suppose our top generals described the growing threat from a hostile Middle East power. The country has tens of billions of oil dollars, a growing army, chemical and biological weapons, and is in the process of developing nuclear weapons. After carefully describing the risks posed by this country, our generals suggested an immediate attack on Canada. They explain that combating this Middle East country would be difficult, but defeating Canada is easy. This is essentially the story of the latest attack on social security. Everyone who looks at the projections agrees; the scary budget stories being hyped in the media and by the Wall Street crew are driven almost entirely by projections of exploding healthcare costs.

What is Responsible Fiscal Policy? - Taxpayers are decidedly working against their own interests when they demand that the government reduce or eliminate its deficit. Here is why: Government deficits create non-government surpluses. It is a simple mathematical proposition; it is neither high theory, nor rocket science. If one sector spends more than it earns, another, by the rules of double-entry bookeeping, earns more than it spends. And so it is with the government—if it spends more than it collects in taxes, it runs a deficit, which is exactly equal to the surplus accumulated by the non-government sector. Deficits create income and profits for the private sector in excess of the taxes the private sector pays to the government. My fellow bloggers have explained this clearly many times before (e.g. here, here and here). What I'd like to impress upon the taxpayers is a simple logical flaw in their anger with the deficit itself.

Deficit: This Is Not Good News - David Cho writes: The federal deficit is running significantly lower than it did last year, with the budget gap for the first half of fiscal 2010 down 8 percent over the same period a year ago, senior Obama administration officials said Monday. The officials attributed the results to higher tax revenue and to lower spending than projected on bailing out the financial system. If the trend continues for the rest of the year, it would mean the annual deficit would be $1.3 trillion -- about $300 billion less than the administration's projection two months ago for 2010...This is bad news: unemployment is higher than it was a year ago, and so the deficit ought to be higher: a lower deficit means that they have gotten fiscal policy off.

Is a Falling Deficit Good News?, - But taking a different view, one that focuses on people rather than votes, there is a reason to help households struggling to find employment. Even if there is little political gain to doing so, every job that is created changes the circumstances some household faces for the better, and that alone ought to be enough motivation to do as much as possible to help. But Stan Collender is correct, as I explain here, to conclude that the administration has no plans to even propose doing more to help. No matter what effect that decision has on votes, with households still struggling to find decent jobs, or any job, I think that’s the wrong choice to make.

Final destination “rising public deficits” with a stopover in “falling public deficits” - Brad DeLong and Mark Thoma posit that a falling US public deficit is bad news – they are right!  Deficit hysteria is now mainstream thinking, while the more appropriate hysteria should be “jobs hysteria”. How in the world is nominal income growth expected to finance a drop in consumer debt leverage if the government supports a smaller deficit? TARP costs less and tax receipt growth is beating expectations. But that's all it is, beating expectations. Put it this way: as long as the US is running current deficits, then a shrinking government deficit will, by definition, squeeze liquidity from the private sector. During a “balance sheet recession”, the government should be growing its balance sheet not shrinking it.

Top Two Reasons Why We Need Fundamental Tax Reform- Bill Gale makes the case for fundamental tax reform in the Brookings interview above, consistent with my “top two” list of reasons for tax reform I discussed in this past weekend’s CNN special on “IOUSA Solutions.” From the CNN transcript (emphasis added): are we raising enough revenue to cover our bills? Right now it’s obvious we are not. We don’t have a sustainable federal tax system. A separate question is once you decide what the right level of revenue is, how do you raise it? There is nothing [that] says we have to stick with any combination of the Bush tax cuts, in fact, current law says they are going away at the end of this year. I happen to think that the Obama Administration can come up with something better than just “Bush tax policy extended”–especially given how much they’ve complained about the poor quality of Bush tax policy over the years.

Dear Mr. President: It’s Tax Day. Do You Know Where Your Tax Policy Is? - by economistmom - With all due respect, I write this open letter to you as an economist and as a mom.  Just like parents ought to know where their children are at 10 pm, I think you, Mr. President, ought to know where your tax policy is–emphasis on your–on April 15th.  It’s your “baby” now, this complicated thing called the U.S. federal tax system. For all the complaining you have done on your Senate campaign trail, and then your presidential campaign trail, and now even as President about how unaffordable and unfair and in general not very smart the Bush tax cuts were, why is it that the centerpiece of your–emphasis on your–tax policy thus far is the deficit-financed extension of the vast majority of these very same (not very smart) tax cuts?Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook? 

When the Starved Beast Bites Back - Ever since George W. Bush massively cut taxes back in 2001, squandering much of the $5.6 trillion, ten-year surplus he inherited from Bill Clinton, liberals have assumed that the fiscal game was rigged. Conservatives had been explicit about their starve-the-beast strategy—the practice of creating large deficits through tax cuts in order to force future spending cuts.  The fear of conservative high jinks persists to this day, which is one reason liberals have responded coolly to President Obama’s deficit-cutting commission. In fact, many suspect the right is up to something even more sinister—a “doubling down on starve-the-beast,” as Paul Krugman put it recently. “Depriving the government of revenue, it turns out, wasn’t enough to push politicians into dismantling the welfare state,” Krugman wrote. “So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe.”

The VAT and the Money-Machine Argument - - It is an article of faith among conservatives that the value-added tax is a money-machine that must be fought to the death. The Wall Street Journal, for example, continually argues against the VAT on the grounds that if we were ever to adopt such an insidious form of taxation we would very quickly become just like Europe, as if the entire continent is one big Gulag instead of someplace where by and large the people are just as free and prosperous as Americans.Today I just want to make two points about the money-machine argument.

"My alternative proposal on trade with China" - In conclusion, it is a failure to understand basic monetary operations and Fed reserve accounting that caused the Democratic Congress and Administration to cut Medicare in the latest health care law, and that same failure of understanding is now driving well intentioned Americans like Atty General Blumenthal to push China to revalue its currency. This weak dollar policy is a misguided effort to create jobs by causing import prices to go up for struggling US consumers to the point where we buy fewer Chinese products. The far better option is to cut taxes as I’ve proposed, to ensure we have enough take home pay to be able to buy all that we can produce domestically at full employment, plus whatever imports we want to buy from foreigners at the lowest possible prices, and return America to the economic prosperity we once enjoyed.

Can we close the budget deficit by taxing the rich? - The deficit over the next 10 years is projected to be $9 trillion. Start with some rough arithmetic. The three million or so fortunate taxpayers whom Mr. Obama counts as rich are projected to earn about $27.5 trillion from 2010 through 2019, according to the Tax Policy Center, a Washington think tank, and about $23.9 trillion after deductions. They are projected to pay $7.4 trillion in taxes. That's 31.1% of every dollar of taxable income, on average. To squeeze an additional $9 trillion out of these taxpayers would require boosting that to 68.9%. And that assumes these taxpayers wouldn't find tax shelters to hide their income or work less. There isn't enough money in the over-$250,000 crowd to stick them with the $9 trillion tab. And this actually makes taxing the rich look better than it is. The deficit that people worry about isn't the $9 trillion short-term budget deficit. It's the mega-trillion long-term deficit. To put this in context, the 2009 deficit was 53 percent of GDP. The 2050 deficit is projected to be 350 percent of GDP.

Taxing the Rich, Over Time -- NYTimes - In 1979, the first year of this C.B.O. tax data, the total federal rate for the top 0.01 percent was 42.9 percent. And research by Thomas Piketty and Emmanuel Saez, two economists, suggests the rate was even higher before 1979. As recently as 1995, it was 40.9 percent.You can think of the 11 percentage-point decline between 1979 and 2005 as a government-provided lift to the after-tax incomes of this group. By contrast, the total federal tax rate for people between the 96th and 99th percentile — those making between about $125,000 and $300,000 — fell just 2 percentage points, to 25.7 percent in 2005 from 27.7 percent in 1979. The tax rate for the middle fifth of earners — a group the column discusses in some detail — fell about 4 percentage points, to 14.2 percent from 18.6 percent. The tax rate of the bottom fifth of earners also fell about 4 percentage points, to 4.3 percent from 8 percent. This chart, which goes through 2004, tells the story in graphical terms.

Taxes on the Rich vs. the Merely Affluent - A few readers wondered whether I was referring to only a very small slice of the highest-income households when I said tax rates on the wealthy had fallen more than on any other group over the last three decades. The short answer is no. This Congressional Budget Office data shows that rates have fallen sharply not just for the top 0.01 percent of earners, as I mentioned, but for the whole top 1 percent. Since 1979, the average effective federal tax rate for this group has fallen almost 6 percentage points, to 31.2 percent. (To be in the top 1 percent in 2006, a household had to make at least $332,000.) The average rate for most income groups has fallen roughly 4 percentage points since 1979. It is true that the tax rate for the next slice of the income distribution — say, the 95th percentile through the 99th percentile — has not fallen as much as for the other group. The average tax rate for the top 5 percent of earners as a whole has fallen roughly 3 percentage points since 1979.

Cherry-Picking Income Distribution Statistics, by Justin Wolfers: Greg Mankiw is critical of Parade magazine’s “Annual Salary Survey.” It’s a series of pictures of real people, who also ‘fess up to what they earned last year. But this being a glossy magazine, they add in a sample of celebrities. In consequence: about 14 percent of the people in Parade’s sample earn more than $1 million a year.  In the real world, the actual percentage is about 0.2 percent.But Greg is concerned that this sends the wrong message: There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.Well, yes and no. If we are interested in thinking about the potential taxes the rich can pay, Mankiw’s 0.2 percent is incredibly misleading. The issue here isn’t how many people are rich, but rather how many dollars are earned by the rich. ...

Tax Burden of Wealthiest Twice Their Share of Income - The IRS recently released preliminary data for 2008 which showed that taxpayers earning less than $100,000 collectively earned roughly half the Adjusted Gross Income (AGI) that year, but paid 25 percent of the income taxes. Meanwhile, taxpayers earning more than $250,000 paid close to half (46 percent) of the income taxes collected while they earned roughly a quarter of the total AGI. While there is a general consensus in America that people who earn more should pay more in income taxes, the fact that the wealthy bear nearly twice the income tax burden as their share of the nation's income should raise some eyebrows. Speaking of paying your "fair share," is it right that the tax burden of those earning less than $100,000 is about half of their share of the nation's income?

A Consumption Tax, Revisited - Letter - NYTimes - On balance, Robert H. Frank’s proposal for a consumption tax on high-income families may be a good idea (“Hey, Big Spender: You Need a Surtax,” Economic View, March 21). But there may be some potential downsides.  The column suggested that reduced future consumption spending (as a result of the tax) wouldn’t cause a fall in total spending in the economy, because investment would rise to pick up the slack. But if businesses know that consumers will be cutting back, they have less incentive to build new plant and equipment. There will also be reduced incentives for people to earn, because, if they cross the threshold, they will start paying this consumption tax (which would also be progressive, exacerbating the problem).

Who Doesn’t Pay Taxes? - NYTimes - What percentage of Americans pays no federal taxes? If you listen to talk radio, you may have heard the number 47 percent. That is the share of households that pay no net federal income taxes, once tax credits like the Earned Income Tax Credit are taken into account. This 47 percent number comes from the Tax Policy Center. But once all federal taxes are considered — investment taxes, payroll taxes and others — the share drops sharply. Several tax experts I interviewed thought the number was around 10 percent and probably lower than that. You can see this by looking at the Congressional Budget Office data on tax rates by income group. It shows that the total net federal tax rate for the poorest fifth of households — that is, those most likely to pay no federal taxes — was still positive. In 2006, the last year for which there is data, this rate was 4.3 percent.

Are Your Taxes Too High? - Americans are split on this question. Here’s a look at how survey respondents have answered this over the last five decades: That chart, from the Gallup Organization, shows that for most of the period since 1956, the majority of Americans have said they believe their taxes are too high. But in the last couple of years, that share has dipped just below half. In the most recent survey using this question, conducted last week, 48 percent thought their taxes were too high; 45 percent said their tax levels were about right; and 3 percent believed their taxes were too low.

Had some debt retired? Don't forget the tax ramifications -- Thousands of people filing taxes this year might have unknowingly under reported their income for 2009.They're among the many consumers managing to stay afloat financially, because creditors have dismissed some of their debt, but in many of those cases that dismissed debt did not really go away. It's a tax law most consumers don't think about when they're drowning in debt and negotiating with their creditors. Reputable debt counselors are often able to get interest rates lowered and in many cases, a reduction in the total debt they owe. But where the IRS is concerned, that reduced balance is income. "There are laws that address what's called 'cancellation of indebtedness,' " explained David Williams of the Internal Revenue Service. "In other words, basically what they say is, if you owed some money and then it got forgiven, you don't owe it anymore. That, in some circumstances is considered income to you."

The search for Basel III loopholes begins - FT has two great articles today following the maneuvering around Basel III. The big-picture story is clear: banks around the world are ganging up to try to weaken and/or delay Basel III’s implementation. Most of the arguments could be made only by banks who have been drinking their own kool-aid for so long that they no longer have any idea what sounds ridiculous and what doesn’t. I hope that the world’s central bankers aren’t going to be swayed by stuff like this: Bankers say that by Friday’s deadline the committee will be inundated with protests, complaining that the the proposals – designed to insulate the industry from another financial crisis – could backfire, cutting bank profits to unsustainably low levels…

Banks Decry Proposed Basel Mandates on Cash, Capital (Bloomberg) -- JPMorgan Chase & Co., Wells Fargo & Co. and Fifth Third Bancorp executives told U.S. regulators last week that plans to bolster banks’ liquidity are based on the wrong assumptions and risk unintended consequences. The three spoke at a private meeting in Washington called by the U.S. Federal Reserve to discuss the impact of rules on bank capital and liquidity being drafted by the Committee on Banking Supervision in Basel, Switzerland. None of the representatives from the Fed and four other regulatory agencies present defended the Basel plans. The complaints voiced by the U.S. lenders are part of a campaign targeting the Basel Committee, which the Group of 20 leaders asked last April to produce rules on how much cash and capital banks must keep on hand following the worst financial crisis in 70 years.

 Capital-Control Confusion at the IMF - In February, the International Monetary Fund, which had long opposed controls on capital inflows, published a surprising paper that reversed course. For countries facing a big inflow of capital — with the attendant risks of asset bubbles — the use of capital controls “is justified as part of the policy toolkit to manage inflows,” the IMF paper wrote. Even if investors figure out ways around the controls, the restrictions still can be useful, the IMF said because “the cost of circumvention acts as ‘sands in the wheels’” and slows down investment. Today, the IMF came close to changing its mind again.

Air Traffic Congestion and The Flow of Funds - Brussels - Disruption of air traffic because of the spread of volcanic ash from Iceland worsened on Saturday with no landings or takeoffs possible for civilian aircraft in most of northern and central Europe. Imagine, instead of stranded passengers, stranded money. Imagine, instead of volcanic ash creating doubts about the safety of flying, a poor auction, bankruptcy, financial fraud charge, or regulatory change creating doubts about the safety of investments. Just as planes don't have to crash, concern itself is enough to stop the flow of passengers; investments don't have to go bust, concern itself is enough to stop the flow of money. Stranded passengers mean work will be undone, meetings will be postponed, and dates will be cancelled. Stranded money means the same things- bills may not be paid, investments may be postponed, and equity and security issues may be cancelled.

Greenspan and the Rhythm Method - Seth Myers, on Saturday Night Live's Weekend Update: "Alan Greenspan, the former chairman of the Federal Reserve, said of his time in office, "I was wrong 30% of the time."  Well that's not bad - for a weatherman - or a free throw shooter - but you were the Chairman of the Fed.  We need the Fed to be on the pill and you ran it on the rhythm method."

After the Crash, a Crashing Bore - WSJ - Like all Americans, I continue to seek to understand exactly what moods, facts, assumptions, dynamics, agendas and structures underlay and made possible the crash and the Great Recession. We do this so that we will be able to bring our gained wisdom into the future and keep another crash from happening, should we ever have another bubble to precede it. We also do it so that we know who to hate. That's why this week's Financial Industry Inquiry Commission hearings were so exciting, such a public service. In fact, the hearings weren't dramatic but a tepid affair, gentle and genteel. The commission members—economists, lawyers, former officeholders—actually made me miss congressmen, who can at least be relied on to emote and act out the indignation of the citizenry as they understand the citizenry

Views Conflict on Fannie Meltdown - WSJ - A Congressional panel heard clashing views about what caused the failure of Fannie Mae on Friday, one that blamed the "impossible" balancing act of the company's competing missions, while a former regulator blamed management failures. "I sought to balance the fine points of mission and business insofar as I could understand them," said ex-Fannie Chief Executive Daniel Mudd before a panel investigating the financial crisis. By September 2008, when the government took over Fannie and its smaller rival, Freddie Mac, as mounting losses threatened to wipe out thin capital reserves, "that was no longer possible...and I am sorry for that," he said. But Armando Falcon, the former head of the company's federal regulator, said the collapse of the companies "was clearly a failure"

Washington Mutual created 'mortgage time bomb,' Senate panel says… Before Washington Mutual collapsed in the largest bank failure in U.S. history, its executives knowingly created a "mortgage time bomb" by making subprime loans they knew were likely to go bad and then packaging them into risky securities, a congressional investigation has found. In some cases, the bank took loans in which it had discovered fraudulent activity -- such as misstated income by borrowers -- and rolled them into mortgage securities sold to investors without disclosing the fraud, according to the report released Monday by the Senate's Permanent Subcommittee on Investigations.

WaMu Examiner Ridiculed, Called "Housing 'bubble' boy" - From the LA Times: Regulators did little to halt reckless practices at WaMu Federal banking examiners found serious problems at Washington Mutual Bank at least five years before its 2008 collapse, but their supervisors showed little concern ... During those five years, examiners constantly warned of "less than satisfactory" loan underwriting, the "horrible performance" of its subprime-backed mortgage securities and the failure of WaMu executives and federal regulatory supervisors to do much about it. One examiner said he was derided by colleagues as "the housing 'bubble' boy" for his "gloom and doom" predictions for some risky loans, and another complained that critics of subprime loans were called "chicken little."

Venture Capital Creating Systemic Risk??? - Rhode Island Senator Jack Reed was quoted in the WSJ yesterday saying that VC firms managing $30mm of capital or more need to report to the SEC because "the government needs the reporting requirement so it can assess whether these private pools pose a systemic risk to the financial system."The only systemic risk the VC business is creating for the financial system is attempting to put the current one out of business by financing entrepreneurs with new ideas for banking, brokerage, insurance, and other financial services. But to suggest that small venture funds of $30mm could possibly be creating systemic risk to the global financial system is ludicrous. I can't even imagine a huge $1bn venture fund could create systemic risk, but I can understand how a regulator might want to keep track of something like that. But a $30mm fund???? I'm speechless.

Glenn Reynolds on The Legislator’s Knowledge Problem - In the modern corporatist state, regulations and their operationalization are far more complex than any mind can possibly understand — causing insuperable problems for the limited mind of your Congressman: Hayek explained in 1945 why centrally controlled “command economies” were doomed to waste, inefficiency, and collapse: Insufficient knowledge. He won a Nobel Prize. But it turns out he was righter than he knew.  In his “The Use of Knowledge In Society,” Hayek explained that information about supply and demand, scarcity and abundance, wants and needs exists in no single place in any economy. The economy is simply too large and complicated for such information to be gathered together.

The silver lining to synthetic CDOs - One of the more thought-provoking bits of the Shleifer paper on financial innovation is this part of the model: Optimism about the profitability of the new claim at t = 0 encourages the intermediary to over-invest in an unproductive activity, eventually triggering a loss… Investment in A occurs only if new securities can be engineered, so financial innovation bears sole responsibility for unproductive investment. It can be argued that the expansion in the supply of housing in the last decade was an example of such inefficient investment needed to meet the growing demand for securitization of mortgages. To put it another way, it was the excessive and irrational demand for collateralized debt obligations which caused all those Miami condos and Phoenix tract homes to be built in the first place. That makes sense to me, but it raises an interesting question about the damage caused by synthetic CDOs. Here’s Jesse Eisinger and Jake Bernstein, from their investigation of Magnetar:

Tom Adams: The Myth of “Insatiable” Investor Demand for CDOs - One of the ongoing myths of the financial crisis is that investor demand was what motivated the creation of so many bad securities. Banks, journalists and academics have all described the period prior to the crisis as a period of “insatiable investor demand” for things like subprime mortgages and CDOs. According to the conventional wisdom this mania-level investor demand is what caused banks and lenders to bundle up mortgage loans and related bonds as fast as they could. As Yves Smith has noted on a number of occasions, the notion of “insatiable investor demand” is nonsense. Real cash investors were not the ones demanding more subprime loans and the bonds that they got packaged into. The demand was artificial and a form of Ponzi scheme. It came, overwhelmingly, from CDOs.

Papagianis, Zingales on CDS Resolution Reform - Christopher Papagianis at Economics 21 has some has some advice for Republicans on ways to make the Dodd financial reform bill better; use some insights from Oliver Hart and Luigi Zingales. It’s worth reading all of it, but I’ll try and summarize. First, he describes resolution authority in a smart way: The question at hand is how to deal with the detection part, the part where you go from ordinary to crisis, a question I worry about as well. What is to be done? ...essentially it means that credit default swaps on bank debt, or market expectations of credit risk, should be used as the trigger for when a systemically risky financial firm should be resolved (or moved further along in the process of resolution). Ok, several things:

Exchanges vs. Clearinghouses (This is Important) - (I wrote this post a while ago, but for some reason I never got around to publishing it. I was reminded of it when I read Felix Salmon's post on derivatives reform from this morning, in which Felix gives a quick-and-dirty explanation of clearing vs. exchange-trading. I was going to write a take-down of Bob Litan's recent Brookings paper on derivatives reform, but it's honestly not even worth my time. Litan makes a compelling case for derivatives reform in a derivatives market that simply does not exist.) Repeat after me: a clearing requirement and an exchange-trading requirement are NOT the same thing. They are very, very different. It is extremely important that people understand the difference between mandatory clearing and mandatory exchange-trading, because there's an incredible amount of confusion about this in the press — even journalists who cover financial reform constantly conflate clearing and exchange-trading.

Bill Would Require Derivatives Trading to Occur on Exchanges… - The Democratic chairwoman of the Senate Agriculture Committee said on Tuesday that she would propose legislation requiring nearly all users of derivative contracts to trade on centralized exchanges and possibly ordering banks to segregate their business in derivatives into separate subsidiaries. The outlines of the proposal drew praise from one Republican Senator, Olympia J. Snowe of Maine, who early this year urged stronger regulation of derivatives.  While issues such as consumer protection and bank bailouts have drawn most of the attention in the financial overhaul legislation, rules on derivatives are the focus of fierce lobbying because trading of derivatives is one of Wall Street’s most profitable businesses. The derivatives that contributed to the financial and housing crisis — credit-default swaps and collateralized debt obligations — were mostly unregulated, with no public reporting of prices or volumes of trades.

Senator Lincoln Proposed Segregating Derivatives Units of Commercial Banks - Yves Smith - Bloomberg reports that Senate Agriculture Committee Chairman Blanche Lincoln is expected to table a proposal to require commercial banks to separate their derivatives operations from their commercial banking activities. The intent is to prevent banks from using cheap deposits to subsidize risky derivatives businesses, and thus eliminate the government backstopping of these activities. This “no bailout provision” would also forbid banks to use emergency banking facilities like the discount window and FDIC emergency liquidity guarantees for their derivatives activities. As appealing as this idea sounds, I’m skeptical as to whether it will solve the systemic risk posed by over-the-counter derivatives businesses, in particular credit default swaps...

Blanche Lincoln’s excellent and doomed derivatives proposals - There’s a fair amount of confusion over the new derivatives legislation that Blanche Lincoln is planning to introduce tomorrow, and partly that’s because a lot of DC journalists don’t really grok the distinction between exchange clearing and exchange trading. (It’s a pretty recondite distinction, I hardly blame them.)The easy way to think about this is that if an instrument is exchange-traded, then it will always be cleared by the exchange as well. It’s possible to have central clearing of derivatives transactions without having them exchange-traded, but you can’t have exchange trading without central clearing.Lincoln wants to mandate exchange trading for most derivatives, although it looks as though she might give the CFTC final say on that front. Lincoln also wants to regulate foreign currency swaps, in a move which goes further than even Treasury wants to go. And more generally, in a Volcker-like move, she wants the big investment banks’ swap desks to be spun out of their bank parents, to prevent contagion and to help make them small enough to fail.

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going - At just the moment that U.S. housing market seemed to be slowing in late 2005, a few savvy financial engineers at a suburban Chicago hedge fund [1] [1] helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages. When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers. Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began. How Magnetar pulled this off is one of the untold stories of the meltdown.

Financial Arsonist Found ? - Jesse Eisinger and Jake Bernstein come very close to accusing Alec Litowitz of the Magnetar hedge fund of being a financial arsonist. I have been speculating about financial arson for a year and a half now. The hypothesis is that Magnetar deliberately set up especially low quality CDOs and bought CDS insurance on them. Magnetar bought the equity tranches of the CDOs and so had a voice in the selection of underlying assets. Many anonymous sources claim that Magnetar pressed for risky assets to be included in the CDOs.  Magnetar clearly used the revenue from their equity tranches to invest massively in CDSs. They claim they were net losers when all but one of the CDOs which they sponsored defaulted. So ? Arson analogy after the jump.

Magnetar: Inside Job | This American Life - A hedge fund named Magnetar comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities... while at the same time betting against the very securities it helped create. Planet Money's Alex Blumberg teams up with two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger, to tell the story. Jake and Jesse pored through thousands of pages of documents and interviewed dozens of Wall Street Insiders. We bring you the result: a tale of intrigue and questionable behavior, which parallels quite closely the plot of a Mel Brooks musical. (40 minutes)  We commissioned a Broadway song to go along with this story, which you can listen to here. (Click to stream; right click or control click to download.)  You can also download the sheet music.

The Cover-Up - Wall Street is engaged in a cover-up. Not a criminal cover-up, but an intellectual cover-up.The key issue is whether the financial crisis was the product of conscious, intentional behavior — or whether it was an unforeseen and unforeseeable natural disaster. We’ve previously described the “banana peel” theory of the financial crisis — the idea it was the result of a complicated series of unfortunate mistakes, a giant accident. This past week, a parade of financial sector luminaries appeared before the Financial Crisis Inquiry Commission. Their mantra: “No one saw this coming.” The goal is to convince all of us that the crisis was a natural disaster — a “hundred-year flood,” to use Tim Geithner’s metaphor. I find this incredibly frustrating. First of all, plenty of people saw the crisis coming.

