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

Saturday, April 3, 2010

week ending Apr 3

Fed's Balance Sheet Shrinks Slightly In Latest Week - The U.S. Federal Reserve's balance sheet shrunk slightly in the latest week as the central bank's purchases of mortgage-backed securities came to an end. The Fed reported in a weekly report Thursday that its asset holdings in the week ended March 31 edged down to $2.311 trillion, from $2.317 trillion a week earlier.  Holdings of mortgage-backed securities fell to $1.069 trillion from $1.074 trillion a week earlier. Meantime, the Fed's holdings of Treasury securities rose slightly to $776.71 billion from $776.67 billion a week earlier.

NY Fed reveals its Bear Stearns portfolio (Reuters) - Two years after the near collapse of Bear Stearns, the New York Federal Reserve is finally revealing the $30 billion worth of ailing assets it took on as part of a hastily arranged rescue of the investment bank. The New York Fed on Wednesday released a complete list of all the commercial and residential real assets it assumed from Bear as part of the deal that enabled JPMorgan Chase to acquire Bear for $10 a share.The eclectic portfolio includes everything from collateralized debt obligations to loans to dozens of Hilton Hotels and a half-empty mall in Oklahoma City. Also in the portfolio are hundreds of credit default swaps and other derivatives, which Bear apparently had taken out to hedge its exposure to some of the other assets going bad. The New York Fed lists the notional, or face value, of the portfolio at $74.8 billion, which is some indication of just how distressed the assets were when the New York Fed set-up Maiden Lane in March 2008

Fed Finally Reveals Some Toxic Bear Stearns Related Garbage On Its Balance Sheet - Bloomberg filed freedom of information lawsuits against the Fed in April and November of 2008. The Fed fought Bloomberg every step of the way. Sanity prevailed in court. With this disclosure, everyone should now be able to clearly see what many of us knew all along: The Fed was not seeking to protect weak banks as it alleged, but rather to protect itself from having to disclose billions of dollars of pure garbage on its balance sheet. Clearly the first Maiden Lane operation was such a rousing success the Fed needed to do repeat performance, only bigger. Thornburg, Countrywide, Hilton, MBIA, and Ambac are all in the mix. Now, after nearly two years of delays, the New York Fed has the gall to issue the statement "“The Federal Reserve recognizes the importance of transparency..." If Bernanke and Geithner were Pinocchio, their noses would be a mile long.

In Fed We TruPS - Wading through 161-pages of CUSIPS takes a while. But here’s something that caught our eye from the Federal Reserve’s Maiden Lane I portfolio – the special purpose vehicle it created to buy up assets from the failed Bear Stearns:  Those are three trust preferred (TruPS) CDOs from the Tropic series.TruPS, you may recall, are a type of preferred security issued by companies including banks and insurance firms. They were an easy to raise money pre-credit crunch, and proved popular collateral fodder for many CDOs. Unsurprisingly, given myriad bank failures, they’ve collapsed spectacularly during the crisis. The Fed’s TruPS are no different.

Why Is The Fed Actively Managing A $25 Billion Maiden Lane MBS Portfolio When Its $2.4 Trillion SOMA Holdings Have A $1 Billion DV01? - An interesting thing happened when we were combing through the Fed's Maiden Lane 1 portfolio. After going through holding after holding of crap, that would make junk indignant if one were to call the Fed's adopted holdings of muni CDS, Subprime mezz bonds, and Agency CMO such, we ended up looking at the rate hedges section. As is disclosed by the Fed, the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0, short 7828 TYH0, short 2240 USH0, and is short a bunch of euro positions. Also, the interest rate exposure is in thousands so the Fed has about 3 trillion in notional swap exposure. Now Maiden Lane is supposed to be an adopted, run off (or, as Geithner likes to boast, run on) portfolio, presumably without active management. Which is why we were surprised by the presence of the TYH0 and TYM0 positions: these did not exist at the time the Fed created Maiden Lane I! In fact TYM0 did not exist until March of 2009!

Should the Fed Worry About Maiden Lane? -  The New York Federal Reserve Bank released new details late yesterday about its Maiden Lane entities, which were created to remove the toxic assets from the balance sheets of Bear Sterns and AIG. The information was requested (.pdf) by Rep. Darrell Issa (R-CA), ranking member on the House Committee on Oversight and Government Reform. It reveals more about the assets that take up a lot of space on the Fed's balance sheet. As a result, many outlets are reporting how ugly the Maiden Lane assets look. Of course, that's not a surprise -- they're toxic assets. But I'm not yet convinced they'll create extraordinary losses for the Fed.  As you might expect, some in the media jumped on the par values listed in the newly released detail for each facility -- they're far more than the market value shown on the Fed's balance sheet. In fact, their market values range from 36 to 44 cents on the dollar.

The Federal Reserve’s Veil of Secrecy is Being Taken Down, But Slowly  - One of the first things that 'put me off' of Obama was the choice he made of key appointments to his Administration, selecting the two Robert Rubin acolytes Tim Geithner and Larry Summers to his team, marginalizing Paul Volcker, and then making no place for Robert Reich. Although I am sure that, like the rest of us, he puts his pants on one leg at a time, he has shown himself to be a remarkably intelligent and competent member of the Washington political world. I admire him. As I recall, the Fed said they were only acquiring 'investment grade' instruments, which would be taken on its balance sheet in support of the US Dollar, in addition to the usual Treasury Debt. The recent exposures of the holdings of Maiden Lane show these to be more like junk bonds, and certainly not as represented. Make no mistake, the Fed looks to have been abusing its secrecy and its position, and Bernanke and Geithner are culpable. Reich makes the points as well or better than I could so here is his recent piece on the subject.

The Fed in Hot Water – Reich - The Fed has finally came clean. It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JPMorgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned ba The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action. This raises three issues. First, only Congress is supposed to risk taxpayer dollars.

Is This "The New Fed"? - First the release of the garbage The Fed bought under Maiden Lane I-III, now this: Advance Notice of a Meeting under Expedited Procedures It is anticipated that a closed meeting of the Board of Governors of the Federal Reserve System at 11:30 a.m. on Monday, April 5, 2010, will be held under expedited procedures, as set forth in section 26lb.7 of the Board's Rules Regarding Public Observation of Meetings, at the Board's offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.To Be Discussed: Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks. So what's this about?  We never got this sort of notice before! Assuming this isn't some sort of April Fool's joke by Bernanke and pals this is a major sea change.

Fed officials signal asset sales will play a key role in exit strategy - - Federal Reserve officials are moving toward a consensus that asset sales will play a more prominent role in their exit from the most expansive monetary policy in the central bank’s history. Chairman Ben S Bernanke told legislators last Thursday that “restoring the size and composition” of the Fed’s record $2.32 trillion balance sheet to a “more normal configuration” is a long-term policy goal. St Louis Fed president James Bullard said in an interview the central bank must start making plans now for future asset sales.  “There does seem to be agreement that you want to get back to a normal-looking balance sheet at some point in the future,” Bullard said. “We want to someday get back to a pre-crisis balance sheet — both the size of it and the fact that it would be an all-Treasuries balance sheet.”

NY Fed’s Dudley: Recovery Calls for Extended Period of Low Rates - A top Federal Reserve official reiterated Thursday the central bank is facing no urgency in tightening monetary policy. The current economic recovery “is likely to be quite muted compared with past recoveries,” said Federal Reserve Bank of New York President William Dudley. “The substantial amount of slack in productive capacity that exists today will likely only be absorbed gradually,” the official said, which indicates “trend inflation, at least over the near term, should remain very low.” That led the official to reiterate what was said at the March Federal Open Market Committee, where the central bank pledged to keep rates low for an “extended period.” Most private sector economists believe the Fed will not raise its overnight target rate, which now rests at essentially 0%, until sometime in the summer, perhaps even later.

Lockhart: End to Fed MBS Purchases Should Be Calm - The end of the Federal Reserve’s mortgage buying program should be calm as private markets are poised to fill the void, Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday. The Fed’s $1.25 trillion mortgage buying program, which it kicked off during the worst of the credit crisis to help markets and the economy, ended Wednesday, and the mortgage market was under a bit of pressure. Lockhart said that mortgage rates should continue to remain attractive to homebuyers at around or a little above 5%, which has been historically attractive.“The ceasing of our purchases should have a relatively light effect,” Lockhart said, and rates should stay in place and “should continue to help stabilize the housing sector. The effect on the housing sector should not be adverse.”

Q&A: Curtain falls on Fed's historic foray into housing (Reuters) - As the first quarter draws to a close, the Federal Reserve is expected to bring its $1.25 trillion mortgage-bond-buying spree to a close.Here are some answers to basic questions about the U.S. central bank's unconventional and controversial initiative.

A Lucas Critique of Monetary Policy as Interest Rates--- The statistical relation between inflation and unemployment will not be invariant to the monetary policy regime". Economists will recognise that statement as an example of the Lucas Critique. They know it has implications for any policy that uses inflation to target unemployment. "The statistical relation between interest rates and inflation will not be invariant to the monetary policy regime". I want economists to recognise that statement as another example of the Lucas Critique. I want them to recognise that it has implications for any policy that uses interest rates to target inflation. Or any other target variable, like nominal GDP. Bill Woolsey has a post on whether the Fed set interest rates too low in 2001-2004.

Critic Group Urges Fed to Act to Control Inflation - The guys on the shadow open market committee are old school. The watchdog group, in existence since the early 1970s, serves as a vehicle to criticize Federal Reserve policy making. Its members are frequently luminaries of the economics profession. The reputation of the shadow outfit arises from the group’s long standing interest in “monetarism” — that is, a focus on the money supply’s influence on the economy. It’s a school that’s out of step with the current practices at the Fed. To be sure, members of the private group hold a diversity of views on economics and monetary policy, but often as not, they end up critical of what policy makers are doing. Not surprisingly then, an event held by the group in New York Friday found its members worried about the state of monetary policy. The committee members are worried the Fed’s current monetary policy stance–it entails keeping rates very low for a long period of time–is dangerous.

 The Outlook, and the Case for Federal Reserve Independence - Janet Yellen - A massive structural budget deficit threatens the long-term economic health of the United States. But the fiscal imbalance won't necessarily fuel inflation as long as the Federal Reserve retains the independence to pursue its objectives of maximum sustainable employment and price stability. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on March 23

Fed's Tarullo Argues for Regular Stress Tests with Public Release of Results - From Fed Governor Daniel Tarullo: Lessons from the Crisis Stress Tests The Supervisory Capital Assessment Program (SCAP) was fashioned in early 2009 as a key element of a crucial plan to stabilize the U.S. financial system. The stress tests, as they have been popularly called, required development on the fly, and under enormous pressure, of ideas that academics and supervisors had been considering for some time. After describing the concept, design, and implementation of last year's tests, I will explain how our experience has helped prompt major changes in Federal Reserve supervision of the nation's largest financial institutions. Then I will discuss how this experience has stimulated debate over the merits of publicly releasing supervisory information.

Fedspeak Highlights - The actions of the Federal Reserve are closely watched by markets for hints of coming policy actions. Some of the best sources of clues are speeches by Fed officials and regional bank presidents. Here are some highlights from speeches since the last meeting of the rate-setting Federal Open Market Committee. (in table form)

An economic puzzle Bernanke can't solve (Reuters) - It's a mystery that has puzzled even Federal Reserve Chairman Ben Bernanke: if the U.S. economy is growing rapidly, why isn't it creating jobs? Bernanke and his central bank colleagues are well aware that Census hiring will skew readings, and have cautioned that unemployment will likely remain near 10 percent all year. The Fed and private economists are trying to answer the bigger question of why the labor market shed 8.4 million jobs during this recession. Although the downturn was the deepest since the Great Depression, the job losses were even more severe than most forecasters had predicted based on models that compare economic growth and employment.

Government Deficits May Soon Be Monetary Policy Variable - - Recent U.S. bond market volatility indicates a day may be coming where government deficits may become as important a variable for monetary policy as economic data. Right now, most believe low inflation, modest growth and a slow improvement in hiring means the Fed can take its time raising interest rates. But the government’s profligacy could change that view, bending the rate outlook in new directions. The harbinger of future trouble emerged last week, when investors pushed Treasury yields higher. Investors want more compensation for buying such epic amounts of debt. They may also want higher returns, given the added risk that Treasury will have trouble paying back all that it’s borrowed at a time when the subject of government finance is raising questions. While 10 year Treasury yields remain historically low at 3.88%, there’s fear it could go up, potentially by a lot. The problem for the Fed? Higher borrowing costs across the economy that could potentially imperil the recovery.

 Economists Who Say "Ni!"- Krugman - OK, it’s actually the economists who say “Inflation!” But isn’t it all too predictable that with almost 10 percent unemployment and ongoing disinflation — at this rate we could be looking at deflation in the core rate by next year — what the shadow open market committee is warning about is … inflation. What seems to have them worried, aside from the fact that they’re always saying “Ni!” “Inflation”, is the growth in the Fed’s balance sheet. Yet as many of us have pointed out again and again, that’s doubly wrong: rapid growth in base money isn’t inflationary when you’re in a liquidity trap — see Japan, 1998-present — and much of the expansion in the monetary base isn’t really a monetary expansion, it’s the Fed taking on the role of intermediary of last resort, taking bank deposits and recycling them to the private sector. But worrying about inflation is what these guys do, no matter the circumstances.

Still disinflating - The Economist - THERE is no end of debate over what should and shouldn't be considered relevant in considering monthly price index moves. Setting that aside, many of the price indicators favoured by policymakers show a clear pattern to recent inflation moves:  That's from the Dallas Fed, via Mark Thoma. Earlier today, I listened to Paul Volcker discuss financial regulatory reform, and after his remarks he was asked about Olivier Blanchard's floating of the idea of the utility of a move to 4% inflation targets. Mr Volcker reiterated a comment he'd previously made about the suggestion (that it's "nonsense"), before declaring: It doesn't make me at all nervous that we have 0% price inflation at the moment. It was a strange statement, reflecting a view that any inflation at any time is bad, as if there were never any potential downside to falling prices. It was not a rigorous answer—"I can see x upsides and y downsides and on balance a higher inflation target is a bad idea"—but a moralistic one.

In Defense of Bubbles... - If there’s one subject I’ve bored New Yorker readers with more than any other over the past decade or so, it’s the dangers of speculative bubbles. When I first started banging on about this subject, back in the late nineteen nineties—see, for example, this piece from 1997—nobody took much notice. Back then, many economists, including Fed Chairman Alan Greenspan, were skeptical about the very existence of bubbles. Even if they did exist, it was widely believed that they didn’t present much of a danger: should a bubble inflate and burst, the Fed could simply cut interest rates to prevent wider damage to the economy.  Today, my long-held view that, in a modern, financially-driven economy, bubbles are a serious and omnipresent danger has become widely accepted. I don’t take any credit for effecting this change: the experience of the dotcom and housing bubbles was far more persuasive than anything I could have written.

Bill Dudley Speaks: Hints At The Endgame - Dollar Devaluation - More doomed rigid theoretical analysis based on flawed theories that now facilitate the shortening of the economic and market amplitudes from low to high. What the Fed's concern should be at this point is how to make sure the market only crashes to a triple digit when its bluff is finally called by someone big and brave enough. Most notably, Dudley hints at the inevitable endgame: "The fact that our foreign indebtedness is for the most part denominated in our own currency is a huge advantage in the event the dollar were to come under significant downward pressure."

The dollar’s international roles - VoxEU - Is the dollar still the dominant international currency? This column argues that the answer is “yes”. The dollar is used as a major form of cash currency, and is the main currency for exchange rate pegs and for invoicing foreign transactions. Network externalities create inertia – everyone uses the dollar because everyone else is using the dollar.

Goldman Capitulation on Dollar Shows Reversal on U.S. (Bloomberg) -- The strengthening U.S. economy, subdued inflation and rising stock prices are propelling the dollar rally into its fifth month as traders seek refuge from Europe’s fiscal crisis and Japanese deflation.  Goldman Sachs Group Inc. and Citigroup Inc. ended bets on a falling dollar last week after the trades lost 2.8 percent. Strategists are raising greenback forecasts at the fastest pace since last March, just before U.S. stimulus efforts that poured as much as $12.8 trillion into the economy ended the currency’s strongest rally in 28 years. Median predictions for the dollar against 47 currencies tracked in Bloomberg surveys rose an average of 1.4 percentage points in the month to March 24.

China’s Central Bank Sees Limited Rebound for Dollar (Bloomberg) -- The People’s Bank of China said the U.S. dollar will have only a limited rebound in 2010 because of the nation’s high fiscal deficit and low interest rates. The greenback may see a “technical rebound” from last year’s declines, though the appreciation may not be “too big,” the central bank said in its 2009 international financial markets report posted on its Web site today. The U.S. currency may also be sought less as a haven due to the global economic recovery, according to the statement. China, the biggest foreign owner of U.S. Treasuries, cut its holdings by $5.8 billion to $889 billion in January, the third consecutive monthly reduction.

China PBOC Says World Recovery Continuing, Warns On Downgrades  - Surging debt levels in major economies such as the U.S. and U.K. raise the threat of sovereign credit rating downgrades, the People's Bank of China warned Friday.The central bank's assessment was among the risks highlighted in its latest annual review of the global financial markets, which gave a broadly upbeat forecast for the year ahead.But it warned of ongoing and fresh difficulties as the world continues to recover from the devastating recession of late 2008 and early 2009."Because of continually expanding public debt, the sovereign credit ratings of major economies, including the U.S. and U.K., face downgrade risks,"

China central bank sees dollar strength, global inflation | Reuters  - China's central bank said on Friday that it expected the dollar to strengthen this year, but it raised the specter of worldwide asset bubbles and inflation. In a lengthy report on the global financial markets, the People's Bank of China also warned that huge, hidden bank bad loans in the West could pose a threat to the global economy.While the dollar is likely to rebound this year if the Federal Reserve raises interest rates earlier than other major economies and sovereign debt problems in the euro zone persist, huge U.S. fiscal and trade deficits could limit its gains."Therefore, even if there is a rebound in the dollar, the rebound will be not be too strong."The central bank said the ultra loose monetary policies, including quantitative easing adopted by major central banks, had pumped huge liquidity into the global financial markets.

How exorbitant is the dollar’s “exorbitant privilege”? - VoxEU - Does the dollar enjoy an “exorbitant privilege”, in which US residents pay relatively low interest on their foreign liabilities while receiving relatively high returns on their foreign assets? This column argues that the answer is “yes”, while the excess returns are not explained by different risks between the US and elsewhere.

Currency Crisis And Debasement - There has been a lot of talk recently about our country's finances. Some now question the long-term viability of the U.S. with booming budget deficits and a national debt that is growing by leaps and bounds monthly. The national debt level was just raised to almost $12.5 trillion. Yes, trillions, not billions. In 29 years we have taken the U.S. national debt from less than $1 trillion to over $12 trillion (a 12-fold increase). What is really troubling is that the ratio of debt to GDP has exploded over the last 29 years from 34% to over 85%. During this 12-fold expansion of debt we have only expanded GDP 5.3 times. We are growing debt at twice the rate of growth of the U.S. economy. This is obviously a troubling situation.

US debt saturation *alert* - There was an interesting chart put up the other week on Nathan’s Economic Edge blog (H/T Chris Cook). We’re not sure how accurate its assertion is. However, if what it implies is true,  the consequences are worrying. The chart, as seen below, essentially reflects the productivity gained from the addition of $1 of debt into the US debt-backed money system. It does so, says the blog, by taking the change in GDP and dividing it by the change in debt. The data itself comes from the US Treasury’s latest Z1 release. And, as can be seen from the chart, the recent trend has seen the productivity plunge through the zero-rate [click to enlarge]:  It’s a point which has also been picked up by Paul Kedrosky, over at Infectious Greed.

Misplaced Rectitude - - In the FT, Jeffrey Sachs and George Osborne argue that governments need to deal with their budget woes sooner rather than later: Virtually all policy analysts agree that the path to renewed prosperity in Europe and the US depends on a credible plan to re-establish sound public finances. Without such a plan, the travails which have hit Greece and which are threatening Portugal and Spain will soon enough threaten the UK, US, and other deficit-ridden countries. In the recent duel of macro-economists, one camp has called for early budget consolidation, followed by further measures over five years. We agree. Others want more fiscal stimulus, delaying deficit reduction. We believe delaying the start of deficit reduction would put long-term recovery at risk. Such an approach misjudges politics, financial markets, and underlying economic realities. Count me with the "others" in the "second camp." In the case of the US, there is still little evidence of a problem. If markets were losing their appetite for US government debt, it would be reflected in rising Treasury yields, which are not apparent.

CBO Report: U.S. National debt will rise to 90% of GDP - On Thursday, the Congressional Budget Office released a report highlighting that President Barack Obama’s 2011 budget will generate $10 trillion in budget deficits over the next 10 years, which will make the debt 90 per cent of the GDP by 2020, according to the Washington Times.  The recent CBO figure is $1.2 trillion more than the original estimate by the Obama administration. Last month, the Obama administration projected a 10-year deficit of $8.53 trillion in its 2011 budget. However, after analyzing the projected budgets, the CBO reported it will be $9.75 trillion in deficits over the next decade.

Dealing With The Debt: A Brief Note - Krugman - I get a lot of worried mail along the lines of “how on earth will we ever be able to pay off our debt”? Look, there are real worries — but the math per se isn’t very hard. The Obama administration’s budget (pdf) predicts that by 2020 we’ll have net federal debt of around 70% of GDP and a budget deficit of around 4 percent of GDP. Now, you don’t have to go to a zero budget deficit to make headway on the debt — a budget deficit of 2-3 percent of GDP would imply a steadily declining debt/GDP ratio. So if you believe the administration’s budget estimates, we’ll need to find another 1-2 percent of GDP in revenue or cost savings.

The World is Choking on Government Debt - Unprecedented relationships are beginning to form in the global bond markets. For as long as anyone can remember, the US government has enjoyed the lowest cost of borrowing whatever the maturity of the bond, because the US has been deemed the safest credit anywhere in the world. The prospect of default of the United States has been considered so low that academics describe the US Treasury bond as the risk-free bond., from which all other credit instruments are priced. This relationship seems to be breaking down, for the first time in living history. This past week Berkshire Hathaway was able to raise funds at an interest rate lower than that of the US Treasury.  The bonds  of DuPont and other stalwart corporate names also yielded less than equivalent maturity Treasuries.

Much Ado About Debt - If the United States suffers a debt crisis in the next decade, historians may well look to March 15, 2010 as an inflection point.On that day, Moody's released a report acknowledging that while the United States' debt was still triple-A rated, the government's margin for error had "substantially diminished" in the wake of the recession and trillion-dollar deficits. The United States suffers from not only a temporary imbalance, but also a deeper rot. Congressional Budget Office Director Doug Elmendorf summed it up this way: "The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services."

Interesting rates - AFTER the financial crisis and recession comes the debt crisis, or at least that's the historical pattern. Most of the world's governments have seen their public debt levels rise through the last few years as revenues have shrunk amid recession and countercyclical fiscal stimuli have been put in place. In a few corners of the world, debt pressure has pushed up interest rates and generated concern about imminent crisis. Europe is currently struggling to avert a debt crisis in Greece, and many are wondering where the trouble will bubble up next. They're keeping their eyes on America, where debt levels have increased fairly significantly through the recession, but where interest rates on long-term debt have remained very low. This combination can't last forever, it's assumed, despite the underlying strength of the American economy and the dollar's status as global reserve currency.

Interest rates spike up - How scary is it? The Wall Street Journal reports: A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher-- a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market. Paul Krugman (also here) and Brad DeLong are not concerned, noting we've seen lots of yield changes of this size or higher in the past. Even so, whether demand will continue to be there for burgeoning U.S. debt is obviously a question of great interest. Yields are now near the highest levels we've seen since the Lehman failure in September 2008, and if they continue to move up at their recent pace I wouldn't want to dismiss it as an irrelevant development.

A different perspective on interest rates - However, there is another way to think about those rates. The US government’s cost of long-term borrowing can be decomposed into a short-term rate plus a term premium which investors demand to cover the interest-rate and inflation risks of holding long-term bonds. The short-term rate is substantially a function of monetary policy: the Federal Reserve sets an overnight rate that very short-term Treasury rates must generally follow. Since the Federal Reserve has reduced its policy rate to historic lows, the short-term anchor of Treasury borrowing costs has mechanically fallen. But this drop is a function of monetary policy only. It tells us nothing about the market’s concern or lack thereof with the risks of holding Treasuries.

Sell-off in US Treasuries raises sovereign debt fears - Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets. It is unclear whether China is selling US Treasuries after cutting its holdings for three months in a row, or what its motive may be. There are concerns that Beijing may be sending a coded message before the US Treasury rules next month on whether China is a "currency manipulator", though experts say China is clearly still buying dollar assets because it is holding down the yuan against the greenback. Some investors may be selling Treasuries as a precaution against a trade spat. Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.

Fed’s Fisher Says U.S. Can’t Ignore Effect of Deficit on Yields (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said the U.S. can’t ignore the effect of the growing federal deficit on Treasury yields and the outlook of investors.  “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said. “The markets, fearing the consequences of runaway deficit financing, have bid up longer-term nominal rates, resulting in a yield curve that is now historically steep.”  Fisher’s remarks underscore the view expressed last week by former Fed Chairman Alan Greenspan, who told Bloomberg Television that he’s “very much concerned” about the financial situation of the U.S. Greenspan said higher yields are a “canary in the mine” that may signal further interest-rate gains and reflect investor worry about the “huge overhang of federal debt.”

China May Shun Treasuries, Yield to Rise, SocGen Says (Bloomberg) -- China may curb purchases of U.S. Treasuries this year as its first trade deficit in 17 years leaves it with fewer dollars to invest, causing yields to climb, according to Societe Generale SA. The trade gap will reach $100 billion in 2010, driven by a 45 percent climb in imports as China’s demand growth outpaces that of other major economies, said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. He said yields on benchmark 10-year U.S. notes will hit 4.5 percent by the end of 2010, capping the biggest two-year increase since 1980-81.

Treasury Bonds: The Pimco Outlook - Could Treasury bonds, long considered the most rock solid of all investments, be starting to show some cracks? In mid-March, the rating agency Moody’s said that the U.S. and a handful of other developed nations are in danger of losing their AAA credit ratings — a move that could send interest rates higher and make it more expensive for the U.S. government to borrow. Is this how the long-feared “bond bubble” bursts? For insights into the global debt market, CBS MoneyWatch turned to Mohamed El-Erian, who as co-chief investment officer and chief executive of bond powerhouse Pimco manages more than $1 trillion in assets.

Why do the bond vigilantes fear a growing economy? - The treasury markets are nervous again, we are told. Last week, three separate auctions for treasury notes attracted less than enthusiastic bidding, sending yields on the 10-year bond to their highest point since fall 2008. On cue, Alan Greenspan immediately labeled the yield spike the "canary in the mine" -- warning that market participants are finally registering their terror of "this huge overhang of federal debt which we have never seen before." The Wall Street Journal, Bloomberg and the Financial Times all promptly expressed dour foreboding.Not to worry, Paul Krugman and Brad DeLong said immediately, rushing to the scene like the econoblogospheric equivalent of Keynesian paramedics. By historical standards, borrowing costs for the U.S. government are still quite low, and they've got the charts to prove it. Don't let the bond vigilantes spook you!Steve Waldman and James Hamilton chimed in with interesting technical takes. For meta-summaries, Ryan Avent and Felix Salmon both concluded that it is very hard to come to a conclusion. One crucial problem: The political and economic implications of a long-term rise in treasury yields are so immense that it is  impossible to evaluate the merits of any individual piece of analysis on this topic without considering the agenda behind it.

Is the U.S. playing a risky game of politics with interest rates? - - The Obama administration just experienced its first interest rate scare. Last week's tepid Treasury bond auctions caused long-term Treasury interest rates to jump. One speculation: America's largest creditor, Beijing, reduced its purchases as payback for congressional criticism of China's currency policy.  Yet the surprise is not that interest rates jumped. The real question is: What took them so long? Despite today's mind-boggling level of public debt and deficits, and extraordinary monetary expansion, interest rates have remained surprisingly low.  The 10-year Treasury interest rate, yielding 4 percent before the September 2008 collapse of Lehman Brothers, still remains below that level. The five-year Treasury interest rate is yielding roughly 2.5 percent. Analyst James Capra points out that from 1980 to 2010 that rate has yielded 2.5 percent or less only 4.6 percent of the time.

Why is the Term Risk on Long Term US Debt So High? - Steven Waldman takes a look at the yield on long term US bonds and concludes that although it's low, it's not really that low when you consider short term rates: There are components of this spread.  Perhaps people are worried about future inflation--but while the spread between inflation-indexed bond prices and regular treasuries is rising, it's still rather low.  It's also possible that people are simply anticipating that eventually, a treasury bubble driven by the global "flight to quality" will dissipate, making it harder to unload longer-maturity debt.  There's currency risk, too, especially since many of our creditors are foreigners.  And of course, there's the dreaded default risk.  If people stop thinking we're good for the money, they will demand higher interest rates, and tip us into crisis.

Department of "Huh?": Default Discounts in U.S. Treasury Interest Rates????????? Edition The term premium on U.S. Treasury debt is low because even though long-term nominal (and real) rates are low, short-term rates are even lower, for we are deep in recession with an enormous fight-to-safety still going on in financial markets populated by spooked investors.  Megan McArdle disagrees, but it is not clear why: Why is the Term Risk on Long Term US Debt So High?: Perhaps people are worried about future inflation--but while the spread between inflation-indexed bond prices and regular treasuries is rising, it's still rather low. And of course, there's the dreaded default risk.  If people stop thinking we're good for the money, they will demand higher interest rates, and tip us into crisis. When investors start to fear an increasing chance of default because the government's finances don't make any sense and to price that default into bond yields, it looks like this--for Latvia:That is not repeat NOT REPEAT NOT!! what we see in the U.S. Not at all. We have $3 trillion more of U.S. government debt held by the public than we did two years ago--and lower long-term interest rates.

A Note On The Term Spread - Krugman - Brad DeLong reads Megan McArdle getting confused about interest rates; he’s a better man than I am. But I think there’s a bit more to say about the subject. As many people have noticed, the term spread — the difference between short-term and long-term interest rates — is very high. The last time I wrote about this, people were taking this as proof that the economy would recover soon. Now they’re taking it as bad news — as somehow suggesting fears of default. But there’s a reason for a high term spread that has nothing to do with either explanation. As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates.

US Government Issues $333 Billion Net In Marketable Debt In March, Second Biggest Ever - In March, the US government issued a massive amount of debt: $332.8 billion - the biggest amount ever since the all time record of $545 billion raised (most of it purchased by the Fed) during the apex of the financial crisis in October 2008. The US Treasury had $12.717 trillion in debt subject to limit at the end of March, compared to just $12.384 trillion in the beginning of the month. The private-to-public debt transfer is going as planned, still in the full absence of the shadow economy. In March the government issued net:

  • $7 billion in Bills
  • $100 billion in Cash Management Bills
  • $228 billion in Notes
  • $13 billion in Bonds
  • $1.8 billion in TIPS

The Sovereign Debt That Dare Not Speak Its Name - Timothy Geithner has apparently penned a letter to Representative Scott Jarrett (R-NJ) telling him that Fannie Mae and Freddie Mac's obligations are not sovereign debt. Of course, the United States government believes that supporting this debt is crucial to saving the economy. But just because we're not-so-implicitly guaranteeing this debt, doesn't mean that you should treat it like government debt. This is exactly the sort of nudge-nudge, wink-wink, now-we-guarantee-it-now-we-don't behavior that allowed the companies to get themselves (and by extension us) in so much trouble in the first place. If we want companies that get the attractive low borrowing rates available to the US government, we should make them a government agency and be done with it. If not, we should sell off their assets and dissolve the companies. But "neither fish, nor fowl, nor good red herring" is not a healthy state for a financial firm. Investors are all too willing to give them the rope they need to hang the taxpayer high and dry.

Could This Be Start of 'The Great Bear Market in Bonds'? (CNBC) One firm calls it "The End of the Affair." A strategist says it's "the beginning of the end." A trader asks, "Has the great bear market in bonds now started?"However the situation is framed, one thing is becoming clear: Investors' long courtship with debt appears to be coming to a close,Last week's poorly received series of Treasury auctions looks now to be a fixed-income flare, a warning shot that too much debt amid too little fiscal restraint is making the bond market frothy and ready to come to an unsightly crescendo. And the damage could hit not only Treasurys but also agency-backed bonds as well as corporates with a longer term than two or three years.

Post Uses Xenophobia to Advance Its Budget Agenda - The Post once again used xenophobia to push its budget agenda as editorial page editor Fred Hiatt darkly warned readers that as a result of projected future budget deficits: "the United States would be increasingly at the mercy of China, Saudi Arabia and other lenders." Of course, as every econ 101 student knows, budget deficits do not determine the indebtedness of the U.S. to foreigners, the trade deficit does. The trade deficit in turn is the result of an over-valued dollar. The Post has actually been a supporter of the "strong dollar" policy that has given the U.S. high trade deficits. So, when it comes to the policy that actually puts us "at the mercy of China, Saudi Arabia and other lenders," the Post has been on the wrong side.

No crisis in confidence—Evidence shows U.S. creditors still think U.S. debt remains safest in world - EPI Issue Brief #276 Print-friendly PDF version In recent days, the Wall Street Journal and Business Week have pointed to a slight uptick in interest rates on Treasury securities as evidence that U.S. creditors—and the bond market more generally—are beginning to worry about the increase in the federal deficit The debt rating agency Moody’s also recently indicated in the New York Times that, while their ratings for U.S. securities is still stable, the U.S. debt may be moving closer to a downgrade But if we have learned anything from the financial market crisis, it is that the bond market and credit rating agencies are not the most reliable sources for sound risk analysis. That said, the United States does borrow substantial funds from a variety of creditors, and a loss in confidence in Treasury securities could, in theory, lead to higher interest rates for government borrowing.

The Chinese Are Coming! The Chinese Are Coming! Oh My! - One of the scare tactics in the toolbox of the deficit hawks is the argument that Chinese ownership of U.S. government bonds is dangerous, economically and politically. Portraying the government as a currency user akin to households, they argue that after reaching some debt to GDP threshold, sovereign governments face difficulties in finding takers for their debt so that they have to pay higher interest rates to compensate holders for higher risk of default. Indeed, it is frequently claimed that China is responsible for “financing” a huge portion of our federal government’s deficit—and that if China were to suddenly stop lending to Uncle Sam, he might be unable to finance his deficits except at usurious rates. So China controls Uncle Sam, holding his debt hostage. This is nonsense.

The Long View... -We sit here in the midst of 10% unemployment in the USA, of fiscal policy that is crippled in some countries by (legitimate) fears that more deficit spending will trigger government debt crises and crippled in others by confusion between short-term cyclical and long term structural deficits, of banking policy crippled by the public populist reaction against more bailouts for the bankers, and of monetary policy crippled by a strange and sinister mindset among central bankers that fears inflation even as rates of wage increase continue to drop—people who are, as R.G. Hawtrey said of their predecessors in the Great Depression, “crying ‘Fire! Fire!’ in Noah’s flood." So it is time to calm myself down. And the best way to calm myself down is by taking the long view.

The VAT Cometh -We are now $8 trillion in debt. The Congressional Budget Office projects that another $12 trillion will be added over the next decade. Obamacare, when stripped of its budgetary gimmicks -- the unfunded $200 billion-plus doctor fix, the double counting of Medicare cuts, the 10-6 sleight-of-hand (counting 10 years of revenue and only 6 years of outflows) -- is at minimum a $2 trillion new entitlement. Obama knows that the debt bomb is looming, that Moody's is warning that the Treasury's AAA rating is in jeopardy, that we are headed for a run on the dollar and/or hyperinflation if nothing is done.  Hence his deficit reduction commission. It will report (surprise!) after the November elections. What will it recommend? What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.  But this won't be nearly enough.. . .

