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

Saturday, May 1, 2010

week ending May 1

Foreign Central Bank Custody Holdings At $3.066 Trillion As of Wed -Fed - The U.S. Federal Reserve's balance sheet contracted slightly in the latest week as discount window borrowing by commercial banks posted yet another decline. The Fed's asset holdings in the week ended April 28 slid to $2.334 trillion from $2.341 trillion a week earlier, the Fed said in a report released Thursday.Total discount window borrowing slipped to $78.37 billion on Wednesday from $ 78.42 billion a week earlier.Borrowing by commercial banks through the Fed's discount window fell to $5.51 billion on Wednesday from $6.11 billion a week earlier.U.S. government securities held in custody on behalf of foreign official accounts rose to $3.066 trillion from $3.052 trillion in the previous week. Treasurys held in custody on behalf of foreign official accounts as of Wednesday climbed to $2.277 trillion from $2.267 trillion in the previous week.Holdings of agency securities rose to $789.18 billion from the prior week's $ 785.60 billion. Further data on the Fed's balance sheet, including a breakdown of district-by- district discount window borrowing, can be found at

U.S. Fed's balance sheet dips in latest week (Reuters) - The U.S. Federal Reserve's balance sheet fell slightly in the latest week, Fed data released on Thursday showed. The Fed's balance sheet -- a broad gauge of its lending to the financial system -- decreased to $2.313 trillion in the week ended April 28 from $2.320 trillion in the previous week. For a graphic on the Fed's balance sheet data, see

Former Fed Staff on 2011 Rate Hikes, Balance Sheet Woes - The Wall Street Journal had a chance to moderate a panel on the outlook for Federal Reserve policy at the Milken Institute’s global conference in Los Angeles yesterday with a group of astute Fed watchers. Here are the highlights and a link to a video of the full discussion: IN SUM: Tightening policy is going to be enormously complicated. The path of least resistance for the Fed is to sit still for as long as it can. The economy might give it reason to do just that. Futures markets are pricing in a Fed rate increase by the end of the year, but the smart money inside the Beverly Hills Hilton had its doubts. We asked the audience — filled with money managers and bankers — for a show of hands on when the Fed was likely to raise rates. Fewer than a third shot up for 2010 and much of the rest went up for 2011 or later.

Fed Authorizes Tool to Drain Liquidity - The Federal Reserve authorized a tool that could be used to drain some of the liquidity it injected into the economy to fight the financial crisis.The Fed on Friday said it approved the offering of term deposits for lenders who are eligible to collect earnings on their balances at the Fed’s Reserve Banks. The tool could be used by the Fed if needed to sop up money built up in the banking system before the money excites inflation. The Fed’s total portfolio of loans and securities expanded after the financial crisis struck. The central bank proposed the term deposits in December and asked for public comment. Term deposits have specified maturity dates and are held by eligible institutions at Reserve Banks. The deposits will be offered through a term deposit facility.

Fed Intends to Keep Rates Low - The Federal Reserve's policy making committee still has its lasers focused on the weak points in this economic recovery.  In the minutes of the open market committee meeting, released today, the Fed noted  that the economy is improving but it also noted ongoing weakness in the labor market and the fact that bank lending continues to contract. It didn't need to say anything about the debt crisis rolling across Europe--that's the elephant in the room. The bottom line: Don't worry about inflation or interest rates; worry about the economic recovery. And, thankfully, that's just what they are doing. The Fed is not only keeping the Fed Funds rate near zero, there is also no evidence that they have begun to shrink their balance sheet, nor are they anywhere close to selling off the $1.5 trillion in mortgage securities that they are sitting on. The good news there is that both long and short-term interest rates should stay tame for the foreseeable future.

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

Alford: Fed Talk As Policy - The Fed believes that it has succeeded in making monetary policy significantly more transparent. Furthermore, the Fed believes that by being transparent it can influence market expectations and the behavior of the real economy. This is the basis for the emphasis on “talk as policy”. However, one can ask: has rhetorical guidance regarding the Fed funds target made policy significantly more transparent than in the past? Assume for the moment that, in an effort to make its next statement less repetitive, the Committee decided to replace the word “extended” with a synonym – “prolonged” Is there any doubt that the markets would react to the changing of the word “extended”, even if it was only to replace with one of its synonyms?

The Lone Dissenter: Another Month, Another Hoenig Dissent - The long-serving official again opposed the central bank’s decision to keep rates very low for an extended period on Wednesday, his third such action in three straight policy gatherings. While the Fed officials who endorse that view say the rate outlook ultimately depends on how the economy performs, financial markets see the language as a pledge the current 0% interest rate policy stance will be maintained for months to come, perhaps even into next year. Hoenig worries the Fed is creating the conditions for future financial imbalances, and he frets the central bank is limiting its flexibility. In comments this year, Hoenig has also suggested the Fed should get around to raising rates sooner rather than later, arguing even a modest tightening would still leave monetary policy very supportive of growth. It should be noted that Hoenig’s dissent is tied to the language, not the policy decision. The statement doesn’t indicate that he wants rates to be higher, just that he wants to remove the “extended period” language to give the Fed more flexibility.

 Do you notice the end of ZIRP? - There was not much reaction to the latest Federal Open Market Committee statement on Wednesday – and nor should there have been. After all, there’s been no real change in the language employed. But examine this chart, mapping the overnight Fed Funds rate in the US over recent months: The official range, established in December 2008, may remain at “zero to 0.25 per cent” – but the actual price of money is most definitely trending higher. In fact, a little over 20 basis points is now typical in overnight trade. That might be a small rise, in nominal terms, from the 10 bps or so seen earlier in the crisis – but it’s certainly a shift away from the zero interest rate policy. America has stopped turning Japanese.

The Fed at a Crossroads - Here's the video from The Fed at a Crossroads panel discussion that I said I'd post:

How the Fed Will Read Latest GDP Numbers - Federal Reserve officials have made it clear in recent weeks that their decision about when to raise interest rates will depend heavily on how the economy performs vis-à-vis their forecast for growth and inflation. If growth underperforms or inflation comes in below expectations, the odds of a rate hike go down. The odds go up if the opposite happens. So what do the first quarter forecast tell us about how the economy is doing? Growth is coming in around as expected though it’s still not convincing growth. Inflation is low and has the potential to come in well below the Fed’s forecast. The Fed expects gross domestic product to grow at an annual rate between 2.8% and 3.5% this year. At 3.2%, the first quarter came in right on target. However, it is still heavily weighted toward inventory rebuilding. The Fed wants to see more sustained consumer spending and investment before being convinced the recovery is healthy and self-reinforcing.

 Obama to Nominate Yellen, Raskin, Diamond to Fed Board - WSJ -President Barack Obama plans to nominate two economists and a lawyer to the Federal Reserve Board on Thursday, reshaping the central bank's top ranks at a critical period for financial regulation and monetary policy. The White House on Thursday will tap Janet Yellen, president of the San Francisco Federal Reserve Bank, to be the board's vice chairman, and Massachusetts Institute of Technology economist Peter Diamond and Maryland state banking regulator Sarah Bloom Raskin to sit on the seven-member board, according to people familiar with the mater. The Senate is likely to confirm them.

Obama Nominates Yellen as Fed Vice Chairman - Putting a bigger stamp on the Federal Reserve, President Barack Obama on Thursday chose Janet Yellen as vice chairwoman of the central bank and filled two other vacancies on the board, which has enormous power over Americans' pocketbooks. His moves come as the Fed, whose decisions influence economic activity, employment and inflation, is facing political and economic challenges. The Fed is steering the economy out of the worst recession since the 1930s, and legislation to overhaul the financial system would eliminate some of the Fed's authority while giving it new responsibilities. Some lawmakers think the Fed overstepped its authority by bailing out some big financial firms during the 2008 financial crisis.

Yellen Touts “Maximum Employment” -  Interesting catch from Annie Lowrey who notes that Janet Yellen put the Fed’s jobs mandate first when officially acknowledging her appointment as Vice Chair of the Board of Governors: I’m honored that President Obama has asked me to serve in that capacity. If confirmed by the Senate, I am looking forward to working even more closely with Chairman Bernanke and the other governors, and continuing to collaborate with my colleagues throughout the Federal Reserve System to conduct policies that foster economic prosperity and ensure a stable financial system. I am strongly committed to pursuing the dual goals that Congress has assigned us: maximum employment and price stability and, if confirmed, I will work to ensure that policy promotes job creation and keeps inflation in check.

Diamond nominated for Federal Reserve post - MIT News - MIT economist and Institute Professor Peter Diamond PhD ’63 has been nominated by U.S. President Barack Obama to serve on the Board of Governors of the Federal Reserve, the central bank of the United States. If confirmed to what would be a 14-year term, Diamond would be one of seven governors on the board. As a member of the Fed’s board, Diamond would automatically serve on the Federal Open Market Committee (FOMC), the group that influences economic activity, employment and inflation by setting key interest rates. At the moment, interest rates are low in an effort to spur lending, investment and growth following the deep recession that began in late 2007. In addition to nominating Diamond, Obama today announced he was naming two others to serve on the Federal Reserve’s central board: Janet Yellen, currently president of the Federal Reserve Bank of San Francisco (nominated to be vice chair of the Fed), and Sarah Raskin, a lawyer who is Maryland’s commissioner of financial regulation.

Understanding central bank operations - On the plane coming over, among other things, I read a paper written a couple of years ago by the Federal Reserve Bank of New York about the way in which monetary policy can be “divorced” from bank reserves. It is a useful paper at the operational level because it brings out a number of important points about bank reserves and the way central banks can manipulate them or ignore them. That is what this blog is about. In the September 2008 edition of the Federal Reserve Bank of New York Economic Policy Review there was an interesting article published entitled – Divorcing Money from Monetary Policy. It demonstrated why the account of monetary policy in mainstream macroeconomics textbooks (such as Mankiw etc) from which the overwhelming majority of economics students get their understandings about how the monetary system operates is totally flawed.

"I Don't Think They've Learned Anything"Those are the words of David Roche of Independent Strategies, who is "well known for his outspoken but prescient views" according to his website. Roche is referring to the U.S. government in general and the Federal Reserve in particular. He believes our beloved Central Bank should be raising rates now, not waiting for an "extended period." He's right, of course, but the U.S. economy still requires emergency life-support. Without that intervention, we would have the Depression we so richly deserve after a 25-year credit bubble. First the CNBC video and some selected quotes followed by some commentary. Roche: What they’re trying to do is start off more bubbles. If you look at consumer spending, it is picking up. Of course it’s picking up. U.S. households now get more money from the government than they pay in taxes … So, what the authorities are trying to do is actually to add state leverage, government bond leverage to private sector leverage so that the bubbles go on and the consumption goes on.

The Fed’s Hollowing Out Of U.S. Banks - Have the Federal Reserve’s unprecedented market and banking interventions fundamentally weakened America’s banks? In this article, we will illustrate how the Federal Reserve has been hollowing out the US banking system. We will show how the Fed has been creating a banking industry shell that looks strong on the surface, but is increasingly empty beneath that facade, with less and less economic strength, and an ever greater reliance on the Federal Reserve’s monetary creation ability. Using a single loan as an example, we will explore in step by step detail how almost 10 percent of US bank assets have been hollowed out, with former investments in the economy being replaced by excess reserve balances at the Federal Reserve. On paper, these balances are the highest quality assets which a bank can own, yet in economic reality, they represent an investment in nothing at all.

 Goldman: Despite The Recovery, America Is Screwed Without More Easy Money From The Fed - Our analysis suggests that fiscal policy should start to “exit” from its current easy stance well before monetary policy, for two reasons. First, the link between an easy fiscal policy now—i.e., a large deficit—and a high debt stock in the future is virtually automatic. In contrast, the link between an easy monetary policy now and a financial asset bubble in the future is much less tight, though low interest rates and large Fed asset purchases do raise the odds of excessive housing and equity valuations. Our conclusion: very large benefits from continued easy monetary policy and—at least for now—small costs in terms of the risk of renewed asset bubbles strongly support our forecast that the federal funds rate will stay at its current near-zero level for much longer than generally expected.  However, the case for fiscal policy is less clear-cut.  While the benefits of continued accommodation are large, the costs look increasingly sizable as well.  Hence, the fiscal “exit” should come well before the monetary one.

The Search for a Reserve Currency - Currency, like all forms of abstract value, is based on trust. And trust itself is based - except among the most naïve - on experience, and the repetitive demonstration of fidelity, whether positive or negative. At present, the US dollar, which had experienced a gradual rise during the 20th Century to the position gained well into the Cold War of being the trading world’s reserve currency. It had the mass, in terms of volumes of available currency; it had the backing of an indisputably wealthy national asset base to move away from the gold standard; it had stable governmental backing. All of that is evaporating. Not, in absolute terms, as far as the mass of currency available, because that has dramatically expanded in recent years, and particularly during the past year of the Administration of Pres. Barack Obama

Rich world may face next downturn with dull weapons |(Reuters) - Rich countries may not be able to resharpen their crisis-fighting tools fast enough to get them ready for the next downturn, leaving them increasingly reliant on cash-rich emerging powerhouses to ensure stability. Before the latest upheaval struck, advanced economies had enjoyed a relatively peaceful stretch dating back to the early 1990s. Aside from the 2001 recession, which proved to be mild, the financial trauma was largely centered in emerging markets. That has changed. As the International Monetary Fund has stressed in the run-up to this week's meetings of world finance officials in Washington, the biggest threats to the global recovery are concentrated in advanced economies now. Emerging markets, scarred by debt crises of the late 1990s, have built up an estimated $5.5 trillion in reserves as a form of self-insurance against future problems, but the rich world has no such cushion.

Do bank purchase of 10 and 30 year Treasurys spell trouble? - One of the notable observations in recent Treasury auctions has been the increasing participation by commercial banks in taking down 10 and 30 Year Treasury auctions - traditionally two parts on the curve banks have historically avoided like the plague. We present some observations on why this may be happening as well as some troubling conclusions, both of which indicate trouble, namely that liquidity is and has been the name of the game for the past 13 months, and that commercial banks, or presumably some of the smarter money around, are seeing economic distress ahead.  Here are the preliminary observations from Morgan Stanley, the one outlier bank which sees rates jumping to 5.5% by the end of the year, and 4.5% by the end of June (by way of context):

Higher Inflation, Not Hyperinflation - Forbes - Last year the federal budget deficit was $1.4 trillion, or 10% of GDP, the largest "peacetime" deficit on record. This year will show some improvement, but not much, with a deficit in the vicinity of 8% of GDP.  Meanwhile, the Obama administration projects that under its own policies--including higher taxes for the "rich" and an end to hostilities in Iraq--the deficit will never get down to the 3% of GDP it believes is sustainable over the long run, much less the 1.2% that prevailed as recently as 2007. Some analysts have proposed inflating/devaluing our way out of this debt crisis. These arguments have increased the fear of hyperinflation. The theory is that with deficits already so large and no immediate prospects for spending control, the U.S. government may have to resort to an Argentina-style monetary policy to pay for its largesse. At first glance, this is not so far-fetched. Overspending in Greece has created a fiscal crisis there, and some analysts think Greece would be better off leaving the euro so it could devalue its debt. While we are worried about rising inflation, we think the odds of hyperinflation in the U.S. are near zero.

Update on the Inflation Debate - Brian Wesbury and Scott Grannis remain concerned about inflation, citing the recent Producer Price report from the BLS. I remain an inflation skeptic based on the two charts above, which show that the 10-15% producer price inflation in the 1970s (bottom chart) was accompanied by much, much higher money growth (top chart). The core ingredient of inflation (producer or consumer) is money growth, and there just doesn't seem to be enough M2 money growth to generate 1970s-era inflation.

Achieving Fiscal Sustainability - Chairman Ben S. Bernanke Speech At the National Commission on Fiscal Responsibility and Reform, Washington, D.C. April 27, 2010  17 KB PDF

Bernanke: U.S. Needs Deficit Reduction Plan - Federal Reserve Chairman Ben Bernanke Tuesday said the U.S. needs to soon come up with a plan to cut the budget deficit, telling a White House debt commission it should look at how the tax system could be changed. Mr. Bernanke’s remarks kicked off the first meeting of an 18-member White House panel charged with drafting ideas to reduce the country’s $1.4 trillion deficit. President Barack Obama created the panel, which includes Republicans and Democrats from the House of Representatives and the Senate, and its focus is on determining the biggest threats America’s fiscal health.  Mr. Bernanke has not spoken about taxes for a while. However, the Fed chief is being more cautious than his predecessor, Alan Greenspan, who made the controversial move of endorsing President George W. Bush’s tax cuts in 2001.

Bernanke Is Getting Scared.... You have to love this sort of utter claptrap...Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk.”  Really Ben? We need to review a few graphs again. Let's start with this one: This is the true deficit, measured simply by the amount of Treasury debt (including intergovernmental games) outstanding. Of note is that it has never decreased materially since 2001. Why is this important?  Because every dollar that the government borrows and spends is one dollar that pulls forward demand from tomorrow and spends it today.

Bernanke: Path To Fiscal Salvation Requires Slash And Burn On Entitlements And Higher Taxes - Fed Chair Ben Bernanke likes to couch his language so that it doesn't look like he's saying anything dramatic, but the nut of his speech today on fiscal reform lays it out pretty plainly near the end: The ultimate goal of the commission's efforts should be to put us on a path to fiscal sustainability. One widely accepted criterion for sustainability is that the ratio of federal debt held by the public to national income remain at least stable (or perhaps even decline) in the longer term. This goal can be achieved by bringing spending, excluding interest payments, roughly into line with revenues. Unfortunately, most projections suggest that we are far from this goal, and that without significant changes to current policy, the ratio of federal debt to national income will continue to rise sharply. Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof.

Tsunami of Red Ink - Global Look at National Debt and Who Owns US Debt - The Chicago Tribune had an excellent set of charts this weekend in A Tsunami of Red Ink regarding US government debt and who owns it, and also a comparison of US debt to the national debt of other countries.Click on the link at the top to see foreign holders of US debt country by country. The top three US debt holders are China, Japan, and the UK. Some will not believe those figures on debt to GDP comparisons. I don't either. For starters the numbers are from 2009. The footnote also says, if intragovernmental debt is included the figure is 83%. That number is approximately correct in my opinion (as of 2009). Some will want to count unfunded Social Security and Medicare liabilities out to 2050 or whatever. This is simply wrong. That would be like counting a car you intend to buy 3 years from now as part of your debt now.

The national debt and Washington's deficit of will - Bill Gross is used to buying bonds in multibillion-dollar batches. But when it comes to U.S. Treasury bills, he's getting nervous. Gross, a founder of the investment giant Pimco, is so concerned about America's national debt that he has started unloading some of his holdings of U.S. government bonds in favor of bonds from such countries as Germany, Canada and France. He's simply worried that Washington's habit of spending today the money it hopes to collect tomorrow is getting worse and worse. It even has elements of a Ponzi scheme, Gross told me.  "In order to pay the interest and the bill when it comes due, we'll simply have to issue more IOUs. That, to me, is Ponzi-like," Gross said. "It's a game that can never be finished."

U.S Government Debt Since World War II - Below is some analysis of how the ratio of government debt to GDP has evolved in the United States since World War II. The data come from tables B-78 and B-80 of the 2010 Economic Report of the President. I deleted the "transition quarter" in 1977. The change in the ratio of debt to GDP can be broken into two components. One is the ratio of the primary deficit to to the current debt. The other is what I call the "erosion factor," which is the nominal interest rate minus the GDP growth rate. In a previous post, I suggested an analogy with a owning a rental property. The primary deficit is the operating loss on the property--rental income minus expenses, but not including interest. The "erosion factor" is the interest rate minus the price appreciation of the property.* As of 1946, the ratio of debt to GDP was 108.67 percent. From 1947 to 1970, it fell to 27.96 percent

The Federal Debt/Income Ratio - Think of Country X as a simplified version of the U.S. and Country Y as a simplified version of a European country with a higher debt/GDP ratio but a much smaller state and local sector. My point here is that debt/GDP, which shows country Y in much worse shape than country X, may not be the right way to compare the two countries. Instead, if you think in terms of debt/income ratio at the Federal level, they are in the same position.  My point is that the fiscal adjustments in the U.S. needed to get the Federal debt down relative to GDP might be much larger relative to the current Federal budget than is the case in Europe. I hope that point is not lost in the various ways in which the example diverges from reality.

The Federal Debt: How To Lose A Trillion Dollars (NPR) Everyone knows that the federal deficit is a real and growing problem. It's so large, however — $12 trillion and spiking rapidly — that it can seem abstract. That's about to change. Serious consequences associated with deficit spending have long seemed like far-off problems, but they are now likely to hit the country with considerable force within the next several years. One is servicing the debt itself. Most people don't pay much attention to the interest payments the federal government makes every year. They haven't had to. Debt service has been manageable, thanks to low interest rates and consistent economic growth. But, according to the Congressional Budget Office, annual debt payments — currently about $200 billion — are set to skyrocket. CBO estimates that interest payments on the federal debt will total $916 billion by the year 2020

Déjà Vu All Over Again: On the Dismal Prospects for the Federal Budget - PDF Abstract - We provide new estimates of the federal budget outlook over 10-year and long-term horizons under three sets of assumptions: the Congressional Budget Office baseline, which assumes no changes in current law; an extended policy scenario, in which it is assumed that future Congresses act more or less like previous Congresses in extending expiring provisions; and the Administration budget. Under either the extended policy or the Obama policy scenarios, deficits are high and rising over the second half of the decade, despite the assumption that the economy is in full employment. In 2020, the deficit is projected to be between 5 and 7 percent of GDP and the debt/GDP ratio is projected to exceed 90 percent. These figures only deteriorate with the passage of time. The long-term fiscal gap – the size of the immediate and permanent change in spending or taxes needed to keep the long-term debt/GDP ratio at its current level – is in the range of 6-9 percent of GDP. Further health care reform can be an important part of reducing the fiscal gap, but the problem is far too large to be solved by plausible reductions in health care spending alone. Postponing the onset of a fiscal package will make the problem even harder: even just a 5-year delay in implementation would raise the required fiscal adjustment by about 0.4 percent of GDP, or almost $60 billion per year.

Treasury Redeems A Gargantuan $643 Billion In Treasuries In April - A week ago we were practically speechless when we showed that the Treasury had redeemed nearly $494 billion in Bills in April. A truly stunning number and an indication of just how much cash the Treasury needs to have access to to keep rolling its ridiculously short average maturity debt load. Today we stand even more speechless: according to today's DTS, the Treasury has now redeemed $596 billion in Bills in Aprils: an all time world record, even when accounting for the Fed's steroid abuse period of SFP 1 (we are currently in the second iteration). Add $47 billion in Notes and there are almost $650 billion in redemptions. This number is simply ridiculous. Forget the interest expense: this ever increasing roll is the number one danger to the US and world economy. Should the Treasury be unable to keep issuing shorter and shorter dated debt (and it already is skirting away from even the belly of the curve), it is for all intents and purposes game over.

Is the US Facing a Cash Crunch? - The US government is caught in a cash vise and is being squeezed between too slow a rebound in tax revenues and the limitations on how quickly it can realistically take its funding requirements to the US Treasury auction. The US Treasury was saved in March by what the government reports as “proprietary receipts.” Those receipts require an explanation that isn’t well publicized since it begs the question of what happens next month without the $117 billion journal entry. The March cash management numbers from the US Treasury’s Financial Management Service are alarming and in my estimation have become perilous. The economy is simply taking much too long to recover, which is affecting urgently required tax receipts. If the US Treasury issues even higher debt supply to the market too fast, it threatens driving up interest rates prematurely and thereby elevating already strained government financing costs despite already increased supply.

Sovereign Risk Prompts Review of Investment Strategies (WSJ) - Some money managers are preparing for the next stage of the global financial crisis -- a world where the traditional perception of risk has been turned on its head. Sovereign debt from the industrialized countries, particularly the U.S., the euro zone and Japan, was once perceived as the safest of investments and the benchmark by which to measure all other assets. But massive debt loads as a result of the global banking crisis eroded sovereign debt creditworthiness, meaning investors have to rethink long-held beliefs and investment strategies. Assets that were once perceived as risky -- such as emerging markets or corporate debt -- are now viewed as less risky than debt sold by large developed economies such as Spain. Greece's downgrade by Standard Poor's into junk territory this week is merely the tipping point in what is likely to be a fundamental adjustment process that will last much longer than most realize.

Goldman's Essay On Why The U.S. Debt Load Is "Not Too Concerning" - After losing all credibility (or whatever they had) with the markets, the objective media and Main Street, but not their clients, who were the ones losing the most for interacting with the squid, yet refuse to take their business elsewhere for fear of being locked out from the market monopolist with the greatest amount of inventory (yes, economies of scale when compounded with not so subtle forced liquidations of key competitors end up in monopolistic outcomes), now their economic team is taking a gamble with its own reputation (this is the team that won the best big bank economic team aware for 2009). In a note distributed to clients, entitled "What's the Right Measure of US Government Debt?" Andrew Tilton and Alec Phillips try to present the case that contrary to what you may have heard, the $12.8 trillion of US debt is not really worth losing sleep over. In fact the next time Goldman needs a bailout and the resultant $2-20 trillion of new debt are added to the make the 2s30s at about 100%, that should not be a source of concern either.

"Budget For A Declining Nation" - That was the title of today's luncheon talk to the National Economists Club by Urban Institute Fellow and former Deputy Assistant Treasury Secretary Gene Steuerle.  A video and slides will be posted here.  These are the main points he made. "What makes this fiscal crisis unique is that we can no longer depend upon economic growth to get out of it.""World War II is always held up as an example of running the national debt over 100%, but no one remembers that we drove it down below 70% within 6 years by the end of the Truman Administration." "The enormous budget squeeze of 2009 saw revenues fail to cover entitlement spending and interest for the first time.""We have a budget for a declining nation because we're increasing federal spending on consumption, and we're cutting federal spending for education and investment."

The Obama Deficit Commission: Five Issues to Watch - President Obama’s Bipartisan Commission on Fiscal Responsibility and Reform is having its first meeting today. As I peer at my bookshelf full of well-meaning policy prescriptions produced by similar panels over the years, I am skeptical at best. These enterprises are, as Dr. Johnson said of second marriages, “a triumph of hope over experience.” Still, you never know. As my colleague Gene Steuerle reminds me, few thought tax reform would get off the ground in 1984-85. Yet, by mid-1986, it had happened. As you consider the deliberations of the latest panel—a bipartisan gang of 18 that has until Dec. 1 to send Congress a non-binding deficit reduction proposal—here are five issues to watch.

Deficit reduction: argument by authority - The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control. What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.

Budget deficit: Economic stimulus is key in a recession - latimes - Tuesday was the opening meeting of President Obama's National Commission on Fiscal Responsibility and Reform. And Wednesday, the billion-dollar Peter G. Peterson Foundation convened its National Fiscal Summit, featuring prominent budgetary conservatives from both political parties, including key administration officials. Both groups are likely to come to the same conclusion: If Congress fails to hit a specific deficit target, then a cap on federal spending should kick in. Budget hawks tend to blame outlays such as Social Security and Medicare, and they are eager to put a lid on them.But there's a problem with all this fiscal alarmism. It confuses three entirely separate concerns: the current large deficits, which are caused by the deep recession; the long-term health of Social Security; and the inexorably rising costs of Medicare and of healthcare generally. If you unpack these issues, a different picture and set of choices emerges.

ND20 Bloggers Ready to Take On Deficit Hawks at D.C. Counter-Conference - The deafening screams of deficit hawks have reached a fever pitch as the Peter G. Peterson Foundation announces that it will hold a special summit “to launch a national bipartisan dialogue on America’s fiscal challenges.” The list of featured speakers reads like a FCIC subpoena, with Alan Greenspan and Robert Rubin set to stoke populist fear and proclaim the evils of government spending; ...There is pushback, however, and the Peterson Summit–along with the cronyism it represents–is being challenged. The Fiscal Sustainability Teach-In Counter-Conference, as it is being called, will be held the same day as the Peterson Summit — April 28th — at George Washington University in D.C. The purpose of the teach-in is to offer a counter-narrative to the recycled neoliberal arguments sure to be spouted at the Peterson Conference. Unlike the Peterson Conference, the teach-in is free and open to the public, with the goal of expanding economic debate, not constricting it to the status quo.

Notes from the Fiscal Sustainability Teach-In - I just got back from the Fiscal Sustainability Teach-In organized by letsgetitdone, selise and others who regularly post and comment here at The Seminal. The event is a bottom-up grassroots response to Pete Peterson and the President’s "catfood commission" – which is already talking about putting things like Medicaid and Social Security on the chopping block in the name of reducing the deficit. If you were able to attend the teach-in, or if you follow the noted economists and presenters who appeared there, you might know that things like full employment are much more important than national deficits, and that the U.S.’s fiscal policy on things like Social Security isn’t nearly as much of a cause for alarm as the right-wing "deficit hawks" might have you believe

Hard To Take New Peterson Foundation Deficit Reduction Survey Seriously - In advance of the "fiscal summit" it's holding today, The Peter G. Peterson Foundation yesterday released a survey that it says shows “broad agreement” for a serious deficit reduction effort. Except that it doesn't. The survey is of 58 of the "most senior economic officials from the last eight administrations and Congressional leaders from the past 30 years." Frankly, I'm not sure how seriously anyone should take the opinion this group about the current need to reduce the deficit and national debt given that all of them were responsible in some way for adding to or not dealing with it when they were in office and actually had an opportunity to do something about it. But putting aside that admittedly snarky comment, the survey results are suspect for a number of reasons.