Macroeconomics: en route - The Institute for New Economic Thinking (INET) hosted its inaugural conference this weekend at King's College Cambridge, an experiment of sorts. I had the pleasure of attending the conference, The conference was a spectacular fireworks display of economic panels, featuring experts across a broad spectrum of applied macroeconomic theory and policy, including banking and development. (You can see the speaker list, presentations, and video here). Definitely read other conference pieces by Marshall Auerback, Mark Thoma, and Yves Smith. INET's goal is the following: “to create an environment nourished by open discourse and critical thinking where the next generation of scholars has the support to go beyond our prevailing economic paradigms and advance our understanding of the economic system as a tool to meet social objectives.” That's a tall order, and likely not the intended output from the inaugural conference.

Notes from INET Conference: The Central Bank as “Deal of Last Resort - Over the last thirty years, we have steadily moved from a bank lending credit system, to one in which capital markets have become the primary form of credit intermediation. Unfortunately, our regulatory apparatus has not kept up. The result has been a series of improvisations: filling gaps in the regulatory framework via bailouts and the steady expansion of moral hazard. Mehrling, noted at the Institute of New Economic Thinking (INET) conference, the ultimate backstop implied by repeated government rescues created a set of expectations on the part of capital market participants. The freefall happened when the failure of Lehman and AIG took a key market maker, and the key ultimate seller of insurance, out of the system. Had someone else, perhaps the government, stepped in to do what Lehman and AIG had been doing, even at a high price, the freefall could likely have been stopped in its tracks and the extent of the subsequent global financial fallout considerably mitigated. Mehrling’s ultimate conclusion: Have the central bank become “Dealer of the Last Resort”, in effect backstopping the system by being the ultimate market maker or “insurer of last resort”.

Lord Turner at the INET Conference - This alone was worth the trip! Lord Adair Turner, Chairman of the FSA .

An open letter to Adair Turner - What I didn’t hear in your talk was an emphasis on the snake oil. To me, it’s the single most important factor in what happened, and the full and immediate disclosure and FDA-type verification of the securities being marketed is the only way to prevent it. It’s not prop trading, but prop information that’s the problem because the prop information is a front to sell the snake oil. You referenced Limited Purpose Banking twice in your talk. It seemed like you got close to saying it was the way to go, at least over time, but then you said you were worried about sudden swings in the willingness of the public to extend credit to itself without traditional bankers “managing” their risks. Let me respond.

Richard Koo, Chief Economist, Nomura Research on The Age of Balance Sheet Recessions: What Post-2008 US, Europe and China can learn from Japan 1990-2005 … Institute of New Economic Thinking: (13 minutes), Youtube (w/ links to other INET presentations on the sidebar)

The Origins of the Next Crisis - William White, the former chief economist at the Bank of International Settlements (BIS) gave an important speech at George Soros’ Inaugural Institute of New Economic Thinking (INET) conference in Cambridge.  While everyone is casting about for the one magic bullet solution which would have prevented this and future crises, he placed the blame for the credit crisis on short-termism, pointing the finger most notably at economists and their models. White said that the models almost all economists use are ‘flow’ models which leave no room for ’stocks’ and thus completely miss unsustainable secular trends. In essence, White was saying: "it’s the debt, stupid."  When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

The Big School and Convertibility Lost - There are, it may seem to a new student of economics, more schools of thought in the field than stars in the sky. I sometimes wonder if David Bohm, author of, inter alia, The Qualitative Infinity of Nature, might have felt more comfortable as an Economist than a Physicist. Economics is far more democratic, tolerating, albeit not without disputes, multiple coincident schools of thought. Of late, however, one school of economic thought has become increasingly dominant in policy making circles. The Big School holds that the larger a financial institution becomes the more protected it should be, and vice versa, the smaller a financial entity is, the less protection it should receive. As an example of this (somewhat) facetious claim, consider the views of JPM's David Lowman: Like all loans, mortgage contracts are based on a promise to repay money borrowed. Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral – be it a home, a car or a stock market investment – depreciates. If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?

Six Pathologies of Orthodox Macro - As the recession has deepened and the financial debacle has passed from one flare-up to another during the past year and a half, commentary on the economy’s troubles has swelled tremendously. Pundits have pontificated; journalists and editors have reported and opined; talk radio jocks have huffed and puffed; public officials have spewed out even more double-talk than usual; awkward academic experts, caught in the camera’s glare like deer in the headlights, have blinked and stumbled through their brief stints as talking heads on TV. We have been deluged by an enormous outpouring of diagnosis, prognosis, and prescription, at least 95 percent of which has been appallingly bad. The bulk of it has been bad for the same reasons. Most of the people who purport to possess expertise about the economy rely on a common set of presuppositionsand modes of thinking. I call this pseudointellectual mishmash “vulgar Keynesianism.”

Lying Hacks - At the NYT the hacks are running wild. Errand Boy Sorkin is peddling the party line that The 1. TARP = the Bailout. 2. That it might lose less taxpayer money than expected. (Elsewhere the other day I saw a claim that even the Citi rathole is actually “profitable” for the taxpayer.) The truth is that the Bailout has already stolen or exposed to theft $14 trillion, while Barofsky’s calculation last year of a $23.7 trillion total potential exposure was rendered antiquated by the quiet moves of Fed and Treasury in December to extend the Bailout limits to infinity, via lifting all limits on laundering the Bailout through Fannie and Freddie. The banks are all permanently insolvent since their balance sheets can never recover a non-fraudulent solvency. Only accounting fraud and the Bailout-supported phony “values” for all that worthless toxic paper keep any of this artificially going at all. The point of this fraud is to enable the banksters to continue their personal looting in the form of “bonuses” and other “compensation”, and to enable the government to lie claiming that the Bailout worked and the banks have been restored to health.

Greek Bailout, Lehman Deceit, And Tim Geithner - By Simon Johnson - We live in an age of unprecedented bailouts.  The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble. The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures.  Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).

Lehman Channeled Risks Through ‘Alter Ego’ Firm -  In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books. The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.  While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

The scandalous Lehman CME auction - It was one of the least transparent and most underpriced asset sales since the days of Russian privatizations. In the chaos of the immediate aftermath of the collapse of Lehman Brothers, the CME Group auctioned off Lehman’s derivatives assets for less than half their value — handing a $1.2 billion windfall to Barclays, DRW Trading, and — you knew this was coming — Goldman Sachs. The details are in pages 319-328 of the newly-unredacted Valukas report, and Andrew Clavell has a good summary: essentially Barclays walked away with $335 million, DRW made $303 million, and Goldman, coming out on top as always, managed to profit to the tune of $450 million

The Rules, Part IX - A few readers have asked me where they can find a list of my “Rules” posts.  You can find such a list here.  One further note on the “Rules” posts — I’m not exactly sure how many there will be, but if I write all of them, there will be around 50 of them.  Should I live so long, and readers still enjoy the series, maybe I would write the last one in 2011. Here’s tonight’s rule: Attempting to control a system changes it. Maybe tonight’s rule deserves the “Duh!” award, but it reminds me of reading THE ART OF WAR, by Sun Tzu.  Most of what Sun Tzu writes about is really basic, but it is amazing how many times generals neglect his easy advice, and bullheadedly persist in unwise courses of action.

JPMorgan gets paid to borrow $271 billion - We know that JPMorgan is not substantially increasing lending anytime soon. And we also know that banks are recapitalizing courtesy of a steep yield curve and near zero rates, what I would call free money.  What I didn’t know is how free these funds truly were. An investor friend pointed out something curious buried deep in JPMorgan Chase’s financial report from Q1 2010, namely that they were effectively paid five basis points to borrow money. This is on page five of the document embedded below. It shows you that JPMorgan Chase earned an average yield of 3.24% more on its assets than it paid out on its liabilities.  This huge margin is in large part due to a steep yield curve and zero rates. The interesting bit is highlighted in red. That is the interest rate that JPM had to pay for Fed Funds i.e. for money borrowed from the Federal Reserve.* The number is –0.05%. That’s right, negative 0.05% for what were $271.9 billion in repo liabilities.

Reform We Can Believe In » I ask, after months of worse than no progress, “Can’t anybody here even spell financial reform, let alone get it done?” We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis. The bank lobbyists are winning and it’s time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no “but first,” let’s jump right in.

Ezra Klein - Financial reforms moving fast - Health-care reform, I often whined, moved too slow. But it's worth taking a step back and noting how remarkably fast financial regulation is going. But there's a downside, too. There's a lot about financial reform that deserves to be debate, but relatively little time in which to do it. The House has voted on legislation. The Senate is pretty sure of the shape of the legislation it means to vote on. People who wanted a chance to whip up support for something very different than what we've got have a lot less time to get the public, or any other actors, on their side.

The Eternal Life of America’s Megabanks - Simon Johnson - The world economy faces a major problem: the largest banks in the United States remain “too big to fail,” meaning that if one or more of them were in serious trouble, they would be saved by government action – because the consequences of inaction are just too scary. This problem is widely acknowledged, not just by officials but by bankers themselves. In fact, there is near unanimity that fixing it is a top policy priority. Even Jamie Dimon, the powerful head of the very large JP Morgan Chase, emphasizes that “too big to fail” must end. Unfortunately, the Obama administration’s proposed approach to ending “too big to fail” – now taken up by the US Congress – will not work.

The Only Way to Prevent Another Bailout of Wall Street is to Cap the Size of Wall Street’s Big Banks - Robert Reich -The best way for Senate Dems and the White House to respond to the Republican charge that the Dem plan for financial reform doesn’t go far enough to prevent another bailout is to call their bluff — and simultaneously do what’s necessary to avoid another bailout: Cap the size of big banks, as the UK is close to doing for its big banks. The so-called “resolution” mechanism the Dems are pushing to wind down any big bank that gets into trouble is a step in the right direction. But it won’t work if two or more giant banks are endangered at the same time — which is likely to be the case when the next crisis occurs because every big bank uses whatever profitable financial ploys every other bank uses (as they did in the runup to the crash of 2008)

Yet Another Reason To Break Up The Big Banks  - Many of us have pointed out that the economy will not stabilize until the too big to fails are broken up. We have also pointed out that derivatives are still very dangerous for the economy, that the derivatives "reform" legislation previously passed has probably actually weakened existing regulations, and the legislation was "probably written by JP Morgan and Goldman Sachs".  That's bad enough. But last week, Bob Litan of the Brookings Institute wrote a paper (here's a summary) showing that - even if real derivatives legislation is ever passed - the 5 big derivatives players will still prevent any real change. James Kwak notes that Litan is no radical, but has previously written in defense in financial "innovation". Here's a good summary from Rortybomb, showing that this is yet another reason to break up the too big to fails:

How to reduce risk on Wall Street? Make the banks pay – Matthew Richardson and Nouriel Roubini -When economists and Wall Street types toss around the term "systemic risk," that's pretty much what they're talking about. The particular risks that led to the crisis -- i.e., big institutions with too much leverage, too little capital and too many implicit and explicit government guarantees -- were not impossible to anticipate. (In fact, some of us warned about the financial pandemic that was to come.) Now, the question is: How do we keep this all from happening again?  To create a truly safe financial system, we have to focus on two goals. First, we have to drive a stake through the heart of the "too big to fail" mantra that only fattens our financial beasts. Second, we should stop focusing on the problems of individual banks and look at the broader risk that the largest and most complex financial institutions pose.

'The Fourteenth Banker,' Anonymous Bank Insider, Describes His Moral Crisis: 'The System Is Built To Be Gamed'- "The system is built to be gamed." "The voices of dissent are not being heard." These are the words of an anonymous executive at one of America's 10 largest banks, who after many years of watching the worst of Wall Street's ethics transform his company, has decided to speak out. (Scroll down for the Q&A) Despite the obvious risks to his banking career, the executive, who's been in the industry for more than 20 years, says he can't bear to keep quiet any longer: "I decided that I cannot live with the extent of the compromises to my value system." In early April, the executive in question started the anonymous blog, The Fourteenth Banker. Intended as forum for bank insiders who feel muzzled by industry gag orders, the blog gets its name from a now infamous March 2009 White House meeting with the heads of the nation's largest banks. (It's also a reference to the book, "13 Bankers: The Wall Street Takeover and The Next Financial Crisis" by Simon Johnson and James Kwak.)

SEC Charges Goldman Sachs with Fraud - The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. "The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

SEC Charges Goldman Sachs with Fraud - The SEC has charged Goldman Sachs with fraud. The charges are for selling a rigged CDO package to investors, but failing to disclose that the package was designed by a hedge fund operator as a bet against the housing market. The hedge fund, Paulson & Co., would short the bonds in the package if the housing bubble burst. Goldman didn’t tell that to investors, who ended up losing when the fund went south. Rick Unger from True/Slant explains:  Here’s how it worked- At the request of a hedge fund operator named John Paulson, a guy who earned $2.7 billon in 2007 betting that the housing bubble was going to pop, leaving many mortgages in distress, Goldman created the fund allowing Paulson to choose the mortgage bonds he wanted included. They were all bonds that Paulson believed were the most likely to lose value and, therefore, the ones Paulson most wanted to bet against.

The SEC Sues Goldman - Yesterday the SEC sued Goldman Sachs for civil fraud. The case centers on Goldman’s 2007 ABACUS CDO, which it manufactured at the behest of hedge fund predator John Paulson. The scam was for Paulson to cobble together a toxic mess of MBS he expected would blow up, find suckers to buy this CDO, and then short it. Goldman’s role was to launder the CDO as having been conscientiously constructed. They used the good name of a vetting firm, ACA. Goldman supposedly told ACA that Paulson was consulting on the MBS selection and would be taking the same side of the bet as the buyers would be. Goldman then cited ACA’s imprimatur in touting this CDO to the suckers – pension funds, other institutional investors, dumber banks, the usual suspects. Meanwhile it helped Paulson really bet against what was really garbage. It collected fat fees every step of the way, including from the investors it defrauded. (Barry Ritholz compares it to The Producers, who try to defraud their investors by putting on a crappy play they expect to quickly close while embezzling much of the loot.)

SEC Formally Charges Goldman Sachs In Derivatives Fraud with Paulson and Company - another 'Rogue Trader at Work?' - The SEC is formally charging Goldman Sachs with fraud in the derivatives markets, specifically with regard to Collateralized Debt Obligations related to subprime mortgages. Investors in Goldman's Abacus CDO lost one billion dollars. In addition to the company, an individual VP in Goldman's international group is being charged, Fabrice Tourre. Paulson and Company, a major hedge fund, paid Goldman to structure a CDO based on mortgages that Paulson selected, so that they could bet against it.  This could be construed as a deft way of throwing red meat to the angry mob, nailing a specific individual at Goldman while limiting the criminal charges against the company although there will be significant civil cases, and dealing with the billionaire hedge fund owner Paulson who made a fortune betting against the subprime market.

U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.  The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.  In a statement, Goldman called the commission’s accusations “completely unfounded in law and fact” and said it would “vigorously contest them and defend the firm and its reputation.”

Goldman May Owe British Taxpayers $841m - British taxpayers have a direct material interest in the outcome of the fraud case brought against Goldman Sachs by the US financial watchdog, the Securities and Exchange Commission. Because the bulk of the loss on the transaction at the heart of the charge against Goldman ended up with Royal Bank of Scotland, the bank where British taxpayers have an 84% stake. How the loss ended up with Royal Bank is quite a long story, which I'll summarise below. But the material fact to dwell on for now is that on 7 August 2008, just before Royal Bank was semi-nationalised, it paid out $841m to Goldman Sachs to settle a claim on credit insurance provided by ABN, the Dutch bank which Royal Bank had acquired (or to be more precise, it had bought a big bad chunk of ABN in the autumn of 2007).

Bove: Time to Clean House at Goldman - Leave it to Richard X. Bove, the outspoken banking analyst at Rochdale Securities, to call for the leaders of Goldman Sachs to “fall on their swords.” Mr. Bove argued Friday that Lloyd C. Blankfein, the firm’s chief executive, and David A. Viniar, the chief financial officer, should resign after the Securities and Exchange Commission accused Goldman of securities fraud in the sale of a mortgage investment, Bloomberg News reports.  “Will Lloyd Blankfein, C.E.O., and David Viniar, C.F.O., maintain their positions in the company? I do not think so,” Mr. Bove wrote in a note to clients. “Someone must ‘fall on their swords’ for the devastating decline in this company’s persona and they may be forced to do so for public relations reasons.”

What Goldman’s Conduct Reveals - Room for Debate Forum, NyTimes with Yves Smith, Michael Greenberger, Bill Black, Ed Harrisoin, Megan McArdle, Nomi Prins, and others...According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like pension funds. As those securities plunged in value, Goldman and the Paulson hedge fund made money on their negative bets, while the Goldman clients who bought the investments lost billions of dollars.  Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?

SEC: Goldman Is Actually a Vampire Squid – Time - A few weeks ago, I did a blog post questioning whether the mega-profitable, much-hated investment bank Goldman Sachs really methodically set about putting together mortgage-backed securities that would fail. I pointed to a Michael Lewis endorsed college thesis that seemed to suggest Goldman's mortgage CDOs had actually done better than the rest. I then asked people to vote on whether Goldman was actually a vampire squid or not. Well the Securities and Exchange Commission casts their vote today and the winner is: VAMPIRE SQUID. The SEC is alleging Goldman committed securities fraud by colluding with a hedge fund to create bonds that were filled with home loans sure to default. Goldman then sold those bonds to invests as regular-old good investments, knowing the hedge fund that conceived the bonds planned to bet against them. Goldman may have placed some bets itself.

Goldman’s reputation in tatters - It’s not easy to parse a one-sentence statement, but Goldman’s declaration that “the SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation” seems ill-advised to me, mainly because it’s so obviously untrue. It might be hard to successfully prosecute Goldman — they have a lot of very expensive lawyers, and securities law is murky at the best of times. But there’s enough in the way of smoking guns in the SEC’s complaint that it’s ridiculous to say that it’s “completely unfounded in fact”. It makes a lot of sense here to do the old-fashioned thing and follow the money. Why was ACA so quiet about the fact that it wasn’t really picking the securities in the CDO it was nominally managing? Because it was being paid millions of dollars for its silence. And why was Goldman so happy to do Paulson’s bidding? Just look at the complaint. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1.

CNBC Guest Tells Truth, Calls Cramer Shallow, Is Yanked Off Air - Any time Erin Burnett tells a guest "You will not be back, you have to be more polite than that" you know the "guest" is telling the truth, the one commodity rarely if ever discussed on General Electric's circus station. Enter (or rather, exit) R&R Consulting's Sylvain Raynes, a structured finance expert, who at 3:10 into the clip takes on what he calls the "public relations officers" for Goldman, and asks "is it all right if I am a little critical?" Apparently the answer is no. First, Sylvain completely destroys Cramer's false "breaking news" about Goldman being long Abacus, using the same logic we discussed earlier: "It's quite possible that Goldman had an equity position, they probably wrote it off on the closing date. So they stood to lose a few million and make a few hundred million...

Goldman Sachs's Response to the SEC Suit  - We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact. We want to emphasize the following four critical points which were missing from the SEC’s complaint.

  • * Goldman Sachs Lost Money On The Transaction.
  • * Extensive Disclosure Was Provided. 
  •   * ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. 
  •   * Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa.

11 Examples Of How Insanely Corrupt The U.S. Financial System Has Become - If you ask most Americans, they will agree that the financial system is corrupt.  It is generally assumed that just like most politicians, most big bankers are corrupt by nature.  But the truth is that the vast majority of Americans have no idea just how corrupt the U.S. financial system has become.  The reality is that the American Dream is literally being stolen from millions of Americans right out from under their noses and they don't even realize it.  The corruption on Wall Street has become so deep and so vast that it is hard to even find the words to describe it.  The level of greed being displayed by many Wall Street firms would make Gordon Gecko blush.  It seems that the major financial players will try just about anything these days - as long as they think they can get away with it.  But in the process they are contributing to the destruction of the greatest economic machine that the planet has ever seen.    The following are 11 examples of just how insanely corrupt the U.S. financial system has become....

How financial innovation causes crises -- Nicola Gennaioli, Andrei Shleifer, and Robert Vishny have a great new paper out entitled “Financial Innovation and Financial Fragility”.* It doesn’t break a lot of new conceptual ground, but it’s very thought-provoking, and it helps to codify in a formal way the serious problems with financial innovation. Their conclusion is spot-on, I think: Recent policy proposals, while desirable in terms of their intent to control leverage and fire sales, do not go nearly far enough. It is not just the leverage, but the scale of financial innovation and of creation of new claims itself, that might require regulatory attention. The idea here is that financial innovation is, by its nature, inherently and predictably dangerous. If something’s innovative, it’s new. And if something’s new, it’s untested.

Ezra Klein - Think Tank - Economic and Domestic Policy

Larry Summers: From Arch-Neoliberal to Regulator - I do not need to rehash Larry Summers' chequered past: harbouring ideas about dumping toxic waste in Africa as World Bank chief, yelling at Japanese finance officials as a Treasury Undersecretary at the height of his Washington Consensus phase, and resigning before being nearly booted as Harvard president after a certain vote of no confidence from its faculty. However much his gaffes have become part of public folklore, it seems the world has yet to see the last of him as he is now the director of the White House's National Economic Council. It is thus no surprise that when it comes to hypocrisy emanating from American officials, there is one who takes the cake--the highly controversial figure of Larry Summers.

Failure Is A Failed Strategy -Paul Krugman- One thing that keeps coming up in comments, both here and on my column, is the widespread belief that all we need to do on the banking front is (a) break up the big banks, so that none of them are too big to fail (b) promise not to bail out any banks in the future. That way, the claim goes, bankers will know that they will face dire consequences if they misbehave, and market discipline will do the rest. Dream on. There are at least three things crucially wrong with this argument.

The Tyranny of Financial Technicians (and its demise)... One of the earliest civilizations of which we still have record, Ancient Egypt, was, in a sense, run as a Technocracy (rule by technical experts). Technicians of that period were revered as priests and studied not money or credit, but time. Their worship of the sun set them apart from other cultures which used the more frequent lunar cycles to track time. By tracking the sun's movement in the sky the priest-technician forecast the coming of the Nile flood on which Egyptian food production was based.  In modern times, the secrets of the temple of money, however, despite demystification attempts by William Greider, et alios, are still considered secret. Financial Technicians are revered perhaps as much as were the Time Technicians of old. Just as the Pharaohs of Egypt thought twice about confronting his priests our rulers think twice about confronting ours

 Yes, we will have no bailouts - Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts.   It would be hard to find groups that are more detested by voters -- including populist Tea Partiers and End-the-Fed supporters of Ron Paul --  than big banks and Wall Street.   GOP leaders know exactly why they oppose the bill: it's a Democratic bill.  Full-stop.   But will that fly with ordinary voters?  Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown?   Doubtful.     It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns.   It is also true that federal regulators would have new "resolution authority'' to shut down failing institutions in an orderly way

IMF Chief: Banks Haven't Learned - The head of the International Monetary Fund says banks remain saddled with too many toxic securities and have not yet shown an understanding of the need to embrace far-reaching operational reforms. Dominique Strauss-Kahn, the IMF's managing director, sketched a nuanced view of a slowly healing world economy still beset by serious weaknesses. The global economy looks set for a period of sluggish growth and still-rising unemployment, he said. But perhaps the greatest risk remains the condition of the banking industry. "All around the world, you still have a lot of undisclosed losses," Strauss-Kahn told a handful of journalists at the global lending body's headquarters.

Bank Lending and the Banking System Remain Weak - Bank lending remained weak during March and the assets of the banking system, on average, continued to follow a downward path, resuming their decline from the November total after bouncing around for a month or two. Banking assets were down 5.8% in 2009 from 2008. The commercial banking figures for the banking week ending March 31, 2010 were impacted by changes in accounts that were related to the adoption of FASB’s Financial Accounting Statements No. 166, Accounting for Transfers of Financial Assets and No. 167, Amendments for FASB Interpretation No. 46(R).The first statement “improves financial reporting by eliminating (1) the exceptions for qualifying special-purpose entities from the consolidation guidance and (2) the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, comparability and consistency in accounting for transferred financial assets will be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting.”

Georgia on My Mind, by Paul Krugman -  I’m not sure how many people know that Georgia leads the nation in bank failures, accounting for 37 of the 206 banks seized by the Federal Deposit Insurance Corporation since the beginning of 2008. These bank failures are a symptom of deeper problems: arguably, no other state has suffered as badly from banks gone wild. ... So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.

The Secret of the Banks’ Success - Paul Krugman - Back in early 2009 I was skeptical about the ability of major banks to recapitalize themselves out of profits. I was wrong, it turns out. Here’s why:  Financial-industry profits have soared, probably because banks that can borrow money cheaply — because they have an implicit guarantee from the feds — are more or less guaranteed money machines unless they do something stupid; and gross stupidity has been placed temporarily on hold.This has been good for the TARP, which won’t lose much money. Beyond that, however, I find this ominous. We got into this mess because we had an over-financialized economy, with finance making a share of profits out of all proportion to its actual economic contribution. And now it’s baaaack.

Recession Arbiters, Wary of Certifying an Upturn - A committee of economists, charged with determining the official turning points in the nation’s business cycles, certifies the beginnings and ends of recessions. But this time, the committee members say, the evidence is not so easy to decipher. The committee plans to announce on Monday that it cannot yet declare an end to the recession that began in December 2007, several members indicated on Sunday. Such an acknowledgment is rare in the history of setting dates to business cycles and could affect the behavior of investors and consumers.  Despite a recent uptick in employment and income, the decision of the committee at a meeting on Friday reflects a lingering worry that the economy could turn downward again in a so-called double-dip recession.

Recovery: Curb your enthusiasm - The Economist - ECONOMIC optimism fills the air, like the petals of the cherry blossoms around the tidal basin. On its front page Thursday the Wall Street Journal declares, “Evidence mounts of strong recovery.” USA Today blares, “New jobs fan rising economic optimism.” Newsweek’s cover proclaims America “The Comeback Country” and Bloomberg BusinessWeek tells us, “Obamanomics is working better than you think.” I find it interesting that amidst all this optimism and the stock market’s solid rally, the Federal Reserve has not lifted its own economic forecasts. Don Kohn, the vice-chairman, said last week that his outlook hasn’t changed since October; things have more or less progressed as he expected. Kohn also subscribes to the post-crisis recovery model.