A VAT Won't Produce Instant, Easy to Collect Revenue, Or Fairness - "As the night follows the day, VAT follows health care reform." That's how Charles Krauthammer started his Washington Post op-ed yesterday. He blissfully implies Uncle Sam can flip a switch and collect a trillion dollars over 10 years for every percentage point of VAT, "the ultimate cash cow." I beg to differ. Some of the lessons I learned from my experience formulating Al Ullman's VAT proposal of 1979 follow:

No Instant Revenues From a VAT - I want to echo what Pete has said about the time it will take to implement a VAT. This is why it needs to be implemented well in advance of a financial crisis, perhaps initially as a revenue-neutral tax reform. If those who believe, as I do, that we will ultimately need a VAT to help close the fiscal gap, waiting until we have a gun to our collective heads to do so will be much too late. The reason is that in a financial crisis the greatest premium will be placed on spending cuts and revenue increases that can be implemented very quickly--in the current or next fiscal year or two. That is because markets and politicians will want to see fast action and try to get the crisis behind them as soon as possible. This will tend to put off the table entitlements, big cuts in which (such as raising the retirement age) need to be phased in over many years, and new revenue sources. In the short run, higher revenues will have to come primarily from the income tax and from raising rates unless there is a VAT already place.

A messy business - AMERICA'S looming deficit challenge has put the idea of a value-added tax, a VAT, on the radar in Washington. Both of America's neighbours have VAT (or VAT-like) taxes, and in Europe VATs at rates around 20% help fund social safety nets. The Economist concluded back in November that a 5% VAT could close about half of America's 2014 budget deficit, which is a decent performance (see this for a discussion of pros and cons).Experts generally praise the VAT because it's relatively efficient and difficult to evade, but also because it's simple—nothing like the maze of deductions, credits, rules, and regulations that characterise America's byzantine income tax system. But is this really the case?

Here Come Higher Taxes: Goldman On Imminent Tax Increases - Tax policy has gained attention in recent days as a result of the tax increases used to pay for health reform. In fact, this is just one of several potential tax debates over the next several months, with the expiration of the 2001/2003 tax cuts and stimulus tax provisions scheduled for year end, proposed and recently enacted corporate tax proposals, and the possibility of some form of consumption tax on energy or, in the longer term, a broader value added tax. There is little possibility of changes for 2010, apart from the expiration of some stimulus-related provisions, but tax rates in 2011 are almost sure to rise on higher incomes as well as capital income. One consideration for lawmakers will be the different effect that tax policy can have in a zero interest rate environment. This may reduce the negative effects associated with increased taxation of labor and capital, but could exacerbate the negative effect of any increase in consumption-related taxes. 

The Present Value of Producing Future Taxpayers - Parents aren’t just raising adorable kids. They are also producing little human capital units that are likely to grow up, get jobs, pay taxes and raise little human capital units of their own. This production process isn’t measured by our economic accounting system, which ignores the value of unpaid work and treats parental expenditures on children as a form of personal consumption no different than expenditures on hot tubs or golden retrievers. Still, many economists (including me) argue that nonparents derive some important benefits from the time, money and effort that parents expend.  A new paper scheduled for presentation at the upcoming meetings of the Population Association of America offers a striking empirical illustration of this argument.

Declining Progressivity in US Taxes - A good source for thinking about this is an article by Piketty and Saez, Progressive is the U.S. Federal Tax System? A Historical and International Perspective, What they show by looking at income and taxes over the period from 1960 to 2004 is revealing.  While our system remains progressive to some extent, the progressivity has declined significantly.  This is primarily, they say, because of the cuts in the corporate tax and the estate tax--taxes that impact the very wealthiest more than others because of their high ownership of financial assets...

High-Income Tax Cuts Should Expire on Schedule - Allowing the 2001 and 2003 tax cuts for couples making over $250,000 (and singles over $200,000) to expire on schedule on December 31 represents the best course of action for the budget and the economy. Extending those tax cuts for one or two years, as some have proposed, would be highly ill-advised. It would make it much more likely that Congress would ultimately act to extend the tax cuts indefinitely, increasing deficits and the debt for as far as the eye can see — and thereby adding to the long-term risks that deficits and debt pose to the economy. Exempting small business income from the scheduled increase in the top tax rates, as some may also propose, would do little for the economy in the short term; only the top 3 percent of people with any business income would benefit.

Taxes per Person - Mankiw - Some pundits, reflecting on the looming U.S. budget deficits, claim that Americans are vastly undertaxed compared with other major nations.  I was wondering, to what extent is that true?The most common metric for answering this question is taxes as a percentage of GDP.  However, high tax rates tend to depress GDP.  Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can.  For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics: Taxes/GDP x GDP/Person = Taxes/Person

Tax rates: A "heavy" burden | The Economist - IN YESTERDAY'S Link exchange, I said that Greg Mankiw should be embarrassed by this post, in which he notes that in terms of taxes paid per person, Americans are right in line with most other developed nations. That is, if you multiply tax revenue shares of GDP by per capita GDP you get a number (about $13,000 for America) that is roughly in line with the number you get for Britain or Canada. As Matt Yglesias noted, this particular data comparison tells us almost nothing about the ability of an economy to handle increased tax rates (or whether or not that would be a good idea). It's too clever by half. Scott Sumner basically says that indeed, Mr Mankiw's silly post was worth attacking. But he then unwisely decides to be contrarian for the sake of being contrarian. This measure could actually be interesting, he hints, in that it could tell us something about the impact of tax rates on output:

Does the U.S. Pay Too Little in Taxes? - EconomPic - Greg Mankiw questions measuring the level of taxes solely by the tax rate: The below is a chart of the table he references above ordered by each country's tax rate. In this case, the United States is in fact taxed at a very low rate, but is in the "middle of the pack" in per capita terms. Greg's conclusion: The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.I feel like an (extremely) exaggerated, but equivalent argument as this is saying a $4000 donation made by a billionaire is similar to a $4500 donation made by someone worth $100,000 (i.e. it may be in theory, but that billionaire is one cheap bastard).It also matters what the money is used for. In other words, is it going to social services, such as education / training / health care, that promote equality or is it going to military spending...

'Tis the Season for Catching Tax Scofflaws - If your fear of getting caught for tax fraud starts to spike in the next few weeks, it’s probably by design. The Internal Revenue Service appears to deliberately ramp up publicity of its tax fraud cases just before Tax Day, a new study finds. The paper, by Joshua D. Blank and Daniel Z. Levin, looked at press releases issued by the Department of Justice’s Tax Division from 2003 to 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. They found that the number of press releases issued by the I.R.S. per week more than doubles in the fortnight preceding April 15 compared to the rest of the year:

Bank of America, Wells Fargo might not pay federal taxes for 2009 | McClatchy - This tax season will be kind to Bank of America and Wells Fargo: It appears that neither bank will have to pay federal income taxes for 2009. Bank of America probably won't pay federal taxes because it lost money in the U.S. for the year. Wells Fargo was profitable, but can write down its tax bill because of losses at Wachovia, which it rescued from a near collapse.The idea of the country's No. 1 and No. 4 banks not paying federal income taxes may be anathema to millions of Americans who are grumbling as they fill out their own tax forms this month. But tax experts say the banks' situation is hardly unique.

It's Official - America Now Enforces Capital Controls -  It couldn't have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration's millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions - Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. Let's parse through the just passed law, which has been mentioned by exactly zero mainstream media outlets.

President Sarkozy Of France Says Europe And America Must Come Up With New Answers President Nicolas Sarkozy of France is in the United States this week to meet with President Obama to discuss Afghanistan and pressing global financial issues. Sarkozy emphasized that if Europe and America do not redesign the global financial architecture, then no other alliance will succeed. He highlighted the urgent need for an open discussion on the economic crisis and world economic regulation.“We can no longer expect a capitalist system where there are no rules, no regulation, no protectionism.”

Who Will Tell The President? Paul Volcker - Against all the odds, a glimmer of hope for real financial reform begins to shine through.  It’s not that anything definite has happened – in fact most of the recent Senate details are not encouraging - but rather that the broader political calculus has shifted in the right direction. Instead of seeing the big banks as inviolable, top people in Obama administration are beginning to see the advantage of taking them on – at least on the issue of consumer protection.  Even Tim Geithner derided the banks recently as,“those who told us all they were the masters of noble financial innovation and sophisticated risk management.”In part this is window dressing.  But in part it recognizes political opportunity – the big banks are unpopular because they remain completely unreformed and unrepentant.  And in part it responds to a very real danger – Senator Dodd’s bill is so obviously weak on “too big to fail” issues that it will be hard to paint its opponents as friends of big banks.

Volcker Optimistic Financial Overhaul Will Include His Rule - The former Federal Reserve chairman defended his proposal to give regulators the power to force banks to get rid of divisions that make risky bets with their capital, in order to help prevent another financial crisis.“We have a promising possibility of getting agreement here” for a “reasonably good bill,” Volcker said, adding he was more optimistic than a month ago. Senate Democrats on March 15 proposed a financial overhaul that would hurt big Wall Street banks by reining in their profits and requiring them to hold more capital. The proposal includes a version of what Obama has dubbed the “Volcker rule.”

Paul Volcker: Do The Right Economic Thing -  Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch coverage) – both of which we also emphasize in 13 Bankers. The financial sector does not add anywhere near as much social value as its proponents claim.“The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector — in compensation and profits — reflect the relative contributions that sector has made to the growth of human welfare” (from NYT story) . Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.“There is an expectation that very large and complicated financial institutions will not be allowed to fail,” he said. “Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”

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

Leonhardt in the NYTimes Magazine, The Uses of Discretion with PCA - David Leonhardt has a good writeup of where financial reform stands in his Sunday magazine article Heading Off the Next Financial Crisis. Let’s look at the uses of the word “discretion” in the piece (my bold):... Barry Ritholtz lays out the case that AIG is the result of specific deregulation carried out in 2000. Two things about discretion. 1) People talk a lot about the “unregulated” shadow banking market, but it is important to remember that they were (poorly) regulated by the SEC. And the SEC gave an exemption to 5 firms – Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley – to leverage up further in the 20-40 to 1 range, while commercial banks were still leveraged in the 8-12 to 1 range. The more leverage means the bigger the returns, but the harder the falls. ...2) Ok, stay with me on this one. It’ll get rough but it is worth it....Resolution authority is predicated on the idea of prompt corrective action; this goes back to Gary Stern and others thoughts about resolution authority at the Minneapolis Fed

Punks and Plutocrats - Krugman - Health reform is the law of the land. Next up: financial reform. But will it happen? The White House is optimistic, because it believes that Republicans won’t want to be cast as allies of Wall Street. I’m not so sure. The key question is how many senators believe that they can get away with claiming that war is peace, slavery is freedom, and regulating big banks is doing those big banks a favor. But won’t opponents of reform fear being cast as allies of the bad guys (which they are)? Maybe not. Back in January, Frank Luntz, the G.O.P. strategist, circulated a memo on how to oppose financial reform. His key idea was that Republicans should claim that up is down — that reform legislation is a “big bank bailout bill,” rather than a set of restrictions on the banks

Idiot-Proofing Financial Regulation – Krugman - Ezra Klein expresses some skepticism about my skepticism. I worried that no financial reform will work if the government is dominated by people who don’t believe in regulation; Ezra counters that the FDIC has been pretty robust to idiots in power. Actually, we’re both right....Now the problem is regulating shadow banking — non-depository banking. So right from the beginning we have the problem of deciding what is a bank, and what liabilities need deposit-type guarantees. All short-term debt? Only some kinds of repo? Who do we need to be worried about? Where possible, the system should be automatic — that’s why the Frank bill, which sets a maximum leverage ratio of 15, is better than the Dodd bill, which leaves all that discretionary. But I just don’t see a way to make this thing run on autopilot.

Krugman as Failure--We were warned the NYT's Nobel Laureate was going to start talking about "financial reform". He's all in today. So, let me give you a little tale on how Paul's financial reform advocacy will go: First few columns: "These bankers are greedy bastards and Wall Street really needs to be fundamentally changed."Next few columns: "We really need this, this, and this. It's imperative, to do anything else would be a sham on the American people and destructive to the American economy."Columns once the bill is pretty much intact: "All this is not nearly enough, they didn't do anything, but there's still time to make a couple good changes."Columns once it's clear even to Mr. Krugman the Democrats are in the tank for Wall Street and nothing good is going to come of it: "Well, this isn't a great bill, but we need to hold our nose and vote for it, to do nothing will be fatal for November." Column when bill is passed: "This is historic, the Democrats are just great, we can improve it in the future."

Think Tank: FinReg edition - Since the blog -- and Washington -- is shifting focus from health-care reform to financial-regulation reform, this week's Think Tank is something of a primer. As it happens, all the links are to reports put out by the Roosevelt Institute, because it has been publishing the best introductory articles by far. For anyone who has the time and the inclination to really get up to speed, download the whole of the 'Make Markets Be Markets' report (pdf). For those who want selections, here are my favorites:

  • 1) Mike Konczal writes up Financial Reform 101. Anyone who doesn't feel up to speed on FinReg should start here.
  • 2) Richard Scott Carnell explains that "in banking, the debacle was above all a regulatory failure."
  • 3) Elizabeth Warren makes the case for a Consumer Financial Protection Agency.
  • 4) Raj Date argues that it's time to get ride of Fannie and Freddie.
  • 5) Rob Johnson lays out what it will take to end the 'Too Big to Fail' threat.

Blunt Rules - Everyone agrees that excessive leverage was one of the core causes of the 2008 financial crash. So how do we fix this? Stronger capital requirements for banks is the usual answer, but that supposes that regulators can be trusted to impose tough standards on an industry that will fight tooth and nail to resist them. At the risk of being branded one of those liberal haters of American exceptionalism, sign me up for the blunt rules approach. It's not that blunt rules are any kind of panacea. Wall Street bankers dedicate their lives to figuring out clever ways to circumvent regulations, and they'll keep doing that.... But that's the whole point of blunt rules... they don't require Congress to anything more than set them in the first place. You still have to trust regulators to act reasonably, but even if they don't you at least have the backstop of statutory limits that are hard to get around.... The big question, of course, is that even if you support this approach, just what should those blunt rules look like?

A Summary of What Bank Reform Should Be - I’ve thought about the issue for a while, and I want to summarize what the key areas for bank reform are, so that you all can know why legislation like the Dodd Bill won’t achieve much.  There are five key areas that have to be addressed to avoid “Too Big to Fail”:

Robert Reich: Don't Wait for Reform - Banks fear genuine financial reform would cost them a bundle. So even as Wall Street sheds crocodile tears about the terrible things it's done, it is throwing money at Capitol Hill to thwart reforms that would prevent it from continuing to do terrible things. The political payoffs seem to be working. Proposed legislation from Treasury and the House (at this writing, the Senate Banking Committee hasn't reported out) has loopholes big enough to allow bankers to drive their Ferraris through them. Specifically, they permit secret derivative trading in foreign-exchange swaps (similar to what Goldman used to help Greece hide its debt) and in transactions between big banks and many of their corporate clients (as with AIG). Before you wallow in hopeless cynicism, though, it's worth noting that we already have a law against this. It's called the Sarbanes Oxley Act of 2002. It just needs to be enforced.

Dodd’s Financial “Reform” Bill Is Nothing but a Placebo for a Very Sick Economy - A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability—the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009. The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, they are sprawling and complex—so vast that their own management teams may not fully understand their own risk exposures. If that is so, it would be futile to expect that their regulators and creditors could untangle all the threads, especially under rapidly changing market conditions. Second, big banks may believe they can act recklessly without fear of paying the ultimate penalty. They and many of their creditors assume the Fed and other government agencies will cushion the fall and assume the damages, even if their troubles stem from negligence or trickery. They have only to look to recent experience to confirm that assumption.

What Living Wills Can't Do (Part 1 of 2)  I should say something about "living wills," since the idea doesn't seem to be going away. It's hard to critique the idea, since no one seems to be willing to define living wills. The Dodd bill simply requires financial institutions to periodically submit: [A plan] for rapid and orderly resolution in the event of material financial distress or failure.Clear as mud. Thanks guys. In any event, there are really two arguments I want to make regarding living wills, so I'm going to split this into two posts: one on what living wills can't do, and one on what living wills can do. I think it's a bad idea to rely on the financial institution to submit a plan for their own resolution. Resolving failed financial institutions is something that regulators do; it's not something that financial institutions do.

What Living Wills Can Do (Part 2 of 2) - Instead of providing a plan for the financial institution's own resolution, we should instead use living wills as a way to force financial institutions to provide regulators with all of the information they'd need to actually carry out a rapid and orderly resolution. This may not seem like much, but it would actually be critically important. The most important piece of information that financial institutions should be required to periodically submit would be a detailed description of cross-border and intra-company funding arrangements. This would allow regulators to see the direct cross-border consequences of seizing the holding company and placing it in receivership. For example, had Lehman been required to submit this kind of detailed description, regulators would have seen that Lehman centralized its funding/liquidity in the holdco, and would have known that the moment the holdco filed for bankruptcy, Lehman's European broker-dealer subsidiary (LBIE) would have been insolvent too.

Curbing Risk on Wall Street - If "too big to fail" is so evidently bad, what other options do we have? One approach would be to remove the implicit guarantee given to large banks by making it clear that the government will not step in to protect them should they fail. But such pledges alone would not get us very far, as policymakers in a crisis would be very unlikely to hold to them — and might even be wrong to. The sudden failure of a large bank could in fact be catastrophic for the nation's financial system. And when politicians are faced with catastrophe, long-term concerns tend to take a back seat to the immediate crisis. Another option is to make the alternatives to intervention more palatable. This is the logic behind the Obama administration's proposal that financial institutions prepare so-called "living wills" — contingency plans for how to unwind their obligations in the event of failure at minimal cost to the system. All market players would understand in advance what would be involved in the failure of a particular institution, and it would be clear to all that massive intervention would not be required and, more important, should not be expected. In principle, this is a good idea; in practice, however, every institution would have a strong incentive to sabotage its own "living will" — designing it so that it would fail to protect the system from the shock of the firm's collapse, and so requiring the government to step in and keep the firm afloat.

10 Questions for Finance Reformers - The current series of proposals for reforming Wall Street and bankers are toothless facades of what real regulation should look like.It seems that each new proposal for reforming Banking and Wall Street is more banker friendly – and ineffective – than the previous one. They are milquetoast, meaningless, appeasing nonsense. The reformers are in a race to see who can offer up legislation that is least offensive to bankers.In order to legislate reform that will prevent the next meltdown from occurring, I suggest that anyone who introduces new reform legislation must answer the following questions about their proposals:

Where's the regulatory middle ground? - There's an inconsistency between free market ideology and the need for reform in areas like health care and financial services. One of the first steps in reforming the system is to acknowledge that the market won't take care of the problems itself. Once that is acknowledged, i.e. that regulation is needed to fix these market failures, the only question is whether that regulation will be of the "market-based" variety or by edict (e.g. this is the difference between system of tradable carbon permits that allow least cost carbon reduction strategies to emerge and a government set emission limit for each industry which generally does not achieve carbon reductions at least cost). With Democrats mostly opposed to old fashioned edict style regulation -- with their willingness to embrace market-based solutions to regulatory issues --  and with Republicans unwilling to embrace anything that Democrats propose, there is little ground left for those Republicans who are willing to admit that markets sometimes fail to stand upon.

FinReg's killer app - "Capital requirements" are one of those terms that wonks are suddenly using a lot and that plenty of people are probably still confused by. But they're important to understand, because they're the killer app of financial regulation. David Leonhardt offers an exceptionally clear explanation: One good way to understand the importance of capital is to look at the fate of firms that entered the crisis with relatively thick cushions. In 2007, commercial banks had an average leverage ratio of about 12 to 1, according to a recent report by McKinsey & Company. This means the banks had a dollar in assets for every $12 in debt. That was enough for many of them, like Bank of New York, to survive the bust in decent shape. By contrast, the five big investment banks in this country — Bear Stearns, Goldman Sachs, Lehman, Merrill Lynch and Morgan Stanley — were close to or exceeding a ratio of 30 to 1.

Fed Official Wants To Break Up Megabanks - The U.S. should bust up its megabanks and impose strict laws curbing the size and complexity of financial institutions, a top Federal Reserve official told the Huffington Post. In a 45-minute interview this week, Federal Reserve Bank of Kansas City President Thomas M. Hoenig, who's emerged as one of the few influential voices calling for a fundamental redesign of a broken U.S. financial system:

  • Lambasted the tilted playing field that benefits Wall Street banks over Main Street banks;

  • Called the idea that the U.S. needs megabanks to compete globally a "fantasy";
  • Said Congress should mandate simple, easily understood and enforceable rules -- rather than guidelines --
  • Prodded the Senate to get tougher on permanently ending Too Big To Fail by enacting laws that would take away much of the discretion currently held by policymakers
  • And criticized the Federal Reserve's ongoing policy to keep the main interest rate near zero because it "guarantee[s] a spread to Wall Street", enabling unearned profits and "encourag[ing] speculation."

Capital Requirements Are Not Enough - The number of important people expressing serious concern about financial institutions that are too big or too complex to fail continues to increase. Since last fall, many leading central bankers including Mervyn King, Paul Volcker, Richard Fisher and Thomas Hoenig have come out in favor of either breaking up large banks or constraining their activities in ways that reduce taxpayers’ exposure to potential failures. Senators Bernard Sanders and Ted Kaufman have also called for cutting large banks down to a size where they no longer pose a systemic threat to the financial system and the economy. To its credit, the Obama administration recognizes the problem; according to Treasury Department officials, addressing “too big to fail” is one of the central pillars of financial reform, along with derivatives and consumer protection.

Breaking the Banks - With healthcare reform passed, the next big legislative battle will be over financial regulation reform. Unlike the Affordable Care Act, which the nation followed from opening to closing credits, financial reform has been running in a largely empty theater. Many reporters and citizens find themselves walking into the show two-thirds of the way through, bewildered by its complexity. But the movie's not over yet, and the ending is undetermined. So it's important for progressives to understand the essential elements of financial reform. Here's where we are. In December the House passed a comprehensive financial reform bill, crafted mainly by Barney Frank and the Treasury. The bill gets, at best, a B-. There are some strong provisions--an independent consumer protection agency and caps on leverage--and some gaping loopholes, such as exceptions for derivatives that render the new requirements largely moot.

Breaking Up Banks - Jeff Hummel has a post on Liberty and Power about proposals to break up the big banks. He points out that some "market-oriented" economists have supported this proposal as a way of avoiding "too big to fail."  Hummel points out that the U.S. banking industry is very fragmented, with many more banks than typical in industrialized countries. He points out that restrictions on bank branching, dating to before the Civil War, have been responsible for the huge number of tiny banks in the U.S. And further, that these regulations are responsible for the record number of bank panics in the U.S.This argument is very traditional for advocates of free banking, and it is one that I have made often in the past, and one that I still consider sound.

Hijacking Too Big To Fail - Krugman - This AP report illustrates perfectly why I’m worried about emphasizing the too-big-to-fail problem rather than the need for tighter regulation: This is the Republican strategy for beating back effective regulation: just claim that what we’re really doing is telling big banks, sternly, that there will be no more bailouts — they’re not too big to fail. And then, when the next financial crisis arrives — well, it will play just like 2008. President Palin or whoever will find themselves staring into the abyss — and conclude that they have to bail out the financial sector anyway.

GoldiSachs and the TBTF BanksGoldiSachs and her friend MorganStanley were tired (of worrying about insolvency) so they went upstairs in the Banks' home and found a bed labeled TBTF that was just right. In contrast to the children's story, GoldiSachs and MorganStanley were welcomed into the club. Perhaps due to the thinning ranks of Primary Dealers (in the previous 2 years, 5 Banks, ABN AMRO, CIBC, Nomura Securities, Lehman Brothers and the aforementioned Bear Stearns, had left the club or died) or some other reason (more on that in my next post) the Fed and Treasury made the hitherto unsaid policy of Too Big To Fail (TBTF), explicit, and welcomed GS and MS into the club, declaring the new entrants Bank Holding Companies (BHCs), for emphasis.

Geithner: Bailouts 'Deeply Unfair,' Financial System Was Run In A 'Crazy Way' (VIDEO) Treasury Secretary Timothy Geithner said Thursday it's "deeply unfair" that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.He acknowledged public outrage over that and said people watched with disdain as Washington protected high-risk banks and investment houses, even as the national unemployment rate was soaring to double-digit levels for the first time in a generation.But in a nationally broadcast interview, Geithner also argued that President Barack Obama had no choice when confronted with a financial crisis. "As the president has said, we had to do some very unpopular things,"

Contradicting Secretary Geithner - Speaking Thursday morning on the Today show, Treasury Secretary Tim Geithner insisted on two points: 1. If the bank rescue of 2008-09 had been handled in any other way – for example, being tougher on bankers – the costs to the real economy would have been substantially higher. 2. The reform legislation currently before Congress would end all concerns regarding Too Big To Fail in the future.  “The president’s not gonna sign a bill that doesn’t have strong enough teeth.” In 13 Bankers, we disagree strongly with point #1 (see this excerpt) and find point #2 so at odds with reality that it is scary.  Friday morning, also on the Today Show, I had a brief opportunity to suggest a different narrative.

Financial Reform 101 - l Krugman - NY Times: Let’s face it: Financial reform is a hard issue... Reasonable people can and do disagree about exactly what we should do to avert another banking crisis.  So here’s a brief guide to the debate — and an explanation of my own position.  Leave on one side those who don’t really want any reform at all. Even among those who really do want reform, however, there’s a major debate about what’s really essential. One side — exemplified by Paul Volcker, the redoubtable former Federal Reserve chairman — sees limiting the size and scope of the biggest banks as the core issue in reform. The other side — a group that includes yours truly — disagrees, and argues that the important thing is to regulate what banks do, not how big they get. ...Here’s how I see it. Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions.

Greeks, Romans, and The Permanent Committee to Save the World Forever Bill - Paul Krugman writes about the current financial reform efforts, and uses a great metaphor for regulatory regimes. Greek armies were specialized and fought better when they had great leaders, while Roman armies were more generic but robust to poor leadership. “And in the end, since mediocre leaders are the norm, the Roman way prevailed.” Heh. I hate to say this, but the most “Roman” part of the Frank House bill, the clear rule of a 15-to-1 leverage requirement for large systemically risky firms, the part that is exciting to me and to others pushing for strong financial reform, was a fluke. Here’s Ryan Grim, November 20th 2009, Rep. Jackie Speier’s Tough Bank Amendment Passes With Room Nearly Empty

A shameful lack of liquidity constraints - Bloomberg points out something that we should be quite troubled by:  In 2,615 pages of financial reform legislation introduced in the U.S. Congress, there are no rules to ensure that banks keep enough cash-like assets when credit disappears.Guidelines on liquidity risk management, which were published March 17 by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp., also avoided spelling out how much banks need to hold, and in what form, to make sure they don’t collapse if short-term lending dries up…The issue here is regulatory creep. When times are good, banks will reduce their liquidity buffers, and this will seem reason to regulators. They will hold back egregious reductions, but they might be unable to stop a slow trend where banks become less liquid.

Setting rules for capital and liquidity - Kevin Drum and I had a thrilling discussion about liquidity risk and capital ratios over lunch on Friday. He sums up:  Getting Congress and the Fed to impose higher and more rigid capital requirements on big financial institutions is important, but what’s even more important is getting an international agreement in place to make sure everyone else does it too. However, there’s really no one who does a good job of reporting on this. Largely this is because the discussions are all held behind closed doors, so we only hear about the status of negotiations when someone like Larry Summers or Mervyn King drops hints in a speech. It’s like reporting on the intelligence community, except worse. And no sooner do we ask for good reporting on this front than along comes Bloomberg’s Yalman Onaran, with a 1,600-word story on the national and international rules and guidelines governing liquidity risk management.

In Financial Regulation, Recognize Our Limitations … THE economy is recovering, in baby steps, from the financial crisis and deep recession of 2008 and 2009. A big question still looms on the horizon: What can policy makers do to prevent this kind of thing from happening again? Perhaps the best place to start is to acknowledge what we cannot do. If recent events have taught economists and policy makers anything, it is the need for humility.  One thing we cannot do very well is forecast the economy. The recent crisis and recession caught most economists flat-footed. This is nothing new. We have never been good at foretelling the future, but when the news is favorable, others forgive our lack of prescience.

Insider Trading - Financial regulatory reform is looking better all the time, isn't it? No serious capital or leverage requirements. A consumer protection agency housed at the Fed and barely worth the paper it's implemented on. And no exchange trading of CDS because the exchanges don't want to do it and Congress probably won't force them to. I don't know about you, but I'm about ready to say we should just scrap the whole thing and admit that we're OK with Wall Street plutocrats continuing to run the country for their own benefit until they destroy the country properly. At least that would have the virtue of honesty. And by the way: Felix will shoot me for saying this, but I've pretty much come to the conclusion that credit default swaps should simply be banned.

Fed’s Sack Says Financial System Needs Leverage - Brian Sack, head of the markets group at the New York Fed, said the financial system can’t operate well without leverage and signaled that he supports the return of a “properly” structured securitization market. “Securitization is a powerful vehicle that should play an important role in the intermediation of credit in the economy,” Sack said in a speech delivered by video conference from New York to an audience in Sydney. “We should also understand that a reduction in leverage to near zero in the financial system is not desirable.”  Sack’s comments come as U.S. lawmakers revamp regulation to prevent a recurrence of the financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007 and led to about $1.76 trillion in losses and writedowns by banks and other financial institutions worldwide. Fed Governor Kevin Warsh, speaking yesterday in New York, said the securitization market will ultimately come back.

How Much Leverage Do Banks Need to Be Useful? - Mankiw - I think it is possible to imagine a bank with almost no leverage at all. Suppose we were to require banks to hold 100 percent reserves against demand deposits. And suppose that all bank loans had to be financed 100 percent with bank capital. A bank would, in essence, be a marriage of a super-safe money market mutual fund with an unlevered finance company. (This system is, I believe, similar to what is sometimes called “narrow banking.”) It seems to me that a banking system operating under such strict regulations could well perform the crucial economic function of financial intermediation. No leverage would be required.”

Don't Be Narrow-Minded –Krugman - Via Brad DeLong, I see that Greg Mankiw seems to favor narrow banking: require banks to hold all their deposits in liquid, short-term assets, thus obviating the risk of financial crises. I’m glad to see Greg trying to think this through; but I’d argue that this is all wrong, on two levels: if it were possible, it would do away with the main purpose of banks, and anyway, it’s not possible. Where Greg goes astray here, I think, is by trying to apply Modigliani-Miller, which says that capital structure doesn’t matter. If you look at the assumptions behind that argument, you realize that it requires that all assets be perfectly liquid. They aren’t, of course — and that’s precisely why we need banks.

The Maturity Transformation (and Liquidity Transformation, and Safety Transformation) Industry - Paul Krugman writes: Don’t Be Narrow-Minded: I see that Greg Mankiw seems to favor narrow banking: require banks to hold all their deposits in liquid, short-term assets, thus obviating the risk of financial crises.... I’d argue that this is all wrong, on two levels: if it were possible, it would do away with the main purpose of banks, and anyway, it’s not possible....Let me focus on Krugman's first objection to narrow banking. It helps, I think, to ask the economist's question: What is the market failure? What is the market failure that would justify narrow banking--which means using the fist of Leviathan to shut down the maturity-transformation industry? Why not let those who promise that they can turn long-term illiquid risky sow's-ear investments into short-term safe liquid silk purses carry out their trade?

Prosecuting insider trading in CDS -  It’s now been three and a half years since Bloomberg’s Shannon Harrington and John Glover showed that there was a very strong pattern of CDS spreads gapping out in advance of debt issuance by large corporates, which came as a surprise to everybody else. And it’s been three years since I noted that the SEC was going to have a hard time prosecuting insider trading in the CDS market, since CDSs aren’t securities.Since then, of course, we’ve had a major financial crisis and the introduction of financial regulatory reform which would give oversight of single-name CDS to the SEC. But if you need an example of how slowly these things move, just look at the front page of today’s WSJ, which is reporting on an insider-trading case based on trades and phone calls which took place in July 2006:

Gaming CDS (non-)rules continues In Wall Street’s Wild West, it’s OK to rob the stage coach because there’s no sheriff to enforce the law. The Journal’s Kara Scannell has the story of defendants in an insider-trading case trying to get off on a technicality.* They claim swaps aren’t “securities” and therefore the SEC has no jurisdiction. There’s a broader theme at play, which I note below. First the story…The broader theme is how those trading CDS continue to exploit regulatory loopholes wherever they can, sometimes making contradictory arguments. This came up in the case of Ambac in Wisconsin last week, about which I wrote a column.

“We Are in a Cabal… Five or Six Players … Own the Regulatory Apparatus. Everybody Is Afraid to Regulate Them” - Harold Bradley – who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation - told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges: There is no incentive from the moneyed interests in either Washington or New York to change it…I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus. Everybody is afraid to regulate them. Indeed, as I wrote last May: In at least one area – one of the most important causes of the financial crisis – reform has already been defeated.

The Wall St. Lobby's Flip-flop - If you need any more reason to distrust Wall Street's lobbying armada, which has spent millions to undercut a new financial reform bill, then look no further than an op-ed from Elizabeth Warren, the staunch consumer advocate and bailout watchdog, published today. In it, Warren highlights the utter hypocrisy of the banking lobby's aim to neuter, if not outright kill, a new, independent consumer financial protection agency. Among the banking lobby's top talking points for fighting this consumer agency is that it would separate what's called "safety and soundness" regulation consumer protection measures, like cracking down on predatory lenders, usurious interest rates, and unfair credit card penalties.

Banking on hypocrisy - Elizabeth Warren - Banks or families? For almost a year, the big banks and the American Bankers Association have presented that choice to Congress. Lobbyists argue that meaningful consumer protection will jeopardize the safety and soundness of banks, telling lawmakers that they must decide between the two. While American families have made clear that they overwhelmingly support the reforms that a new consumer financial protection agency will produce — like clear, understandable terms and conditions for consumer credit products and accountability for the big banks — the lobbyists have made equally clear their plan to kill the agency. ABA lobbyists now aggressively insist that separating consumer protection and safety and soundness functions would unravel bank stability. Yet just a few years ago, they heatedly argued the opposite — that the functions should be distinct.

The Woman Who Just Might Save the Planet and Our Pocketbooks… What if our economy was not built on competition? Nobel Prize winner Elinor Ostrom talks about her work on cooperation in economics. Fran Korten, YES! Magazine’s publisher, spent 20 years with the Ford Foundation making grants to support community management of water and forests in Southeast Asia and the United States. She and Ostrom drew on one another’s work as this field of knowledge developed. Fran interviewed her friend and colleague Lin Ostrom shortly after Ostrom received the Nobel Prize.

BlackRock’s Fink Snubs ‘Socialized’ Money-Fund Industry Plan(Bloomberg) -- Laurence Fink, chief executive officer of BlackRock Inc., stands alone among the biggest U.S. money-market fund providers in opposing a proposed safety net for the industry that manages $3 trillion for investors.  Fink, who has said companies should set aside their own capital cushions, won’t back a plan to spread risk among money- market mutual fund firms, according to Brian Beades, a spokesman for BlackRock, the world’s biggest asset manager. JPMorgan Chase & Co., Federated Investors Inc., Vanguard Group Inc., Goldman Sachs Group Inc. and four other firms have endorsed the plan, which was proposed by the industry’s trade group last month.

N.Y. Fed Knowingly Bought Lehman Junk Under Geithner - As Lehman Brothers headed toward bankruptcy in 2008, the New York Federal Reserve Bank, under the direction of now-Treasury Secretary Tim Geithner, reportedly allowed itself to be used as a "warehouse" for Lehman Brothers junk loans. A report from Anton Valukas, an examiner appointed by the court to investigate how Lehman’s accounting, found clear evidence that the New York Fed knew that Lehman was sending it garbage that it had no intention to market, even though Fed guidelines say it can only accept investment grade bonds. The move, in fact, created baskets of assets for the specific purpose of selling to the Fed for far more than they were worth, The Huffington Post reports.