Bond Traders Declare Inflation Dead After Yields Fall (Bloomberg) -- The bond vigilantes who punished governments for profligate spending in past years have gone into hiding. Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data. The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago. While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren’t troubled that the growth will spur inflation..

The Tax That Hides in Your Paycheck - NY Times: Every year at tax time, libertarians indignantly denounce government income transfers from rich to poor. Society’s income distribution, they argue, should reflect as closely as possible what people would earn in unregulated private markets. ... As closer scrutiny of that premise will make clear, the libertarian denunciation of income transfers fails on its own terms.  The main problem is that private pay patterns embody an implicit tax that is actually far more progressive than the federal income tax. To understand why, first consider some background about the way these patterns work.  Economic theory holds that in competitive labor markets, workers are paid the market value of what they produce. In actual markets, pay does rise with productivity, but not by much. The most productive worker, for example, might produce twice as much as his least productive colleague, but is rarely paid even 30 percent more.

When We Will Get a VAT - The recent mini-boomlet for a value-added tax (VAT) that was kicked off a few weeks ago when former Federal Reserve chairman Paul Volcker indicated support for the idea is now officially over. Jackie Calmes of the New York Times quotes him this morning as dismissing the VAT for the time being. "I don't think it's on the political table for now or for the indefinite future, but that's the kind of thing you have to look at," Volcker said. Since his brief comment of support on April 6, the right-wing crazies have been having a field day denouncing it. No doubt, millions of pieces of direct mail have already been dropped to raise money for an all-out war against the VAT. Thousands of little old ladies will be induced to sign over their Social Security checks for dubious campaigns against a tax that has no chance whatsoever of being enacted for many years. Since there is nothing to keep at bay, all such contributions will simply go into the pockets of executives at the organizations sponsoring these direct mail campaigns and the companies that do the mailing.

Dividends Tax Rate Next Year? - Congress is beginning to realize how expensive it will be to cap the dividends tax rate at 20% for those earning over $250,000 beyond the end of this year.  Yesterday, House Ways and Means Chair Sander Levin (D-MI) told the Bureau of National Affairs that it would be "very expensive" and that there was no provision for exempting it under the Budget Act or for "paying for" it at a cost of $138 b. FY11-FY20.  Congressional taxwriters have spent the last few months struggling to find ways to "pay for" $31 b. of extensions of expired tax provisions and would have a much more difficult time finding $138 b. worth.  President Obama has proposed setting the dividends and capital gains rates at 20% for all taxpayers.  So far, there have been no signs that Congress is ready to grapple with the issue of extending the 2001 and 2003 Bush tax cuts.  It could easily fall over until a lame duck session after the election.

More American Expatriates Give Up Citizenship — Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.  “What we have seen is a substantial change in mentality among the overseas community in the past two years,” said Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva. “Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”

Finding the “Relatively Easy” in a World of Hard Choices - A Wall Street Journal article by Corey Boles describes the tough work cut out for the President’s fiscal commission, meeting on Tuesday for the first time:“We’re afraid the solutions they focus on will be entitlement cuts which are completely unwarranted,” Roger Hickey, co-director for the Campaign for America’s Future, an umbrella organization of liberal groups...Brian Darling, director of Senate relations at the Heritage Foundation, a conservative think tank, said he feared the Obama administration would use the panel to justify tax increases.“The bottom line is if you give politicians an easy way out they will take it,” . “And the easy way out in this case is tax increases and not cutting spending programs.” Well, tax increases are certainly not the “easy way out.”  Just ask the Democrats in Congress why they weren’t lining up to sign onto Senator Conrad’s budget resolution

A Democratic Cry For Help - I have periodically advocated a "Megan Tax" for certain consumer goods which are, I believe, God's way of telling you that you have too much money for your own good.  It is my belief that if you buy a $20,000 Hermes handbag (after putting yourself on a waiting list for some), or a Harrier, this is a sort of cry for help.  Your money is overcrowding your life so much that you have become unable to deploy it wisely. In the event of such a tragedy, I have suggested, the government should swoop in, take half your money, and donate it to the Children's Scholarship Fund. You will breathe freer, and some poor kids will get a shot at a decent education. Gains from trade!

Fair and Substantial—Taxing the Financial Sector - iMFdirect - We knew we were in for a tough time when the leaders of the Group of Twenty (G-20) asked the IMF to give them our views, at their summit coming up in June 2010, on  “… the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”Everyone has strong feelings these days on the taxation of the financial sector. Taxpayers who financed the rescue of the financial sector during the recent crisis want their money back—or at least not to get caught again. Some want to see more of the money coursing through the financial system turned to public use.

All for One Tax and One Tax for All? - Rogoff - Recently, the IMF proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses.The Fund’s proposal has been greeted with predictable disdain and derision by the financial industry. More interesting and significant are the mixed reviews from G-20 presidents and finance ministers. Governments at the epicenter of the recent financial crisis, especially the United States and the United Kingdom, are downright enthusiastic, particularly about the tax on size. Countries that did not experience recent bank meltdowns, such as Canada, Australia, China, Brazil, and India, are unenthusiastic. Why should they change systems that proved so resilient? But the IMF’s big-picture diagnosis of the problem gets a lot right. Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits. Since that risk is then passed on to taxpayers, imposing taxes on financial firms in proportion to their borrowing is a simple way to ensure fairness.

Who's Afraid of a Bank Tax? You won’t be surprised to learn that Wall Street doesn’t like the idea of a bank tax. Wall Street lobbyists argue that a tax on banks — meant to discourage risky investments and cover the costs of financial crises — will keep banks from being able to lend to worthy borrowers. That’s not theoretically impossible, but it doesn’t seem very likely. The taxes under discussion would have a low rate. It’s also worth remembering that Wall Street’s lobbyists often claim that they are just looking out for the interests of borrowers A more surprising bit of opposition comes from regulators in Canada and Australia. Those countries survived the bust better than most, in part because of tougher oversight of their financial sectors. Now, with the International Monetary Fund suggesting a globally coordinated bank tax, Canadian and Australian officials are saying that their banks shouldn’t be punished alongside American and European banks.

 Deja Vu Time: G-20 as Bretton Woods Rehash - To its credit, the G-20 process seems to be making meaningful progress on fronts I thought would be sacrosanct only a few months ago: cracking down on tax havens; increasing transparency of hedge fund positions; regulating "systemically important" banks; and even a then-unheard one of charging these banks for the public service of bailouts going forward. We now know that the current IMF head has proclaimed the death of the Washington Consensus, while its quest for ever-freer capital flows has been abandoned (for now). Now, Eric Helleiner makes an number of salient points, First, the Bretton Woods conference was itself a UN-sponsored event. Second, as we often forget, the World Bank and IMF are nominally under the umbrella of the UN system. Thus, UN bodies alike UNCTAD should have a way in how these institutions function. Third, many of the issues we face today--regulating capital flows, accommodating heterodox (read: contra Washington Consensus) policies, and what else have you were also the points of debate at Bretton Woods.

The carry trade is back – The shift in global economic conditions to an “expected growth” mode brings into play the traditional carry trade. This trade works by selling or borrowing low interest currencies and buying the higher interest paying currencies. It is a play on interest rate differentials. In a sense, there always will be a carry trade as long as there are differences in interest rates between countries. In pre-crisis years, the Japanese yen was the favorite carry trade currency, as the yen held the status of the lowest interest rate currency. This was followed to a lesser degree by the use of the Swiss franc and even the U.S. dollar. Forex traders would play the carry trade by selling these currencies against currencies offering higher rates such as the British pound, Australian and New Zealand dollars. The world became afloat in borrowed yen and U.S. dollars. This trade strategy collapsed as trillions of yen and U.S. dollars had to be quickly bought back during the global de-leveraging that occurred.  However, now with global conditions changing toward growth, the carry trade is back.

Q&A: Volcker on Bank Regulations - Former Federal Reserve Chairman Paul Volcker relishes tough assignments. As Federal Reserve Chairman from 1979 to 1987, he tamed inflation by pushing interest rates to 20% — and withstood withering criticism as the economy sank into recession. Since then he has investigated corruption at the United Nations and World Bank and uncovered tens of thousands of Swiss bank accounts that may have belonged to victims of the Holocaust. His once intimidating presence has softened now — he long ago gave up smoking cigars and lets his mischievous side show through. But at 82, he’s taken on another big assignment: remaking global banking regulation.. He sat down for a conversation with The Wall Street Journal’s Bob Davis, before the controversy over Goldman Sachs dominated the headlines. Below is an edited transcript.

The Rules of the Game? -Maxine Udall (girl economist)  - I've been thinking about "the rules of the game." Consider this from a recent ProPublica article on Magnetar: there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. “The rules in place,” I said to myself. “What does this remind me of?” And then I remembered: "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud."  --Milton Friedman. The rules of the game must be changed. They must be changed now. And they must be changed in ways that serve the public interest. Investment banks and bankers must be regulated. Leverage, transparency, size. I'm sure there is more. Toxic assets, toxic instruments, and toxic casino-like speculation are no different from toxic patent medicines. They harm us all.

Brains on Drugs - As it considers how to regulate the financial sector, Congress should heed the lessons of the Food and Drug Administration. As this issue goes to press, congressional deliberations on the mammoth financial reform bill have entered the trench-warfare stage, over a seemingly obscure question: where to put the new Consumer Financial Protection Agency (CFPA), which will centralize the writing and (to some degree) enforcement of federal financial regulations on such things as mortgages, savings accounts, and consumer debt. Should it be an independent agency, like the Securities and Exchange Commission, or a subunit of the Treasury Department or the Federal Reserve?

Jimmy Stewart is dead: Break up the banks... I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the "lower classes" have at least a decent life. A chance to feed their kids and send them to a proper school, to get proper medical treatment for their families if and when required, and, when they age, to draw sufficient retirement funds not to suffer from hunger and cold. The Blankfeins and Jamie Dimons of the planet have no idea who these people are, or what they think, what they're going through, many hundreds waiting in line for an entire day for a handful of low-paid jobs. See, if you make $20,000 a year, and many wish they'd make that much, you have to worth for 500 years to get to that $10 million. Lloyd Blankfein made over $400 million in the past decade.

Can't Anybody Here Play This Game? – Krugman - Bear with me while I vent for a moment. On financial reform, there are clear villains in the political process: But at this point I’m accustomed to that sort of thing. What’s frustrating is the way people who favor reform keep getting pulled off into side issues and obvious misinterpretations. If you want to push too-big-to-fail as a key issue, fine; but please don’t say that resolution authority is encouraging too-big-to-fail, because we don’t have anything like that for smaller banks; it’s just not true: the whole point of resolution authority is to recreate for shadow banks the same kind of authority the FDIC already has for smaller, old-fashioned banks. If you want to argue that Wall Street is corrupt, fine; but don’t use emails showing Goldman employees crowing over their success in shorting housing — which is ugly but doesn’t amount to wrongdoing — to make your point.

How the Ratings Agencies Lost the Will to Say 'No' - Friday's congressional hearing on the role of the ratings agencies in the financial crisis featured three panels: The first, filled with ex-employees of Standard & Poors (MHP) and Moody's (MCO), told a dark, detailed tale of how the ratings agencies produced inflated ratings.  Rather than claim management deliberately required inflated ratings, the ex-employees suggested that massive underfunding and understaffing of the ratings departments coupled with a shift to a customer-satisfaction culture -- customer being defined as the banks issuing the securities, not the market at large -- inexorably led to inflated ratings.

Senate Subcommittee cracks down on credit rating agencies… A slew of internal e-mails from the leading credit rating agencies show employees at those firms knew of the dangers in subprime mortgages, but gave them the seal of approval anyway. "Let's hope we are all wealthy and retired by the time this house of cards falters. :o)," wrote an employee from Standard & Poor's Rating Agency in an internal e-mail in December of 2006.This is frightening. It wreaks of greed, unregulated brokers, and 'not so prudent' lenders," said one S&P internal e-mail dated September 2006. And another from that same month: "...this is like another banking crisis potentially looming!!" The e-mails and other documents were presented as evidence at a hearing on Capitol Hill Friday, part of an 18-month investigation by the Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin, examining the causes of the financial crisis.

Berating the Raters – Krugman - Let’s hear it for the Senate’s Permanent Subcommittee on Investigations. Its work on the financial crisis is increasingly looking like the 21st-century version of the Pecora hearings, which helped usher in New Deal-era financial regulation. In the past few days scandalous Wall Street e-mail messages released by the subcommittee have made headlines.That’s the good news. The bad news is that most of the headlines were about the wrong e-mails. When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing.No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

What to do about CDO ratings II - I have two proposals (last time I only had one). One is to give up on the ratings agencies. They were geese that laid golden eggs providing an immensely valuable service for a tiny fee, but we've killed them. Regulations could be based on firms which put a whole lot of money where their mouth is. Those would be firms which write CDSs. Personally I trust the vampire squid. If G-S is willing to write CDSs with huge notional value on something and sell them for y basis points per year, I'd guess they are pretty safe. GS may or may not be evil but they sure aren't stupid. This reform would have to wait until the idiot CDS writer problem is solved (can you say AIG-FP ?).Short of that, I'd say it would work fine to require the agencies to insure 0.01% of anything they rated. It takes a long time for instruments to actually default, but if the agencies balance sheets included CDS written and marked to market, they would be much much more careful.  A problem with this proposal is that the incentives are too long term.  The solution is to make compensation above say $500,000 a year of officers of, for example, ratings agencies be paid only in stock which can't be sold for 10 years.

Time to rein in the ratings agencies - The organisations on political trial last Friday were the ratings agencies Moody’s and Standard & Poor’s, which played a more central role than any investment bank in the failure of so many investment-grade securities. If all the subprime mortgage securities they rated triple A had not turned to junk, no bail-outs would have been required. The stories that former Moody’s and S&P employees told at that hearing – of the agencies trying to please investment banks that were paying big fees to get high ratings – cast doubt on a central plank of how the fixed-income markets are supposed to work. Why should investors place faith in these over-rated bond market guardians again?

Watching the Watchers - Credit-rating agencies exist to evaluate the safety of debt securities. Imagine for a moment that they had done their job when financial go-getters began churning out bonds backed by sketchy loans and the dream of endlessly rising home prices. Properly labeled as junk, those bonds would have found few buyers. Denied access to the vast reservoirs of capital held in mutual, money-market, and pension funds, the go-getters would have ended up as minor players. And millions of Americans might still have the jobs, homes, retirement savings, and economic security they lost.  The first imperative of reform, then, is to align the incentives of these badly corrupted entities with their mission. 

Ratings failure - I should say upfront that I absolutely loathe rating agencies.  I do not think rating agencies should even exist. However, people blame rating agencies for a lot of stuff that is not exactly their fault.  There seems to be a lot of confusion about what exactly constitutes a “ratings failure.”  Take this column by John Gapper in the Financial Times, for example: The ratings failures went beyond synthetic mortgage CDOs. BMS’s audit committee had questioned treasury staff about whether they were making any risky investments.“They said everything was in treasuries and nothing more than 90 days [maturity], triple A.  What were they in to the tune of $800m? Auction rate notes, triple-A rated by the agencies,” he said.  Mr. Robinson said that this cost BMS $600m when the auction rate note market collapsed in February 2008.One cannot fault the rating agencies for the collapse of the auction rate securities market.  Auction rate securities typically had long-term nominal maturities, but with rates that were periodically reset at short-term intervals through an auction process.  So long as there was sufficient investor demand for the securities, these securities were liquid investments.

Ezra Klein - Should we nationalize the ratings agencies? -  Kevin Drum says that the issue with the ratings agencies is more complicated than people realize. Obviously it's a problem that the ratings agencies are paid by the banks whose products they're rating. But, Drum says, the common solution -- to have a regulator assign the ratings agencies rather than letting the bank do it -- will create problems of its own. If you do this, the ratings agencies no longer have any incentives to do much of anything; their incentive would be to hire the cheapest possible analysts and cut costs to the bone.   Actually, why not? This is a question I've asked for a long time and never gotten a really good answer to. The ratings agency business has two apparent settings: Hopeless conflict of interest or heavily regulated utility with an incentive to cut costs. But they play a very important role in the system. So why not make them -- or some basic version of them -- public? It would be better for both accountability and incentives.

The Case for Ratings Agency Deregulation (vimeo) The term “deregulation” is normally associated with the right, but there’s a long tradition of progressive deregulation in this country aimed at bolstering competition and forcing firms to be disciplined by each other rather than by captured regulators. Ted Kennedy, for example, played a key role in bringing price competition to air travel and trucking. And via Tim Fernholz, here’s a proposal in that spirit from Lawrence Wright at the Roosevelt Institute to unravel the regulatory cartel that keeps the ratings agencies in business no matter how badly they screw up.

Goners - Until last week, I'd never heard of "IBGYBG." But during the Senate Permanent Subcommittee on Investigations' eye-opening hearings into ratings agency malfeasance, former Moody's senior credit officer Richard Michalek introduced me to it while testifying about the perverse incentives that dominated the industry. On the investment bank side, he said, bankers were looking to score the one-time fee from whatever securitization deal they were asking the agency to rate, and move on to the next deal. The incentives for the bank, Michalek said in prepared testimony, were clear: "get the deal closed, and if there's a problem later on, it was just another case of IBGYBG--I'll be gone, you'll be gone."

Out of the Black Hole - This crisis was caused in large part by the opaque and unregulated over-the-counter (OTC) derivatives, or "swaps," market, which was then estimated to have a value of almost $600 trillion, or 10 times the world's gross domestic product. Approximately one-tenth of the unregulated OTC market was made up of the now-infamous credit-default swaps, a product that Wall Street sold to "insure" sub-prime mortgage investments but which lacked regulation and, therefore, the capital required to support these "guarantees." When sub-prime investments failed, the "insurance" payments were triggered. Only the multitrillion-dollar U.S. taxpayer interventions to save Wall Street prevented a worldwide depression.

The Corporate Derivatives Slander? Or The Big Derivative Secret? - Today, in the Financial Times,George Soros repeats a claim that I have been hearing a lot lately, The five big banks which serve as marketmakers and account for over 95 per cent of the US's outstanding over-the-counter transactions are likely to oppose it because it would hit their profits. It is more puzzling that some multinational corporations are also opposed. The only explanation is that tailor-made derivatives can facilitate tax avoidance and manipulation of earnings.  In recent weeks, the Wall Street Journal has reported on big banks use of the repo market to hide its debts whenever they need to report to investors. Could it be that large non-financial corporations want to keep the derivatives market in the dark because they use derivatives to deceive investors or the IRS? And if so, who is doing this?

Warren Buffett Fails To Get Derivatives Loophole - Just because you're one of the world's best-known billionaires and close to President Barack Obama's White House doesn't mean you always get your way. At least, that's what appears to be the case from a Wall Street Journal story. reports that Warren Buffett's Berkshire Hathaway was seeking legislative language in the financial derivatives regulation bill produced by the Senate Agriculture Committee that would've kept the company from needing to put up more money as collateral for billions of dollars in derivative positions the company has.  But the provision Berkshire lusted after was removed

Potential Derivative Loophole #1: Trading Facility - It’s Friday, so for fun let’s play financial reform loophole detective. Here’s the definition of a “swap execution facility” in Senator Lincoln’s original bill (p. 47): This language was passed out of the Ag Committee. Here is the Ag Committee’s language merged into the Dodd Bill that will be debated next week (p. 773-774). Can you find a difference?  The word “trading” has been removed from the Dodd Bill. Specifically, a swap execution facility no longer means a “trading facility” but just a “facility.” I thought this might not mean much, until I just saw this Bloomberg report from Matthew Leising that this might in fact be a big deal: A one-word deletion in the 1,565- page Senate financial reform bill may help banks and inter- dealer brokers maintain how they trade swaps in the unregulated $605 trillion over-the-counter derivatives market…. The latest version deletes the word “trading” from the term “trading facility,” according to a copy of the revised bill obtained by Bloomberg News.

Clinton on Derivatives: ‘Too Much Has No Economic Purpose’ - WSJ - Former President Bill Clinton said he’s not certain Goldman Sachs broke the law in setting up the deal that drew civil fraud charges from the SEC, but he questioned the merit of financial firms' deals that amount to bets on things they don't own.  “I think too much of this stuff has no economic purpose,” Clinton said at a financial summit, referring to the use of derivatives. He did say that derivatives for farmers and agriculture companies to hedge bets on their own crops is a different matter.Clinton said use of derivatives is part of a broader problem in the economy. “Too much of our growth in the last decade was in finance,” he said.

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

Any Regulation of Risk Increases Risk - That is the contentious title of a new paper from Philip Z. Maymin and Zakhar G. Maymin, which is significantly less contentious than their abstract: We show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken on by those financial entities than would otherwise be the case… This result leaves three directions for the future of financial regulation: continue regulating by enforcing risk measurement  algorithms at the cost of occasional severe crises, regulate more severely and subjectively by fully nationalizing all financial entities, or abolish all central banking regulations including deposit insurance..

Financial innovation: Give me a number | The Economist - FELIX SALMON interviews Glenn Yago: Felix Salmon and Glenn Yago on financial innovation from Felix Salmon on Vimeo. It's an interesting little conversation, but I continue to be frustrated by the lack of empirical specificity among innovation defenders. Yes, it's easy to come up with ways that innovation might generate benefits, just as it's easy to point out the very real economic damage done by crises associated with innovation. What's missing is any real empirical evidence that there are net benefits to a free-wheeling, innocent until proven guilty approach to financial innovation.

SAFE Banking Act, What it Does in 2D - Let’s talk about the SAFE Banking Act. First up, what does it do? Well, it caps deposits at 10% of total deposits, non-deposit liabilities at 2% of GDP for banks and 3% of GDP for non-banks. Huh? Let’s put it on a 2d graph: Banks take in money, and lend out money. The riskier the money they take in, the more likely it is you’ll have a bank run. On the y-axis we have the amount of deposits a firm has. Because of FDIC insurance and the federal reserve window, deposits are fairly sticky, even in a crisis (have you worried about a bank run?). This bill would reinforce that one bank can’t have more than 10% of the total deposit base, which is around $800 billion. But what about non-deposits? What about liabilities like obligations in the repo market and other shadow deposits, liabilities very subject to shadow bank runs? That will be on our x-axis. The SAFE Banking Act would limit this to 2% of GDP for banks, and 3% of GDP for non-banks. Right now that is about $280 billion, and $420 billion respectively.

Too Big for Us to Fail - Financial regulatory reform was on few people's minds when Barack Obama launched his presidential campaign in February 2007. But with the near collapse of the global financial system in 2008, leading to high unemployment and high government deficits for years to come, it became frighteningly obvious that something had to change. However, in one respect -- the politics of financial reform -- nothing has changed.  We agree with many of its proposals, including a strong Consumer Financial Protection Agency, dedicated oversight of systemic risk, and new requirements to move derivatives onto exchanges and central clearinghouses. At the same time, we do not think the administration has gone far enough to curb the behavior of "too big to fail" institutions and mitigate the risk that they pose to the financial system and the economy. But these reasonable debates over how the regulatory system should be overhauled are peripheral to a more fundamental issue: the political power of the financial sector, which determines how the regulatory system will be overhauled, if at all.

Relying on the Big Banks to Save the Economy - It is irritating but not especially surprising when Goldman Sachs CEO Lloyd Blankfein says things like "they are doing God's work", or claims that attacking Goldman is "hurting America." I'm sure people like him really believe they are good people just doing their best to help the world economy, in the same way Ayn Rand really believed that selfishness is a virtue and the Gordon Gecko character in Wall Street really believed that greed was good. What is disturbing is when Obama administration officials believe it too -- or at least believe that these massive mega-banks (the top six controlling assets equal to 63% of our nation's GDP) are needed to keep our economy going...Summers quote: "that was the approach America took to banking before the depression. That was the approach America took to lending in the thrift sector, before we had the S&L crisis. Most observers who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to serve large companies, and hurt the competitiveness of the United States. But that's not the important issue, they believe that it would actually make us less stable."

Why Does Larry Summers Like Big Banks So Much? - The internets are buzzing with the news that Larry Summers told PBS Newshour that breaking up the banks is a bad idea.  It's not clear to me that the core of his argument is actually wrong--100,000 small banks going hog wild on subprime mortgages would not have been obviously better than 100 big ones.  Indeed, it would have been . . . the savings and loan crisis.  However, when the time came to bail out those behemoths, regulators did not go into a lengthy disquisition on the mystery of capital flows, and asset-price bubbles.  They said the institutions they were bailing out were "Too big to fail" without explaining that the risk wouldn't necessarily have been any safer for the economy if it had been more evenly throughout the banking system. 

Why Can’t Reform Apply to the Biggest Banks? - NYTimes -  Too big to fail is alive and well, alas. Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.  Here’s an example of this special treatment: Both bills would establish a specific process to resolve big-bank failures. Smaller institutions, by contrast, would be allowed to go bankrupt without a new resolution scheme.  This special resolution system is not only unfair; it also sends a pernicious signal to the market about large and intertwined institutions. The message is this: Subject as they will be to a newly codified “resolution authority,” these institutions and their investors and lenders can expect to be rescued if they get into trouble.

Growth of the Six Big Banks  (chart)

Maybe it's time to break up the banks - As the Senate takes up debate on financial industry overhaul, there is one issue above all others that is imperative to work out: how to deal with institutions that are Too Big To Fail. The reason the government stepped in with taxpayer money at firms like Citigroup and AIG is still alive and well. Our financial giants are so behemoth and interconnected that should one quickly go out of business, the entire system could be at risk.Unfortunately, as an increasing number of commentators are pointing out, the solution Congress is currently contemplating will likely do little to change that. This solution has a number of problems. The core one is that it doesn't actually address the fact that companies are too large and interconnected. It merely sketches out a process for dealing with any potential fall-out.

Provision would break up nine biggest banks.- Nine of the largest financial institutions including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. would have to scale down by about 40%, according to legislation introduced by a group of eight Democrats on Thursday. The group is hoping the measure will be approved as part of sweeping bank reform legislation under consideration on Capitol Hill. The measure limits the size of non-deposit liabilities at financial institutions to 2% of U.S. gross domestic product, or about $300 billion. It's unclear whether congressional leaders will allow the measure to be voted upon by the full Senate or whether lawmakers would approve it.

US banks pouring millions into bid to kill Barack Obama’s finance reform bill - In the face of deep public anger over the financial crisis and government bailouts, banks have flooded Congress with lobbyists seeking to curtail key parts of the sweeping regulatory bill – such as provisions to create an office for consumer protection and more strongly regulate the vast derivatives market.JP Morgan Chase is at the forefront of lobby spending with $1.5m (£980,000) in the first quarter of this year alone – a sharp rise on the same period in 2009 – followed closely by Citigroup. Credit Suisse and Goldman Sachs have also spent more than $1m on lobbying Congress this year, more than double their previous spending. The banking industry is second only to healthcare interests in the amount it spends on political lobbying. Last year, America's eight leading banks and finance houses spent $30m to influence legislation. The broader financial industry has more than 2,600 lobbyists registered with Congress.

Swiftboating Finance Reform - Robert Reich Republicans are blocking a Senate vote on the Dodd bill, seeking to build public support by misleading the public. They’re claiming to want a stronger bill when in fact they’re doing the Street’s bidding by seeking a weaker one. Evidence of their tactics comes in the form of a shady anti-financial reform group called “Stop Too Big To Fail” which today announced a new TV advertising push in three key states. The ad features an out-of-context quote from me to bolster its case to kill financial reform.As TPMmuckraker has reported, Stop Too Big To Fail is the project of a veteran astroturf operation called Consumers for Competitive Choice, and it’s using the services of an ad agency that worked with the Swift Boat Vets For Truth in 2004. TPMmuckraker says the group has already spent $1.6 million on anti-reform ads and won’t say who’s funding the group’s efforts. “Stop Too Big To Fail” has previously featured MIT economist Simon Johnson in one of its media conference calls before Johnson realized the goals of the outfit and demanded it stop using his name. Now, “Stop Too Big To Fail” is using me. I demand it stop using my name

Citigroup’s Vikram Pandit pens letter to White House - Citigroup chief executive Vikram Pandit wrote to Obama pledging to support key reform principles. “I believe banks should not speculate with their capital. I believe in transparency of markets. I believe derivatives should be cleared and settled centrally. I believe there should be a strong federal consumer authority to protect consumer interests,” Pandit wrote, echoing language he used during congressional testimony last month. “We must have a strong systemic regulator. With respect to compensation, we need a merit-based system driven by long-term performance. And it is essential to have a level playing field across the global financial industry,” Pandit continued.  An administration official disputed that the White House solicited the Citi letter, but did not address whether other banks had been asked.

Can $25.3 Million Buy the Senate Banking Committee? - They've been taking large amounts of money from financial services companies for years. And for many observers that raises a simple question: Can lawmakers who are so beholding to a megabillion industry really be expected to objectively carry out a mandate to dramatically change it? Overall, members of the 23-seat committee chaired by Sen. Chris Dodd, D-Conn., have received at least $25.3 million in campaign contributions during 2005-2010 from a variety of financial services interests. That's according to calculations by the Center for Responsive Politics, a nonpartisan campaign research organization. That includes more than $9 million from Securities and Investment firms, $6.6 million from real estate, more than $4 million from insurance companies, $2.6 million from commercial banks, more than $1 million from finance and credit companies, more than $1 million from accountants, $231,814 from credit unions and $161,600 from savings and loans. The figures include both contributions from political action committees and individuals employed by those industries.