If This Is A Recovery, Why Does It Seem Like Things Keep Getting Worse? - The talking heads on all the major news shows keep telling us that the U.S. economy is experiencing a recovery.  Usually the term "recovery" is accompanied by a qualifier such as "jobless", but they continue to use the word recovery anyway.  We are told that the greatest financial crisis since the Great Depression is behind us and that the great American economic machine is roaring back to life and everything will be back to normal soon.  So why does it seem like things keep getting worse?  Why does it seem like the American Dream is out of reach for more Americans than ever?  Why does it seem like economic pain is spreading to more families and more businesses? Well, maybe it is because things are getting worse.

E.C.B. Sees Risk of New Financial Crisis - NYTimes— The European Central Bank warned Thursday that a resurgence of enormous trade imbalances, and growing government debt, were creating a volatile mix that could ignite fresh economic turmoil. “We may already have entered into the next phase of the crisis: a sovereign debt crisis following on the financial and economic crisis,” Jürgen Stark, a member of the E.C.B.’s executive board, said Thursday in remarks prepared for delivery in Washington. Mr. Stark’s comments echoed warnings in the central bank’s monthly bulletin, released Thursday, that said China and other developing countries were likely to again generate huge trade surpluses while the United States and other wealthy countries piled up trade deficits. “The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies,” the central bank said.

‘Wall of Debt’ of $2 Trillion a Struggle to Refinance   (Bloomberg) -- Companies in the U.S. will struggle to refinance a $2 trillion “wall of debt” maturing over the next five years as banks grapple with lending restrictions of their own, according to Standard & Poor’s.  “Most of this debt was issued during the period of 2004 to 2007 when the bank and high-yield bond markets were very robust,” John Bilardello, S&P’s global head of corporate sector ratings, said on a teleconference call from New York. “There’s a serious question over whether the securitization market will come back and whether banks will be able to lend to the extent they did several years ago.”

Extend and Pretend -  With regard to credit conditions, the U.S. financial system continues to pursue a strategy of "extend and pretend." ... The impact of "extend and pretend" is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity. Moreover, regulatory changes over the past year have affected what actually gets reported as "troubled." As the New York Times recently observed, " A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only."As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. The real concern from my perspective remains the potential for a second wave of delinquencies beginning in data as of the first quarter of 2010 and extending well into 2011. ...

Are We Heading for a Decade of 1970s-Style Stagflation? - Sometimes history rhymes--but only for the first line. On the surface, there are reasons to anticipate a 1970s-style stagflation in the decade ahead: a stagnating economy beset by rising inflation.  Four fundamental factors that profoundly influenced the economy in the 1970-1980 period are not present today. As a result, we must be careful not to expect history to rhyme stanza after stanza.

FDIC Offers Busted Bank Loans on Terms Buyers ‘Love’ (Bloomberg) -- Starwood Capital Group LLC, Colony Capital LLC and TPG, whose leaders profited from the 1990s savings and loan crisis, are among firms buying assets from the Federal Deposit Insurance Corp. for as little as 22 cents cash on the dollar, according to data compiled by Bloomberg. The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals. 

FDIC Plans $1.97 Billion Sale of Loans From 22 Seized Banks (Bloomberg) -- The Federal Deposit Insurance Corp. is seeking bids on a $1.97 billion portfolio of loans from 22 seized banks, pushing the agency’s structured asset sales this year beyond the 2009 total. The sale consists of 1,739 loans mostly tied to commercial real estate, with borrowers late on payments for almost half the portfolio, according to a preliminary announcement obtained by Bloomberg News. Barclays Capital was listed as the marketing agent for the sealed-bid auction. The FDIC is stepping up sales of assets accumulated by the bank regulator as 182 firms failed since January 2009. The agency is trying to restore its deposit insurance fund, which posted a $20.9 billion deficit last year after lenders collapsed at the fastest pace in two decades.

Manufacturing giants aim to protect industrial banks - - Business giants General Electric, Toyota and dozens of others are on the verge of a major victory over President Barack Obama’s push to rein in their financial arms. The White House wanted to regulate the industrial loan companies just the same as big banks. The administration argued ILCs had access to a federal safety net in the form of federal deposit insurance without having to comply with the regulations a regular bank faced. Several companies with ILCs also received billions of dollars in federal aid during the worst of the financial crisis.The administration’s proposal prompted a multimillion-dollar lobbying effort by some of the biggest names in corporate America, which feared new regulations would hurt their bottom line and choke off credit to their customers.

 $2.7B in Office Mortgage Bonds Due by 2015 - Nearly $3 billion worth of mortgage bonds tied to office buildings in Orange County is coming due in the next five years, with about $200 million due this year alone, according to local market trackers.The bulk of $2.7 billion in debt—most of it issued near the peak of the commercial real estate market in 2007 and 2008—is expected to go into default as building prices remain as much as 50% lower than during the boom. The owners “will be under a lot of pressure to find financing in the next five years, and many will not be able to (refinance) because of the overvalued debt they have,” said one office owner here on the condition of anonymity.It’s “not going to be pretty by the time you get to 2015,” he said.

JP Morgan Chase’s Big Profits Don’t Mean Much - JP Morgan Chase reported a net income of $3.3 billion in Q1 2010. Their profits, which are up 57% from Q1 2009, came largely from trading. The JP Morgan report comes the same week the Dow went above 11000 for the first time in 18 months. JP Morgan CEO Jamie Dimon stated he is optimistic about the economy. But where’s the context for the rest of us?  For big banks, making profits off investments means borrowing money at a record-low interest rate, then reinvesting it into bonds, commodities, currencies, and other securities with higher yields. That could all go down the toilet if interest rates rise. Although loan losses are slowing down, banks still aren’t making nearly as much off consumers as they are from their investment spread.

JPMorgan balance sheet shows recovery not complete  (Reuters) - JPMorgan is increasingly sanguine about the economy, but the company's balance sheet reflects a bank that is still facing difficulty. Stripping out the effect of an accounting change, the bank's loan book fell by about 1 percent during the quarter, while low risk assets like overnight loans of reserve balances at the Federal Reserves rose nearly 18 percent. Cash on its balance sheet rose more than 19 percent. These are not the actions of a bank that is seeing a huge surge in loan demand, analysts said. But meanwhile, Chief Executive Jamie Dimon sounded bullish notes on the economy on a conference call with reporters, noting "The chance of a double dip is rapidly going away" and "This could be the makings of a good recovery."

U.S. bank chief mobbed by angry borrowers  (Reuters) - The mortgage chief of the United States' second largest bank was mobbed by angry borrowers on Tuesday after he invited customers to speak to him if they feared foreclosure of their homes.The JPMorgan Chase & Co executive was at a congressional hearing in Washington when a lawmaker asked him who mortgage borrowers could turn to if they felt his bank's employees were not helping them hold onto their homes."Come to me," said David Lowman, chief executive for JPMorgan Chase & Co's home mortgage business in response to the question from Massachusetts Democrat Barney Frank. Minutes later, around 50 borrowers burst from the audience and presented Lowman with a 6-page document alleging his bank reneged on a pledge to help struggling homeowners.

Bank Profits Dimmed by Prospect of Home-Equity Losses (Bloomberg) -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year. The cost of these reserves was calculated by CreditSights Inc., a New York-based research firm whose prediction almost four years ago proved prescient after banks reported unprecedented mortgage-related writedowns. Recognizing the home- equity loan losses is unfinished business from the housing bubble, CreditSights said in a March 29 report.

Major Lenders Say They Will Write Down Second Mortgages - Executives from four of the nation's largest lenders- -Bank of America Corp. (BAC), Wells Fargo (WFC), JP Morgan Chase and Co.(JPM), and Citigroup Inc. (C)--told a House panel Tuesday that they are willing to reduce the principal on second mortgages if the lender of the first mortgage offers a similar reduction. Bank executives who testified before the House Financial Services Committee also said they are working together with other lenders to ensure cooperation on mortgage reductions. The executives appeared before the committee to discuss their participation in the federal government's Home Affordable Modification Program, or HAMP. JP Morgan Chase Home Lending CEO David Lowman said a broad-based principal reduction program for second liens would have industry- wide costs of $700 billion to $900 billion.

Banks Resist Plans to Reduce Mortgage Balances - NYTimes - In a rebuff to the Obama administration, two big banks on Tuesday drew a line in the sand on cutting the mortgage balances of beleaguered homeowners, saying that the tool would be applied sparingly. The idea of reducing loan principals last month became a centerpiece of the administration’s efforts to help seven million households threatened with foreclosure. But an official at one of the banks, David Lowman of JPMorgan Chase, said principal reduction could reward households for consuming more than they could afford, might punish future homeowners by raising the cost of borrowing and in any case was simply unworkable.

Big Banks Rebel Against Push to Help Struggling Homeowners… Some big U.S. banks are pushing back against the idea that they should slash mortgage balances for millions of troubled borrowers. In written testimony prepared for a hearing in Washington Tuesday of the House Financial Services Committee, some of the nation's top mortgage lenders warned of the risks of relying heavily on forgiving principal as a means of averting foreclosures and argued for concentrating mainly on other methods, such as reducing interest rates. That may set up a clash with Rep. Barney Frank, chairman of the committee, and other lawmakers eager for more aggressive action to prevent foreclosures. In a letter last month to four big banks, Rep. Frank, a Massachusetts Democrat, argued that "to save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages."

JPMorgan Chase Argues Against Mortgage Modifications, Citing the Sanctity of Contracts … With millions of homeowners losing their homes to foreclosure during this recession, megabank JPMorgan Chase plans to argue against the Obama administration's latest weapon in its fight to stem the problem -- principal cuts for struggling borrowers -- by citing the sanctity of contracts and the borrower's "promise to repay." David Lowman, chief executive officer for home lending at the "Too Big To Fail" behemoth, will fight back against the program which calls for lenders and investors to decrease the outstanding debt owed on a home mortgage. While his competitors at Bank of America, Wells Fargo and Citigroup plan to dance around the issue -- judging from their prepared remarks -- Lowman cut right to it: borrowers don't deserve it."Like all loans, mortgage contracts are based on a promise to repay money borrowed," Lowman's prepared remarks read. "Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral -- be it a home, a car or a stock market investment -- depreciates.

Lawler: BoA and Chase on Second Mortgages - The following report is from housing economist Tom Lawler: In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

Obama Proposes Further Delay on Fannie & Freddie | Cato - President Obama seems to be slowly waking up to the fact that the American public has grown tired of the endless bailout of Fannie Mae and Freddie Mac.  The public has also rejected the talking point that Fannie and Freddie were simply victims of a 100 year storm in the housing market.  So what’s Obama’s response?  To ask for public comment and have public forums. This strategy is clearly one of delaying and avoiding any reform of Fannie and Freddie while pretending to care about the issue.  Where was the public comment and forums on the Volcker rule?  Seemingly the standard is that fixing the real causes of the financial crisis should be delayed and debated while efforts like the Dodd bill, which do nothing to avoid future financial crises, should be rushed without debate or comment.

How to fix mortgage finance? You decide! - It's a tough nut to crack: how should the U.S. reconfigure its housing finance system, including lumbering giants Fannie Mae and Freddie Mac, in the wake of the greatest housing-finance meltdown since the Great Depression? In fact, it's so difficult a question to answer that the Obama Administration is turning for advice to... well, you. Today the Treasury Department published 7 questions it would really like to have answers to. For example, "How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?" and, "What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?" The Treasury department is now hoping that you—yes, you, Joe and Jane Q. Public—will ring in with your thoughts. You can do that here*

Robert Shiller: "I burst the housing bubble" - - It must be true, he says so his own self:"In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks."

Don’t Bet the Farm on the Housing Recovery  - Robert Shiller - NY Times - MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?  Alas, the evidence is equivocal at best.  The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.  The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.

Second Mortgages Vex Borrowers – WSJ - After losing her condo in San Diego to foreclosure last year, Charissa Kolich thought that at least she was free of mortgage bills. But Wells Fargo & Co., which holds a home-equity loan made five years ago to Ms. Kolich, last month filed a lawsuit against her in the Superior Court of California, San Diego County, seeking to collect the nearly $72,000 it said she still owed on that second mortgage. "This was all kind of a shock,"

Housing Starts mixed in March -  Total housing starts were at 626 thousand (SAAR) in March, up 1.6% from the revised February rate, and up 30% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Single-family starts were at 531 thousand (SAAR) in March, down 0.9% from the revised February rate, and 49% above the record low in January and February 2009 (357 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and the slow and sluggish recovery in housing starts.

Foreclosure sales nearly double - Foreclosure sales increased 92.3 percent in March from the prior year when most major lenders had voluntary moratoriums in place while awaiting the implementation of the federal “Home Affordable Modification Program,” according to a new report Tuesday from ForeclosureRadar Inc., a Discovery Bay-based foreclosure information company. March foreclosure sales increased 24.2 percent from February, with 79.2 percent of those going back to the lender and the remainder sold to third parties, primarily investors.

Foreclosure rates surge, biggest jump in 5 years (AP) -- A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report.RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition, households facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009.More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said.

Inventory of foreclosed homes hits record - The inventory of foreclosed homes in the U.S. hit a record in February, a sign that the real-estate crisis is lingering, according to data released Monday by a leading mortgage processor.  February's foreclosure rate of 3.31% represented a 51.1% jump from February 2009, Lender Processing Services reported. The company also said that the total number of delinquent home loans was 21.3% higher than in the same period last year. There was a 1.45% seasonal decline in delinquencies from January 2010 to the end of February, but the national delinquency rate still stood at 10.2%.

Foreclosure Rates Jump 35 Percent - CBS - A record number of U.S. homes were lost to foreclosure in the first three months of this year, a sign banks are starting to wade through the backlog of troubled home loans at a faster pace, according to a new report. RealtyTrac Inc. said Thursday that the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. In addition, households facing foreclosure grew 16 percent in the same period and 7 percent from the last three months of 2009. More homes were taken over by banks and scheduled for a foreclosure sale than in any quarter going back to at least January 2005, when RealtyTrac began reporting the data, the firm said. "We're right now on pace to see more than 1 million bank repossessions this year,"

EXCLUSIVE: Major lender signals surge in local foreclosures… Bank of America, the nation's largest mortgage lender, ramped up its foreclosure activity in March, sending hundreds of letters warning delinquent borrowers in the region that it could sell their homes at auction in as little as three weeks, according to North County Times analysis of data from ForeclosureRadar. The bank said the increased activity was a natural consequence of borrowers running out of options.

California Enacts Mortgage Forgiveness Tax Relief - A new California state law enacted at the eleventh hour allows residents to immediately exclude forgiven mortgage debt from their taxable income.The measure, “SB 401,” permits most taxpayers to exclude canceled mortgage debt up to $500,000 on their primary residence resulting from a foreclosure, short sale, or loan modification. The limit is $250,000 for married/registered domestic partner individuals filing separately. It applies to debt forgiveness in 2009 through 2012, and mainly brings California into conformity with federal debt relief laws.

Homeowners making sacrifices in tough economy  - More than two thirds of Americans who've been unable to sell their home and buy one that better fits their needs have cut back on household expenses such as food, entertainment and clothing in order to pay their mortgage, a survey released Tuesday shows. Homeowners who have fallen on financial hard times have made other sacrifices and lifestyle changes: About a third have downsized to a smaller home or delayed expanding their family as planned. And, a quarter of homeowners who want to sell their current home and buy another say they need to make the move in order to lower their monthly expenses due to financial problems.

More than 42 percent of small rental buildings in Cook County are ‘underwater’ Owners of 96,000 two- to six-unit rental buildings in Cook County are upside-down on $12.6 billion of mortgage debt, potentially putting 42 percent of small rental buildings in the county at risk of default, new data show. A study by DePaul University's Institute for Housing Studies, released Wednesday, also found that $3 billion in multifamily building mortgages already are in foreclosure, affecting more than 32,000 rental units in Cook County, or 6.8 percent of multifamily mortgages. That compares with about 38,000 single-family homes in foreclosure in Cook County. Researchers analyzed 25,822 sales of existing small rental buildings and 591 sales of buildings with seven or more units in Cook County.

Multi-family foreclosure rate spikes in Cook County - The foreclosure rate on multi-family rental properties in Cook County has spiked, and falling property values have put 30 percent, or more than $13 billion in Cook County’s multi-family mortgages at default risk, according to a study released today by DePaul University’s Institute for Housing Studies. The report found that there are more than 32,000 rental units in Cook County impacted by foreclosures. The percent of loans in foreclosure on small two- to six-unit properties jumped to 8.75 percent in the fourth quarter of 2009 from 1.67 percent five years ago. On large seven-plus unit rental properties foreclosure rates jumped from 0.3 percent in 2004 to 3 percent in the fourth quarter of 2009. For one in eight rental apartment units, revenues are falling below operating costs for owners.

Report: Obama Mortgage Aid Plan Won't Help Many - CBS - A watchdog panel overseeing the financial bailouts says the Obama administration's flagship mortgage aid program lags well behind the foreclosure crisis and leaves too many families out.  The Congressional Oversight Panel says in a report released Wednesday that the administration projects only one million families will end up with lower monthly payments as a result of the program. The report says six million families are more than two months behind with their payments, and 200,000 more families receive foreclosure notices each month.  Additionally, one quarter of all U.S. mortgages are underwater, meaning the value of the home is less than the money owed on the loan, A year and a half after launching the program, "Treasury is still fighting to get its foreclosure programs off the ground," Elizabeth Warren, who heads the independent panel set up by Congress, told reporters Tuesday.

75% Of Homeowners In Obama's Loan Modification Plan Still Owe More Than Their Homes Are Worth More than three-quarters of homeowners who have had their monthly mortgage payments reduced under the Obama administration's primary foreclosure-prevention program owe more on their mortgage than their house is worth, according to a new report by government auditors. Over half of the roughly 170,000 distressed borrowers who have gone through the program are seriously underwater, meaning they have negative equity of at least 25 percent, the report shows, citing data through February. In other words, for every $1.00 their home is worth, they owe at least $1.25. The average homeowner that's received a five-year modified mortgage under the administration's plan had negative equity of about 35 percent prior to the program, according to a Wednesday report by the Congressional Oversight Panel, a federal bailout watchdog. After modification, that burden actually increased for the average homeowner, who is now underwater by more than 43 percent, according to the bailout watchdog's report. Research shows that the more under water homeowners are, the more likely they are to fall behind on payments, default, or walk away.

Foreclosure Prevention Efforts Aren't Keeping Pace with Defaults: LPS - Despite servicers’ efforts to modify unprecedented volumes of troubled mortgages and a large-scale government-led program put in place to stem the nation’s viral foreclosure epidemic, they haven’t been enough to keep up with the rapid pace of loan deterioration, according to new data from Lender Processing Services (LPS). A market report released by the company Monday shows that the total number of delinquent loans as of the end of February was 21.3 percent higher than it was a year earlier. Although the data showed a small 1.45 percent seasonal decline in delinquencies from January 2010 to February 2010, LPS reported that the national delinquency rate still stood at 10.2 percent

Defaults Rise in Federal Loan Modification Program - The number of homeowners who defaulted on their mortgages even after securing cheaper terms through the government’s modification program nearly doubled in March, continuing a trend that could undermine the entire program. Data released Wednesday by the Treasury Department and the Housing and Urban Development Department showed that 2,879 modified loans had been ended since the program’s inception in the fall, up from 1,499 in February and 1,005 in January. The Treasury Department said it could not explain the growing number of what it called cancellations, almost all of which were apparently prompted by the borrower’s being unable to make the new payment. A scant number — 37 — were because the loan had been paid off, presumably because the borrower sold the house.  About seven million households are behind on their mortgage payments.

Report: Obama Mortgage Aid Plan Won't Help Many - CBS - A watchdog panel overseeing the financial bailouts says the Obama administration's flagship mortgage aid program lags well behind the foreclosure crisis and leaves too many families out.  The Congressional Oversight Panel says in a report released Wednesday that the administration projects only one million families will end up with lower monthly payments as a result of the program. The report says six million families are more than two months behind with their payments, and 200,000 more families receive foreclosure notices each month.  Additionally, one quarter of all U.S. mortgages are underwater, meaning the value of the home is less than the money owed on the loan, A year and a half after launching the program, "Treasury is still fighting to get its foreclosure programs off the ground," Elizabeth Warren, who heads the independent panel set up by Congress, told reporters Tuesday.

Federal aid is forestalling only a fraction of says… The government's foreclosure prevention efforts are struggling to make an impact on millions of borrowers who are in trouble on their mortgages, according to a report issued Wednesday by a congressional watchdog panel.   The program, known as Making Home Affordable, is on course to prevent only about 1 million foreclosures, aiding a small fraction of the homeowners who are in trouble with their mortgages nationwide, according to the report by the Congressional Oversight Panel, which monitors spending on financial bailout efforts.  About 230,000 U.S. homeowners had secured permanent loan modification under the program through last month, according to Treasury Department data also released Wednesday.

Foreclosure actions spike despite aid (Reuters) - U.S. home foreclosures actions spiked in March and set a quarterly record despite federal programs to combat the unrelenting pace that homeowners are defaulting on mortgages, RealtyTrac said on Thursday.The government aid, intensified in late March, has so far failed to overcome the staggering effects of nearly double-digit unemployment and wage cuts on borrowers. Foreclosure activity jumped 19 percent to a monthly record in March, driving first-quarter actions up 7 percent from the prior quarter and 16 percent from a year ago to a record of more than 932,000 properties. One in every 138 U.S. households got a foreclosure filing in the quarter such as a notice of default, auction or bank repossession.

Editorial - Fighting Foreclosures - NYTimes- From the start, the central concern about President Obama’s antiforeclosure effort has been that it would postpone foreclosures but ultimately not prevent enough to ease the economic strain from mass defaults. That concern seems increasingly justified.  In the first quarter of 2010, there were 930,000 foreclosure filings — an increase of 7 percent from the previous quarter and 16 percent from the first three months of 2009, according to recent data from RealtyTrac, an online marketer of foreclosed properties. The surge seems to indicate that homes that were in the foreclosure pipeline are now being lost for good.  We have long called for using bankruptcy court to help resolve the foreclosure crisis. A big advantage of bankruptcy over government-subsidized modifications is that bankruptcy is a difficult process that does not entice anyone to purposely default in order to get better repayment terms.

Unsustainable Mods | Analysis Graphs & Tables - Treasury’s March report for the its mortgage modification program shows another uptick in the number of so-called “permanent” modifications. It’s a positive trend, sure, but still not much to celebrate.  The 231k borrowers that have received such mods represent only a fraction of total borrowers who are at-risk of default. Amherst Securities estimates that 7 million borrowers have already defaulted on their mortgage and another 5 million are at high risk of default. But the bigger problem is that these “permanent” modifications are anything but permanent…As you can see, relatively few borrowers are receiving principal forgiveness. Instead, most modifications rely on extend and pretend tactics like interest rate reductions and extended loan terms.

The Government’s Loan Mod Bizarro World - Just when you think that the statistics can’t get any worse for the graduating class of the Obama Administration’s Home Affordable Modification Program, they do. Otherwise known as HAMP, this program is apparently designed to convince people who really can’t afford their current debt load that they really can.To that end, it is meeting with modest success. How else can one explain that total debt-to-income ratios have risen even higher than February’s ridiculous burden of just under 60 percent as noted in this item four weeks ago?

Oh, the wicked web We weave - Government policy often only introduces bureaucracy into real-time events; causing delays in performance which does not explicitly help in any manner. Federal policy slowed the rate of mortgage failures last year, but the repossessions rate is regaining previous levels. Here is the trouble with the government action. The mortgages issued were bad, with mortgage takers failing of Income performance, and mortgage holders engaged in extreme leverage. Everyone was saying they could make their obligations, and no one could. The Government taking up that Proclamation after the Participants grew tired of the pretentious claim only held back the onset of failures; it did nothing to alter the state of such failings. Everyone took the money which granted a breathing space, but then they went back to failure as the Income generation was still missing. Government policymakers spent a lot of Taxpayer money (which they did not even collect–simply borrowed) to buy what was about as valuable as the initial mortgages.

How loan servicers milk the foreclosure-prevention program -  If there’s one consistent villain in the tale of attempts to minimize home foreclosures, it’s the loan servicers. They lose paperwork, they foreclose on homes they have no right to foreclose on, they accept borrowers into modification programs while trying to foreclose on them at the same time, they deny borrowers a modification even when they shouldn’t, they’re impossible to get ahold of, their communication with borrowers is atrocious, they claim to be owed vastly more money than they actually are owed, and so on and so forth. Which is why it’s so depressing that servicers are actually the biggest winners of the way that the government is doing mortgage modifications — at the expense of homeowners, no less. Shahien Nasiripour, who is not giving up in his attempt to push principal reduction as a solution to the mortgage-modification problem, finds this in the latest COP report:

Report: No Push to Extend Homebuyer Tax Credit -From Amy Hoak at MarketWatch: End of road for home-buy credit Two groups that once lobbied strongly for the credit -- the National Association of Realtors and the National Association of Home Builders -- have no plans to make a push for its extension, according to spokesmen from both groups. And the word from NAR's government-affairs department is that another extension isn't in the cards. The first round of the homebuyer tax credit was widely criticized by economists as inefficient and misdirected. The tax credit went mostly to people who would have bought anyway - and it just provided an incentive for people to move from renting to owning without reducing the overall stock of housing units.

RealtyTrac: March Foreclosure Activity Highest on Record -  From RealtyTrac: Foreclosure Activity Increases 7 Percent in First Quarter RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for Q1 2010, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009. One in every 138 U.S. housing units received a foreclosure filing during the quarter. Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

One Out of Ten Mortgages is Delinquent - Despite a slight seasonal improvement over last month, mortgage delinquencies still hover near record highs, 21 percent above a year ago. One of ten mortgages are delinquent as of the end of February and new delinquencies continue to run at record rates.The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end. That’s the frightening news from Lender Processing Services latest Mortgage Monitor Report, which also reported that the nation’s foreclosure inventories also reached record highs. February’s foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase.

Housing and the End of Upward Mobility in the U.S. --- In the postwar period of 1945-2005, the way to move up in America was to earn a college degree and become a homeowner. By several measures, upward mobility has ceased to be a standard feature of American life: Is America's Middle Class Going the Way of China? (Cam Hui) The article compares present-day America with the Communist Party-dominated People's Republic of China, and concludes both are run by small financial and political Elites which are largely inherited positions. Yes, Ivy League universities are still pathways to power and wealth, but these are essentially Upper Caste positions which serve the interests of the Power Elites, doing the dirty work and the heavy lifting of the status quo.