Lehman Says Unsecured Claims May Fall to $260 Billion (Update3) - (Bloomberg) -- Lehman Brothers Holdings Inc., which has been reviewing creditors' demands for payment, said unsecured claims may fall to $260 billion as it rejects inappropriate claims, from more than $819 billion submitted, according to a regulatory filing today.If Lehman succeeds in trimming the 65,000 claims, there will be more money for the remaining creditors who survive the review. Chief executive officer Bryan Marsal has said he may recover $40 billion to $50 billion from Lehman assets in the next five years. "A review of claims both on a substantive basis and for purposes of plan classification is ongoing," Lehman said in the filing.

Councils free to sue Lehman Bros - The court's ruling yesterday knocked over a deal that had been recommended by Lehman Brothers Australia, which is in liquidation, under which it would pay the councils between 2.4c and 10c of each dollar for failed investments, while other related Lehman Brothers companies could get all their money back.The High Court decision also means the councils can sue Lehman Brothers in the US to recover their investments. The councils say their funds should never have been used to invest in products, such as collateralised debt obligations sold by Lehman Brothers, as they were outside their investment guidelines. Some councils lost millions of dollars, while others are still holding their investments. About $1.2bn of the controversial Lehman Brothers products were sold to various Australian councils, charities and churches.

(Almost) All-Ivy Audit Notes: The Corporation, Repo 105, Complexity Trap : CJR - Justin Fox of the Harvard Business Review has the most interesting read of the day, an interview with historian Brian Murphy, who’s studied early American corporations, and says the Founders would be appalled by how corporate power and status has grown: Read the whole thing. And I’d love to read more on the evolution of the corporation in America. — The Wharton School’s business journal Knowledge@Wharton has a very good piece explaining why Lehman’s Repo 105 was pure fraud. — NYU’s Clay Shirky has a fascinating post (okay, let’s say it ties for most-interesting of the day) on complexity and what it means for the institutional media, pointing to a book implicating complexity in the collapse of civilizations from Rome to the Mayans.

SEC Launches Repo 105 Investigation -- The Financial Times reports that the SEC has launched a probe into whether other financial firms used repos to engage in what amounted to financial fraud (as in fraudulent financial reporting), although perilous few are using the “F” word. From the Financial Times:US regulators on Monday asked more than 20 financial groups whether they engaged in transactions along the lines of “Repo 105” – an accounting device that helped Lehman Brothers conceal its high leverage ratio during the financial crisis.The corporate finance division of the Securities and Exchange Commission wrote to chief financial officers of “close to two dozen” large foreign and domestic banks and insurers, demanding details of repurchase agreement deals.

Wall Street’s Repo 105 Cops Wake Up From Dead – BusinessWeek -- The good news this week from the Securities and Exchange Commission is that it’s on the hunt for companies that have used Lehman-style accounting tricks to make themselves look less leveraged than they really are. Now for the downside: The headline-chasing agency is way too late, as usual.The SEC on March 29 said its Division of Corporation Finance would be sending detailed questionnaires to two dozen large banks and insurance companies. Among other things, the SEC is asking the companies if they ever treated repurchase agreements as sales for accounting purposes during the past three years as a way to temporarily shrink their balance sheets. This, readers may recall, is the same gimmick Lehman Brothers executives used, known internally by the name Repo 105. It’s probably no coincidence that the news of the SEC’s queries came less than three weeks after Lehman bankruptcy examiner Anton Valukas broke the story about Repo 105, which Lehman used to trim as much as $50 billion off its balance sheet at the end of any given quarter.

Full SEC Letter Demanding Repo 105 Disclosures From Financial Firm CFOs… Dear Chief Financial Officer: We are currently reviewing your Form 10-K for fiscal year ended__. In our effort to better understand the decisions you made in determining the accounting for certain of your repurchase agreements....

Cassandra Does Tokyo: We Are All Zaitech Now - Repo 105 has come and gone in the media - a mere Tourette's tic-of-a-reaction. Lots of shock and indignation (in which, surprisingly, NY law firms came out looking good), along with calls for some good ol "hang 'em high" Fuld-targetted vigilanteism, but not the amount of introspection one might expect. Former bank analyst, John Hempton, now CIO at Sydney Bronte Capital made the very important point (in Repo 105's Antecedents: Ken Lewis) that Repo 105 was an old trick, commonly used by many firms to - without mincing words - brazenly deceive. ,,,The natural question implied by Repo 105 and by John's accusation, in the bigger picture is, "How endemic is this raping of the spirit of the law", not just in finance but across our society ? Wasn't Enron and Sarbox was supposed to usher in a new era?

Bloomberg on the CDO Shuffle That Helped Break AIG : Ryan Chittun – CJR - Bloomberg dropped a major investigation today on the AIG collapse, shedding much-needed light on the conflicted role of CDO managers in the crisis—something that’s gotten too little coverage. Of course, Goldman Sachs (an Audit funder) is involved. But Bloomberg brings Societe Generale-owned TCW to the fore, and it looks very bad for them. Keep in mind as you read the piece that Goldman Sachs and Societe Generale, a French bank, were the two biggest beneficiaries of the backdoor bailouts taxpayers provided through AIG—more than $30 billion.  Bloomberg zeroes in on a CDO called Davis Square Funding III that Goldman created in 2004, TCW managed, and AIG insured. Bloomberg writes that TCW eventually swapped out one-third of the bonds, almost always with worse ones from later vintages, which is the year of origination.

Did the Federal Government Make Money Bailing Out Citigroup? » The Washington Post is anxious to tell its readers that the government made a profit on its bailout of Citigroup. This claim gives a whole new meaning to the notion of "profit." The government gave enormous amounts of money to Citigroup through various direct and indirect channels. It is only getting a portion of this money back in its "profits," the rest is going to Citigroup's shareholders (e.g. Robert Rubin) and its millionaire executives who are highly skilled at getting the government to hand them money.

CDS Counterparties Hoist on Their “Not Insurance” Petard -  Yves Smith - Rolfe Winkler has an useful sighting on a wrinkle in the Ambac receivership. A big bone of contention has been the credit default swaps that Ambac wrote on various structured credit transactions. While many of the contracts provided for considerably delayed payment (they were different in this regard from AIG’s CDS), as Ambac’s condition worsened, its obligations increased to about $120 million a month. That is enough of a cash drain to impair Ambac on an ongoing basis.  Enter Wisconsin regulator (Ambac is domiciled in Wisconsin). The regulator is trying to avoid putting Ambac into receivership, since the banks would argue that that was a credit event on their CDS and would argue for immediate payment. Here is the conundrum and the proposed solution:

The CDS inquisition, California edition -It was only a matter of time. California — following in the footsteps of Ireland and Iceland, Greece, Spain, and politicians of all stripes and nationalities — has called for an examination of credit default swaps sold against its bonds. As Reuters reported:California Treasurer Bill Lockyer has sent a letter to six big banks that underwrite the state’s municipal bond sales, asking what the banks’ role may be in also selling credit default swaps on Californian debt. The banks in question are Bank of America Merrill Lynch, BarCap, Citi, Goldman Sachs, JP Morgan Chase and Morgan Stanley. According to Reuters, Lockyer — who surely has a lot on his mind, given the steady fiscal implosion of the state — is concerned that “spreads on California CDS are mispricing the state’s credit risk and inflating interest costs.”

Robert Reich (Fraud on the Street) The Securities and Exchange Commission announced Monday it had begun an inquiry into two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers. Where on earth has the SEC been? It’s now clear Lehman Brothers’ balance sheet was bogus before the bank collapsed in 2008, catapulting the Street and the world into the worst financial crisis since 1929. The Lehman bankruptcy examiner’s recent report details what just about everyone on the Street has known since the firm imploded – that Lehman defrauded its investors. Even Hank Paulson, in his recent memoir, referred to Lehman’s balance sheet as bogus. In order to look like it could borrow $30 for every dollar of its own money, Lehman shifted liabilities off its books at the end of each quarter. Its CPA, Ernst and Young, approved of this fraud against the advice of its own whistle blower, whom Ernst and Young fired

Financial Fraud on Wall Street - The Fed and American and foreign bankers gambled and lost, so it was up to American taxpayers to bail them out. Needless to say, these actions were outrageous. The Fed not only had no authority to do what they did, but they did, but they also suborned perjury. We wonder how the Appeals Court missed that? The Fed has buried our country in debt, allowed unbelievable leverage and absolutely refuses to tell us what they are up too. Except for a few in Senate and House hearings, questioning is a total farce. The Fed has done as it pleases for 97 years and that has to stop. We cannot allow Ben Bernanke to lie before Congress and get away with it either. We also cannot allow any corporation or financial institution to keep two sets of books and not mark their investment to market.

Bill Black: To Own a Country, Rob a Bank (5 videos) New Deal 2.0 readers know that Roosevelt Institute Braintruster Bill Black isn’t afraid to tell it like it is, and in recent weeks he’s been turning up the heat on the banksters who defrauded the American public and brought the country to the brink of economic collapse.  Now a revealing interview with the Real News Network, entitled “To rob a country, own a bank,” has one blogger asking, “Why hasn’t Bill Black been killed?”While we don’t believe Bill is in any real danger, his brutal honesty does pose a serious threat to the financial sector’s status quo.  You can watch the entire interview below and see why Bill is enemy number one among the opponents of financial reform.

Straight-Shooting Volcker Takes Aim at Bank Management - At a session on financial sector governance, former Federal Reserve Chairman Paul Volcker said that bank directors weren’t mainly responsible for the bad decisions made by financial firms— management was. Part of the problem is that top managers are paid too much, he told a conference organized by the Center for Strategic and International Studies, so changing incentives doesn’t make a big difference. “If you’re making $20 million a year, it doesn’t matter if you spread it out over one year, three years or five years,” or have provisions to claw back some of the pay later on.Part of the problem is that top managers are too frequently blind to the moral dimension of their jobs. He derided the idea that “the more you make, the more qualified you are.”

Jamie Dimon Complains About Demonization of MegaBanks - Yves Smith - One has to wonder whether anyone in a position of influence really believes what he is selling. At best, Jamie Dimon’s defense of too big to fail banks like his own JP Morgan is a vivid illustration of Upton Sinclair’s saying, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” But Dimon’s patently self-serving argument is more likely part of a broader industry push to try to win over the public it just looted.  The Financial Times took note of his salvo, which comes in his letter to shareholders

Pay of Hedge Fund Managers Roared Back Last Year – NYTimes - The Lazarus-like recovery of the nation’s big banks did not benefit just the bankers — it also created huge paydays for hedge fund managers, including a record $4 billion gain in 2009 for one bold investor who bet big on the financial sector.  The manager, David Tepper, wagered that the government would not let the big banks fail, even as other investors fled financial shares amid fears that banks would collapse or be nationalized. That strategy handed Mr. Tepper, a plain-spoken Pittsburgh native who first made his name at Goldman Sachs, the top spot on the annual ranking of top earners in the hedge fund industry by AR: Absolute Return+Alpha magazine (subscription required), which comes out Thursday.

Rent party - America is controlled by what economists call rent-seeking behaviour. Virtually everyone important has a revenue stream, and they don’t want anyone to take that revenue stream away. So pharma and insurance companies, who would have been damaged badly by single payer (they would have lost hundreds of billions) made sure that a plan to provide everyone with better health care for a third less than current costs was never even considered.The most important game in America today is the contest for control of government, so that government can directly or indirectly give you money. Health care “reform” in which the government decided to force Americans to buy private health insurance or be fined is merely the latest (and most blatant) example. Virtually every industry, from finance to telecom to agriculture is involved in this game. It is in all their interests to make sure the game continues, but they do fight amongst each other for the spoils.This game will continue until the US can no longer afford it.

Comptroller of Currency Often Sides With Banks, Critics Say - NYTimes -  The Office of the Comptroller of the Currency operates this service center, fielding thousands of complaints each year about the nation’s banks.  One recent morning, a woman groused that her credit card limit had been cut for no apparent reason. Another said her bank had continued to charge her for disputed transactions on her credit card. A man said he was charged overdraft fees on the same day he made several deposits. What many customers may not realize is that the man who oversees the operation used to represent the very banks they are complaining about. John C. Dugan, a former bank lobbyist, has been comptroller since 2005 — when the mortgage boom was in full force — and he’s responsible for regulating banks with national charters, including giants like Citibank and Chase.

Credit Unions, Commercial Banks at Odds Over Lending Turf - A proposal to double the percentage limit that determines how much credit unions can lend to small businesses is drawing sharp criticism from commercial lenders, building upon an already thorny relationship between the two. The Credit Union National Association is lobbying Congress to increase how much credit unions can lend to small business from 12.25% to 25% of a credit union’s total assets, and increase the individual loan amounts that wouldn’t count toward the cap from $50,000 to $250,000. As policymakers continue to wrangle with how to reduce constrained lending standards to companies, the association — seizing the opportunity put forth by the financial meltdown — said credit unions are viable resources for businesses who need loans.

 FT Alphaville » Credit where it counts? -*Poof* That is the sound of US bank credit evaporating.Or maybe, a giant *Pop* would be more apt given the credit frenzy pre-2007. Gluskin Scheff’s David Rosenberg estimated in February that $740bn of bank credit had evaporated since the credit crisis began. That’s despite quantitative easing and a myriad of liquidity operations undertaken by the Federal Reserve to help stimulate bank lending. You can see the credit contraction in the below chart, sourced from the Fed, and sent in courtesy of Sean Corrigan of Diapason Commodities:

What Works About the FDIC? - Read Ezra Klein and Matt Yglesias (between the two of them they have more years than I do). Klein thinks the FDIC works well. Yglesias notes that it keeps eating banks every Friday and has doubts about the quality of its prudential regulation. I will argue that the FDIC has more of an incentive to make banks prudent than the SEC, the Fed, the Treasury or the comptroller of the currency. The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don't read this blog). So long as the FDIC doesn't run out of money, it doesn't have to go begging to Congress.

Washington’s Scrap Dealers - From their perch at the Federal Deposit Insurance Corporation, the two senior officials are responsible for sorting through the carnage of the financial crisis and finding buyers for the deposits, branches and loans of more than 200 failed banks.Between them, Mr. Wigand and Mr. Jiampietro have sold more than $508 billion in assets over the last two years, from financial giants like Washington Mutual and Corus Bankshares to little-noticed community lenders. They have reeled in new investors with innovative transactions. One October night, they announced they had found a buyer for nine failed banks.

Growth of Problem Banks (Unofficial) - By request here is a graph of the number of banks on the unofficial problem bank list over time. We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public. CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest. Based on the current trend, there is a reasonable chance that the unofficial problem bank list will be over 1,000 banks later this year ...

Fed's Evans: Commercial Real-Estate Loans 'A Key Problem' - The head of the Chicago Federal Reserve said Tuesday that policymakers would have needed to crack down on U.S. commercial real-estate lending in 2004 or 2005 to head off the current rise in delinquencies, which some observers view as a threat to economic recovery. Charles Evans said the inability to recognize at that time the systemic risks built up through commercial property lending practices highlighted the difficulty regulators faced in identifying and neutralizing potential asset bubbles. "Commercial real-estate loans are a key problem area for the banks in my District,"  Evans used the mounting delinquencies in commercial real-estate loans and derivatives to justify his calls for a more expansive role for the central bank in policymaking in oversight, amid a spirited debate that includes calls for its role to be more narrowly defined.

Geithner: Commercial real estate loans problematic  Mounting losses from commercial real estate loans will continue to be a problem for the U.S. and especially smaller banks, but it can be managed, Treasury Secretary Timothy Geithner said Monday. Commercial real estate's still going to be a problem for the country," Geithner said in an interview with CNBC. "But we can manage through this process." Geithner also said the Treasury Department's announcement that it will begin selling the stake it owns in Citigroup Inc., which could net about $7.5 billion to the government, shows "how far we've come" in exiting from the financial bailout program.

Elizabeth Warren: Half of commercial RE mortgages to be underwater - Bad news for commercial real estate and the economy: By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, in a wide-ranging interview on Monday. “They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending." As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normalcy in 2010

CMBS Delinquencies Increase to 6 Percent in February - The delinquent unpaid balance for commercial mortgage backed securities (CMBS) increased to $47.82 billion in February, soaring $1.87 billion from January, according to the latest Monthly CMBS Delinquency Report released Sunday by investment rating agency Realpoint, LLC.The overall delinquent unpaid balance was up almost 300 percent from February 2009, when only $11.98 billion of delinquent unpaid balance was reported. In addition, it was more than 21 times the low point of $2.21 billion in March 2007.

Special Report: Holy bubble! Churches struck down by foreclosures… Supercheap, few-questions-asked loans were a temptation even churches could not resist, but now they are paying for their sins as the debt crisis enters the house of God. Long considered among the safest of borrowers, churches gambled on real estate at a time when credit copiously flowed and lenders were startlingly lax. But places of worship have since been battered by the economic downturn. Donations have dipped, investment returns have plunged and bank credit is still hard to come by.

Downtown NYC Towers Empty as Best Market Falters (Bloomberg) -- Downtown Manhattan, where demand for office space began to surge three years after the 9/11 terrorist attacks, is about to lose its spot as the best- performing U.S. market.  Vacancies may exceed 14 percent of the area’s 87 million square feet by late 2011, empty space that’s equivalent to four Empire State Buildings and the highest rate since 1997, according to property broker Cushman & Wakefield Inc. That doesn’t include the 4.4 million square feet of offices in two towers now under construction at the World Trade Center site. Those are scheduled for completion in 2013. “The amount of space that’s potentially going to come to the market will increase availabilities and put pressure on pricing,” said Kenneth McCarthy, Cushman’s head of New York- area research. “It will be quite awhile before it can be absorbed.”

Broker: Half of Phoenix area’s small, midsize retail centers in trouble - About half of the small to midsize retail shopping centers in metro Phoenix are in financial trouble. According to David Wetta, director of Marcus & Millichap’s national retail group, there are 1,753 retail properties in the Valley between 5,000 and 300,000 square feet. “Of that total, I estimate that 50 percent -- or about 876 -- are underwater. In other words, today’s value and even tomorrow’s value up to the next five years are less than the debt on these properties,” he said. Wetta predicts 50 percent of the centers in trouble will go through foreclosure or bankruptcy within two years. However, he said, “It will take between three and five years for those properties to be sold to new owners and begin the process of normalization.”

$1.25 Trillion Effort to Buy Mortgage Debt Ends - NYTimes - The Federal Reserve’s single largest intervention to prop up the American economy, its $1.25 trillion program to buy mortgage-backed securities, came to a long-anticipated end on Wednesday. The program has been credited with holding mortgage interest rates at near-record lows and slowing the nationwide decline in home prices that threatened to send the economy into an extended slump. When the central bank announced the program two days before Thanksgiving 2008, the spread, or difference, between the rates for a 30-year fixed-rate mortgage and a 10-year Treasury note exceeded 2.5 percentage points, or 250 basis points, nearly twice the typical spread.  Demand for mortgage bonds had been frozen since the federal takeover of Fannie Mae and Freddie Mac, the giant mortgage-finance companies, in September 2008.

Mortgage Problems? Fed Can Relate - WSJ - The Federal Reserve Bank of New York doesn't have to look far to understand the woes of banks and investors that hold loans and securities underpinned by real estate. It can look at its own books. A review of the portfolios the regional Fed bank assumed as part of two financial bailouts in 2008 shows a complex hodgepodge of souring commercial-property loans, securities backed by U.S. subprime loans, credit insurance written on troubled bond and mortgage insurers and loans tied to struggling hotels in Georgia and California. The New York Fed published the detailed portfolios on Wednesday.

Fannie, Freddie may fill Fed void in mortgage market (Reuters) - Goodbye, Federal Reserve. Hello Fannie and Freddie. With the Federal Reserve ending its 15-month $1.25 trillion mortgage bond buying binge on Wednesday, delinquent loan buyouts by Fannie Mae and Freddie Mac could serve as the saving grace for the $5 trillion agency mortgage-backed securities market. The paydowns from these buyouts will put billions into the hands of mortgage investors for reinvestment and significantly reduce supply, mitigating the massive void the central bank will leave behind and helping keep yield spreads near record tights.

Geithner: Fannie, Freddie Debt Isn’t Sovereign Debt - Geithner, responding to a letter from to Rep. Scott Garrett (R., N.J.), said debt from the two government-sponsored enterprises isn’t the same as U.S. Treasurys, but that support for the two firms “is crucial in helping to stabilize the housing market and the overall economy. The Treasury’s actions regarding the two firms, which have been under government control since September 2008, “should leave no uncertainty about Treasury’s commitment to support Fannie Mae and Freddie Mac,” Geithner wrote.“The Administration will take care not to pursue policies or reforms in a way that would threaten to disrupt the function or liquidity of these securities or the ability of the GSEs to honor their obligations,” Geithner wrote.

Where Are Mortgage Rates Going after Fed Exit Finalized - The Fed will officially put the kibosh on its $1.25 trillion shopping spree in the mortgage securities market Wednesday, essentially removing the one major buyer from a market that still bears deep scars from the financial crisis.The prospect of the Fed’s buying power vanishing had caused some consternation among those who watch the mortgage markets. They wondered whether bidding adieu to the biggest buyer might mean that prices would fall and yields would rise, yanking up consumer mortgage rates and raising another hurdle for the housing market. But as this chart — from Strategas Research’ Don Rissmiller — shows, the mortgage market seems to be pretty placid over the Fed’s ever-so-gentle, and well-telegraphed exit from the market:

Home prices inch up, but analysts fear rebound is fading… Home prices rose modestly in January, according to a closely watched index released Tuesday, but some housing industry analysts remain concerned about the sustainability of the housing sector rebound.  Home prices in 20 cities tracked by the Standard & Poor's/Case-Shiller home price index rose 0.3 percent on a seasonally adjusted basis in January compared with December. That was the eighth consecutive monthly increase in the index. Compared with the same period a year earlier, prices were down 0.7 percent.

Home Prices in 20 U.S. Cities Increased 0.3% in January - (Bloomberg) -- Home prices in 20 U.S. cities unexpectedly rose in January, indicating the housing market is stabilizing as the economy expands. The S&P/Case-Shiller home-price index climbed 0.3 percent from the prior month on a seasonally adjusted basis, matching the gain in December, the group said today in New York. The gauge was down 0.7 percent from January 2009, the smallest year- over-year decrease in three years. Cheaper homes, low borrowing costs and government incentives have combined to support the housing market, which helped trigger the worst recession since the 1930s. Gains in hiring are required to overcome mounting foreclosures that are keeping pressure on prices and posing a threat of renewed declines in real estate.

Home price dip continues - - The market seems to have pulled the rug out from under housing industry hopes for a sustained early recovery.After a five-month run-up in home prices starting last spring, prices have now fallen for four consecutive months, according to the S&P/Case-Shiller Home Price Index of 20 cities, a gauge of market values, released Tuesday. In January, prices were down 0.4%, compared with December and have fallen 0.7% from a year earlier."The rebound in housing prices seen last fall is fading," said David Blitzer, chairman of the Index Committee at Standard & Poor's. "Fewer cities experienced month-to-month gains in January."

Housing Prices May Be Heading for a Double Dip - Anyone thinking housing prices have reached a bottom had better do some recalculating. Despite Tuesday's Case Schiller report showing smaller declines in January, housing prices may already be in another free fall. Newly revised numbers are pointing to the decline. The Federal Housing Finance Agency's (FHFA) adjusted figures show a housing price decline of 2 percent in December and 0.6 percent decline in January—reversing some regional price increases in 2009.  And more pricing dips are predicted.

Shiller: 50-50 Chance For A Double Dip In Housing Market…Bloomberg TV video: Robert Shiller said there is a "50-50" chance that a double-dip will occur in the housing market.

Delinquencies Continue Rising - In light of our discussion yesterday (More Foreclosures, Please), Jim Fickett of ClearOnMoney sends us these charts: They are the result of the Mortgage Metrics report for Q4 of 2009, and the results are distressing. Serious delinquencies continue to rise – in the 64% of the market covered by Mortgage Metrics, there are now about 3.4 million loans either seriously delinquent or in the process of foreclosures. Completed modifications actually declined in each of Q2-Q4 of 2009. (Foreclosures have been flat). Thus, as this chart suggests, the various programs amount to little more than window dressing hiding the underlying weakness of the Real Estate market

HAMP = Foreclosure Over the last year, I have been watching the HAMP modification program with great interest. I have wanted to believe that the Federal Government would actually put into place a loan modification program that would help homeowners, though I knew that this was likely false hope. The results are now in, at least in my opinion. HAMP is a complete fraud! Nothing else can be said otherwise. The Government has once again put into place a program that will not help homeowners. Instead, HAMP modifications will end up postponing homes foreclosures for a period of time for modified loans, but, most will end up losing the home in the end, except for a “very” lucky few who actually make it. I cannot believe that the Government expected anything other than the HAMP program would end up being a failure. To understand what to expect, we must look inside the numbers.

More Mortgage Meddling: Will it Work This Time? - The Obama administration has just released the details on yet another "major" push to help homeowners who are underwater on their mortgages--a number now estimated at something like 20% of all homeowners. The last big pushes yielded little in the way of results.  The problem we thought we had a year ago--vulnerable homeowners being rocked by resetting "teaser rates" on their adjustable mortgages--turns out to be much less pressing than we thought.  Instead, we an income problem:  a lot of homeowners whose income has fallen too far to afford any reasonable payment on their homes. Until around 2005 or 2006, home equity actually cushioned other income shocks.  If anything bad happened, you could always refinance, or in extremis, sell.  Now people who have had income shocks can do neither.  People who need to move for career or family reasons are also trapped. That's why many people have suggested principal write-downs.  But this has run into multiple problems.

Obama's mortgage plan won't bring relief -- But the super-sleuths at the Fed, Treasury and other centres of decision-making just could not see the bubble. They couldn't even see the flood of bogus mortgages being spit out by the millions and packaged into mortgage-backed securities and more complex instruments.As a result of this astounding incompetence, we are now living through the worst downturn since the Great Depression. Because Greenspan and Bernanke and the rest messed up, tens of millions of workers are unemployed. Close to one in four mortgages are underwater and the baby boom cohort has seen much of its wealth destroyed as they reach the edge of retirement. In short, as Joe Biden might say, this was a big fucking mistake.Remarkably, the folks in charge seem to have learned zip. They still have no clue about the housing bubble. How else can anyone explain the Obama administration's latest proposal for helping out underwater homeowners?

Modding mods - Friday’s announcement that the administration is overhauling its mortgage modification program to encourage principal forgiveness shows they understand that unless folks have equity in their homes, mortgage defaults will continue in huge numbers. The plan is a decent one, and it appropriately would have lenders absorb the lion’s share of losses. Still, its an all-carrots approach that may be tough to get off the ground. And taxpayers would get even more deeply involved in housing finance. If it doesn’t work, regulators have a stick to force lenders to take losses, which I describe at the end.

Extending the home-buyer tax credit: up is down and down is up - Once again, the federal home-buyer tax credit meant to spur demand in the housing market is coming to an end. To claim the credit—worth up to $8,000 for first-time buyers and $6,500 for folks who already own a home—you've got to be in contract by April 30 and close by the end of June. Much as happened the last time this deadline loomed, people are rushing to buy houses. Also like last time: there's talk of hanging on to the credit for a bit longer. But it might surprise you who thinks that's a good idea and who doesn't. Consider this passage from a recent NYT story: Arguments for extending the tax credit a second time are just beginning. Robert Shiller, a professor of economics at Yale and co-developer of the Standard & Poor's/Case-Shiller housing price index, is an early advocate. He thinks the credit was a bad idea that nevertheless the market cannot do without.

Gaming Uncle Sam’s Mortgage Modification Program - A new release by the SIGTARP (Office of the Special Inspector General for the Troubled Asset Relief Program) is exceptionally enlightening in detailing how a likely significant percentage of those homeowners who entered the trial mortgage modification process gamed the system.Once again, major high five to our friends at 12th Street Capital for sharing this report and providing insightful commentary. As 12th Street pointed out: With all of the hoopla surrounding the government and Bank of America announcements to push principal forgiveness to the top of the waterfall for mortgage modification triage, it would have been easy to miss the latest report from the SIGTARP (Special Inspector General of TARP). I have attached the report here and would encourage you to print it out and read it.

Strategic Defaults: Lessons From the Great Depression - Government policy continues to rigidly classify mortgages by their “affordability,” and pays too little attention to strategic defaults. Policy mistakes like these serve to prolong the foreclosure crisis.The home foreclosure process begins when a homeowner stops making his mortgage payments, so the major policy question is how to get homeowners to pay.As shown by a 1999 study by Martha Olney, a professor at the University of California, Berkeley, the Great Depression of the 1930s offers vivid evidence that borrowers default for strategic reasons, and make full payments even on loans that appear “unaffordable” when given the incentive to do so.

How Long Will Negative Equity Last? - There has been a lot of recent talk about mortgages in negative equity – underwater homes – and the impact on the housing market. In response, First American CoreLogic asked the question: When will these homes start to float? The company estimates that the typical underwater homeowner will not begin to surface until late 2015 to early 2016. It’s an even longer stretch for some of the most depressed markets, where First American CoreLogic says the typical borrower in negative equity may not experience positive equity until 2020 or later.

Should homes be worth twice what they were in 1996? -  In 1996, unemployment was low, the economy was booming, stocks were rising, and the future looked bright. Email and the internet were just starting to make their ways into homes around the country. Optimism was high as an economic revolution was brewing. Is there any reason why homes today should be worth twice as much as in 1996? Graphically, prices were heading right back to 1996 until the government decided to spend trillions of dollars to prop them up.   Consider what’s been done to halt the collapse of home prices. Our demand for homes has been artificially boosted with low mortgage rates and tax credits, and our supply of homes for sale has been cut drastically by all of the foreclosure prevention efforts. Here is the result:

Reporting Matchmaker: Setting Up Home Loan Modification Applicants With Local Journalists - Allow us to make an introduction: Homeowners, local journalists. Local journalists, homeowners. We’d like to set you up. Since last May, nearly 800 struggling homeowners from all over the country have shared their stories with ProPublica about their efforts to get a loan modification through the federal program. With their help, we showed the incredible delays [1] and frustrations applicants typically face: mortgage servicers have repeatedly lost documents [2], misinformed homeowners [3], and denied modifications [4] for reasons that run contrary [5] to the program’s guidelines. Among the 1.1 million homeowners who’ve begun the program’s trial stage, which is supposed to last three months, hundreds of thousands have waited in limbo for six months or more [6].We have no doubt that there are many more important stories to be told. By any account, millions of homeowners are facing possible foreclosure. Although we read every homeowner’s story, we can only use a fraction in our coverage. That’s why we’re offering to set up our readers with local journalists (with the homeowner’s permission, of course). Often, the media can be the most effective recourse for homeowners who have nowhere else to turn [7].

Lower Home Prices Can Fix What Government Can’t: (Bloomberg) -- Thud! Four years after the peak of the housing bubble, home sales are slumping... again. New home sales, which lead the complex of housing indicators, fell to an all-time low of 308,000 in February, the fourth consecutive monthly decline. For existing home sales, it was the third consecutive drop after last year’s tax-credit- driven bounce. Homebuilder sentiment has rolled over. Housing starts are bumping along the bottom, with new construction too low to accommodate normal growth in households, according to Michael Carliner, a Potomac, Maryland, economic consultant specializing in housing. Alas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.

Does Anyone Who Writes on Housing for the NYT Know Arithmetic? - When people talk about plans to "help" homeowners they must (yes, I said "must") ask two simple questions: 1) Are the homeowners being "helped" paying less in mortgage and other housing costs than they would to rent a comparable unit: and 2) Are the homeowners likely to end up with equity in their homes? Neither of these questions get asked in this discussion of the merits of the Obama administration's plans to "help" homeowners. This means that the NYT wasted readers time and killed trees for no good reason.

Fear Seen Driving Prices Lower than Last 20 Years - Most metro areas will see prices fall below the lowest levels of the last 20 years, according to the latest forecast from University Financial Associates of Ann Arbor. It is often stated that prices decline faster than they rise because fear is a stronger emotion than greed. This certainly proved to be the case in Detroit where 10 years of real price gains were erased in just 4 years,” said UFA in its most recent UFATM House Price Forecast.“Detroit metro was the canary in the coal mine this cycle, with falling house prices arriving earlier than in other metros,”  “Other metros that have already or will soon converge to pre-bubble real prices include Las Vegas, Phoenix, the inland California metros and many south Florida metros.”UFA’s prediction would take the national median price of a home in most markets below $101,000, the national median in 1990, according to the Census Bureau.

Housing Market Recovery: On the Same Schedule as Godot - So far the markets have not seemed to notice, but there are not one…but two bulls in this china shop. First, the US government is going broke. Second, we’re at the beginning of a Great Correction. As to the second item, here’s this update from Bloomberg: Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market. Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

Construction Spending Declines in February - Private residential construction spending has turned down again over the last few months. I expect some growth in residential spending in 2010, but the increases will probably be sluggish until the large overhang of existing inventory is reduced. Private non-residential spending decreased in February, and is now at the lowest level since July 2006. The collapse in non-residential construction spending continues ... The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. The second graph shows the year-over-year change for private residential and nonresidential construction spending.

Your New Condo Leaks? Join the Club - NYTimes - ROOFS and windows that leak whenever it rains. Heating and air-conditioning units that can’t quite heat or cool the entire building. Balconies with flaking concrete and wobbly railings. These kinds of complaints have become more and more common in recent months, according to lawyers and engineers who represent owners of sleek new condominium units across the city. They say the wave of development in New York City that started in 2004 and crested in mid-2007 has resulted in a wave of accusations about defective construction and building design.

Was Quality Compromised During The Housing Bubble? - We can see what really happened:

* The high demand fueled builders to build more homes and condos;
* They compromised on the quality of materials used because they wanted to make a huge profit and knew that people would buy at any cost;
* With the amount of construction taking place across the country, there was a shortage of skilled manpower and quality building materials. This led to construction companies making do with just about anybody or anything to build their condos and homes, which in turn led to the demise of quality.
* Municipalities did not have the time to inspect and certify all the new homes that were popping up by the dozen.

Did US Housing Have a Boom/Bust Cycle? (2 national graphics) The NY Fed has a curious research piece out, looking at areas of Upstate New York that were “insulated” from housing price volatility.They note that many parts of the country have not experienced dramatic declines in housing prices, and upstate metropolitan areas of Buffalo, Rochester, and Syracuse even enjoyed price increases during the recession. The NY Fed suggests the reason why is fairly simple: “The region’s relatively low incidence of nonprime mortgages.”

Much of U.S. Was Insulated From Housing Bust (US map)- The U.S. still is feeling the effects of widespread housing bust, but a new report serves as a reminder that large swaths of the nation didn’t experience a boom in home prices and hasn’t suffered from the bust.  New York Federal Reserve staffers Jaison R. Abel and Richard Deitz released a report highlighting the stability of upstate New York’s housing markets. The research notes that while the rest of the U.S. saw a real-estate boom and bust, upstate New York was largely insulated from the cycle.“Despite upstate’s long-term weak economic growth and population loss, Buffalo, Rochester, and Syracuse all ranked in the top 10 percent of metro areas in terms of home price appreciation in 2009, with Buffalo ranking sixth overall,” the authors wrote.

The Lone Star Secret - Texas’ 3.1 million mortgage borrowers are a breed of their own among big states with big cities. Just less than 6 percent of them are in or near foreclosure, according to the Mortgage Bankers Association; the national average is nearly 10 percent. Texas might look to outsiders an awful lot like Sunbelt sisters Arizona (13 percent) or Nevada (19)—flat and generous in letting real estate developers sprawl where they will. Texas was even the home base of two of the nation’s biggest bubble-era homebuilders, Centex and DR Horton  But there is a broader secret to Texas’s success, and Washington reformers ought to be paying very close attention. If there’s one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it’s to follow the Lone Star State’s lead and put the brakes on “cash-out” refinancing and home-equity lending.

Fannie Mae: Delinquencies Increase in January - Here is the monthly Fannie Mae hockey stick graph for January ... Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 5.52% in January, up from 5.38% in December - and up from 2.77% in January 2009. "Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans."