The Importance of Getting Wall Street Out of Washington... - Robert Reich - Washington’s relationship with Wall Street is growing more schizophrenic by the day. On the one hand, Congress is trying to show how tough it can be on the financial sector by enacting a law ostensibly designed to prevent another near-meltdown and taxpayer-supported bail-out. The lawsuit launched by the Securities and Exchange Commission against Goldman Sachs for alleged fraud only confirms the view held by many that the economic game is rigged. On the other hand, both parties are going to Wall Street seeking campaign donations to fund critically important television advertising in the months ahead. After all, the Street is where the money is, and TV ads demand huge amounts of it. In recent years, the financial industry has become the second-biggest source of campaign contributions in America – just behind the healthcare industry

Why Financial Reform Needs a Bank Tax - NYTimes - The financial regulation bill before the Senate has the potential to do a lot of good. But it also has at least one major flaw: it would not do enough to prevent taxpayers from paying the bill for a future crisis.  What would? A tax on banks. The International Monetary Fund has started pushing for a bank tax, and a tax has also become part of the debate in Britain’s election campaign. In this country, however, the subject has taken a back seat to issues like derivatives regulation and the Goldman Sachs case. Those other issues are important, but they are not as central to minimizing the damage from the next crisis.  To understand why, let’s take a glimpse into the future. Imagine the year is 2020, and a major financial firm is collapsing.

Big business pleads for loopholes in financial regulation - Here's a simple explanation for the financial crisis: Too much cheap credit was extended to households, businesses and even sovereign governments that couldn't afford to carry that debt or pay it back. The obvious implication is that, going forward, credit and other financial risks should be made more expensive and harder to get. Now, however, as we close in on the endgame for financial regulatory reform legislation, special interests are crawling out of the political woodwork demanding loopholes and exemptions. And if you strip away their end-of-the-world-as-we-know-it rhetoric, their basic complaint is that the reform bill would make credit and other financial risks more expensive and harder to get -- in other words, the bill is doing exactly what it is supposed to.

Alarmist—and wrong—Wall Street predictions about regulations - Last week, the Senate agriculture committee, led by Blanche Lambert Lincoln, sent to the floor a bill that would significantly alter derivatives trading. Should it become law—here are the highlights—the bill would require regulated banks with derivatives-trading units to spin them off. It would also require that derivatives, many of which are traded over-the-counter (i.e., not on an exchange), be traded through a central clearinghouse, with pricing and volume data made available to the public.  Predictably, the industry is opposed to the mandates for greater transparency. As Reuters reported, "mandating that all swaps be exchange-traded will increase costs and risks for the manufacturers, technology firms, retailers, energy producers, utilities, service companies and others who use over-the-counter derivatives." My general rule of thumb is that we should generally ignore what Wall Street has to say about financial regulation. Investment banks lack the common sense to know what's good for them.

They’ve Got It - Fixes for the Financial System - NYTimes… — Congress is consumed by the proposed legislation to overhaul the financial system, with lawmakers clashing over the best ways to regulate derivatives, protect consumers and end taxpayer-supported bailouts. Most proposals in the Senate bill supported by President Obama amount to variations on the current system of regulation. But some scholars in finance, law and economics — perhaps less inhibited by practical considerations — see an opportunity to revolutionize the financial system. In books, papers and presentations, they have proposed an avalanche of ideas, some more outlandish than others. Here are a half-dozen; judge the merits for yourself.

Uh Oh -- They're Back (Thoma) Interesting. The opening session at the Milken Global Conference -- Q&A from the moderator -- turned almost immediately to whining about government regulation and how it will go overboard and kill the economy (Steve Forbes and Ken Griffen in particular, Mohamed El-Erian is being a bit more reasonable). They are complaining about both financial regulation and coming climate change regulation, and how it's all part of the administration's agenda to increase the size and scope of government. It's pretty clear that the first order of business is to block as much regulation as possible, and then, if it happens anyway, to do everything possible to overturn any new regulatory initiatives. It also seems pretty clear that ths group still has a relatively high opinion of the importance of financial innovation as a key source of economic growth, and seem to have forgotten all about the risks such innovation poses for the economy.

Is Market Fundamentalism the Easier Argument? – Thoma - This is probably a "grass is greener on the other side" argument, but when I listen to market fundamentalists argue for their side, as many have so far today in the sessions I've attended at the Milken Global Conference, I get envious. It's such an easy argument to make. No matter what the problem, the solution -- though stated in many, many creative ways -- is always the same. Get government out of the way and let markets do their magic. A tax cut, a reduction in government spending, or easing of regulation will always make things better, not worse. And if there are problems in markets, they can always be blamed on government. Even when fundamentalists admit there is a market failure because it cannot be denied, they can (and do) argue that the government will still make things worse if it intervenes. Thus, no matter the problem, there is always a simple explanation and a simple solution.

A Loss of Faith in Government – Thoma - I’m at the Milken Global Conference, my third, and I’ve been trying to detect changes in the attitude of participants, changes in the program, etc. relative to the past two years now that we’ve moved from recession to what appears to be the beginning of a recovery. One of the biggest changes I’ve noticed, and this goes beyond the conference, is the attitude toward government. Republicans have always targeted government as inefficient, bloated, a threat to liberty, and so on, but this is different. The criticism and contempt for government is more widespread, and it’s gone beyond a party slogan. Even with many accomplishments under its belt, e.g. health care legislation, and even with the perception of moving forward on immigration, financial reform, and climate change legislation, government is still viewed as ineffective, irresponsible, and unresponsive to people’s needs.

Financial reform's big unknowns - The one thing we know about the financial "reform" now moving toward what looks like eventual congressional approval is that it will be oversold, says economist Robert Litan of the Kauffman Foundation. We will be told that it will forever prevent a repetition of the recent financial crisis; that it will root out corruption on Wall Street; that it will eliminate "bailouts"; that it will protect consumers against greedy lenders. In the present anti-Wall Street mood, no one wants to be accused of coddling America's money merchants. History counsels caution. Every financial reform, even if mostly successful, ultimately gives way to another because there are unintended consequences or unforeseen problems.

Democrats Closing Ranks on Finance Reform - NYTimes— Senate Democrats said Sunday that they had bridged internal party differences and coalesced around a plan to tighten regulation of derivatives, the complex financial instruments that were a major factor in the 2008 economic crisis.  The proposed derivatives rules are an important part of the effort to strengthen regulation of the nation’s financial system, and seem certain to anger some of Wall Street’s biggest players.  The agreement among Democrats would combine overlapping proposals on derivatives by the banking and agriculture committees, and it raised the pressure on Senate Republicans, who said that they were still fighting for changes to the bill and planned to block the start of floor debate in a first procedural vote on Monday.

Republican Senators Block Finance Reform Bill - NYTimes - Senate Republicans, united in opposition to the Democrats’ legislation to tighten regulation of the financial system, voted on Monday to block the bill from reaching the floor for debate. As both sides dug in, the battle has huge ramifications for the economy and for their political prospects in this year’s midterm elections.  Republicans said they were intent on winning substantive changes to the bill and accused the Democrats of rushing the most far-reaching overhaul of the financial regulatory system since the Great Depression. Both sides say they expect the overhaul eventually will be approved.

The mysterious “Fed staffers” document - Get those conspiracy caps on already!Here, courtesy of the FT’s Tom Braithwaite, is the four-page document that has helped block financial reform legislation in the Senate. For now.Dated April 24, these are unsigned “comments” on the Senate Agriculture Committee’s OTC Derivatives Bill – the anti-swap legislation that was largely folded into the slightly less-aggressive Dodd bill on Monday. Click to read. This document is what caused Ben Nelson, the Democratic senator from Nebraska, to join 39 Republicans in opposing a procedural motion late on Monday that would have opened up the financial reform bill for debate in the Senate.

Silly Season - Things are reaching quite the bizarre crescendo this week for finance “reform”. We have the regular crooks and the windmill tilters, and sometimes it seems exciting enough that I’m ready to charge a windmill myself. Lloyd Blankfein will go before Congress to talk about Goldman’s political plight. (This is definitely a political matter as far as its real significance; even if the SEC is serious about its action, it’s doubtful that with these rigged laws Goldman will end up getting more than a wrist slap.) They’ve already issued some preliminary lies and nonsense, as dissected here and here. Is it really possible that the SEC suit against Goldman will be the tipping point? That even the worst Democrats like Blanche Lincoln are feeling the heat to the point that they might even pass a quasi-reform rather than a pseudo-reform? This past weekend they even made a good adjustment in the derivatives proposal. They beat back arch-criminal Warren Buffett’s brazen attempt to carve out an exception for himself, which was enough to piss off Buffett’s waterboy Ben Nelson, who yesterday voted with the Republicans to cut off debate on the bill…. …and that brings us back down to earth.

Financial Reform Bill Heads to Senate Floor - NYTimes - With political pressure mounting, Senate Republicans relented on Wednesday and agreed to let Democrats open debate on legislation that would impose the most far-reaching overhaul of the nation’s financial regulatory system since the aftermath of the Depression.  The decision by Republicans to allow floor deliberations came after they voted three days in a row to block the bill, and it suggested that they saw political peril in being depicted as impeding tougher rules for Wall Street.  But Republicans still oppose many aspects of the bill, and a rough floor fight lies ahead.  Senate Republicans control enough votes to filibuster the bill and prevent it from being adopted.

Elizabeth Warren: GOP Reform Plan Is A Failure, Republicans Choosing Banks Over Families  It's time for senators -- especially the Republicans -- to square their upcoming votes on financial reform with their long-professed desire to protect families, said consumer advocate and federal bailout watchdog Elizabeth Warren on Wednesday in an interview with the Huffington Post."Everyone in Washington claims to be on the side of families and to support reform," said Warren, a member of the 2010 TIME 100 list of the world's most influential people. "But the test is who votes to paper over problems with another regulatory system designed to fail and who votes for real Wall Street accountability even if it means that some donors will be disappointed."I'm tired of hearing politicians claim to support families and, at the same time, vote with the big banks on the most important financial reform package in generations. I'm deep-down tired of it."

How Obama Wimped Out - How else to explain the refusal to include the Brown/Kauffman bill to break up banks “too big to fail?” Why were Blanche Lincoln’s tough tactics on derivatives trading dropped from the Senate bill? Whatever happened to the creation of a strong consumer protection agency, as Jack Reed, among others, proposed? Why the reluctance to reimpose Glass-Steagall protections, which worked so well for so long? And what, despite Ron Paul’s support for it, is so dangerous about opening up the Fed to a little democratic oversight? (For a menu of worthwhile reforms needed to strengthen the bill on the floor of the Senate, go here and here.

Why Government Regulation Fails – WSJ - Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepreneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. By the use of force, a thief takes by arms what is not rightfully his; he who commits fraud takes secretly what is not rightfully his. It is the difference between a robber stealing brazenly on the street and a burglar stealing by stealth at night. The result is the same: the loss of property by its owner and the disordering of civil society. And government has failed miserably to perform this basic function.

The best financial reform? Let the bankers fail - The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits. Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors. The plausible threat of personal bankruptcy would suffice to focus the minds of American financiers on safety and soundness as they have not been focused for years.

Why Did We Save the Financial System? , Steven Randy Waldman explains the infamous Goldman transaction. My initial reaction to the Goldman lawsuit was that the nature of the transaction was beyond my depth. Reading Waldman's post confirms this.  Incidentally, I am not stupid. Nor do I lack a background in finance. Among other things, I have read Marcia Stigum's treatise on money markets, worked through Robert Merton's lecture notes from his graduate course, and read Robert McDonald's graduate textbook on derivatives. And I have close to no idea what Waldman is talking about.But I put it to you that this transaction was part of a financial ecosystem that did not create value for the rest of the economy. And this is the financial system that Ben Bernanke and Henry Paulson are credited with saving. My question is, why was it so important to save this system?

Barofsky Says Criminal Charges Possible in Alleged AIG Coverup – Bloomberg - The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York. The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges. In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment bank on April 16.

Is Geithner in SIGTARP’s Crosshairs? - Yves Smith - A Bloomberg story today on Neil Barofsky, the head of the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, contained this explosive little item: The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.  We’ve been told that Barofsky is political, despite his “take no prisoners” image, and indeed, his report that criticized the New York Fed for paying out 100% of the notional value to holders of AIG credit default swaps bore that out when it bizarrely exonerated the Fed for its repeated retrades of the AIG funding, which is of greater economic consequence than the failure to negotiate a haircut on the CDS).

Bob Rubin Just Wants to Be Cuddled I'm in line for the checkout, and a very familiar looking guy gets in line behind me. It's one of those situations where I'm not sure if I eyed him or he eyed me first, but I noticed him shortly when I turned to the left to swipe my debit card. He was standing right behind me in the checkout line - only a few feet away. He looked very familiar and famous, and while that's no rarity in Miami, it is when you realize it's because the guy looks like the former Treasury Secretary -- but maybe no, he's maybe not tall enough? -- and then somehow you finally just blurt out, "Hey, you look just like Bob Rubin!" He looked startled. A little smile.  "Whoa, you are Bob Rubin!" And what do you know, I'd crossed paths with my second former Treasury Secretary! But this one was a whole lot more receptive. I introduced myself and mentioned Phat Math...we made some small talk ...He told me he chaired a community outreach nonprofit, I told him about my work in derivatives, that sort of thing. Later in the day one of my colleagues suggested I send former Treasury Secretary Rubin a formal letter with my resume, and a bit of information on our work helping kids do math. And lo and behold, a few weeks later Mr. Rubin started calling me back.

Bob Rubin sex scandal: He can’t get past second base - Now this is what we really need on a Friday afternoon: a Bob Rubin sex scandal! It’s all based on a whopping 3,500-word blog entry from Iris Mack, who had a long relationship with Bob Rubin which involved hundreds of phone calls, a few dates, the occasional “cuddle” — and no sex. Mack says that Rubin behaved like a “bratty teenager”, and that she finally got disgusted enough with him to go public after she watched his dreadful performance in front of the FCIC. But not before this: “Do you want to go upstairs and…cuddle?” So that’s what this is about. For a moment I was totally speechless and had to dig into my Harvard trained PhD brain to figure out what the hell he meant by “cuddling”! What can I say; once a teetotaling math geek, always a bit slow to pick up on signals from the menfolk. So the former Treasury Secretary had a “crush” on me! And not long afterward the former Treasury Secretary had his tongue down my throat and hands everywhere sort of like an octopus. But as soon as the thought entered my mind — the former Treasury Secretary has his tongue down my throat?!

Should the SEC self-finance? - I haven't seen this issue receive much attention on the usual blogs (Yves Smith is one exception).  Here is one argument for self-finance: The Obama administration has requested long overdue increases in both budget and staff for the S.E.C., and has plans to add as many as 374 employees. Those increases are vital, but because they’re dependent on Congress, there is no guarantee that they will be sustained.  Instead, the commission should finance itself — much as the Federal Reserve and the Federal Deposit Insurance Corporation do today through fees on banks. These two pivotal financial regulatory agencies thus have the flexibility to adjust their own staff.  And it appears easy:Such a self-financing system would not mean higher fees; the commission collects far more in fees from corporate filings and stock market trading than it gets from Congress. But those fees go back into the federal coffers. In 2007, the S.E.C. brought in $1.5 billion, almost twice its 2007 budget.

SEC gathered range of experts for Goldman case - On the fifth floor of the headquarters of the Securities and Exchange Commission, five men and one woman worked marathon hours over three months to finalize a case alleging that Goldman Sachs had defrauded clients.  Led by a former federal prosecutor and a pair of veteran SEC investigators, the team was preparing to take legal action against America's most storied financial firm. On the line was the promise made by SEC Chairman Mary Schapiro, appointed by President Obama last year, that the agency would restore its traditional role as an aggressive check on Wall Street abuses.  The team consists of three old hands and three more junior lawyers. Together, former colleagues say, they bring a mix of backgrounds suited for the many dimensions of the Goldman case. They can understand the details of very complex financial products, grasp the nuances of law and simplify complicated issues for a lay jury.

Op-Ed - Fight On, Goldman Sachs! - NYTimes - MAYBE Lloyd Blankfein was doing “God’s work” after all.  When the Goldman Sachs chief executive made that tone-deaf remark to an interviewer in November, he became the butt of a million insults, the ultimate symbol of Wall Street’s abdication of responsibility for its sleazy role in the Great Crash of ’08. But now we’ve learned that Blankfein was actually, if inadvertently, on the side of the angels. It’s his myopic, unrepentant truculence that left Goldman exposed to a Securities and Exchange Commission accusation of fraud that will be litigated in public rather than bought off in private. And it’s that S.E.C. legal action that has, in a single week, radically transformed the politics and prospects for financial reform in America.

Reputational Risk: In Goldman Sachs We Trust - We all seem to suffer from a common, self-inflicted wound that can be summed up simply as a lack of trust. The lack of trust, in our view, stems from the breakdown in the rules which once governed and also limited the actors in the world of finance, particularly the rules regarding the creation and sale of securities. Banks, funds and the rating agencies all share the blame, but none more than the politicians in Washington and in the Congress who enabled this mess. Remember that as you watch the hearings before the Senate Permanent Subcommittee on Investigations this week. One senior media maven asked us if we thought that the disclosure about GS selling securities to one client while enabling another, namely Paulson & Co, to sell the same securities short would damage the ability of Buy Side clients to trust GS. Our initial response was no.  The sad fact is that the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place that is bereft of honor -- and a source of infinite risk to the participants.

With SEC charges, Goldman Sachs's reputation is tarnished…No longer does the company inhabit an exalted place in the financial-services firmament. With a single filing, the SEC has revealed that underneath its impassively urbane exterior, Goldman Sachs is no better than the rest of Wall Street. Bear Stearns, the scrappy bank that had always seemed to be Goldman's polar opposite, actually turned down the deal that the SEC is focusing on, saying it just wasn't right. The complaint paints a picture of sleazy, untrustworthy bankers -- and it's that picture, more than the legal charges themselves, that has toppled Goldman from its pedestal.

Have Goldman Sachs charges opened floodgates? On the face of it, the Securities and Exchange Commission (SEC) charge relates to a deal worth $1bn. That is the amount UK and German taxpayers have had to cough up to cover losses that their banks made on "Abacus 2007-AC1" - the sub-prime mortgage instrument that the watchdog alleges Goldman sold fraudulently. In the grand scheme of things, that $1bn liability is not a huge amount. After all, the sub-prime mortgage market grew to some $1.3 trillion at the peak of the credit bubble in March 2007, while the £500m loss on Abacus that landed in the UK's lap is less than half a per cent of the government's total deficit of £167bn ($255bn) this year. Goldman itself made profits of almost $3.5bn in the first three months of 2010 alone. But the issues raised by the SEC's charges are a lot bigger than just this one collateralised debt obligation (CDO) - and throw open the sort of questions that worried investors when they rushed to sell shares in Goldman and other Wall Street giants.

Spitzer & Black: Questions from the Goldman Scandal - For those who have spent years investigating fraud, it was no surprise to hear that Goldman Sachs, the (self-described) jewel of Wall Street, is the latest firm to emerge from the financial crisis with tarnished reputation. According to a lawsuit brought by the Securities and Exchange Commission, Goldman misrepresented to its customers the quality of the toxic assets underlying a complex financial derivative known as a “synthetic collateralized debt obligation (CDO).” As you may now have heard, the story involves a pair of Paulsons. As CEO of Goldman, Hank Paulson oversaw the buying of large amounts of CDOs backed by largely fraudulent “liar’s loans.” When he became U.S. Treasury Secretary, he went on to launch a successful war against securities and banking regulation.

Eliot Spitzer on Goldman: Where are the prosecutors? - If Eliot Spitzer is truly on the road to rebirth as a politician, the single issue that he still owns is financial wrongdoing. Eradicating the scams he once prosecuted as New York attorney general, before such chicanery brought down the national (and global) economy, is not only popular but essential. While Spitzer makes no excuses for himself, his advocates have suggested that the former governor’s powerful Wall Street enemies gave a hard push to the prostitution scandal that forced his resignation. Whether or not Spitzer believes there was a conspiracy against him, he shows no signs of backing down from his old adversaries. Today on New Deal 2.0, the news and opinion website of the Franklin and Eleanor Roosevelt Institute, he and Bill Black, the economist and scholar who is among the nation’s leading experts on financial fraud, launch a broadside at Goldman Sachs and former Treasury Secretary Hank Paulson, among others, and more or less insist that the public interest demands indictments:

Charlie Rose: Boies, Lewis, Sorkin - Good Charlie Rose discussion with David Boies, Andrew Ross Sorkin, Michale Lewis on the SEC v Goldman Case: click for video

Is Goldman Sachs simply a gambling operation? Does it do anything that helps America? - The filing of the Goldman case has crystallized the public support for more vigorous regulation of Wall Street. Under any bill that is likely to pass, derivatives trading will become reasonably transparent; a consumer protection agency will be created with a significant degree of independence; some chairs will be rearranged on the organizational deck of the regulatory ship of state; capital requirements and leverage ratios will be adjusted in ways that will be designed to reduce overall risk; and a systemic risk overseer will be created. This is all good stuff, but none of it is really adequate to address the "too big to fail" structure of the financial industry in a fundamental way. And it won't repair the underlying asymmetry of our having "socialized risk" and "privatized gain" for those entities that have an explicit federal guarantee behind them.

FT Buries the Lede on Ex-SEC Officials and Goldman - The paper put out a story headlined “Handling of Goldman case under attack” that said “several former high-ranking SEC officials”—almost all of them unnamed—were bashing the SEC for charging Goldman Sachs (an Audit funder) in the Abacus scandal. Which is pretty revealing if you think about it, but not in the way the FT intended. Here’s its lede: The high stakes legal confrontation between the US Securities and Exchange Commission and Goldman Sachs has been mishandled by both sides and probably should have been avoided, former high-ranking SEC officials told the Financial Times. So ex-SEC dawdlers don’t like confrontation and say the SEC should have sought a settlement, presumably for pocket change—and one that would avoid airing Goldman’s dirty laundry. But it’s worse than that, because look at how the FT describes these eight ex-officials (emphasis mine): “I think the case will come back to bite the SEC. Goldman is really struggling and something awful could happen,” said one former top official who, like most of those interviewed, asked for anonymity because their employers either work for Goldman or are being probed by the SEC.

Goldman's 'Victim' in SEC Case Was a Yield Chaser - The German bank on the losing end of the Goldman Sachs derivatives deals that have attracted the ire of the Securities and Exchange Commission was so absorbed in the pursuit of high-yield returns from financial instruments linked to the U.S. housing market that it preferred to lose one of its top executives rather than change course. This single-minded pursuit of yield provides an important context for the SEC's case against Goldman. In hindsight, it can appear that Goldman must have been committing some kind of fraud in order to sell subprime CDOs that performed so badly. But at the time, the buyers of these instruments were actively seeking exposure to subprime risk.

Deutsche Bank Also 'Victimized' Goldman 'Victim' - Goldman Sachs was not the only investment bank selling the complex securities that ultimately resulted in staggering losses for the German bank IKB Deutsche Industriebank. Traders at Deutsche Bank sold similar collateralized debt obligations (CDOs) -- built from credit protection on a portfolio of mortgage-backed securities selected in consultation with hedge fund manager John Paulson -- to the German bank. And like Goldman, Deutsche Bank didn't reveal Paulson's role in the construction of the CDOs. So far, the SEC has not charged Deutsche with fraud relating to these transactions. The failure of Goldman to disclose the role of Paulson to buyers of a single synthetic CDO forms the heart of the fraud charges the Securities and Exchange Commission filed against Goldman earlier this month. Paulson's hedge fund, Paulson & Co, made billions of dollars by betting against portfolios of mortgage-backed securities, often by purchasing the short position in CDOs structured by large investment banks

Investors Were Not Duped, Goldman to Tell Senators - An initial panel of four current or former Goldman officials insisted that they had done nothing to mislead their clients. Among them was Fabrice P. Tourre, a vice president at Goldman Sachs who helped create and sell a mortgage investment that figures in a fraud suit filed this month by the Securities and Exchange Commission. Senate investigators are building on a case initiated last week by the Securities and Exchange Commission, which has accused Goldman of defrauding investors in a transaction known as Abacus 2007-AC1. The subcommittee takes the S.E.C. case a step further by claiming that the bank had not devised just one of the deals, but a series meant to profit from the collapse of the home mortgage markets. The subcommittee’s claims suggested for the first time that the investigation into the bank extended beyond the single transaction.

Goldman’s Fabulous Fab’s conflicted love letters - Reuters - They emailed back and forth about how they wanted to curl up in each other's arms and how they looked forward to tender moments together. Tourre, a Goldman Sachs bond trader, also wrote in the emails of the impending collapse of the subprime mortgage market and how he was masterminding ways at Goldman to make money from it. Little did they know that three years later these very personal emails written through Tourre's Goldman Sachs e-mail account would become part of one of the biggest investigations into the subsequent financial crisis. In the email exchanges between Tourre and his girlfriend, Marine Serres, Tourre comes off as a young, hotshot trader who foresaw the subprime meltdown while still selling shoddy subprime-backed products so prolifically he could peddle them to "widows and orphans."But Tourre -- the only individual the Securities and Exchange Commission charged in its fraud case against the firm -- also seems ethically conflicted.

Fabulous Fab Tourre: The CDO's I Create Are "Pure Intellectual Masturbation" -Fabrice "Fabulous Fab" Tourre has bitten his tongue again, after it was revealed in an e-mail that he likened the debt instruments he created to, "pure intellectual masturbation," according to the Times of London. Other e-mails also revealed his distrust for the index many of his derivatives products were based on, the ABX, comparing it to "Frankenstein", who famously turned on his inventor. He also said that his creation was “a ‘thing’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price.” While the SEC's release of a full e-mail between Fabrice Tourre and his girlfriend did much to make the man look more sincere, these latest revelations will heap pressure on the Goldman Sachs market-maker as his Senate hearing looms.

Two-timing top trader’s ‘Fabulous’ defiance – Fabulous Fab -- the smooth-talking bad-boy trader who played Goldman Sachs investors for fools while simultaneously romancing two French paramours -- took his slick act to the Senate floor yesterday and defiantly told investigators he'd done nothing wrong.  Sporting a five-o-clock shadow and smug demeanor, French-born Goldman Vice President Fabrice "Fabulous Fab" Tourre, 31, "categorically denied" SEC charges against him, blasting: "I will defend myself in court against this false claim."  "I am saddened and humbled by what happened in the market . . . but I believe my conduct was proper."

Goldman Sachs E-Mail by Montag Described CDO as ‘Shi**y Deal’ (Bloomberg) -- Thomas Montag, the former head of sales and trading in the Americas at Goldman Sachs Group Inc., called a set of mortgage-linked investments sold by his firm “one shi**y deal,” according to an excerpt from internal e-mails released by Senate lawmakers. The transaction was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs, according to a statement from the Permanent Subcommittee on Investigations. The CDO also included optimistic side-bets on the performance of CDOs, derivatives in which the firm took the opposite pessimistic side in “many” cases, the panel said. “Boy that timberwo[l]f was one shi**y deal,” Montag, who is now Bank of America Corp.’s president of global banking and markets, said in a June 22, 2007, e-mail to Daniel Sparks, who ran Goldman Sachs’s mortgage business at the time, according to the statement yesterday. Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008, according to the panel.

Goldman Sachs Emails: Firm Traded Against Clients, Profited Off Their Losses, And Spread 'Poison Throughout System' - Goldman Sachs put its own interests ahead of its clients in trying to profit off the souring housing market of 2007, documents released Monday show. The firm, which had profited handsomely off packaging and selling securitized subprime home mortgages to investors during the housing boom, switched directions in early 2007, furiously shedding its home mortgage-linked risk and buying as much insurance as it could, effectively shorting the market throughout the year -- a move that netted the firm "billions and billions" at the expense of its clients, according to the documents released by the Senate Permanent Subcommittee on Investigations. Goldman says it always puts its clients' interest first. It's a position the firm has stuck by as Levin's investigation has produced emails and internal documents apparently showing otherwise.

Goldman Sachs E-mails Spur Democrats Push for Wall Street Rules - White House officials and Democratic lawmakers, bracing for a Senate showdown on Wall Street oversight, seized on internal e-mails from Goldman Sachs Group Inc. to push for new curbs that would include a ban on proprietary trading. “These e-mails signify that there are all kinds of conflicts of interest on Wall Street, that Wall Street is working for its clients and working against its clients in the same sort of bundled toxic securities,” Senator Sherrod Brown, a Democrat from Ohio, said today on ABC’s This Week. “That’s why we need really strong reform that will separate the proprietary trading from banking functions.” The e-mails show that the New York-based firm “made a lot of money by betting against the mortgage market,” said Carl Levin, a Michigan Democrat.  A ban on proprietary trading, named the Volcker rule after former Federal Reserve Chairman Paul Volcker who’s advising the President Barack Obama, is “highly relevant” to ending conflicts of interest on Wall Street, Austan Goolsbee, a White House economic adviser, said today on ABC’s program “This Week.”

The Goldman hearings - The Goldman Sachs hearings today are making for fascinating theater. The official Goldman statements are strong, especially that of Fabrice Tourre:  But in the actual hearings, the members of the Goldman mortgage desk are looking decidedly weak. They don’t answer questions, they keep on asking to double-check documents to run down the clock, they give narrow and unhelpful answers, and they generally act in a slippery and unsympathetic manner. I can see why it’s working out this way: the Goldman team has been briefed by their lawyers to be very careful about what they say, while the Senators are interested in grandstanding and scoring points. Disappointingly, no one seems to have got any clarity on the biggest point of contention here. Goldman Sachs claims that it made less than $500 million on mortgages in 2007, while Senator Levin claims that it made $3.7 billion. But whatever the truth of the matter is, these hearings are clearly bad for Goldman.