Retail Sales increase sharply in March - On a monthly basis, retail sales increased 1.6% from February to March (seasonally adjusted, after revisions), and sales were up 7.6% from March 2009 (easy comparison). This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). The red line shows retail sales ex-gasoline and shows the increase in final demand ex-gasoline has been sluggish. Retail sales are up 8.3% from the bottom, but still off 4.4% from the peak. The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.3% on a YoY basis (7.6% for all retail sales). The year-over-year comparisons are easy now since retail sales collapsed in late 2008. Retail sales bottomed in December 2008.

Mortgage Defaults May Be Driving Consumer Spending - Lender Processing Services just put out its "Mortgage Monitor Report," and we have a new record: The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. Okay, so 7.9 million Americans are not paying their mortgages.  Are we really thinking about the implications of that?  I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.) That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically.

Oh, So The "Recovery" Is About Delinquency? - I've said for a long time that one of the reasons our consumer spending numbers have been "reasonably good" the last six months or so - and have been improving - is that people haven't been paying their mortgages. Now comes Bank of America about to tell Congress the same thing:Bank of America's top mortgage executive, testifying today before Congress, will release sobering details of home-loan delinquencies, including that "hundreds of thousands of customers" haven't made a payment in more than a year. And, to put a number on it...Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes.

Mortgage Defaults Drive Consumer Spending: Experts Weigh In… I opened up a big can of debate Monday, when I repeated some chatter around that consumer spending might be juiced by all those folks not paying their mortgages.   I decided to ask Mark Zandi, of Moody's, who will often shoot down my more ridiculous theories.  I asked him if this was a crazy idea: No, not crazy. With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status) , this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments.

Are Defaults Really Driving Retail Spending? - Paul Jackson makes the case that voluntary mortgage delinquencies are driving retail sales. I disagree.  What do we know about Retail Sales? They have gained strength for 7 consecutive months. There gains have been concentrated in a few areas: • Luxury sales rose 22.7% • Furniture sales rose 13.8% • Appliance sales rose 6.9% • Auto sales gained 24% from year ago levels.  Those people voluntarily not paying their mortgages are not buying luxury goods, for the simple reason they cannot afford them. The people behind on their mortgages in these days of tight credit are not qualifying for car leases or loans. And if you plan on abandoning a house in 6 months to a year, are you really buying appliances and furniture?

Irreconcilable Differences - I may have to get a divorce from the news, nothing adds up anymore.For example, even as the stock market surges along, as one might expect at the tail end of trillions in stimulus and bailouts, and retail sales apparently roared ahead in March according to the Commerce Department, small businesses are as gloomy as they've ever been.I really do have a difficult time trying to understand the source of the disconnect between these entirely divergent reports: Retail sales surge in March ; Small Business Optimism Declines in March ; Texas sales tax revenue down 7.8 percent in March ; New Jersey Taxes $250 Million Behind Christie Plan ; One Out of Ten Mortgages is Delinquent

An auspicious sign: the consumer (for now) is back - Rebecca Wilder - I remain very skeptical about the sustainability of the recovery, as the labor market is in shambles and nominal wage growth is unlikely to facilitate “healthy” deleveraging - please see this recent post “Reducing household financial leverage: the easy way and the hard way”. I digress; because you can't fight the data. And for now, the consumer is back. The latest retail sales figures reveal two bits of information worth noting. First, autos were a big factor in the March 2010 surge. Second, even though the large contribution from motor vehicles and parts compromises my enthusiasm somewhat, the underlying trend has emerged: consumers are less frugal in spite of income constraints. (pie graphs with sectors breakdown)

CHART OF THE DAY: American Consumers Return To Their Historical Pattern Of Going Nuts - Remember when it looked as though consumers might enter into some new age of thrift and austerity? Well, it's true that there was in fact a brief, unprecedented dip, but the key word is: brief. As you can see, the steady march higher continues apace.

Selection Bias In Economic Data - Let's talk about selection bias and how it applies to recent economic data. Selection bias is the phenomenon of potentially erroneous sampling.  Last week, retail "same store sales" (SSS) numbers came out, up 9% year over year,  blowing away expectations.  Now, there is an inherent selection bias embedded in the SSS numbers - it only counts data from stores which have been open for at least a year.  So, we have another embedded bias:  survivorship bias:  the data from stores which went out of business isn't counted.  This morning I was thinking to myself, "Why on Earth would they want to use such a clearly flawed metric?  Why not just use total retail sales?"  Well, there are good reasons:  most of the time, during normal, stable or growing economic periods, the same store sales numbers probable provide a much more smooth, accurate depiction of the economic situation.

Menzie Chinr: Averting the Consumption Disaster - The CEA has just released the newest quarterly report on the impact of the ARRA. In addition to tabulating the impacts on output and employment, there's a special section by Chris Carroll (one of the leading authorities on modeling consumption behavior -- I used to teach his papers in my PhD macro course), which concludes in the absence of the ARRA "...consumer spending would likely have continued to fall" (which is consistent with my post from a couple days ago).  From the CEA blog:  After some discussion of various recent analyses of consumer behavior, the report concludes: Together with the spending dynamics from the extra income in 2009, the $73 billion in tax relief and income support in 2010:Q1 directly raised household spending by $47 billion (not at an annual rate)...

Martin Wolf, Here's the Truth About US Savings- I was startled to read this assertion by the FT's Martin Wolf while "Evaluating the Renminbi Manipulation": Mr [Stephen] Roach [of Morgan Stanley] also points to today’s negligible net US savings. But this, too, is the result of a fiscal offset to a surge in private sector savings surpluses. Why was this needed? The answer is that, with a huge structural current account deficit, a rise in private savings in the US would otherwise have created a depression. In sum, savings surpluses are a policy variable, not a given. Unfortunately, the esteemed chief economics commentator for the FT is mistaken on two straight assertions. Rather than engage in armchair theorizing, I decided to pay a visit to the Bureau of Economic Analysis and its National Income and Product Accounts (NIPA) to assess the veracity of these statements for myself. As you can see, the chart above plotting BEA data presents quarterly data for four things: personal saving, corporate saving (in the form of retained earnings), and government saving (the difference between revenues and expenditures). Taken together, these three comprise net US saving. Clearly, we observe two things...

Jobless shoppers buoy Grating Recovery -  Welcome to the recovery -- one like no other. To underline that point this week, Mark Zandi, chief economist at Moody's Analytics, opined that the six million Americans currently behind on their mortgage payments are likely spending that money on other things. As a result, U.S. retail sales were surprisingly strong in March, with those numbers helping the stock market to go to new 19-month highs. Go figure.  The Dow Jones Industrial average went over 11,000 this week for the first time since September 2008 and the S&P 500 followed suit by crossing 1,200, both indexes regaining almost 70% of the losses from the market crash. But talk to those millions of folks not making their mortgage payments, some of whom are among the almost 20 million unemployed or underemployed, and you will get a different view of the recovery. The stock market may be looking Vshaped in its rally. Underlying economic conditions for many are flat-lining or worse.

Is America's Middle Class Going the Way of China? - I have written before that America is becoming like Argentina. Disturbing characteristics such as the emergence of a social elite, combined with low class mobility combined to drive Argentina from a promising emerging market economy that was on par with countries like the United States a century ago to the long road to stagnation that we have seen today. Unfortunately, there are signs that America is not only going down the road to Argentina, but also adopting the worse social practices seen in China.

CPI Remains Low... Core at Lowest Level in 6 Years... U.S. consumer prices rose 0.1% on a seasonally adjusted basis in March due mainly to an increase in prices for fresh fruits and vegetables, the Labor Department reported Wednesday. The overall gain matched expectations of economists surveyed by MarketWatch. The core CPI - which excludes food and energy prices - was unchanged in March, while analysts had expected a 0.1% gain. In March, overall food prices rose 0.2%. Bad weather pushed up fresh fruits and vegetables prices, which rose 4.6%. Energy prices were unchanged in March. In the past year, the CPI has risen 2.3%. The core rate is up 1.1% in the past year, the smallest gain since early 2004. The last time the year-over-year core increase was smaller was in January 1966. Shelter prices were down 0.1% last month.  As can be seen below, the majority of the increase remains in transportation (i.e. fuel). All other categories point to a complete lack of inflationary (and potential disinflationary) pressure on final consumption at the moment.

Obama credit card reform makes it "more expensive to be poor" - Her dark view of the economy is underpinned, she said, by a problem that hasn't gone away: America, despite everything it's been through, is still overleveraged. Whitney argues that credit will -- indeed must -- continue to contract. Yanking it away from consumers is one big way this will happen."The lower middle class gets squeezed," says Whitney, estimating that banks and lenders will pull $2.7 trillion in outstanding credit lines by the end of 2011. "It [will be] more expensive for them to [extend credit, which] they had been doing more cheaply, through the financial system."

The inventory question - As Bloomberg reports, this is the message of the inventory cycle, which appears to have largely run its course. Inventories surged as the recession intensified, leaving firms scrambling to bring output in line with the new level of sales. Now, firms have inventories under control." I have been pondering those data as well, ever since the advance fourth quarter gross domestic product report indicated that 3.4 percentage points of the then-reported 5.9 percent annualized growth rate was accounted for by a slowing in the pace of inventory decumulation. (The numbers have subsequently been revised to 3.8 percentage points of a 5.6 percent growth rate.) It certainly appears that inventory-sales ratios have reverted to the prerecession norm, justifying Duy's sense that inventories will not be a big part of the economic story as we move through 2010.  That conclusion does rest, of course, on the likelihood that a downward trend in the ratio truly did break in the middle part of the decade.

Wanted: People with Good Credit for Low-Paying Jobs - Despite the increased proportion of Americans who are behind on their mortgages or have lost their houses to foreclosure, the practice of doing credit checks on prospective employees continues to climb sharply in popularity. The Society of Human Resources Management’s recent survey found that 60 percent of employers run credit checks on at least some job applicants; back in that “healthy” economy of 2006, the comparable figure was 42 percent. The growth in credit checks by employers is some evidence to counter arguments that the stigma of financial distress, bankruptcy, or foreclosure is falling as more and more Americans struggle to meet their debt obligations. Employers seem to be taking the opposite tact, with the weak labor market permitting them to be increasingly selective about whom to hire. Credit checks are a fast and cheap way to screen out candidates. And one in 8 employers checks the credit of every applicant for every job--meaning that people like janitors and retail workers can suffer employment discrimination on the basis of their credit.

Make up your minds - HERE'S your challenge for the day. Reconcile this: Confidence among U.S. consumers unexpectedly fell in April to the lowest level in five months, indicating Americans are discouraged about the labor market.The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 69.5 from a reading of 73.6 in March. The gauge was projected to rise to 75, according to the median forecast in a Bloomberg News survey of 69 economists...The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, slumped to 62.3, the weakest reading since March 2009, from 67.9.With this:

Consumer Sentiment Turns Down in April -  Consumers grew gloomier in the middle of April despite a better-looking job market, according to a report released Friday. The University of Michigan/Reuters consumer sentiment index’s preliminary reading for April fell to 69.5, from a final March reading of 73.6. The index was the lowest since November 2009. Economists surveyed by Dow Jones Newswires had expected the mid-April index to rise to 75.0. The mid-April current conditions index fell to 80.7 from 82.4 in late March, and the expectations index dropped to 62.3 from 67.9. The expectations index is at its lowest since March 2009. Consumer economic attitudes generally are driven by labor markets. The high March jobless rate of 9.7% may be holding down spirits even though on April 2 the government reported that payrolls have finally begun to grow again, with March jobs up 162,000.. the April one-year inflation expectations reading was 2.9% versus 2.7% at end-March and the five-year inflation reading remained at 2.7%.

Consumer Confidence, Unemployment Rate and Gasoline Prices - First from Reuters yesterday: Consumer mood unexpectedly worse in early April U.S. consumer sentiment took a surprise negative turn in early April due to a persistently grim outlook on income and jobs, a private survey released on Friday showed. The article says "consumer sentiment is seen as a proxy for consumer spending", but I'm not sure. In 2005, Dr. Dean Croushore of University of Richmond argued consumer confidence is "essentially useless for forecasting Americans' spending patterns. ... consumer confidence just reflects the past. You lose your job, your confidence falls. There's not really anything new there." Every time I see "consumer confidence", I think employment and gasoline prices ... and here are a couple of graphs to show the relationship:

Small Business Index Declines in March - From the National Federation of Independent Business: Small Business Optimism Declines in March The National Federation of Independent Business Index of Small Business Optimism lost 1.2 points in March, falling to 86.8. The persistence of index readings below 90 is unprecedented in survey history. “The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”..After a devastating period of employment reductions, employment change per firm hit the “zero line” in March. .... While actual job reductions may have halted, plans to create new jobs remain weak. ...

Small Business Optimism "Very Low and Headed in the Wrong Direction” - If the US economy was about to reach "escape velocity" as Larry Summers says, small business optimism would not be in the gutter and sinking. Thus, proof that Larry Summers is in Fantasyland can be found in a NFIB report that shows Small Business Optimism Declines in March. The NFIB report is certainly deflationary. There is no ability for businesses to pass on cost increases nor any reason for small businesses to go on a hiring spree. Housing starts and small businesses optimism typically lead the economy out of recession. Both are absent.In February, "poor sales" was the top concern of small businesses, and with expected earnings sentiment at negative 43 percent, it is all but certain small businesses are not about to go on a huge hiring spree.

Loan Seekers Are Left in the Lurch by Erratic Funding - Congress has infused a popular small-business loan program with capital three times to keep it running. But the short-term renewals, rather than the government committing to the program long-term, are causing some business owners to fall through the cracks of the lending process.  Lenders have historically issued loans backed by the Small Business Administration as a means to accommodate some of their more-risky Main Street customers because up to 75% of the loan would be reimbursed by the government in the case of default.But in the depths of the credit crunch, lenders weren't enticed by the 75% guarantee and SBA lending plummeted. That prompted Congress to include provisions in last February's Recovery Act that temporarily boosted the government guarantee to 90% and dropped fees associated with the loans.

Retail Vacancies Continue to Creep Higher - Real estate research firm Reis Inc.’s data for the first quarter of 2010 shows that fundamentals at neighborhood and community centers and regional malls continued to slide. And while the pace of declines in occupancies is slowing, rents are still falling at a brisk pace.Vacancies at both property types rose. For shopping centers, vacancies are at their highest point since 1991 and for regional malls vacancies are at their highest point since Reis began tracking the figure at the end of 1999. At neighborhood and community centers, the vacancy rate rose to 10.8 percent in the first quarter of 2010. Asking and effective rents continued to decline, falling by 0.3 percent and 0.8 percent respectively. For regional malls, the vacancy rose from 8.8 percent to 8.9 percent. This is the first time in almost 10 years of quarterly history that Reis has observed rent declines for six straight quarters.

Strip Mall Vacancies Hit 30-Year High - The vacancy rate at area shopping centers has climbed for three straight years to 11.8%, the highest since at least 1980, when real estate research firm Reis Inc. began tracking the data. Properties tracked include small centers and larger ones anchored by supermarkets or national discount chains. The empty storefronts are eye-sores that cost municipalities tax revenue. Increasing vacancies also will keep the construction industry idle longer as few new shopping centers are built in coming years. Chicago's vacancy rate, which jumped from 11.5% in the fourth quarter, is markedly higher than the 10.8% rate nationwide, according to New York-based Reis.

Food stamps for the middle class (Reuters video)

Dealing With a Recession That’s ‘a Different Creature’ - Nancy Pelosi, at lunch, was making the point that this latest recession was not a typical cyclical downturn.  “This is a different creature,” she said, “and it demands that we see it in a different way.” The evidence is stark. More than 44 percent of unemployed Americans have been out of work for six months or longer, the highest rate since World War II. Perhaps more chilling is a new analysis by the Pew Economic Policy Group that found that nearly a quarter of the nation’s 15 million unemployed workers have been jobless for a year or more.  Everything in Washington is a heavy lift. The successful struggle to pass last year’s stimulus package fended off an even worse economic disaster, and the Democrats have managed to enact their health care initiative. But the biggest threat to the health of the economy — corrosive, intractable, demoralizing unemployment — is still with us. And the deficit zealots, growing in strength, would do nothing to counter this scourge.

Senate impasse costs 425,000 their unemployment checks - Democrats say that the legislation — which also would fund temporary increases in Medicare payments to doctors — is a response to true emergencies. Republicans agree, but insist that the cost should be offset by cutting federal spending elsewhere. The lawmakers spent much of their 16 day spring recess, which ended Monday, railing against each other. Meanwhile, money to fund part of the unemployment benefit program ran out on April 5. An estimated 425,000 people who should be getting benefit checks aren't. The National Employment Law Project, an advocacy group on jobless issues, estimates that another 212,500 people are affected each week that the benefits remain unfunded.

Senate to take up $18B jobless benefits bill  -A measure restoring jobless benefits to people struggling to find work is back on track in the Senate. The $18 billion measure could pass Thursday and prevent even more people whose 26 weeks of state-paid benefits have run out from losing an average of $335 a week in federally funded benefits. Democrats say deficit-financed jobless benefits not only are needed to help those unable to find work but are an effective way to pump up the still-struggling economy."

Senate Restores Jobless Benefits -- President Barack Obama has signed a bill extending unemployment benefits through June 2 and restoring full Medicaid payments to doctors.  The bill cleared both houses of Congress on Thursday night. The House passed the bill 289-112 just two hours after it emerged from the Senate on a 59-38 vote that capped an unusually partisan debate. Republicans largely chose to take a stand against the legislation for adding to the $12.8 trillion national despite backing it by wide margins in December and again recently. People who lost out on the additional weeks of benefits after exhausting their state-paid benefits will now be able to reapply and receive those checks retroactively.

Jobless Recovery Shows Inadequate Demand - Annie Lowrey explains the jobless recovery: Wondering what’s behind those recent jobless recovery numbers?1. Fortune 500 companies tripled their profits to $391 billion in 2009.2. They also slashed their payrolls by more than 800,000 jobs. But here’s the thing. Normally, if I’m running a delicious deli and making lots of profits then soon enough I’m going to want to open a second location and make even more money. Maybe you’re able to finance the startup of the new location out of the profits you made running the first, or else maybe a bank is willing to loan you the money since, after all, your first location was so profitable. The point is, new location equals new jobs. Similarly, if my factory is profitable and profits are growing, I’ll want to expand production and that means more hiring.  Unless, that is, I think I’m operating my business in an overall climate of weak, flat demand

Millions of unemployed may never recover— Despite recent job gains, one grim statistic casts a long shadow over the recovering economy and the futures of more than 6 million workers: Fully 44 percent of the nation's 15 million unemployed have been out of work for more than six months. And evidence suggests many of them may never rebuild their working lives completely.Never since the Great Depression has the U.S. labor market seen anything like it. The previous high in long-term unemployment was 26 percent in June 1983, just after the deep downturn of the early '80s. The 44 percent rate this year translates into more than 6.5 million people.In fact, nearly two-thirds of these workers actually have been jobless for a year or longer, new Labor Department reports show.

The Jobs Picture Still Looks Bleak - Robert Reich - Since the start of the Great Recession in December 2007, the economy has shed 8.4 million jobs and failed to create another 2.7 million required by an ever-larger pool of potential workers. That leaves us more than 11 million jobs behind. (The number is worse if you include everyone working part-time who'd rather it be full-time, those working full-time at fewer hours, and people who are overqualified for the jobs they're in.) This means even if we enjoy a vigorous recovery that produces, say, 300,000 net new jobs a month, we could be looking at five to eight years before catching up to where we were before the recession began.Given how many Americans are unemployed or underemployed, it's hard to see where we get sufficient demand to support a vigorous recovery. Outlays from the federal stimulus have already passed their peak, and the Federal Reserve won't keep interest rates near zero for very long.

Romer: ‘It’s Aggregate Demand, Stupid’- Christina Romer, chair of the president’s Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs. It’s the old-fashioned Keynesian diagnosis: Too little demand in the economy. “The overwhelming weight of the evidence is that the current very high—and very disturbing—levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified,” Ms. Romer said in remarks prepared for a conference at Princeton University today.

The Future of American Jobs - Robert Reich - Many of my students at Berkeley who will be graduating in June are worried about the job market. I understand their worries. But they and other new college grads have less cause for concern than most American workers. Let me explain.Since the start of the Great Recession in December 2007, the U.S. economy has shed 8.4 million jobs and failed to create another 2.7 million required by an ever-larger pool of potential workers. That leaves us more than 11 million jobs behind. (The number is worse if you include everyone working part-time who’d rather it be full-time, those working full-time at fewer hours, and people who are overqualified for the jobs they’re in.)This means even if we enjoy a vigorous recovery that produces, say, 300,000 net new jobs a month, we could be looking at five to eight years before catching up to where we were before the recession began.

Jobless Recovery Explained in Two Simple Statistics - Wondering what’s behind those recent jobless recovery numbers? 1. Fortune 500 companies tripled their profits to $391 billion in 2009. 2. They also slashed their payrolls by more than 800,000 jobs.

Labour markets: Recovery, except for the workers | The Economist - THIS week, I have a piece on the NBER recession dating committee's decision not to declare the American recession to officially be over. It reads in part: But full-throated cheerleading is premature. By Mr Gordon’s calculations, much of the data point to June 2009 as the likely recession end-date. Since then the American economy has seen a net deterioration in employment by about 900,000 workers. The performance is by far the worst nine-month stretch following a recession of any post-war downturn (see chart). The last time the American unemployment rate rose above 10%, during the recession of 1981-82, the economy added between 1m and 2.5m jobs in the first nine months of recovery.

Manufacturing Employment (% of workforce chart)

"The Return of Industrial Policy" - CAMBRIDGE – British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right. Industrial policy is back. In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation. China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. State-owned enterprises have acted as incubators for technical skills and managerial talent.

Ezra Klein Misunderstands Elites, Non-Elites, and Everyone In Between - After reading a speech by the head of the AFL-CIO about the decline of manufacturing jobs, Ezra Klein opines about class and creative destruction:…consider the way elites have treated the decline of journalism jobs and the decline of manufacturing jobs. Both sectors are fundamentally suffering from the same thing… But where the decline of manufacturing was greeted with sanguine talk about “retraining,” the decline of journalism has been greeted with something akin to grief. I have some friendly advice for journalists: if you find yourself thinking that anyone other than your co-workers and their immediate families give a whiff about journalism jobs any more than they care manufacturing jobs, restaurant jobs, or any other kind of jobs for that matter, then you need to spend more time outside the lunchroom of the Washington Post. Because nobody cares. This belief that journalism jobs in-and-of-themselves are somehow important isn’t an elite/non-elite divide, it’s a delusional journalist/everyone else divide.

U.S. Postal Service Risks Taxpayer Bailout: GAO - Reuters) - The U.S. Postal Service could be on its way to a taxpayer bailout unless it takes extreme steps to become financially viable, according to a congressional report released on Monday.The Government Accountability Office (GAO) said the postal service faces "daunting financial losses" of more than $238 billion over the next decade.The GAO said Congress should form a panel of independent experts to make recommendations that could include removing the requirement that mail be delivered within six days, reducing USPS' operations, and allowing it to do business in new, non-mail-related areas. "If no action is taken, the risk of USPS's insolvency and the need for a bailout by taxpayers and the U.S. Treasury increases," the GAO said.

 Post Office May Go Broke by October Without Help, Potter Says (Bloomberg) -- The U.S. Postal Service may run out of cash as early as October unless Congress drops a requirement to prefund health benefits for retirees, Postmaster General John Potter told lawmakers today.  Potter asked the House Oversight and Government Reform Committee to let the service cut Saturday delivery and stop paying health costs in advance. Dropping the funding requirement would allow the agency to be solvent when the next fiscal year begins Oct. 1, Potter said. “Today we stand on the brink of financial insolvency,” Potter told committee members who expressed skepticism about endorsing his plan to reduce mail deliveries to five days from six. “If Congress is unable to act this fiscal year on broader legislation, our projections show that we will risk running out of cash the first month of fiscal year 2011.”

Do Smarter Workers Work Less?- Last week, we summarized a Labor Department report on hours worked and earnings by state, which found that Nevadans work the longest hours and workers in the District of Columbia had the highest hourly wage. Over at The Atlantic, Richard Florida has parsed the data to focus on what makes a state’s labor force more or less likely to work longer weeks and get higher pay. His result: Education seems to play a big role in how long a state’s average resident works, and for what wage. In the chart below, Mr. Florida, director of the Martin Prosperity Institute at the University of Toronto, plotted states according to human capital — here defined as what share of their work force had at least a bachelor’s degree — and how much their average worker earned per hour.

March State Unemployment Rates: New Record Highs in California, Florida, Georgia and Nevada - From the BLS: Regional and State Employment and Unemployment Summary - Regional and state unemployment rates were little changed in March. Twenty-four states recorded over-the-month unemployment rate increases, 17 states and the District of Columbia registered rate decreases, and 9 states had no rate change, the U.S. Bureau of Labor Statistics reported today. Forty-four states and the District of Columbia recorded jobless rate increases from a year earlier, 5 states had decreases, and 1 state had no change. Michigan again recorded the highest unemployment rate among the states, 14.1 percent in March. The states with the next highest rates were Nevada, 13.4 percent; California and Rhode Island, 12.6 percent each; Florida, 12.3 percent; and South Carolina, 12.2 percent.

Unemployment by State: Where Are The Jobs? - WSJ- See the full interactive graphic. The unemployment rate increased in just under half of states in March and joblessness continues to be worst in western states that have been hit hard by the recession and housing bust, according to a Labor Department report released Friday. The unemployment rate increased in 24 states in March from a month earlier, with 17 states and the District of Columbia showing decreases. The unemployment rate was unchanged in nine states

State, Local Budget Woes to Continue - WSJ —State and local governments will continue to face budget squeezes long after the economic recovery is well established, as costs rise and tax revenues lag, according to tax experts gathered here for a conference.State and local governments have seen their tax revenues hit hard by the recession, with drops in sales, income and other taxes on which they rely. State and local tax collections fell 6% in 2009, the largest yearly percentage decline on record.  "State and local governments see themselves in a full-blown cyclone,"

Revenue Picture Brightens a Bit for States - WSJ. - Wednesday's report suggested that the deep declines in state tax revenue have slowed and that revenues will resume growing by next year, in part because of recently enacted tax increases. State and local personal income taxes fell 4.7% in the last three months of 2009 versus the same period a year earlier, while state and local sales taxes fell 2.8%, according to the Census Bureau. The fourth-quarter declines were much tamer than those in earlier quarters. Income and sales taxes account for two-thirds of state revenue.