HUD Redefines "Foreclosed" to Include 60-Day Delinquencies - HUD’s got a big red editing pen in hand and is going to work on what we’ve all understood to be the traditional meaning of foreclosure. The federal agency announced Friday that it is changing how it defines foreclosed to include properties in default and abandoned to include uninhabitable homes with lingering code violations. Effective immediately, HUD is classifying any property that is at least 60 days behind on the mortgage or the property owner is 90 days or more delinquent on tax payments as a “foreclosed” home. In addition, HUD is expanding the definition of an “abandoned” property to include homes where no mortgage or tax payments have been made by the property owner for at least 90 days or a code enforcement inspection has determined that the property is not habitable and the owner has taken no corrective actions within 90 days of notification of the deficiencies

U.S. Probes Foreclosure-Data Provider - A subsidiary of a company that is a top provider of the documentation used by banks in the foreclosure process is under investigation by federal prosecutors.  The prosecutors are "reviewing the business processes" of the subsidiary of Lender Processing Services Inc., based in Jacksonville, Fla., according to the company's annual securities filing released in February. People familiar with the matter say the probe is criminal in nature.   A spokesman for the U.S. attorney's office for the middle district of Florida, which the annual report says is handling the matter, declined to comment.  The case follows on the dismissal of numerous foreclosure cases in which judges across the U.S. have found that the materials banks had submitted to support their claims were wrong. Faulty bank paperwork has been an issue in foreclosure proceedings since the housing crisis took hold a few years ago. It is often difficult to pin down who the real owner of a mortgage is, thanks to the complexity of the mortgage market.

Foreclosure Experts Forecast Explosive Numbers in Homelessness-- Foreclosure experts at and Heavy Hammer Inc. today warned of skyrocketing homelessness as high unemployment and foreclosure rates continue to impede economic recovery.  Citing a combination of record rental vacancies and residential foreclosure rates, Heavy Hammer Inc. CEO Michael Urbanski said true numbers of displaced Americans are masked by "assimilated homelessness," a term describing those who have lost homes or can no longer afford rent and have sought refuge with friends and family members.  "Record foreclosures, rental vacancies and home sales to multi-generational buyers, combined point to increased assimilated homelessness," said Urbanski. "With seven million jobs lost since the beginning of the recession, and unemployment hovering at record levels, households are collapsing at an alarming rate. Younger Americans are returning home and the recently unemployed are turning to friends and loved ones for help in order to keep their families off the streets."    

Foreclosure Properties May Take 5 Years To Be Absorbed Into Market - Even switching into high gear, the nation’s banks have far to go to catch up with processing an unprecedented number of foreclosures. This could potentially delay recovery for another half decade according to Housing Predictor. Although the true extent of this shadow inventory is unclear, foreclosures have topped 7 million in just the last 3 years. The shadow inventory of homes and other residential properties exceeds 6 million, which will prolong the recovery of the U.S. housing market. The inventory of properties that have not yet been completed as foreclosures, but are under distress represent a growing inventory to be absorbed by the market.

Study: Chapter 13 bankruptcy little help in saving homes - The research, conducted by Michelle White of the University of California, San Diego, and Ning Zhu of UC Davis, finds that only about 1 percent of filers who would have otherwise defaulted are actually able to save their homes under chapter 13. This is despite the fact that 96 percent of chapter 13 filers are homeowners—an indication that it is seen as a “save your home” procedure, the authors say. Chapter 13 bankruptcy is designed to help homeowners save their homes in three ways. First, it delays foreclosure proceedings and gives homeowners a chance to catch up on overdue payments. Second, it allows judges to eliminate burdensome lender fees. Third, it enables judges to partially or completely discharge credit card and other unsecured debts. This so-called credit card subsidy is designed to free up money that filers can then put toward their mortgages.

From bucolic bliss to 'gated ghetto' - Home foreclosures have devastated neighborhoods throughout the country, but the transformation from suburban paradise to blighted community has been especially stark in places like Willowalk -- isolated developments on the far fringes of metropolitan areas that found ready buyers when home prices were soaring but then saw an exodus as values crashed. Vacant homes are sprinkled throughout Willowalk, betrayed by foot-high grass. Others are rented, including some to families that use government Section 8 vouchers to live in homes with granite countertops and vaulted ceilings.

You Can Borrow For Less Than Greece - We have an odd juxtaposition to consider today. The mortgage rate on conforming 30- year mortgages is around 5%, according to Meanwhile, at the sale of Greek seven-year notes yesterday the yield was set at 5.9%. I should note, too, that even at 5.9% (the coupon rate), investors were not rushing to buy. So what state of the world puts a working stiff somewhere in New Jersey or Calfornia or Texas worthy of a mortgage at just 5% when Greece, a sovereign nation and a member of the European Union, is seen as a less worthy borrower and told to pay more? It's either time to start citing catchy verses from The Second Coming or it's time to pull back on some of the generous guarantees on U.S. home mortgages.

House Flippers in U.S. Crowd Courthouse Steps in Hunt for deals… (Bloomberg) -- During the U.S. housing boom, even amateur investors could buy and sell a property within a couple of months and turn a profit. Today there’s nothing amateur about house flipping. Homes with punctured walls and missing appliances draw multiple offers from professional investors at auctions in foreclosure-ridden states such as Arizona, California, Florida and Nevada. Competition is so stiff that experienced flippers such as Sergio Rodriguez and Brian Bogenn look back with nostalgia at last year, when they turned over 48 residences in the Phoenix area. “A year ago, bums outnumbered bidders at the courthouse steps,” where many foreclosure auctions take place, Rodriguez said. “Now the bums are way outnumbered.”

Spurt of Home Buying as End of Tax Credit Looms - After several disastrous months for home sales across the country, when volume dropped by 23 percent, the pace appears to be picking up again. The number of Des Moines homes under contract in February rose by a third from the January level. The number of pending contracts jumped 10 percent in Naples, Fla., 14 percent in Houston and 21 percent in Portland, Ore.  These deals will be reflected in the national sales reports when they become final, this month or next. There is no evidence that prices have begun to move in response to the higher volume. Indeed, so many homes are coming on the market that prices might well fall further.

Mortgage Refinance Applications Increase in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, increased 1.3 percent on a seasonally adjusted basis from one week earlier. ... “Purchase applications have increased over the past month, and are now at their highest level since last October when many homebuyers were rushing to get loans closed before the expected expiration of the homebuyer tax credit,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “We may be seeing a similar pattern now, as the extended version of the tax credit ends next month.”

No more extensions of tax credit for first-time home buyers - Home buyers hoping to take advantage of a new or extended tax credit should not procrastinate: This third bite at the apple will be the last.Proponents of the $8,000 credit for first-time buyers and the $6,500 credit for move-up buyers made it clear during the debate on Capitol Hill that the benefits would not be renewed when they expire. And a lobbyist for the National Assn. of Realtors confirmed that at the group's annual convention last month.

The long-term impact of the mortgage crisis--and why it keeps me awake, by Richard Green: My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. ... My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced ... twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off.

Apartment rents cheaper than stays in homeless shelters - Cities, states and the federal government pay more to provide the homeless with short-term shelter and services than what it would cost to rent permanent housing, the U.S. government reports.A study of 9,000 families and individuals being released today by the Department of Housing and Urban Development finds that costs to house the newly homeless vary widely, depending on the type of shelter and social services provided by the six cities in the report.Emergency shelter for families was the most costly. In Washington, D.C., the average bill for a month in an emergency shelter ranges from $2,500 to $3,700. In Houston, the average is $1,391.

Jim the Realtor on Short Sales: "Rampant Fraud and Deceit" (video) First: the buyer should find out if it is a HAFA short sale (starts April 5th). If so, the "negotiator fee" must be disclosed and be part of the agent's fee (total agent fee not to exceed 6%).  As an aside, if the homeowner or buyer is an agent, they are not eligible for any commission.  Second: as part of a HAFA short sale, the lender(s) must agree not to pursue a deficiency. If the lender balks on a short sale - I'd ask them about HAFA.  Third: Where are the regulators? Jim the Realtor is talking about rampant fraud in San Diego. Hello? Is anybody listening?

Housing and the Paradox of Credit Bubbles, Equity and Demand  - There is an unresolvable paradox at the heart of the government's desperate attempts to keep housing prices from falling any lower: the government must either reinflate housing values or at least maintain them at current levels, lest owners and lenders lose all their capital/collateral.  But keeping house prices artifically inflated to save owners and lenders who borrowed/lent during the bubble means that prices will remain unaffordable to qualified buyers (i.e. those who actually meet prudent lending standards, not government giveaway programs like the FHA 3% down payment, the $8,000 tax credit, etc.) Without organic demand (demand from truly qualified buyers), then there is nothing to keep prices artifically high; over-supply and limited demand lead to lower prices.

New Rule Makes Easier to Tell When ‘Free’ Credit Reports Will Cost You- Starting today, credit-reporting bureaus will have to work harder to ensure consumers won’t get fooled. As part of last year’s credit-card legislation, companies marketing free credit reports will have to add additional warning labels on their advertisements for “free” offers.Such ads, including ones from Experian’s, have filled the radio and TV waves for years, causing confusion among consumers, advocates say. Complaints came when consumers signed up for the free scores, only to find they were then enrolled in a monthly, fee-based program.“[] wasn’t a free site,” Chi Chi Wu, a staff attorney at the National Consumer Law Center says. “It was a deceptive site.”

Consumer spending increases in February, 5th straight months of gains - Consumers kept their wallets open for the fifth month in a row in February even though their incomes remained unchanged, according to government data released Monday. Spending on nondurable goods, such as clothing, jumped 0.9 percent last month, while spending on services rose 0.3 percent. Those increases were partially offset by a 0.2 percent decline in purchases of durable goods such as autos. Total consumer spending increased 0.3 percent.

On the (Perceived) Unimportance of Income – Annaly Salvos   “Stocks in U.S. Rise as Consumer Spending Report Boosts Economic Optimism“, gushed Bloomberg, and quickly followed it up with “U.S. Consumer Spending Climbs a Fifth Straight Month as Recovery Quickens.“  The Wall Street Journal also ran a piece on the Personal Income and Outlays release this morning on page A6, for those of you who still read a physical paper (we still do).  Personal spending rose 0.3% in nominal dollars in February over the prior month, in-line with expectations, while personal income was flat.  Not surprisingly, the personal savings rate fell to 3.1%, levels not seen since late 2008.   While it is true that ours is an economy driven by consumer spending, and many look to data on aggregate spending and retail sales as indicators of an economic turnaround, we have instead chosen to focus on the driver of sustainable spending:   income.  We hope this has the effect of washing out the noise of one-time stimulus-related spending, and it probably does.  We would struggle to label consumption “healthy” if it isn’t being supported by income.

Are Americans Already Back to Their Old Ways? - Financial-Planning reports: While 63% of Americans said they were concerned about the overall state of financial markets in 2009, just 45% said they were concerned in 2010. Nervousness and fear about retirement dropped from 55% who were nervous or afraid last year to just 40% this year. American's concern about having enough money to retire has fallen from 56% in 2009 to 51% this year, the same as in early 2008, the study found.“The number of people who reported being concerned about issues such as day-to-day expenses, education costs, paying off credit cards, and saving for big ticket purchases didn’t just decline – each category hit a four-year low.”Which leads us to this morning's personal consumption and expenditure report. To the NY Times..

What new era of thrift? - A FEW weeks back, The Economist took a look at how the last decade compared with previous periods in American economic history:  If you look at the middle chart there, you see that for most of the previous century, income grew roughly as much (or occasionally more than) consumption. But during the most recent decade, consumption grew significantly more than income. This was the product of stagnant income growth and easy borrowing, and it corresponds to the great period of increase in household indebtedness. But that's all over now, right? Well, perhaps not. Real personal consumption expenditures grew in February, by 0.3%, following on an increase of 0.2% in January. That's the fifth consecutive monthly increase, which seems like good news; certainly markets are taking it as a positive this morning. The problem is that incomes barely rose in February—by less than 0.1%. And they declined in January. And what happens to savings when spending is rising and incomes are flat?

How will US savings rate rise if you don’t penalize consumption? Michael Pettis - There seems to be a thaw in the currency war.  President Obama and President Hu had a long telephone conversation today and my guess is that the Treasury will hold off on naming China a currency manipulator in two weeks.  I hate to be a pessimist, but this might be very temporary.  Unless the US and China, with the involvement of Japan, Germany, and deficit Europe, don’t work out very quickly a real agreement, in which surplus countries make serious efforts to create domestic demand over the next several years, and to reduce their surpluses, in exchange for which the deficit countries agree to slow down their domestic adjustments, the fight will only be very temporarily postponed, and the next round will be much angrier. Any agreement must deal with more than the RMB.  It must involve the whole range of issues which depress consumption in the surplus countries and force it up in the deficit countries.

Why do people give to charity? So you’ll get out of their faces - Do people donate to charities because altruism makes them feel good about themselves, or because of social pressure to donate? It matters because altruistically motivated giving benefits both the giver and the charity, since the giver enjoys giving, while social pressure motivated giving benefits only the charity. A new study from Stefano DellaVigna, John List, and Ulrike Malmendier uses a randomized field experiment and a structural model to estimate the extent to which giving to door-to-door charities is motivated by each: If their study is taken to be representative of door-to-door fundraisers, the authors claim that the welfare loss incurred by those being solicited for donation is in the hundreds of millions of dollars. Do we need a pigouvian tax for door-to-door charities?

A little more on Mortgage Debt and Aging - I did a quick comparison of average household income for 1989 and 2007 (using the census) and average mortgage debt for those that has mortgage debt (using Survey of Consumer Finances data). In both cases I looked at 45-54 year olds. In 1989, average household income among 45-54 year olds was $39,934; average mortgage debt outstanding among those who had debt was $39,300, so the ratio was about one-to-one. In 2007, average household income among 45-54 year olds was $83,100; average mortgage debt outstanding among those who had debt was $154,000, so the ratio was just under two-to-one.In 1989, the share of households in the age group with a mortgage was 58.3 percent; in 2007 it was 65.5 percent.The only good news: interest rates have dropped from about 10.5 percent to 5 percent. So in 1989, an average income household that wanted to amortize an average mortgage in 15 years would need to pay 14 percent of gross income to do so; in 1989 it would need to spend 19 percent. So putting this all together, the ratio of debt service to income for amortization by retirement has increased by (.19*.655/.14*.583)-1 = 52 percent.

Alan Schram: Where Did Inflation Go? - For those concerned about incipient inflation resulting from the gargantuan monetary expansion we had over the past 18 months and the budget deficits we are still running, the lack of inflation is confounding. One explanation is that the Consumer Price Index is inaccurate and misleading. For example, a third of the consumer price index is Owners' Equivalent Rent, an artificial addition put into the CPI in 1980. In the go-go years of housing, real estate prices were up much more than the Owners Equivalent Rent, and the actual cost of living went up by about 7%. The CPI did not reflect that. Remove housing costs from the CPI, and inflation is back. In January the CPI was up 5.8% on an annualized basis, excluding owners-equivalent rent.

High Income Disparity Leads to Low Savings Rates – Yves Smith - Andrew Dittmer, who was an important collaborator on ECONNED, sent me pdfs of the notorious Citigroup Plutonomy reports for leisure reading. Michael Moore highlighted these two research reports (2005 and 2006) in Capitalism: A Love Story . Yet as far as I can tell, there has been virtually no discussion of the macroeconomy effects of rising income and wealth disparities, or to look into what the implications for investment strategies might be. Now the fact that the Citi team asked a worthwhile question does not mean they came up with a sound answer. In fact, he reports are almost ludicrously funny in the way they attempt to depict what they call plutonomy as not merely a tradeable trend (as in leading to some useful investment ideas), but as a Brave New Economy development. I haven't recalled such Panglossian prose since the most delirious days of the dot-com bubble:

The Volatility of Household Income - From The Income Rollercoaster: Rising Income Volatility and its Implications, by Karen Dynan at Brookings:  The conclusion: Household income volatility appears to have trended significantly upward over the past several decades, with much of the rise tied to an increase in the frequency of very large changes in income. Volatility of earnings per hour has risen more sharply than the volatility of hours, suggesting an important involuntary component to the increase in income variability. Expanded access to credit has probably mitigated the degree to which income declines translate into consumption declines, but this development has posed other risks to household economic security, as have other trends in household financial opportunities. It is too early to know what effects the current economic crisis will have on these trends. The high current degree of weakness in labor markets—together with the expectation that the economic recovery will proceed only slowly—implies that household income volatility may be unusually elevated for several years to come.

Lessons from paying people to be less poor - For the past three years, New York City has been paying members of some 2,400 poor families to do things like get dental check-ups, open savings accounts, hold down jobs, show up for school and carry health insurance. The cash incentives—typically ranging from $20 to $150 per desired behavior—are meant to get people with complicated, resource-constrained lives to invest in themselves and their children in ways that should ultimately break the inter-generational cycle of poverty. It hasn't worked too well. At least that's the impression you get from reading today's headlines. The mayor of New York, Michael Bloomberg, held a press conference to announce the program's early results, which were mixed. More visits to the dentist, but no change in middle schoolers going to class. A reduction in the use of expensive financial services like check cashing, but a minimal budge in families having health insurance.

Reuters/University of Michigan Surveys of Consumers - The Index of Consumer Sentiment was unchanged in March from the February survey and nearly identical to the level recorded six months ago. Following the sizable gains recorded from the recession lows set more than a year ago, confidence has moved sidewards with only small variations during the past six months. Consumers reported gains in the overall economy and expected the economy to continue to improve during the year ahead. Despite these expected gains in the economy, consumers’ evaluations of their own financial situation have re-mained grim due to the widespread expectation that improvement in their job and income prospects will be very small during the year ahead.

Can't help but put ISM and Confidence surveys together: looks a little off - Today I digress to compare the U.S. Consumer Confidence report (released today) to the PMI production surveys, a "soft" comparison of supply and demand. According to the Conference Board today: This report is nothing to write home about. Consumer confidence remains at excruciatingly low levels. In a post back in September, I argued that the expectations index is a better indicator of consumer spending. As such, the expectations component remains stronger than the composite, having rebounded to its level at the onset of the recession. However, like the composite index, the expectations index is moving rather laterally since May 2009.Notice the bigger picture, with the Confidence survey illustrated alongside the ISM manufacturing and non-manufacturing surveys. The story remains to be very one-sided on the production side, which is more likely to drop back to meet weak consumer demand UNLESS THE JOBS MARKET IMPROVES...FOR REAL.

The U.S. economy: on the surface and under the hood - The GDP recovery is underway, but I would call it a facade. Because below the GDP hood, the picture is not as bright. The labor market is weak, and income-generating prospects remain muted. The latter portends a back-up of consumer spending down the road without substantial policy support. Please see Spencer's post at Angry Bear blog for a very nice interpretation of today's employment report, but he sums it up quite nicely: Yes, the employment situation has quit deteriorating, and there are encouraging details within the report. But the overall rebound in the economy and the employment situation is one of being stuck in the doldrums. The chart illustrates the GDP contraction for each recession since 1971, except that for 2001 because GDP did not actually decline. Point "0" represents the quarter where GDP bottoms out. I circumvent the official date of the recession's end as point 0 - the NBER is the agency that "dates" business cycles in the U.S. - because I want to focus on GDP, which is a composite of spending motives (including the government).

Consumer Bankruptcies Surged in March - Consumer bankruptcy filings hit their highest monthly peak in March since Congress overhauled the system in 2005. The number of filings rose to 149,268, 34% higher than February’s filings, according to data from the National Bankruptcy Research Center. The March tally was also 23% higher than the same time a year ago. March and April tend to have the largest number of consumer bankruptcies because people will wait for their tax refund check and then use the money for bankruptcy filing and attorney fees.

Sharp Increase in March in Personal Bankruptcies - More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash. Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October. “Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.

Moves to Garnish Pay Rise as More Debtors Fall Behind - One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions. Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases. Most consumers never offer a defense, and creditors win their lawsuits without having to offer proof of the debts, much less justify to a judge the huge interest charges and penalties they often tack on.  After winning, creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.

Your debt is forgiven, but your taxes are not - Here's a bit of unhappy news for tax season. The folks over at point out that even if your credit card company has forgiven the debt you owe them, there's still a good chance you have to pay tax on the amount. That caveat is going to catch a lot of people this year since, as Steve mentioned a few weeks ago, card companies have been on a charge-off binge. According to was a surge in credit card debt forgiveness in 2009. According to the IRS, more than 2.5 million people will be receiving 1099 forms, because they owe income taxes on forgiven debt from car loans or credit cards. Now, if you're in bankruptcy proceedings or insolvent (that is, you owe more than the value of all your assets, including your house, car, furniture and investments), then you don't have to pay tax. Lucky you! Otherwise, you'll be receiving a 1099 and will be obligated to pony up.

Three reasons for the continued fall in US savings rate - -I have been tracking the savings rate on this blog for some time.  What has been obvious to me and other observers is that the U.S. has had a declining savings rate since the secular bull market in bonds and shares began in the early 1980s. Indeed, it seems likely that there is a correlation between asset prices and savings rates in the United States. However, we have now experienced a spectacular bust in asset prices. Many pundits including myself expect a secular shift away from consumption toward saving.  However, the data do not show this shift.  In fact, after peaking this past Spring at 6.4%, savings rates have plummeted to 3.1% in the last month. What gives? Well for one, asset prices have skyrocketed since then. And it does seem that the prior correlation between asset price increases and low savings rate is intact.  However, I want to offer up a few other possibilities and make a few conclusions about low income growth and industrial policy.

The saving rate paradox - Edward Harrison at Credit Writedowns is theorizing why the saving rate is falling when it should be rising, as households scram to deleverage their balance sheets. My reaction to this is twofold: first this is a meaningless exercise; but second, and worse yet, there's likely something very "unhealthy" going on here. Meaningless: The BEA conducts a comprehensive revision of the NIPA tables every five years. The saving rate is usually revised upward, and by a fair amount, as was the case for most of the 2000s.Unhealthy: But even if they don't "find" much more than and average +1% a year, there's probably something a bit more sinister and non-economic (i.e., nothing that has to do with wealth, income, or substitution effects - see Edward Harrison's post on this point) going on here: non-market activity is rising. I haven't seen a study to this point  but I wouldn't be surprised if non-market income has creeped up lately, i.e., through the informal labor force.

Armed with information, people make poor choices - When faced with a choice that could yield either short-term satisfaction or longer-term benefits, people with complete information about the options generally go for the quick reward, according to new research from University of Texas at Austin psychologists. The findings, available online in the journal Judgment and Decision Making, could help better explain the decisions people make on everything from eating right and exercising to spending more on environmentally friendly products."You'd think that with more information about your options, a person would make a better decision. Our study suggests the opposite," . "To fully appreciate a long-term option, you have to choose it repeatedly and begin to feel the benefits."

Feeling Less Secure? Research Suggests You Probably Are - The recession of 2007 may have felt like a once-in-a-lifetime disaster, but it’s just the latest shock in what has become a more volatile world for the typical American household, according to a leading expert on household finances. In a new article published by the Brookings Institution, senior fellow Karen Dynan says that the ups and downs in household income have become about a third larger between the late 1960s and the middle part of the 2000s. What’s more, the share of households experiencing big drops in income — of 50% or more — has also increased, to about 12% in the mid-2000s from about 7% in the late 1960s. For much of that time, U.S. consumers have done an impressive job of preventing those fluctuations from affecting their spending, which has grown relatively smoothly

 Year-End Growth Spurt Not Likely To Be Repeated - The Commerce Department reported Friday that the economy grew at a 5.6 percent pace in the October-to-December quarter in its third and final estimate of economic activity during the period. Even though growth turned out to be a tad less than the government's prior two estimates for the quarter, the new reading still marked the strongest showing in six years. Many economists, however, think the economy has slowed in the current quarter to about half the pace seen at the end of last year. Why won't the big growth spurt be repeated? Because the main force behind it is already ebbing.

A special report on America's economy: Time to rebalance - The Economist… - Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. Employment in residential construction and carmaking is down by almost a third, in retailing and banking by 8%. As the economy recovers, some of those jobs will come back, but many of them will not, because this was no ordinary recession. The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return.  Instead, America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky.

A Lost Decade (or Two?) - In recent posts I have shared my growing concerns that we may be entering a prolonged recession that could drag on for the next decade. Well, I may have been too optimistic. James Pethokoukis pointed to a paper in his blog today by economist Robert Gordon that makes the following economic forecast for the next two decades: "The implied forecast 1.50 percent growth rate of per-capita real GDP falls far short of the historical achievement of 2.17 percent between 1929 and 2007 and represents the slowest growth of the measured American standard of living over any two-decade interval recorded since the inauguration of George Washington." If Gordon's forecast is correct, America could become the latest economic powerhouse to lapse into a prolonged period of stagnation.  We may be faced with our own lost decades, just like Japan faced in the 1990s and beyond.

ATA Truck Tonnage Index Fell 0.5 Percent in February The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 0.5 percent in February, following a revised 1.9 percent increase in January. The latest drop put the SA index at 108.5 (2000=100), down from 109.1 in January.  The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 97.6 in February, down 0.8 percent from the previous month.   Compared with February 2009, SA tonnage increased 2.6 percent, which was the third consecutive year-over-year gain.  For the first two months of 2010, SA tonnage was up 3.5 percent compared with the same period last year.  For all of 2009, the tonnage index contracted 8.7 percent, which was the largest annual decrease since 1982.

Fed’s Evans Says Jobless May Exceed 9% at Year-End - (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the U.S. jobless rate may remain higher than 9 percent at the end of this year, underscoring the potential need to keep interest rates low into 2011.  The unemployment rate may be “nine and a quarter” at the end of 2010, and higher than 7 percent at the end of 2011, Evans said in an interview with Bloomberg Television today in Hong Kong. A government report this week may show the rate was 9.7 percent in March, according to the median forecast in a Bloomberg News survey.

Fed's Lockhart on Employment - I'd like to highlight a few key points from Atlanta Fed President Dennis Lockhart's speech today: Prospects for Sustained Recovery and Employment Gains Today's slow pace of employment gains is due more to the slow pace of job creation, not the high rate of layoffs. Job gains, as conventionally understood, require two things: a vacancy and a worker able to fill that vacancy. For most of 2009, vacancies were relatively flat while unemployment continued to rise. This condition suggests the existence of what labor economists call "match inefficiencies."There are two key types of match inefficiency. One is geographic mismatchPeople may be reluctant to relocate for a new job if the value of their house has declined. In addition, many who would like to move are under water in their mortgage or can't sell their homes.The second inefficiency is skills mismatch. In simple terms, the skills people have don't match the jobs available. Coming out of this recession there may be a more or less permanent change in the composition of jobs

Employment (or lack thereof), unemployment (or surfeit thereof), and monetary policy Atlanta Fed blog -For what it's worth, today's advance peek at the March jobs picture via the ADP National Employment report was an unpleasant surprise. From Calculated Risk... It bears noting that the ADP report is not always a very good predictor of the official job statistic as released. But even if that 200,000 figure comes to pass, and even if it does portend a trend, a full recovery in labor markets would appear to be a ways off. Dennis Lockhart, our leader here in Atlanta, spoke to this issue at a speech delivered today in Hartford, Connecticut:

"Prospects for Sustained Recovery and Employment Gains" I'm encouraged that at least one Federal Reserve policymaker (though not a voting member of the FOMC) is linking increases in the target federal funds rate, i.e. moving away from a zero interest rate policy, to improvements in the labor market. However, if expected inflation begins increasing, all bets are off. That's the part that concerns me. How quickly will policymakers abandon efforts to stimulate employment by maintaining a zero interest rate policy if they start to get worried about inflation? What, exactly, is the tradeoff here? Will any sign of inflation whatsoever cause policymakers to panic and start aggressively raising interest rates even if unemployment remains elevated, or will concerns over employment cause them to be patient and accept some inflation in the short-run? Again, it's encouraging that employment concerns are coming to the forefront of the policy decision, but will those concerns carry sufficient weight if there are signs that inflation expectations are increasing? I'm worried that they won't:

Fiscal policies in “normal” and “abnormal” recessions – VoxEU -Should governments continue with fiscal expansion or should it be cut back as soon as possible? This column compares different economic models and argues that the answer depends on the type of recession we are facing. In “normal recessions” the New Keynesian model is best, but in “abnormal recessions” it is the Keynesian model.

The Magic Potion for the Economy - NYTimes The just-say-no crowd will insist that we can’t afford a real effort to revitalize employment, that budget deficits are too high, that the economy will recover without additional government stimulus, that the president has used up most of his political capital, and that there isn’t much that government can do under any circumstances to create jobs. Meanwhile, the United States is in real danger of sinking into a long-term economic funk. The recession is not over for the nearly 15 million people who are unemployed. Many of them have been out of work for longer than six months, a seeming eternity. Widespread joblessness and underemployment are threatening to become permanent features of the American landscape, corroding not just our standards of living but the very vibrancy of the American way of life.Poverty and homelessness are increasing. More and more adult children, unable to find work, are living with their parents. The closest thing to a magic potion for individuals, families and the American economy is a job. F.D.R. understood that. The longer it takes for the rest of us to catch on, the deeper the long-term damage to the society will be.

The Mother Of All Jobless Recoveries - Oh God, more awful news about jobs. Now before you click away to read something lighter, please consider: this post is about something sad, but it makes its point with a numbered list. Easy enough, right? Right. So keep reading. This Cleveland Fed report "Are Jobless Recoveries the New Norm?" is a fascinating, lucid and distressing look at why unemployment is still at 9.7% and why it's not going down any time soon. Read the whole thing, if you have time. But here are three keys facts I want to pull out.

Aargh! Beware of reporting on the March Employment Report - I read this from Bloomberg this morning: Payrolls Probably Increased in March Employers in the U.S. probably added jobs in March for the second time in more than two years, setting the stage for a broadening of the expansion, economists said before a report this week.  Payrolls probably rose by 190,000...Aargh. As I noted earlier this month in Employment: March Madness, a headline number of 200,000 net payroll jobs might be considered weak! The March report will be distorted by two factors: 1) any bounce back from the snow storms in February, and 2) the decennial Census hiring that picked up sharply in March.

 Private sector sheds 23,000 jobs in March (Reuters) - U.S. private employers unexpectedly shed jobs in March, dampening hopes about the strength of the recovery two days before the government employment report. In addition, U.S. Midwest business activity expanded less than expected in March while a gauge of New York City business conditions fell, separate reports showed on Wednesday.U.S. private employers cut 23,000 jobs in March, missing expectations for an increase in jobs although fewer than the adjusted 24,000 jobs lost in February, according to the data by a private employment service."It throws a little cold water on the idea we were going to be adding jobs in March, which is a little disappointing, people thought finally this might be the month,"

ADP: Private Employment decreased 23,000 in March -ADP reports: Nonfarm private employment decreased 23,000 from February to March on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from January 2010 to February 2010 was revised down slightly, from a decline of 20,000 to a decline of 24,000. The March employment decline was the smallest since employment began falling in February of 2008. Yet, the lack of improvement in employment from February to March is consistent with the pause in the decline of initial unemployment claims that occurred during the winter. Note: ADP is private nonfarm employment only (no government jobs).

ADP Employment Report: Rep. Boehner, Read Those Footnotes - What has interested me about the ADP report is not the headline estimate, but rather the details of employment in different industries and sizes of companies. I even wrote an extensive post about it a while ago, trying to get behind the issue of job creation by small businesses. (Feel free to read it, but that post now has crime-scene tape around it.)The official, and I believe, more accurate BLS numbers show that small businesses, those with under 50 people, have employed about 30 percent of the work force for many years, and created about one-third of the net new jobs. According to ADP, small businesses have created nearly all new jobs.Why the difference? It’s the unit of measure. The BLS looks at a business as one legal entity — a corporation or LLP or whatever. There might be two offices, or three stores, or 15 franchises, but it’s one business.

Job Market Brightened in March - NYTimes - After more than two years in which more than 8 million jobs were lost, the country’s nonfarm payrolls surged in March.  Employers added 162,000 jobs last month, and employment numbers in the previous two months were revised upward. Nationwide, the unemployment rate held steady at 9.7 percent. To many ordinary, out-of-work Americans, the recovery may finally start to feel real.  Nearly a third of the gains came from temporary hiring for the 2010 Census, which will continue over the next couple of months. The report was also complicated by a rebound from weather-related work stoppages in February.

March Employment Report: 162K Jobs Added, 9.7% Unemployment Rate - From the BLS...This graph shows the unemployment rate and the year over year change in employment vs. recessions. Nonfarm payrolls increased by 162,000 in March. The economy has lost 2.3 million jobs over the last year, and 8.2 million jobs since the beginning of the current employment recession. The unemployment rate was steady at 9.7 percent. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). For the current recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early '80s recession with a peak of 10.8 percent was worse). Census 2010 hiring was 48,000 (NSA) in March.

Unemployment Rate Holds Steady at 9.7% - My take on the employment report (buttressed with graphs and quotes from Dean Baker Unemployment Rate Holds Steady at 9.7% Like Dean, I wasn't very impressed with the report. Update: David Altig:Updating a calculation referenced in a speech by Atlanta Fed President Dennis Lockhart on Wednesday, at a pace of 162,000 jobs added per month and at the current labor force participation rate, unemployment this time next year would still be just north of 9 percent.And it's unlikely that labor force participation will hold constant. Instead, it's likely to increase. If so, then the unemployment rate will be even higher.

Broader U-6 Unemployment Rate Increases to 16.9% in March - The U.S. jobless rate was unchanged at 9.7% in March, flat from the previous month, but the government’s broader measure of unemployment ticked up for the second month in a row, rising 0.1 percentage point to 16.9%. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.5 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

The Long-Term Unemployed -  While the general message from today’s jobs report is relatively sunny, one bleak trend remains: long-term unemployment. The average length of time the jobless have been out of work has reached 31.2 weeks in March. That’s the longest average jobless period since the government began collecting such data in 1948. This number reflects a sort of bifurcation in the labor market. Those with jobs, or only recently unemployed, are doing relatively well. But those who have already been jobless for an extended period are threatened with being left behind in the broader economic recovery. More than half of all jobless were permanently laid off from their previous jobs (as opposed to being entrants to the work force, quitting or just on temporary layoff), a proportion much higher than that in previous recoveries.

Updated unemployment numbers and graphs from the St. Louis Fed (Don't miss this)

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report ... The Employment-Population ratio ticked up slightly to 58.6% in March, after plunging since the start of the recession. This is about the same level as in 1983. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The general upward trend from the early '60s was mostly due to women entering the workforce.  The Labor Force Participation Rate increased slightly to 64.9% (the percentage of the working age population in the labor force). This is at the level of the early 80s. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) increased sharply to 9.1 million.  The all time record of 9.2 million was set in October. This suggests the increase last month was not weather related - and is not a good sign. The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce.

NFP: +162k - Nonfarm payroll employment increased by 162,000 in March, and the unemployment rate held at 9.7 percent, the U.S. Bureau of Labor Statistics reported today. Temporary help services and health care continued to add jobs over the month. Employment in federal government also rose, reflecting the hiring of temporary workers for Census 2010. Employment continued to decline in financial activities and in information. Let’s break down the highlights into the good and bad:

Employment Change Per Industry - With today's employment report showing a gain of 162,000 jobs for March, I thought it would be useful to break these jobs gains down by industry sector. The table below does so and also shows the cumulative change in jobs over the previous three months as well as the December 2007 - December 2009 period. (Click on table to enlarge.)A couple of things to note. First, it is interesting that the 162,000 jobs gained in March is equal to the total number of jobs gained during the past three months of January, February, and March. Second, it is encouraging to see the four industries hit hardest during the recession--construction, durable goods manufacturing, professional & business services, and retail trade--had jobs gains in March and all but one of them have had job gains over the past three months as well. For a broader perspective I have graphed below the cumulative percent change in employment since December 2007 per industry sector. (Click to enlarge figures.)