Goldman Sachs on trial – Fans and detractors of Goldman Sachs agree on at least one point: The investment bank employs the smartest traders on Wall Street. The best risk managers, the most deadly sharks, the crème de la crème. But at the start of a full day of congressional hearings featuring Goldman Sachs executives, past and present, Sen. Carl Levin, chairman of the Senate's Permanent Subcommittee on Investigations, made Daniel Sparks, Goldman's former head of mortgage trading, look pretty dumb. The first panel featured four Goldman executives at the heart of Goldman's structured finance division, including Fabrice Tourre, the trader who is the focus of the SEC's allegations of securities fraud against the investment bank. It would not be an exaggeration to describe these four men as the belly of the structured finance beast -- the creators and marketers of the complex financial instruments whose collapse was at the heart of the financial crisis.

David Prosser: Goldman Sachs is just the start of the battle to tame Wall Street – If anything, Mr Tourre was a little more compelling in his appearance in front of the US Senate yesterday than his more senior Goldman colleagues. He at least appears to have had some understanding of the market the bank was making, though not of the conflict of interest involved in not telling one client that the investor on the opposite side of the trade was the world's best known and richest shorter of sub-prime debt. That impression may actually suit Goldman, which, as Twitter's "fake Lucas" rather unkindly suggests, would no doubt not be too miserable if the world concluded Mr Tourre was some sort of rogue trader, rather than a cog in the bank's machine.  Still, if you want a clear picture of what Goldman and other banks were up to in the run up to the crunch, yesterday's hearings did not offer it. Try, instead, reading Michael Lewis's The Big Short,  Its explanation of how a handful of individuals, lead by John Paulson, the hedge fund investor with whom Goldman dealt on Abacus, made a killing betting on the sub-prime collapse is difficult to believe.

The Goldman E-mails, or How to Sell Junk –- The e-mails appear to support one of the most important criticisms of the bank — that it served itself at the expense of its clients — and illustrate the conflicts of interest that arise when banks’ proprietary trading overlaps with customer sales. The panel put it simply: After Goldman Sachs decided to reduce its mortgage holdings, the sales force was instructed to try to sell some of its mortgage related assets, and the risks associated with them, to Goldman Sachs clients. In response, Goldman Sachs personnel issued and sold to clients RMBS and CDO securities containing or referencing high risk assets that Goldman Sachs wanted to get off its books. Goldman has insisted that the deals that have been making headlines recently involved only institutional investors —

Goldman Sachs Dictionary Reveals Hidden Truth  (Bloomberg) -- The key to understanding Goldman Sachs resides not in its opaque balance sheet, or the trove of internal e-mails that the Senate Permanent Subcommittee on Investigations will release at its hearing on the bank’s role in the financial crisis. What you must realize, foremost, is that Goldman’s employees speak their own distinct language.   All the senators need to follow the testimony is a handy-dandy Goldmanese-to-English dictionary, excerpts from which will be provided shortly.

The Goldman Hearings: Levin vs. Wall Street - No one on any side of this debate appreciates the casino analogy, but I think it’s still the most useful way to think about this question: when you place a bet on the Super Bowl, the casino is taking the other side of that bet. In many cases, it’ll balance the bets it makes on both sides of the trade, so that it’s exposed to no risk and it collects the certain profit from the spread. Regardless, though, any individual bettor knows that if he wins, the casino loses, and vice versa. That is, he knows the casino is on the other side of the trade. Levin seems to be saying that this means there’s a conflict of interest between the casino and the bettor, and that it’s illegitimate for the casino to take the bet. But there’s no conflict, because everyone knows what the deal is. And as long as the bet’s honest, and as long as the price is fair, the casino is doing right by the customer, because the customer is getting exactly what he wants: a chance to speculate.

Goldman Sachs executives still don't get it. Today's Goldman Sachs hearing in the Senate is fantastic theater. The kind of theater that makes you want to run to the restroom to vomit.I've been watching the hearing on TV, and I am nauseated to report that they still don't get it. The world came to the brink of financial ruin, and the people driving the mortgage securities death-machine still can only look back and say that at the time it all made sense. To say that the Goldman Sachs executives testifying lack introspection is like saying that the Black Death was a minor health scare. What really frightens me in all of this is that it didn't seem like a legal or PR strategy. It seemed like these Goldman executives genuinely had no ability to take a step back and make observations about the system in which they operate. It seemed like they had been so thoroughly inculcated in the culture of high finance that it was literally impossible for them to do the thing intelligent people are supposed to be able to do in the wake of a systemic breakdown—re-evaluate the assumptions that went into building that system.Perhaps I was expecting too much out of my fellow human beings. We are deeply shaped by our environments, after all. I just thought—especially after hearing that the Goldman executives agreed to testify without being subpoenaed—that we might learn something useful in these hearings. That we might actually gain some insight instead of just another reason to want to bring these people down a peg. I was wrong.

The Senate Goldman Hearing: Fiduciary duties for broker-dealers? - I watched a good chunk of the Senate Goldman hearing today and was most interested to see what it might signal about financial reform.  Perhaps the most interesting signal came during Senator Collins (R-Me) questions during the first panel.  Her questions of the Goldman employees (as well as her opening statement) suggested she is considering whether SEC regulated broker-dealers ought to be subject to fiduciary duties for clients.  She contrasted investment advisers, which are subject to fiduciary duties and must therefore act in the best interests of clients, with broker dealers, which are not under such duties but do have more limited suitability requirements.  Her press statement also signals that she is interested in exploring fiduciary duties for broker dealers. This may seem like a small detail, but if this idea from a senior Republican gains any traction it could dramatically change the way broker dealers and Wall Street firms do business. 

Legislating a Conscience on Wall Street - Lloyd Blankfein doesn't seem to feel responsible for anything beyond Goldman Sachs’s bottom line. Nor should he, according to the meager mores of Wall Street. Goldman, you see, is a "market maker," as Blankfein loves to repeat. This absolves the firm of any fiduciary responsibility for the deals it sets up for its clients. Creating "liquidity" in the markets, Blankfein believes, is Goldman’s only social responsibility. At a hearing of the Senate's Permanent Subcommittee on Investigations on Tuesday, Chairman Carl Levin repeatedly tried to get Blankfein to concede that Goldman was morally wrong to bet on the sly against securities that it had touted as solid investments to its clients. No, no, no, the Goldman CEO demurred, that's not how the financial system works any more. "There's been a change in the sociology of the business in the last 10 to 15 years," Blankfein explained

Did Josh Birnbaum Make a Slip? Did the Senators Catch It?  In the last 45 minutes of the testimony Josh Birnbaum (Co-head of the Structured Products Group (“SPG”) was asked a series of questions by Senator/Dr. Tom Coburn (R.Ok). Senator Coburn produced an internal Goldman report for the fall of 2007 that showed that Goldman had an open short on the stock of Bear Stearns. Coburn asked Josh if he was responsible for that short position. After thumbing through the book Josh finds the report in question and looks back at the Senator, smiles, and says, “This is a firm wide report. I can’t determine if this is my department’s short position or not.” Next Coburn asks, “How did you select the shorts you used?” Josh responded, “We had a macro view. I had a list of stocks that were correlated to the sub prime industry.” For me this is a bit of a bombshell. It shouldn’t be. It was a perfect strategy for the sole reason that it worked. But consider the consequences.

Goldman v. Congress -- Both Are Hiding In Plain Sight From The Voters. -There's plenty of blame to go around. Why should we be surprised that people at Goldman and in Congress and in the real estate market got greedy and followed the herd over the cliff? It's in our genes. Behavioral economists are just beginning to get some respect within the profession for theories that say people act irrationally in certain situations. When we make lots of money, we think it's because we're smarter than everyone else. When we lose lots of money, we look for someone to blame. Why not admit that all of us are subject to such irrational impulses and that, therefore, we should adopt some rules that limit how much risk we can take on without adding capital and requiring more margin, and, above all, impose some tough disclosure and transparency rules. It's been two years since the financial crisis broke into the open. It's about time we passed financial regulatory reforms, as imperfect as they will be.

Casino Royale -  In a rather prescient piece a couple months ago, The Epicurean Dealmaker attributed Goldman Sachs’ parade of public relations nightmares to the fact that the firm is now run by traders.  He writes: This is a trader’s mentality. A trader never apologizes. A trader never admits he made a mistake. A trader never says he’s sorry. To do so, in his mind, would be to admit weakness. Another trader could use such an admission against him in the next trade. By the same token, a trader never sits back and takes it. If someone attacks him, he attacks back, preferably in greater strength, to discourage similar attacks from his opponent or others in the future. Perceived weakness is blood in the water in trading, and it attracts other sharks. I can’t think of a more accurate description as to how Goldman has approached the SEC suit and the political catastrophe that followed. 

Quelle Surprise! Goldman Knowingly Sold Garbage Barges - Yves Smith - As Goldman and the Senate Committee on Investigations are duking out The Battle of the E-Mails, with each side claiming the other has painted a misleading picture, it is becoming pretty clear that Goldman, contrary to its sanctimonious twattle about putting clients first, actually puts its fees first. This should come as no surprise to anyone who had dealt with the industry; While the securities industry had always focused on getting deals done, deregulation has led to changes in industry structure and conduct which in turn unleashed much more aggressive behavior (we discuss this issue long form in ECONNED).  So it is predictable that an e-mail dump would unearth some less than savory conduct. For instance, the Wall Street Journal highlights that Goldman worked with some crappy lenders

Market Manipulation, Systemic Risk and Fraud, Pure and Simple, And It Continues Today - This article by the Financial Times should remove any doubt in anyone's mind that Goldman Sachs was willfully selling fraudulent financial instruments. It appears that they were working in conjunction with Ratings Agencies, Mortgage Origination Firms, and Hedge Funds to cheat investors. "Cheat" means to circumvent or distort the normal price discovery process through misrepresentation, price manipulation, and omissions and distortion of key data.Carl Levin summarized the situation in his opening statement this morning in tying together various Congressional hearings and investigations into aspects of the recent financial crisis and the underlying frauds. It sounds remarkably like the frauds that Enron had so recently inflicted on the American public. In particular, Congressman Levin gave a good description of the key role that derivatives played in this control fraud.

A knife fight is not a mediation - Goldman wasn’t structuring a trade between two clients, as far as IKB and ACA were concerned. It was working to form a business entity called ABACUS 2007-AC1, LTD and underwriting an issue of securities by that entity. The only clients formally involved were IKB and ACA, and they were on the same side of the deal. If this had been an adversarial deal, Goldman would have had no obligation to inform the side that wasn’t paying it whether they were making a good trade. But if this had been an adversarial deal, Goldman would have been advising one party or the other. Both parties could not have been its customers. Imagine you are trying to buy a house. It is contentious. Disputes arise over price, warranties, settlement terms, etc. You would hire an agent, and the other party would hire an agent. Those agents would be different people. The hazards of relying on the same advisor in a difficult negotiation are obvious. IKB/ACA may have been “sophisticated”. They may have been dumb, or corrupt, or unlucky. But, in an adversarial negotiation with John Paulson, they would not have shared the same agent with him. A knife fight is not a mediation.

Goldman and “hope” - On Friday, Goldman published a letter called Goldman Sachs: Risk Management and the Residential Mortgage Market . Here’s a bit of it: In a “synthetic” CDO, two parties enter into a derivative transaction, which references particular assets. By the very nature of a synthetic CDO, one counterparty must be long the risk (i.e., hoping to benefit from an increase in the value of the referenced assets), and the other counterparty must be short the risk (i.e., hoping to benefit from a decrease in the value of the referenced assets).I have made this point before, but I will bore with repetition. Both in theory and in practice, there need be no identifiable party “hoping to benefit from a decrease in the value of the referenced assets”. Historically, in the vast majority of deals, there was no such party. Does anybody wish to dispute this as a factual matter? Mr. Blankfein? Synthetic CDOs began as a tool for balance sheet management by banks.

White House Official: Goldman CEO ‘Not Going to Win Any Popularity Contests’ - Goldman Sachs Chief Executive Lloyd Blankfein earned $68.5 million in 2007 at the height of the credit boom, which worked out to more than $20,000 an hour. On Tuesday, he will earn some of that keep — spending several hours before the Senate Permanent Subcommittee on Investigations to testify about Goldman’s conduct during the boom. And comments by lawmakers and White House officials over the weekend suggest Blankfein will face a tough grilling on Tuesday. “The CEO of Goldman is not going to win any popularity contests when, over a period that ordinary Americans’ pensions, houses et cetera were collapsing in value, they were actually making significant money off of it,” Austan Goolsbee, a member of the White House’s Council of Economic Advisers, said on the ABC News program “This Week” on Sunday.

Blankfein Testimony to the Permanent Senate Subcommittee on Investigations - pdf

Goldman CEO Blankfein: We'd Can Any Wrongdoers - In an interview after Blankfein and several current and former Goldman executives were grilled at length Tuesday by members of the Senate Permanent Subcommittee on Investigations, Blankfein steadfastly defended his firm, as he and the others did during the hearing.  Asked by CBS News Business and Economy Correspondent Rebecca Jarvis whether he could "state unequivocally" that Goldman hadn't run afoul of the law or ethics under his watch, Blankfein responded, "I think that's a broad statement about a firm with 35,000 (employees). It is it is my belief that nothing unethical and nthing illegal has happened but I will tell you if I discovered something like this or any senior person at Goldman Sachs discovered illegal or unethical behavior, we would eliminate that from the firm." Special Section: Wall Street Under Fire

Blankfein Says Firm Doesn’t Need to Disclose Position (Bloomberg) -- Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein told a Senate panel that market-makers have no obligation to tell clients about their own position in a security.  Blankfein, responding to questions from Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations, said the nature of the principal business often puts the firm on the opposite side of customers.  “What clients or customers are buying is they are buying an exposure,” Blankfein said. “The thing we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn’t care what our views are. They shouldn’t care.”

Goldman boss Lloyd Blankfein denies moral obligation towards clients (video) Lloyd Blankfein has admitted that he believes Goldman Sachs has no moral obligation to tell clients it is betting against a product it is asking them to buy." The stark admission – made by the bank's chairman at the end of a more than nine-hour marathon hearing before the US Senate – came in spite of his assertion that "I think people trust us" as he tried to fend off accusations that Goldman inflated the US housing bubble. Senator Carl Levin told the veteran banker that he "wouldn't trust" Goldman as he repeatedly asked whether the bank would disclose its position "when they're buying something you solicit them to buy, and then you're taking a position against them?" "I don't believe there is any obligation" to tell investors, Mr Blankfein responded

Op-Ed Meet the Real Villain of the Financial Crisis - TODAY, we will have the pleasure of watching outraged members of the Senate Permanent Subcommittee on Investigations fire questions at a half-dozen executives from Goldman Sachs. The firm first attracted anger for its return to making billions, and paying its employees millions, right after the financial crisis. And since the Securities and Exchange Commission this month charged Goldman with fraud over an investment tied to subprime mortgages, politicians have turned the firm into the arch-villain of the economic collapse. But the transaction at the heart of the S.E.C.’s complaint is a microcosm of the entire credit crisis. That is, there are no good guys here. It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government.

The Feds vs. Goldman - Goldman isn't dead – far from it. But this new SEC suit officially places it at the center of a raging national discussion about the hopelessly fucked state of American business ethics. As a halting, first-step attempt at financial regulatory reform makes its way toward a vote in the Senate, the government has finally thrown open the door and let a few of the rottener skeletons tumble out. On the surface, the failure-to-disclose rap being leveled at Goldman feels like a niggling technicality, the Wall Street equivalent of a tax-evasion charge against Al Capone. The bank will try and – who knows – might even succeed in defending itself in a court of law against these charges. But in the court of public opinion it was doomed the instant the SEC decided to put this ghastly black comedy of a fraud case on the street for everyone to see

Goldman was hedging–how evil!!!! - According to the Washington Post: Goldman admits it had reduced its exposure to the overheated U.S. property market and had sought to limit possible losses through a strategy that would make money if home prices fell. It says such “hedging” is a routine part of its business and is intended to moderate risk to the firm, an especially vital function when markets shift violently, as they did in 2008. The Post puts “hedging” in quotes like it is some fatuous excuse by Goldman. Let’s see: Goldman is accused of betting against the housing market (that housing prices would fall). It also had other bets that housing prices would rise. It is prudent to not bet the whole firm one way or the other on something so uncertain as housing prices. Having bets on both sides is called “hedging” and is Finance 101.  Goldman Sachs is on the hook for a lot of possible sins, of which it may be indeed guilty. Hedging is not one of them. That the media and politicians can’t even understand hedging is not reassuring when the largest financial reform in a generation is underway.

Goldman executives cheered housing market's decline, newly released e-mails show - Levin said the documents obtained by his committee contradict Goldman's assertion that it didn't seek to profit from the housing downturn. "Goldman made a lot of money by betting against the mortgage market," Levin said. In one of the e-mails obtained by the committee, Goldman's chief financial officer, David A. Viniar, responded to a report that the firm earned $50 million in one day with "short" positions, or bets that the housing market would decline. "Tells you what might be happening to people who don't have the big short," Viniar wrote to his colleagues.  In another e-mail, Goldman executives discussed how the securities of one subprime mortgage lender the company worked with were facing "wipeout" and another collapse was "imminent." Goldman helped this lender bundle and sell its loans to investors. But one executive, Deeb Salem, wrote that the "good news" was that Goldman would profit $5 million from a bet against the very same bundles of loans it had helped create.

New Goldman PR Disaster: Execs Celebrated Subprime Implosion - It’s ironic how the “Goldman was so smart to have shorted subprime” meme is now being turned on its head in the MSM as Goldman’s conduct in the run-up to the crisis is begin re-examined in a new light.The underlying premise of the Goldman defenders is that it is fine for the firm to have laid off its exposures whether via the old-fashioned mechanism of selling them, unbundled, into the market, or the modern way of wrapping them into more complex products. The very reasons that the latter yielded better results at the time are the very same reasons that strategy is being criticized now.First, the products were often so complex as to be difficult for investors to analyze. Crudely speaking, that means you have a bigger universe of potential stuffees, since presumably some would have rejected these exposures had they understood what they were getting. Of course, one might reasonably say, “Don’t buy anything you don’t understand,” but I would hazard that a lot of supposedly professional investors routinely buy products they don’t understand based on a salesman’s explanation.

Deconstructing ABACUS - Goldman’s controversial “ABACUS 2007-AC1″ synthetic CDO turns out to be a very complicated deal. This is not your grandfather’s vanilla mezzanine RMBS synthetic CDO. It is, in some sense, a supersynthetic CDO. There’ve been some excellent posts dissecting the deal, including… Alea: Abacus for Dummies - Bionic Turtle: Goldman’s Abacus illustrated - Sandrew on Finance: Reverse Engineering the ABACUS Timeline Also, the formal prospectus is now available, as well as a marketing “flipbook“. In what way was ABACUS a “supersynthetic CDO”? Despite notionally having seven classes of investors, just two classes of notes were actually sold. When I read this at Alea, it blew my mind. The only notes that were sold were AAA debt, from senior (but not “super senior”) tranches. I didn’t understand how this could work.

Analyst: Paulson's role hidden in Goldman CDO -Goldman Sachs said yesterday he didn't know about hedge- fund titan John Paulson's involvement in engineering the deal.  "It just changes the whole dynamic of the structure," Eric Kolchinsky, told a Senate subcommittee about not knowing that Paulson helped put together the collateralized debt obligation in question. It was "something that I would have wanted to know." The testimony by Kolchinsky, a former analyst at Moody's Investors Service, adds a new twist to the SEC's case against the gold-plated bank and a vice president, Fabrice Tourre, both of whom are accused of misleading investors by withholding information that Paulson had a role in selecting at least some of the collateral used in the controversial CDO.

Goldman Sachs Loses Room to Maneuver After Public Testimony -- Goldman Sachs Group Inc may have backed itself into a corner by speaking out quickly to counter fraud claims by the U.S. Securities and Exchange Commission.  In the two weeks since the SEC filed its lawsuit, Goldman Sachs has released multiple written defenses, sent executives to Capitol Hill for sworn testimony and put Chief Executive Officer Lloyd Blankfein on television to explain the firm’s conduct as the housing market soured. While broadcasting its story, the New York investment bank also has given regulators, lawmakers and law enforcement agencies material to scour for contradictions that could weaken its defense. While locking in testimony this early in the litigation process posed risks, it was part of Goldman Sachs’s strategy, according to a person with direct knowledge of the firm’s defense. Tourre’s public statements make it less likely that he could change his story later and negotiate a lesser penalty with the SEC in return for information that could be damaging to the firm or other executives

FT Alphaville » Get Goldman - Goldman is the butt of prime-time TV jokesters, the subject of a Justice Department probe, home of the banksters, a lightening rod for anti-capitalists, a danger to the American public. Merrill Lynch downgraded Goldman stock to “neutral” earlier on Friday. Neutral? Try “FAIL.”The risk for the banking sector as a whole is that we now get rampant reputational contagion. Was Goldman a badder bank than other banks? No. Did other firms put their own free-wheeling interests before those of their clients? Yes.Is Goldman now a victim of its own, home-grown, blinding arrogance? Absolutely. Lloyd Blankfein, now the public face of Wall Street, not just his own firm, passed up the chance to offer an open act of contrition earlier in the week when appearing in front of Carl Levin’s subcommittee on Capitol Hill. For that alone he should now be fired. Don’t listen to us. Listen to the market:

It's hard not to be a hater -THE financial industry caused a very serious recession, got bailed out, and appears to have resumed business as usual, while the typical American pays the bill. All the more galling, jubilant emails have emerged from the smuggest of them all, Goldman Sachs, revealing that their short positions paid off as the housing market collapsed. This may explain the popular perception that the economy is a zero-sum game where if finance wins everyone else loses. But really the opposite is true. When the financial system functions we all benefit. The problem was not that a big bank bet against the housing market—most banks were far too exposed to it. If Lehman had hedged itself better, it might still be here, and big banks would not have needed tax dollars to survive.

Goldman set to settle SEC fraud case soon: report (Reuters) - Goldman Sachs may soon settle its fraud case with the U.S. regulator, the New York Post reported on Thursday, opting to end a legal fight rather than endure a repeat of the public flogging it received this week. The Post report, citing sources familiar with the matter, said Wall Street's top investment bank was mulling closing the fraud case with the U.S. Securities and Exchange Commission (SEC) to limit damage to its reputation. "It's almost a certainty that there will be a settlement," the paper quoted a source as saying. Goldman could not immediately be reached for comment in London. Goldman Chief Executive Lloyd Blankfein and other executives faced a blistering cross-examination from U.S. lawmakers about the company's ethics and behavior toward its clients on Tuesday.

Fraudonomics  - Because in the 21st century, fraud is as American as baseball, apple pie and Chevrolet Volts—fraud’s all we got left, Doc. Scare off the fraud with Obama’s “scrutiny,” and the entire pyramid scheme collapses in a heap of smoldering savings accounts. That’s how an acquaintance of mine, a partner in a private equity firm, put it: “Whoever pops this fraud bubble is going to have to escape on the next flight out, faster than the Bin Laden Bunch fled Kentucky in their chartered jets after 9/11.”And that’s why this SEC suit accusing Goldman Sachs of fraud is really just a negotiating bluff to give Obama’s people some leverage—or it’s supposed to be, anyway—according to the PE guy. He dismissed all the speculation that the fraud investigations would turn on other obvious villains like Deutsche, Merrill, Paulson & Co., the Rahm Emmanuel-linked Magnetar and so on. “You don’t get it, Ames. Even Khuzami, the SEC guy in charge of the Goldman case, is a fraud; the fucker was Deutsche’s general counsel when they pulled the same CDO scam as Goldman. You have no idea how deep this goes.”

American Baby - Citizens are discovering that a very large percentage of people whom they used to admire and envy for mouth-watering financial success earned a large portion of that success by cheating, by gaming the system, and by rigging the rules in their favor. What seems to outrage many Americans even more is that these very financiers do not seem to recognize that they have violated the implicit social norms almost everybody else seems to accept. They hide behind a defense of arrogance, superciliousness, and moral obliviousness which makes most Americans' teeth grind in frustration.This is a dangerous situation for the plutocracy. For, when you get right down to it, most Americans are not really interested in supporting a system that is designed to preserve the wealth and privileges of those who have already made it to the top.

Did Goldman Sachs commit a crime? - Things keep getting worse for Goldman Sachs. Late yesterday news broke that federal prosecutors are looking into whether to bring criminal fraud charges against the Wall Street firm. (The outstanding SEC lawsuit involves only civil charges.) No word yet on any details about what those new charges may entail. What to think? I am going to take my cue from Charlie Munger, Warren Buffett's long-time business partner, and a big owner of Goldman shares (via Berkshire Hathaway).  While Mr. Munger thinks Goldman did nothing illegal, the firm was engaged in "socially undesirable" activities, he said in an interview after the SEC lawsuit was filed."They were very competitive in maximizing profits in a competitive industry that was permitted to operate like a gambling casino," Mr. Munger said. "The whole damn industry lost its moral moorings."

What is "social license," and has Goldman Sachs lost it? -  It's been a bad week or two for Goldman Sachs. On April 16, the Securities and Exchange Commission charged the firm with fraud for the way it structured and sold some junky mortgage-related products. Earlier this week, its top executives came off as responsibility-evading jerks when testifying before Congress. And then on Thursday, the Wall Street Journal reported that the SEC had referred Goldman's case to the Justice Department. I'd argue that Goldman is entering dangerous territory. The firm is in danger of losing what may be its most valuable asset: its social license. Social license is a vague term that you see bandied about more and more in the corporate world. It's something like reputation. Social license describes how a company plays with others and how it responds to problems. If a company has social license, it behaves in such a way that other businesses and institutions want to do business with it, and governments are more likely to give it permission to operate.

"Banging the Close" and Other Urban Truths - I couldn't believe my eyes as I read the stories above. A Hedge Fund (and former employer), Moore Capital, caught manipulating closing prices and the SEC caught timing the release of GS fraud charges to further their agenda. What's next? Will the experts soon assert, with somber gravitas, that life, in fact, exists....on Earth? That is, the incredulous implication of the above articles (and many others these days) is to me, incredulous. Do we all really believe we take up no space? politicians and bureaucrats don't play politics? fund managers don't "window dress", "paint the tape" or "bang the close"?

Goldman Sachs adds to its ranks of lobbyists - Over the past two years, as it emerged from the financial crisis with a reinforced image as Wall Street's top bank but also the No. 1 target of public ire, Goldman has built up a 12-person government affairs office in Washington to help the firm get its message to legislators and regulators. The team has gotten down in the trenches with the other large banks, meeting multiple times in recent months with members of key House and Senate committees working on the regulatory overhaul. Earlier this month, for example, Goldman sent executives from New York to Washington, where they accompanied the firm's lobbyists to a meeting with the staff of Sen. Blanche Lincoln (D-Ark.), chairman of the Senate Agricultural Committee and author of a proposal that would force banks to spin off their lucrative derivatives-trading desks.

How to sell without selling? - FELIX SALMON links to an interesting bit of writing from someone at Goldman Sachs' European sales desk: Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant. Aggregate loss of our clients on just these 5 trades along is 1bln+. In addition team feels that recognition (sales credits and otherwise) they received for getting this business done was not consistent at all with money it ended making/saving the firm. Mr Salmon adds: Clearly Goldman’s clients aren’t buying what Lloyd Blankfein is selling: the idea that they’re just arm’s length counterparties who know what they want to buy and are just looking for the best price. Fair enough. I'm not really sure what else Goldman was supposed to do, however.

Prosecutors Said to Start Inquiry at Goldman - NYTimes - Federal prosecutors have opened an investigation into trading at Goldman Sachs, raising the possibility of criminal charges against the Wall Street giant, according to people familiar with the matter. While the investigation is still in a preliminary stage, the move could escalate the legal troubles swirling around Goldman. The Securities and Exchange Commission, which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to prosecutors for the Southern District of New York, which has now opened its own inquiry. Goldman has vigorously denied the accusations by the S.E.C., which accused Goldman of defrauding investors involved a complex mortgage deal known as Abacus 2007-AC1.

SEC Official Who Surfed Tranny Porn To Deal With Stress Of The Job– Not Alone! - A couple months ago, we discussed an SEC worker who got in a bit of trouble with his employer for checking out a little porn while on the job. The unnamed supervisor made at least 1,800 logged attempts to check out some sites that included,,, and, which, he admitted, “were kind of distraction per se.” Since then, when mentioning the Commission, we’ve casually suggested (by stating outright) that the majority of the staff spends its time looking at porn instead of, for instance, nailing Allen Stanford or Bernie Madoff. But we were just kidding! We had no reason to believe anyone but the tranny fetishist did this. A little hyperbole, etc. You know how it goes. As it turns out, though, the guy is actually in some good company. Like he told the lawyer sent in to investigate the matter, the hundreds attempts to get on alone in one day was an outlet to deal with the stress of the job. And according to a new probe by the SEC inspector general, over 30 of his colleagues, who ramped up their porn viewing time since the crisis started, have the same excuse. The world was ending! How could they be expected to deal with the global financial meltdown without Anal Sins 9-5? Also let’s give props where props are due. Some of these people (like the attorney who “admitted to downloading so much pornography to his government computer that he exhausted the available space on the computer hard drive and downloaded pornography to CDs or DVDs that he accumulated in boxes in his office”) are great problem solvers. They’d probably do a good job of catching frauds if they weren’t looking at tranny tits all day.