Budget deficit grows deeper Topeka — The lines deepened Friday between those wanting a tax increase and those wanting more cuts as a new revenue estimate revealed a $510 million state budget hole and a shaky economy. Given the revenue freefall over the past year of recession, Gov. Mark Parkinson’s budget director Duane Goossen said the dropping revenue figures were expected. Previously the shortfall had been in the $450 million neighborhood.

Illinois ‘Poster Child’ of Debt Crisis Draining State Services (Bloomberg) -- Illinois, the second-lowest-rated U.S. state after California, must fend off a “financial implosion” as its unfunded liability for retiree benefits threatens spending for other services, a group of community leaders warned. The Civic Committee of the Commercial Club of Chicago, led by former and current executives, is pressuring Governor Pat Quinn and other state leaders to control growth of pension costs they say put the state at risk of fiscal collapse. Members of the group, which estimates the state’s retirement-related liabilities at $130 billion, are speaking out as Illinois enters its general-election season. Illinois, with the largest unfunded pension and health care liability among U.S. states, is a “poster child” for municipalities that have borrowed money to cover up budget deficits without addressing spending issues, said R. Eden Martin, president of the committee. Since the U.S. economy went into a recession in 2007 the $2.8 trillion municipal bond market has been a “slow-motion collapse of a very large building,” as cities and states borrowed, Martin said.

Cash-strapped Illinois owes companies $4.5 billion - The state is supposed to cover the cost of that helping hand to the elderly, but it is falling further and further behind in paying its bills, and Vala has had to remortgage his house and cash in his retirement savings to keep Community Care Systems afloat. "I've never seen nor imagined anything like this could happen," he said. "It used to be a state contract is gold. Now banks don't even want to lend you money if you have a state contract." The state owes billions of dollars to thousands of companies that do everything from supply pens to run drug treatment programs. Vala's company is among those owed the most — about $10.9 million, according to the Illinois comptroller's office.

 Does The State Of Illinois Owe You Money? - The state has more than $5 billion in unpaid bills, and a lot of that money belongs to businesses all across Illinois doing work with state government. Does the state have an outstanding balance on your books? The Quad-City Times will be telling the stories of local businesses, organizations and individuals struggling with late payments from the state.

Detroit-Area Home Sales Up 6.2%  - Home sales continued to climb in parts of metro Detroit in March, fueling price increases and whittling down the number of houses on the market.In Detroit, the median sales price last month was up 33% to $7,725. And the number of houses for sale in Detroit dropped by 28% to 3,919 from 5,460 last March. Yet 804 homes sold in the city last month, compared with 1,173 in March 2009. Inventories fell across the board in March as banks continue to limit release of foreclosed properties, said Karen Kage, president of Realcomp.

Mayor says it's now or never for Detroit - Detroit Mayor Dave Bing's proposed $2.9-billion budget doesn't slice and dice through city services or its employees, but it does trim the workforce by 300, moves satellite offices back to City Hall and reduces spending in nearly every department.Bing has a lot riding on his first spending plan -- he campaigned on the notion that he would turn the city's fiscal crisis around by using his business sensibilities. On Tuesday, Bing also said "it is indeed now or never" if the city is going to avoid bankruptcy or state receivership.

Los Angeles Budget Crisis Puts Homicide Investigations on Hold - Despite an increase in killings, the homicide unit of the Los Angeles Police Department (LAPD) has been sitting idle due to lack of funding, a newspaper report said on Monday. With its overtime budget decimated, the department is forcing officers to put cases on hold and take days or even weeks off, the Los Angeles Times said. Among the hardest hit by the financial crisis, the homicide unit has sat idle for six weeks, unable to follow any leads on old cases or pick up new ones, according to the paper. Because of demanding work schedules that routinely require them to investigate a case into the night or through the weekend, homicide detectives have been among the first officers to be sent home in significant numbers, said the paper.

Police overtime ban halts cases - Murder detectives in cash-strapped Los Angeles are being forced to drop cases because of an overtime ban.The city's budget crisis is forcing them to stop work for days by taking time off in lieu of payment and some detectives said they had to delay interviewing witnesses."Could this cause us to not solve a case? Sure," said Detective Chris Barling, who oversees the South Bureau homicide unit.The 11 detectives in the Southeast Division's homicide squad had to take off 700 hours in February despite opening five new investigations. Nine of 14 killings reported in the area this year are unsolved.

California ire over Borat bonds - Taking a page out of Greece’s playbook, the peeved treasurer of America’s largest state fired off letters this week to the chiefs of Goldman Sachs and other banks questioning their marketing of credit default swaps on California’s debt. The instruments, he complained, “wrongly brand our bonds as a greater risk than those issued by such nations as Kazakhstan.” On paper, California’s debt of $85bn supported by 37m citizens and the world’s eighth largest economy looks more manageable than Kazakhstan’s nearly $100bn heaped on its poorer population of 16m. Go beyond headline figures though and Kazakhstan, with the world’s 11th largest oil reserves, an economy that grew more than 8 per cent annually from 2002 through 2007 and unemployment of just 6.7 per cent looks positively vibrant next to the Golden State’s joblessness of 12.4 per cent.

Cash-strapped state opens bidding on $2 billion in office buildings - Under a plan approved by the Legislature last year, the state expects to clear at least $660 million once it pays off the debt on the properties. A total of 11 properties were put up for sale, including the massive East End complex and Attorney General Building in downtown and three other properties in Sacramento.The state would lease back the buildings for 20 years at a total cost of about $5.2 billion, according to the Department of General Services. The size of the rental payments, which dwarf the amount the state would receive from the sales, are at the heart of the controversy. Four board members of authorities that oversee the finances of state buildings were removed from their posts in recent weeks after questioning the Legislature's decision, said General Services spokesman Jeffrey Young.

Texas sales tax revenue down 7.8 percent in March - Forbes… - AUSTIN, Texas -- Texas sales tax collections were down 7.8 percent in March, compared with the same month a year ago. Texas Comptroller Susan Combs said Wednesday that the state collected $1.46 billion in sales tax revenue in March. Although that's down, she said collections continue to moderate for the second month in a row. Following an eight-month stretch of double-digit declines, the pace of revenue losses is slowing, Combs said.

Minnesota state government's financial picture getting worse – Minnesota state government is delaying school, university and some refund payments in order to pay bills. And the situation will get worse later this year, state budget officials told a legislative committee Monday.“Our overall balances are getting drawn down,” said State Budget Director Jim Showalter, adding the future depends on how quickly the economy recovers and what legislators do to balance the state budget before adjourning for the year May 17.The slow economy has reduced state revenues, forcing Minnesota Management and Budget to borrow from other state and educational funds. The state’s bank account would have dipped below the $500 million state law requires to be available to pay bills if not for the borrowing from state and local agencies.

Buffalo schools to face $93 million deficit in three years, officials warn - The Buffalo Public Schools will face a "scary" $93 million budget gap within three years unless ways can be found to contain skyrocketing pension, health insurance and charter school expenses, educators warned the Common Council on Tuesday. Some school officials also said the system will ask the city for additional aid, noting that the city's contribution to the Board of Education has not increased in a few years.But during the meeting in Council Chambers, school officials did not specify how much additional city aid they will request when a budget is unveiled later this month.

Sen. Harkin proposes $23 billion bailout for schools - As public schools nationwide face larger class sizes and cuts in programs, the Senate's leading Democrat on education issues proposed a $23 billion bailout Wednesday to help avert layoffs of tens of thousands of teachers and other school personnel in the coming academic year. Education Secretary Arne Duncan estimated that school layoffs could total from 100,000 to 300,000 unless Congress acts. "It is brutal out there, really scary," Duncan told reporters on Capitol Hill. "This is a real emergency. What we're trying to avert is an education catastrophe."

Not from the Onion: NYC to stop paying teachers to do nothing - The city will end the practice of paying teachers to play Scrabble, read or surf the Internet in reassignment centers nicknamed "rubber rooms" as they await disciplinary hearings, Mayor Michael Bloomberg and the teachers union announced Thursday. The deal will close the centers, where hundreds of educators spend months or years in bureauratic limbo, costing taxpayers tens of millions of dollars a year.  This part is so 'not making this stuff up': The nickname refers to the padded cells of asylums, and teachers have said the name is fitting, since some of the inhabitants can become unstable. "There are fights among teachers because some teachers are nuts," said Leonard Brown, a high school teacher who spent four years in a reassignment center in Queens. "They put crazy people in with very sane people."  More here.

 Teacher Pension Deficit at $900 Billion May Be Triple Reported (Bloomberg) -- Taxpayers across the U.S. owe public school teacher retirement accounts about $933 billion, nearly triple the amount reported by the plans themselves, a study says. The $332 billion gap estimated by teacher retirement funds between what they have on hand and the cost of promised benefits is low because it includes an “aggressive” 8 percent assumption on future investment earnings, the Manhattan Institute for Policy Research said in the study, released today. It also doesn’t reflect the full cost of stock market losses suffered in the past two years, the New York-based research organization said. The report, covering 59 plans for 13 million working and retired educators, found that California had the largest unfunded teacher pension liability at almost $100 billion, more than the $42.6 billion reported by the system in January. It’s the third study in less than two months to suggest that pension costs of about $1 trillion threaten to overwhelm state and local budgets already crimped by declining tax revenue.

30000 Teachers Could Retire From NJ System At Once (video) New Jersey faces the prospect of losing tens of thousands of well-qualified teachers before the next school year begins, thanks to a new proposal from Gov. Chris Christie. He is faced with a state budget that could have a deficit as high as $11 billion. In an effort to help fill that gap, according to NJEA, the teachers' union in New Jersey, the Republican governor proposes changing the terms under which people receive state-provided medical insurance and pensions. Teachers are the largest segment of state benefits recipients, and Christie's proposal could force some 30,000 of them to retire by August 1st, according to the union. The reason why, NJEA says, is that teachers' current benefits would shrink significantly if they don't retire soon: A teacher who would retire before August 1 of this year would keep free medical benefits for life. Under the governor's proposal, teachers would have to pay an as-yet undetermined portion of their medical costs if they stayed employed after the August 1 deadline.

Boomer Entitlement Mess???- Barkley Rosser at Econospeak takes aim at immigration and worker ratios: Robert Reich says so, "Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess", which is also linked to by Mark Thoma. He has been on the Social Security Advisory board and has heard all the tales of coming Demographic Doom due to the impending wave of boomer retirements, even though the adjustments due to the Greenspan Commission in the early 80s were supposed to pay for the boomers' retirements. This year the fund is running a (small) deficit, and so out of all the sources of the broader federal budget deficit (of which rising medical care costs, not to mention high defense budgets) it is social security that is the Big Problem that Something Must Be Done About (along with Medicare). I would agree that more immigrants will help in the short run, but demography is not the main problem here.

For post-boomers, public education worth more than Social Security and Medicare - It's popular to assume retiring baby boomers will benefit from Social Security and Medicare at the expense of younger generations, as analysts estimate that these government-run programs will pay out more than they collect in payroll taxes by 2017.  But a far-reaching new study from the University of California, Berkeley, concludes that younger Americans – specifically those born between 1972 and 2060 – are actually getting the better deal when the value of public education is factored in as an intergenerational entitlement program on a par with Social Security and Medicare. "Receiving public education is a really big benefit, and the fact that kids get it at the start of their lives rather than at the end makes it even more valuable,"

Boston’s $6B shaky promise Unfunded liability continues to soar as benefit costs eat up more of city budget - Boston’s promise to city workers to pay their medical costs in retirement until they die is shaping up as a pipe dream. The city’s estimated unfunded liability on that promise soon could zoom past $6 billion, a conservative figure that still ranks as one of the highest in the nation.“This is an incredibly large number and it represents promises that have been made,”But the city has set aside only a token amount to address the estimated unfunded liability for retiree medical costs. Last summer, that unfunded liability was pegged at nearly $5.8 billion by an actuarial firm hired by the city. That’s up from about $5.5 billion in 2007. At the end of fiscal 2009, the city should have set aside nearly $431 million toward funding the liability, according to its own estimates. So far, only $20 million has been set aside in a special trust.

Quinn signs pension revamp -- Democratic Gov. Pat Quinn affixed his signature onto a pension reform package Wednesday, saying the state will save billions of dollars because benefits will be lower for new employees, who will have to work longer to collect their retirement checks. While union leaders complained the new law doesn't address Illinois' $77 billion shortfall in the government employee pension systems, it is expected to save taxpayers money in the coming decades on retirement costs for teachers, lawmakers and many public servants throughout state government, universities, cities, counties and park districts. "It's imperative to show the taxpayers we're serious about saving money," said Quinn

From the Editor: $28 billion pension gap is ours to repair Public employee pensions have become one of the prickliest topics The Bee covers, and our front-page story today adds some sobering numbers to the discussion. Here's one: $28 billion. That's the collective gap, according to The Bee's analysis, between the amount of pension money that's invested and the amount that's promised to employees and retirees in California's 80 largest city and county governments.

No time to worry about CalPERS - Well done to CalPERS for responding forcefully to a rather silly Stanford policy brief which gets very alarmist about California’s pension liabilities. There are so many enormous and immediate fiscal problems facing California right now that it seems utterly pointless to put out a paper saying that the state should inject $200 billion into its pension funds — especially when the logic of the paper is as confused as this: we recommend that CalPERS, CalSTRS, and UCRS allocate more of their investment portfolios to fixed income asset classes, thereby reducing risk with a minimal loss of long term investment performance.

Pension crises: Debt bomb | The Economist - CALL me a fiscal conservative, but mounting federal and state debt scares the heck out of me. At the Kauffman economics bloggers forum, many participants claimed that they expect a sovereign debt crisis in America in the next few decades. Many states' finances are even more dire than the federal government's, but at least states and municipalities can default without triggering a sovereign debt crisis. It is credible that the federal government will not bail-out individual states. But the residents of many states probably face obscenely high taxes in the future. This expectation can undermine future growth because businesses and high earners can easily relocate to lower tax states.This is precisely why we should be very worried about the financial condition of state pension plans. Their projected short-falls don’t tell half the story.

Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State? - According to a report by the American Enterprise Institute, public pensions are underfunded by more than $3 trillion. Following is a state-by-state interactive map I put together from the report. Note: Please give the map a few extra seconds to load.

GM's Pension: A Ticking Time Bomb for Taxpayers? - TIME - General Motors Corp. may no longer be the world's biggest automaker, but it still operates the country's largest pension fund. The threat to its pension plans has always been an issue, butit took on a new urgency when GM disclosed April 7 that its plans were underfunded by more than $27 billion, with more than half of that being owed to U.S. workers and retirees. Across town, a post- bankrupt Chrysler faces its own pension shortfall. Moreover, a report last week from the Government Accounting Office (GAO) says the pension crisis in the auto industry could create an unprecedented crisis for the federal Pension Benefit Guarantee Corp., a government-sponsored organization to backstop company pensions.

Actual List of Social Security Trust Fund Assets -  Well this is a response to a question in the Rivlin thread. There are widespread misunderstandings about what if anything makes up the "IOUs" in the Trust Funds, with many people thinking they just have artificially low rates (and so obviously underperforming theoretical private accounts) or just are open-ended loosey-goosy commitments to maybe pay the money back someday. Well that is not how it works at all on a monthly basis. So with no further ado here they are: As always click to enlarge. Some notes under the fold.

Will More Immigration Save Social Security? - Robert Reich says so, I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the "optimistic" projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration

Migration Information Source - Filipino Immigrants in the United States … The United States is home to about 1.7 million Filipino immigrants, making them the second-largest immigrant group in the United States after Mexican immigrants.  The Filipino immigrant population grew rapidly during the 1970s and 1980s and has continued to grow (although at a slightly slower pace) since then. In addition, the United States is home to about 1.4 million native-born US citizens who claim Filipino ancestry. Heavily concentrated in the western United States, the Filipino born account for almost half of all immigrants in Hawaii (for more information on immigrants by state, please see the ACS/Census Data tool on the MPI Data Hub). Compared to other immigrant groups, Filipinos are better educated than the immigrant population overall, and Filipino immigrant women are more likely than other immigrant women to participate in the civilian labor force.

Bye-Bye Medicaid Asset Test* - The Affordable Care Act (ACA) goes a long way toward simplifying Medicaid eligibility. Go try and figure it out from the legislative language and you’re not likely to believe me. Fortunately, Joy Johnson Wilson, Health Policy Director for the National Conference of State Legislatures, has done the dirty work. In a handy document Wilson summarizes Medicaid and CHIP provisions in the new law and compares them to current law. In particular, on page 8 Wilson notes that the ACA “[r]equires states to use a net income standard (no asset or resource test, no income disregards) to determine [Medicaid] eligibility.” Yep, you read that right, bye-bye asset test. Hello simple income test. The new federal income eligibility threshold will be 133% of the federal poverty level

Spreading the Wealth via Heathcare Reform - I have long said that one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income.  The Tax Foundation has now put some numbers to that proposition for the recently passed bill.  Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits.  Click here for the more complete description.

How Much Does the Health Care Reform Law Redistribute Income? - A new report from the Tax Foundation discusses the effect on income redistribution from the recently passed health care reform bill. Here are the�summary results: (table)

Health insurers shifting costs ahead of law: report - (Reuters) – Some of the largest U.S. health insurers are changing their accounting practices to book administration costs as medical costs in an attempt to circumvent new industry reforms, according to a U.S. Senate panel's report released on Thursday. Under the healthcare law passed in March, insurers must adjust their spending habits to meet new requirements. For example, large group plans must spend at least 85 cents of every premium dollar paid to them on actual medical care as opposed to administrative costs, while individual and small group plans must spend 80 cents.

One Reason U.S. Health Care Costs So Much-- At a recent conference, David Cutler, a Harvard economics professor and health care adviser to Barack Obama’s presidential campaign, presented a version of the following chart: It shows the number of people employed in various occupations within the health care sector. The takeaway: For every doctor, there are five people performing health care administrative support.There are two basic reasons for the absurdly large administrative employment in health care. First, our health care system — with its actuarially focused multiple health insurers, paper-based record keeping and multiple billing systems — is bound to create a lot of administrative work. Second, the way the payment system is structured, there is little incentive to make the system more efficient.

Scientists Work to Keep Hackers Out of Implanted Medical Devices - Researchers say it is possible for hackers to access and remotely control medical devices like insulin pumps, pacemakers and cardiac defibrillators, all of which emit wireless signals. In 2008, a coalition of researchers from the University of Washington, Harvard Medical School and the University of Massachusetts at Amherst wrote that they remotely accessed a common cardiac defibrillator using easy-to-find radio and computer equipment. In a lab, the researchers used their wireless access to steal personal information from the device and to induce fatal heart rhythms by taking control of the system.

Scrubbing IDs Out of Medical Records for Genetic Studies - Databases that link thousands of people’s DNA profiles to their medical histories are a powerful tool for researchers who want to use genetics to individualize the diagnosis and treatment of disease. But this promise of personalized medicine comes with concerns about patient privacy. Now scientists have come up with a way to alter personal medical information so it’s still meaningful for research, but meaningless to someone trying to ID an individual in a database. The new method, published online April 12 in the Proceedings of the National Academy of Sciences, simply disguises parts of the medical history data that are not relevant to a geneticist’s particular research question using an algorithm that combs through health records and makes some aspects of them more general.

Human genes to be injected into goats, cows, and sheep - Scientists have been given permission to put human genes into goats, sheep and cows for the next 20 years, to see if the animals will produce human proteins in their milk. But people will not be pouring the genetically modified milk on their Weetbix just yet - the milk will be discarded. AgResearch won Environmental Risk Management Authority approval to allow a handful of scientists to breed and keep genetically-modified animals at the Ruakura research facility, near Hamilton. The work will begin with genetically modified cows, and could be expanded to genetically modified goats within the next year.

'Growing concern' over marketing tainted beef - USATODAY…— Beef containing harmful pesticides, veterinary antibiotics and heavy metals is being sold to the public because federal agencies have failed to set limits for the contaminants or adequately test for them, a federal audit finds. A program set up to test beef for chemical residues "is not accomplishing its mission of monitoring the food supply for … dangerous substances, which has resulted in meat with these substances being distributed in commerce," says the audit by the U.S. Department of Agriculture's Office of Inspector General.The health effects on people who eat such meat are a "growing concern," the audit adds.The testing program for cattle is run by the USDA's Food Safety and Inspection Service (FSIS), which also tests meat for such pathogens as salmonella and certain dangerous strains of E. coli. But the residue program relies on assistance from the Environmental Protection Agency, which sets tolerance levels for human exposure to pesticides and other pollutants, and the Food and Drug Administration, which does the same for antibiotics and other medicines.

U.S. standards on beef are lax, inspector general says (CNN) -- The U.S. government is not fully guarding against the contamination of meat by traces of antibiotics, pesticides or heavy metals, a new report warns.The U.S. Department of Agriculture's inspector general said federal agencies have failed to set limits on many potentially harmful chemical residues, which "has resulted in meat with these substances being distributed in commerce." When it comes to pesticide traces, only one type is tested for, according to the report. There are also no set limits for some heavy metals, like copper. In 2008, Mexican authorities turned away an American shipment of beef, because it did not meet Mexico's limits when tested for copper traces. But the very same rejected meat could be sold in the United States, since no limit has been set, the analysis says. That example shows "the government has fallen down on the job here,"

Peak P? Phosphorus, food supply spurs Southwest initiative…- The mineral phosphorus (P) is critical to the creation of bones, teeth and DNA. "P" is also a key component of the fertilizers used to produce our food, as critical to agriculture as water. But is P, like oil, peaking? Natural and social scientists in Europe, Australia, the United States and elsewhere see growing evidence that the answer is yes. But when? That is the question. Predictions of P scarcity run the gamut, starting as early as 2034 to as late as 2070 or beyond. According to ecologist James Elser of Arizona State University (ASU), most people don't realize that phosphorus is mined and that these mines are a limiting resource.  "Our current use of phosphorus is not sustainable

GM viruses offer hope of unlimited energy - Scientists have made a fundamental breakthrough in their attempts to replicate photosynthesis – the ability of plants to harvest the power of sunlight – in the hope of making unlimited amounts of "green" energy from water and sunlight alone.The researchers have assembled genetically modified viruses into wire-like structures that are able to use the energy of the sun to split water molecules into their constitute parts of oxygen and hydrogen, which can then be used as a source of chemical energy. If the process can be scaled up and made more efficient, it promises to produce unlimited quantities of hydrogen fuel, a clean source of energy that can be used to generate electricity as well as acting as a portable, carbon-free fuel for cars and other vehicles.

LA billionaires sued over Calif. water sales - Now, as drought-stricken California weighs whether to give private companies more control in managing its scarce water supplies, a new lawsuit claiming the Resnicks violated utilities law by making money from a vast, taxpayer-funded underground reservoir is causing a stir in the state Capitol. "Water is a public resource, owned by the people," said Democratic Assemblyman Jared Huffman of San Rafael. "We shouldn't be giving away public funds to private sector interests, let alone choosing winners and losers in the business world."

Scientists Race to Engineer a New Magnet for Electronics…A magnet at the heart of high-tech products such as cell phones and hybrid cars relies upon an increasingly scarce supply of the rare earth element known as neodymium. Now one of the original inventors of that magnet hopes to create a new generation of magnetic materials that can ease or break free of that dependence. The neodymium-iron-boron magnet represents the most powerful commercial magnet available today, and has a starring role in many technologies crucial to the U.S. economy and defense. But the U.S. overwhelmingly relies upon China for its supply of neodymium and other rare earth minerals, and China has warned that its own domestic demand may soon force it to cut off that supply.

Do rising oil prices threaten the economic recovery? - Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum. Oil had been holding around $80/barrel over the last month, but traded as high as $87 last week, leading the Financial Times to ask whether oil could give the "kiss of death to recovery."Americans buy a little less than 12 billion gallons of gasoline in a typical month. With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009. On the other hand, the U.S. average gas price is still more than a dollar below its peak in July of 2008. Changes of this size can certainly provide a measurable drag or boost to consumer spending, but are not enough by themselves to cause a recession. My view is that it is not just the level of consumer spending but also a sudden change in its composition that sometimes contributes to an economic recession

US military warns oil output may dip causing massive shortages by 2015 The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with a significant economic and political impact.The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel. "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report, which has a foreword by a senior commander, General James N Mattis. It adds: "While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds.

One Of The World's Biggest Oil Producers Is Going Bust - Most Americans don't realize it, but Mexico is a major player in global oil production. According to the Energy Information Agency, it was the seventh largest oil-producing country in 2008. Mexico is the U.S.'s second-largest source of imported oil, behind Canada. You read that correctly: We import more oil from Mexico than we do Saudi Arabia, Iraq, Kuwait, or any other Middle Eastern country. You don't read about it much in the papers, but Mexico is a critical supplier to American drivers.  Now, Mexican oil officials have a problem... one the entire world has: There are no easy barrels left.  You see, in the oil business, there are "easy barrels," like the kind discovered in Mexico, Texas, and Saudi Arabia decades ago.   There are also "hard barrels," like the kind locked inside oil sands. They require enormous amounts of digging and processing in order to become the "light, sweet" crude that we turn into gasoline.

IEA: OPEC Had First Big Drop In Output In A Year - Recovery in the world's biggest economies could be jeopardized if crude oil prices stay over $80 per barrel, the International Energy Agency said Tuesday. The IEA also reported that OPEC posted the first "significant decline" in output in March in more than a year — falling 190,000 barrels per day to 29 million barrels a day — largely due to a near 10-percent drop in Iraqi output. The agency, the energy arm of the Organization for Economic Cooperation and Development, a grouping of the world's richest nations, said concerns remain that global oil markets are "overheated," with crude around $85 per barrel. "Ultimately, things might turn messy for producers if $80-100 (per barrel) is merely seen as the new $60-80 (per barrel), stunting economic recovery while prompting resurgent non-oil and non-OPEC supply investment"

OPEC production versus target output - mind the gap - How much wider can the gap between OPEC's official quotas and its actual production get? Platts' latest monthly estimates of the oil producer group's production show the gap at 2 million b/d. Relatively strong oil prices are certainly not encouraging any efforts among individual members to rein in output. Despite steadily rising production over the past year, OPEC has kept its 24.845 million b/d target in place since January 2009. Both the target and the individual quotas are looking increasingly irrelevant, and at some point--barring unforeseen events--the cartel is going to have to tackle the credibility gap. OPEC's own estimates, derived from secondary sources, put total production at 29.263 million b/d, down 28,000 b/d from February, and OPEC-11 output at 26.823 million b/d, up 83,000 b/d.