‘Forced’ Part-Time Employment Increases - The DOL (U.S. Dept. of Labor) calls the category "Part-time for Economic Reasons". I call it forced or involuntary part-time. These are people who have had their hours cut by their employer or have been able to find only part-time work when they were seeking full-time. The number surged in March to 9.1 million, just shy of the record level of 9.2 million last October. Here is a graph from Calculated Risk: For larger image click here. In the last two months, involuntary part-time employment has increased by 738,000. See Table A-8. This implies that either (1) more people who were already employed have been reduced to part-time status or (2) part-time positions are being added to payrolls.

Underemployment Rises to 20.3% in March - One in five American workers continued to be underemployed in March. The percentage of part-timers wanting full-time work increased, while unemployment saw a slight decline. Among the underemployed, 6 in 10 are still not hopeful they will find work in the next month. These results are based on March interviews with more than 20,000 adults in the U.S. workforce, aged 18 and older. Gallup classifies respondents as underemployed if they are unemployed or working part-time but wanting full-time work. Gallup employment data are not seasonally adjusted. (update) As of March 28 Gallup has the underemployment rate at 20.4%

No Jobs Recovery - The US economy added 162,000 jobs in March. Great news until you look more closely. In March, the federal government began hiring census takers big time. These are six-month temp jobs, and they tell us nothing about underlying trends in the labor market. It’s hard to gauge precisely how many were hired — probably between 100,000 and 140,000, although some estimates put the hiring as low as 48,000. Almost a million census workers will need to be hired over the next few months. Subtract these, and today’s job numbers are good but nothing to write home about. Two big things to bear in mind: First, government spending on last year’s giant stimulus is still near its peak, and the Fed continues to hold down interest rates. Second, since the start of the Great Recession, the economy has lost 8.4 million jobs and failed to create another 2.7 million needed just to keep up with population growth.

Unemployment Rates and Duration of Unemployment - Here is a graph of the unemployment rate seasonally adjusted and not seasonally adjusted - plus, by request, two more graphs of the duration of unemployment. The first graph shows the calculated unemployment rate - both seasonally adjusted (SA) and not seasonally adjusted (NSA). Some sites noted the NSA rate was "only" 9.5% when the SA moved above 10% last October. Other sites noted that the NSA rate had hit 10.6% in January. Both sites were correct - but there is a clear seasonal pattern for employment, so the SA unemployment rate is the one to use. This graph shows the duration of unemployment as a percent of the civilian labor force (line graph unstacked). The graph shows the number of unemployed in four categories as provided by the BLS: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.

Another Incremental Improvement of a Bad Labor Market - BLS reports that the economy added just over 160 thousand news jobs during March but the reported unemployment rate remained at 9.7%. This 160 thousand plus new jobs showed up in both the payroll survey and the household survey reporting but we should also note that the labor force participation rate also inched upwards so when the employment-population ratio also inched upwards, the unemployment rate remained the same. Our graph shows that we have had very modest improvements in the employment-population ratio for the last 3 months – from 58.2% to 58.6% - as we have also seen the labor force participation rate rise – from 64.6% to 64.9%. Note also the tremendous decline in the employment-population ratio from December 2006 to December 2009. The rise in the unemployment during this period understated the decline in the employment-population ratio as labor force participation also declined. While we are making small progress, we are very far away from a healthy labor market.

Census Hiring Just Getting Warmed Up - The Census Bureau added 48,000 employees in March, but the number was smaller than expected and there are much greater numbers on the horizon.The 48,000 total was double the combined total for the previous two month, according to the Labor Department, but so far the government has only added a small fraction of the more than one million workers who work on the census.If you look past trends, the Census hiring peaks in the second quarter of the census year. This census will be bigger than any other, and researchers are already fretting that the surplus of vacant housing wrought by the depressed real estate market will require more and more hours from part-time census workers.

The Ugly Truth If You're Looking For Work -  A post on the forum jogged me on this Ticker that I was writing months ago and never finished.... and pushed it back to the top of the line.  This is an echo of a topic I've raised a couple of times on Blogtalk as well, from my experience as a CEO and the "negotiator in chief" with health insurance companies during that time.First, let me tell you how health insurance actually works from the employer perspective, because most people simply don't understand this. You probably have a line on your pay stub that says something like "Health Insurance: $100" or similar.  You think that's what it costs on your "group plan." You're wrong.

Planned Job Cuts Jump 61% in March - Planned layoffs rose sharply in March, largely due to reduction of government payrolls, staffing consultancy company Challenger, Gray & Christmas reported Thursday. The number of job cuts planned rose by 67,611, up 61 percent from February. But the number of planned layoffs remained well below the pace of the previous year, down 55 percent from March 2009. Planned government cuts rose 75 percent last month to 50,604, with the US Postal Service planning to cut its payroll by 30,000 workers. The postal service is not permitted to lay off employees so will achieve the cuts by retirement and attrition, the report said.

For job seekers, no recovery in sight—Why prospects for job growth and unemployment remain dim - EPI Briefing Paper #259 Print-friendly PDF version The National Bureau of Economic Research (NBER), the nation’s arbiter for dating business cycles, is apt to conclude that the recession officially ended in the middle of 2009. Yet consistent job growth has yet to arrive and the unemployment rate will probably not peak until the second half of this year. In short, this recovery is currently “jobless” and has been for quite some time. Worse, even when it is no longer technically jobless (that is, when we have positive employment growth), the unemployment rate will likely not fall substantially for a year or even longer.

Top Executives Not Immune to Recession Job Losses - Even if today’s employment report shows the job market turning around, it’s probably too early for senior executives to feel safe in their corner offices. This recession has been tougher on top executives than its predecessors, and the pain isn’t necessarily over, says Doug Matthews, president and COO of outplacement and career management firm Right Management.“The recession has filtered all the way up,” says Mr. Matthews, who has been helping senior executives find new jobs for about 27 years. He estimates he’s seen about 15% more executives at vice-president level or higher lose their jobs over the past year than in the other recessions he’s seen — and those include the whopper of 1982-1983, when the unemployment rate exceeded 10%.

Tight job market is squeezing out young workers -Teens and young adults, short on experience and skills, have been giving up the job search at higher rates than other workers are during this great recession.Frustrated by a lean job market, nearly 1.3 million workers ages 16 to 24 have left the labor force since the recession hit in December 2007. That's about 6 percent of them, and it's nearly 31/2 times the exodus rate of workers ages 25 to 54.With a jobless rate of 18.5 percent for 16- to 24-year-olds, some have gone back to school, some are volunteering, some are joining the military and some are just chilling at home until the economy heats up again. It's anybody's guess when that will happen.

Growth of Unpaid Internships May Be Illegal, Officials Say - With job openings scarce for young people, the number of unpaid internships has climbed in recent years, leading federal and state regulators to worry that more employers are illegally using such internships for free labor.  Convinced that many unpaid internships violate minimum wage laws, officials in Oregon, California and other states have begun investigations and fined employers. Now, as the federal Labor Department’s top law enforcement official, she and the wage and hour division are stepping up enforcement nationwide. Many regulators say that violations are widespread, but that it is unusually hard to mount a major enforcement effort because interns are often afraid to file complaints. Many fear they will become known as troublemakers in their chosen field, endangering their chances with a potential future employer.

Jobless? Blame your neighbours - ED GLAESER makes an intriguing argument this morning at Economix: cities with educated workforces have enjoyed lower levels of unemployment through this recession. That sounds incredibly mundane, but it's not. The relationship between human capital levels and unemployment is stronger than you'd expect from just adjusting local populations for education levels. In other words, we know that unemployment is lower for individual workers with college degrees, and so we'd assume that cities with more college graduates would, on average, have lower unemployment rates. And they do. But too much lower to simply be a result of the effects of population composition.Mr Glaeser credits the same positive spillovers from high metropolitan levels of human capital that make smarter cities so productive (and highly remunerative) in the first place

In tough market, some job seekers go abroad - With an anemic job market in the United States, many are looking beyond our shores to find employment or advance their careers. International experience is often seen as a plus for career enhancement. But finding employment abroad is anything but easy, especially if you’re not moving with an existing employer. Furthermore, becoming an expatriate can be a major adjustment.Despite the challenges, many job seekers are eyeing foreign lands as possible career saviors or enhancers. “Obviously, the recession is bringing out many people who can’t find a job and want to look abroad,”

Teach Your Neighbors Well -- This recession has hit some places much harder than others, and the spillovers from well-educated neighbors can help explain why. The unemployment rate is 18.9 percent in Modesto, Calif., and 15.6 percent in Detroit, but only 7.7 percent in Minneapolis. Human capital — as measured by the share of adults who have college degrees — is among the best predictors of metropolitan fortunes, and, as the figure shows, that remains true today. But the link between education and January 2010 unemployment is so strong that it creates something of a puzzle.

Human capital: literal truth, fairy tale or myth? - Every undergraduate student in labour economics gets told the story of human capital. Education and experience make people more productive. The skills so acquired are called “human capital.” This explains why some people earn more than others, and why some countries are richer than others. Is human capital theory the literal truth? There is an element of truth in it.  But there are many things that human capital cannot explain. Perhaps we should think of human capital as a fairy tale, a reassuring bedside story.

A Big Plan to Create American Jobs - We have a really serious problem with job creation. It’s been more than a half-year since the economy began to grow again – including several months of very strong, stimulus-fueled gains – but private sector employment continues to fall. The truth is, these results shouldn’t surprise anyone with a long memory. While businesses began to create more new jobs than they destroyed within three months of the end of the 1981-1982 recession, that didn’t happen for a full14 months following the 1991 downturn and for more than two years after the 2001 recession. The problem this time looks even more daunting. The economy is growing, but the pace may be moderating already. That’s because this time, most Americans have lost part of their savings and part of their homes’ value, leaving them more cautious about going on the kind of spending spree that used to drive early recoveries.

A manufacturing renaissance for America? - MIT Over the last few decades, the sector of the U.S. economy devoted to manufacturing has lost ground to the services sector. The number of U.S. manufacturing jobs has declined from nearly 20 million in 1979 to about 12 million today. Yet as the recent global recession suggests, services can propel the economy only so far. There is no substitute for making tangible, useful products.  But what form will new kinds of manufacturing take? At an MIT roundtable discussion on Monday titled “The Future of Manufacturing — Advanced Technologies,” more than a dozen of the Institute’s faculty shared converging ideas about how to reinvigorate America’s goods-producing businesses.  These meetings are part of a larger effort by MIT to contribute the Institute’s expertise in emerging technologies and innovation policies to the national effort to revitalize the American economy.

Paper Entrepreneurs Are Beating the Product Entrepreneurs - Robert Reich - The paper entrepreneurs are winning out over the product entrepreneurs. Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spinoffs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quottas, price supports, bailouts; going private, going public, going bankrupt. Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

Gridlock holds up unemployment benefit extension, again - Extended jobless benefits will run out for at least 212,000 Americans out of work after April 5 because the Senate closed up shop Friday afternoon without a deal to extend filing deadlines. Senate Democrats and Republicans failed to agree on passing a House version of the extension of deadlines to apply for federal unemployment benefits and the COBRA health insurance subsidy. In 10 days, those receiving state jobless benefits won't be able to apply for additional federally paid unemployment insurance, and anyone already receiving those checks could be cut off. They also won't be able to sign up for the 65% federal subsidy for COBRA unemployment insurance.

Should You Hire Someone Who's Overqualified? - Is it actually a good idea to hire someone who is technically “overqualified” for a position? The answer is complicated, at least according to academic research on the subject. The conventional wisdom, of course, is to steer clear of such job candidates. It is almost a mantra of human resources managers. As a result, a frequent complaint among job seekers is that they cannot even get called back for lower-level positions that they feel like they could do in their sleep. The literature on overqualification is limited.But the studies essentially all conclude that people who are deemed to be overqualified, whether by objective or subjective standards, tend to be more dissatisfied with their jobs and turn over faster. A good overview of this research by Douglas C. Maynard, a professor of psychology at the State University of New York, An interesting open question is how overqualification affects job performance. This is much more of a gray area, where the research actually leans toward supporting the hiring of overqualified candidates.

Overqualified? Yes, but Happy to Have a Job - Don Carroll, a former financial analyst with a master’s degree in business administration from a top university, was clearly overqualified for the job running the claims department for Cartwright International, a small, family-owned moving company here south of Kansas City.  Conventional wisdom warns against hiring overqualified candidates like Mr. Carroll, who often find themselves chafing at their new roles. (The posting for his job had specified “bachelor’s degree preferred but not required.”) But four months into his employment, it seems to be working out well for all involved. It is a situation being repeated across the country as the aspirations of many workers have been recalibrated amid the recession, enabling some companies to reap unexpected rewards.

Personal Income Drops Across the Country - WSJ.- Personal income in 42 states fell in 2009, the Commerce Department said Thursday. Nevada's 4.8% plunge was the steepest, as construction and tourism industries took a beating. Also hit hard: Wyoming, where incomes fell 3.9%. Incomes stayed flat in two states and rose in six and the District of Columbia. West Virginia had the best showing with a 2.1% increase. In Maine, Kentucky and Hawaii, increased government benefits, such as unemployment insurance and Social Security, offset drops in earnings and property values. Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation.

EnergyScam - Thank God we have government programs like EnergyStar to help us live a greener lifestyle: But this week the Government Accountability Office reported on its test of the EPA's testing.  GAO obtained Energy Star certifications for 15 bogus products, including a gas-powered alarm clock. Even worse: The GAO attached a feather duster to a space heater, sent the photo to the EPA, and got approval in just 11 days. How on earth could this have happened?  This is the sort of thing the government is supposed to be good at:  providing transparency and certification for private efforts.  Yet it seems they weren't even bothering.

Opportunity Costs - Smart, internet connected devices of all sorts have significantly reduced the pain of what were previously dead times — sitting on the train, waiting in the airport terminal, standing in line at the customer service counter, waiting to be called back for your doctor’s appointment (and then waiting for the doctor), and so on. But sitting behind the wheel of a car is not a dead time, however much it might feel like one. You’re constantly assessing road conditions, the behavior of the cars around you, and the behavior of your own car, while you use arms and legs to operate the vehicle. This is why it’s so dangerous to do other stuff while driving; you’re actually very busy.

Money - The big obstacle to passing a new, comprehensive transportation bill is the lack of agreement over a source of financing. The traditional source of funding for federal transportation programs is the gas tax, which, as we all know, hasn’t been increased since 1993, which means its real value has fallen considerably. And, it seems to be taken as given that any new increase is unthinkable, although I’m not sure why. Of course, there are other potential funding sources out there, like, say, tolling. But: Oberstar also pooh-poohed the prospects of tolling interstate highways built during the road program’s postwar heyday. Pennsylvania is currently pushing for federal approval to add tolls to an existing interstate. “We’re not going to allow tolling of the interstate highway system,” Oberstar said. “It’s already been built and paid for.” Built, yes. Paid for, no. The trouble with roads, you see, is that you have to repair the damn things, which requires money.

Counting the jobs lost to China - China’s entry into the World Trade Organization in 2001 was touted as a win-win development that would benefit both the U.S. and Chinese economies. Almost a decade later, it is clear that American workers have suffered significant losses. In a new paper, EPI International Economist Robert Scott calculates that 2.4 million American jobs were lost between 2001 and 2008 as a result of increased trade with China, and that those job losses have occurred in every U.S. state, Congressional district, and most industries. The Figure below shows the job loss by state as a portion of total state employment, with the darker shades representing the most severe job loss. California, which has lost 370,000 jobs as a result of this trade imbalance with China, has suffered the largest total job loss. Measuring job loss as a share of total state employment, New Hampshire lost the most jobs

Demographic shifts - and working with China - Business Insider’s chart of the day has some revealing population projections that suggest that the USA’s labour force is set to continue to expand in the years ahead whereas China’s labour force will shrink by 10%, Europe’s will shrink 25%, and that of Korea and Japan’s will also contract by a significant amount. The BBC news website carries a related article on labour mobility within the Chinese economy. Millions of internal migrants moved away from the manufacturing heartlands during the recent economic crisis. How many of them will return especially with the financial incentives on offer from a Chinese government that is seeking to create a million more entrepreneurs. Read: Why migrant workers are shunning China’s factories

Parents at Work - The President’s Council of Economic Advisers on Wednesday released its report on “Work-Life Balance and the Economics of Workplace Flexibility.” What inspired it? Well, in short, this: In 1968, a quarter of all American children lived in households in which all parents were working full time. Four decades later, the report notes, that portion had doubled to nearly one-half of all children.That chart is from the introduction to the report, which discusses the evolving needs of the American work force. The rest of the paper discusses what kinds of jobs can enable a healthy work-life balance. For example, here’s a look at which industries are most likely to allow their employees to work flexible hours:

The Associated Press: Construction spending at lowest point since 2002  - Builders cut back on new projects at a faster-than-expected pace in February and drove down construction spending to the lowest level in eight years. It was a fresh sign that the troubled real-estate market remains a sore spot for the economic recovery. The Commerce Department reported Thursday that spending on construction projects around the country fell by 1.3 percent to a seasonally adjusted annual rate of $846.23 billion. That was the lowest level since November 2002. Economists were predicting builders would pare spending by 1 percent. The weakness was widespread. Spending fell for home building, commercial ventures, including hotels and motels, and big government public works projects, such as highways and streets.

NY Suspends Construction Projects In Fiscal Crisis - Gov. David Paterson is suspending hundreds of current and new construction projects because of New York's budget woes, including a highway to Fort Drum and a major interchange on Long Island.Paterson administration officials told The Associated Press on Tuesday that all projects not paid for by federal economic stimulus funds will be delayed until the Legislature and the governor agree on a 2010-11 budget or emergency funding.The extraordinary order also tells contractors on existing projects that the state won't fund any work after the start of the new fiscal year on Thursday until there is a budget or emergency funds. The soonest that could happen is April 7, when the Legislature returns. Or it could come April 14, when an emergency spending appropriation expires.

Cash-Strapped States Labor to Fund Jobless Benefits (PBS News Hour) The latest jobs reading showed the U.S. unemployment rate holding steady at 9.7 percent in March despite positive news that employers added 162,000 jobs. But with 20 million Americans collecting jobless benefits last year from already cash-strapped states, unemployment insurance systems around the country are stretched to their breaking points. To find out which states are in the most dire straits, we spoke to ProPublica reporter Olga Pierce, who has been tracking the health of unemployment insurance funds around the U.S.  So far, 32 states plus the Virgin Islands have insolvent funds.

Some States Face Greek-Style Debt Woes - California, New York and other U.S. states are showing many of the same signs of debt overload that recently took Greece to the brink -- budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis.

States Are Insolvent; Soon They May Be Illiquid - In the New York Times, Mary Walsh looks at the sorry condition of state budgets, paying particular attention to unfunded public employee pension liabilities. She drew on a recent AEI working paper of mine that calculated the market value of such shortfalls. It’s a good article and worth checking out. Here I expand on the numbers she used to give a more complete picture of how big the financial hurdles facing Americans truly are. The chart below shows three types of debt.

• Explicit state borrowing, in the form of general obligations bonds and other debt.
• The market value of unfunded state employee pension obligations; this is generally several times higher than the value states themselves acknowledge.
• States’ shares of the total federal debt: these are calculated by assuming that states bear the federal debt in the same proportion to which they pay overall federal income taxes, such that high income taxes will tend to carry proportionately more than low-income states.

Payback Time - States’ Debt Woes Grow Too Big to Camouflage…- California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay. Some economists fear the states have a potentially bigger problem than their recession-induced budget woes. If investors become reluctant to buy the states’ debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. “If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics professor at Harvard and a former research director of the International Monetary Fund. “But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble.”

Will Federal Stimulus Money for States Expire Before Recovery Arrives? -The Recovery Act was passed late and politics trumped targeting in many states. Of necessity, federal stimulus has also proven less temporary than Summers and his boss, Barack Obama, envisioned. In an effort to spur the lagging recovery, Congress has approved and the president signed another stimulus bill, this one to give employers a break on payroll taxes and inject more money into road and bridge construction, one of the many goals of the Recovery Act. But the Recovery Act, reminiscent of similar initiatives undertaken during President Franklin D. Roosevelt's New Deal, remains a big deal to the unemployed, to the working poor, to homeowners under water on their mortgages, and to small business owners of every description who are struggling to make ends meet.

States Seeking Cash Hope to Expand Taxes to Services - In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns. Opponents of imposing taxes on services like funerals, legal advice, helicopter rides and dry cleaning argue that this push comes as businesses are barely clinging to life and can ill afford to see customers further put off by new taxes. This is especially true, they say, in states like Michigan and Pennsylvania, where some of the most sweeping proposals are being considered this spring.  But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.

Tax Burdens by State - interactive - Just ahead of April 15, the Tax Foundation, an organization that promotes lower tax rates,  released its annual report on state and local taxes. It shows cigarette, gas and alcohol excise tax rates by state; lottery ticket sales per capita in each state; and state debt per capita, among other interesting statistics. But one table is particularly compelling, especially for people who like to complain that their state taxes are unusually high: the tax burden for each state’s residents, in state and local taxes. Here’s a map showing the state and local tax burden for residents of each state, as a percent of that state’s total income:

States urged to speed up tax refunds --Give people their money. It's the rallying cry of lawmakers around the country pushing back against states that are delaying tax refunds to shore up their budgets. Holding on to the refunds allows states to use the money for other purposes, earn interest on it or simply wait until there's enough cash to cover the checks. But the cost can be an unhappy public. "It's not the state's money, it's the people's money," said Missouri Rep. Jason Smith, R-Salem. "It's money they've overpaid to the state, and they deserve to get their money back in a prompt time."

Corrections chief: Cuts might free 2500 inmates -  Florida's corrections chief warned Monday that the Senate's plan to cut prison guard jobs and privatize others could force the release more than 2,500 prisoners before their sentences are up. The main architect of the plan, Senate budget chief JD Alexander, fiercely disputed the charge. He said the plan will make sure prisons have enough funding. "We will not pass a budget that triggers early release," said Alexander, R-Lake Wales. "The amendment we passed went a long way toward making sure we had adequate resources for staffing prisons." The confusion and conflict revolve around Alexander's proposal to shut down two prisons and privatize another to fill the Blackwater River Correctional Facility, a state-of-the-art private facility close to completion in Santa Rosa County

Budget Deficit Makes Committing Felonies Way Easier - There's never been a better time to go on a crime spree in California. To cut the state's $20 billion budget deficit, under a proposed plan convicted felons can be released on parole with no supervision. Not a bad idea! According to the AP, "restrictions have been relaxed for nonviolent criminals like burglars, drug offenders and fraudsters" — meaning its time to get dust off those digital scales and crowbars and get to work.

Fitch downgrades Illinois ratings, may cut again | Reuters  (Reuters) - Fitch Ratings on Monday downgraded Illinois' general obligation bonds and said it may lower them again on concerns about the state's ability to close a budget deficit and cope with huge pension liabilities. Fitch downgraded Illinois' rating by one notch to A-minus, putting it four notches above speculative, or "junk" status. The agency also downgraded ratings on debt based on the state's appropriation to BBB-plus, or three notches above junk. The action "reflects the magnitude and persistent nature of the state's fiscal problems and the likelihood that the budget to be enacted for fiscal 2011 will not sufficiently address either the annual operating deficit or accumulated liabilities," the agency said. Fitch is the third of the major rating agencies to weigh in on Illinois, which is gearing up to sell at least $1.0 billion of Build America Bonds in the coming weeks.

Illinois' rating on $23.4 billion of municipal debt cut to A- - Illinois' rating on $23.4 billion of municipal bonds was cut one level to A- by Fitch Ratings, which cited a rising budget deficit in the next fiscal year for the second-lowest rated state after California."The fiscal 2011 budget "will not sufficiently" address the estimated general fund gap, expected to total $9.3 billion, or 33 percent of revenue, Fitch said in a report today. Fitch kept the state on a ratings watch list for a possible further downgrade from the fourth-lowest investment grade. The lower ranking may raise the state's borrowing cost as it comes to market with more than $1 billion of new debt and investors demand a higher yield. Standard & Poor's cut the state's rating March 26 by one level to A+, its fifth-highest, and Moody's Investors Service today assigned an A2 rating with a negative outlook, meaning the bonds may be downgraded."

NJ Deserves Lower Bond Rating, Merrill Lynch Says (Bloomberg) -- New Jersey’s bonds should be ranked a step below those assigned by the three major credit-rating firms, as the state faces a $46 billion pension deficit and record high debt-load, Merrill Lynch analyst John Hallacy said. The state’s general obligations are rated Aa3 by Moody’s Investors Service, AA by Standard & Poor’s, and AA- by Fitch Ratings, the fourth- , third- and fourth-highest investment grades, respectively. New Jersey is the third-most indebted U.S. state according to Moody’s, and expanded its borrowings to a record $33.9 billion as of June 30, from $31.8 billion a year earlier. “We are revising our view on New Jersey’s credit in light of the state’s sizable debt load, severely unfunded pension and health-care retirement benefits liabilities, and aggressive budget assumptions for its fiscal year ending 30 June 2011 which we believe will be difficult to achieve,”

Paterson asks for giveback of raises by state workers — Gov. David Paterson called on state workers Thursday to forgo their 4 percent raises scheduled for this month because the state is running out of money to pay its bills."The whole issue is we're not asking because we're trying to gouge anyone, we're asking because the state is now $9.2 billion in deficit," Paterson said on his weekly radio appearance on WOR-AM. "When is somebody going to get it? We have run out of money." In a statement later in the day, Paterson said it is unfair for unions to get the raises when more than 300,000 New Yorkers have lost their jobs, the state has a nearly 9 percent unemployment rate and the private sector has accepted wage freezes, salary cuts and furloughs

New York's phantom taxes: City squeezes residents another way-—by hitting us with nearly $900 million in fines. - The cash-starved city is socking New Yorkers with a massive ticket blitz in a bid to pump an extra $80 million into its depleted coffers, records show. Reluctant to raise taxes publicly, the Bloomberg administration is pursuing a “stealth tax” — launching an unprecedented squeeze on Big Apple residents and businesses, cracking down on parking, health, safety and quality-of-life infractions with a vengeance, the data shows. The ongoing blitz has worked so well that City Hall bean counters expect to rake in a record $884 million in fines by the end of this fiscal year, which runs from July 1, 2009 to June 30, 2010.

Statler Towers Crumbling; Another Piece Fell to Ground - Another piece of the historic Statler Towers in downtown Buffalo has fallen to the street. The latest incident occured around 11 a.m. on Thursday. City Fire crews responded to make sure no one was hurt. They blocked off the sidewalk on West Genesee in order to check the rest of the building. The Statler Towers was shut down in January and then boarded up. The previous owner filed for bankruptcy and the group that tired to buy it out of bankruptcy court could not come up with the necessary payments. Last November, another piece of the towers fell to the ground. Firefighters were forced to block off a section of the nearby road as a response.

What Do Detroit, the Postal Service, and Health Care Reform Have in Common? - That the U.S. Postal Service is swimming in red ink isn’t news. The nation’s postal service, despite its first-class mail monopoly, swims in red ink a lot. The important news to Americans as they follow Washington’s three-ring health care circus is that U.S. Postmaster General Joe E. Potter wants to drop Saturday mail delivery as a cost-cutting measure.To repeat, the postmaster general wants to reduce service in an effort to staunch red ink. That’s service as in mail delivery, the U.S. Postal Service’s bread and butter. Imagine a hamburger joint announcing to its customers that it plans to stop selling hamburgers a day or two a week to cut costs.

Rainy day savings critically low in metro Detroit - Rainy day funds that protect communities during economic downturns are running dangerously low in dozens of metro Detroit cities and counties as the worst fiscal storm in 70 years bears down.After five years of dipping into emergency savings, many communities confront a grim reality: Without sufficient savings, they must raise taxes or cut deeper into services to offset drops in property taxes and state funding.Of the 25 communities analyzed by the Free Press, 21 have drawn down their savings to below levels considered safe by the Government Finance Officers Association, a national group that advises public officials on financial management. The impact could be severe as many communities stand to lose up to 20% of their budgets to declining property values

Flint cuts trash pickup to every other week The city is switching to every-other-week trash collection starting today for residents in some areas and beginning April 5 for others. While the frequency of collection is changing, pickup days are staying the same. Mayor Dayne Walling has said the change could save about $20,000 a week and more than $1 million over the next fiscal year. Flint has been taking steps including police and fire worker cutbacks to deal with a budget deficit that is estimated at $8 million.

Mich. neighborhood complains it is overrun with rats - Residents of a Michigan neighborhood said they have taken pictures and video of a plague of rats overrunning the outside of their homes.Some residents said they are staying inside their Madison Heights homes at night to avoid encounters with the rats, which have been photographed running rampant around garbage cans, under decks and inside barbecue grills, WDIV-TV, Detroit, reported WednesdayThe neighbors said they have contacted the city about the rodent problem but there has been no meaningful action on the part of officials."We've cleaned everything up. We've done poison, we've done this and that, and it's got worse," resident Mick Hohner said. "If it's only a few of us doing it, it's not going to get better."

Strapped Cities Struggling to Fund Water Treatment Upgrades -There are 16,000 publicly owned wastewater treatment plants in the United States that operate 100,000 major pumping stations, 600,000 miles of sanitary sewers and 200,000 miles of storm sewers, according to U.S. EPA. That system received a grade of D- from the American Society of Civil Engineers in its latest "Report Card for America's Infrastructure." The society noted that billions of gallons of untreated wastewater is discharged each year because of lagging investments. Hornback said many communities would be facing a difficult challenge even if the economy were more robust. Communities historically "undervalue" their water and sewer services, charging users less than is needed to keep the systems operating to modern standards."The pipes in the ground are in some cases over 100 years old,"

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

Midwest economy: A state-by-state glance for March - The Institute for Supply Management, formerly the Purchasing Management Association, began formally surveying its membership in 1931 to gauge business conditions. The overall index ranges between 0 and 100. Growth neutral is 50, and a figure greater than 50 indicates an expanding economy over the next three to six months. Here are the state-by-state results of the March survey in the Mid-America region:

State's good economic news will be temporary - California’s economy is expected to bounce back this year, but don’t expect the good news to linger long.According to a new economic outlook released by San Francisco-based Beacon Economics, the state and national economy will become precarious by the end of 2011.Economic growth is returning in the short run, yet the forecast concludes that the rebound is mostly the result of unsustainable government policy rather than improving economic fundamentals, according to Beacon Economics.“The imbalances that pushed the nation into recession in the first place have not been corrected, but papered over by government fiscal and monetary policy,”

State's tax collections drop 14% in '09 - State taxes collected in California dropped 13.94% in 2009 from a year earlier, according to a new report from the U.S. Census Bureau. That compares with an 8.6% drop nationwide. The report doesn’t include local or federal taxes or state unemployment compensation taxes. The state collected just over $101 billion in 2009, down $16.4 billion, even though the legislature and governor approved the largest tax increase in state history including hikes in sales, motor vehicle and income taxes.

On Jefferson County – Matt Taibbi – My new article, “Looting Main Street,” is out on newsstands in Rolling Stone. It’s about Jefferson County, Alabama, and how a group of Wall Street banks (in particular JP Morgan Chase) ran the Birmingham area into the ground with predatory interest rate swap deals.If you’ve heard of the financial scandal in Greece, JeffCo is sort of an earlier version of that, though slightly different. As Christopher “Kit” Taylor, the former chairman of the Municipal Securities Rulemaking Board, put it to me: “[The banks] basically took what they were doing in places like Jefferson County and exported it overseas.”The broad story with municipal debt is that the incentives got out of whack for the banks, just like they had in the mortgage market, where commissions for doing safe, 30-year fixed loans fell to the point where they weren’t much of a moneymaker for brokers.

California Treasurer Asks Six Banks for Swap Details (Bloomberg) -- California’s treasurer asked six investment banks that underwrite the state’s bonds to explain why they also market credit-default swaps on them, saying such contracts may cost taxpayers by exaggerating credit risk.Treasurer Bill Lockyer asked JPMorgan Chase & Co., Bank of America Merrill Lynch, Barclays Plc, Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley to detail the extent to which they market the insurance contracts and to explain how trading in them affects the interest cost on the state’s general-obligation bonds, according to letters he released today."

Chiang: Worst yet to come for California budget crisis - State Controller John Chiang said Monday the worst of California's budget crisis is still to come. Although lawmakers are challenged by a nearly $20billion deficit, "the bad year's 2012," Chiang said. That year, state finances will be hit with a trifecta of pain: The temporary tax hikes approved last year will be over; federal stimulus funds will be gone; and funds that the state "raided" from local governments will come due.The deficit at that point will be some $25billion, according to Schwarzenegger administration estimates. And finances in later years aren't great either: Last year, the Legislative Analyst Office released a report projecting a $20billion deficit every year for the next five years.

L.A. school unions agree to cut days from academic calendar. - Los Angeles school district officials and employee unions announced an agreement Saturday to cut five days from this school year and seven days next year in an effort to maintain up to 2,100 campus jobs. If approved by members of the teachers and administrators unions, the move would save the Los Angeles Unified School District about $140 million and preserve class sizes in grade and middle schools, officials said. The district, the second largest in the nation, is facing a $640-million deficit. District officials had been urging unions for months to make concessions to help balance the books. Administrators agreed to the furlough days Monday night, and the teachers union reached a deal late Friday, representatives said at a news conference.

Public Libraries Reduce Hours and Staff as Budgets Tighten…  Massive budget cuts that have already led to furloughs for government workers and increased class sizes for public school teachers are claiming another victim: libraries. The Los Angeles Board of Library Commissioners this week ordered nine city libraries to close on Sundays, citing a city government hiring freeze that will keep it from replacing an estimated 200 retiring library workers. And in Pasadena, home to academic powerhouse Caltech, public school officials say they'll close school libraries next year, among other cuts, if a local tax measure doesn't pass in May. "Every librarian and their staff received pink slips in our district," said Susan Hernandez, president of the Pasadena High School Parent, Teacher and Student Association. "How does a school function without a library?" But the problem is not California's alone.

'Texas schoolbook massacre' rewrites American history - Country music is an important modern cultural movement; hip-hop isn't. Thomas Jefferson deserves to be erased from a list of "great Americans", but Ronald Reagan doesn't. And we should re-evaluate Senator Joe McCarthy: he was almost certainly a national hero. If you think that sounds like a quirky rewriting of American history with a right-wing twist, then you're not alone. But if the state of Texas gets its way, it'll be what teachers across the rest of the nation are required to tell their students. In a move that has sparked controversy from coast to coast, together with a slew of headlines about the "Texas schoolbook massacre", the Lone Star state has just narrowly approved a series of conservative-minded alterations to its social studies curriculum.

Guess who? - They grade papers at home. They buy class room supplies with their own money, and now your child will determine their job security and salaries! Can you guess who this is? If you answered Florida public school teachers, you are correct! Yes it is true, now every child is a little dollar sign, whom our state senate made responsible for our teachers paychecks by how well they can take a test! Isn't that great! Now there's a good chance your child will spend a whole year learning how to take a test! Who can we "thank" for this ingenious pay system? None other than The Party of NO, the Republicans!

One Game Machine Per Child - Ofer Malamud and Cristian Pop-Eleches look at the effects of a program that gave poor households a voucher to purchase a computer. The income cutoff is shown by the red line.  Beginning at the top left we see that households with incomes just below the cutoff were much more likely to have a computer than households with incomes just above the cutoff - thus the voucher program has a big effect on computer ownership.  The income cutoff is shown by the red line.  Beginning at the top left we see that households with incomes just below the cutoff were much more likely to have a computer than households with incomes just above the cutoff - thus the voucher program has a big effect on computer ownership.  Not surprisingly, with all that game playing going on, the authors find that the voucher program actually resulted in a decline in grades.

Student debt keeps rising - (Click here to enlarge) The vast majority of loans come from the government. It’s doing students few favors by offering them. More debt on offer to pay for an asset — whether a house, a security, or a college education — just inflates its price. For other assets, it’s easy to sit out the borrowing arms race. Dwellings can be rented, savings parked somewhere besides frothy stocks or bonds. But every year there’s a new crop of 18 year-olds that have to pay the debt-inflated price of tuition.