SEC Staffers Engorge Hard Drives In Flaccid Economy - According to an agency monitoring activities of the Securities and Exchange Commission, senior staff members spent hours looking up pornography on government computers instead of monitoring the economy. The SEC’s inspector general initiated 33 investigations of employees who perused porn sites on the job within the past five years, according to a leaked memo. According to the document, 31 of those investigations occurred in the nearly three years the financial system was unstable and almost crashed. One senior member spent up to eight hours a day watching and downloading pornography on company computers. When he ran out of room on his hard drive, he burned the images and videos to disks which he kept in his office.One accountant was blocked more than 16,000 times in a one-month period from adult sites, but was still able to collect sexually provocative images on his hard drive

SEC porn scandal: Political payback for fraud suit against Goldman Sachs? - The reemergence of a Securities and Exchange Commission porn scandal may be political payback for the agency's fraud suit against Goldman Sachs, some officials suspect. News of salacious Internet sex surfing by dozens of SEC supervisors actually broke months ago, but it got new life after the commission's April 16 vote to act against the financial powerhouse. GOP lawmakers have loudly slammed the decision, government sources noted. Asked whether there was any connection between the lawsuit and the recently leaked inspector general's report on downloading porn, SEC spokesman John Nester declined to comment.

AIG May Be on the Hook in Lawsuits Against Goldman Sachs Board… (Bloomberg) -- American International Group Inc. may be required to pay to defend lawsuits against Goldman Sachs Group Inc.’s top executives, including Chairman and Chief Executive Officer Lloyd Blankfein, under directors and officers insurance policies held by the company.AIG, which was rescued from collapse by the U.S. government, sold so-called Side A directors and officers’ coverage to New York-based Goldman Sachs, according to a person with knowledge of the policy. Goldman Sachs was sued last week by the U.S. Securities and Exchange Commission, which claimed it misled investors about collateralized debt obligations tied to subprime mortgages in 2007. “If it were a derivative suit against Goldman, defense costs would be covered, and I’d prefer not to be a primary on the policy,” said John Degnan, vice chairman and chief operating officer of AIG competitor Chubb Corp., while answering a question about Goldman Sachs on an April 22 earnings call.

When You Lie Down With Them Dept: Morgan Stanley Has 69% Tier 1 Capital Exposure to the PIIGS - That statistic about Morgan Stanley was an eye opener in terms of percent of capital exposure. No wonder Angie Merkel is playing hard to get, holding out for more than another back rub. Morgan Stanley looks like it done slipped in the pig wallow.  Gentlemen, start your presses. 

JPMorgan Has Biggest Exposure to Debt Risks in Europe (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain, according to Wells Fargo & Co. JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote. “Regulatory data suggests JPMorgan’s exposure is largest in aggregate, but Morgan Stanley held the largest aggregate exposure to the PIIGS relative to Tier 1 capital,” the analysts wrote. Overall U.S. bank “exposure to Greece is lower than exposure to Ireland, Italy and Spain.”

Bronte Capital: The arithmetic of bank solvency – part 1 = First observation: at zero interest rates almost any bank can recapitalize and become solvent if it has enough time.  Imagine a bank which has 100 in assets and 90 in liabilities.  Shareholder equity is 10. The only problem with this bank is that 30 percent of its assets are actually worthless and will never yield a penny.  [This is considerably worse than any major US bank got or for that matter any major Japanese bank in their crisis.]Now what the bank really has is 70 in assets, 90 in liabilities and a shareholder deficit of 20.  However that is not what is shown in their accounts – they are playing the game of “extend and pretend”. Now suppose the cost of borrowing is 0 percent and the yield on the assets is 2 percent.  [We will ignore operating costs here though we could reintroduce them and make the spread wider.]This bank will earn 1.4 in interest (2 percent of 70) and pay 0 in funding cost (0 percent of 90).  It will be cash-flow-positive to the tune of 1.4 per annum and in will slowly recapitalize.  Moreover provided it can maintain even the existing level of funding it will be cash-flow-positive and will have no liquidity event.  (It does however need to be protected from runs by a credible government guarantee.)

Snow Business - Deep in Fantasyland: White House touts GM loan repayment: . . . the White House is trumpeting the news. Here's a blog post by chief White House economic adviser Larry Summers: What a difference a year makes. Just about a year ago, the American auto industry was on the brink of collapse. Today, General Motors announced that it has repaid its $6.7 billion loan to the U.S. government in full five years ahead of schedule . . . However, a more independent opinion comes from the man the Democrats appointed to oversee TARP, Neil Barofsky. Barofsky told Fox News that while it's "somewhat good news," there's a big catch."I think the one thing that a lot of people overlook with this is where they got the money to pay back the loan. And it isn't from earnings. ... It's actually from another pool of TARP money that they've already received," he said Wednesday. "I don't think we should exaggerate it too much. Remember that the source of this money is just other TARP money."

Goldman Sachs Underwriting Market Shares in Subprime RMBS and CDOs (bar graphs) Abacus for Dummies 

A Still Moment - George W. Bush was onto something in the fall of 2008 when he remarked apropos of the Lehman collapse: "...this sucker could go down."   It's my serene conviction, by the way, that this sucker actually is going down, right now, even as I clatter away at the keys -- perhaps in slow motion, so that not many other bystanders have noticed yet, and the few who have noticed are mostly too crosseyed with nausea to speak.  "Going down" will mean a society with no money and an infrastructure for daily life that requires gobs of money to run, and a populace too dazed, confused, and inflamed to do anything useful in the way of organizing new infrastructures for daily life for their new circumstances. In retrospect, the Great Depression of the 1930s will look like "The Philadelphia Story" compared to what we wake up to ten years from now.

Goldman Said to Have Been in Other Mortgage Deals – NYTimes. The legal storm buffeting Goldman Sachs continued to rage Tuesday just ahead of what is expected to be a contentious Senate hearing at which bank executives plan to defend their actions during the housing crisis.  Senate investigators on Monday claimed that Goldman Sachs had devised not one but a series of complex deals to profit from the collapse of the home mortgage market. The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission. The S.E.C. has accused Goldman of defrauding investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.

Deutsche Bank Faces U.S. Mortgage Securities Suit – NYTimes (Reuters) - Deutsche Bank faces a U.S. class-action lawsuit over mortgage-related securities it helped arrange, Germany's biggest lender said in its first-quarter report. But it tried to distance itself from a whirlwind sweeping Wall Street rival Goldman Sachs by revealing it had not been informed by the U.S. Securities and Exchange Commission (SEC) of any imminent charges.  It said the Federal Home Loan Bank of San Francisco had filed suit regarding the role a number of financial institutions, including Deutsche Bank affiliates, had played as issuer and underwriter of certain mortgage pass-through certificates purchased by the San Francisco-based bank. "In addition, certain affiliates of Deutsche Bank, including DBSI, have been named in a putative class action pending in the United States District Court for the Eastern District of New York regarding their roles as issuer and underwriter of certain mortgage pass-through securities," it said.

Follow the money - What happened to housing and financial markets over the last decade? To find out, follow the money. According to Yale Professor Robert Shiller's data, the run-up and collapse of U.S. home prices over the last decade were without precedent over the previous century. Where did U.S. households get the money they needed to bid up house prices so high? The answer is, they borrowed it, with household mortgage debt growing more than twice as fast as GDP between 1999 and 2006. And where did the money come from that the institutions lent to U.S. households? The loan originators, who provided the initial mortgage loans, quickly sold them off to loan aggregators. In the 1980s these loan aggregators were primarily the government-sponsored enterprises Fannie Mae and Freddie Mac. But by the final days of the housing boom, the loan aggregators were more often private institutions who bundled the mortgages into asset-backed securities.OK, so where did the loan aggregators get the money with which they bought the mortgages from the loan originators?

Gambling with Other People's Money - How Perverted Incentives Caused the Financial Crisis - Beginning in the mid-1990s, home prices in many American cities began a decade-long climb that proved to be an irresistible opportunity for investors. Along the way, a lot of people made a great deal of money. But by the end of the first decade of the twenty-first century, too many of these investments turned out to be much riskier than many people had thought. Homeowners lost their houses, financial institutions imploded, and the entire financial system was in turmoil. How did this happen? Whose fault was it? In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. .

Number of the Week: $132 Billion of Lost Synthetic Mortgage Bets - As the Securities and Exchange Commission and Goldman Sachs head toward their day in court, it’s high time to take a look at how deals like the one at the center of the case — a synthetic mezzanine ABS CDO called Abacus 2007-AC1 — helped turn the U.S. housing bust into a global economic disaster.The names of the deals serve only to obscure their true nature, so we’ll just call them a betting game. This game allowed investors — including banks and insurance companies such as UBS, Merrill Lynch, AIG and Germany’s IKB — to make huge side bets on the performance of subprime borrowers, dramatically increasing the amount of money that would have to change hands if things went wrong.

Moody's Downgrades Another $9.9 Billion In RMBS - The latest downgrades from Moody's are part of a host of cuts announced in April by the ratings agency. A couple of weeks ago, Moody's downgraded $42.2 billion in subprime RMBS. Separately, S&P said it revised some of its criteria assumptions for rating RMBS, saying its loss estimates for some loan pools may increase. RMBS helped feed the subprime boom, winding up in the hands of investment funds or in more complicated pools known as collateralized debt obligations, in which underlying mortgage pools were ultimately sliced into different risk tranches

Why Adam ate the apple - In my last post, I discussed how the run-up of U.S. mortgage debt during the last decade was funded. One important element was the sale of commercial paper that helped fund the purchase of some mortgage-related securities. Here I comment on why it was hard for some institutions to resist buying that commercial paper. I recently read a very interesting discussion of the role of commercial paper in the financial crisis by NYU professors Marcin Kacperczyk and Philipp Schnabl. One of the stories they recounted was that of Reserve Primary Fund, ...the Wall Street Journal provided these further details:

 Self-Defense on Predatory Lending - I don't do well in back-and-forth blog spats, but I want to reply to the anonymous blogger at The Economist, who is jumping to the conclusion that I am ignorant, when I believe I know what I am talking about. The issue is predatory lending, and he points out that mortgage brokers could make a profit by making risky loans and selling them to investors. But that is not predatory lending, as I would define it. The mortgage broker is taking advantage of the investor in the loan, not the borrower (mortgage brokers try to take advantage of borrowers, too, but that is another story). When I was with Freddie Mac, we assumed that mortgage brokers were scum who would try to pawn off bad loans, and we took all sorts of steps to try to avoid buying such loans. It was not because we felt sorry for the borrowers. It was because we did not want to lose money.

U.S. Role in Mortgage Market Grows Even Larger - The U.S. government's massive share of the nation's mortgage market grew even larger during the first quarter.Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance. The increase was driven by a jump in the share of loans backed by Fannie Mae and Freddie Mac, the government-owned housing-finance giants.By providing a steady source of liquidity to the mortgage market, the government has helped housing markets to stabilize. However, "Fannie and Freddie have to get smaller and less relevant in order to revamp them, and instead, every day they're getting bigger and bigger and bigger,"

96.5% of Mortgages Backed by Government entities in Q1 - From WSJ: U.S. Role in Mortgage Market Grows Even Larger Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance. The following graph from San Francisco Fed Senior Economist John Krainer puts this in perspective (from Oct 2009): Recent Developments in Mortgage Finance As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.

Competition tough in failed bank real estate asset auctions (Reuters) - Bidding on real estate assets of failed banks has become aggressive, as investors searching for distressed opportunities in the sector, wait in vain for property to come to the market. "We were all joking that the distressed cycle lasted about two months," "The flow of capital is staggering right now to the property markets, including the debt markets." Starwood, a U.S. private equity firm which has its roots in real estate, teamed up with other investors to buy a pool of assets of failed Corus Bank in October and has been beaten while competing for other assets by wide margins, Sternlicht said. In the Corus deal, the Starwood group paid about 60 cents on the dollar. Corus had a large portfolio of distressed construction loans, many of them tied to condominiums

Reforming Housing Finance - NYTimes -  The Treasury secretary is bedeviled over what to do with Fannie Mae and Freddie Mac, the bailed-out mortgage giants that have cost the taxpayers upward of $125 billion with as yet no end in sight. Shutting them down is not so easy because — get ready for this — since their bailout, in September 2008, Fannie and Freddie have become more, not less, important to the U.S. housing market. At present, 9 of every 10 new mortgages are sold to, or guaranteed by, arms of the U.S. government, the majority of them to Fannie and Freddie. Which is to say, without Uncle Sam, it is not clear that the private market for housing would even exist.

CFED: Weathering the Storm: Have IDAs Helped Low-Income Homeowners Avoid Foreclosure? -Homeownership has always been an essential ingredient in the American dream and is one of the most important means by which low-income and minority households can build wealth. But as we know all too well from recent years, homeownership is by no means a risk-free proposition. Foreclosure can dash that dream, stripping owners of hard-earned investments. It can also devastate a community, leaving behind vacant houses that drag down property values for surrounding homes and drain tax dollars from cash-strapped local governments.Strategies that promote homeownership and deter foreclosure, such as Individual Development Accounts (IDAs), can break this cycle. New research conducted by CFED and the Urban Institute substantiates the claim that if affordable home ownership is done right – that is, with savings, financial education and equity rather than just debt – low-income and minority individuals can be successful homeowners.

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.

Home Tax Credit a Costly Failure - From the NY Times: Home Tax Credit Called Successful, but Costly Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible. There is no question this program was very costly. And why is the Treasury confusing activity with accomplishment? Sure sales briefly surged, but were new households formed? How many new jobs were created?

METRO FORECLOSURE HOT SPOTS BUCK NATIONAL TREND IN FIRST QUARTER WITH ANNUAL DECLINES IN FORECLOSURE ACTIVITY RealtyTrac® (, the leading online marketplace for foreclosure properties, today released its Q1 2010 Metropolitan Foreclosure Market Report, which shows that cities in California, Florida, Nevada and Arizona once again accounted for all top 20 foreclosure rates in the first quarter among metropolitan areas with a population of at least 200,000 even while the majority of those top metros reported decreasing foreclosure activity from the first quarter of 2009.California accounted for 10 out of the top 20 metro foreclosure rates, followed by Florida with seven, Nevada with two and Arizona with one. Foreclosure activity declined on a year-over-year basis in 14 of the cities in the top 20 and in eight of the cities in the top 10. In contrast, foreclosure activity in the first quarter increased on an annual basis in 159 of the 206 metro areas tracked in the report, and foreclosure activity nationwide increased 16 percent from the first quarter of 2009.“The decreasing foreclosure activity in some of the nation’s top foreclosure hot spots in the first quarter is largely the result of government intervention and other non-market influences, and not a sure signal that those areas are out of the woods yet when it comes to foreclosures,”

'Strategic’ Mortgage Defaults Jump to 12% of Total (Bloomberg) -- Decisions by U.S. homeowners to walk away from mortgages they can afford account for an increasing share of defaults, according to Morgan Stanley. About 12 percent of all mortgage defaults in February were “strategic,” up from 4 percent in mid-2007, New York-based Morgan Stanley analysts wrote in a report today. Borrowers are more likely to stop paying their mortgages the higher their credit scores and the larger their loans, the analysts said. Defaults by borrowers who owe more than their homes’ values are among the biggest risks for the housing market, according to analysts including Zelman & Associates’ Ivy Zelman and Amherst Securities Group LP’s Laurie Goodman. Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers’ principal amounts, instead of just the payments they make, to address the issue.

First American CoreLogic: House Prices Decline 2.0% in February - The Fed's favorite house price indicator from First American CoreLogic’s LoanPerformance ...From LoanPerformance: Home Price Index Shows First Annual Increase in Over Three Years, But Shadow Inventory and End of Tax Credit Program May Result in Further Declines National home prices, including distressed sales, increased by 0.3 percent in February 2010 compared to February 2009, On a month-over-month basis, the national average home price index fell by 2.0 percent in February 2010 compared to January 2010, This graph shows the national LoanPerformance data since 1976. January 2000 = 100. The index is up 0.3% over the last year, and off 30.6% from the peak.

Home Prices Fall in Major Cities - More than half the cities in the Case–Shiller 20-city composite index saw year-over-year declines in house prices for the Dec/Jan/Feb time period. This news identifies further weakness in housing markets, indicating that even with government supports, home prices are not sustainable. During the Dec/Jan/Feb timeframe, home prices declined in 19 of the 20 cities in the 20-city composite. These include Phoenix, LA, San Francisco, Denver, DC, Miami, Tampa, Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, Las Vegas, New York, Cleveland, Portland, Dallas, and Seattle. San Diego showed a one point increase.Most cities showed a one- to two-point drop over the three months starting in December. Portland showed the biggest decrease, down by over 6 points in the index, followed by Chicago, down almost 5 points, and Seattle, down by 4 points.

Case-Shiller House Prices "mixed" in February - These graphs are Seasonally Adjusted (SA). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs. The monthly data includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities). The first graph shows the nominal not seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 30.0% from the peak, and up slightly in February (SA).The second graph shows the Year over year change in both indices. The Composite 10 is up 1.4% compared to February 2009.The Composite 20 is up 0.6% compared to February 2009. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller, by Metro Area (April Update) The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, fell slightly in February from a month earlier. The index rose 0.6% from a year earlier, while a 10-city gauge rose 1.4%, marking the first annual gains in both measures since December 2006. But 11 out of 20 cities still experienced year-over-year declines in home prices. On a month-to-month basis prices fell 0.9% in February from January in the 20-city index and 0.6% in the 10-city index.  Nineteen of 20 metro areas declined on a monthly basis, while 14 have now fallen for at least four straight months. In six cities — Charlotte, Las Vegas, New York, Portland, Seattle and Tampa — prices stood at their lowest point since home prices peaked three to four years ago. “These data point to a risk that home prices could decline further before experiencing any sustained gains,”

We Have Met the Housing Bottom, Maybe - For the first time since December 2006, both the Case-Shiller 10-city housing index, and the 20-city housing index, show year-over year growth.  That's good news . . . but don't pull out the Veuve Cliquot just yet.  There's a lot of variation in those numbers.  More than half the cities in the 20-city index still show year-over-year declines; it's just that a bunch of the other cities showed big bounces, particularly in California.   Of course, California was one of the bubbliest states, so that's great news . . . but Las Vegas was still free-fallin' for most of 2009.  Overall, aside from the "dead cat bounce" in California, and my own city with its government expansion in full flower, the downside news is worse than the upside.

Trouble ahead - THE good news is that according to the Case-Shiller index of home prices, American home values showed an increase in value over the previous 12 months, the first year-on-year increase in roughly three years. The bad news is that the year-on-year rise was almost entirely due to the massive declines in home values that were taking place early last year. From January of 2009 to February of 2009, prices fell 2.2%. From January to February of this year, prices fell only 0.8%. Voila: a year-over-year increase. It's hardly encouraging news, however. Just last week Standard & Poors warned that based on uncertainty surrounding the seasonal adjustment factor it regarded the unadjusted data is more reliable than the seasonally-adjusted data. Looking at the unadjusted series, we see that both the 10-city and 20-city indexes declined, month-on-month, as did 19 of the 20 individual markets.

Homeownership Falls Further -The homeownership rate fell further last quarter, and is now at its lowest level in a decade, according to a Census Bureau report released today.The homeownership rate — measured by the percentage of occupied housing units that are occupied by their owners — had been rising in the 1990s and early 2000s partly because of more lax mortgage lending, and partly because of demographics. That is, the population has been aging, and older people are more likely to own their own homes.

Q1 2010: Homeownership Rate Lowest Since Q1 2000 - The Census Bureau reported the homeownership and vacancy rates for Q1 2010 this morning. Here are a few graphs ...The homeownership rate declined to 67.1%. This is the lowest level since Q1 2000. The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%. A normal rate for recent years appears to be about 1.7%.  This leaves the homeowner vacancy rate about 0.9% above normal. This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 675 thousand excess vacant homes.

Meet the ownership society - HERE'S your chart of the day, from Calculated Risk: The economy has now erased all of the increase in the homeownership rate resulting from the bubble years. Based on the dynamics of the crisis, the rate will likely fall a bit more, but it probably won't give back the entirety of the increase from 1994 to peak (unless interest rates return to 1980s levels). Why? The age factor:The homeownership rates by age of householder for first quarter 2010 were highest for those age 65 years and over (80.6 percent) and lowest for the under 35 years of age group (38.9 percent). The rates for those under 35 years of age and the 55 to 64 age group were lower than their respective rates a year ago, while the other age groups shown were not statistically different from their corresponding rates in first quarter 2009.

Freddie Mac: 90+ Day Delinquency Rate at 4.13% in March - Note: Freddie Mac reported the serious delinquency rate decreased in March from February, but that is only after the previous months were revised higher. Also there might be some distortion from the modification program - loans in trial mods were considered delinquent until the modifications were made permanent. Freddie Mac reported that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business decreased to 4.13% in March 2010, down from 4.20% in February - and up from 2.41% in March 2009. "Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..."

‘Strategic’ Mortgage Defaults Reach 12%, Morgan Stanley Says (Bloomberg) -- Decisions by homeowners to walk away from mortgages they can afford are accounting for more defaults, according to Morgan Stanley. About 12 percent of all mortgage defaults in February were “strategic,” up from about 4 percent in the middle of 2007, New York-based Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report today.Borrowers with higher credit scores and larger loans are more likely to stop paying their mortgages even while staying current on other consumer debt of at least $10,000, the analysts wrote, based on analysis of data from Transunion LLC

Squatters: 4.4 Million and Counting - The above table from the FDIC and Foresight Analytics reveals the steady climb in the number of people living in their homes but not paying for them. The data, which go back 9 quarters (and include an estimate for the first quarter of 2010), show that 14% of the approximately 52 million residential mortgages outstanding in the U.S. were delinquent in the first quarter. This amounts to 7.3 million mortgages. Only 5.5% were on nonaccrual status, however. This amounts to 2.9 million mortgages. Nonaccrual means the lender is no longer posting income on the loan. Depending on the length of time the loan has failed to accrue, foreclosure proceedings may have already begun (with eviction to follow at some point), but not necessarily.

Private mortgage insurers return to market - latimes - The low-down payment mortgage landscape is changing.The Federal Housing Administration, which insures lenders for losses incurred should a borrower not make his payments as promised, is pulling in its horns in an effort to remain solvent in the face of a rising number of delinquencies and foreclosures.At the same time, though, some of the half a dozen private companies that provide lenders with similar protection against defaults are quietly reentering the market, a market they all but vacated when the housing sector tanked.

Real estate: Flipping houses is back in South Los Angeles… Flipping homes is back.Lured by steep discounts on bank-owned properties, investors are sifting through the wreckage of Southern California's real estate bust, snapping up foreclosed homes in hopes of making a quick killing. The rapid-sale rebound comes amid a general recovery in housing prices and sales, and the epicenter is South Los Angeles.MDA DataQuick, the real estate research firm, ranked Southern California Zip codes by frequency of flips, which it defined as homes resold within three weeks to six months of purchase. Three of those Zip codes were in South Los Angeles, and two others were in the nearby unincorporated county communities of East Compton and Willowbrook.In Watts, about 1 out of every 6 homes sold during the final three months of 2009 was flipped, making it the neighborhood with the highest concentration of flipped properties in all of Southern California, DataQuick said.

Where to Buy, Where to Rent… When should you rent versus buy? It’s a question lots and lots of people are asking these days. Armed with intriguing new post-crash data on the relative costs of renting versus buying, The New York Times’ David Leonhardt suggested that the significant decline in real estate prices was making buying a home a much better proposition in a growing number of communities across the country. (The Times offers a great interactive rent-or-buy tool, if you’re currently thinking about this).Leonhardt’s analysis provoked an intriguing debate among many of the web’s most thoughtful economics commentators. Ryan Avent, writing at Free Exchange, urged caution. Felix Salmon thinks housing prices still have a ways to fall, especially as inflation eats away at them. Robert Shiller, the Yale economist who initially identified the housing bubble, and the tech bubble before that, also believes real estate prices may still have further to fall. Leonhardt replies thoughtfully here and here

Real House Prices and the Unemployment Rate - Earlier today S&P released the Case-Shiller house price indexes for February, see: Case-Shiller House Prices "mixed" in February  Below is a comparison of real house prices and the unemployment rate using the First American Corelogic LoanPerformance national house price index (starts in 1976) and Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter. This is an update to a post from almost a year ago. The two previous national declines in real house prices are evident on the graph (early '80s and early '90s). The dashed green lines are drawn at the peak of the unemployment rate following the peak in house prices.  The unemployment rate peak in 2009 is likely, but not certain.

Household Leverage and the Recession - Atif Mian and Amir Sufi offer “Household Leverage and the Recession of 2007 to 2009″ (older ungated draft here) which uses county-level data to demonstrate a connection between the scope of household indebtedness and the onset of the recession: We sort counties according to the increase in the household debt to income ratio from 2002 to 2006, and we refer to counties with large (small) increases in leverage during this period as high (low) leverage growth counties. We find that the recession both began earlier and became more severe in high leverage growth counties relative to low leverage growth counties.

GDP Growth: It’s the Inventories Stupid! - This is in the preemptive strike category. It seems from initial reports that no one bothered to notice that half of this quarter's GDP growth (1.6 percentage points) was driven by inventory accumulation. If we pull out inventories, final demand grew at a 1.6 percent annual rate, almost exactly the same as the 1.7 percent rate in the 4th quarter of 2009 and the 1.5 percent rate in the 3rd quarter of 2009.In other words, we are still looking at a very weak economy; one far weaker than would be expected coming out of such a severe downturn and one which may not even be growing fast enough to create any jobs at all.

As Recession Ebbs, Many Still See Gloom - THROUGH recession after recession over the last four decades, Americans remained more optimistic than pessimistic about their own futures, even when they grew very worried about the overall economy. But that ended during the 2007-9 downturn. More people thought their own financial situation was going to get worse than thought it would improve. The Conference Board has been asking consumers the same questions since 1967 as it compiles its consumer confidence index. Three of the questions deal with forecasts of what will change over the next six months, but they differ in perspective. Both of those questions seek an assessment of the overall economy, and at the bottom of recessions there has usually been a lot of gloom.

Albert Edwards: Global economy to roll over in six to nine months’ time - SocGen’s Albert Edwards was out with a note today which is in line with my calls for a marked slowing of the economy toward the end of this year. He indicates that the rate of change in leading indicators in the real economy and in markets is rolling over right now. Edwards writes that this suggests softness in six-to-nine months I like his analysis because it depends on first derivatives or the rate of change rather than absolute levels which are misleading at turning points (see Has the increase in U.S. jobless claims peaked? from March 2009 for an example of first derivatives presaging the end of recession).  Remember, a recession begins from a cyclical peak in economic activity. So, the economy is rising until that point. Analysts looking at absolute levels only will miss the slowing in the rate of change.

Collapse of the Standard of Living in the USA - A series of recent studies conducted by the Pew Research Center shed new light on the scope of the economic crisis in the US and the level of hostility the majority of the American population holds for the US government.Released in March, a survey entitled “Health Care Reform—Can’t Live With It, or Without It” indicates that 92 percent of Americans give the national economy a negative rating. No fewer than 70 percent of the respondents report having suffered job-related and financial problems in the past year, an increase from 59 percent the year before. Fifty-four percent report someone in their home has been without a job and looking for work in the past year, up from 39 percent in 2009.The poll saw an aggravation of conditions in every area of economic life studied the year before. Increasing numbers of people are reporting difficulty receiving or affording medical care (26 percent) or paying their rent or mortgage payments (24 percent). More Americans faced problems with collections and credit agencies (21 percent), or had mortgages, loans or credit card applications denied (19 percent).

US Food Inflation Spiralling Out of Control - The Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) report for March 2010 and the latest numbers are shocking. Food prices for the month rose by 2.4%, its sixth consecutive monthly increase and the largest jump in over 26 years. NIA believes that a major breakout in food inflation could be imminent, similar to what is currently being experienced in India. Some of the startling food price increases on a year-over-year basis include, fresh and dry vegetables up 56.1%, fresh fruits and melons up 28.8%, eggs for fresh use up 33.6%, pork up 19.1%, beef and veal up 10.7% and dairy products up 9.7%. On October 30th, 2009, NIA predicted that inflation would appear next in food and agriculture, but we never anticipated that it would spiral so far out of control this quickly. The PPI foreshadows price increases that will later occur in the retail sector.

Consumer credit: More than meets the eye - Atlanta Fed blog - A lot has been made (here, for a recent example) of the idea that banks have shown a surprising amount of reluctance to extend credit and to start making loans again. Indeed, the Fed's consumer credit report, which shows the aggregate amount of credit extended to individuals (excluding loans secured by real estate), has been on a steady downward trend since the fall of 2008. Importantly, that report also provides a breakdown that shows how much credit the different types of institutions hold on their books. Commercial banks, which are the single largest category, accounted for about a third of the total stock in consumer credit in 2009. The two other largest categories—finance companies and securitized assets—accounted for a combined 45 percent. While commercial banks have been the biggest source of credit, they have not been the biggest direct source of the decline.

U.S. Households Lost $100,000 From Crisis, Study Says (Bloomberg) -- The financial crisis and recession cost U.S. households an average of about $100,000 in lost wealth and income, according to a study by former Treasury Department economist Phillip Swagel. From June 2008 through March 2009, households’ stock holdings fell $66,000 and real estate dropped $30,000, according to the study released today by the Pew Economic Policy Group. Each household also lost an average $5,800 from unemployment and lower earnings from September 2008 through December 2009, the study said.  While stocks have rebounded this year, the fallout from the crisis was broader than the price of the government’s $700 billion bank rescue or $787 billion economic stimulus package, the study said. Swagel said the losses probably won’t be recouped until 2011 at the earliest.

CEO: Wal-Mart's Customers "still feel the pressure" - From the WaPo: Consumer confidence is up, but test looms "Some would say there is a recovery taking place," [Wal-Mart chief executive Mike Duke] said during a meeting with Washington Post editors and reporters. "The lower-income and middle-income customers . . . they still feel the pressure."  In addition, he said that the weak housing market continued to hold back the recovery "It will take housing to create some of those jobs," Duke said. Don't hold your breath on housing and housing related jobs. And a summary paragraph in the article:  With federal stimulus spending beginning to taper off over the second half of the year, the fragile recovery in the housing markets showing signs of petering out and exports unlikely to create the same boost over the next nine months that they did over the past nine months, it will be up to American consumers to pick up the slack and drive a continued expansion.