North Sea drilling falls to six-year low - Telegraph - The amount of offshore drilling for oil and gas on the Britain's Continental Shelf dropped to its lowest level in six years during the first quarter of 2010, according to research by Deloitte. The company's North West Europe Review, which summarises drilling and licensing in the region, showed that overall, exploration and appraisal (E&A) drilling decreased by 33pc during the past three months, compared to the same period last year.

Alaska Predicts Higher Oil Price But Lower Output  (Reuters) - Prices for crude oil produced on Alaska's North Slope will remain high but output from the aging basin will continue to slump, according to a semi-annual forecast released late on Friday by the state Department of Revenue.The department's spring forecast predicts that North Slope crude prices will average $75.32 per barrel in fiscal 2010, which ends June 30, and rise to an average $77.65 per barrel in fiscal 2011. But fiscal 2010 production will be 6.9 percent lower than that achieved in the previous fiscal year, averaging 650,000 barrels per day, according to the forecast. Production in fiscal 2011 will drop another 4.8 percent to 619,000 barrels per day, according to the forecast.North Slope oil production peaked in 1988 at slightly over 2 million barrels per day. The main North Slope fields, Prudhoe Bay and Kuparuk, are the two largest in the nation, but they are mature and producing far less than they did two decades ago.

Ceridian-UCLA: Diesel fuel consumption increases in March - Press Release: March PCI Increase Indicates U.S. Economy on 4 Percent Growth Track: Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management staged a healthy comeback in March, with the PCI growing by 1 percent, making up for February’s snowstorm-induced decline of 0.7 percent. The adjusted index grew from 107.4 to 108.5, continuing its climb from a recessionary low of 100.7 in June 2009. ... [T]he March PCI shows growth over the prior year period for the fourth consecutive month. This follows twenty-two consecutive months of year-over-year declines experienced prior to December 2009. This graph shows the index since January 1999 (monthly and 3 month average). There is significant variability month to month.

Romance blooming in the spring: Americans + driving - Looks like Americans are revving the engines early this year.The Mastercard data, which we've written about before, is one of many imperfect ways of trying to measure US gasoline demand. It's based on credit card swipes, and it comes out weekly. And what the report the last few weeks has been showing is that Americans have been driving a lot. All those other times when the numbers exceeded 67 million barrels occurred during the summer driving season. So despite almost 10% unemployment, despite gasoline prices that are edging toward the $3/gal mark, despite the dumping of SUVs and the love affair with hybirds, the MasterCard data suggests that Americans consumed more gasoline in March than at any time in US history.

More on Oil's Impact on Consumption - Americans buy a little less than 12 billion gallons of gasoline in a typical month. 12 billion gallons per month of gasoline is a lot, but according to the EIA, total crude use is almost double the level used in gas (about 18.5 million barrels per day x 42 barrels per gallon x 365 days / 12 months = 24 billion gallons per month). Using this "total" level and comparing it to personal income based upon market prices at each point, we can see how much of a drag the spike in oil would have impacted 'consumption ex oil'. We can also see why "this time" may not be so bad... the overall level of personal income that is allocated to oil is currently not much higher than what we saw pre-crisis (and much lower than 2008 levels).

How Much Oil is Left? Economics, Monetary Changes & Shrinking Supply - Q. Mr. Heinberg, your most successful book-title to this date is The Party’s Over. What kind of party is it and why do you assume that this festivity and its special features are about to come to an end? A. The “party” was humanity’s one-time-only opportunity to fuel economic growth and technological  innovation with a bounty of cheap, abundant energy from fossil fuels. The harvesting of oil, coal, and natural gas has inevitably proceeded on a best-first or low-hanging fruit basis. While the Earth still possesses a wealth of unexploited energy resources, the cheapest and easiest-accessed of those resources have by now already been used. All of these fuels are in the process of becoming more expensive, and the various energy alternatives are limited in one way or another in their ability to  replace hydrocarbons. That means we are currently seeing the end of economic growth as we have  known it. The impacts for transportation, globalization, and world food supplies will be serious indeed

World oil demand to hit record high this year: IEA - (Reuters) – Global oil demand will hit a record high this year, the International Energy Agency (IEA) said on Tuesday, revising up consumption estimates as the world economy recovers from recession. The Paris-based adviser to industrialized economies raised its forecast for world oil demand growth this year to 1.67 million barrels per day (bpd), up 100,000 bpd. The agency said in its monthly Oil Market Report that world oil demand would reach an average of 86.60 million bpd this year, up from 84.93 million in 2009. The previous record high for world oil demand was 86.5 million bpd in 2007 before the onset of the global financial crisis and economic slowdown.

Deja Vu: Goldman Says Oil Is Going To $99 - It’s almost like bad case of 2008 deja vuGoldman Sachs says oil is going to $99 in the next 12 months as Bernanke’s reflation experiment drives prices higher.  According to their analysts energy and metals prices have “broken out” of their trading range and could head higher:“Energy and industrial metals prices break out of recent trading ranges, rising to the highest levels seen since 2008. After trading in an increasingly narrow range in March, energy and metals prices broke out to the upside as March rolled into April, with WTI crude oil prices rallying above $85/bbl.”“We expect the supply-demand balance to continue to tighten in 2010 as the global economic recovery continues to strengthen demand, draw inventories and draw OPEC spare capacity back into the market.”

AFP: Oil price surge threatens economic recovery: IEA - Rising oil prices threaten to crimp recovery in the world's leading economies, the International Energy Agency warned on Tuesday saying that unexpectedly strong activity could overheat the market. Higher prices and tighter lending conditions "could stall OECD economic recovery" the IEA said, referring to the 30 advanced economies of the Organisation for Economic Cooperation and Development. But the IEA also said that the outlook for supplies of oil was improving.

More on oil prices and the economic recovery - - On Saturday I commented on whether rising oil prices threaten the economic recovery. Here are some quick links to perspectives from other observers. Bill McBride shares my conclusion that the recent rise in oil prices is not enough to cause a double-dip recession, though if vehicle miles driven continue to decline, he says that would make him more concerned. New Deal Democrat links to a number of other analyses, including Steve Kopits' view that the U.S. runs into problems whenever our crude oil expenditures exceed 4% of GDP. Here is a graph I produced similar to Steve's. Eighty-five dollar oil is about the point at which the 4% threshold would again get crossed.

Oil Supply Crunch: 2011-2015 - Concerns are mounting about peak oil, and there continues to be much debate over when the peak will be reached, whether a plateau can be sustained or whether the onset of decline would occur quickly, whether we will hit peak demand before we hit peak supply, etc.There is convincing evidence that conventional oil production has already peaked, since we have been stuck at around 74 mbpd for over half a decade (despite the incentive of record high prices).There also seems to be growing consensus that global liquids production (currently around 86 mbpd) is likely to peak within the next decade and almost certainly at less than 95 mbpd. However, there are increasing warnings about an “oil supply crunch” within the next few years, not because of geological constraints, but because of under-investment.

Tipping Point: Near-Term Systemic Implications of a Peak in Global Oil Production -- Collapse Dynamics - Recently, a 55 page paper called Tipping Point: Near-Term Implications of a Peak in Global Oil Production (PDF warning) was published as the joint effort of two organizations: Feasta and The Risk/Resilience Network, with lead author David Korowicz. We have recently published two excerpts from that paper, which can be found at this link. This is a third excerpt.

On Being a 21st Century Peasant - Reason - “Here’s all I’m trying to say: The planet on which our civilization evolved no longer exists,” asserts environmentalist Bill McKibben in his new book, Eaarth: Making a Life on a Tough New Planet. “The earth that we knew—the only earth we ever knew—is gone.” According to McKibben, we are about to find ourselves living on a much less friendly planet he calls “Eaarth.” Why? Because the climate is about to get really freaky due to man-made global warming and we’re also about to run out of oil—the apocalypse, courtesy of Peak Temperature and Peak Oil combined. McKibben is no stranger to environmentalist jeremiads, having declared The End of Nature back in 1989 due to global warming and the rise of biotechnology. Twenty years later he’s declaring the end of civilization, at least, as we know it.

Toyota's Bill Reinert on Peak Oil - "Everything you know is wrong" Reinert expects gasoline demand destruction to hit at about $6/gallon. At $3.50/gallon behavior begins to change, and even more so at $4.20/gallon. When the price of gas went up in 2008 Prius sales increased as much as SUV sales declined and then when it went back down, SUV sales increased even more. He said we are at or near "peak oil," and that it will hit the second half of this decade. At Toyota they don't discuss peak oil, they discuss peak liquid fuels. A half barrel of oil goes towards the production of gasoline. He explained why corn ethanol is a political game and not a rational choice because the amount of gasoline it offsets after inputs is minimal. He does think bioplastics make more sense since they offset another part of oil use. He has some hope for algae.

Pumping tax dollars to big oil - Getting priorities right on tax subsidies for oil companies  - ExxonMobil paid no U.S. federal income tax in 2009. In fact, it was entitled to a $156 million tax refund. Why?  CAP’s Sima J. Gandhi, has the answer in this repost. The answer is more boring than you think: It overpaid its 2008 taxes. ExxonMobil was required to bolster its pension plan by $3 billion when the market went down in 2008.  But what’s more interesting about this story is Exxon’s effective income tax rate. Exxon has over the past couple years paid a U.S. federal income tax that is about 10 percent lower than its non-U.S. effective tax rate. Other oil companies also pay less, and in some years this difference has approached 50 percentage points.* Oil companies pay less in U.S. taxes in part because they receive generous tax subsidies. These subsidies will cost the U.S. government about $3 billion next year in lost revenue and nearly $20 billion over the next five years.

Peak Oil is Soooo .... May of 2008 - Despite gas prices having climbed a good chunk of the way back up to 2008 levels, the level of worry about higher prices hasn't seemed as high this time around. To test that, I pulled data from Google Trends on searches for "peak oil" and compared that to WTI crude prices over the same period. As this graph shows, while the two moved up together in 2007/2008, this time around "peak oil" and higher prices have disconnected in the public awareness -- at least for now.Why might that be? One explanation is that oil prices haven't climbed as fast as they did in early 2008, with the slope of the ascent being a primary source of worries. Second, with consumers having seen prices considerably higher than today's just two years ago, perhaps they have become desensitized to oil at "merely" $87 a barrel. Of course, if either or both are true it wouldn't take much to turn around perception and have people paranoid about peak oil again: higher prices or a faster ascent would do the deed in short order.

BBC News - German car exports up by more than a half - German car exports rose by more than a half in March compared with a year earlier, but domestic car sales fell by a quarter, official figures have shown. Germany exported 419,400 cars in March, while overseas orders for future deliveries were up by more than 28%. However, domestic sales fell by 27% to 295,000 as demand fell due to the end of the country's car scrappage scheme, which closed in September last year.

In Case You Had Any Confusion About Why Oil Is Surging,This Chart Of Chinese Car Sales Should Clear That Up - Don't just look at the orange chart. Look at the year over year growth of nearly 60%. Given that China is the marginal buyer of oil, and arguably setting the price with its imports of crude, the connection here is hard to argue. (via Waverly Advisors)

China Boosts Oil Imports 29%, Remains Net Fuel Buyer  (Bloomberg) -- China, the world’s second-biggest energy consumer, increased March crude oil imports by 29 percent from a year earlier and remained a net importer of fuel as the country’s economic recovery drove demand. Crude imports reached 21.1 million metric tons, or 4.98 million barrels a day, preliminary data released by the General Administration of Customs showed today. Net imports were 20.8 million tons, second only to December’s record 20.9 million tons. Exports of Chinese-made goods rose 24.3 percent in March, spurring fuel consumption by factories. China may post a new all-time high for crude imports this year as a resurgent economy drives fuel-demand growth, an estimate from China National Petroleum Corp. showed on Feb. 4.

More on Oil's Impact on Consumption - Americans buy a little less than 12 billion gallons of gasoline in a typical month. 12 billion gallons per month of gasoline is a lot, but according to the EIA, total crude use is almost double the level used in gas (about 18.5 million barrels per day x 42 barrels per gallon x 365 days / 12 months = 24 billion gallons per month). Using this "total" level and comparing it to personal income based upon market prices at each point, we can see how much of a drag the spike in oil would have impacted 'consumption ex oil'. We can also see why "this time" may not be so bad... the overall level of personal income that is allocated to oil is currently not much higher than what we saw pre-crisis (and much lower than 2008 levels).

US Still Dumping Subsidised Biodiesel In Europe - Despite the introduction of punitive anti-dumping duties brought into force last summer, US biodiesel is still being shipped into Europe reports suggest. A 10,000 MT shipment was recently seized in Italy, having been shipped into the ports of Venice and Trieste in mid-March.  The consignment was declared as Canadian origin, but strong evidences indicate that it instead originates from the US where it benefited from the US illegal subsidies, the European Biodiesel Board (EBB) says. The EBB has repeatedly raised the attention of EU authorities that these duties are being circumvented, either via triangular trade through various other countries (including Canada), or various artificial blends which are then imported into Europe.

Newsweek Gets Coal Terribly Wrong - Daniel Stone published a dreadful piece on coal and energy over at Newsweek’s The Gaggle called “West Virginia Mine Disaster Unlikely to Affect National Energy Debate.”  Guest blogger JW Randolph of Appalachian Voices, debunks it fully in this WR repost. David Roberts at Grist responded to Energy Committee Staffer Bill Wicker for a quote he had in the article, and it’s well worth the read. But the article was so full of misinformation and false pretexts that I wanted to spend some pixels correcting a few things, beginning with this paragraph:

Natural Gas May Be Worse for the Planet than Coal - - This week the U.S. Congress heard testimony supporting a bill that would push to replace diesel with natural gas in heavy vehicles. It's an attempt to cut oil imports, and at the same time reduce greenhouse gas emissions. Part of the argument is that natural gas is substantially cleaner than diesel, and results in the emission of about 25 percent less greenhouse gas.  But experts are warning that natural gas might not be as clean as it seems.  In fact, using natural gas rather than diesel in vehicles could actually increase climate change, Howarth is basing his conclusion on a preliminary analysis that includes not only the amount of carbon dioxide that comes out of a tailpipe when you burn diesel and natural gas, but also the impact of natural gas leaks. Methane, the main component of natural gas, is much more effective at trapping heat than carbon dioxide, so even small amounts of it contribute significantly to global warming.

Clean Coal Catch-22 - Coal will keep fueling national and world energy needs for decades to come, but that doesn't have to mean a dirty-power future, coal-industry executives told a House committee yesterday. Many environmental advocates have contended that technology to trap greenhouse gases emitted by coal-fired power plants is years away and will come only at a tremendous cost. But executives of Peabody Energy, Arch Coal and the Rio Tinto mining company, along with the head of the Ohio Coal Association, told lawmakers that clean-coal technology must be developed before steep penalties on emissions are put in place by federal regulators or climate-change legislation.Just so I'm straight. Carbon pricing legislation will provide incentives to develop clean coal technologies. But legislation shouldn't be considered until clean coal technologies are developed.

A ton of SO2 costs less than a beer?* - From the Clean Air Markets page at the USEPA: The 2010 SO2 Allowance Auction took place on March 23, 2010. Allowances were auctioned that could first be used in 2010 as well as in 2017. Notice how much the price has plummeted. All oddly timed with the  start of the Clean Air Interstate Rule, not the intended outcome I presume.** Here are the posts to the 2008 and 2009 auction results.

Growth And Greenhouse Gases - Krugman - So I’ve gotten some pushback from environmentalists on the proposition in my mag piece that we can afford, at real but modest cost, to limit greenhouse gas emissions. Oddly, it comes from two directions. On one side, there are those who insist that greening the economy is win-win: more jobs, more growth, as well as less carbon. On the other, those who insist that you can only be serious about protecting the planet if you admit that we have to give up on economic growth. On the first: there is actually a fair bit of evidence that many energy-saving measures would also be cost-saving, even at current prices. Like most economists, I take these estimates with a grain of salt: if these actions really are cost-saving, why aren’t they being taken already? Isn’t that an indication that there are hidden costs?

Global warming graph attacked by study - A key piece of evidence in climate change science was slammed as “exaggerated” on Wednesday by the UK’s leading statistician, in a vindication of claims that global warming sceptics have been making for years. Professor David Hand, president of the Royal Statistical Society, said that a graph shaped like an ice hockey stick that has been used to represent the recent rise in global temperatures had been compiled using “inappropriate” methods. “It used a particular statistical technique that exaggerated the effect [of recent warming],” he said. The criticism came as part of a report published on Wednesday that found the scientists behind the “Climategate” e-mail scandal had behaved “honestly and fairly” and showed “no evidence of any deliberate scientific malpractice”.

Will 2010 be the warmest year? - Well, how is the satellite record looking lately? I moseyed over to the AMSU-A temperatures site maintained by Roy Spencer of the University of Alabama at Huntsville (a favourite of the denialosphere for his consistently lower warming trend) and Danny Braswell of NASA and did the following, which you can repeat to update the results: The orange line that stops in April is the daily temperatures for this year. Observe that since 10 January, every day has had the highest temperature for that date in the satellite record going back to 1998. This particular data only starts partway through 1998 so we don’t have the complete picture back to the last record or near-record year (depending whose data you look at; some put 2005 slightly higher than 1998) but if this trend continues, 2010 will easily set a new record for satellite temperatures. Is this because we’re in a super-monster El Niño? Not if you look at the SOI (most recent values at time of writing from the Australian Bureau of Meteorology):

Bye-bye, global cooling myth: Hottest March and hottest Jan-Feb-March on record- IT was the hottest March in both satellite records (UAH and RSS), and tied for the hottest March on record in the NASA dataset.  It was the hottest (or tied for hottest) January through March in all three records.The record temperatures we’re seeing now are especially impressive because we’ve been in “the deepest solar minimum in nearly a century.” It now appears to be over. It’s just hard to stop the march of anthropogenic global warming, well, other than by reducing greenhouse gas emissions, that is. NASA’s prediction from last month is standing up:  “It is nearly certain that a new record 12-month global temperature will be set in 2010.″ Actually, NASA made that prediction back in January 2009: Given our expectation of the next El Niño beginning in 2009 or 2010, it still seems likely that a new global temperature record will be set within the next 1-2 years, despite the moderate negative effect of the reduced solar irradiance.”

"Missing" heat could haunt us (Reuters) - The rise in greenhouse gases in the atmosphere means far more energy is coming into Earth's climate system than is going out, but half of that energy is missing and could eventually reappear as another sign of climate change, scientists said on Thursday.In stable climate times, the amount of heat coming into Earth's system is equal to the amount leaving it, but these are not stable times, said John Fasullo of the U.S. National Center for Atmospheric Research, a co-author of the report in the journal Science.The gap between what's entering the climate system and what's leaving is about 37 times the heat energy produced by all human activities, from driving cars and running power plants to burning wood. Half of that gap is unaccounted for, Fasullo and his co-author Kevin Trenberth reported. It hasn't left the climate system but it hasn't been detected with satellites, ocean sensors or other technology.

CO2 at 400 ppm may be enough to push the collapse of Greenland's ice sheet past its tipping point - Combined gravity and GPS measurements show that rapid melting of Greenland's icecap spread from southern to northwest Greenland over the past decade. These results are consistent with a new model study which predicts failure of the icecap from beginning from northwest Greenland as CO2 levels rise above 400 parts per million (ppm). Until the sudden spread to the northwest in 2007 ice melt in Greenland had been largely confined to the south. Combined satellite gravity and GPS measurements are apparently showing that outlet glaciers beginning to move large amounts of ice from the northwestern margin of Greenland's ice cap. Direct link to Greenland ice melt mpeg movie. The extreme warmth over Greenland this winter will likely add to the increasing rate of melt in northwest Greenland. Warm water around southern Greenland and storms in the Labrador sea have warmed the atmosphere over the Greenland ice cap. This could be the beginning of the process that causes the collapse of the ice sheet over northwest Greenland.

NASA: Melt Season in the Arctic Getting Longer - The icy cap over Earth’s North Pole reaches its summer minimum in September and its winter maximum in late February or early March. Satellite observations since 1979 have shown that amount of ice that survives the summer is getting smaller; declines have been especially dramatic in the past decade. Recently, scientists from NASA and the National Snow and Ice Data Center described another way Arctic sea ice is changing: the summer melt season is getting significantly longer. This trio of images shows changes between 1979 and 2007 in the average date of melt onset in the spring (left), the first autumn freeze (center), and the total average increase in the length of the Arctic sea ice melt season. The color scales show the trends in days per decade. Red indicates trends consistent with warming: earlier melt onset, later freezes, and longer total melt season. White indicates little or no change. The maps are based on satellite observations of microwave energy radiated from the ice. (Even a small amount of melt water on snow or ice dramatically changes the way the surface looks in the microwave part of the electromagnetic spectrum.)

P. Huybers & C. Langmuir, Earth Planet. Sci. Lett., 286 (2009), Feedback between deglaciation, volcanism, and atmospheric CO2 - CO2 output from the increased subaerial volcanism appears large enough to influence glacial/interglacial CO2 variations. We estimate subaerial emissions during deglaciation to be between 1000 and 5000Gt of CO2 above the long term average background flux, assuming that emissions are proportional to the frequency of eruptions. After accounting for equilibration with the ocean, this additional CO2 flux is consistent in timing and magnitude with ice core observations of a 40-ppm increase in atmospheric CO2 concentration during the second half of the last deglaciation. Estimated decreases in CO2 output from ocean ridge volcanoes compensate for only 20% of the increased subaerial flux.  If such a large volcanic output of CO2 occurs, then volcanism forges a positive feedback between glacial variability and atmospheric CO2 concentrations: deglaciation increases volcanic eruptions, raises atmospheric CO2, and causes more deglaciation. Such a positive feedback may contribute to the rapid passage from glacial to interglacial periods. Conversely, waning volcanic activity during an interglacial could lead to a reduction in CO2 and the onset of an ice age. Whereas glacial/interglacial variations in CO2 are generally attributed to oceanic mechanisms, it is suggested that the vast carbon reservoirs associated with the solid Earth may also play an important role.

Trends and patterns in sea ice age distributions within the Arctic Basin and their implications for changes in ice thickness and albedo - However, it has been claimed that since 2007 the Arctic ice has been recovering. What does the actual data from Arctic studies show? Here we look at recent data and multiple strands of independent evidence to see if this claim has any basis in reality. Temperature, almost by definition, is the main factor that governs seasonal melting and re-freezing of ice. The amount of Arctic sea ice can almost be regarded as a self calibrating proxy for regional temperature, but there are several inter-related dynamic factors driving the high latitude weather patterns, air and oceanic temperatures, currents, and thus ice area and thickness. These causal factors will be the subject of a future post. Certainly, average temperature over the central Arctic has increased more than in any other region of the planet over at least the last fifty years, and the average length of the ice melt season has significantly increased over the past three decades (Markus 2009, Howell 2009, Rodrigues 2009).

Rising Water Temperatures Found in US Streams and Rivers - New research by a team of ecologists and hydrologists shows that water temperatures are increasing in many streams and rivers throughout the United States. The research, published in the journal Frontiers in Ecology and the Environment, documents that 20 major U.S. streams and rivers -- including such prominent rivers as the Colorado, Potomac, Delaware, and Hudson -- have shown statistically significant long-term warming. By analyzing historical records from 40 sites located throughout the United States, the team found that annual mean water temperatures increased by 0.02-0.14°F (0.009-0.077°C) per year. Long-term increases in stream water temperatures were typically correlated with increases in air temperatures, and rates of warming were most rapid in urbanized areas.

Stefan Rahmstorf: A new view on sea level rise - Has the IPCC underestimated the risk of sea level rise? - Recent studies predict that sea level could rise by more than one metre this century if greenhouse gas emissions continue to escalate. Over the course of the twentieth century, the rate of sea level rise has roughly tripled in response to 0.8 °C global warming2. Since the beginning of satellite measurements, sea level has risen about 80% faster, at 3.4 mm per year3, than the average IPCC model projection of 1.9 mm per year. The difference between the semi-empirical estimates and the model-based estimates of the IPCC can be attributed largely to the response of continental ice to greenhouse warming. The IPCC range assumes a near-zero net contribution of the Greenland and Antarctic ice sheets to future sea level rise, on the basis that Antarctica is expected to gain mass from an increase in snowfall. Observations show, however, that both ice sheets have been losing mass at an accelerating rate over the past two decades4.

A second garbage patch: Plastic seen in Atlantic - Researchers are warning of a new blight at sea: a swirl of confetti-like plastic debris stretching over a remote expanse of the Atlantic Ocean.The floating garbage — hard to spot from the surface and spun together by a vortex of currents — was documented by two groups of scientists who trawled the sea between scenic Bermuda and Portugal's mid-Atlantic Azores islands. The studies describe a soup of micro-particles similar to the so-called Great Pacific Garbage Patch, a phenomenon discovered a decade ago between Hawaii and California that researchers say is likely to exist in other places around the globe."We found the great Atlantic garbage patch," The debris is harmful for fish, sea mammals — and at the top of the food chain, potentially humans — even though much of the plastic has broken into such tiny pieces they are nearly invisible.

Lovelock: We Can't Save the Planet (BBC video series) The man who achieved global fame for his theory that the whole earth is a single organism now believes that we can only hope that the earth will take care of itself in the face of completely unpredictable climate change.  Interviewed by Today presenter John Humphrys, videos of which you can see below, he said that while the earth's future was utterly uncertain, mankind was not aware it had "pulled the trigger" on global warming as it built its civilizations.  What is more, he predicts, the earth's climate will not conveniently comply with the models of modern climate scientists.

Growth And Greenhouse Gases - Krugman -So I’ve gotten some pushback from environmentalists on the proposition in my mag piece that we can afford, at real but modest cost, to limit greenhouse gas emissions. Oddly, it comes from two directions. On one side, there are those who insist that greening the economy is win-win: more jobs, more growth, as well as less carbon. On the other, those who insist that you can only be serious about protecting the planet if you admit that we have to give up on economic growth.

Come on! You don't give the same discount rate to insurance as stock, and that includes global warming insurance!  - Paul Krugman recently had a long New York Times article on the economics of global warming. The vast majority of it was very good for laypeople, as you would expect from the great Nobel Prize winning economist, but this part I really didn't like: The policy-ramp advocates [most notably William Nordhaus with his DICE model] argue...costs that far in the future should not have a large influence on policy today. They point to market rates of return, which indicate that investors place only a small weight on the gains or losses they expect in the distant future, and argue that public policies, including climate policies, should do the same...As a professional economist, I find this debate painful. There are smart , well-intentioned people on both sides and each side has scored some major points.