Disadvantaged reap most financial return from college education - With the college admission season upon us, teens across the country are glued to college websites in hopes of learning whether they have been admitted to their school of choice.  But high school seniors who did not apply to college may be missing out on more than this popular rite of passage, a new UCLA-led study suggests. They could be forgoing some of the greatest financial returns a college education can offer, according to the findings, which appear in the April issue of the American Sociological Review. "We found that the highest economic return to a college education is among the students who were least likely to go to college," said Jennie E. Brand, the study's lead author and a UCLA assistant professor of sociology. The study's co-author is Yu Xie, the Otis Dudley Duncan Distinguished University Professor of Sociology at the University of Michigan.

Slashing Prices - Inside Higher Ed - Tuition discounting reached record high levels at private colleges and universities in 2008, and the largest share of that aid was awarded without consideration of students’ financial need, according to a report released Tuesday by the National Association of College and University Business Officers Despite lamentations from some college presidents, tuition discounting has become an increasingly common practice at private institutions. Standard discounting involves placing the sticker price of attendance beyond the reach of many families, only to effectively slash that price by offering institutionally funded financial aid to many or, more typically, most students. Critics say it steers too much aid toward students without financial need, and it also forces high-tuition colleges to defend sticker prices students seldom actually pay.

More Families Depend On School Lunches - In the midst of a blistering recession, more families are flocking to the federal program that gives students free or reduced-priced lunches. Schools are watching for who enrolls in the program because it gives teachers insight into life at home and officials consider it a barometer of poverty.The numbers are telling.During the 2008-2009 school year, about 19 million students received free and reduced lunches, which is 895,000 more than the previous year — a jump of nearly 5 percent and that greatly outpaced the overall increase in school enrollment, according to the U.S. Department of Agriculture's Food and Nutrition Service. Typically, the increases are about 1 to 2 percent each year."We have seen record program growth over the past two years as we go through this difficult period,"

'Devastating' layoffs loom in school districts statewide - In recent weeks, state education funding woes have triggered a tsunami of pink slips to thousands upon thousands of teachers and support staff in school districts statewide, with about 9,800 announced layoffs of teachers so far.  Another 1,600 retiring teachers won't be replaced. Total planned layoffs stand at more than 17,000 school personnel. And that's with just 75 percent of districts responding to a survey sent by a coalition of education groups. When all is said and done, school layoffs statewide could top 20,000, the coalition warns. "What looms this school year is devastating for all of Illinois. It's going to significantly diminish the quality of education throughout the state,"

Paterson Witholds School Payments - Governor David Paterson has once again put off some payments that the state owes to schools, citing lack of money. Governor Paterson, who originally included the school aid money in emergency spending bills approved by the legislature, now says he's going to withhold $2.1 billion dollars in school aid payments after all, due to "severe cash flow difficulties". This is the second time the governor has had to delay payments due to schools or local governments. The first was in December, when he and the legislature failed to agree on a complete plan to close a deficit in the current year's budget. The money was eventually paid in January, when more revenues came in.

Schools fear never getting delayed state aid - The state's delay in paying $2.1 billion in school aid was not the thing that was most worrisome to local school officials Wednesday.What concerned them far more was the gnawing fear that the state's financial crisis is so severe that the money will never be paid, or that the already-budgeted amounts will be substantially reduced.Those fears were fueled by not only the magnitude of the state's budget crisis but also Gov. David A. Paterson's statement that the money will be paid by June 1 "assuming sufficient cash is available." Schools had been scheduled to receive the aid Wednesday.There is precedent for the loss of anticipated aid from Albany.A state bailout of New York City's Metropolitan Transportation Authority last year was supposed to be followed by increased funding to repair upstate roads and bridges. But the upstate aid never materialized

Why We're Broke - Mayor Bloomberg showed a firm grasp of the obvious yesterday, responding to a Post exclusive detailing the $242,000-a-year pension just awarded to a retiring FDNY deputy commissioner. True, it doesn't appear that former First Deputy Commissioner Frank Cruthers did anything untoward to qualify for the windfall. "This is a pension he's entitled to," the mayor noted."The issue that we have is that the whole pension system is something that we cannot afford," Mike said.

Showing the Woes in Public Pensions Government-pension problems, widely considered bad, may actually be even worse. That is the assessment of some experts who maintain that the current rules of number crunching for state and local governments make retirement-benefit obligations seem lower than they really are. Soon, their view may prevail. The accounting board for governments is likely to move toward changes that would increase the pension liability that local governments display on balance sheets by tens of billions of dollars.If the modifications are approved, many already cash-strapped states and municipalities would likely have to increase the amount they are supposed to pay annually to their pension funds to help cover the shortfall.

CalPERS, CalSTRS at risk in new credit squeeze? The nation’s two biggest public pension funds, CalPERS and CalSTRS, were big investors in debt-laden private equity during the boom years. Now some worry that a wave of debt coming due in two years could limit borrowing needed for refinancing. A page-one New York Times story this month said massive corporate and federal government debts are coming due at the same time, causing worry that “some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.”

Overfixing Social Security: the Importance of Honest Scoring - And I could add honest definitions and honest framing to that.In Dec 2005 three former staffers to Bill Clinton, John McCain and GW Bush respectively released the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (9 pg PDF) or LMS. The authors proposed a package of changes to Social Security comprised of a 1.5% across the board payroll tax increase, an adjustment of the payroll gap back to the 90% level (it had drifted down to 84%) for the equivalent of another 1.0% of payroll, and adjustment in retirement age scored at 0.62% of payroll, and a change in indexing of initial benefits that scored at 2.08% of payroll for a total worker financed 'fix' of 5.2% of payroll.  So why a 5.2% solution to a problem scored 1.92%?

The high price of success - I GOT my Social Security statement in the mail last week—the same week the Congressional Budget Office announced that Social Security would run a deficit this year. This was not supposed to happen until 2016, but reduced revenues from the recession mean that the finances of Social Security are worse than expected. My statement promises that Social Security “will still be around” when I retire. But it cautions that without reform, by 2037 there will only be 76 cents for each dollar of scheduled benefits.  The only way to restore Social Security to solvency is to increase taxes or cut benefits. Sensible reform proposals often include some clever combination of the two. The sooner reform takes place the smaller the cuts to benefits and increases in taxes need be. That is precisely why I find statements like this, from influential expert Teresa Ghilarducci, so disturbing.

Excessive Outrage on Retiree Subsidy Accounting - So as blogged yesterday, the new health care plan changed the tax treatment of a subsidy for retiree prescription drug benefits, which caused those companies who had received the subsidy to announce a charge against their deferred tax assets.  Conservatives gleefully pointed out that this was probably going to change peoples' drug benefits.  Liberals leaped into the fray, arguing that all the law had done was 'closed a loophole", and accusing the companies of "double dipping".  All this moralizing seems to me to be extremely overwrought.

 Obama Signs Overhaul of Student Loan Program - NYTimes - President Obama signed legislation on Tuesday to expand college access for millions of young Americans by revamping the federal student loan program in what he called “one of the most significant investments in higher education since the G.I. Bill.” Mr. Obama went to a community college where the wife of his vice president teaches to draw attention to the student loan overhaul attached to the final piece of health care legislation that passed last week. In signing the bill, Mr. Obama put the final touches on his health care program but used the occasion to highlight the education provisions.

The Rage Is Not About Health Care - There’s nothing entertaining about watching goons hurl venomous slurs at congressmen like the civil rights hero John Lewis and the openly gay Barney Frank. And as the week dragged on, and reports of death threats and vandalism stretched from Arizona to Kansas to upstate New York, the F.B.I. and the local police had to get into the act to protect members of Congress and their families. How curious that a mob fond of likening President Obama to Hitler knows so little about history that it doesn’t recognize its own small-scale mimicry of Kristallnacht. The weapon of choice for vigilante violence at Congressional offices has been a brick hurled through a window. So far.

Former militiaman unapologetic for calls to vandalize offices over health care - Mike Vanderboegh, a 57-year-old former militiaman from Alabama, took to his blog urging people who opposed the historic health-care reform legislation -- he calls it "Nancy Pelosi's Intolerable Act" -- to throw bricks through the windows of Democratic offices nationwide. "So, if you wish to send a message that Pelosi and her party [that they] cannot fail to hear, break their windows," Vanderboegh wrote on the blog, Sipsey Street Irregulars.  "Break them NOW. Break them and run to break again. Break them under cover of night. Break them in broad daylight. Break them and await arrest in willful, principled civil disobedience. Break them with rocks. Break them with slingshots. Break them with baseball bats. But BREAK THEM."  (

How the States Could Sabotage Health Reform - The 14 states suing the Obama administration to stop the enactment of health care reform aren't likely to get very far. But though they probably won't succeed in overturning the legislation, they could seriously undermine it. The Affordable Care Act, as the reform bill is known, will create health insurance exchanges, which each state will be responsible for setting up. And reform-resistant state governments will have much opportunity for foot-dragging and spotty regulatory enforcement. Under the law, the federal government will establish national regulations for the exchanges—which will enable individuals and small businesses to purchase more affordable coverage in a regulated market—but the states will have the job of creating and overseeing them.

Should Firms Be Able To Own Your Genes? - 60 Minutes -(CBS) Biotech companies have patented 10,000 human genes in their efforts to profit from the keys to disease prevention and cure many of them hold. But the idea of private ownership of things produced inside the human body is coming under scrutiny and a recent lawsuit struck a blow against it.  A law professor tells "60 Minutes" correspondent Morley Safer it's just plain wrong in a report to be broadcast this Sunday, April 4, at 7 p.m. ET/PT.  "It's as if the first surgeon who took a kidney out of your body then patented the kidney," says Lori Andrews, a professor at Chicago-Kent College of Law. Patent law was really intended to "reward inventors who brought something new into the world," she tells Safer.

Judge Invalidates Human Gene Patent - A federal judge on Monday struck down patents on two genes linked to breast and ovarian cancer. The decision, if upheld, could throw into doubt the patents covering thousands of human genes and reshape the law of intellectual property.  The case could have far-reaching implications. Myriad Genetics, the company that holds the patents with the University of Utah Research Foundation, asked the court to dismiss the case, claiming that the work of isolating the DNA from the body transforms it and makes it patentable. Such patents, it said, have been granted for decades; the Supreme Court upheld patents on living organisms in 1980. About 20 percent of human genes have been patented, and multibillion-dollar industries have been built atop the intellectual property rights that the patents grant.

Drug That Extends Life Span Prevents Alzheimer’s Deficits - A few weeks after a report that rapamycin, a drug that extends lifespan in mice and that is currently used in transplant patients, curbed the effects of Alzheimer's disease in mice, a second group is announcing similar results in an entirely different mouse model of early Alzheimer's. Both reports are from The University of Texas Health Science Center at San Antonio, where the rapamycin studies are conducted in the Sam and Ann Barshop Institute for Longevity and Aging Studies and in basic science departments.

Sex infection gonorrhea risks becoming “superbug”(Reuters) - The sexually transmitted disease gonorrhea risks becoming a drug-resistant "superbug" if doctors do not devise new ways of treating it, a leading sexual health expert said. Catherine Ison, a specialist on gonorrhea from Britain's Health Protection Agency said a World Health Organization (WHO) meeting in Manila next week would be vital to efforts to try to stop the bug repeatedly adapting to and overcoming drugs. "This is a very clever bacteria. If this problem isn't addressed, there is a real possibility that gonorrhea will become a very difficult infection to treat," she said in a telephone interview.

Cigarettes might contain pig blood - Simon Chapman, a Professor in public health in the University of Sydney, noted a stream of Dutch research which has found 185 different industrial uses of pig parts. One use was found to be pig haemoglobin included in some cigarette filters. The research provides an insight into the manufacturing of cigarettes, says Professor Chapman, a business that is otherwise very secretive. He also said that this information will likely alarm devout Jews and Muslims. Adding pig haemoglobin can make cigarette filters more effective by helping stop some of the dangerous chemicals entering a smoker's bodies, according to the Netherlands study.

Chocolate reduces blood pressure and risk of heart disease - - Easter eggs and other chocolate may be good for you – at least in small quantities and preferably if it's dark chocolate – according to research that shows just one small square of chocolate a day can lower your blood pressure and reduce your risk of heart disease. The study is published online today (Wednesday 31 March) in the European Heart Journal [1]. Researchers in Germany followed 19,357 people, aged between 35 and 65, for at least ten years and found that those who ate the most amount of chocolate – an average of 7.5 grams a day – had lower blood pressure and a 39% lower risk of having a heart attack or stroke compared to those who ate the least amount of chocolate – an average of 1.7 grams a day. The difference between the two groups amounts to six grams of chocolate: the equivalent of less than one small square of a 100g bar.

Remember this Barack Obama Campaign Ad Against McCain's Health Care Plan? - Tax Foundation - So what does the health care bill signed into law by President Obama last week do? 1) It would tax health benefits for the first time ever. 2) It sends your health premium tax credit directly to the insurance company. (JCT explanation: "Based on the information provided to the exchange, the individual receives a premium assistance credit based on income, and the Treasury pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled.")

Health Care - I first posted this in December of 2006. Nothing has changed since then. NOTHING. So I'm reposting it. Health care in the USA is completely broken. Health care is a difficult problem, to be sure, but I think it's clear that we're currently solving it very badly. Two problems with health care: One is that people expect everyone to have the same health care as a rich person, even if they're not rich themselves. Another is that health care, not being exposed to the discipline of the market, is very expensive. If everyone gets the same health care as a rich person, then there is no pressure to create more frugal health care. Health care then being expensive, everyone expects somebody else to be paying for their health care....

File Under Vile - Krugman - OK, I finally got around to reading Douglas Holtz-Eakin’s op-ed on health care reform. It’s much worse than I thought; time to scratch Holtz-Eakin off my shrinking list of reasonable, reasonably honest conservatives. How bad is it? Holtz-Eakin declares that Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending. I think that’s what is technically known as a “lie”. Holtz-Eakin, of all people, knows how to read a CBO report. So he’s perfectly capable of looking at the actual report (pdf) and seeing that the revenues, like the costs, are minimal for the first four years.

THOSE IMAGINARY IRS AGENTS.... - Not quite two weeks ago, House Minority Leader John Boehner (R-Ohio) appeared on Fox News with a new warning for those concerned about health care reform: "Ten billion dollars and 16,000 new IRS agents to make sure that everyone buys the health insurance that the government decides you have to have." Rep. Ron Paul (R-Texas) went a little further, saying there will be 16,500 new IRS agents, each of whom will be "armed." Boehner and Paul were blatantly and shamelessly lying. looked into this and concluded that it's a "wildly inaccurate claim." The Affordable Care Act, the researchers concluded, "requires the IRS mostly to hand out tax credits, not collect penalties. The claim of 16,500 new agents stems from a partisan analysis based on guesswork and false assumptions, and compounded by outright misrepresentation."

A Rumor That Won't Die - Just now on CNN, the hosts reading an e-mail attacking the new law. If health care reform is so good, the writer wanted to know, why are politicians exempting themselves from it? I've heard critics of the bill, from Republican senators to random internet writers, say this many times. And it's frustrating, because it's not true... members of Congress and their staffs must enroll in the new insurance exchanges. Those are the exact same exchanges through which millions of other individuals will be buying their coverage.... the members themselves and the people who work directly for them are all covered. And, far from pointing out the problems of reform, it demonstrates its virtues: The politicians believe in it enough to entrust their own lives, and those of their families, to the new system..."

Insurers Might Delay Covering Pre-Existing Conditions - NYTimes - Mr. Obama, speaking at a health care rally in northern Virginia on March 19, said, “Starting this year, insurance companies will be banned forever from denying coverage to children with pre-existing conditions.”  The authors of the law say they meant to ban all forms of discrimination against children with pre-existing conditions like asthma, diabetes, birth defects, orthopedic problems, leukemia, cystic fibrosis and sickle cell disease. The goal, they say, was to provide those youngsters with access to insurance and to a full range of benefits once they are in a health plan.  To insurance companies, the language of the law is not so clear. Insurers agree that if they provide insurance for a child, they must cover pre-existing conditions. But, they say, the law does not require them to write insurance for the child and it does not guarantee the “availability of coverage” for all until 2014.

Health Care Bill Bait and Switch: Insurers Have Wriggle Room to Refuse Coverage for Pre-Existing Conditions - Yves Smith -The way pre-existing conditions often come into play now is that a patient has an expensive ailment, and the insurer looks for a way to deny coverage. So they go through the patient’s medical history and find something, anything they failed to tell the insurer about, and use that as an excuse to deny coverage. And it doesn’t matter that the condition you failed to report was inconsequential, or that you failed to report it because your doctor diagnosed it late (for instance, you got Lyme disease before you got a policy, but no one diagnosed it until it was advanced Lyme disease, after you were covered). Why can insurers use these weak excuses to cancel coverage? Because they have been able to argue successfully, that these omissions are “fraud and intentional mispresentation”.Guess what? The draft bill preserved the “fraud and misrepresentation” out, and I have seen nothing to indicate that this language was revised.

Making Health Care Insurers breath hard! - Have you ever sat in on an Argument where 3 lawyers discussed the Intent of specific legislation? Avoid it if possible, but if forced to attend, expect a real flow of BS. We are currently at that stage of health care description, and everyone is shocked about the purported lack of clarity. The language of the health care legislation is not confusing; lawyers simply claim that it is, a carrying capacity to get other lawyers, this time called Judges, to agree with the ambiguity. Everyone knows what is expected from the legislation, everyone knows what is wanted from the legislation, and everyone knows that the delays of implementation can mean huge Profits for the Insurance companies. Want to stop the Argument from even occurring? Simply pass a Codicil which states there is an ex post facto element to the new law, where Insurers must pay the health care costs of the five previous years for every insured Individual, with premiums set based upon the payment schedule of those 5 years. Threat of this Codicil will probably shut down this discussion within minutes of it’s proposal.

Can the Individual Mandate Be Enforced? - Big Government has written a post suggesting that the individual health care mandate will not actually be enforced by the IRS.  It will be assessed, but if you refuse to pay it, the normal enforcement mechanisms under Subtitle F of the tax code--such as liens and garnishments--may not be employed.  Politically, this is obviously the safest route; you don't want articles about the nice middle aged lady who may lose her house because she didn't pay her mandate.  But practically, this is disastrous, if true.  It would mean that in practice the mandate would only apply to people who get tax refunds; otherwise, just write the IRS a check for everything except the mandate.  And since you don't have to get a tax refund--you can have your employer change your withholding--anyone who doesn't want to pay it, wouldn't have to. But it's not clear that this is what's actually going to happen.  If the IRS can reorder the priority of the tax dollars they take from you, then they can simply put any funds towards the mandate first.

Is the mandate penalty large enough? - Reihan offers some discussion.  He also links to the Massachusetts page on penalties, for instance: 2009 tax penalties for adults above 300% of the federal poverty level are based on 1/2 the cost of the lowest-priced Commonwealth Choice plan.  They are: $52 each month or $624 for an entire year for individuals aged 18-26. $89 each month or $1068 for the year for individuals 27 or older.Those are higher penalties than for the Obama plan, which doesn't go up to $695 for a few years (update: Austin Frakt offers more numbers here).  Still, media coverage may be a bigger issue than the size of the fee.  If national media run stories about people who avoid the mandate and prosper, the practice could spread.  Massachusetts media have not had the same power or influence. 

Good News On Mandates –Krugman -One big concern about health reform has been the argument that the individual mandate — which is essential to keeping the risk pool broad enough — won’t work, because the penalties for noncompliance are too weak. But Austin Frakt does some calculations which seem to suggest that the penalties for noncompliance under Obamacare are, if anything, slightly stronger than under Romneycare — and that since gaming of the system doesn’t seem to be a large problem in Massachusetts, it probably won’t be a big problem nationally.

Quote of the Day: Sarkozy on Healthcare - From French President Nicolas Sarkozy, speaking today at Columbia University: 'Welcome to the club of states who don't turn their back on the sick and the poor.... The very fact that there should have been such a violent debate simply on the fact that the poorest of Americans should not be left out in the streets without a cent to look after them... is something astonishing to us.' Sarkozy was something of a darling of the right when he was first elected, thanks to his support of laissez-faire economics and general embrace of American values. But the financial collapse of 2008 turned him into something of a regulatory hawk, and now there's this. I'll bet the American right doesn't think much of him anymore.

Ezra Klein - Access to medical care is not 'candy' or an indulgence - For Robert Samuelson, the fact that the Affordable Care Act is fully paid for and in fact reduces the deficit isn't good enough. "If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits -- not finance new spending," he writes. "Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless." "Self-indulgent." Wow. Jon Chait puts his back into it...And before you think this is all about Samuelson, consider that Charles Krauthammer calls coverage "candy." There's an absence of empathy here that borders on a clinical disorder.

Robert Samuelson on Economics And on unavoidable spending, and debt crises, and on budget accounting... From the Washington Post: comes this headline: With health bill, Obama has sown the seeds of a budget crisis Here's a choice excerpt: Should the United States someday suffer a budget crisis, it will be hard not to conclude that Obama and his allies sowed the seeds, because they ignored conspicuous warnings. A further irony will not escape historians. For two years, Obama and members of Congress have angrily blamed the shortsightedness and selfishness of bankers and rating agencies for causing the recent financial crisis. Kinda wierd -- I thought that Obama was inaugurated in January 20, 2009, which is somewhat less than two years ago, by my count. Aside from time dilation, I thought it interesting that Mr. Samuelson neglected to mention how much of the upward jump in the debt-to-GDP ratio occurred before January 2009, as shown in this graph.

On Obamacare and High Deductible Health Insurance Policies - A former student's comments on his FB page: My current health insurance is illegal under the Health Care Reform legislation just signed into law. My deductible is higher than the maximum $2000/individual deductible allowed under Section 1302(c)(2)(A)(i). Paying the first several thousand dollars of my health care each year encourages me to shop around and be price conscious in my health care spending. Why is the gov't discouraging this?  My health plan is neither bad nor irresponsible, and I am very happy with it. I pay very low premiums and self-insure with my own savings and by depositing a portion of my paycheck into a Health Savings Account which rolls over every year (and is quickly approaching the size of my annual deductible). I've found that I often get quoted a wide range of prices when I shop around, and am usually quoted a much lower rate when I tell them I am paying out of pocket. This gets at the heart of why, unless it resorts to death panel style rationing, Obamacare won't "bend the cost curve." Instead of reducing the role of third party payments, the new law leads to even more third party payment.

Health Reform Revelations - Krugman - One of the side benefits of health reform is that it has acted as a character test. If, for example, you thought of Mitt Romney as a person of character, his desperate attempts to disavow what is essentially his own policy proposal have cured you of that affliction. And as Menzie Chinn points out, Robert Samuelson’s hysterical reaction to what is, when all is said and done, a fairly modest — and paid for! — expansion of social insurance tells what what really lies behind his constant harping on the long-run fiscal issue. Menzie has a nice chart comparing four policies and their impact on the budget: the two big Bush tax cuts, the Iraq war, and the health reform:

The right man for the job: Why Mitt Romney should run Obamacare - Now that health care reform has passed, the focus is moving on to implementation. It is a huge undertaking that aims to reshape a significant chunk of the U.S. economy. Setting up this public-private partnership will require creating new infrastructure, managing a lot of moving parts, and dealing with powerful corporations and industry blocs. So who should President Obama appoint to be his health care reform implementation czar? As I see it, there are three principal requirements for the job.

Can we control costs without Congress? - It is a sad commentary on Congress that the most promising cost control in the Affordable Care Act is the one that takes much of the responsibility for controlling costs away from Congress and hands it off to an independent board of experts. That board -- officially known as the Independent Payment Advisory Board -- has made it through to the final bill, and in substantially stronger form than I, for one, expected. The House had always been more skeptical of the idea, but then the Senate bill became everybody's bill and the energy on changing it shifted to the big-ticket items such as affordability and surviving reconciliation. The result was that a strong version of IPAB slipped through almost unnoticed.

All Hail CBO - It's not at all clear whether Republicans or Democrats will end up being the political winner of health care reform, but it is absolutely certain that the Congressional Budget Office came out of the debate in a far better and more highly esteemed position than when it began. At some point during the reform debate:

  • Republicans and Democrats both cited CBO's numbers and rulings as the authoritative voice that validated what they were saying
  • Debates in both houses were delayed until CBO's could complete its estimates
  • Republicans happily and repeatedly used CBO's labeling of some of the Medicare savings as "double-counting as if the phrase was handed down from on high
  • House and Senate Democrats eagerly cited CBO's projections (here and here, for example) of lower deficits from the health care bills as if they were gospel.

Budget Games - Stan Collender tut-tuts at me for saying that the CBO process can be gamed.  He seems to think that I am inplying some dark conspiracy between the folks at the CBO, and Democrats in Congress. I confess, I have no idea how he derived this from an offhand observation that the CBO process can be gamed, but not infinitely.  But had he read any of my other writings on the subject, he would know that I have the highest respect for the CBO.  It is how the CBO is being used in the political process that I object to. The idea is that Congress proposes legislation, and the CBO tells you how much that legislation costs.  Maybe you modify some provisions that cost too much or increase the deficit.  Then you pass the legislation. Or don't, if it turns out to be a bad idea. But that is not how it was used in the health care process. 

Law falls well short of reining in future increases in costs… Mark Zandi is chief economist at Moody's. The health-care overhaul will significantly affect all our lives, but when added up will have little effect on the broader U.S. economy. This is both a success and a failure, and it is also why the long, painful debate over health care isn't over.  The overhaul's success is that it insures the uninsured and, more or less, pays for itself. Extending coverage to more than 30 million Americans who currently lack insurance - achieving nearly universal coverage - is an impressive achievement. The cost of this will be split, with roughly half coming from tax increases on the health-care industry and high-income households, and half from cuts in the growth in Medicare spending.

Obamacare and Small Firms - Barron's -  Hillarycare was a nightmare from which the country soon awakened; Obamacare has managed to become law. While the new legislation also exempts most small businesses, Dunkelberg is again firmly convinced that the exemptions won't last. And either way, it can't be good for job creation. Just when a small business gets large enough to no longer be called "small" is arbitrary. The legislation sets the exemption bar at fewer than 50 employees. And it turns out that, based on Bureau of Labor Statistics figures, there were nearly 4.7 million such firms in the U.S. last year, 95% of all private-sector firms. This 95% employed just 31.2 million workers in 2009 (down from 33 million in '07), accounting for 29.4% of all private-sector employment. Not surprisingly, Congressional Budget Office figures show that a disproportionate share of these workers lack health insurance. The legislation waits until 2014 before imposing stiff fines on firms with 50 or more employees that do not install a government-approved health insurance plan. If Dunkelberg is right, however, then rising costs and shortfalls in revenue could lower the cutoff to 20 employees, or even 10. At a cutoff of 10, for example, one million firms (out of the 4.7 million total), would no longer be exempt. But wherever the cutoff is set, consider how the rule could affect firm behavior.

Tax Loopholes, Wealth Destruction, and Health Reform - AT&T, Caterpillar, Deere, and Verizon garnered headlines last week (and an unwelcome summons to Capitol Hill) for announcing that a provision in the recent health care legislation would result in substantial accounting write downs. AT&T, for example, told the SEC that it expects to take a $1 billion charge in the first quarter because the law eliminates a tax subsidy for providing prescription drug coverage to retirees. According to the Wall Street Journal, Credit Suisse estimates that the total accounting hit for corporate America will total $4.5 billion. Citing these impacts, a Wall Street Journal editorial denounced the provision as “a wholesale destruction of wealth and capital.” White House Press Secretary Robert Gibbs, in contrast, praised it as “closing a loophole.” Who’s right?

Congress seeks more information on health care charges - AT&T announced last week that it would charge $1 billion against its earnings as a result of the recently passed health care bill. Other companies also announcing charges include Caterpillar ($100 M), John Deere ($150 M), and MMM ($85-90 M). Analyst David Zion of Credit Suisse estimated that S&P 500 companies will rack up a combined $4.5 B charge.In response, Congressman Henry Waxman (D-CA), Chairman of the House of Representatives Committee on Energy and Commerce, and Bart Stupak (D-MI), Chairman of the Subcommittee on Oversight and Investigation, sent letters to the chief executive officers of AT&T, Caterpillar, Deere & Co, and Verizon. Here is an excerpt from the letter for AT&T: My position is that eliminating the tax-deductibility of the subsidy, as the recent legislation did, was perfectly reasonable, and that the companies' responses to the legislation were perfectly reasonable. But the Congressional "request" for a personal appearance of the CEOs and the right to peruse all the company email on the topic are not reasonable.

Energy & Commerce Subcommittee to Hold Hearing on Impact of Health Care Reform Law on Large Employers - Chairman Henry A. Waxman and Subcommittee Chairman Bart Stupak today announced that the Subcommittee on Oversight and Investigations will hold a hearing on April 21, 2010, regarding claims by Caterpillar, Verizon, and Deere that provisions in the new health care reform law could adversely affect their company's ability to provide health insurance to their employees.  These assertions appear to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.

America's biofuel muddle: Coming up empty | The Economist… THE renewable-fuel standard released in February by America’s Environmental Protection Agency (EPA) paints an ambitious picture of biofuels’ future. It wants the amount of the stuff used as transport fuel to climb from 13 billion gallons (49 billion litres) in 2010 to 36 billion gallons in 2022, requiring by far the largest part of that increase to come from various advanced biofuels, rather than ethanol made from corn (maize). The fact that corn-ethanol production has continued to grow, despite the failure of a number of firms in late 2008 and early 2009, points to the efficacy of the various protections and subsidies it enjoys (falling maize prices helped too), though it says nothing about their efficiency or wisdom. Ethanol, which is used mainly as an additive to petrol, is not a particularly good fuel: it offers only about two-thirds as much energy as petrol and can corrode pipelines and car engines. By 2014 or earlier, ethanol production is expected to reach 10% of America’s total fuel demand, and thus to hit a “blend wall”, since the EPA does not at present allow blends of more than 10% for mainstream use.

Ethanol Tax Incentive Extension Could Save 112,000 Jobs - Extension of the Volumetric Ethanol Excise Tax Credit (VEETC) would save 112,000 jobs according to a new report. If the credit is allowed to expire at the end of 2010, it is estimated that U.S. ethanol production capacity, regardless of feed stock, would decrease by 38 percent thus eliminating nearly 30 percent of the 400,000 jobs the ethanol production industry supports today. Notably, the projected job lost would impact rural communities most heavily.

The Nuclear Waste Problem: Where To Put It? - President Obama's new Blue Ribbon Commission on America's Nuclear Future has a mission that nobody else has been able to do: find a long-term storage solution for America's growing mountain of radioactive nuclear waste.  Earlier this month, Steven Chu, secretary of the US Department of Energy (DOE), filed papers to finally end the agency's nearly 30-year quest to make Nevada's Yucca Mountain the main US repository for spent nuclear fuel and other radioactive waste. That leaves the United States without a permanent storage site.  The commission is charged with recommending safe, long-term options for storage, processing and disposal of civilian and military spent nuclear fuel from power plants and high-level radioactive waste. The focus is on finding an alternative to Yucca Mountain, which would have stored 70,000 metric tons of nuclear waste.

Shale Gas Shenanigans - In the years leading up to the crash of the Housing Bubble in 2006 and the subsequent financial meltdown in 2008, there was no shortage of people telling us America's continued prosperity was not in jeopardy. All that talk was nonsense, of course. In 2010, the situation is eerily similar in the natural gas business. We are told that we have 100 years of supply, implying that we will still be producing cheap shale gas long after the oceans are devoid of fish. As in the pre-Housing Bubble days, a few skeptics are crying foul. There are underground rumblings that things are not on the up & up with shale gas.The first bone of contention is what the actual production costs are. The Financial Times' John Dizard has been questioning the accepted wisdom lately— A couple of weeks ago, I quoted Ben Dell, an analyst with Bernstein Research in New York, as estimating the shale gas industry really needs a price of $7.50 to $8 [per mcf] to break even on its all-in costs of finding and producing the stuff, which would be a 60 per cent price rise [over about $5 per mcf]. Not easy for many people, or industries, to pay these days...

A Controversial Drilling Practice Hits Roadblock in New York City… The highly productive method of natural gas extraction known as “hydro fracturing” has spread rapidly across the United States in recent years, opening up vast new reserves in Texas, Wyoming, Pennsylvania, and other states.Last fall, however, the process — also known as “fracking” — ran headlong into opposition from New York City. And for now at least, stiff resistance from the city, which fears the contamination of its pristine water supply in upstate New York, seems to have slowed the momentum behind this highly touted — and highly controversial — drilling technique.  The city’s 90-page inventory of the possibly dire impacts of hydraulic fracturing has now become primary source material for a growing environmental backlash to the gas industry’s rapid assault on the huge gas-rich geological formation known as the Marcellus Shale, which underlies large portions of rural Pennsylvania, West Virginia, and New York State.

Saudi’s Al-Naimi ’Hopes’ Oil Stays in $70-$80 Per Barrel range (Bloomberg) -- Saudi Arabian Oil Minister Ali al- Naimi said he “hopes” prices remain in the $70-a-barrel to $80-a-barrel range, signaling the world’s largest producer may be willing to boost output if crude accelerates further. The country could boost production by as much as 4.5 million barrels a day and is “waiting” for demand to rise after increasing capacity to 12.5 million barrels, Al-Naimi told reporters yesterday in Cancun, Mexico. Prices in the $70-to $80- range are “as close to perfect as possible,” he said, adding today that he “hopes” prices remain in that range.

Drought in Southwest China bringing about power shortage and chain effects -Summary: A worst drought has severely cut down hydro power generation in Southwest China, causing a new round electricity supply tightness. It is yielding far reaching effects in the country, including draining coal inventories and rising coal prices due to extra coal demand for more thermal power electricity. On the other hand, it might benefit thermal power companies, water and energy saving service firms, and small back-up diesel-fired generator providers.

Chavez Cash Crunch Looms on Oil, Morgan Stanley Says - Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said. “Venezuela may be hard pressed to avoid its day of reckoning,” The country, which depends on crude for 94 percent of export revenue, has seen output plunge to 2.2 million barrels a day from 3.7 million in 1997, according to Morgan Stanley. Venezuela now faces the risk that oil prices won’t rise enough in coming years to offset declines in production, forcing it to use savings to fund spending, the report said.

PetroChina Plans $60 Billion of Overseas Expansion (Bloomberg) -- PetroChina Co. plans to spend at least $60 billion in the next decade on overseas acquisitions, challenging Exxon Mobil Corp. and BP Plc in the race to control oil and gas fields.  “Ten years ago, PetroChina was a state-owned oil company, but now we have a goal of becoming an international, integrated energy company,” Jiang Jiemin, chairman of the world’s largest company by market value, said in a March 25 interview, where he announced the investment plan.  Beijing-based PetroChina spent almost $7 billion in the last year to buy refineries and reserves in Australia, Canada, Singapore and Central Asia. The expansion pits PetroChina against Irving, Texas-based Exxon, which agreed to pay about $30 billion for U.S. gas producer XTO Energy Inc. in December.  “Every five, 10 years or so, you’ll get the occasional $30 billion deal, but this is at least $6 billion every year and that’s significant for any major oil company,” “This puts PetroChina on par or exceeding some international oil majors in spending.”

DOE Saying Possible Peak "Liquid Fuels" by 2011 - The U.S. Department of Energy admits that “a chance exists that we may experience a decline” of world liquid fuels production between 2011 and 2015 “if the investment is not there”, according to an exclusive interview with Glen Sweetnam, main official expert on oil market in the Obama administration.  This warning on oil output issued by Obama’s energy administration comes at a time when world demand for oil is on the rise again, and investments in many drilling projects have been frozen in the aftermath of the tumbling of crude prices and of the financial crisis.  Yet the answer to the issue of knowing when, where and in which quantities additional sources of oil should be put on-stream remains widely “unidentified” in the eyes of the most prominent official analyst on energy inside the Obama administration.