The recession is over - The new GDP numbers allow us to update the Econbrowser Recession Indicator Index for the preceding quarter (2009:Q4), which now stands at 7.7%, a definitive signal that the recession is over. This number comes from a pattern recognition algorithm for dating business cycle expansions and contractions that waits one quarter for data revisions and clear trend identification before making an assessment. Following our predetermined rule, once a clear signal of a new business cycle phase has emerged, we use the full history of data available as of that date (April 30, 2010) to assign a most probable end date for the recession. These calculations determine that 2009:Q2 was the last quarter of the recession and that the expansion began with the third quarter of 2009.

Real GDP in recoveries - In all the discussions of the real GDP release I did not see this comparison, and I thought it should be made. So far real GDP has increased 2.7% as compared to an average of 4.3% in recoveries since 1950. The range is from a high of 6.8% in 1958 to a low of 1.5% in 1991. (bar graph)

The Rules, Part XII - Growth in total factor outputs must equal the growth in payment to inputs.  The equity market cannot forever outgrow the real economy. This is the “real economy rule,” and was listed first in my document, but i have not gotten to it until now.  It is very important to remember, because men are tempted to forget that financial markets depend on the real economy.  If the global economy grows at a 3% rate, well guess what?  In the long run, payments to the factors — wages, interest, rents, and profits will also grow at a 3% rate.  Maybe some of the factor payments will grow faster, slower, or even shrink, but you can’t get more out of the system than the system produces year by year.

GDP Grows by 3.2 Percent, Initial Claims for Unemployment Insurance Remain Elevated - Thoma - I have been worried since November of last year about the economy moving sideways, and more specifically about stagnating employment since February. Yesterday’s release of initial claims for unemployment, which saw average claims increasing slightly, did nothing to change that assessment:  Initial claims have been moving sideways for four months, and are above the approximately 400,000 level many people believe represents the point at which jobs are being created rather than lost. Here’s a graph of the series: Here’s a graph since 2007 that makes the recent sideways movement in claims more apparent: Turning to other economic news, the Bureau of Economic Analysis released its advanced estimate of GDP growth for the 1st quarter this morning, and GDP growth was estimated to be 3.2 percent:

US GDP growth rate is unsustainable; recovery will fade - The US turned in a fairly robust quarter in Q1 2010, with real GDP growth meeting expectations at 3.2% annualized. This comes on the back of a very robust annualized 5.6% growth in the previous quarter. This is the best growth two-quarter growth we have seen since 2003.However, when one digs deeper, it is obvious this growth is unsustainable because it is predicated on a reduction in savings rates and a releveraging of the household sector. As a result, I expect weak GDP growth in the second half of 2010. The problem with the BEA reported numbers is the composition of GDP growth

Gary Shilling: Americas Lost Decade - The US faces 10 years of slow growth and deflation that could rival Japan’s “lost decade” – two words which Gary Shilling did not utter but which unmistakably characterize his forecast.Shilling laid out his deflationary forecast along with his investment recommendations at last week’s Strategic Investment Conference, held in San Diego and hosted by Altergis Investments and Millennium Wave Investments.  Shilling is founder and President of the New Jersey-based economic consulting firm A. Gary Shilling & Co.  His talk was titled “Investment Strategy for an Era of Slow Growth and Deflation.”Our GDP will grow by a mere 2% annually over the next decade, Shilling said, and further growth will be impossible while we “socialize our debt” – transferring financial sector and household liabilities to the federal balance sheet.  “This deleveraging, in my estimation, is going to take at least a decade, and that’s the good news,” he said.  “If it were to happen in a couple of years, it would make the Great Depression look mild.”

Generation Y: The Broke Generation - No group in America has been hit harder during the current recession than young adults.  Millions of Americans are graduating from college with virtually no money, lots of debt and with very dim employment prospects.  Those who don't go to college are even worse off.  All their lives these young Americans were taught if they studied hard, got an education and worked within the system that good jobs and the American Dream would be waiting for them.  But now millions of them are realizing that all of their studying and hard work is not providing them with the rewards that they always thought they would get.  This is causing large numbers of young American adults to become depressed and disillusioned.  In fact, record numbers of them are moving back in with their parents.  But without decent jobs, what are they supposed to do? According to the Bureau of Labor Statistics, in March the national rate of unemployment in the United States was 9.7%, but for Americans younger than 25 it was 18.8%.  In fact, according to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

Guest Post: Unemployment for Those Who Earn $150,000 or More is Only 3%, While Unemployment for the Poor is 31% -  Boeing CEO Jim McNerney succinctly summarized a recent study by Northwestern University’s Center for Labor Market Studies regarding unemployment rates for different income brackets: The Center analyzed the labor conditions faced by income-grouped U.S. households during the fourth quarter of 2009. In the face of one of the worst economic environments in memory, those in the highest income groups had nearly full employment levels, with just a 3.2 percent unemployment rate for households with over $150,000 in income and a 4 percent rate in the next-highest income group of $100,000-plus.The two lowest-income groups — under $12,500 and under $20,000 annually — faced unemployment rates of 30.8 percent and 19.1 percent, respectively. The study – published in February – notes that the poor are suffering Depression levels of unemployment:

 Paid sick leave pushed for low-income workers - Fresh off passage of a sweeping health care overhaul, the Obama administration is supporting legislation to provide mandatory paid sick leave for more than 30 million additional workers who are some of nation's lowest-paid employees. The Healthy Families Act, sponsored by Sen. Christopher Dodd, and Rep. Rosa DeLauro, both Democrats from Connecticut, would require companies that have 15 or more employees to provide one hour of paid sick leave for every 30 hours worked or up to seven sick days a year for a full-time worker. Both bills — HR 2460/S1152 — are stuck in committee and haven't yet faced a vote. In fact, most legislative action has come at the state and municipal level. In recent years, California, Ohio, Maine and New Jersey have considered bills requiring paid sick leave. San Francisco and Washington, D.C., have passed laws that require it for private-sector employees. New York City is debating a similar measure.

Unemployment: Many Workers exhausting all benefits - From Bloomberg: More Than a Million in U.S. May Lose Jobless Benefits [Lawmakers] are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands of Americans have already reached. In coming months, the number of those who will receive their final government check is projected to top 1 million. Interviews with state officials found that in New York, 57,000 people have received their last check. In Florida, 130,000 are no longer eligible as are about 30,000 Ohioans. According to the BLS, a record 6.5 million workers have been unemployed for 27 weeks or more. The article notes a study by the Pew Fiscal Analysis Initiative that shows 3.4 million workers have been unemployed for more than a year. Not all states have 99 weeks of benefits, but some workers are starting to exhaust all of their benefits.

More Than a Million May Lose Jobless Aid Due to Deficit Concern (Bloomberg) -- Since the U.S. recession began in December 2007, Congress has extended the duration of weekly unemployment benefits for the jobless three times. Now, the lawmakers may have reached their limit.They are quietly drawing the line at 99 weeks of aid, a mark that hundreds of thousands of Americans have already reached. In coming months, the number of those who will receive their final government check is projected to top 1 million.It’s a deadline that has rarely been mentioned in recent debates over jobless benefits, in which Republicans have delayed aid because of cost concerns.

One in Five Americans Fear Job Loss in Next 12 Months Even as Gallup's underemployment measure shows that more people are getting full-time jobs, 21% of American workers think it is "very" or "fairly" likely that they will lose their jobs or be laid off during the next 12 months. That is nearly twice the 12% pre-recession level of 2007 and about the same as the 19% recorded in late 1982, during another deep recession. Further reflecting today's lack of job security, 38% of Americans employed full- or part-time say they are "not at all likely" to lose their jobs over the next year -- down 19 points from April 2007, and by far the lowest level of self-professed job security Gallup has measured since 1975.

Forget 10% Unemployment, The Real Job Loss Pain Number Is 54%… A March survey from Pew shows just how broad the unemployment pain has been felt. When you hear of 10% unemployment, you might imagine 1/10th of Americans experiencing extreme financial stress from the recent recession.Yet given the unemployment rate's odd methodology whereby it drops people who stop looking for work out of the data, and the fact that American households usually have more than one person, the real 'pain' number is 54% -- over half of American households felt the direct impact of job losses: Pew Research: A majority now says that someone in their household has been without a job or looking for work (54%); just 39% said this in February 2009. Only a quarter reports receiving a pay raise or a better job in the past year (24%), while almost an equal number say they have been laid off or lost a job (21%).

IBM crowd sourcing could see employed workforce shrink by three quarters - Multinational firms saddled with huge people costs are considering downsizing their permanent workforce and hiring sub-contractors on a scale never seen before - presenting an "enormous" management task for HR. IT giant IBM told Personnel Today that the firm's global workforce of 399,000 permanent employees could reduce to 100,000 by 2017, the date by which the firm is due to complete its HR transformation programme. Tim Ringo, head of IBM Human Capital Management, the consultancy arm of the IT conglomerate, said the firm would re-hire the workers as contractors for specific projects as and when necessary, a concept dubbed 'crowd sourcing'. "There would be no buildings costs, no pensions and no healthcare costs, making huge savings," he said.

Most U.S. Factory Jobs Lost in Slump May Stay Empty in Recovery…  (Bloomberg) -- U.S. manufacturers will fill fewer than 30 percent of 2 million lost factory jobs as the economy recovers over the next six years, according to an estimate from an industry trade group.  Most of the hiring will come in 2011 and 2012, David Huether, chief economist for the National Association of Manufacturers, said yesterday after NAM President John Engler spoke on a job-growth panel at the Milken Conference in Los Angeles.  “I wish there were a silver bullet where we just walk in and just sprinkle this pixie dust,” Ron Bloom, a conference panelist and senior White House adviser for manufacturing policy, said in an interview. “But this is slow, hard work.”

CHART OF THE DAY: 49 Out Of 50 State Economies Are Still Underwater - 49 out of 50 U.S. states are still showing less economic activity than a year ago, based on February 2010 coincident economic indicators from the Federal Reserve of Philadelphia. The chart below is organized from top to bottom, from the most growth in economic activity to the largest declines in economic activity.

States Bristle as Investors Make Wagers on Defaults - As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default. These so-called credit default swaps are basically insurance contracts that have long been available to protect holders of corporate bonds against default. They became available a few years ago for municipal debt, allowing investors to short sell—or bet against—countless cities, towns and bridges, and more than a dozen states, including California, Michigan and New York.  The derivatives are still thinly traded, but their existence has the potential to make investors skittish.

California Declares War on State Bond Short-Sellers (Bloomberg) -- California wants to know why underwriters take its money to sell the state’s bonds, and then talk trash behind its back. That’s what California Treasurer Bill Lockyer asked in March of six banks that have made $215 million from selling the state’s general obligation bonds since 2007. “We have information that indicates your firm, which sells California GO bonds, may participate in the municipal credit default swaps market,” the letter said. Lockyer wanted to know why, and to what extent. The treasurer posted the banks’ responses on his Web site last week.

Banks Bailed Out By American Taxpayers Are Paying Us Back By Shorting Our States and Cities - Americans bailed out the giant banks. So how do the too big to fails re-pay the American taxpayers? By betting that American states and cities will fail. As the Wall Street Journal notes: As U.S. cities and towns wrestle with financial problems, investors are finding a new way to profit on their misery: by buying derivatives that essentially bet municipalities will default.These so-called credit default swaps are basically insurance contracts that have long been available to protect holders of corporate bonds against default. They became available a few years ago for municipal debt, allowing investors to short sell—or bet against—countless cities, towns and bridges, and more than a dozen states, including California, Michigan and New York.

Police Cuts Spark a Debate on Public Safety - WSJ-  In New York, Mayor Michael Bloomberg recently vowed not to lay off cops, but tight budgets have slowed hiring so much that the force is down about 12% from 2000, with more attrition expected. Some violent crimes, including homicides, are on the rise. Paul Browne, a deputy police commissioner, says the department has kept a lid on problems by flooding high-crime areas with cops on foot patrol who practice community policing, such as checking in with merchants and pastors. Mr. Browne said the department is committed to such programs but acknowledges that "it's getting harder" to devote enough resources.

Paterson presses to delay tax credits, furlough 100K workers - New York Gov. David Paterson wants to delay payment of business tax credits and furlough 100,000 state workers, he said on Tuesday. In addition, Paterson is demanding a vote on his budget proposal on Wednesday, before legislators leave town as scheduled. “This crisis is worsening,” Paterson said on Tuesday. “Pass my budget tomorrow, in an up or down vote. Time is of the essence.” Budget talks are barely plodding along, and they’re becoming uglier by the day. The state faces a $9.2 billion deficit, and the state budget is now nearly a month late.

Revitalizing our cities - The most recent victim of the urban crisis in the area of publicly provided social services in my city, Detroit, is indicative; this week it was announced that Detroit's Neighborhood Services Organization would lose 2/3 of its funding effective immediately (link).  This program reaches out to Detroit's homeless people and provides transition assistance permitting 1000 people per year to return to housed status.  It is now forced to close down its operations entirely until October 1, since the program has already expended 1/3 of its budget for 2009-10.  No one disputes that NSO is doing great work and returning multiples of benefits relative to its budget; but the state's fiscal crisis has been passed on to this effective, people-oriented program.  (CEO Sheilah Clay was featured as a guest on the Craig Fahle show on WDET today -- one of the best parts of the urban Detroit dial.   So cities are suffering from very significant structural disadvantages in the United States today.  And yet, as Richard Florida argues so persistently and so correctly, cities are crucial to the future of the United States and the rest of the world (link).

17,000 NJ Students Use Facebook to Organize Statewide Walkout - Thousands of students across New Jersey walked out of class Tuesday to rally against school budget cuts brought fourth by Gov. Chris Christie. The students came together after organizing the state-wide protest on the social networking site Facebook. Over 17,000 students signed up to the event page on Facebook called "Protest NJ Education Cuts - State Wide School Walk Out," where thousands agreed to cut class to protest reductions in state aid. The page was created by 18-year-old college student, Michelle Ryan Lauto, who attended high school in Bergen County. It was launched before voters rejected most school budgets, but after Governor Chris Christie announced he was slashing $820 million for next year

College Graduates’ Debt Load May Outstrip Ability to Repay… (Bloomberg) -- Students, especially at for-profit universities, are leaving college in the U.S. with a debt load large enough to raise questions about the ability of many to repay loans, a study found.  At for-profit colleges, 53 percent of the degree recipients in 2008 had education-related debt of $30,500 or more, compared with 24 percent at private nonprofit colleges and 12 percent at public schools, the New York-based College Board said in a report released today.  Students graduating in 2008 faced jobs prospects reduced by the financial crisis and subsequent recession, the worst since the 1930s. Whether the students can earn enough to repay their loans is unclear, according to the study.

Law school tuition hikes prompt talk of bubble - With large numbers of unemployed or underemployed lawyers who borrowed heavily to pay for their educations, legal educators face growing skepticism about the value of a law degree.  Christine Hurt, a law professor at the University of Illinois, suggests that the market for legal education is strikingly similar to the subprime mortgage market. Her theory, which she posted on "The Conglomerate Blog" last week, goes like this: Double-digit tuition increases in the last 25 years have priced law schools out of reach for many. Yet the promise of a career at a big law firm with its six-figure paychecks kept boosting enrollment. Easy credit allowed more students to finance their law degrees. All of a sudden law firms lay off droves of attorneys and limit the number of new hires, leaving graduates out of work with more than $100,000 in loans to repay.

Pension fund denounces IOU plan - The Teachers' Retirement System is asking lawmakers to reject Gov. Pat Quinn's idea of giving billions worth of IOUs rather than cash to the pension funds in an effort to balance the state budget.The plan Quinn's administration asked the pension systems to consider would set aside a 1995 law that made pension payments a budget priority, lower next year's required payment by hundreds of millions of dollars and give the systems an IOU. Retirement system trustees said the effects would be "devastating" on the teachers' pension fund, one struggling from years of underfunding and recent market downturns and is only 15 years into a 50-year plan for financial stability

Pension Bills May Put Taxpayers in ‘Hole,’ Hawaii Governor Says… Bloomberg) -- Future U.S. economic growth may be threatened by increases in public-employee pension liabilities, according to Hawaii Governor Linda Lingle. “Until the public rises up and says, ‘Enough is enough, you have to stop this spending,’ it won’t stop, and our quality of life will degrade,” Lingle, 56, said of government-paid retirement benefits.  U.S. public-worker retirement systems are underfunded by more than $2 trillion, according to a January estimate by Orin S. Kramer, chairman of New Jersey’s State Investment Council and manager of the Boston Provident Partners hedge fund. California’s three biggest state pension funds are as much as $500 billion short of meeting promises made to future retirees, a Stanford University report said on April 5, while a Manhattan Institute study said U.S. teacher pensions have a $332 billion gap.

Americans Shift Expectations About Retirement Funding -- Non-retired Americans' expectations for the financial resources they will draw on to fund their retirement have changed since 2007. Most notably, more expect to rely heavily on Social Security and fewer expect 401(k)s or IRAs, home equity, and pension plans to be major funding sources. Overall, non-retirees still most commonly say IRAs and 401(k)s will be a major source of retirement income (45%), followed by Social Security (34%), work-sponsored pension plans (23%), saving accounts or CDs (22%), home equity (20%), and individual stock investments (20%). The 34% of non-retirees who say Social Security will be a major source of income in their retirement is the highest Gallup has measured since 2001, the first year the annual Gallup Economy and Personal Finance survey was conducted. Prior to 2008, between 25% and 29% of non-retired Americans expected Social Security to be a major source of retirement funding, but that number has been at or above 30% in each of the last three years.

California's legislative leaders ask feds for billions owed - California Speaker of the Assembly John Perez (D-LA) says he’ll make the case to California’s congressional delegates and the Obama administration that the feds owe California some money.  "I want to be clear that we’re not going to Washington D.C. to ask for a bailout of California." Perez said.  Perez and Senate leader Darrell Steinberg (D-Sacramento) will ask the feds for $700 million that the state spent on medical care for people mistakenly denied coverage under the fed’s Medicaid program.  They also want the feds to chip in more to offset the $800 million that California spends each year to incarcerate undocumented felons. Steinberg says California needs some help with its $18 billion deficit.

Vermont House passes health reform bill, 91-42 -The Vermont House has passed a health reform bill that includes designing a single-payer system.  By a vote of 91-42 Friday, the House passed a bill with two major sections. One calls for expanding Vermont's Blueprint for Health, which has regional teams of health professionals working to manage the cases of patients with chronic diseses. The bill would set up those teams statewide and would expand the types of health care they deliver. The measure also calls on designing three possible options for moving ahead with health reform: a single-payer system like Canada's, a public option like the one discussed and later dropped in Congress and expanding current reform efforts.

Obama’s Deal | Backroom deals and health care bill | FRONTLINE | PBS Video -  It wasn't pretty, but it worked. Inside the backroom deals and hardball politics that finally got Obama his health care bill.

The Mystery of Future Health Care Costs - Ezra Klein had a post last week about the accuracy of projections about health care, in which he called reports like the recent one from HHS a sort of Rorschach test--conservatives and liberals each see in them what they want to.  I think this is true, to a point.  The history of health care spending projections is considerably more checkered than either liberals or conservatives acknowledge... virtually all of the reports written on this question consists of simply cherry picking your examples very carefully in order to generate the answer you want.  This would be a perfect job for the CBO, except that members of Congress request those reports, and I doubt either party is willing to risk getting the wrong answer. But there is one example of "cost underruns" that I keep hearing, which I think should be used cautiously if at all.  That's Medicare Part D, which came in substantially beneath projections

Health Care and Cars Are Different - Periodically, one sees the assertion that it’s a good thing that health care expenditures are rising, just as it would be good if more people bought Priuses.  Last year, Geoff Colvin, Fortune senior editor at large, emitted this opinion. We’ve all seen the graph that shows health-care costs increasing much faster than GDP; it’s usually presented as evidence of the crisis we’re in. Take a graph with that same trajectory and label it “Sales of hybrid vehicles” or “Downloads from the iTunes Music Store,” and nobody proposes government intervention to stop it.  How come? To compare health care expenditures to car purchases is absurd.  Purchasing a car is a discretionary purchase that improves the buyer’s life.  The vast majority of health care expenses are to fix something that is no longer working properly.

The latest national security threat: obesity Are we becoming a nation too fat to defend ourselves?  It seems incredible, but these are the facts: As of 2005, at least 9 million young adults -- 27 percent of all Americans ages 17 to 24 -- were too overweight to serve in the military, according to the Army's analysis of national data. And since then, these high numbers have remained largely unchanged. Data from the Centers for Disease Control and Prevention show obesity rates among young adults increasing dramatically nationwide. From 1998 to 2008, the number of states reporting that 40 percent or more of young adults are overweight or obese has risen from one to 39. Since 1995, the proportion of potential recruits who failed their physical exams because of weight issues has increased nearly 70 percent, according to data reported by the Division of Preventive Medicine at the Walter Reed Army Institute of Research.

FDA wants your advice on food labeling - This week the FDA asked for comments and information from the public about what is effective with front-of-package labeling and shelf tags on food products now in stores. The FDA wants to develop a front-of-pack nutrition label that consumers will notice and that is driven by sound nutrition criteria, consumer research and eye-catching design, said FDA spokeswoman Siobhan DeLancey. The labels will enhance nutritional awareness but will not replace the nutritional facts panel already on products. There is not a standardized system for front-labeling at this time, said Kim Stitzel, the director of nutrition and obesity at the American Heart Association. The AHA supports an FDA-regulated unified system to help clear up confusion about the meaning of the various icons and labels now used by food companies.

Six in Ten Americans Breathe Dangerously Polluted Air - Six in 10 Americans — about 175 million people — are living in places where air pollution often reaches dangerous levels, despite progress in reducing particle pollution, the American Lung Association said in a report released this week. The Los Angeles area had the nation’s worst ozone pollution. The report examined fine particulate matter over 24-hour periods and as a year-round average. Bakersfield, Calif., had the worst short-term particle pollution, and the Phoenix-Mesa-Scottsdale area of Arizona had the worst year-round particle pollution.

Mercury surprise: Rice can be risky - In an upcoming issue of Environmental Health Perspectives, the researchers report that although mercury exposures for these communities varied dramatically, in every one of them “rice accounted for 94 to 96 percent of the probable daily intake of methylmercury” — the most neurotoxic and readily absorbed form of mercury. Methylmercury poisoning has been linked with diminishing the IQ of children exposed in the womb and with raising blood pressure and other heart-disease risks among adults. Guizhou’s heavy cereal contamination traces in large part, the study says, to the fact that rice paddies harbor the types of bacteria that can convert inorganic mercury to its more toxic, methylated form. Moreover, in Guizhou, more than 70 percent (27 million people) live in rural areas  — impoverished communities where the annual household income averages less than the U.S. equivalent of $300.

Honeybee-Colony Losses Widened Last Winter, USDA  (Bloomberg) -- Honeybees in the U.S. died at a greater rate from October to April than a year earlier, with more beekeepers attributing the cause to an illness that has devastated hives in recent years, the government said. Managed colonies lost to all causes reached 33.8 of the total, compared with 29 percent a year earlier and 35.8 percent during the winter of 2007-2008, the U.S. Department of Agriculture said today. About 28 percent of surveyed beekeepers reported losing hives without any evidence of dead bees, a sign of Colony Collapse Disorder, compared with 26 percent the previous year and 32 percent the year before that.“It’s unsustainable,” said Dennis vanEngelsdorp, a past president of the Apiary Inspectors of America, which helped conduct the USDA survey. “It’s a pretty big loss for beekeepers to absorb, and they can’t keep doing that.”

Carbon Dioxide Emissions Causing Ocean Acidification to Progress at Unprecedented Rate — The changing chemistry of the world's oceans is a growing global problem, says the summary of a congressionally requested study by the National Research Council, which adds that unless man-made carbon dioxide (CO2) emissions are substantially curbed, or atmospheric CO2 is controlled by some other means, the ocean will continue to become more acidic. The long-term consequences of ocean acidification on marine life are unknown, but many ecosystem changes are expected to result. The federal government's National Ocean Acidification Program, currently in development, is a positive move toward coordinating efforts to understand and respond to the problem, said the study committee. The ocean absorbs approximately a third of man-made CO2 emissions, including those from fossil-fuel use, cement production, and deforestation, the summary says. The CO2 taken up by the ocean decreases the pH of the water and leads to a combination of chemical changes collectively known as ocean acidification.

Acidifying Oceans Dramatically Stunt Growth of Already Threatened Shellfish, Research Finds - New research shows that global warming and its effects -- in particular, ocean acidification -- have descended upon shellfish reefs, particularly those formed by the Olympia oyster. More than one-third of the world's human-caused carbon dioxide emissions have entered the oceans, according to Brian Gaylord, a biological oceanographer at the Bodega Marine Laboratory of the University of California at Davis. "Similar to what happens in carbonated soda," says Gaylord, "increasing carbon dioxide in seawater makes it more acidic."Even with small changes in acidity, seawater becomes corrosive to the shells of aquatic organisms.

Sea surface temperature anomalies for April 26, 2010 -- massive buildup between northern coast of South America and West Africa - Sea surface temperature anomalies for April 26, 2010 -- massive buildup between northern coast of South America and West Africa means if wind shear drops, some very strong hurricanes may form (see color graphic)

A Snowball Effect Heats the Arctic -A feedback loop can be a nasty thing. In one, a small disturbance becomes self-reinforcing and is greatly amplified — the proverbial snowball effect. This is one way that seemingly minor contributions of carbon dioxide and other greenhouse gases to the atmosphere — a few hundred parts per million — just might destabilize the climate. Now climate researchers have detected such a feedback loop at work in the Arctic. It is well known that the region is warming faster than anywhere else on Earth. But a study by scientists at the University of Melbourne published this week in the journal Nature finds clear evidence that a positive feedback loop, driven by melting sea ice, is behind the Arctic’s dramatic recent warming.  The retreat of the sea ice has steadily uncovered wider and wider swaths of much darker ocean, which absorbs more solar radiation. The warmer water heats the air above it, leading to less floating ice below — and so on and so forth.

ANDRILL ice cores show far more dynamic melt history for Antarctica than previously thought - The southern McMurdo Sound core yielded clear evidence of some 74 cycles of ice sheet buildup and retreat during a 6-million-year stretch starting in the Miocene Epoch some 20 million years ago. The unexpected ice-sheet dynamism has ANDRILL climate modelers considering what input or software adjustments would make the simulation produce the kind of dynamism seen in the geological record. Their model currently indicates that even if the imperiled West Antarctic Ice Sheet succumbs to current warming trends, the much larger East sheet should stubbornly resist melting. According to the simulation, the East ice sheet melts only when atmospheric carbon dioxide levels are at least eight times higher than preindustrial levels. The ice sheet’s so-called hysteresis, or resistance to change, is now in doubt.

James Lovelock: The Earth is about to catch a morbid fever that may last as long as 100,000 years - Our planet has kept itself healthy and fit for life, just like an animal does, for most of the more than three billion years of its existence. It was ill luck that we started polluting at a time when the sun is too hot for comfort. We have given Gaia a fever and soon her condition will worsen to a state like a coma. She has been there before and recovered, but it took more than 100,000 years. We are responsible and will suffer the consequences: as the century progresses, the temperature will rise 8 degrees centigrade in temperate regions and 5 degrees in the tropics. Much of the tropical land mass will become scrub and desert, and will no longer serve for regulation; this adds to the 40 per cent of the Earth's surface we have depleted to feed ourselves.

Science & the Public: Rural ozone can be fed by feed (as in silage) Livestock operations take a lot of flak for polluting. Manure lagoons not only irritate neighbors’ noses but also leak nitrogen — sometimes fostering dead zones up to 1,000 miles downstream. And ruminants can release copious amounts of methane, a greenhouse gas. Researchers are now linking ozone to livestock as well. But this time the pollution source is not what comes out the back end of an animal but what’s destined to go in the front. State air-quality managers have been puzzling over why some rural areas suffer high ozone pollution. It’s been a real conundrum in California’s San Joaquin Valley, home to three of the nation’s six most ozone-ravaged counties.

Carbon, Nitrogen Link May Provide New Ways to Mitigate Pollution Problems - A new study exploring the growing worldwide problem of nitrogen pollution from soils to the sea shows that global ratios of nitrogen and carbon in the environment are inexorably linked, a finding that may lead to new strategies to help mitigate regional problems ranging from contaminated waterways to human health.The University of Colorado at Boulder study found the ratio between nitrates -- a naturally occurring form of nitrogen found in soils, streams, lakes and oceans -- and organic carbon is closely governed by ongoing microbial processes that occur in virtually all ecosystems. The team combed exhaustive databases containing millions of sample points from tropical, temperate, boreal and polar sites, including well-known, nitrogen-polluted areas like Chesapeake Bay, the Baltic Sea and the Gulf of Mexico.

Pressure is building on disputed wind farm. Political pressure continues to build on Interior Secretary Ken Salazar as he prepares to announce his decision this week on the fate of a proposed wind farm off the coast of Cape Cod, Mass., that has been stalled for nine years. The governors of six East Coast states called on Mr. Salazar last week to approve the project, which is proposed by Cape Wind Associates and would be the nation’s first offshore wind farm. Turning it down, they said, especially on the grounds that it would harm the view from historic sites, “would establish a precedent that would make it difficult, if not impossible, to site offshore wind projects anywhere along the Eastern Seaboard.”