What’s Missing in Paul Krugman’s Climate Economics Primer But let’s start by accenting the positive.  Krugman’s explanation of mainstream environmental economics is clear and powerful.  He recognizes that there really are a lot of free energy lunches lying around uneaten, in the form of potential efficiency improvements.  He knows that predictions of economic disaster due to carbon policy are without foundation and fail to take into account the potential for innovation.  Above all, he understands that investments in minimizing climate change offer valuable insurance against potentially catastrophic outcomes—the ice-sheet meltoffs and methane megabelches that we have little ability to predict and from which we would have little chance to recover.Why ask for more?  Because three enormous concepts are completely missing....

Why cap-and-trade should (and does) have appeal to politicians - VoxEU - Are cap-and-trade schemes working? This column presents a summary of eight existing schemes arguing that half meet the independence property whereby the initial allocation of property rights does not affect the environmental or social outcome and the scheme is cost-effective. This success is a contrast with other policy proposals where political bargaining reduces the effectiveness and drives up cost.

Climate change and the pattern of trade: Historical evidence - What are the likely economic effects of climate change? This column examines the impact of changes in climate on detailed export data. If a poor country is one degree Celsius warmer in a given year, its exports are lower, by as much as 5.7%. While there is no effect on rich countries’ exports, their consumers will still suffer from reduced imports at higher prices.

Why US Agri Protectionism is Subsidizing Brazil- I have covered the story of Brazil taking the US to the WTO over the latter's agricultural supports for cotton growers many, many times [1, 2, 3, 4]. As TIME nicely summarizes below, the WTO ruled in Brazil's favour and asked the US to remove the offending subsidies. However, instead of removing them, the US has continued them and arguably made them worse with the passage of the 2008 Farm Bill. And so Brazil has been entitled to apply retaliatory tariffs and skirt certain intellectual property provisions. Since the US did not particularly like either sanction, it has come to a settlement where America pays Brazil a cool $147.3 million until the 2008 Farm Bill runs its course. Just think: the US is paying its growers fat subsidies...and those of Brazil too. Whether congresspersons will come to their senses when 2012 comes around (and the next Farm Bill is drawn up) is certainly an open question as they don't seem to have learned their lesson just yet:

Wrong Headline - A headline in a story in today’s NYT: “Imports Rose in February, Building Hope for Recovery” The headline should have read: “Imports Rose in February, America Borrow More From Overseas” or “Imports Rose in February, America Sinks Deeper into Debt” or “Imports Rose in February, No Wonder Americans Are Having a Tough Time Finding Jobs”

Trade Deficit increases in February - The Census Bureau reports: [T]otal February exports of $143.2 billion and imports of $182.9 billion resulted in a goods and services deficit of $39.7 billion, up from $37.0 billion in January, revised.The first graph shows the monthly U.S. exports and imports in dollars through February 2010.On a year-over-year basis, exports are up 14% and imports are up 20%. This is an easy comparison because of the collapse in trade at the end of 2008 and into early 2009. This is the first time since late 2008 that imports are up a greater percentage than imports on a YoY basis as export growth appears to have slowed.

Trade Deficit in U.S. Widens More Than Anticipated as Import Demand Grows(Bloomberg) -- The trade deficit in the U.S. widened in February more than anticipated as Americans snapped up foreign-made televisions and computers, illustrating the rebound in economic growth. The gap increased 7.4 percent to $39.7 billion from a revised $37 billion the prior month, the Commerce Department said today in Washington. Imports climbed 1.7 percent, outpacing a gain in exports that pushed sales abroad to the highest level since October 2008. The global recovery from the worst economic slump in the post-World War II era means imports and exports will probably keep growing in coming months. Rising surpluses with emerging economies in Asia and Latin America point to gains in overseas demand

Feb Trade Deficit above expectations - The Feb Trade Deficit was $1.2b above expectations at $39.7b and up from $37b in Jan. The rise in the deficit was due to a 1.7% gain in imports which offset a .2% rise in exports. The import gain was led by semi’s, computer related items, crude oil, pharmaceuticals and services. The modest export gain was led by semi’s, auto’s and industrial supplies. Bottom line, with the slowly improving US economy and US consumers beginning to spend again, whether due to pent up demand or something more, the US Trade Deficit is back near its highest level since Dec ‘08. The key to long term economic health though will be a greater contribution from exports and less on borrowing and spending all over again (US savings rate down to 3.1%, the lowest since Dec ‘08). The higher than expected number today, with all else equal, will lead to a .1 of a % pt decrease in Q1 GDP estimates.

Guest Contribution: Dani Rodrik on China’s Fat Trade Surplus - This morning, the International Monetary Fund advised China and other countries with big trade surpluses that they can slash those surpluses without sacrificing economic growth by adopting a toolkit of measures including revaluing their currencies, shifting policies toward domestic consumption and pursuing more sophisticated markets. The IMF report, part of its semi-annual World Economic Outlook, frequently cites the work of Harvard economist Dani Rodrik in reaching its conclusion. Here’s Mr. Rodrik’s thoughts, e-mailed to the Wall Street Journal’s Bob Davis:

A Chinese Trade Deficit? - From Reuters: China's $7.24 billion deficit in March, the first time the trade balance has been in the red since April 2004, mainly reflected strong imports of oil, raw materials and cars, the General Administration of Customs said on Saturday. Here is a time series plot of the log trade weighted real value of the Chinese yuan, and the (annualized) trade balance.The general consensus appears to be that the deficit was driven by distortions in output and shipping around the lunar new year, in combination with a surge in imports to be used in exports.

A Chinese trade deficit - AS PROMISED, China's economy ran a current account deficit in the month of March, the first monthly trade deficit since 2004. Strong imports of natural resources and cars were primarily responsible. On a year-over-year basis, imports rose 66% in March, while exports rose 24%. Barack Obama will be meeting with Hu Jintao this week, and the currency issue will still be on the table. Some revaluation of the renminbi remains both desirable and inevitable. Economists are indicating that the deficit might just be a one-month blip, and they have a point. But as the following chart, from Menzie Chinn, indicates, the broader trend seems clear:

China records rare $7.2bn trade deficit- China on Saturday announced a rare deficit in its politically sensitive trade balance for March, the first in six years, bolstering Beijing’s argument that the value of its currency only has a limited impact on international trade flows.News of the $7.2bn deficit comes at a fortuitous time for Beijing, which is under pressure particularly from the US to allow the renminbi to appreciate – a move which would make American exports to China relatively cheaper. Timothy Geithner, US Treasury secretary, this week made an unscheduled visit to Beijing for talks with Wang Qishan, the Chinese vice-premier responsible for economic affairs, as the US Congress has been putting pressure on the White House to force a change in China’s currency regime. The fact that China in March had its first monthly trade deficit in six years, even though the renminbi had held steady, had shown yet again that the exchange rate was not decisive in determining trade flows, Yao Jian, the ministry’s spokesman, said on its website.

What China's Trade Deficit Means - China posted a trade deficit – no, that's not a typo, I did mean deficit – in March, of $7.2 billion. That's the first monthly deficit since 2004. It couldn't come at a more auspicious time, for China that is. Beijing is in the middle of a tug-of-war with Washington over the value of its currency, and the deficit takes a bit of steam out of the American position that the yuan is grossly undervalued. Politicians in Washington have insisted that China purposely keeps the yuan (also known as the renminbi) at an artificially cheap level, giving its exports an unfair cost advantage in global markets and fueling China's persistent trade surpluses.  The March trade deficit does not settle the controversy about China's currency regime.  The March figure could well be a one-off event, or at best a sign of a very temporary phenomenon. The deficit was caused by an unusually large level of imports (up 66% year-on-year), especially of the raw materials needed to fuel China's recession-busting infrastructure binge.

Bernanke: U.S. Should Press China on Yuan Policy - The U.S. should continue to press China on its foreign exchange policy, Federal Reserve Board Chairman Ben Bernanke said Wednesday, agreeing with a top Democratic senator that the level of the yuan was one of the causes of the global recession. Bernanke agreed with Democratic Sen. Charles Schumer (D., N.Y.) that China’s currency exchange policy was a major cause of “harmful of global imbalances.” He said China would benefit from a more flexible yuan. Combined with other steps by the Chinese government, Bernanke said a rising yuan would encourage the development of domestic consumption in China.

China Official: Won't Bow To Foreign Pressure On Yuan - China won't bow to foreign pressure to reform its yuan exchange-rate policy, a senior Chinese official said Tuesday. Calling the reform "an internal affair," Cui Tiankai, vice minister of foreign affairs, said at a news briefing after a two-day global nuclear-security summit that Chinese policymakers are committed to the goal of reform because it meets the nation's own need for economic and social developments But Cui argued that the yuan's value isn't the cause of many problems in the global economy. On Monday, Hu told Obama that the yuan's revaluation won't solve the trade imbalances between the two countries, nor would it address the high unemployment rate in the U.S. "You got a cold and you asked your neighbor to take pills. That won't solve the symptom of your flu," said Cui

Extreme sensitivity - THE New York Times has a fascinating story up today on the internal debate in China over the decision to revalue the currency against the dollar. It seems that leaders ultimately decided that revaluation was in China's interest, but an actual decision on a shift has been complicated by political factors—the more of a public issue the currency becomes, the harder it is to change course. The Chinese news media, which have far more freedom to report on economic issues than political ones, have framed the currency issue mainly in terms of protecting Chinese sovereignty. That has prompted a series of assurances by Chinese officials over the past four days that China will not be pushed by foreign pressure into doing anything..People close to Chinese policy makers say that officials would prefer to do it much sooner, but that it became impossible to act in the days before Mr. Hu’s visit to Washington

Why China's exchange rate is a red herring - VoxEU - The US obsession with the Chinese exchange rate is a classic example of blaming foreigners for domestic woes. This column argues that we’ve been here before. In the 1980s, the US government – reacting to political pressure from ailing US manufacturers – engineered a massive yen appreciation. That did as little to save US manufacturing jobs then as a rise in the yuan would do today.

The US-Sino currency dispute: Introducing a new eBook - Today Vox posts a new eBook “The US-Sino currency dispute: New insights from economics, politics, and law” that gathers 28 short essays written by 33 authors from around the world. The eBook provides the best available economic, legal, political, and geopolitical thinking on the confrontation, as well as on the causes and likely consequences of the dispute.

Recent estimates of Chinese Yuan misalignment - Yin-Wong Cheung, Eiji Fujii and I have just written a chapter for a VoxEU book The US-Sino Currency Dispute edited by Simon Evenett (link to blog post). After discussing the various approaches to measuring misalignment, we summarize the most recent estimates of CNY undervaluation.In our chapter, we report the most recent estimates in each of these categories (save the "equilibrium approach" which is difficult to implement), and summarize them in this chart: To recap, currency misalignment can be determined on the basis of the following criteria or models:

  • Relative purchasing power parity (PPP)
  • Absolute purchasing power parity
  • The "Penn Effect"
  • The behavioral equilibrium exchange rate (BEER) approach
  • The macroeconomic balance effect
  • The basic flows approach
  • An equilibrium approach

Is China a Currency Manipulator? – - The U.S. Treasury Department's decision to delay its annual report on whether to label China a so-called "currency manipulator," originally slated for April 15, highlighted the Obama administration's push to improve U.S.-China relations. The administration--which met with Chinese officials following the report's postponement--considered the delay an important step in efforts to persuade China to let its currency rise in value against the U.S. dollar. However, economists remain divided both on whether the yuan is undervalued and how to best influence Chinese policy on the issue. Some say China has pegged its currency to the U.S. dollar to extract unfair trade advantages with U.S. consumers. Others consider profligate U.S. spending habits and low interest rates to blame for trade imbalances. In this roundup, Morgan Stanley Asia's Stephen Roach, the Atlantic Council's Albert Keidel, CFR's Charles Kupchan, and CFR'S Sebastian Mallaby all argue the Obama administration was right to postpone its decision.

What are the costs of reducing a large current-account surplus? - As the debate over whether China should reduce its current-account surplus continues, this column examines 28 such surplus reversals in advanced and emerging market economies over the past 50 years. Surplus reversals were not associated with lower growth in output or employment. Moreover, there are better balances between external and domestic demand and between growth in the tradables and non-tradables sectors.

Exchange Rate Disorder - Project Syndicate - Two troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances. Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will still be 7% to 8% below its 2008 peak, while many or most countries, including industrial nations, are seeking to boost their current accounts. Indeed, if we believe the IMF’s projections, the world economy’s accumulated current-account surpluses would increase by almost $1 trillion between 2009 and 2012! This is, of course, impossible, as surpluses and deficits must be in balance for the world economy as a whole. It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy. Under these conditions, export-led growth by major economies is a threat to the world economy. This is true for China, Germany, Japan, and the United States.

How's that rebalancing coming? - TODAY brings news on the state of both of America's big deficits—budget and trade. The Washington Post reports some surprising news on the state of the federal budget; higher than expected tax revenues combined with lower than expected spending on financial rescues to produce a first half fiscal performance than originally forecast. As things stand, the federal deficit is on pace to come in below $1.3 trillion in fiscal 2010, while the administration initially projected a shortfall of about $1.6 trillion. Budget numbers may yet deteriorate in the second half of the year, but the news is a positive sign for growth, although it also suggests that there is more room in the budget to address continued labour market weakness, which has persisted despite an output recovery. And then there is the trade deficit.

China and the yuan: What's at stake - The agreement is widely expected to result in an immediate 2% to 3% rise in the yuan -- a fairly modest step. What could make the agreement significant, however, is if China agrees to future increases as the currency moves toward being freely traded for the first time. Laidi thinks the yuan is undervalued by 15% to 20% undervalued, and said a rise of 6% to 7% a year will be needed to start to make a significant dent in the undervaluation. That's possible, Laidi said, given that China allowed the yuan to rise more than 15% from mid-2005 to mid-2008. Some economists think the yuan is undervalued by as much as 40%. But many said there is good reason for both China and the United States to pursue a slow adjustment.

China May Post 11.7% Growth, Adding Pressure on Yuan -- China’s economy may have expanded 11.7 percent in the first quarter, the fastest pace in almost three years, making officials more likely to raise interest rates and scrap the yuan’s peg to the dollar. The median estimate in a Bloomberg News survey of 24 economists compares with a 10.7 percent gain in the previous quarter from a year earlier. The statistics bureau will release the data in Beijing tomorrow. Singapore will undertake a one-time revaluation of the nation’s dollar, the central bank said today, as Asian policy makers counter rising inflation pressures. China, accused by some U.S. lawmakers of holding the yuan’s value down to secure an unfair advantage in trade, is likely to let currency gains resume by June 30, a Bloomberg News survey of economists showed.

China's economy: On the rebound | The Economist - In the first quarter of this year Singapore’s economy performed a reverse bungy jump of its own. It grew at an annual pace of 32.1%, according to preliminary figures released on April 14th. Manufacturing shot up by 139%. The city-state’s authorities announced a “gradual” currency revaluation to reduce inflationary pressure.  Impressive in itself, Singapore’s economy may also be a bellwether for its bigger neighbours. On April 15th China reported that its economy grew by 11.9% in the year to the first quarter, its fastest pace since 2007. The strong figure increased speculation that China would follow in Singapore’s footsteps, allowing its currency to strengthen, as America and other countries have been pressing it to do. The yuan has been pegged tight to the dollar since July 2008, much to the consternation of its trading partners.

Chinese Economy Grows 11.9%, Highlighting Threat of Overheating… (Bloomberg) -- China’s economic growth accelerated to the fastest pace in almost three years in the first quarter, highlighting overheating risks that may prompt the government to scrap the yuan’s peg to the dollar.  Gross domestic product rose 11.9 percent from a year earlier, the statistics bureau said at a briefing in Beijing today. That was more than the median 11.7 percent estimate in a Bloomberg News survey of 24 economists.  A lower-than-estimated gain in consumer prices complicates a debate in Beijing on when to raise interest rates, cut in 2008 to counter the financial crisis. Australia and India have already moved and Singapore yesterday allowed a one-time revaluation of its currency as the region winds back stimulus policies to limit asset-bubble and inflation risks.  “The next policy move remains likely to be a yuan revaluation,”

China's Q1 coal output increases 28% ‎ - China's coal output grew 28 percent, year on year, to well over three-quarters of a billion tons in the first quarter, according to the National Bureau of Statistics.  The increase indicates that the country has built up large production capacity, following rapid growth in fixed asset investment, according to an analysis by the China National Coal Association. The report estimates that the nation's total coal production capacity has exceeded 3.6 billion tons. Mergers and acquisitions in coal-rich areas like Shanxi Province, Henan Province, and the Inner Mongolia Autonomous Region are expected to create large mining companies, and further raise production level

Is China's Economy Overheating? - China's gross domestic product grew a spectacular 11.9% in the first quarter of 2010, compared to the same period a year before. Qu Hongbin, an economist with HSBC, figures that China's GDP is expanding at an annualized rate of nearly 11%.That's darn fast. Perhaps too fast. Reports from economists about the Q1 figures featured the word “overheating.” It's hard to tell when a rapid-growth economy like China's is overheating, but economists are getting concerned that some of the risks associated with China's giant stimulus program – inflationary pressures and asset bubbles – are intensifying. That was clear in other data released on Wednesday that solidified fears that China's roaring real estate market is heading into dangerous nosebleed territory. The government's main urban property-price index rose a whopping 11.7% in March from a year earlier, the largest increase in five years. This jump comes despite concerted efforts by the Chinese government since late last year to cool off the market by, for example, tightening up mortgage lending.

China’s property bubble - VoxEU - One objection to the calls for China to let its currency appreciate argues that the yen's appreciation during the 1980s was a cause of Japan’s “lost decade”. This column instead blames policymakers for not dealing with Japan’s property bubble early enough. China should learn from these mistakes with its own property bubble and let the renminbi appreciate.

China Raises Home Mortgage Rates, Down Payments   (Bloomberg) -- China’s cabinet raised minimum mortgage rates and down payment ratios for some home purchases, saying “more forceful” steps are needed to cool speculation after property prices rose at a record pace in March.  Down payments for second homes must be at least 50 percent, up from 40 percent, and interest rates can’t be lower than 110 percent of benchmark rates, the State Council said in a statement, citing decisions made during a meeting yesterday. Banks should also raise down payment ratios and rates for third homes “by a broad margin.”  The State Council said local governments have failed to control speculation, a day after a survey showed property prices in 70 cities jumped 11.7 percent from a year earlier. China’s economy grew at the fastest pace in almost three years in the first quarter, a report showed today, fanning concern that record lending is creating asset bubbles.

No room to relax | Andy Xie –The central government has unleashed another round of property tightening measures. This time it is focusing on mortgage lending terms: the mortgage interest discount for first-time homebuyers has been reduced; the discount for second-time homebuyers has been abolished and the down payment requirement raised to 40%; and the rate for third-time buyers is being left to the banks' discretion with down payments raised to 60%.Predictably, sales volumes in both primary and secondary markets have collapsed. But no one is panicking, not even those who live off the property bubble. Why? Aren't they supposed to be terrified of the government's crackdown?It seems we have seen this movie before. China has launched property-tightening measures several times but it relaxed them just when they began to bite. The bottom line is that local governments, and the central government through them, depend very much on property for revenue.

Five myths about China's economy - China's stunning economic rise is one of the biggest stories of this generation. In just three decades since beginning to embrace market economics, China has left its desperate poverty behind to become the world's top exporting nation. The transformation has occurred so quickly that myths and misperceptions abound about the challenges and opportunities that China poses to America and the rest of the world.

How Big Is China and How Ignorant Are They at the WAPO? - Those are the questions that readers of the WAPO's Sunday Outlook section must be asking. The Post told readers that: "this year, China's economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world's second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy."This reflects China's GDP measured on an exchange rate basis. However, economists typically use purchasing power parity measures of GDP for international comparisons. By this measure, China's economy is expected to be about $9.5 trillion this year. At its current growth rate, it will pass the size of the U.S. economy in about five years.

BBC News - China bank lending falls sharply - Lending by Chinese banks fell sharply in the first three months of the year after the government's efforts to clamp down on new loans proved successful. Banks lent 2.6 trillion yuan ($381bn; £247bn) between January and March, a 43% drop on the 4.6tn yuan they lent a year earlier, the central bank said. The state is trying to curb lending to prevent the economy from overheating and prices from rising too fast. It has set a limit for lending for the whole of 2010 of 7.5tn yuan.

Oil, Not China, Is Real Destroyer of America's Trade Balance- UBS's head of Asia-Pacific economics argues that the real global trade imbalance isn't U.S.-China, it is U.S.-oil. As shown below, current account surpluses from fuel exporting-nations have been a far larger driver of total global trade imbalances coming from emerging markets.  China's current account surplus (in blue) has been large in recent years, as a percentage of the global economy, but it has been dwarfed by fuel exporters (in green):Looking at the movements from the late 1990s through 2006, when the overall U.S. deficit worsened from 2 percent of GDP to nearly 7 percent of GDP at the trough, a full three percentage points of that adjustment came from other advanced economies and from fuel imports; only two percentage points came from China and other non-fuel emerging markets. And the recent drop in the U.S. deficit had almost nothing to do with China; again, it was oil prices and developed trade that explains the entire swing over the past 18 months.

US Military Warns Of Oil Shortages By 2015 With Significant Economic And Political Impact, Especially On Weak Countries, India And China- A report issued by the US Joint Forces Command has a rather bleak view on US oil production, and on peak oil in general. In a foreword to the report issued by General James Mattis, he warns that "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day." While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India."

China Metal Quotas Limit U.S. Smart-Bomb Output, Lawmakers Told - (Bloomberg) -- The U.S. military depends on China for the metals required to build smart bombs, night-vision goggles and spy radar, according to a report to Congress obtained by Bloomberg News. China controls 97 percent of production of materials known as rare earth oxides, giving it “market power” against the U.S., the Government Accountability Office said in the report. The materials -- found in General Dynamics Corp.’s M1A2 Abrams tank and Aegis SPY-1 radar made by Lockheed Martin Corp. -- are so irreplaceable that suppliers to military equipment makers could be buying from China for years to come, the GAO said. The U.S. needs to rebuild a domestic industry for the metals after mining in the U.S. lapsed and production migrated to Chinese suppliers, according to members of Congress

China signals softer stand on Taiwan trade - China has signalled it may accept an unbalanced deal on agriculture to reach a broad trade pact with Taiwan.  China, which allows the import of Taiwanese food products, has agreed not to demand that Taipei further open up its doors to Chinese products and is even considering a request to further reduce its tariffs on certain agriculture items from Taiwan.  The gesture by China, a leading exporter of many food products, is aimed at placating Taiwanese farmers, who have emerged as strong opponents of the proposed trade deal. Both governments are keen to sign the deal, which would be seen as a major milestone in improving bilateral relations and pave the way for Taiwan to pursue trade deals with other countries which have been reluctant to annoy Beijing by moving first. Taiwan has been left behind as other countries in the region have signed a flurry of bilateral and regional pacts. Efforts to advance a deal with the US, its most important political ally, have stalled in part because of domestic opposition to US demands for greater market access for farm goods, most recently certain beef products.

It Lives! Asian Monetary Fund, Meet AMRO - In previous posts, I've reflected on how the Chiang Mai Initiative Multilateralization (CMIM) had the potential to improve matters by building regional safeguards as Hu suggested as well as an Asian financial infrastructure. Together with the Asian Bond Market Initiative (ABMI) and the Credit Investment Guarantee Facility (CGIF) which I will have more to say about in the future, there already is an emerging infrastructure. The CMIM's history is generally well known. During the Asian financial crisis, a Japan concerned with possible unravelling of its regional production networks proposed the creation of an Asian Monetary Fund (AMF) in July of 1997. However, the Americans were unhappy with this proposal. It prompted Treasury Undersecretary Larry Summers to call Vice-Minister for International Finance Eisuke Sakakibara (known in financial circles as Mr. Yen) and yell in true ugly American fashion, "I thought you were my friend!" Still, Asian countries felt the cause important enough to face down American pressure to eventually propose the Chiang Mai Initiative

The BRICs: Plotting a New World Order? - There's something that smells inherently revolutionary, or at least counter-culture, about these summits. Rather than meeting in a global forum such as the G20, with the developed world included, the fact that these four up-and-comers go out of their way to huddle on their own leaves the impression that they're plotting what the world will look like when they're in charge. Yet in the end, nothing so radical appeared to be taking place.What made this latest BRIC summit interesting was how little they had to say about what they want the new world order to be. Instead, they just want a bigger piece of the existing world order. In the summit communiqué, which you can read here, you'll have to get through all the usual diplomatic niceties about forging better relations and a more peaceful world (blah, blah, blah), before finding any real meat. The strongest point concerns the International Monetary Fund and World Bank. Here's a bit of the statement:

Indian call centers promote school enrollment » Emily Oster and Bryce Millett report: Over the last two decades in India there have been large increases in outsourced jobs and large increases in schooling rates, particularly in English. Existing evidence suggests the trends are broadly related. In this paper we explore how localized these impacts are; this has implications for understanding how quickly information about these jobs diffuses. We use panel data on school enrollment from a comprehensive school-level administrative dataset. This is merged with detailed data on Information Technology Enabled Services (ITES) center location and founding dates. Using school fixed effects, we estimate the impact of introducing a new ITES center in the vicinity of the school on enrollment. We find that introducing a new ITES center results in a 5.7% increase in number of children enrolled; these effects are extremely localized.

India has more mobile phones than toilets: UN report - Far more people in India have access to a mobile phone than to a toilet, according to a UN study on how to improve sanitation levels globally. India's mobile subscribers totalled 563.73 million at the last count, enough to serve nearly half of the country's 1.2 billion population.But just 366 million people - around a third of the population - had access to proper sanitation in 2008, said the study published by the United Nations University, a UN think-tank. "It is a tragic irony to think in India, a country now wealthy enough that roughly half of the people own phones," so many people "cannot afford the basic necessity and dignity of a toilet," said UN University director Zafar Adeel.

Time for toilet deregulation? - Right now, India has more cell phones than toilets. That’s the headline buzzing over the wires today, thanks to the latest phones-to-toilets ratio released by the United Nations. It’s certainly a dramatic factoid. But it’s not just true of India’s 1.2 billion-strong population — this lopsided statistic is true around the globe, as well. This is from the Global Poverty blog. The most obvious explanation: And though the mobile sector has seen massive private investment — thanks in many countries to telecommunications deregulation — few corporations are clamoring to provide better sanitation for the poor. (This picture is from an earlier Aid Watch blog reporting a happy encounter with the private sector toilet service industry in Ghana.)