BBC –  Angry America: why an oil-man’s scenario worries me - There has been an outbreak of vandalism - bricks through politicians' windows; there have been threats of violence and a lot of violent language. Democrats, in response have begun to accuse mainstream Republican commentators of stoking up the violence, and in turn they have accused the Democrats of trying to provoke a violent reaction.All this has made me consider in a new light something said by an oil-man who consults for one of the biggest companies in the world. Last summer he told me: "We run a mainframe computer simulation of the global political and economic situation, modelling various outcomes of the resource crunch that begins in the back half of the 2010s. And no matter which way we tweak it, it always comes out with the same result: civil war in America in 25 years's time." For obvious reasons, given that the said company is a global player, they were not very interested in publicising the scenario.In this oil company scenario the driver is not ideology but simply resources.

Two Bones to Pick - This week two blog posts jumped out at me and I decided it would be appropriate to point out their misconceptions 1. The 24/7 Wall St. Twenty Best Financial Blogs. Oh. Boy. One of these days I will be making a list such as this because these lists drive a lot of traffic to your site and make everyone want to be your friend blah blah blah....Now, for the next gee whiz blog read of the week. 2. Taking Hope in the Long View by J. Bradford DeLong - As I see it, there are two camps of people in this industrialized world. In the ever-growing camp are those who understand the meaning and ramifications of the term peak oil and in the other camp which is decreasing in size are those who do not understand. This article by DeLong clearly puts him into the second camp. I find it astonishing that a bright academic economist such as DeLong doesn't know the role that fossil fuels have played in the developed world, its labor force, and its economics.

Regulator seeks to rein in energy market trading by Big Wall Street Firms -The rule would also force this highly lucrative trading into daylight, requiring for the first time that the public be told which companies have special permission to trade commodities with virtually no constraints. By reversing course, the Commodity Futures Trading Commission, under its activist chairman, Gary Gensler, is trying to prevent the concentration of power in the hands of a few large businesses. For example, a single firm, the United States Oil Fund, was able to gain the rights to nearly one-fourth of all the publicly traded crude oil scheduled for delivery during one month last spring, the fund's head said in an interview. Advocates of the commission's proposal have said the influx of Wall Street money has led to violent price swings. In 2008, the price of a barrel of crude oil leapt to a record of more than $147 and within months crashed to below $34. This volatility not only disrupts household budgets but also makes it hard for food manufacturers, airlines and other companies to get the goods they need when they need them, the advocates said.

Oil demand Exceeds Supply (chart)

Economics are pushing natural gas companies to seek more oil… There's an obvious reason why U.S. natural gas producers such as Chesapeake are suddenly pining for oil. It has been commanding an exceptionally large price edge over natural gas for months now, and many energy analysts expect that trend to continue for the foreseeable future.  There is an unusually large price ratio of more than 20-to-1 between the two fossil fuels. Even when oil hit a record high of more than $147 a barrel in summer 2008, the price ratio was much closer to 10 to 1, because gas had skyrocketed to more than $13.50 per million Btu. McClendon said Chesapeake is earning "by far" its highest rate of return on production from the Granite Wash of the Texas Panhandle and western Oklahoma, a petroleum province revived by horizontal drilling that has greatly increased the output of oil just as it has done for big shale-gas plays such as the Barnett.

Obama to Open Offshore Areas to Oil Drilling for First Time - NYTimes - The Obama administration is proposing to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling, much of it for the first time, officials said Tuesday. The proposal — a compromise that will please oil companies and domestic drilling advocates but anger some residents of affected states and many environmental organizations — would end a longstanding moratorium on oil exploration along the East Coast from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean. Under the plan, the coastline from New Jersey northward would remain closed to all oil and gas activity. So would the Pacific Coast, from Mexico to the Canadian border.

Obama Administration Cops to Looming Oil Shortage - In an exclusive interview published March 25 in Le Monde, Glen Sweetnam, the Obama administration’s official expert on the oil market, confirmed nearly every element of the “Peak Oil” scenario that many analysts both in and outside the oil industry have warned of for years: A decline of world oil production could begin soon—perhaps next year, and only extraordinary levels of investment by the oil industry can maintain current rates of production much longer.After decades of ignoring the “Peak Oil” theory that predicts global oil production will peak and then rapidly decline, Sweetnam’s admission marks a profound shift in the U.S. government’s position on energy depletion. "I understand how difficult it must be for officials of the Department of Energy to acknowledge that the lifeblood of the industrial economy--cheap oil--is disappearing faster than they had previously forecast,”  “But the American People deserve the truth."

Drill, Baby, Drill - Welcome to the coastal drilling era: The Obama administration is proposing to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling, much of it for the first time, officials said Tuesday.The proposal — a compromise that will please oil companies and domestic drilling advocates but anger some residents of affected states and many environmental organizations — would end a longstanding moratorium on oil exploration along the East Coast from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean

Risk Is Clear in Drilling - Payoff Isn’t - NYTimes — In proposing a major expansion of offshore oil and gas development, President Obama set out to fashion a carefully balanced plan that would attract bipartisan support for climate and energy legislation while increasing production of domestic oil. It is not clear that the plan announced Wednesday will do either. While the oil industry, business groups and some Republicans offered muted support for the proposal, most environmental groups denounced it. And the senators whose support Mr. Obama is courting for highly contentious climate and energy legislation to be introduced in the coming weeks gave decidedly mixed reactions: For every senator who praised it as at least a partial answer to the nation’s energy needs, another raised alarms about befouled beaches and continued dependence on fossil fuels.

Drill, still? - I AM going to have to disagree with my colleague at Democracy in America once more. Regarding Barack Obama's decision to allow drilling in areas off the Atlantic, Gulf, and Alaskan coasts, he notes that the politics may make sense, but the environmental angle does not... The problem is this: if you follow this line of thinking to its natural conclusion, then you have to declare that America should immediately stop all extraction of fossil fuels, right now. Now perhaps this is what my colleague believes that we ought to do. I don't. The cold turkey approach to fossil fuels would be extraordinarily costly to the American and global economies, and it would cause a great deal of human suffering.

Thank goodness they aren't saying it will reduce gas prices- Because it won't (Obama to open offshore areas ...): Here is what I concluded back in September 2008: ... the net benefits of offshore drilling are way, way positive (even considering climate change) so the official Environmental Economics blog position is in favor.

U.S. unveils 35.5-m.p.g. rule by '16 - While the new rule will cost the industry $52 billion to meet, automakers embraced the standards for avoiding a patchwork of state and federal regulations, and called on the government to begin work immediately on updates for the 2017 model year and beyond.Administration officials said the rules would raise the average price of a new vehicle by less than $1,000 in the 2016 model year, and that many consumers would earn back the cost in fuel savings over three years.“This is the most aggressive fuel economy standard ever set in the United States for cars and trucks,” said U.S. Transportation Secretary Ray LaHood.The joint rule between the Department of Transportation and the U.S. Environmental Protection Agency is the first U.S. limit designed to reduce greenhouse gas emissions, stemming from a Supreme Court ruling that classified carbon dioxide as a pollutant under federal law.

The Trouble Turning Over the U.S. Auto Fleet - Many people, myself included, consistently underestimate the difficulty of transitioning the U.S. auto fleet to something other than gasoline reliance. This chart makes that point clearly, because it's hard to change the fleet when people insist on hanging onto their autos ever-longer.

Eastern Gulf of Mexico Program Overview The Eastern Gulf of Mexico Planning Area extends along the Gulf’s northeastern coast for some 1,120 kilometers (700 miles), from Baldwin County, Alabama, southward to the Florida Keys. The area encompasses approximately 76 million acres, with water depths ranging from tens of meters to over 3,000 meters (9,900 feet). Seaward of the State/Federal boundary (3 leagues or roughly 9 miles off the Florida coast) the area extends southward for more than 480 kilometers (300 miles). Since the late 1980's, a limited amount of OCS activity has taken place in this planning area because of administrative deferrals and annual congressional moratoria. In 2000, MMS estimated that between 6.95 and 9.22 trillion cubic feet of natural gas and 1.57 and 2.78 billion barrels of oil and condensate are contained in the Eastern Gulf of Mexico Planning Area.

Offshore Drilling Will Have No Noticeable Impact on Oil Prices - The Post reported on President Obama's lifting of the moratorium on offshore drilling and the response to the decision. While the article noted the reactions of politicians and presented polling data, it neglected to mention the fact that the oil that can potentially be obtained from these areas will have no noticeable impact on oil prices. According to the Energy Information Agency, it will take two decades for the areas to reach peak production of 100,000 barrels a day, or 0.1 percent of world oil supply. In other words, the decision to open up drilling in these areas was entirely political. It had nothing to do with meeting the country's energy needs. This information probably would have been more useful to readers than accounts of the political reaction to President Obama's decision.

Obama opens new oil drilling offshore in climate drive (Reuters) - President Barack Obama unveiled plans on Wednesday for a limited expansion of U.S. offshore oil and gas drilling in an effort to win Republican support for new proposals to fight climate change.Opening up parts of the U.S. Atlantic coast, Alaska and possibly offshore Florida to exploration is Obama's latest effort to woo legislators needed to pass a climate bill before mid-term elections in November. Some senior Republicans in Congress called the drilling announcement a step in the right direction but said Obama did not go far enough. Environmental groups and some congressional liberals condemned the plan for endangering wildlife and coastal areas merely to give oil companies more profits.

Drill, maybe - YESTERDAY, Barack Obama announced a proposal to open parts of the Atlantic and Gulf coasts, and the north coast of Alaska, to offshore oil drilling. Environmental journalist David Roberts laid out a typical political criticism of the policy: The most important thing to understand about President Obama’s announcement on offshore drilling is that it’s mostly for show. Its intended effects are political — corralling more Senate votes for a climate bill and defusing anticipated voter anger over gas price spikes. Even on those grounds, however, it’s unlikely to succeed.Mr Roberts goes on to point out that the oil from these areas won't amount to much in the scheme of things; certainly, it will be too little to have much of an effect on American oil imports or on global oil prices (or domestic petrol prices). Accordingly, it won't much blunt criticisms of the administration this summer, should petrol prices rise as anticipated. And as Mr Roberts says, a bargaining chip isn't much of a bargaining chip if it's played pre-emptively.

Gasland" - Will the boom in natural gas drilling contaminate America's water supply? -  PBS - In the debate over energy resources, natural gas is often considered a "lesser-of-evils". While it does release some greenhouse gases, natural gas burns cleaner than coal and oil, and is in plentiful supply—parts of the U.S. sit above some of the largest natural gas reserves on Earth. But a new boom in natural gas drilling, a process called "fracking", raises concerns about health and environmental risks. This week, NOW talks with filmmaker Josh Fox about "Gasland", his Sundance award-winning documentary on the surprising consequences of natural gas drilling. Fox's film—inspired when the gas company came to his hometown—alleges chronic illness, animal-killing toxic waste, disastrous explosions, and regulatory missteps.

Water shortages put world's food supply at risk - Water shortages and inefficient irrigation threaten the world's ability to feed a growing population, said David Molden, deputy director-general for research at the International Water Management Institute. The grain-growing regions of northern China, India and Australia's Murray Darling Basin, as well as farming areas in the western United States, Mexico and Pakistan, face "really tight" water situations, Molden said.  Agriculture and irrigation methods must change for the world to produce enough food, the researcher said. More precise water delivery can make irrigation more efficient while water rationing and pricing may provide incentives to farmers to reduce consumption, he added.  "Our food security is based on unsustainable water practices," "I don't think people have quite realized that. The next 10 years are going to be tough as we deal with water shortages."

Raw materials and global competition - Whether there is or is not a near peak in either of these two metals (copper and gold), we should expect to see prices inexorably climb. The reason? The enormous appetite of China for raw materials. However we look at it, China's ponderous entry onto the world stage has been the most significant economic event in the last 50 years. Now the question is: How will this affect the U.S. and Europe? Certainly, there will be a race to secure raw materials, especially those whose supply is clearly and perhaps measurably finite. Furthermore, this race comes at a time when the U.S. and Europe are not exactly flush with cash. Economically, I would say that this one of the biggest stories out there

Little US impact seen from new iron ore pacts - New international agreements that will raise iron-ore prices are expected to have little impact on the prices U.S. consumers pay for products made with steel. The price of steel has been rising steadily for the past 10 months. Analysts say any increases stemming from the new international contracts shouldn't impact U.S. manufacturers because they get most of their supply domestically."We've actually seen steel prices more than double since last May and it's had no impact on inflation because steel's such a small part of the economy," Steel Market Intelligence analyst Michelle Applebaum said. For example, it might cost an automaker $900 in steel for a new car. If that increases to $1,000, it is still not the highest cost of materials in a $25,000 car, she noted.

Melt value on nickels now over 6 cents

New regulations will put an end to mountaintop mining - The Obama administration effectively called time today on one of the most destructive industries in America, proposing new environmental guidelines for mountaintop mining removal. The move was seen as a bold action from the White House, which has in the past disappointed environmental organisations for failing to move more aggressively on pollution and climate change. But in a conference call with journalists, just an hour after the administration for the first time finalised regulations setting limits on greenhouse gas emissions from cars, officials spelled out guidelines that they acknowledged would make it virtually impossible for mining companies in Appalachia to carry on with business as usual.

A Race to Reap Energy From the Ocean Breezes - As New Englanders await a decision in Massachusetts on a bitterly contested proposal to build the nation’s first offshore wind farm, the State of Rhode Island is forging ahead with its own project in the hope of outpacing — and upstaging — its neighbor.Instead of having a private developer dominate the research on potential sites, as Massachusetts has, Rhode Island embarked on a three-year scientific study, to be completed in August, of all waters within 30 miles of its coast. It has spent more than $8 million on research into bird migration patterns, wildlife habitats, fish distribution, fishermen’s needs and areas that might be of cultural importance to Indian tribes

Nitryl chloride concentration at 500 ppm above Boulder, Colorado - "In February 2008, we were in Boulder, Colorado, installing our instruments in a shipping container to prepare for a chlorine-related study on a research cruise across the Atlantic," said Thornton. "While in Boulder, we decided to test our instrument developed for measuring a potentially important chlorine atom precursor – nitryl chloride. We found that this chlorine atom precursor is produced in Boulder, 900 miles from any coast, at levels similar to coastal regions. This was initially quite surprising and frankly completely unexpected." Once back from the research cruise, the team carried out more measurements, this time from a park 150 feet above the city, a location removed from any obvious sources of chloride. Information from air-quality monitoring in national parks around the US indicated that nitryl chloride is present there too.

Science & the Public: The skinny on indoor ozone - Smog’s ozone isn’t just a problem outdoors. This respiratory irritant seeps into homes and other buildings. Indoor concentrations tend to be far lower than those outside, largely because much gets destroyed as the gas molecules collide with surfaces and undergo transformative chemical reactions. New research identifies a hitherto ignored surface that apparently plays a major role in quashing indoor ozone: It’s human skin — or, more precisely, the oils in it. While the removal of ozone from the air in homes and offices is good, what takes its place may not be. Indeed, some byproducts created when ozone hits skin oils are probably more toxic than the starting ozone, according to scientists here at the American Chemical Society spring national meeting.

Obama Puts Pesticide Pusher in Charge of Agricultural Trade Relations - Sidestepping a stalled Senate confirmation vote, yesterday President Obama recess-appointed Islam Siddiqui to be chief agricultural negotiator in the office of the U.S. trade representative. Dr. Siddiqui's nomination was held up in the Senate and was opposed by the Center for Biological Diversity and more than 80 other environmental, small-farm, and consumer groups. More than 90,000 concerned citizens contacted the White House and Senate to oppose the nomination. Siddiqui is a former pesticide lobbyist and is currently vice president of science and regulatory affairs at CropLife America, a biotech and pesticide trade group that lobbies to weaken environmental laws.

Western States Brace For Grasshopper Infestation - Grasshopper infestations have taken on mythic tones here on the arid prairie of northeastern Wyoming; they blanket highways, eat T-shirts off clotheslines and devour nearly every scrap of vegetation on ranches and farms. The myth may come closer to reality this summer than at any time in decades in several states in the West and the Plains. A federal survey of adult grasshoppers last fall indicated that parts of Wyoming, Montana, South Dakota, North Dakota, Nebraska and Idaho could face costly grasshopper infestations this summer. Ranchers and farmers as well as federal and municipal pest control agencies are praying for well-timed cool and wet weather to stifle the young grasshoppers when they hatch around May and June. In the meantime, they're scrambling to line up the millions of dollars it will cost to battle an outbreak with aerial insecticide.

Weak Rules in U.S. on Toxins and Consumer Safety - NYTimes - Every society needs to make a choice about how to prioritize consumer safety. If you try too hard to avoid problems, you can end up stifling daily life. Outlawing gasoline, for instance, would doubtless reduce pollution and respiratory disease, but no one is suggesting such a step. Europe, with its hostility to genetically modified foods, arguably errs on the side of being too cautious about chemicals and other such substances. But the United States clearly seems to be on the other side of the line. We are not taking toxic risks seriously enough. Several common diseases, like certain cancers and developmental disorders, have been rising in recent decades, and scientists are not sure why. In some cases, evidence suggests chemicals may be the reason.

Wanted: less exploitative ways to do more with less - On a visit to India last year, I bought some shampoo from a roadside kiosk in Kolkata. This was largely unremarkable, although like any shopping trip further afield than Dublin, it brought a frisson of excitement. I noticed that the sachet of shampoo – enough for one wash for the raven-haired beauty on the packet, or four washes for your balding columnist – was tucked into a tiny paper bag, just big enough to store two packets of cigarettes. The bag itself was fashioned out of a quarter page of the local newspaper, fastened with a couple of dabs of glue. In its own quiet way, it was a splendidly efficient use of natural resources.

Sea of plastics - Patches of tiny polymer fragments more common and deeper than previously recognized - Recent studies show that the oceans may hold more “garbage patches” of fine plastic flotsam than scientists realized and that the fragments extend well below the sea surface. Most of these items are the size of fingernail clippings or smaller. They are the wave-shattered remnants of items such as rubbish, abandoned fishing gear and floats from fishing nets and scientific instruments. These plastic bits are especially common in a region of the Pacific Ocean southwest of California that is sometimes called the Great Pacific Garbage Patch.

US urges removal of Chinese drywall from homes - US consumer watchdogs on Friday told American homeowners and business to strip buildings of Chinese drywall, which they warned could pose a safety threat. Officials said tests had found Chinese drywall -- also known as plasterboard -- emitted dangerous levels of sulfur, which could corrode electrical wiring and gas pipes. "Certain Chinese samples had emission rates of hydrogen sulfide 100 times greater than non-Chinese drywall samples," the Department of Housing and Urban Development (HUD) and Consumer Product Safety Commission (CPSC) said in a joint statement. "Based on scientific study of the problem to date, HUD and CPSC recommend consumers remove all possible problem drywall from their homes, and replace electrical components and wiring, gas service piping, fire suppression sprinkler systems, smoke alarms and carbon monoxide alarms."

UN Says Dirty Water Kills More People Than War -- Dirty water is killing more people than wars and other violence, the United Nations announced on World Water Day.  Almost all dirty water produced in homes, businesses, farms, and factories in developing countries is washed into rivers and seas without being decontaminated.  And up to 60 percent of supplies that have been purified to the point that they are potable are lost through leaky pipes and ill-maintained sewage networks, according to a report released today. Saving half of these lost supplies could give clean water to 90 million people without the need for costly new infrastructure, says the UN.  "The sheer scale of dirty water means more people now die from contaminated and polluted water than from all forms of violence including wars," the United Nations Environment Programme (UNEP) said.

Who Killed Cap-and-Trade? - Stavins: In a recent article in the New York Times, John Broder asks “Why did cap-and-trade die?” and responds that “it was done in by the weak economy, the Wall Street meltdown, determined industry opposition and its own complexity.”  Mr. Broder’s analysis is concise and insightful, and I recommend it to readers.  But I think there’s one factor that is more important than all those mentioned above in causing cap-and-trade to have changed from politically correct to politically anathema in just nine months.  Before turning to that, however, I would like to question the premise of my own essay. Is Cap-and-Trade Really Dead?Although cap-and-trade has fallen dramatically in political favor in Washington as the U.S. answer to climate change, this approach to reducing carbon dioxide (CO2) emissions is by no means “dead.” The evolving Kerry-Graham-Lieberman legislation has a cap-and-trade system at its heart for the electricity-generation sector, with other sectors to be phased in later

Climate Progress: House of Commons exonerates Phil Jones - The committee’s chair, Phil Willis, Member of Parliament (MP), said in a press conference: "We do believe that Prof Jones has in many ways been scapegoated as a result of what really was a frustration on his part that people were asking for information purely to undermine his research." The CBS/AP story headlines, “Climategate Researchers Largely Cleared:  Investigation Finds No Evidence Supporting Allegations of Tampering with Data or Peer Review Process. The UK’s Times Online story opens: “The climate scientist at the centre of the row over stolen e-mails has no case to answer and should be reinstated, a crossparty group of MPs says..”

CLIMATE CHANGE: Native Peoples Reject Market Mechanisms - Proposals from governments and international non-governmental organisations (NGOs), such as the Clean Development Mechanism and the UN-REDD Programme (United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries), "are new forms of economic geopolitics" that endanger indigenous rights enshrined in treaties, says the final declaration of the forum, which ended Wednesday.  These proposals allow states and transnational corporations to promote dams, agrofuels, oil exploration, tree plantations and monoculture crops, that cause expropriation and destruction of indigenous peoples' territories and the criminalisation, prosecution and even murder of native people, the document says.

Humans 'too stupid' to save climate - Humans are too stupid to prevent climate change from radically impacting on our lives over the coming decades. This is the stark conclusion of James Lovelock, the globally respected environmental thinker and independent scientist who developed the Gaia theory. It follows a tumultuous few months in which public opinion on efforts to tackle climate change has been undermined by events such as the climate scientists' emails leaked from the University of East Anglia (UEA) and the failure of the Copenhagen climate summit. "I don't think we're yet evolved to the point where we're clever enough to handle a complex a situation as climate change," said Lovelock in his first in-depth interview since the theft of the UEA emails last November. "The inertia of humans is so huge that you can't really do anything meaningful."

Interview with James Lovelock (

Exposed: green consumers' dirty little secrets - Green consumers sometimes take the moral high ground – but it's all too easy to slide back down. New research suggests that those who make "green" purchases are subsequently more likely to behave selfishly, cheat and steal. "Another way to think about it is that you're off the hook – you've done your good deed," explains Benoît Monin, a psychologist at Stanford University in California who studies the phenomenon, called "moral self-licensing".  Moral self-licensing has been shown elsewhere, too. In the run-up to the 2008 US presidential election, for instance, Monin found that people who expressed their support for Barack Obama, thereby winning credit as non-racists, were more likely to later declare that whites would be better suited than blacks for a hypothetical job vacancy

Is Vegetarianism Good for the Environment? - Using a standard rule of thumb – and the work of “Economical Environmentalist“ Prashant Vaze – I can inform you that a 250g steak is responsible for more than 4kg of CO2-equivalent emissions, before cooking the stuff.  Now, this is not exactly new territory for us, in that we previously examined the environmental impact of buying local produce compared to having it shipped to your local supermarket from halfway around the world. But one thing we didn't do in that previous analysis was to consider how much carbon-based fuel and materials go into producing the Earth's transportation systems - we had only looked at how much fuel would be consumed in the actual transportation.

Arctic Sea Ice about to hit ‘normal’ – what will the news say?… Barring an about face by nature or adjustments, it appears that for the first time since 2001, Arctic Sea ice will hit the “normal” line as defined by the National Snow and Ice Data Center (NSIDC) for this time of year. NSIDC puts out an article about once a month called the Sea Ice News.  It generally highlights any bad news they can find about the disappearance of Arctic ice.  Last month’s news led with this sentence. In February, Arctic sea ice extent continued to track below the average, and near the levels observed for February 2007. But March brought good news for the Polar Bears, and bad news for the Catlin Expedition and any others looking for bad news.  Instead of ice extent declining through March like it usually does, it continued to increase through the month and is now at the high (so far) for the year. If it keeps this trend unabated, in a day or two it will likely cross the “normal” line.

Deciding the Arctic's Future Behind Closed Doors - Diplomats from Finland, Iceland and Sweden are upset; indigenous groups are furious. Five countries bordering the Arctic Ocean are meeting behind closed doors on Monday to discuss the region's future. Many of those who have interests in the Arctic have not been invited. Canadian Foreign Minister Lawrence Cannon has invited his counterparts from four other Arctic countries -- the United States, Russia, Denmark (representing Greenland) and Norway -- to discuss the future of the far north. No other guests have been invited -- a fact that has enraged diplomats from several northern countries as well as representatives from indigenous peoples who call the Arctic their home.

Risk to Everglades is Florida's shame - CONSERVATIONISTS and scientists working to restore the Everglades were stunned and delighted in June 2008 when Florida's governor Charlie Crist announced that the state had negotiated a deal to buy 75,000 hectares of farmland from United States Sugar. The Everglades has been in long-term decline due to agricultural pollution and the blockage of water flow by development. The $1.75 billion deal offered realistic hope of reversing the degradation. The euphoria was short-lived, however, and today the deal hangs by a thread. Florida was in a budget crunch before the economic meltdown made money even tighter. By April 2009, the deal had shrunk to $536 million for 30,000 hectares. Now the state has given itself just six more months to arrange financing, but money for the deal is far from certain. Recent press reports - notably in The New York Times - have raised serious doubts about the value of the deal for Everglades restoration.

Farmers leave strawberries rotting in the fields after price drops - Some supply and demand from Florida: Strawberry farmers in Florida are facing such a sharp collapse in prices for their berries that many are deciding to simply leave huge tracts of the berries to rot in the fields.  This only adds to a cold-induced disaster in Florida agriculture this year and spurs some bitter irony for homeowners who suffered sinkholes and water shortages as nearby farmers drained groundwater in hopes of staving off frost damage. "Our biggest block of 65 acres, we just had to drop and leave there," said Parke, a grower for Parkesdale Farms in Plant City. The market is already flooded with an abnormally huge wave of berries, pushing prices well below the break-even point for farmers. All around Plant City, farmers are making the same decision.

The net energy of pre-industrial agriculture - Following on from yesterday's discussion, I want to make a point that seems like it must have been made before, but I cannot quickly find a good discussion of it.  That is that the net energy of pre-industrial agriculture, taken as a whole energy-gathering system, must have been low, with EROEI probably on the order of 1.1-1.6 depending on place and time. Prior to the industrial revolution, the main source of primary energy in society was biological - agriculture and forestry, with a significant assist from water mills.  The biological energy was used to feed horses (used themselves in ploughing, but also in transportation), as well as agricultural workers.  The water-mills were primarily used to mill flour (ie also used in agricultural production, for the most part).

Food aid for Africa: When feeding the hungry is political - The Economist - THE World Food Programme (WFP), created by the United Nations in 1962 to save lives, has since grown into the behemoth of the aid business, envied and disliked in almost equal measure by many of its smaller peers. It says it feeds 90m people a year in 73 countries. Yet some query whether it always fulfils the high ideals of its humanitarian mandate.The WFP has had to get used to fierce criticism, particularly of its operations in Africa. The main complaint is that food aid creates a dependency culture among the poor. The WFP employs large numbers of press officers in its headquarters in Rome and elsewhere to jump to its defence.

Southern China suffers worst drought in memory - The whole of Southern China is in the grip of the worst drought in living memory, leaving at least 18 million people without access to drinking water, according to the government.  In response to the drought, which has swept across Yunnan, Guangxi, Guizhou, Sichuan and Chongqing, China has mobilised the full might of its army, sending troops to deliver 1.4 million tons of emergency food and thousands of water trucks. Wen Jiabao, the prime minister, has made a personal visit to the region to reassure villagers, some of whom are having to trek more than 12 miles a day to collect water.  Growing enough food to hit China's targets this year "will be a test for sure" in the wake of the calamity, said Mr Wen.

Globalization Critic Noreena Hertz: 'Even War Is Good for Economic Growth' - SPIEGEL ONLINE: Dr. Hertz, one is constantly reading about how much a country's economy has grown or shrunk. Why is gross domestic product (GDP) taken so seriously? Noreena Hertz: It's easy to measure and shows how one nation performs in comparison to another. Every country, therefore, measures its economic success by its GDP. Only Bhutan is an exception. SPIEGEL ONLINE: According to the constitution of Bhutan, the people should not become richer every year, but happier. The little Asian kingdom wants to achieve this with a socially equitable society and better protection of the environment. Is this a better approach?

WTO: Trade Will Expand 9.5% This Year - You've got to hand it to WTO Director-General Pascal Lamy and his eternal optimism. From always seeing the completion of the Doha Development Round being around the corner to forecasting a significant rebound of trade this year, he's an upbeat chap. Hence, the WTO is predicting an expansion in global trade volume of 9.5% in 2010 after a contraction of 12.2% in 2009. Almost certainly, we will not go back to pre-crisis trade volumes just yet, but a 9.5% annual increase is nothing to sneeze at, either. The following press blurb is part of a much lengthier feature on how product and service categories and, in turn, trading nations and regions have been differentially affected by the crisis. There's also more on the never-ending debate on why trade shrunk so much so quickly last year. The chart here is of year-on-year changes in regional merchandise exports to Q4 2009, BTW:

Be careful of bilateral trade numbers – Michael Pettis  -A report just came out from the US-China Business Council that seems to be getting a lot of play in the press.  Among other things the report repeats a widely accepted claim that since the US no longer produces the kinds of goods that it is importing from China (the evidence for this is always anecdotal, so I have no idea if it is true), any attempt to contract the US trade deficit by getting the Chinese trade surplus to contract could not possibly succeed. Although I agree with much of what the report recommends, and some of what it asserts, I have to say I am more inclined to blame the SCBC for “flawed analysis” than the EPI.  Mr. Frisbie claims that the EPI’s estimate of job losses is “built on the faulty assumption that every product imported from China would have been made in the US otherwise.”

Some Say Trade Numbers Don't Deliver the Goods - WSJ - They make for dramatic reading: The WTO says world trade fell 12.2% in 2009. On Friday, the organization predicted that trade would bounce back sharply this year, rising 9.5%.  But these figures don't tell the whole truth about trade. According to some economists, trade in finished products—the things consumers actually buy, such as cars, computers and iPods—declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported. By ignoring the multinational composition of goods, conventional trade data also make trade imbalances between some trading partners seem larger than they really are. China imports a huge quantity of parts from places like Japan and South Korea, but when those components are assembled into finished goods and shipped to the U.S., all the pieces count as Chinese exports, inflating the U.S. trade imbalance with its most polarizing trade partner.

World-Wide Factory Activity by Country - (interactive table) Global manufacturing activity strengthened across the globe in March, led by a strong gain in the U.S. as Greece was the only country registering a contraction. A global index produced by J.P. Morgan rose to a 70-month high of 56.7 last month, compared to 55.4 in February. Despite expansion in the euro zone, the strength of growth is spread out. Ireland and Spain moved into expansionary territory this month. Separately, Russia continues to lag, just barely registering growth for the second month in a row.

Supertanker Rates Jump Most in Five Weeks as Cargoes Increase… (Bloomberg) -- The cost of delivering Middle East crude oil to Asia, the world’s busiest route for supertankers, jumped the most in more than five weeks as the volume of shipments increased.  Charter rates for very large crude carriers, or VLCCs, on the industry’s benchmark Saudi Arabia-to-Japan route gained 8.7 percent to 83.24 Worldscale points, the biggest climb since Feb. 22, according to the London-based Baltic Exchange. Returns from the voyage surged 19 percent to $44,576 a day.  Crude shipments to Asia from the Middle East are likely to increase to 12.86 million barrels a day, up 390,000 barrels from a month ago, Oil Movements, a Halifax, England-based company that tracks tanker deals, said in a report today. VLCCs haul 2 million-barrel cargoes.

U.S.-Bound Boxes Pile Up in Asia as Lines Avoid Adding Ships - A capacity crunch on transpacific routes has disrupted deliveries of Asian and U.S. exports, prompting a probe by U.S. regulators. Container lines have cut trips and imposed higher rates on customers, or shippers, after slumping trade and an excess supply of vessels caused industrywide losses of about $20 billion last year, according to Drewry Shipping Consultants Ltd. “With the economy recovering, we have been seeing a lot of containers that didn’t make it out on time because there wasn’t enough space on ships,”

The source of global trade imbalances - Global imbalances are seen by some as contributing to the global crisis – but what caused the imbalances themselves? This column argues that the popular savings glut hypothesis appears to be at odds with the data. Instead a behavioural explanation based around asset-price bubbles is a much better match for the key facts.

Manufacturing From China to U.S. Expanding in Global Recovery… (Bloomberg) -- Factories from China to the U.S. accelerated in March, pointing to a rebound in international trade that is contributing to a global economic recovery.  Manufacturing in China grew for a 13th month and U.S. factories expanded the most since July 2004, reports showed. Business sentiment in Japan rose to the highest since 2008, while factories in Britain and the euro region stepped up production. Surging economic growth in China is helping pull the global economy out of its worst slump in more than six decades

Another Nail in the Global Saving Glut Coffin - David Laibson and Johanna Mollerstrom have a new paper--see here for a shorter version--that further undermines the popular global saving glut theory (GSG). According to the GSG theory there was an increase in global savings beginning in the mid-to-late 1990s that originated in Asia and to a lesser extent in the oil-exporting countries. This surge in global savings found its way into the United States via large current account deficits that, in turn, created the asset bubbles of the past decade. Laibson and Mollerstrom argue the GSG theory has the causality backwards: the asset bubbles in the advanced economies came first and spurred consumers to go on a consumption binge. That consumption binge, in turn, was financed by savings from abroad. The smoking gun in their story is that had the foreign funding been truly exogenous then then there would have been a far larger investment boom given the amount of foreign lending. Instead, there was a consumption boom which is more consistent with causality starting from an asset bubble. Their paper adds to their growing chorus of SGT skeptics including Menzie Chinn, Maurice Obstfeldt and Kenneth Rogoff, Guillermo Calvo, and myself.

$500 Billion Reserve Drain Made Crisis Worse: IMF's Ferhani - Speaking at Central Banking's National Asset Liability Management conference in London on Friday, Hervé Ferhani, the deputy director of the monetary and capital markets department, said: "By and large, reserve managers reduced their exposure to risk assets in a way that was similar to the behaviour of commercial fund managers. A forthcoming working paper by the IMF estimates central bank reserve mangers moved approximately $500 billion out of bank deposits during the crisis.

Control That Capital - In a new study, staff members of the International Monetary Fund (IMF) endorse an idea to help mitigate the impact of economic crises in developing countries: capital controls. Before the 1997 Asian economic crisis, IMF staff thought controls -- really a macroeconomic policy to smooth the amount of money coming into and leaving an economy -- should be banned. Now, and particularly since the Great Recession, the IMF has changed its tune. Capital controls are a good idea -- and now is the time for the IMF and the United States to back them. The more capital coming in, the more the developing country benefits, one would think. But it is a bit more complicated than that. Cross-border capital flows tend to be "pro-cyclical": too much money comes in when times are good, and too much money evaporates during a downturn.

US-China trade war can shake up markets: Nouriel Roubini…Ever since he predicted the global financial meltdown, Nouriel Roubini, the professor of economics, New York University, has been a much sought-after man. It’s not just businessmen but policy and law makers who also seek him out to ascertain his views and as to where the global economy is headed for. Dr Doom, as he’s dubbed, was in Mumbai to attend a conference organised by Edelweiss. In between meetings, he took time off to talk to ET Bureau. Excerpts:

Yuan not cause of China-US trade gap: minister - (Reuters) - Letting the yuan rise is not a solution to the imbalance in trade between China and the United States, Commerce Minister Chen Deming said. He pointed to Chinese data showing that the yuan, also known as the renminbi, rose by 21 percent against the dollar between July 2005 and July 2008, but the U.S. trade deficit with China grew by 21.6 percent during the period. "It does not help if one side, driven by its political agenda at home, puts pressure on the other with unwarranted threats of trade sanctions," Chen said. He reiterated the official view that the U.S. trade deficit has been over-estimated. He said the trade gap was a reflection of globalization, with U.S. firms moving to China to lower their costs while U.S. consumers benefit from cheap Chinese goods.