Why Environmentalists Don’t Trust Economists - I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach.  I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable). Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side

Note to Environmentalists Part II -The climate change bill that was supposed to be unveiled in the Senate on Monday is now on indefinite hold. Senator Lindsey Graham, the lone Republican supporter, walked away from the bill because President Obama and the Democratic leadership signaled that immigration reform may come first. Harry Reid responded immediately to Graham’s reasoning, stating that the American people expect the Congress to tackle both issues and there is no reason not to proceed. We’ll know within a couple of days whether the increasingly watered-down climate legislation has any chance of passing in the Senate this year.That this legislation, which passed the House almost a year ago and was one of Obama’s main priorities, is so close to failure should be a wake-up call to environmentalists— The interests aligned against reducing our dependence on fossil fuel are legion;

E.P.A. Makes Its Case on Climate Change - NYTimes - Polls show that tackling climate change is a low priority for the American public. Indeed, a Yale poll found that only 12 percent of Americans were “very worried” about global warming. In the last few days, the Environmental Protection Agency seems to have initiated a public campaign to make clear where it, and the science, stand, stating that the rise in greenhouse gases is a serious problem to be confronted. On Monday night, the E.P.A. administrator, Lisa Jackson, made the point as a guest on “The Daily Show With Jon Stewart.” And on Tuesday, the agency released an 80-page glossy report called “Climate Change Indicators in the United States” to help Americans make sense of climate change data.

The Case for EPA Action - On April 1 the Environmental Protection Agency established rules restricting greenhouse gas emissions from cars and trucks, starting in 2012. But a dangerous assault on the agency is gathering momentum in Congress, corporate boardrooms, the media and the courts. The swarm of counterattacks all seek to strip the EPA of its power to regulate greenhouse gas emissions from stationary sources like coal-fired power plants. Some legislative proposals would even undo the EPA's finding that greenhouse gases are hazardous, taking the EPA out of the climate fight altogether. Wonkish at first glance, the fight over EPA rulemaking may be the most important environmental battle in a generation. The UN's Intergovernmental Panel on Climate Change says rich countries like the United States must cut emissions 25 to 40 percent below 1990 levels by 2020--only ten years away--and thereafter make precipitous cuts to almost zero emissions. If we don't act now, average global temperatures will likely increase by more than 2 degrees Celsius and trigger self-compounding runaway climate change, resulting in a massive rise in sea levels, devastated agriculture and attendant social chaos

Joseph Romm: Senior U.S. military leaders announce support for climate bill - The Pentagon affirmed earlier this year that “Climate change, energy security, and economic stability are inextricably linked.” Today an unprecedented 33 retired US military generals and admirals announced that they support comprehensive climate and energy legislation in a letter to Senators Reid and McConnell as well as a full page ad (click to enlarge).  The news release points out: It was the largest such announcement of support ever, reflecting the consensus of the national security community that climate change and oil dependence pose a threat American security. Here is the full text of the letters signed by these generals and admirals:

Climate bill gives polluter and nuclear breaks (Reuters) - The U.S. climate change bill expected to be unveiled on Monday contains incentives to spur development of a dozen nuclear power plants, but delays emissions caps on plants that emit large amounts of greenhouse gases, industry sources said on Friday.The draft bill, led by Democratic Senator John Kerry, has loan guarantees, protection against regulatory delays and other incentives to help companies finance nuclear plants, which can cost $5 billion to $10 billion to build, the sources said."I think it's a start that combined with a price on carbon" should help the power companies build new nuclear capacity, said one source briefed on a call held by Kerry on Thursday night with industry representatives.

Washington Approves Wind Farm Off Cape Cod - After nine years of regulatory review, the federal government gave the green light Wednesday to the nation's first offshore wind farm, a sprawling project off the coast of Cape Cod.The approval of the 130-turbine farm gives a significant boost to the nascent offshore wind industry in the United States, which has lagged behind far Europe and China in harnessing the strong and steady power of ocean breezes to provide electricity to homes and businesses.  With Gov. Deval Patrick standing beside him, Interior Secretary Ken Salazar announced at a news conference at the Massachusetts Statehouse that the government had approved a permit for Cape Wind Associates, a private venture, to build the farm.

Why carbon tax proponents should talk more about deregulation - After nine years of regulatory review, the federal government gave the green light Wednesday to the nation’s first offshore wind farm, a highly contested project off the coast of Cape Cod. The full article is here.  But wait, whoops!, I left out one part: Several regulatory hurdles remain, and opponents of the wind farm have vowed to go to court, potentially stalling Cape Wind for several more years.

Monju Reactor Set To Resume Operation May 6 After 15-Year Suspension - Japan's prototype fast-breeder Monju nuclear reactor will be restarted possibly on May 6 after a 15-year suspension as the governor of its host prefecture accepted the restart plan Wednesday. The reactor, located in the city of Tsuruga, was suspended following a sodium coolant leak and a resultant fire there in December 1995. The resumption has been postponed several times since then because of delays in repairs. However, it is unclear whether the development of a commercial fast breeder reactor will be completed by 2050 as envisaged by the government.

Britain 'facing electricity blackouts' - Ofgem’s study warned that demand for electricity and gas could outstrip supply in the future, causing a national energy crisis. Ofgem said that a worst case scenario would be failing levels of supply at peak times, including the evening and during winter months, by as early as 2016. Every home could be left without power for up to an average of 40 minutes during the year, the report suggested. That could increase to two hours in 2017, the report warned. Labour had admitted last year that energy could reach dangerously low levels by the end of the decade.

Cash from EU green plan 'to fund dirty coal plants' European countries will be able to use money from a key EU scheme for reducing climate-changing carbon emissions to build new coal-fired power stations, documents leaked to The Independent suggest. Billions of pounds in revenues from the EU's Emissions Trading Scheme (ETS) – under which power plants have to buy "permits to pollute" so they have an incentive to drive their emissions down – may find their way into state aid for new coal-fired power station construction across the continent.The bizarre situation of a climate policy pulling in two directions at once arises from concessions made to new and poorer EU member states such as Poland, when the EU was drawing up its current "20-20-20"climate change regime, seeking to cut emissions by 20 per cent, and secure 20 per cent of energy from renewable sources, by 2020.

Coal extraction issues will remain lost in the shuffle - I have not posted David's material in awhile, nor actually much on economics of water in more than a year. We don't always agree on the economics of water, but we do agree on its importance and value. My first postings on water economics were a result of a challenge from Tim Worstall to look at privatizing water utilities as occurred in 1989 in the United Kingdom, in relation to privitizing water supplies in the US and ongoing changes of ownership through the World Trade Oganization rules. Time permits a return to my special interest. Unfortunately it is still a ho-hum issue for the bulk of Americans if the media is any indication. I am posting David's post on coal and water tables so I don't have to. But my sentiments are along the same lines.)

They’re still blowing up our mountains and there still ought to be a law… A month ago, before the nation's attention was drawn to the tragedies at the Upper Big Branch Mine in West Virginia and the oil rig off the Louisiana coast, the EPA issued a blockbuster announcement about a strict new guidance for the permitting of mountaintop removal mines in Appalachia. The announcement left many people -- reporters, politicians, and the general public alike -- confused whether or not the EPA had just put an end to mountaintop removal. The announcement generated headlines ranging from a fairly modest "E.P.A. to Limit Water Pollution From Mining" in the New York Times to "New regulations will put an end to mountaintop mining?" in the Guardian. On a recent trip through eastern Kentucky, set up by our good friends at Kentuckians For The Commonwealth, the answer to whether mountaintop removal in Appalachia has come to an end was abundantly obvious.The photo of a new active mountaintop removal mine looming above Route 23 in Pike County, Kentucky, at right, tells the story.

Global Biofuel Drive Raises Risk of Eviction for African Farmers— African farmers risk being forced from their lands by investors or government projects as global demand for biofuels encourages changes in crop cultivation. Research from the University of Edinburgh has found that livelihoods may be put at risk if African farmland is turned over to growing crops for biofuel. With growing pressure to find alternatives to oil, global biofuel production trebled between 2003 and 2007 and is forecast to double again by next year. In Africa, countries including Malawi, Mali, Mauritius, Nigeria, Senegal, South Africa, Zambia and Zimbabwe have enacted pro-biofuel national strategies. Dr Tom Molony, who contributed to the research, said that the allocation of land for biofuel production by government projects or wealthy investors could mean that the rural poor would be forced off their land.

Food vs. fuel: Growing grain for food is more energy efficient - Using productive farmland to grow crops for food instead of fuel is more energy efficient, Michigan State University scientists concluded, after analyzing 17 years' worth of data to help settle the food versus fuel debate. It's 36 percent more efficient to grow grain for food than for fuel," said Ilya Gelfand, an MSU postdoctoral researcher and lead author of the study. "The ideal is to grow corn for food, then leave half the leftover stalks and leaves on the field for soil conservation and produce cellulosic ethanol with the other half." Other studies have looked at energy efficiencies for crops over shorter time periods, but this MSU study is the first to consider energy balances of an entire cropping system over many years. The results are published in the April 19 online issue of the journal Environmental Science & Technology.

With Cellulosic Ethanol, There Is No Food Vs. Fuel Debate - As more and more corn grain is diverted to make ethanol, there have been public concerns about food shortages. However, ethanol made from cellulosic materials instead of corn grain, renders the food vs. fuel debate moot, according to research by a Michigan State University ethanol expert.  Bruce Dale, an MSU chemical engineering and materials science professor, has used life cycle analysis tools, which include agricultural data and computer modeling, to study the sustainability of producing biofuels -- fuels such as ethanol and biodiesel that are made from renewable resources. Dale will present his findings at the American Chemical Society annual meeting in Chicago.

Canada Sounds the Alarm - Last month the National Energy Board of Canada (NEB) issued a report entitled, “Short-Term Canadian Natural Gas Deliverability 2010-2012” which confirms my prediction about the strong likelihood of a significant and imminent decline in both Canadian natural gas production and natural gas exports to the US. In the 12 page document, the NEB provides three different price scenarios between 2010 and 2012, a high-price, mid-price and a low-price scenario. In each case, Canada’s natural gas deliverability and exports to the US decline. While I agree with many of the conclusions the NEB reaches in its report, I believe the NEB overstates Canada’s gas deliverability even in a low price scenario. Recent declines in Canadian natural gas prices and high levels of storage will result in a near shut-down of Canadian natural gas drilling activity for the balance of 2010. A dramatic fall in drilling will result in a sharp fall-off in natural gas production in the second half of 2010 and beyond.

Bill Gates and Chad Holliday - Energy sector poised for innovation -- with the right spark
This country runs on innovation. The American success story -- from Ben Franklin's bifocals to Thomas Edison's light bulb to Henry Ford's assembly line to today's advanced microprocessors -- is all about inventing our future. But our country is neglecting a field central to our national prospect and security: energy. Although the information technology and pharmaceutical industries spend 5 to 15 percent of their revenue on research and development each year, U.S. companies' spending on energy R&D has averaged only about one-quarter of 1 percent of revenue over the past 15 years.  And despite talk about the need for "21st-century" energy sources, federal spending on clean energy research -- less than $3 billion -- is also relatively small. Compare that with roughly $30 billion that the U.S. government annually spends on health research and $80 billion on defense research and development.

Shell, Total Step Up Reliance on Gas as Access to Oil Declines (Bloomberg) -- Royal Dutch Shell Plc and Total SA are among energy producers shifting the balance of their production toward natural gas as oil-rich countries clamp down on access and deposits become easier to tap. BP Plc is also moving more resources to gas even after purchasing $7 billion of mainly oil assets from Devon Energy Corp. last month. Exxon Mobil Corp. blazed the trail into gas with its $30 billion acquisition of XTO Energy Inc. in December. Although oil prices have risen 69 percent in the last year compared with a 21 percent gain for gas, companies are betting that the need for gas will grow.

(BN) Pemex May Need to Invest More Than $25 Billion for Output Gains (Bloomberg) -- Petroleos Mexicanos, Latin America's largest crude producer, may need to boost spending by about a third to more than $25 billion a year as it seeks to meet long-term output targets, Mexico's Energy Minister said. Higher investment in the state-owned company will help ensure "gradual growth" in production to a goal of 3.3 million barrels a day by 2024, Energy Minister Georgina Kessel said yesterday in an interview at Bloomberg's headquarters in New York. She's also chairwoman of the Mexico City-based company, which currently produces about 2.6 million barrels a day.

Foreign Oil Dependence: Why the Crux of the Energy Issue Centers on this Fossil Fuel - Picture : It’s 1856 and the Industrial Revolution is just getting underway in the United States.As America ratchets up its manufacturing and innovation and grows into a vibrant industrial hub, the driving force behind this growth is the greatest energy windfall in the history of the world… The discovery and commercialization of oil. Flash forward to 2010: We’re still relying mostly on oil to satisfy our energy demands. But the end of the “Age of Oil” is on the horizon and the world faces major energy problems. Supply. Demand. Cost. The environment. The list goes on… These problems affect the prosperity of countries and people around the world. That’s because when it comes to economic growth and the future of mankind, there is nothing more precious – and more crucial – than cheap energy.

An Uncomfortable Fact About Oil - America is mired in recession. Europe is in turmoil. Banks are reducing lending. Families are selling their extra vehicles. All of these factors would tend to push the price of oil down. Yet, the opposite has happened. The price of crude-oil futures jumped more than 70 percent over the past year, and as of mid-April sat near $86 per barrel. This strange contradiction is an overlooked warning sign that nations—especially America—would do well to heed.  In the time ahead, it is going to become dramatically more difficult to obtain and secure energy—and sooner than most people realize. This is a truth that American policy makers and politicians are afraid to publicly admit because the implications of an oil-constrained world affect everything from stock markets and food production to the dollar’s status as the world’s reserve currency. In short, over the next several years, global oil dynamics may change the planet forever. And America will not be immune.

Two Videos: Energy Security and the Milken-Roubini Debate - As I travel, here's an automatic post of video from two of the lunchtime sessions at the Milken Global Conference. First, the panel on "Geopolitics, Global Demand and the Quest for Energy Security": Here's the video from the session "Nouriel Roubini and Mike Milken Debate Where We've Been – Where We're Going":

A New Page - In the Media - cmartenson - When I was out in San Francisco in January, Janaia Donaldson interviewed me for Peak Moment Television and, with Robyn's excellent technical abilities, turned out a very nice product.  I'd like to direct you both this video clip in particular and to Peak Moment's excellent content in general: The Crash Course - Exponential Growth Meets Reality

Peak oil: Why industry and government should sit up and listen - "The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well. ….Our message to government and businesses is clear: act. Don't let the oil crunch catch us out in the way that the credit crunch did." So wrote the CEOs and Chairmen of the companies involved in the UK Industry Taskforce on Peak Oil and Energy - Richard Branson of Virgin, Ian Marchant of Scottish and Southern, Brain Souter of Stagecoach, Phillip Dilley of Arup and I – in the forward of our second annual report, released on 10 February. In the report, we produce data that suggests a peak of global oil production at less than 95 million barrels a day, up from some 85 now, and we summarise fears that could result in a peak of less than 92, plus a steep fall beyond the peak, all at a time when demand is rising well in excess of 100 million barrels a day. The data is based on research into current and projected oil production levels, extraction costs, exploration projects that are underway or in the pipeline and growth projections for developed and developing nations.

Global oil demand to increase by 5 mn bpd: Kuwait - Global oil demand will increase by five million barrels per day in the next five years, and China and India will lead the growth in emerging markets, the Kuwaiti oil minister said at the opening ceremony of the 18th Middle East Oil and Gas Conference in Kuwait City on Monday."The fastest growth will be in Asia, where consumption is expected to account for more than 30 per cent of the global demand," Xinhua reported quoting Oil Minister Sheikh Ahmad Al-Abdullah Al-Ahmad Al-Sabah.Sheikh Ahmad said the Middle East countries, which together hold 65 per cent of the world's proven reserves, would remain the main provider for the growing world demand.

How Will Supply and Demand Effect Peak Oil? From IEA whistle-blowers to the US military warning of peak oil in a few years, there's plenty of reason to question the sustainability of our energy intensive ways. But when I wrote about the Dark Mountain Projects' rejection of environmentalism, I noted that much of our profligate energy use is not because we need it to make ourselves comfortable or feed ourselves, but simply because oil is so cheap that we don't even think about it. When oil hits $150 or $200 a barrel, I argued, I think we'll be surprised at how much unnecessary consumption will fall away of its own accord

Why it doesn’t matter that there’s ‘plenty of oil left’- Peak oil felt like a very real and immediate possibility around the time of the oil price peak in mid-2008, but the “oil-is-here-to-stay” crowd has enjoyed something of a resurgence since then.Oil prices are down (though back to more than twice the low seen after the financial meltdown). Furthermore, 2009 was a banner year for new oil field discoveries — more than 10 billion barrels in potential reserves of black gold, which was the most found since 2000. Then there’s the fossil fuel riches of the Arctic that will likely be opening up in years to come, thanks to climate change. Don’t get too excited, though. While there might be plenty of oil left below the surface of our planet, it won’t be enough to prevent an oil shock in the short-term future. Here’s why: What’s left is deep, hard to drill for and expensive to get at: BP’s Tiber find in the Gulf of Mexico, for example, lies below more than 3/4 of a mile of water … and then below an additional 6.6 miles of ocean crust.

BP plan deemed major spill from Gulf well unlikely - The worst U.S. oil spill in decades reached into precious shoreline habitat along the Gulf Coast as documents emerged showing British Petroleum downplayed the possibility of a catastrophic accident at the offshore rig that exploded. BP suggested in a 2009 exploration plan and environmental impact analysis for the well that an accident leading to a giant crude oil spill — and serious damage to beaches, fish and mammals — was unlikely, or virtually impossible.The Coast Guard estimates now that at least 1.6 million gallons (6 million liters) of oil have spilled since the April 20 explosion that killed 11 workers. The amount already threatens to make it the worst U.S. oil disaster since the Exxon Valdez spilled 11 million gallons (42 million liters) off Alaska's shores in 1989.

Document: BP didn't plan for major oil spill -– British Petroleum once downplayed the possibility of a catastrophic accident at an offshore rig that exploded, causing the worst U.S. oil spill in decades along the Gulf Coast and endangering shoreline habitat. In its 2009 exploration plan and environmental impact analysis for the well, BP suggested it was unlikely, or virtually impossible, for an accident to occur that would lead to a giant crude oil spill and serious damage to beaches, fish and mammals. At least 1.6 million gallons of oil have spilled so far since the April 20 explosion that killed 11 workers, according to Coast Guard estimates. One expert said Friday that the volume of oil leaking from the well nearly 5,000 feet below the surface could actually be much higher, and that even more may escape if the drilling equipment continues to erode. "The sort of occurrence that we've seen on the Deepwater Horizon is clearly unprecedented," BP spokesman David Nicholas told The Associated Press on Friday. "It's something that we have not experienced before ... a blowout at this depth."

Big Oil Fought Off New Safety Rules Before Rig Explosion Deepwater Horizon, the giant technically-advanced rig which exploded on April 20 and sank two days later, is leaking an estimated 42,000 gallons per day through a pipe about 5,000 feet below the surface. The spill has spread across 1,800 square miles -- an area larger than Rhode Island -- according to satellite images, oozing its way toward the Louisiana coast and posing a threat to wildlife, including a sperm whale spotted in the oil sheen. The massive $600 million rig, which holds the record for boring the deepest oil and gas well in the world -- at 35,050 feet - had passed three recent federal inspections, the most recent on April 1, since it moved to its current location in January. The cause of the explosion has not been determined. Yet relatives of workers who are presumed dead claim that the oil behemoth BP and rig owner TransOcean violated "numerous statutes and regulations" issued by the Occupational Safety and Health Administration and the U.S. Coast Guard, according to a lawsuit filed by Natalie Roshto, whose husband Shane, a deck floor hand, was thrown overboard by the force of the explosion and whose body has not yet been located.

Well beneath sunken US rig has serious oil leak— An oil well on the ocean floor beneath a drilling rig that exploded and sank into the Gulf of Mexico began spewing oil on Saturday, the U.S. Coast Guard said.The well, 5,000 feet beneath the ocean surface, was leaking about  42,000 gallons per day of oil, a Coast Guard spokeswoman said, in what the agency called a "very serious spill." Remote underwater vehicles detected oil leaking from the riser and drill pipe, the spokeswoman said. "We are classifying this as a very serious spill and we are using all our resources to help contain it,"

BP Oil Well Leak May Take Months to Close After Rig Sinks BP Plc said it may take months to drill a well to stop an oil spill under the Gulf of Mexico that threatens to become an environmental disaster. BP and Swiss drilling contractor Transocean Ltd. began using remote-controlled vehicles yesterday to try to halt the 1,000 barrel-a-day leak. If that doesn’t work, BP may need to pump heavy fluid into a relief well to stop the flow of crude from the seabed. “The relief well as described could take several months,” Doug Suttles, BP’s chief operating officer of exploration and production, said in a teleconference yesterday

Golf Oil Spill Costs BP $6 million per Day Image: NASA - Ever since the Deepwater Horizon oil rig blew up last week, BP, which was leasing the rig, has been trying to control the Gulf oil spill. The 1,000 workers, 5 planes, robotic submarines, and 32 ships the company deployed are costing them more than $6 million/day. BNET’s Kristen Korosec has more:This time, the stakes and potential fallout aren’t just big for BP, but the rest of the offshore drilling industry as well. An estimated 1,000 barrels of oil a day are leaking from the BP well located some 5,000 feet under water. The spill, as of Tuesday, was 21 miles from shore, U.S. Coast Guard Rear Adm. Mary Landry said during a press conference. This could be the most significant spill in recent history if the well isn’t secured, Landry said.…the oil company is going to shell out a lot more before it’s over because the stakes for the environment, its own reputation and the industry are higher than ever. Drilling a second well to plug the leak, an option BP is pursuing, will cost an estimated $100 million.

Drilling And Spilling For All The Oil That's Left - America’s dream of greater energy independence is rapidly turning into an ecological nightmare. Instead of filling empty gas tanks, BP’s Deepwater Horizon well miles offshore is oozing thousands of barrels a day of oil, already covering an area over 1,900 square miles in the food-rich waters of the Gulf of Mexico. With no way of shutting off the valve, which is now buried 1,900 metres below the sea, a $2-billion seafood industry is threatened, not to mention the billions more in damage to coastal real estate values and the potential devastation to wetlands and the wildlife they contain if the growing slick washes ashore.  Most forms of unconventional oil and gas (including, by the way, shale gas) are invariably very hard on the environment. Although tar sands production draws most of the world’s criticism, we are quickly discovering that deep-water wells and the pressure surges they engender run the risk of wreaking even greater ecological and environmental devastation.   If this week has shown us the pressure surge of wells a mile below the ocean floor, what are the prospects of our standing up to those we’ll encounter in newly discovered Gulf of Mexico fields like BP’s Tiber one, six miles below the ocean floor?

Coast Guard to try burning oil slick off Louisiana coast…- The U.S. Coast Guard could begin burning off portions of a Gulf of Mexico oil slick as early as Wednesday as the pool of crude began to encroach on sensitive ecological areas in the Mississippi River Delta. The option is one of several that Coast Guard officials were considering as the oil slick moved to within 20 miles of the Louisiana coastline. Officials said the oil spill has the potential to become one of the worst in U.S. history. Oil is leaking at a rate of about 42,000 gallons a day from the well, some 50 miles off Louisiana.

Oil Leaks Could Take Months to Stop - Officials worked Sunday to try to stop oil leaks coming from the deepwater well drilled by a rig that sank last week near Louisiana, but they acknowledged that it could be months before they are able to stem the flow of what is now about 42,000 gallons of oil a day pouring into the Gulf of Mexico.  The response team is trying three tacks: one that could stop the leaks within two days, one that would take months and one that would not stop the leaks but would capture the oil and deliver it to the surface while permanent measures are pursued.  Officials determined through weather patterns that the sheen of oil and water, now covering 600 square miles, would remain at least 30 miles from shore for the next three days. But states along the Gulf Coast have been warned to be on alert.

New oil leak in well of sunken drilling rig…— Five times more oil a day than previously believed is spewing into the Gulf of Mexico from a blown-out well of a sunken drilling rig, the Coast Guard said Wednesday, an estimate the oil company trying to contain the massive spill disputes. A new leak was discovered in the pipes a mile below the ocean's surface. Coast Guard Rear Adm. Mary Landry said National Oceanic Atmospheric Administration experts now estimate that 5,000 barrels a day of oil are spilling into the gulf. Officials had estimated the leak for days at 1,000 barrels a day. The news came hours after crews tried a test burn on the massive spill to try to slow it from reaching the U.S. shoreline.

Oil Leak in Gulf of Mexico May Be 5 Times Initial Estimate - NYTimes  In a hastily called news conference, Rear Adm. Mary E. Landry of the Coast Guard said a scientist from the National Oceanic and Atmospheric Administration had concluded that oil is leaking at the rate of 5,000 barrels a day, not 1,000 as had been estimated. While emphasizing that the estimates are rough given that the leak is at 5,000 feet below the surface, Admiral Landry said the new estimate came from observations made in flights over the slick, studying the trajectory of the spill and other variables.  Doug Suttles, chief operating officer for exploration and production for BP, said a new leak had been discovered as well. Officials had previously found two leaks in the riser, the 5,000-foot-long pipe that connected the rig to the wellhead and is now detached and snaking along the sea floor. One leak was at the end of the riser and the other at a kink closer to its source, the wellhead.  But Mr. Suttles said a third leak had been discovered Wednesday afternoon even closer to the source. “I’m very, very confident this leak is new,” The new, far larger estimate of the leakage rate, he said, was within a range of estimates given the inexact science of determining the rate of a leak so far below the ocean’s surface.

BP welcomes military help for larger Gulf oil leak -– A massive oil spill in the Gulf of Mexico is even worse than believed and as the government grows concerned that the rig's operator is ill-equipped to contain it, officials are offering a military response to try to avert a massive environmental disaster along the ecologically fragile U.S. coastline. Speaking Thursday on NBC's "Today" show, an executive for BP PLC, which operated the oil rig that exploded and sank last week, said the company would welcome help from the U.S. military. "We'll take help from anyone," BP Chief Operating Officer Doug Suttles said. But time may be running out. Not only was a third leak discovered — which government officials said is spewing five times as much oil into the water than originally estimated — but it might be closer to shore than previously known, and could have oil washing up on shore by Friday. – US oil slick five times bigger than estimated -The US was braced on Friday for oil from the spill in the Gulf of Mexico to hit its shoreline, threatening an environmental disaster across four southern US states.Louisiana declared a state of emergency as the slick neared the coast, threatening wildlife and fishing grounds. The US military might be deployed to help contain the leak Booms have been stretched around the most sensitive wildlife areas and the shrimp season has opened early in hope of harvesting some seafood before it becomes contaminated.The Obama administration on Thursday stepped up its response to the BP oil spill in the Gulf of Mexico, designating it an event “of national significance” as rescue workers struggled to stop the oil from washing ashore on the Louisiana coast on Friday.The move will free up money and resources from around the country to fight the slick caused by last week’s explosion on the Deepwater Horizon drilling rig, which appears to be leaking five times as much oil as was previously feared.

Gulf Coast oil spill could eclipse Exxon Valdez - An oil spill that threatened to eclipse even the Exxon Valdez disaster spread out of control with a faint sheen washing ashore along the Gulf Coast Thursday night as fishermen rushed to scoop up shrimp and crews spread floating barriers around marshes. The spill was bigger than imagined - five times more than first estimated - and closer. Faint fingers of oily sheen were reaching the Mississippi River delta, lapping the Louisiana shoreline in long, thin lines.  "It is of grave concern," David Kennedy of the National Oceanic and Atmospheric Administration, told The Associated Press. "I am frightened. This is a very, very big thing. And the efforts that are going to be required to do anything about it, especially if it continues on, are just mind-boggling."  The oil slick could become the nation's worst environmental disaster in decades, threatening hundreds of species of fish, birds and other wildlife along the Gulf Coast, one of the world's richest seafood grounds, teeming with shrimp, oysters and other marine life. Thicker oil was in waters south and east of the Mississippi delta about five miles offshore.

Gulf States Mobilize for Valdez-Scale Oil Disaster - U.S. Interior Department inspectors began boarding deep-water platforms in the Gulf of Mexico and Louisiana mobilized the National Guard as an expanding oil slick that may rival the Exxon Valdez spill approached the coast.  Future drilling must safeguard against a recurrence, President Barack Obama said today in remarks at the White House, promising a “thorough review” of the BP Plc well leak the government estimates is spewing 5,000 barrels a day.  Interior Secretary Ken Salazar was ordered to report in 30 days the additional precautions needed, Obama said. The department’s Minerals Management Service, regulator of offshore drilling, is focusing on the blowout preventer, equipment used by all drillers that should have prevented the spill and an explosion that resulted in the death of 11 people, Mike Saucier, an agency spokesman, said yesterday at a press conference.