Why Humanity Loves, and Needs, Cities - For much of its early existence, our species spread out.Many millennia ago, we left our primordial homes in search of places where fewer people were competing over nature’s abundance. In the 19th century, settlers extended across North America to get access to Iowa’s rich soil and Montana’s mines. But now humanity is marked more by concentration than by spread. In 2007, one-half of the world’s population became officially urban. One-third of Americans inhabit just 16 large metropolitan areas, which collectively use only a tiny fraction of the country’s land mass.Given the vastness of the globe, why do human beings choose to live so close to one another?

Me and Lady Gaga - - I have gotten as excited as anyone else by social networks. A previous blog post talked about intra-ethnic-group networks that are useful for enforcing contracts and deterring cheating. Another important social network function is spreading information. A paper forthcoming in the American Economic Review by Tim Conley and Chris Udry describes how Ghanaian farmers were more likely to succeed at growing pineapples for export the more successful were neighbors already growing pineapples. Pineapple growing is very sensitive to having too much or too little fertilizer, so it was useful that farmers could adapt their fertilizer use based on what had worked for their neighbors.A similar paper finds that farmers in Mozambique are more likely to adopt a profitable new crop (sunflowers) if someone in their family and friends network had done so.

Does health aid to governments make governments spend more on health? -There is new evidence, from a study from the Institute for Health Metrics and Evaluation published in the Lancet last week, showing that this story doesn’t describe what’s really going on. Overall, global public health financing shot up by 100 percent over the last decade, but the study’s authors found that on average, for every health aid dollar given, developing country government shifted between $.43 and $1.17 of their own resources away from health. The trend is most pronounced in Africa, which received the largest amount of health aid.The finding that health aid substitutes for rather than complements existing government health spending has caused a mini- scandal in the press precisely because it runs so counter to people’s optimistic expectations, perpetuated by aid agencies’ fund-raising campaigns, about the level of control that donors can exert over the spending of developing country governments.

US demand down for special work visas - The US Citizenship and Immigration Services said last week that it has received about 13,500 requests for its standard H-1b visas since it began accepting applications on April 1. That’s far fewer than the 42,000 requests filed during the same period last year, during the worst of the recession.The agency sets an annual quota of 65,000 of the H-1b visas. Companies, rather than individuals, apply for the visas in order to bring foreign workers with special skills into the country to work for three to six years. H-1b visas can be used to hire all kinds of specialized workers, including chefs and fashion models, but they’re especially popular with computer and telecom munications companies.

Is Japan hurtling toward a debt crisis? - Mr. Kanno at J.P. Morgan said deflation is leading to a rise in banks and individuals choosing what they wrongly assume are “risk-free assets” in Japan government bonds (JGBs), which yield more than bank deposits. While 94 per cent of debt is currently held by domestic investors, they won't be able to finance the government indefinitely, as tax revenue flattens amid higher demands for welfare spending. “People forget about the credit crisis and the risk of JGBs,” Mr. Kanno said. “The JGB bubble will eventually burst some day. Japan's fiscal problem is a flow problem. Will domestic investors finance the deficit forever?” Within three to five years, the government deficit will exceed tax revenue, and debt servicing costs will likely rise, Mr. Kanno said. “Japanese journalists don't want to tell the truth to the Japanese public. The current public pension system will not be sustained,” he said. “All the best policies are going to have short-term pain to get the best long-term results. Without taking these risks, Japan will fall into a trap from which we can't find an exit.”

Risk of Japan going bankrupt is real, say analysts - Greece's debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation.Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population.Based on fiscal 2010's nominal GDP of 475 trillion yen, Japan's debt is estimated to reach around 950 trillion yen -- or roughly 7.5 million yen per person.

Japan's Ruling Party: Let's Go Back to ¥120/$1 - A few days ago, I discussed how Swiss currency intervention has transpired instead of Japanese currency intervention despite the yen's unusual strength. Displaying uncommon restraint, our Japanese friends have not bothered to appreciably intervene in spot currency markets since 2004. Whether Japan has not intervened due to (1) being disabused that currency intervention doesn't work or (2) US pressure is certainly up for debate. No matter; we now receive news care of the ever-reliable Reuters that the Democratic Party of Japan believes that a more realistic exchange rate is 120 yen to the dollar. And how exactly are they going to achieve that, I ask?

Japan mulls monetisation of public debt and yen devaluation Japan’s ruling party has called for drastic monetary easing to devalue the yen by 30pc and halt the slide into deflation, putting it on a collision course with the Bank of Japan. A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90. Shizuka Kamei, financial affairs minister, said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

Charity that sterilises addicts to come to UK - Drug addiction experts have reacted with horror at the revelation that a controversial American charity worker who pays addicts to be sterilised is setting up a franchise in Britain. Project Prevention, which operates out of North Carolina, has stopped more than 3,500 drink and drug addicts from having children by paying them up to £200 to seek long term or permanent forms of contraception such as an IUD implant or full sterilisation. Once the addicts prove that an operation has been carried out they are awarded a cash sum which, even the charity admits, usually goes towards feeding their habits.

Back sterling over euro says Soros - The UK is in a far stronger position to bring its fiscal policy back under control following the election than the euro area, veteran investor George Soros has said.The euro area still had a long way to go before it resolved the crisis among it members he added, saying that Greece was still at risk of falling into a ‘debt spiral’. Speaking at the annual Economist City Lecture, Soros said the lack of concessions offered in a rescue package for Greece agreed this week had highlighted the lack of effective policy making in the euro area.

BBC News - Emigration returns to crisis-hit Greece and Ireland -  In the places worst affected by Europe's economic crisis, unemployment and cuts in pay and public services are hitting the headlines. But the crisis is also having another effect with profound long-term consequences - the return of emigration. Places like Greece and Ireland thought the good times of the last decade or two had finally ended the cycle of emigration, with the brightest and best youngsters no longer feeling they had to move away. No-one believes that any more.

European Gov't Officials Offer Greece $61 Billion Rescue Package - Saddled with debt and ever increasing borrowing costs, European finance ministers said Sunday they would offer the country up to 45 billion euros ($61 billion) in financial loans at below market interest rates.The move comes after Greece’s borrowing costs surged to an 11-year high. The pledge will not only restore confidence in Greece’s ability to service its debt, but will also restore some faith in the euro, which has been in a downtrend in recent months. The euro has dropped 5.7 percent against the dollar so far this year as investors worried over the Greek debt crisis and how it would impact the rest of the 16-nation eurozone.The finance ministers said they would offer up to 30 billion euros in three year loans this year at roughly 5 percent. An additional 15 billion euros would come from the International Monetary Funnd

Full Text Of EMU Statement Of Support For Greece | zero hedge

IMF Boosts Credit Line Against Crises to $550 Billion - (Bloomberg) -- The International Monetary Fund’s board of directors approved a 10-fold increase in the size of a credit line designed to stem financial crises, adding contributors such as China to the $550 billion pool. “This will help ensure that the Fund has access to adequate resources to help members that are vulnerable to financial crises,” IMF Managing Director Dominique Strauss-Kahn said today in an e-mailed statement. The IMF in November announced an expansion of the credit line to as much as $600 billion pending approval by the board. The deal fulfills an April 2009 pledge by leaders of the Group of 20 to boost the IMF’s resources. The worst financial crisis since the Great Depression has prompted nations including Iceland, Ukraine and Hungary to seek aid from the IMF.

Germany Said to Accept EU Loan Compromise for Greece (Bloomberg) -- Germany is prepared to give Greece loans at below-market interest rates, dropping its opposition to subsidies as European finance ministers meet to discuss the terms of a lifeline for the debt-stricken nation, a European government official said. The loans would be priced above the rate charged by the International Monetary Fund, which would also participate in a European Union-led rescue, said the person, who spoke on condition of anonymity. Such an arrangement would satisfy German demands that Greece shouldn’t be given subsidized loans, the person said. Greece may receive loans for between 20 billion euros ($27 billion) and 25 billion euros at a rate of about 5 percent, Die Welt reported today, without citing anyone.

Sarkozy, Berlusconi and Trichet reportedly ganged up on Merkel, and forced her to accept the deal - News leaks of how the deal happened: Merkel had insisted on a 6% interest rate, but Berlusconi, Sarkozy and Trichet worked out the 5% among each other, and ganged Merkel into accepting it, threatening to go it alone; German reaction is furious: complaints that the government did not tell the truth when insisting there would be no bailout; German conservatives say the deal constitutes a breach of European law; Morris Goldstein criticises the deal because it puts the IMF under pressure to accept EU rules; Peter Boone and Simon Johnson argue that the markets might test Portugal; the financial crisis costs Italy 6.5% of its GDP; in his last commentary before his death, Slawomir Skrzypek writes that Poland did well to shun the euro; Dominique Moisi, meanwhile, explains how France fell out of love with Nicolas Sarkozy.

Merkel ‘Buckled’ on Greek Aid Terms, Lawmakers Say – (Bloomberg) -- German government lawmakers slammed Chancellor Angela Merkel for signing up to a European Union plan that offers Greece loans at below-market rates, saying she backtracked on a demand that “subsidies” be ruled out. “Germany buckled under the pressure -- we shouldn’t kid ourselves that such loans are anything but subsidies,” Frank Schaeffler, deputy finance spokesman for Merkel’s Free Democrat junior coalition partners, said in an interview yesterday. “The loans would hurt the euro, help Greece only temporarily. We would be standing on very thin ice, legally, economically.” Merkel dropped her demand that Greece should pay market interest rates after its bonds plunged last week, pushing the yield on its 10-year debt to an 11-year high of 7.5 percent. Her government has argued that German taxpayers’ money shouldn’t be put at risk to help a country that had lived beyond its means.

Grecian Formula 16 Now On Sale- At long last the EU has embraced Grecian Formula 16, a product guaranteed to enhance credit ratings, hair color, stock rallies, debt offerings, and improve one's libido. News on Grecian Formula 16 is everywhere you look this weekend. Please consider ... EU Readies Formula 16 Bazooka. The Wall Street Journal is reporting Europe Bankrolls Greece. Huge Bottle of Formula 16 Unveiled After months of denial about unwillingness to offer below market pricing on formula 16, the EU stepped up to the plate with a gigantic $61 billion subsidized offering. Greece Wins EU45 Billion Aid Pledge to Blunt Crisis ... Greece Denies It Needs Formula 16 Now that a bottle of formula 16 is finally on the table, Greece Denies It Needs EU Aid.

PIGS Exposure Explains ‘Shotgun Greek Wedding’  (Bloomberg) -- German and French banks’ “enormous” exposure to Portugal, Ireland, Greece and Spain explains why Europe’s biggest economies are moving to rescue their southern neighbors, Societe General SA said today in a report titled “Shotgun Greek Wedding.”  The CHART OF THE DAY shows how much money German, French, Swiss and U.K. banks have at stake in the so-called PIGS countries. Banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to the four countries, according to data from the Bank for International Settlements. Overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS.

Greek lesson: we are all in the same boat – How much worse off is Greece than the rest of the developed world? The answer, according to Dylan Grice of Societe Generale, is: not as much as you might have assumed. In fact, he points out that in many senses it is actually a little better-off than many other countries, which ought to be slightly alarming for the rest of us.In particular, he strips out a useful chart which underlines the fact that Greece (and for that matter the UK) have, on average, a far longer-dated stock of government debt than most other countries.

Robbing Pedro to pay Paul (of Greece) A variation of the old English idiom might spring to mind when reading details of the eurozone’s loan to Greece, as announced on the weekend. The rescue package consists of a €30bn “non-concessional” loan from euro-area members, plus an IMF contribution, should the Hellenic Republic ever need it. But if it is ever requested, all eurozone members will be on the hook for that €30bn.  Clearly, the region has the fiscal capacity to provide support to Greece: indeed, of the major economies around the world, the Euro area as a whole has by far the strongest fiscal position. There is some uncertainty about whether the activation of the support mechanism will eliminate all contagion risk. One problem is that other fiscally stressed countries will be contributing to the funding...

The Greek debt spreadsheet - How fabulous is this spreadsheet? It allows you to take the official Greek assumptions of what’s going to happen with respect to its fiscal situation over the next few years, and replace them with anything you like. Play around with anything in the orange cells, except for the ones saying “Nominal GDP growth”: that’s just the sum of the two rows above. It’s pretty easy to come up with some assumptions which show Greece’s debt-to-GDP ratio flattening out at somewhere north of 127%, instead of peaking at 120.6% and then falling to 113%:

Greasing the Wheels - It seems that Greece still fails to understand the difference between liquidity and solvency.  Here's an explanation for you - with last night's European Union & IMF rescue plan, Greece solves their LIQUIDITY problem.  They did nothing to solve their SOLVENCY problem.   Liquidity is cash flow - solvency is balance sheet.  This rescue plan addresses the cash flow, but does nothing to remedy the damaged Greek balance sheet.Now, obviously, the hope is that with the time they just bought themselves, Greece will be able to work out some sort of plan to address the solvency side of the equation - but that remains to be seen. Even more troubling is the continued rhetoric coming from Greek Prime Minister Papandreou (via Nemo)

Not enough – Economist - AS MENTIONED in yesterday's Link exchange, European governments have agreed to a package of loans to Greece to help cover financing needs while fiscal adjustments are made. The package is fairly generous; some €30 billion will be available the first year, with more authorised for 2011 and 2012. But big as that seems, it's unlikely to be enough. Here is The Economist: Whether it does convince the markets may soon be clear:  Greece was due to try to auction a fresh slice of short-term debt. The government needs to borrow about €11 billion by the end of May to roll over maturing debt and service interest charges. All in all, the country may need to borrow more than €50 billion in 2010 (estimates vary)...Reuters news agency quoted a Greek official as saying the country is likely to need a total €80 billion of loans over three years. If so it will be the largest multilateral rescue of a debt-ridden country yet seen.

Greek Aid Terms May Be ‘Red Herring’ Amid Recession (Bloomberg) -- Greece’s rescue package from the European Union will do little to bolster economic growth even as it staves off the immediate risk of default, said economists at Goldman Sachs Group Inc., HSBC Holdings Plc and Morgan Stanley. Euro-region finance ministers yesterday offered Greece as much as 30 billion euros ($41 billion) in loans at a rate of around 5 percent as the government cuts wages and spending to tackle the EU’s largest budget deficit. Another 15 billion euros in aid would come from the International Monetary Fund.  “The real issue will be whether Greece can regenerate growth while cutting the fiscal deficit,” Erik Nielsen, London- based chief European economist at Goldman, said in an e-mailed note. “Without growth, the debt is only sustainable if someone will finance them at much less than 5 percent” for at least the next decade. “The exact interest rate charged on the bailout package is a bit of a red herring.”

Euphoria over Greek rescue fades as first cracks appear - Euphoria over a joint EU-IMF rescue deal for Greece worth €45bn (£39.8bn) has given way to caution after angry reactions in Germany and continued concerns among bond investors that any bail-out merely delays the day of reckoning. "This is a short-run fix, not a long-run solution," said David Owen at Jefferies Fixed Income. "At the end of the day, Greece has to carry out monumental fiscal tightening even as it slides deeper into recession. They risk chasing their tail." Mohamed El-Erian, head of the US bond fund Pimco, doused hopes that his firm would soon step in to buy Greek debt, saying the rescue package at rates near 5pc does not address the underlying "solvency challenges" facing the country.

Greece hit by new debt doubts, string of strikes - Greece suffered a new setback on Wednesday when its borrowing rate shot up again to above 7.0 percent, just as taxi drivers and lawyers began a new series of strikes against huge budget cuts. The Socialist government of Prime Minister George Papandreou faces renewed doubts on international markets about its ability to borrow, and opposition at home to how draconian economic reforms will affect specific sectors. About 15,000 taxi drivers were set to demonstrate in the centre of Athens in the afternoon. Greece has to borrow heavily to avoid default and pay current bills including some pension entitlements, and the interest rate or yield it has to offer has become critical to the nation's future.

Greece's sovereign-debt crisis: Still in a spin The Economist - TWO months ago the governments of the euro zone agreed in principle to offer emergency loans to Greece. A near-panic in the bond markets has now forced them to spell out the terms of support for their stricken colleague, should it be needed. If push comes to shove, the other 15 euro-zone countries are willing to provide Greece with up to €30 billion ($41 billion) of three-year fixed- and variable-rate loans in the first 12 months of any support programme. The announcement was made by Olli Rehn, the European Union’s economics commissioner, and Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, after a telephone conference of the Eurogroup on April 11th. The chief obstacle in previous negotiations had been the interest rate to be charged for the rescue loans. Portugal and Ireland, the next-riskiest borrowers in the euro area, pay less than half as much for three-year money. Germany pays a mere 1.3%.

Soros Says Greek "Death Spiral" Risk Remains After Aid Package -  (Bloomberg) -- Greece still faces the danger of a “death spiral” because the cost of borrowing in the euro region’s rescue package is too expensive, billionaire investor George Soros said. “While it’s better than what the market is currently willing to offer, it’s still rather high,” Soros said at an event in London late yesterday organized by the Economist magazine. “It is a question of solvency. If you start charging very high rates as the market does in anticipation of solvency then that pushes you into insolvency.”

EU May Lend Greece More Than $120 Billion, Handelsblatt Says Bloomberg) -- Europe’s rescue package for Greece may turn out to be three times as large as originally announced, Handelsblatt reported, citing unidentified people in the European Commission. The package might amount to as much as 90 billion euros ($123 billion), the newspaper reported. Handelsblatt also cited a German government official as saying it could be “at least twice as high” as communicated so far. European finance ministers agreed that the program will cover a three-year period, the newspaper said, citing the transcript of a telephone conference that took place over the weekend.

Greece May Spur German Rethink, Morgan Stanley Says (Bloomberg) -- Germany might consider exiting Europe’s current monetary union to create a smaller bloc as the Greek crisis threatens to turn the euro area into a region of “fiscal profligacy,” Morgan Stanley said.  Greek rescue measures “set a bad precedent for other euro- area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time,” said Joachim Fels, co-chief global economist at Morgan Stanley in London, in an April 14 note. “If so, countries with a high preference for price stability, such as Germany, might conclude that they would be better off with a harder but smaller currency union.”

We Swirl The Bowl With Greece - Many cheered the "Greece Bailout" deal Sunday night. As I have repeatedly reported, however, there is in fact no deal.  At least not yet. The problem is that there really isn't a good reason for Greece to consent to any deal, whether they get one or not.  Specifically, their economy is contracting yet borrowing costs are rising.  This is the toxic death-spiral that inevitably follows profligate spending and debt-hiding operations when the market loses confidence. All sovereigns think they have the unlimited ability to countenance and commit fraud.  Witness the hearings on WaMu, three panels worth that I had on background all day long yesterday. Virtually every second word was "fraud" in those hearings.  Fraudulent mortgages, fraudulent underwriting, fraudulent securities sales. 

Is Greece Beginning To Consider A "Strategic" Default? - And why not - after all it's all the rage among those waiting in line for iPads so they can be first to buy "The Steve Jobs Guide for Deadbeat Dummies Trying To Learn To Read Good." Now that Obama has given his blessing to an entire generation of Americans to tear up contracts (very appropriate coming from a contract law professor), the follow up to moral hazard is resulting in not just individuals and companies, but entire nations simply opting out of paying their dues. Evans-Pritchard reports that after today's ludicrous rates on 3 and 6 month Bills the tide may be turning in Greece, with both parties in the country finally realizing its creditors will do everything in their power to bleed it dry, at "usurious" rates. With economic growth negative for a decade and debt interests quite certainly positive, the marginal difference will destroy not only economic output, but sink Greece ever more in debt, as existing creditors fund capital shortfalls at maturity (or default) by ever increasing interest rates. Greece has the option to stop funneling domestic capital to Germany later (inevitable) or sooner (if it finally makes the right decision).

Greece seeks talks on EU/IMF rescue - The Greek government has finally popped the question; Papandreou is seeking talks with the EU and the IMF about the conditionality for a loan; 10-year government bond yield rose to 7.319%, higher than before the rescue package; ECB says governments were not doing enough to avert a new crisis in future years; says global imbalances will return with a vengeance; Stark says sovereign debt crisis is the next phase of the global financial crisis; Germany’s economic institutes say eurozone imbalances are a problem, but not our problem; Stark sees inflation risks on the upside due to commodity price rises; eurozone wages rose by 2.6% in 2009; Gillian Tett says not maths, bad maths is to blame for the crisis; Joachim Fels, meanwhile, says the end of the euro is nigh.

Deflation the only option for Greece: IMF chief (Reuters) - Deflation is the only way Greece can effectively tackle its debt problems, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn was quoted on Monday as saying. "The only effective remedy that remains is deflation," Strauss-Kahn told Austrian magazine profil in an interview. "And this is exactly what the European Commission has correctly recommended."Euro zone finance ministers approved a 30-billion-euro ($40 billion) emergency aid mechanism for debt-plagued Greece on Sunday, but stressed Athens had not requested the plan be activated yet.

The Greek disease--THIS week's print paper features a long look at the Greek sovereign debt crisis and potential developments in the wake of the European bail-out agreement. The general point will be familiar to regular readers: a reckoning has been delayed, but not averted. The package of assistance to Greece was slightly more generous than was expected, perhaps because of the turn for the worse taken by conditions in the days before its announcement. But the need for a massive fiscal adjustment remains.The big problem is that this has been an incredibly difficult process, over a relatively small mess. The Greek economy isn't that big, and neither is the level of its outstanding debt. There is a little over €300 billion in outstanding Greek bonds, some 70% of which are held outside of Greece. But total foreign-bank exposure to Greek, Portuguese, and Spanish debt is $1.2 trillion. Restructuring of all of that debt would be problematic, and potentially destabilising.

ECB Skeptical G-20 Can Correct Global Imbalances - The ECB appears skeptical that an effort at the G-20 level to correct global imbalances will yield concrete results. “It remains to be seen whether significant progress will be made in the main deficit and surplus economies in terms of living up to the commitments made at the Pittsburgh G20 Summit” last September, the ECB said in its latest monthly bulletin. The Pittsburgh Summit, the ECB notes, pledged to launch a “Framework for strong, sustainable and balanced growth”, which includes a pledge to “promote more balanced current accounts.”Global policymakers have been talking about this topic for decades, with few results. Consumption-driven economies like the U.S. are still running big current account deficits, though not as large as before. Export-dependent ones like China and Germany still have big deficits. The global downturn alleviated some of those imbalances, as they usually do. But the ECB doubts that adjustment will prove lasting.

Greek wealth finds a home in London | The Guardian Greeks taking fright at the fiscal crisis enveloping the debt-stricken country are snapping up properties in Britain as part of a desperate flight of capital.British homeowners may still worry about the resilience of the British economy but from Athens it appears as a relative haven and prime real estate in London, the traditional home of Greece's wealthy shipping community, is being bought at an unprecedented rate by rich Greeks desperate to transfer their bank deposits.The land grab has astounded estate agents, with many referring to the new homebuyers as "cash Greeks" because of their willingness to part with large sums of money in record time to secure £1m-plus properties.

Europe’s bazooka is not enough  -  Hank Paulson, then US Treasury Secretary, went to Congress to request the mandate for a potential financial backstop of Fannie Mae and Freddie Mac. Faced with the Congress’ inherent aversion to an explicit government guarantee on the two companies, Mr. Paulson’s argument was raw, yet forceful: "If you have a bazooka in your pocket and people know it, you probably won't have to use it."We all know how this ended. Europe’s EUR30bn financial package to Greece is the new bazooka on the block. Even the Greek Prime Minister himself, George Papandreou, seemed keen on recycling the analogy: “The gun is now loaded” he said to a Greek newspaper, perhaps unaware of the fate of its US precedent.

Greece Saved For Now – Is Portugal Next? - The Europeans announced Sunday they would provide 30 billion euros of assistance to Greece, amid informed rumors that the IMF will offer another 10-15 billion.  With a total of say 40-45 billion euros in the bag – more than the market was expecting — the Greeks have time to make changes. The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy.  This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone. Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.

Debt Worries Shift to Portugal, Spurred by Rising Bond Rates - Speculators have begun to zero in on another small member of Europe’s troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits. Just as investors are turning their attention to the next vulnerable country, Greece moved a step closer on Thursday to activating a $61 billion rescue package, as Prime Minister George A. Papandreou asked the European Union and the International Monetary Fund to meet in Athens next week. The aid package agreed on last weekend — aimed at calming fears of a Greek default — has not yet had its desired effect. The yield on Greek 10-year bonds briefly topped 7.3 percent Thursday, not far from the 7.5 percent it was at before the rescue package was announced. Interest rates on 10-year government bonds for Portugal have also been rising, hitting a high of 4.5 percent on Thursday.

Hungary May Face 'Greek Tragedy' on Budget, Loans, Lombard Says (Bloomberg) -- Hungary, the first European Union member to obtain a bailout in the 2008 credit crisis, faces the risk of a sell-off in its currency as the Greek fiscal crisis spreads, Lombard Street Research said. Hungary is vulnerable because of its reliance on foreign- currency loans, the level of government debt and an expected increase in the budget-deficit figure as the next government plans to consolidate losses at state-owned companies, Lombard economist Maya Bhandari said“Hungary could soon find itself in a Greek tragedy of its own,”

Why do we care about Greece? - An interesting point, though I think it's hard to know what the net effect on monetary policy will be. The FT noted yesterday: Moreover, the European Central Bank decided last week to prolong the exceptional collateral regime, which allows banks that own Greek bonds to exchange their assets for cheap central bank funds. This was a significant announcement, and will provide Greece and its creditors with breathing space.The ECB is roped into the rescue, which could reflect poorly on its credibility and lead to increased inflation expectations, or which could spur the ECB to tighten excessively in order to avoid the public perception that its credibility is compromised. Either way, the impact on monetary policy is something to watch.

Did the Fed Just (Surreptitiously) Bail Out Europe? - No, not just Greece - all of Europe.  Without Congressional authorization or notice, of course. Or if you prefer it on a one-year time scale...That nice little vertical line is a gain of $421.8 billion dollars of outstanding loans and leases in one week's time. WHERE THE HELL DID THAT MONEY GO AND WHAT COLLATERAL WAS TAKEN AGAINST A FOUR HUNDRED BILLION DOLLAR INCREASE IN OUTSTANDING LOANS?

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