China: A Tale of Three Swan Songs | zero hedge - Internationally, China is under growing pressure--especially from the United States--to appreciate the value of the yuan. Chinese leaders contend that the yuan's role in trade balance is limited, and asked nations to loosen the restriction on the import of products instead.  This yuan-induced heated debates prompted two prominent economists to reference the age-old Swan diagram. However, each came up with a different position for China. The Swan diagram is generally used to represent the situation of a country with a currency peg. The concept was developed by Trevor Swan in 1955. The two diverging swan images are also reflective of the clashing views regarding currency between China and the U.S. In this case, beauty is really in the eye of the beholder.

Disappointing Roach - Krugman - I really don’t know what to say about Steve Roach’s column on China today. It doesn’t sound as if he’s read anything those of us calling for a tough stand on the renminbi have written. The whole thing is laid out as if China critics were focused on the US-China bilateral imbalance, when I’ve made it very clear that this is not at all the right thing to focus on: ...And his insistence that changing the value of the renminbi wouldn’t change overall balances, because these reflect savings, seems to me to imply both that he subscribes to the doctrine of immaculate transfer and that he’s oblivious to the fact that the world is both deeply underemployed and in a liquidity trap. I’m not necessarily right about China. You can argue, for example, that the dangers of confrontation outweigh the potential gains. But this issue deserves more than misrepresenting the views of the renminbi hawks and rolling out old macroeconomic fallacies.

Why CNY DEVALUATION Is Now Increasingly Likely | zero hedge -  As we pointed out a few days ago when we noted that China is about to disclose a March trade deficit, Soc Gen's Albert Edwards was right on the dot, and has been since November. Sure enough, today he (rightfully so) revels in his vindication: To be sure, only economists who still reference 1984 textbooks and write uninspired columns could not see this coming. Shockingly, this was indeed the dominant view. And inevitably it will take a long time before the ramifications of what a Chinese deficit means, finally sink in.  Edwards attempts to make llife for those whose world is about to be turned upside down, a little easier.

China shows new divisions on yuan - China displayed new divisions on Tuesday over how to respond to mounting U.S. pressure to let its exchange rate rise. Two new advisers to the central bank called for the yuan to resume its gradual appreciation, but they were slapped down by Commerce Minister Chen Deming, who said a stronger currency would not wipe out China's trade surplus with the United States. "It has been proved both in theory and practice that the appreciation of a nation's currency provides little help for improving the balance of payments," Mr. Chen said in a detailed defense of China's trade policy. The clock is ticking down toward an April 15 ruling by the U.S. Treasury on whether China is deliberately manipulating its currency to keep its exports competitive and gain an unfair advantage in global markets.

Reduce reliance on US T-bills, says Cheng  China should be cautious in buying or selling huge amounts of US Treasury bonds due to the inherent risks they pose, Cheng Siwei, an influential economist, said on Wednesday, suggesting that the suitable ceiling for the nation's foreign exchange reserves is $800 billion. "The country should diversify its currency portfolio for foreign exchange reserves and reduce the share of US dollar-dominated assets for risk control purposes," said Cheng, the former vice-chairman of the Standing Committee of the National People's Congress, in a speech at Fudan University."

Leave China alone - THE case for getting tough with China continues to seem extremely tenuous. Today, Tyler Cowen links to a couple of good resources on the subject. Here's a relatively new paper by Ray Fair, for instance, the abstract to which reads: This paper uses a multicountry macroeconometric model to estimate the macroeconomic effects of a Chinese yuan appreciation. The estimated effects on U.S. output and employment are modest. Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction. And here's a Financial Times piece. I particularly appreciate the FT's invocation of the Peterson Institute and its suggestion that an American policy of keeping quiet would be most helpful. Just today, Real Time Economics published an interview with the Peterson Institute's Fred Bergsten...

Ever-Closer Relations With China « Following up on this post about China’s role in Iran sanctions and nuclear security, President Obama and Chinese President Hu Jintao shared a phone call last night. The New York Times has much more about China’s kinda-sorta-emerging pro-U.S. tilt, and focuses on whether the cost of its development will be Obama taking a soft line on alleged Chinese currency manipulation. Sen. Chuck Schumer (D-N.Y.) is alarmed. “It relates to American jobs, American wealth and the future of this country. This issue should not be traded for another.”

Is China Punishing The US for Google and Exchange Rate Bashing? - Maybe a little bit, but probably not much. The spike in interest rates on ten year US bonds accompanying a "weak" sale last week from 3.67% to 3.91% has the WSJ and numerous commentators freaking out about US national debt crisis and collapse and also noting that China bought little to nothing, leading some to speculate that China is punishing the US either for Google standing up to them or to the US for Obama pressuring them to appreciate the yuan/renmimbi. Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all. the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.

Move Over, China. Google Has a Russia Problem, Too – Business – The Atlantic - Foreign Policy's Evgeny Morozov has a lengthy post on today's news that Russia may pump $100 million into launching a national search engine and what it might mean for Google. Today Google is a very distant second in the Russian search market. The largest search engine is Yandex, which controls a crushing 62.8 percent of the market. Google has a 21.9 percent share. Since September, 2007, Yandex's market share has never dipped below 55 percent, according to statistics at Google's share has yet to break 25 percent. To add insult to injury, Yandex has come out with its own browser based on Chromium, the Google-sponsored, open-source project on which Google's Chrome browser is based, according to TechCrunch. Yandex's browser seems indistinguishable from Google's and, apparently, it's also called Chromium.

Put Down Trade Spats, Pick Up a Mirror - Andy Xie - A confrontation between China and the United States is looming sooner than I expected. Quite likely, the U.S. Treasury Department will name China a currency manipulator in its April report to Congress. Such a conclusion would require that the Obama administration impose punitive tariffs on Chinese imports. China may be tempted to strike back with a trade-war volley. But such a move would be in China's worst interests. China is the biggest beneficiary of globalization and must do everything possible to defend the global trading system. So its best response, in my view, would be to take the case to the World Trade Organization, even though any resolution would be a long time coming and would not help the current situation.China also would be wrong to stoke a dispute with the United States in hopes of diverting attention from its domestic problems. China's biggest challenge today is how fruits of its economic growth are divided, not how fast the economy is growing. And a key to this dividing game is held by the middle class, which deserves support.

Are Chinese statistics manipulated? - My answer to it, at least regarding the data in recent years, is a firm NO. How do I know that? The reason is pretty simple: in such a big economy as China, it is extremely hard, if not impossible at all, to massage the data without leaving any trace—any manipulation in the data will be quickly spotted by observers—and I personally haven’t found any signs of data manipulation in recent years. In China, there are a whole lot of government departments, semi-government organizations, and private sector institutions providing various statistics. FJust like how different parts of the economy are connected to each other within an organic whole, data released by different institutions is interrelated and need to be consistent with each other. Hence, any attempt to manipulate data—say, flattering the GDP number a little bit—requires concerted efforts of various government departments as well as private sector institutions. If there are some participants in the circle not doing this kind of massage to their own data, inconsistency arises, leaving footprints of manipulators in statistics.

China facts of the day - As far as China’s involvement with the rest of the world goes, the real story since the worst of the crisis is not China’s recovering exports but China’s strong imports. The forthcoming trade release – interestingly due a few days before the Treasury report – is likely to demonstrate enormous import growth again, absolutely and relative to exports. This is seen not just in Chinese data, but in those from many other important trading nations. Indeed, quite remarkably, Germany’s trade with China is showing such strong growth that by spring next year, on current trends, it might exceed that with France. China last year reported a current account surplus of 5.8 per cent of GDP, significantly lower than apparently assumed as the current level by many people in Washington. In 2010, it could be closer to 3 per cent – incidentally below the 4 per cent level deemed as “equilibrium” by the Peterson Institute for International Economics. There is more here.

China's credit curbs pose mounting risk to commodities - The big global banks are quietly preparing for a slide in commodity prices over coming months as China clamps down on excess lending and the US Federal Reserve takes away the liquidity pot. "We believe overheating risks in China are escalating," said Michael Lewis, commodities chief at Deutsche Bank. "Heading into the second quarter, we believe China will become the main source of event risk for commodity markets, specifically industrial metals." Mr Lewis said Beijing is likely to slash growth in spending on infrastructure from 120pc last year to just 7pc this year. Deutsche expects China's central bank to cut loan quotas by almost a quarter to 7.5 trillion yuan ($1.1 trillion) this year, raise rates, and tighten reserve rules to choke inflation, while local authorities take their own measures to curb the property boom. Lead, zinc, copper, and nickel are all highly leveraged to China's building cycle.

Behold China - Over the years, a variety of short-term explanations have been offered for why the Chinese leadership’s supposed plans for political change have been deferred. The Chinese leadership is too new on the job to launch reforms. Or, perhaps, it’s been around too long. No, it can’t loosen up right before a Communist Party Congress, the big gathering held every five years. Nor can it do anything in a year that ends in a nine (too many sensitive anniversaries fall during these years, including the Tiananmen Square crackdown of 1989). It couldn’t risk reform before the Beijing Olympics. And certainly not in a period of recession or sluggish growth--nor, for that matter, during high growth or inflation. If you took seriously all of these past justifications for short-term delay, the perfect time for the Chinese regime to proceed with opening up its political system might be right about now. Yet there is no sign of political liberalization.

What China's Volvo Deal Means - That acquisition is a big, big deal for Geely, and for China. It sends up a bright, flashing warning signal to the rest of the global auto industry that China is deadly serious about becoming a significant player in the international car market, and that its companies command the resources and guts to make that goal a reality. The deal also continues a recent pattern of aggressive carmakers in emerging economies taking advantage of their weakened American competitors to buy assets to upgrade and expand their operations. India's Tata Motors snagged Jaguar and Land Rover from Ford in 2008, while China's Beijing Auto agreed last year to purchase some technology from GM's Saab unit. Such transactions represent what may be an important long-term trend in the global car industry – the shift of focus to fast-growth emerging economies, such as China and India, both in terms of production and sales. After all, China surpassed the U.S. as the world's largest car market last year.

Along the Silk Road at 220mph: China’s high-speed rail revolution - Plan would let passengers board train in London and reach Beijing two days later - High-speed rail is the only way to travel in China these days, with bullet trains zipping along thousands of miles of track at speeds of up to 220 miles an hour. Now China is planning a new Iron Silk Road to link it with 17 countries in central and southeast asia, using the same state-of-the-art technology. Nations along the three planned routes are being offered all kinds of lures to agree to the high-speed lines. Cash-poor Burma's high-speed rail network is being built in exchange for raw materials for export to China, such as lithium. Central Asian economies that pump gas and oil to China are also being given financial assistance.

Stopping the Clock on SOE Land Sprees_English_Caixin (chart) By the end of 2009, the 16 central SOEs accounted for a major share of the total real estate business in total assets, revenue and net profit. China's government plans to order some central state-owned enterprises (SOEs) to quit the real estate business in an aim to curb surging land and housing prices. The State-owned Assets Supervision and Administration Commission (SASAC) will require 78 centrally-administered SOEs, whose major business is not property development, to withdraw from the business. The government's move comes after a land shopping spree right after this year's NPC and CPPCC, which was blamed for driving up the country's property prices. However, a total of 16 central SOEs, centered on property, such as the China National Real Estate Development Group Corp. and the China Poly Group Corp., will be allowed to continue real estate business.

China’s Debt Bubble: When Will the Ponzi Unravel? - Yves Smith - Independent Strategy’s latest report, “China’s credit bubble: the missing piece in the jigsaw” makes a persuasive case that China’s debt fueled growth model is due for a hard landing, but the timing is uncertain, since the debt is funded internally.  China is barely past an episode of dealing with banks chock full of bad loans (). On a more fundamental level, China has copied the Japanese mercantilist development model pretty much wholesale. It arguably hit the wall with the 1985 Plaza accord, when the US found the continued trade deficits unacceptable and succeed in organizing a G5 intervention to drive up the yen (that succeeded too well, the yen overshot, leading to the Louvre accord to push up the greenback). Japan’s central bank lowered interest rates to stoke asset prices in the hopes that the wealth effect would produce higher domestic consumption and offset the effect of the fall in exports. We all know how that movie ended.

Who ya gonna call? Entrepreneurs! These maps (with data from 2001, 2004, and 2008) show how cell phones have quickly bypassed the dysfunctional landline companies and emerged as a triumph of bottom-up entrepreneurial success.The measure is cell phone subscribers per 100 population, with darker shades of blue indicating movement from 0-20 to 20-30 to 30-40 to above 40 (above 40 is the dark blue shade that is most evident in all the graphs).Note the darker blue color now encroaching on all sides of the African continent. This gives us hope that the dynamism of the bottom from entrepreneurs can overcome sclerosis at the top. Data source: World Development Indicators

Japan's 10-Year Bonds Complete Monthly Loss Before BOJ's Tankan - The increasing fiscal risk premium is bound to push yields up,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities, one of the 23 primary dealers that are required to bid at government debt sales. “The pace at which banks buy JGBs will probably slow.”The Ministry of Finance said in December it will boost total issuance to a record 144.3 trillion yen in the year starting tomorrow. Japan’s national debt will increase to 973 trillion yen by the end of March 2011, the Finance Ministry said in January. The debt level may rise to 246 percent of gross domestic product by 2014, according to the International Monetary Fund

Japan Banks May Sell Record Subordinated Bonds, Citigroup Says - (Bloomberg) -- Japanese banks may sell a record 2.3 trillion yen ($24.8 billion) of subordinated bonds in the next fiscal year as they refinance debt to meet regulatory requirements, according to Citigroup Inc. Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. are among lenders that will need to sell bonds to replace older notes, whose value as Tier 2 capital declines when they have less than five years to maturity, Katsuhide Takahashi, a credit specialist at Citigroup Global Markets Japan Inc., said in a phone interview from Tokyo.“They would need to refinance them to keep their current capital ratios,” The Basel Committee on Banking Supervision requires lenders to keep capital equal to at least 8 percent of risk-weighted assets, split between Tier 1 capital including stock and Tier 2 capital including subordinated debt with at least five years to maturity.

Sengoku Says Japan Fiscal Situation Not Unlike Greece (Bloomberg) -- Japanese National Strategy Minister Yoshito Sengoku said the country should have a greater sense of urgency about the nation's fiscal situation, comparing it to the plight of Greece."So far some have been crying wolf, but Greece's situation isn't entirely unrelated to Japan's," Sengoku said at a news conference in Tokyo today. "At the end of the day, Japan's situation right now is not that good. There hasn't been a sense of crisis about this, including from ourselves."Sengoku has been tasked with developing a plan for repairing the finances of a country that is burdened with the world's largest public debt. "

Counting a billion: India begins new census - Adding to the complexity of counting and classifying the world's second biggest population will be a simultaneous process of collecting biometric data on every person, to be used in a new National Population Register. "It is also a challenge to see that the 2.5 million enumerators carry out the instructions we have given them without error," Chandramouli said from his New Delhi office. Officials will collect fingerprints and photograph every resident for the first time for the register -- a process described by Home Minister P. Chidambaram as "the biggest exercise... since humankind came into existence."  Along with census details, "personal attributes" will be recorded, such as declared nationality and marital status, and details on the proportion of bank account holders and cellphone users.

It's hard to get anyone to make a bear case for EM, so I'm going to try - The EM story is a strong one - in sharp contrast to the developed world, EM counties tend to have favourable sovereign/consumer debt dynamics, current account surpluses, high savings rates (implying scope for a pick up in consumer demand) and strong demographics.  Continued globalisation and liberalisation should be to the advantage of these counties.   Reflecting these opportunities,  US mutual fund flows into EM debt have seen the sharpest increase of any asset class year to date versus this time last year, and I suspect it's a similar story for EM equity. However you rarely hear about the risks in EM, only the opportunities, so I thought I'd try to present the other side of the argument. 

Argentina, Oh, Argentina: Playing With Fire - While the world watches Greece, Argentina is burning.  Because both countries have debt problems and endemic private and public corruption, some commentators have tried to draw parallels between the two.  In fact they are two very different situations.  In 2002, Argentina defaulted on $95 billion of debt internationally.  Greece is not in jeopardy of default and will not default.  While both countries are still emerging from dictatorship, the level of private (including tax evasion), public, and political corruption is far more invasive in Argentina with its peronista culture.  While Greece has a competitiveness problem within the Eurozone as the result of fixed trade exchange rates, the euro is not a pegged currency.  The Argentine peso maintained a fixed peg with the US dollar for 11 years until 2002 which increased its dependence on US dollars and foreign debt leading to the 2002 default.  Beginning in 2002 with the rescinding of the currency peg, inflation broke out and has continued to the present as a virtual way of life and may approach 20% this year.

Argentina to Pay More Than 10% on Bonds, Marengo Says (Bloomberg) -- Argentina’s accelerating inflation and deteriorating finances will undermine President Cristina Fernandez de Kirchner’s goal of selling global bonds with an interest rate below 10 percent, said Silvia Marengo, who helps manage $500 million of debt at Falcon Private Bank in Zurich. Fernandez is seeking funds to help cover a budget deficit that RBS Securities Inc. said will more than double to 1.4 percent of gross domestic product this year from 2009. Inflation will top 20 percent this year, the highest in the region after Venezuela, because of “extremely lax fiscal and monetary policies,” said Alberto Ramos, an economist at Goldman Sachs Group Inc.The government plans to tap global credit markets for the first time since its 2001 debt default after reaching a restructuring accord with holders of about $20 billion of bonds. Economy Minister Amado Boudou, who vowed last week to give defaulted debt holders a final offer by mid-April, said March 25 that the government will sell bonds at a “single digit” interest rate after an agreement is reached.

German deficit hits record level in '09  (Reuters) - Germany's total public sector budget deficit hit a record 105.5 billion euros (93.9 billion pounds) last year, the Federal Statistics Office said on Wednesday. The deficit, combining a funding shortfall at federal, state and local government levels -- as well as the balance of the social security systems -- broke a previous record of 74.1 billion euros from 2003, the preliminary Office figures showed.In 2008, the deficit was 5.2 billion euros, it said.Germany's economy contracted by some five percent in 2009 -- its worst postwar slump -- leading to a sharp drop in tax revenues. The state also spent billions of euros propping up the labour market and pumping money into struggling banks.

Down To Earth In Germany? - (click pictures for better viewing) It was hard not to sense that part of the IMF’s recent inquiry into Germany’s economy was also aimed at asking the country to eat a little bit of humble pie in the context of the ongoing difficulties facing the Eurozone. Consequently, Germany has been the poster child for the good pupil in class and  an example to follow as the world seemed to have  come to a near end in Greece, Spain and elsewhere. Today’s hint from the IMF should alert us to the fact that all is not well in the so-called engine room of Germany. (Bloomberg):The International Monetary Fund cut its growth forecast for Germany after a recovery in Europe’s largest economy came to a halt, and said the government needs a “credible” plan to reduce its deficit. The IMF expects the German economy to expand 1.2 percent this year and 1.7 percent in 2011, the Washington-based lender said in a report published today. In January, the fund forecast growth of 1.5 percent in 2010 and 1.9 percent next year

Forget Greece, Germany Should Leave the Euro... So says Joachim Starbatty in the NY Times: The Greek crisis is only the first of what could be several tremors resulting from the euro’s original sin. While few are willing to say it yet, the solution is clear: the only way to avoid further harm to the global economy is for Germany to lead its fellow stable states out of the euro and into a new and stronger currency bloc.[...] If Germany were to take that opportunity and pull out of the euro, it wouldn’t be alone. The same calculus would probably lure Austria, Finland and the Netherlands — and perhaps France — to leave behind the high-debt states and join Germany in a new, stable bloc, perhaps even with a new common currency. This would be less painful than it might seem: the euro zone is already divided between these two groups, and the illusion that they are unified has caused untold economic complications.

France's budget deficit hits record high - France's public deficit reached 7.5 per cent of gross domestic product (GDP) in 2009, its highest level ever and more than twice the maximum agreed for members of the European Union. The French budget deficit hit 144.8 billion euros last year, according to figures released by national statistics office Insee on Wednesday. The increase soared to 80.1 billion euros more than 2008's. Insee attributes France's growing deficit to a sharp drop in government revenues and a simultaneous increase in public spending.

The Pain To Come -As Britain prepares to go to the polls, its sick economy is uppermost in voters’ minds. With good reason. There are fundamental doubts that it can ever recover fully from a banking crisis and recession that laid Britain lower than many other rich countries. In the short term, the worry is whether a feeble recovery reliant on fiscal and monetary life-support can develop its own driving force. Looking ahead, there are fears that the strong, steady growth rate in the 15 years before the financial crisis is no longer Britain’s default mode. And casting a dark shadow over the next parliament are public finances that have veered wildly into deficit and will need to be hauled back harshly from the brink.

Portugal's budget deficit for 2009 revised upwards to 9.4 pct of GDP – Portugal’s budget deficit in 2009 has been revised upwards from 9.3 percent to 9.4 percent in the first notification of the year as part of the procedure for excessive deficits for Eurostat, the National Statistics Institute (INE) said Monday in Lisbon.The projections included in the INE report also pointed to gross public debt rising from US$110.376 billion euros (66.3 percent of GDP) in 2008 to 125.909 billion euros in 2009 (76.8 percent), with figures for 2009 still provisional.

Irish Banks Need $43 Billion in New Capital - Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. “Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.” The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.

Italy's High Debt, Low Growth Pose Challenge, Moody's Warns - (Bloomberg) -- Italy’s ability to tackle its high debt amid low economic growth “will be tested,” Moody’s Investors Service said. Italy is struggling to shake off a recession that saw the economy contract 5.1 percent last year, the most in at least three decades. Debt will rise this year to 117 percent of gross domestic product, the second-highest in the EU, after Greece, according to European Union forecasts. “The government faces some challenges in growing out of its high public-debt levels given the current context of low economic growth,” Alexander Kockerbeck, a Moody’s analyst, said in a report released today.

Fiscal tightening and growth: A good squeeze | The Economist… ACROSS much of the rich world an era of budget austerity beckons. Government debt is rising faster than at any time since the second world war. By 2014 the public debt of big rich countries will reach an average of 110% of GDP, up by almost 40 percentage points from 2007, according to the IMF (see chart). On current policies it will continue rising. How to alter this bleak trajectory will be policymakers’ most difficult task over the next decade. But so far less than half of the OECD’s member countries have detailed medium-term plans to reduce their deficits. Their choices will have huge implications for the growth and structure of their economies. Worryingly given the stakes, economics offers surprisingly little certainty about either the optimal goal or the best way of getting there.

The global financial crisis: Why were some countries hit harder? - VoxEU - Despite the global reach of the financial crisis, some countries fared better than others. This column argues that this was due to differences in trade or financial openness, underlying vulnerabilities to external forces, or the strength of their economic policies.

ECB Trichet: ECB To Accept BBB- Collateral Beyond End 2010 - The European Central Bank will maintain laxer collateral rules beyond the end of 2010, ECB President Jean-Claude Trichet said Thursday.  As of next year, the central bank will introduce larger haircuts for lower graded collateral, the president added.  "It is the intention of the ECB's Governing Council to keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010," Trichet said.  "In parallel, we would introduce, as of January 2011, a graded haircut schedule, which will continue to adequately protect the Eurosystem," he added.

The Greece Agreement: ‘Kohl Would Have Done the Same Thing’ – SPIEGEL ONLINE – 

The Greek Bailout Plan: Merkel’s Risky Hand of Brussels Poker – SPIEGEL ONLINE –

The World from Berlin: Merkel’s Greece Deal ‘Betrays the Concept of Europe’ – SPIEGEL

Guardian: Angela Merkel agrees on Greece rescue package – but wants new euro rules - Germany's chancellor, Angela Merkel, agreed for the first time yesterday on a "last-resort" rescue package for debt-stricken Greece, while pushing for a tough new regime of sanctions and penalties against European single currency countries whose fiscal misconduct endangers the euro. Prodded by Merkel and the French president, Nicolas Sarkozy, the 16 countries using the single currency agreed a mixture of bilateral European loans and International Monetary Fund help for Greece if it finds itself facing default, unable to refinance its ballooning debt.

WSJ: Greek Plan Extends IMF's Sway - The euro zone's decision to include the International Monetary Fund in any Greek rescue plan extends the Fund's influence to a large swath of the world economy—and gives a political boost to its managing director.Over the past two years, the IMF has worked with the European Union to bail out EU members, including Latvia and Hungary. Now it is clear that the IMF mandate reaches also to Portugal, Spain and other troubled members of the 16-nation euro zone, said Domenico Lombardi, a Brookings Institution expert on the IMF.  "Any possible (economic) contagion to Portugal and Spain (from Greece) should be under control," because of IMF and euro-zone involvement, he said.

Greece Rescue = Smoke and Mirrors--Yves Smith - It is astonishing that the words “rescue” and “bailout” are being applied to the headfake announced by the EU for Greece last week. Rebecca Wilder at Angry Bear blandly noted, “All I’m saying is that this plan, in its current form, is really not much of a plan at all.” Ed Harrison stressed that voters in Germany would be assured “This is not a bailout”. The big problem with this non-bailout bailout is that it appears designed to provide Greece with air cover so it can roll its debts coming due (April and May are crucial months) without adequately addressing the underlying problems. The problem is that deep budget cuts are almost certain to worsen rather than improve deficit to GDP ratio. They will simply put the economy into a deflationary tailspin, with the GDP contraction assured. Wilder explains:

Greece and the EuroZone: Angie, Ain’t it Time to Say Goodbye? –  Auerback - Time for Greece to exit the Eurozone? Marshall Auerback argues that as painful as it might be, the alternative of wage-cutting is worse. Greece indeed is being offered a financial aid package of around 22 billion euro, but no funding will be made available until the country fails to find funding elsewhere, entirely obviating the point of the bailout. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity. As George Friedman of Stratfor has noted, “That is akin to offering a homeowner, who is about to default on a mortgage, a refinancing offer that equals or increases his mortgage rates above the rate he already cannot pay.”

Marshall Auerback on Greece – video -As before, this is in fact another statement that indicates no checks are to be written. The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt. It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity. This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available.

Greece [Will/Will Not] Issue 6%+ Debt This Week, Even As Evans-Pritchard Summarizes It Best: "Greece Is Drowning" - Something funny happened on the road to a Greek bailout: nothing. Well, a few exceptions: Germany and the ECB are now enemies, nobody knows what the hell the Maastricht rules really are, the ratings agencies are discredited beyond repair as even the ECB says its own internal bureaucrats can do a better job at modelling the Greek AAA rating... Yet Greek debt is still yielding 6%+. If anyone will recall, the primary concern that various administration George Pap[...]'s had, was that Greek debt was "unfairly" yielding double where German debt is. So yeah, lots of talk, more non-bailout bailouts, and in meantime, Greek default risk is pretty much where it was two months ago. Which is why speculation that emerged toward the end of last week that Greece will promptly issue new debt, is now being squashed by G-Pap (fin min or FM, not to be confused with the prime min or PM). In the end, it is all irrelevant: as Ambrose Evans-Pritchard says, the end is close for Greece.

Greece to Sell 7-Year Bonds in 1st Issue Since Rescue (Bloomberg) -- Greece is selling 5 billion euros ($6.7 billion) of seven-year bonds, its first debt offering since the European Union agreed to help the nation finance the region’s biggest budget deficit.  Greece will price the securities to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed. The 6 percent yield is the same as the nation’s existing seven-year notes, according to composite prices on Bloomberg.

In Crucial Test, Greece Raises $6.7 Billion in Bond Sale - The bonds, worth $6.7 billion, were priced to yield 6 percent, according to banks that managed the sale, meaning that Greece was paying a princely 3.34 percentage points above what Germany, considered the European benchmark, pays to borrow at a similar maturity. It was also well above the rates paid by governments in Portugal, Spain, Ireland and Italy, other countries whose indebtedness has caused concern.

Greece May Be Heading Back to ‘Square One’ on Aid as Bonds Fall (Bloomberg) -- Europe’s week-old rescue plan for Greece has so far failed to do what its leaders predicted: reduce borrowing costs for the region’s most indebted country.  The yield on 10-year Greek government bonds has increased 25 basis points since EU leaders agreed to the aid blueprint on March 25, reaching a one-month high of 6.529 percent yesterday. The yield eased to 6.525 percent today, still more than double the rate on comparable German debt. Seven-year bonds sold by Greece on March 29 fell for a third day today.

Here Is Why Greece's 12 Year Reopening Earlier Was A Failure… Call it poetic justice. In its pursuit to kill CDS "speculators", Greece has shot itself in the foot, and potentially hit a major artery. Earlier today Greece tried to do a quick drive by with a €1 billion in a reopening of a 12 Year auction. Instead, it barely managed to get €390 million off: a miss by 61%, which anywhere else would have caused the organizers to scrap the auction and never mention it again (but not here). The lack of demand for the remarkably stupid surprise auction, orchestrated by former Goldmanite Petros Christodoulou, achieved no incremental funding for Greece but merely spooked the entire curve, and forced buyers of yesterday's 7 Year auction to take immediate losses, as the bond traded down from 6% to 6.27% (not to mention a move wider in CDS). This is the third sequential auction in which primary buyers have taken post break losses. At this rate of disappointment (yesterday the 7 Year had a meager 1.4 Bid To Cover ratio), soon Greece will be unable to pull anything issuance off. Yet the bigger reason for the lack of demand is even simpler: the hounding of all those who hedge exposure with CDS.

Europe has left Greece hanging in the wind - However you dress it, the Greek package agreed by EU leaders is a capitulation to German-Dutch demands. There will be no European debt union as long as Angela Merkel remains Iron Chancellor of Germany. The Frankfurter Allgemeine summed up the deal succinctly: "No member of Europe's monetary union should be liable for the debts of another state. Bilateral credit from Berlin for Athens is not the same as German acceptance of responsibility for Greek debt." This shatters the assumption since Maastricht that monetary union leads inexorably to fiscal union. By drawing the IMF into Euroland's affairs, Germany has broken the spell and reduced EMU to a fixed-exchange system with knobs on, like the 1930s Gold Standard that it so resembles. No wonder Jean-Claude Trichet at the European Central Bank is cross.

The IMF should impose default on Greece to end the charade - I just had lunch with Carmen Reinhart, author of `This Time is Different: Eight Centuries of Financial Folly” and a world authority on sovereign defaults. Suitably, she was wearing a medallion of a Spanish silver coin dating from 1580, celebrating Philip II’s third default in eighteen years.The Fuggers bit the dust. They were the richest family in Christendom in the 16th Century and bankers to the Counter-Reformation, the Citigroup of their day. This cleared the way for rise of Dutch and Anglo-Scottish finance, and the great power shift to the North Atlantic. But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.

The IMF Does Europe -Ken Rogoff - With the International Monetary Fund playing a central role in the eurozone’s blueprint for a bailout of Greece, the multilateral lender has come full circle. In its early days after World War II, the IMF’s central task was to help Europe emerge from the ravages of the war. Once upon a time, the Fund had scores of programs across the Continent (as Rong Qian, Carmen Reinhart, and I illustrate in new research on “graduation” from sovereign debt crises.) But, until the financial crisis, most Europeans assumed they were now far too wealthy to ever face the humiliation of asking the IMF for financial assistance.Welcome to the new era. Europe has become ground zero for the biggest expansion of IMF lending and influence in years. Several large Eastern European countries, including Hungary, Romania, and Ukraine, already have substantial IMF loan programs. Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.

The IMF's new wisdom - Over the past year or two the IMF has made some positive changes in policy and in their published work, some of which challenges the conventional wisdom among central banks and even the past practice of the IMF itself. The fund, which prior to the current decade was one of the most powerful financial institutions in the world, has presided over a number of economic disasters and was widely seen – at least in the low-and middle-income countries to which it has lent for the past four decades – as generally doing more harm than good. Now there is debate over how much it has changed, and what these changes mean for the IMF itself and its role in the global economy going forward.

PIMCO sees Greece action ineffective; UK downgrade (Reuters) - PIMCO sees Europe's action on Greece as ineffective in fixing the country's problems, while Britain's sovereign debt rating could be downgraded within a year, a top executive of the world's largest bond fund said. Scott Mather, head of global portfolio management at Pacific Investment Management Co (PIMCO), told a briefing in Taipei on Thursday that the company was underweighting UK, U.S. and pan-European 10-year sovereign bonds."Miracles are needed in the next six months in order to keep economic growth in the developed world,"

Economics focus: Default settings | The Economist -IN DECEMBER 2001 Argentina defaulted on $81.8 billion of sovereign debt, after months of turmoil in the country’s banking system. That led to the abandonment of its exchange-rate regime and a sharp devaluation of the peso. Argentina’s GDP plummeted by 10.9% that year. It has been locked out of international capital markets ever since. In Greece such tales now have a worrying resonance.  If the worst were to happen, how much pain might it suffer as a result? In theory, default should be costly. The damage it causes is the main incentive for debtor countries to honour their promises. Yet there are clearly lots of occasions when governments judge that the benefits of defaulting outweigh the costs. An IMF study by Eduardo Borensztein and Ugo Panizza counts as many as 257 sovereign defaults between 1824 and 2004. Between 1981 and 1990 alone, there were 74 defaults (see chart).

International reserves and swap lines: substitutes or complements? - VoxEU - The global crisis has been associated with an unprecedented rise of swap agreements between central banks of larger economies and their counterparts in smaller economies. This column explores whether such swap lines can reduce the need for reserve accumulation. The evidence suggests that there is only a limited scope for swaps to substitute for foreign-exchange reserves.

European Banks Face $209 Billion Shortfall on Real Estate Debt (Bloomberg) -- European banks may face a 156 billion-euro ($209 billion) shortfall in funds needed to refinance commercial real-estate debt in the next two years, DTZ Holdings Plc estimates.About 480 billion euros of property loans will mature by the end of 2011, according to research by the London-based broker. Banks won’t be able to refinance all of the debt, particularly when loans exceed the value of the properties backing them. More than half of the shortfall will occur in the U.K. and Spain, DTZ said. European lenders are grappling with the legacy of 1.8 trillion euros of loans given to buyers of stores, offices and warehouses in the five-year real estate boom that ended in mid- 2007. Many were granted near the market’s peak at more than 80 percent of building values. Prices then sunk by about 26 percent across continental Europe and 44 percent in the U.K, leaving many borrowers owing more than the value of the buildings.

Unemployment and Inflation Rise in Europe - NYTimes - The unemployment rate in the euro area rose to 10 percent in February, while inflation accelerated more than economists had forecast, probably a result of higher food and oil prices, according to data released Wednesday. Eurostat, the European Union’s statistics agency, said that seasonally adjusted unemployment in the 16 nations that use the euro rose to 10 percent in February, the highest rate since August 1998, from 9.9 percent in January. The figure had been put at 10 percent in November, but it was subsequently revised down to 9.9 percent. For the 27 members of the European Union, the rate in February was a more moderate 9.6 percent.

Euro zone inflation more than expected, jobless up - (Reuters) - Euro zone inflation was much higher than expected in March and the unemployment rate reached 10 percent in February, data showed on Wednesday, highlighting the fragility of economic recovery. Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February, the European Union's statistics office said. The data pointed to reawakened price pressure despite low consumer demand. Eurostat's flash estimate for inflation, which contained no monthly figure or any breakdown, compared with the 1.1 percent price growth expected by analysts polled by Reuters

Western Civilization and the Economic Crisis, The Impoverishment of the Middle Class- It seemed for a time that “Western Civilization” had worked, even if only for the west.  While the great problems of the world, and for the majority of the world’s people, persisted and expanded exponentially, the great purpose of the middle class was siphoned and expanded into facilitating the development of a massive consumerist society. The function of the middle class became that of consuming, not necessarily contributing to determining the direction of society. Nevertheless, life was good; or so it seemed. Thus, the people were by and large able to turn a blind eye to the plight of the world’s majority. As the decades progressed, however, the great western empires, increasingly united under the umbrella of a US-led NATO empire, grossly expanded their plundering and exploitation of the rest of the world. New avenues for capitalist expansion needed to be found, more money to be made, more assets to be owned, more power to be had. As a part of this process, class structure was being reorganized, which meant that the middle class was to undergo an evolution. The middle classes of the western world, surviving only on debt, are about to be subject to a “class default.” The wealthy class will be the consumption class, as the middle class is absorbed into the lower class and labour work force.

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