Oil spill approaches Louisiana coast - The Big Picture -Late on the night of April 20th, 50 miles from the shore of Louisiana, a fire broke out aboard the Transocean Deepwater Horizon oil rig under lease by BP, with 126 individuals on board. After a massive explosion, all but 11 of the crew managed to escape as the rig was consumed by fire, later collapsing and sinking into the Gulf. Safeguards set in place to automatically cap the oil well in case of catastrophe did not work as expected, and now an estimated 5,000 barrels (over 200,000 gallons) of crude oil is pouring into the Gulf of Mexico every day - and could possibly continue to do so for months as complicated efforts are made to stop the leak. Collected here are several recent photos of the developing situation along Louisiana's Gulf Shore - one with the potential to eclipse the 1989 Exxon Valdez oil spill in scope and damage. (32 photos total)

Unfavorable winds set to push Gulf of Mexico oil spill into Louisiana - Oil continues to gush from the well head at 5,000 feet depth at a rate five times what was previously estimated -- 210,000 gallons per day. This is equivalent to about 2% of the total spilled oil from the 1989 Exxon Valdez disaster in Alaska entering the Gulf of Mexico each day. If 210,000 gallons per day has been leaking since the disaster began on April 20, over 2 million gallons of oil has already been spewed into the Gulf, about 18% of the 11,000,000 gallons spilled in America's previous worst oil spill, the Exxon Valdez disaster. With the winds expected to begin blowing the oil spill on shore this weekend, the Deepwater Horizon oil spill appears destined to become one of the most disastrous oil spills in U.S. history

Oil Spill Seen Approaching Shore from Space - The dark swirl of the expanding oil spill in the Gulf of Mexico was photographed yesterday from space as the slick inched ever closer to the Louisiana coast.  The latest image from the European Space Agency's Envisat satellite showed that the oil spill - five times larger than first estimated - had spread to just under 3 miles (5 kilometers) from the coast, threatening an environmental disaster.  To help with the cleanup effort, Envisat images are being provided to U.S. authorities immediately after they are acquired through the International Charter Space and Major Disasters. The Charter is an international collaboration between worldwide space agencies to put satellite remote sensing at the service of civil protection agencies and others in response to natural and man-made disasters. Envisat also used its radar capabilities to observe the spill, which produced a black-and-white image on Wednesday, in which the slick is visible as a lighter grey C-shape just south-southeast of the Louisiana-Mississippi coast (on the left side of the large black pattern stretching across the Gulf in the image).

Louisiana waits for black tide -Louisiana was braced on Thursday for oil from the spill in the Gulf of Mexico to hit its shoreline as early as Saturday. Booms have been stretched around the most sensitive wildlife areas and the shrimp season has opened early in hopes of harvesting some seafood before it becomes contaminated. Bobby Jindal, Louisiana governor, has issued a declaration of emergency, which allows federal agencies to be deployed.  He has asked the Coast Guard and BP, which bears responsibility for the leak, to set up two hotlines – one for volunteers wishing to help in the clean-up and a second for those who have suffered property or income losses because of the spill. The Louisiana seafood industry produces between 30-40 per cent of North America’s oysters, shrimp and blue crabs. It has been hit before, by hurricanes and the occasional small spill, but wildlife experts say this is different because there is no end in sight to the flow of contaminants into the water.

10 a.m. Thursday: Oil spill hits Louisiana shore; Jindal wants National Guard to help - Raw crude oil is washing ashore in delicate estuaries along Louisiana's southernmost point, Pass a'Loutre in Plaquemines Parish. With oil that's spewing from the BP PLC-owned Deepwater Horizon offshore well moving onshore, Louisiana officials are now focusing on cleaning up what the Coast Guard couldn't block and trying to keep even more oil from coating the coastline."We're taking every step we can to help protect our coast, wildlife, environment and our people," Gov. Bobby Jindal said. "We absolutely have to be prepared for the worse." That includes seeking to call out the National Guard. Jindal sent letters to the head of the Department of Defense and Homeland Security seeking funding to pay up to 6,000 members of the Guard to help the state handle what could be a major disaster.

Oil spill reaches Louisiana shore -— Efforts to keep some of the millions of gallons of oil spewing from an offshore well from hitting the coast of Louisiana were unsuccessful as waves carrying raw crude moved overnight into delicate estuaries at the state's southernmost point, Pass a'Loutre in Plaquemines Parish. With oil that's spewing from the Deepwater Horizon offshore well moving onshore, Louisiana officials are now focusing on cleaning up what the Coast Guard couldn't block and trying to keep even more oil from coating the coastline. "We're taking every step we can to help protect our coast, wildlife, environment and our people," Gov. Bobby Jindal said. "We absolutely have to be prepared for the worse."But so far, the only physical assistance the Coast Guard approved toward fighting the oil intrusion is allowing fishermen trained in installing oil barrier buoys to place booms that could block some of the surface oil. However, the National Weather Service says that with high winds, rain and higher than normal tides predicted for this weekend, the boom string is not expected to be too effective.

BBC News - US military joins Gulf of Mexico oil spill effort… The US military has joined efforts to stop an oil leak in the Gulf of Mexico as fears rise about its scale. Five times as much oil as previously thought could be leaking from the well beneath where a rig exploded and sank last week, the US Coast Guard says. Rear Admiral Mary Landry said 5,000 barrels a day were thought to be gushing into the sea off Louisiana. The Department of Homeland Security has designated the spill as one of "national significance". Homeland Security Secretary Janet Napolitano, who is to go to Louisiana to oversee operations, told reporters in Washington that this designation would allow resources to be ordered in from other areas of the US. At the same briefing, a coastguard official said the oil slick was expected to wash ashore on the Gulf Coast on Friday. The oil slick caused by the leak is 45 miles by 105 miles and is heading towards the coast.  If the coastguard estimate is correct, within two months the spill could match the 11 million gallons spilt from the Exxon Valdez tanker off Alaska in 1989.

NASA satellite shows Gulf oil slick reaching Mississippi Delta - The following photos, taken Thursday by NASA's Terra satellite, show oil from the Deepwater Horizon disaster as it moves toward the Louisiana coast.  The top image is a wide view of the Gulf. The bottom image shows a close-up of the area bordered by white in the wide view.  At the time the photos were taken, the northwestern tip of the oil slick almost touched the Mississippi delta. "Sunglint" (the mirror-like reflection of the sun off the water) enhanced the oil slick's visibility, NASA said.

This oil spill 'the bad one' — recipe for disaster What makes an oil spill really bad? Most of the ingredients for it are now blending in the Gulf of Mexico. Experts tick off the essentials: A relentless flow of oil from under the sea; a type of crude that mixes easily with water; a resultant gooey mixture that is hard to burn and even harder to clean; water that's home to vulnerable spawning grounds for new life; and a coastline with difficult-to-scrub marshlands.Gulf Coast experts have always talked about "the potential for a bad one," said Wes Tunnell, coastal ecology and oil spill expert at Texas A&M University-Corpus Christi."And this is the bad one. This is just a biggie that finally happened."

Experts: Oil May Be Leaking at Rate of 25,000 Barrels a Day in Gulf - WSJ —The Gulf of Mexico oil spill could be leaking at a rate of 25,000 barrels a day, five times the government's current estimate, industry experts say.Basing their calculations on government data and standard industry measurement tools, the experts said the Gulf spill may already rival the historic 1969 Santa Barbara, Calif., and 1989 Exxon Valdez disasters. Ian MacDonald, professor of oceanography at Florida State University who specializes in tracking ocean oil seeps from satellite imagery, said there may already be more than 9 million gallons of oil floating in the Gulf now, based on his estimate of a 25,000 barrel-a-day leak rate. That's compared to 12 million gallons spilled in the Valdez accident.

Leaked report: Government fears Deepwater Horizon well could become unchecked gusher - A confidential government report on the unfolding spill disaster in the Gulf makes clear the Coast Guard now fears the well could become an unchecked gusher shooting millions of gallons of oil per day into the Gulf. "The following is not public," reads the National Oceanic and Atmospheric Administration's Emergency Response document dated April 28. "Two additional release points were found today in the tangled riser. If the riser pipe deteriorates further, the flow could become unchecked resulting in a release volume an order of magnitude higher than previously thought." Asked Friday to comment on the document, NOAA spokesman Scott Smullen said that the additional leaks described were reported to the public late Wednesday night. Regarding the possibility of the spill becoming an order of magnitude larger, Smullen said, "I'm letting the document you have speak for itself." In scientific circles, an order of magnitude means something is 10 times larger. In this case, an order of magnitude higher would mean the volume of oil coming from the well could be 10 times higher than the 5,000 barrels a day coming out now. That would mean 50,000 barrels a day, or 2.1 million gallons a day. It appears the new leaks mentioned in the Wednesday release are the leaks reported to the public late Wednesday night.  

Joseph Romm: Oilpocalypse Now -- WSJ reports BP oil disaster may be leaking at rate of 1 million gallons a day - It will be the biggest energy and environmental news story for the foreseeable future.  Eleven people are already dead and if yesterday’s Wall Street Journal story, “Experts: Oil May Be Leaking at Rate of 25,000 Barrels a Day in Gulf” (subs. req’d, excerpted below) is accurate, then the scope of the environmental disaster is far beyond anything we’ve imagined. How the story plays out will probably determine more than anything else whether there is comprehensive energy and climate legislation this year.  I have been writing, researching, and speaking about oil for two decades now. My first two books discussed the oil security issue extensively, including the one I wrote for the Council on Foreign Relations in 1993, Defining National Security: the Nonmilitary Aspects. My first Congressional testimony representing the Department of Energy in 1996 was on an analysis that I did on the threat posed by growing US oil dependence (hard to read HTML here, massive PDF here). I have been following the oil and the drilling debate closely here on CP.  As I discussed in a March post, here’s what we’re going to get for all that new drilling people want to do:  EIA: New offshore drilling will lower gas prices in 2030 a few pennies a gallon.

Deepwater Horizon Disaster: New Spill Calculation, Exxon Valdez Surpassed Today - Dr. Ian MacDonald at FSU just produced a new spill-size estimate based on the US Coast Guard aerial overflight map of the oil slick on April 28, 2010. The bottom line: that map implies that on April 28, 2010, there was a total of 8.9 million gallons floating on the surface of the Gulf.That implies a minimum average flow rate of slightly more than 1 million gallons of oil (26,000 barrels) per day from the leaking well on the seafloor. Since we're now in Day 11 of the spill, which began with a blowout and explosion on April 20, we estimate that by the end of the today 12.2 million gallons of oil, at a minimum, have been spilled into the Gulf of Mexico. The oft-quoted official estimate for the Exxon Valdez spill is 11 million gallons, although some think that is the lower limit of the likely range. It appears that we've just set a very sad new record. Here is Dr. MacDonald's calculation:

What's going on beneath the sea? A graphic explanation of the fight to shut off the oil leak - Even as experts scramble to come up with a way of keeping the oil from the Deepwater Horizon well from continuing to flow freely into the Gulf of Mexico,  BP concedes that a relief well will eventually have to be drilled in order to successfully shut down the existing leaking well. The graphic below explains what's happening on the ocean floor, and how the relief well will work.

Solution to Capping Well Remains Elusive - As cleanup crews struggled Friday to cope with the massive oil slick from a leaking well in the Gulf of Mexico, dozens of engineers and technicians ensconced in a Houston office building were still trying to solve the mystery of how to shut down the well after a week of brainstorming and failed efforts. They have continued to focus their attention on a 40-foot stack of heavy equipment 5,000 feet below the surface of the gulf — and several hundred miles from Houston. Known as a blowout preventer, or B.O.P., the steel-framed stack of valves, rams, housings, tanks and hydraulic tubing, painted industrial yellow and sitting atop the well in the murky water, is at the root of the disaster.  When an explosion and fire crippled the deepwater drilling rig on April 20, workers threw a switch to activate the blowout preventer, which is designed to seal the well quickly in the event of a burst of pressure. It did not work, and a failsafe switch on the device also failed to function.

Gulf Oil Spill May Be Impossible to Clean Up: Experts - Several different technologies exist to clean up oil spills, including booms to contain them, dispersants to break up the oil and skimmers to scoop it up. But the oil pouring out of BP's ruptured oil rig in the Gulf of Mexico is likely to overwhelm any and all of them, experts agree. Nancy Kinner, director of the joint University of New Hampshire/NOAA Coastal Response Research Center, says: "Many of the technologies that we would typically use don't work well when you have got high wind and waves, and that is basically what is happening down there now. It is causing the oil to emulsify and make this kind of sticky chocolate-mousse type of material." Such an emulsion does not burn well, Kinner said, and the wind and waves can drive the foamy oil both over and under booms deployed to contain it.

The Oil Spill: Wildlife at Risk - The oil spill from a deepwater well is threatening various birds and marine mammals along the Louisiana coast. The National Audubon Society has identified some of the most vulnerable birds. About 210,000 feet of protective boom has been laid. Related Article »

Oil Spill’s ‘Fisheries Failure’ May Signal End of Coastal Towns - State agencies today closed recreational and commercial fishing and shut down the oyster harvest in most areas east of the Mississippi River. Louisiana Governor Bobby Jindalsent a letter to Commerce Secretary Gary Locke, asking Locke to declare a “commercial fisheries failure” and requesting assistance for both the seafood industry and recreational fishing businesses. Jindal wrote that those businesses are crucial to Louisiana’s coastal towns and the country, supplying almost one- third of the seafood in the lower 48 states, with values in excess of $2.85 billion a year. “As the largest provider of domestic seafood in the continental United States, protection of Louisiana’s fisheries, habitats and catch are critical to our nation’s economy and food supply,” he wrote. “The seafood industry is not only a large economic driver, but a defining element of the unique culture, and a crucial tourist draw to the state.”

Grain Exports Threatened as Oil Spill Reaches Louisiana (Bloomberg) -- The biggest grain-shipping port in the U.S. may be disrupted by the spread of the BP Plc oil spill in the Gulf of Mexico, threatening to depress domestic prices by encouraging importers to buy from South America.More than half of the grain inspected for export from the U.S., the world's largest grower of corn and soybeans, is shipped from the mouth of the Mississippi River, according to the Port of New Orleans. Traffic has yet to be restricted through the main deepwater channel, the Southwest Pass, used by ships carrying commodities such as oil, coal and grain. BP and Transocean Ltd. are struggling to cap a damaged undersea well leaking 5,000 barrels of crude a day since the Deepwater Horizon drilling rig exploded April 20. The edge of the spill began washing ashore in Louisiana late yesterday and may reach Florida's coast early next week.

GULF OIL LEAK CATASTROPHIC -Leak Rate 25,000 bpd -- Terrorism or an act of war has not been ruled out. DHS and Interior have assumed command of the investigation. According to the BP Chairman no one has a clue what caused the explosion. Then it got really scary. Someone said clearly that the whole world was watching because of what this meant for already-funded offshore exploration under development. The safety measures designed to protect against a blowout have failed completely. How many more billions of research and millions in cost per fix are going to be needed? How many projects delayed or halted? Worse: The oil slick is now the size of Delaware. It will be Ohio-sized within days. Florida has declared a state of emergency. All commercial fishing in the Gulf is threatened. All widlife is threatened. And when and if the slick gets to NOLA it will have a disatarous impact on energy production and the brave, battered, courageous people who live there. Coastal refineries may have to close... What might happen if the oil ignited? Oil should be at $100 before the end of next week. I suspect between $150 and $200 (maybe higher) this summer.

Can Microbes Save The Gulf Beaches? The Challenges Are Myriad At this point it's unclear how much of an environmental threat oil spreading from the BP spill will cause, but the federal government is mobilizing thousands of workers to prepare for the worst. They have a potential ally: microbes that have evolved an ability to break down oil that seeps from the ocean bottom. It gets devoured by a variety of bacteria, which eat it by chemically transforming its compounds into useful cellular constituents. "If it wasn't for the natural ability of bacteria to eat oil we would all be knee-deep in the stuff," says bioremediation expert Ken Lee of the Bedford Institute of Oceanography in Nova Scotia, Canada.  So could bugs help cleanse the gulf? A number of companies have tried to create bacteria that could break down oil on demand, but Lee and colleague Albert Venosa of the Environmental Protection Agency say that experiments have shown that novel bacteria, even if they show promise in the lab, cannot compete with bacteria already living on beaches and marshes.

Latest BP Cleanup Estimate Soars To $3 BILLION - BP has lost over $20 billion in market cap since the Deepwater Horizon oil spill. Some folks have called the selloff overdone on the argument that the cleanup would ultimately be fairly cheap for the company (which is legally obliged to pay for it all). But estimates of the total bill continue to spiral higher. According to The Telegraph (via ForexLive), many are now pegging the cost at around $3 billion. Morgan Stanley believes the cleanup will go as high as $3.5 billion. Either way, at this point we're talking real money. And beyond that, it now seems unfathomable that this won't lead to serious limits on new drilling, not to mention added safety and regulatory costs for current operations. The only question, though, for the US, is: Where do we get our new oil from?

Senator Reid seeks offshore drilling re-examination  (Reuters) - Senate Majority Leader Harry Reid on Friday called for a re-examination of offshore drilling in wake of the spreading oil slick in the Gulf of Mexico. With President Barack Obama planning to open vast stretches of the coastline to oil and gas drilling, Reid said the worsening spill should be considered in any expansion. "This terrible event will, undoubtedly, require us to re-examine how we extract our nation's offshore energy resources and will have to be taken into consideration with any legislation that proposes to open new areas to development," Reid, a Democrat, said in a statement.The stalled climate change bill was expected to have provisions to spur expansion of offshore drilling, in a bid to shore up votes from Republicans. The White House acknowledged on Thursday that the spill could force the president to rethink plans to increase offshore oil drilling, an essential component of legislative efforts to stem global warming

Russian PM Putin orders Arctic cleanup  (Reuters) - Russian Prime Minister Vladimir Putin has ordered that a million abandoned barrels of Soviet-era fuel be removed from the Arctic because they are polluting the environment. Putin visited the Russian archipelago of Franz Josef Land, 1,000 km (600 miles) from the North Pole, as part of Russia's drive to reassert its presence in the resource-rich region, now opening up to commercial exploration because of melting ice. Putin told state-run Rossiya 24 television in the Arctic he was shocked to see stocks of "abandoned barrels of fuel scattered all the way to the horizon." It was not immediately clear when Putin made the trip.

Peak Everything? When you really need something, it's natural to worry about running out of it. Peak oil has been a global preoccupation since the 1970s, and the warnings get louder with each passing year. Environmentalists emphasize the importance of placing limits on consumption of fossil fuels, but haven't been successful in encouraging people to consume less energy—even with the force of law at their backs. The debate over peak oil is heavily politicized, so let's set it aside and test the idea of imminent resource peaks and their consequences for economic growth on three other non-renewable resources: lithium, neodymium, and phosphorus.

Paul Collier and his Plundering Planet: When Both Economists and Environmentalists Don’t Get it Right - World Bank Poverty and Growth Blog - Do you remember The Bottom Billion, Paul Collier’s 2007 book which became a classic? If you do, you will certainly like his latest work, The Plundered Planet. He came to launch his new book to the Bank this week, and I found it both fascinating and provocative. Let me give some examples of why. Professor Collier, now the Director of the Centre for the Study of African Economies at Oxford University, declares a two-front war on economists and environmentalists at the same time. He is against what he calls “utilitarian economists,” because if left on their own, they would end up plundering the planet. But Collier also takes on “romantic environmentalists,” who would be unable to eradicate hunger in case they’re given the chance to rule the world. So as you can see, the book’s premises don’t really fit into the script of the blockbuster, Oscar-winning movie Avatar.

Even worse than ATM fees - I get annoyed by the $3 fees I sometimes get charged by ATMs, but this figure pales in comparison to the high cost migrants face in sending remittances. According to World Bank estimates, some $317 billion in remittances were sent to developing countries in 2009. This money is often a vital income-stream for recipients. But according to a new policy note from the World Bank’s Payment Systems Development Group, a combination of fees and currency exchange spreads took a significant chunk out of this money. In the 3rd quarter of 2009, the global average total cost for sending migrant remittances was 9.4 percent. What’s more, some of the poorest countries face some of the highest average costs.

The Next Empire - All across Africa, new tracks are being laid, highways built,ports deepened, commercial contracts signed—all on an unprecedented scale, and led by China, whose appetite for commodities seems insatiable. In most of Africa’s capital cities and commercial centers, it’s hard to miss China’s new presence and influence. Do China’s grand designs promise the transformation,at last, of a star-crossed continent? Or merely its exploitation? The author travels deep into the heart of Africa, searching for answers.

Food and water drive Africa land grab – Rich Arab states such as Saudi Arabia have bought huge tracts of land across Africa in recent years in a bid to combat global food shortages, water scarcity and desertification and feed their burgeoning populations.But now the scramble for Africa is intensifying, with investment banks, hedge funds, commodity traders, sovereign wealth funds, corporations and business tycoons out to grab some of the world's cheapest land -- for profit. China has leased 6.91 million acres in the Democratic Republic of Congo for the world's largest oil palm plantation. South Korea's Daewoo conglomerate planned to buy 2.9 million acres of Madagascar until the deal collapsed when rioters toppled the Indian Ocean island's government. Philippe Heilberg, CEO of the New York-based investment fund Jarch Capital ... has leased between 998,000 and 2.47 million acres in southern Sudan from the warlord Paulino Matip.

A suggestion for the 1MillionShirts guys - Here’s the back story: Two young American entrepreneurs wanted to use their powerful social media profiles to do good. They hit on the idea of convincing people to pack up all their unneeded T-shirts, throw in a dollar for shipping, and send them – 1 million of them – somewhere in Africa. They partnered with two charities, applied for 501(c)3 status, and voila, a new cause was born: 1MillionShirts. Yesterday, professional aid workers, academics, and researchers responded vociferously to this idea. Take a look at these blog posts for more details, but for our purposes we can break it down to two reasons why 1MillionShirts is a poor idea...

India's Bond Yields at 18-Month High on Concern Over Debt Sales(Bloomberg) -- India’s 10-year bonds dropped for a second day, pushing yields to an 18-month high, on concern appetite for the debt will cool as the government steps up sales to finance its budget deficit.The government will issue 120 billion rupees ($2.7 billion) of bonds on April 30, the finance ministry said today. The sale will include a new 10-year bond for 50 billion rupees. The Reserve Bank of India increased its benchmark policy rates by a quarter-percentage point each at a meeting on April 20. “The fact that the government’s borrowing program is robust will continue to push up yields,”

Exports to China up 75% -   Indian exports to China surged by 75 per cent in the first quarter this year, with a big increase in textiles and stones and precious metals shipments, bringing down the trade deficit. Overall trade with China grew by about 66 per cent during the period, raising hopes of achieving the trade target of $60 billion this year, according to data released by the Chinese government today. The trade figures released by the Chinese customs brought blushes back on the faces of Indian diplomats and trade officials here as Indian exports, which declined radically last year and resulted in a $16 billion dollar trade deficit, have shown significant improvement.

Malaysia To Promote Cross-border Investments With Gulf Countries (Bernama) -- Malaysia is examining ways to promote more cross-border investments among Gulf states, a move that will boost Islamic finance growth. The Raja Muda of Perak, Raja Dr Nazrin Shah, said Malaysia was looking at possibilities of talking to regulatory, supervisory and enforcement agencies in the Gulf region to allow investment activities with minimal intervention and in a harmonised manner. "Gulf countries offer a lot of potential. We feel there's a lot of scope of expansion in terms of trade and investment between these two regions but of course we may look further," he told BERNAMA in an interview. Raja Dr Nazrin is currently leading a delegation to the United Arab Emirates and Saudi Arabia roadshow organised by the Malaysia International Islamic Financial Centre

Brazil’s Economy to Grow 6.4% to 7% This Year (Bloomberg) -- Brazil’s economy will grow 6.4 percent to 7 percent this year as the country’s output gets “close to overheating,” said Octavio de Barros, chief economist at Banco Bradesco SA. Brazilian policy makers will raise their target rate 75 basis points, or 0.75 percentage point, in their next meeting to curb inflation, said Barros in a speech at an investment summit organized by Terrapinn Holdings Ltd. in Sao Paulo. “Inflation is a point of worry,” said Barros. “The fact that so many banks are rising their growth expectations shows how the economy is overheating.”

China and Latin America: Re-evaluating Macro Linkages - Last week, I attended a conference organized by the Eduardo Fernandez-Arias and Alessandro Rebucci at the Inter-American Development Bank. One of the panels focused on the impact of China on Latin America's economy. Originally, I'd thought that the linkages would have been quite limited, but in doing research for this talk, I've re-evaluated my views. Rebucci presented a paper which evaluated the implications of shocks to the Chinese economy, using a global VAR (GVAR) model (for more on GVARs, see here). The details of the model are contained in this paper (which differs slightly from the version implemented in the presentaiton). He and his coauthors found that the effect of shocks to Chinese GDP had increased over time. More surprisingly, they also found that a Chinese revaluation would slow growth in the US, Europe, Japan, as well as in Latin America.

China ponders yuan regime shift to ditch dollar peg (Reuters) - When Singapore surprised the market by revaluing its dollar this month to pre-empt inflation, analysts had to rack their brains to find out how much the currency's value had actually gone up. Such an obscure system may be just what China needs. Steering the exchange rate, not interest rates, is the Monetary Authority of Singapore's key policy tool. The MAS has managed its currency within a secret trade-weighted band to keep the economy on an even keel and shield the island from speculative attacks since the early 1980s. By contrast, the yuan looks like an easy target for the market as the Chinese authorities come under mounting pressure to abandon a 21-month-old peg to the dollar. A shift is widely expected as early as this quarter. Intriguingly, chatter in the market is that Beijing might have an eye on Singapore's track record as it decides what to do next.

Crises and currencies - HERE I was thinking that the world's intense focus on European debt concerns presented the perfect opportunity for China to quietly revalue its currency against the dollar: The yuan’s climb to a one-year high against the euro will erode China’s competitiveness in its largest export market and delay an end to its currency’s peg against the dollar, said UniCredit SpA and Societe Generale SA.Forward contracts on the currency fell after debt-rating downgrades of Greece and Portugal yesterday deepened concern that a sovereign-credit crisis will hamper a global economic recovery. The European turmoil may buttress Premier Wen Jiabao’s reticence to abandon the yuan’s peg to the dollar, adopted in July 2008 to shield exporters from the world recession. “Chinese authorities have said all along that they are concerned about the stability of the global recovery,”

The RMB and the magic of accounting identities - I wanted to work through Paul Krugman’s point on currency intervention because, as I see it, he is simply using accounting identities to set out the parameters of how to think about the issue of RMB revaluation.  Accounting identities cannot be violated, neither in practice nor in theory, although depressingly enough much of the discussion of trade balances, even when conducted by economists, brazenly violates these identities.  It may make sense then to place the discussion solely in that context so that at least we can all agree where we legitimately disagree.  Here is what Krugman says:

So, yuan to fight about it? - Does the US have a legal case against China’s exchange-rate regime? This column, which first appeared in Vox's latest eBook, argues that any claim against China at the WTO would face substantial hurdles, and would be unlikely to add pressure on China any time soon. If a claim does go ahead, it is more likely than not to fail.

Pay Us In Yuan, Not Dollars (Pretty Please) - An interesting piece in the FT by StanChart's chief economist Gerard Lyons makes the case that, in spite of its continued willingness to buy dollar-denominated reserve assets, China is nonetheless undermining the dollar by facilitating the use of renminbi swaps with its trading partners for invoicing and settling transactions. For sure, there is still some way to go before the yuan becomes more freely traded, but this is a step in the right direction. I cannot possibly hide my antipathy towards the wretched greenback, so I wish these small-scale experiments China is conducting with various LDCs--especially those in Southeast Asia--pick up speed. What impresses me with Lyons is that, unlike many other commentators who've been living in their whitebread world, he understands that these efforts are currently being coursed through the Hong Kong Monetary Authority (HKMA) and not the People's Bank of China (PBoC). The reason is simple: the former simply has more accumulated experience facilitating these types of transactions. The currency is the yuan, but the overseer is a former British colony's legacy central bank:

Why Trade Figures Do Not Prove China Is Rebalancing - China’s trade surplus declined in the first quarter, and during March the country ran a deficit of $7.2 billion, its first monthly trade deficit since 2004. Contrary to some analyses, this is not proof that the economy has made significant progress toward rebalancing or a reason for the United States to back away from pushing China on yuan appreciation. The short-run decline in the trade balance was driven by seasonal effects, a slowdown in China’s export markets, and a surge in raw materials imports - none of which indicate that China is making a transition to an economy driven by greater consumer demand. On the contrary, a breakdown of trade figures indicates that although demand has returned, it is largely related to investment-led growth, not to consumer demand.

Can China save the world by consuming more? - VoxEU - Would an increase in Chinese domestic demand meaningfully reduce global imbalances and improve US and European employment prospects? This column says that Chinese policy has a relatively small impact on developed economies' macroeconomic circumstances. It estimates that major reduction in Chinese saving would improve US employment by less than one quarter of a percentage point.

Another $586 billion "Stimulus" Coming to China? - Mish - China Business says China May Announce 4 Trillion Yuan Stimulus. China will announce in August a new stimulus package of possibly 4 trillion yuan ($586 billion), the China Business newspaper reported on its Web site, citing unidentified sources. The plan, from China’s National Development and Reform Commission, will likely cover nine industries including information technology and new energy, the report said.  I have no idea if that is true or not. What I do know is how insane that is, if it is true. China has the biggest property bubble in the world. Another massive stimulus would fuel that bubble. In turn, increased demand for commodities would further stimulate the property bubbles in Canada and Australia.

China's Construction Boom Pushes Power Consumption Up 25% -Chinese electricity consumption soared 24.2% in Q1 to 969.5 billion kilowatt-hours according to China's National Energy Administration (NEA). China Daily: Breaking the figures down, thermal, nuclear power and wind power generation increased 24.3 percent, 7 percent and 99.3 percent, respectively, compared with the same period last year, while hydropower generation declined 5 percent, the NEA said in a statement on its website. ..China may increase its fuel consumption in the second quarter driven on the back of robust economic growth and increased domestic travel during the Shanghai World Expo, said NEA official Zhou Xi'an. Note that China's most energy consuming industries are steel, chemical, building materials, and metals.

Wrangling with the Wild Bulls - Andy Xie - A double digit–growth rate and a howling one-third increase in property investment. Recent statistics, though far from accurate, unambiguously show an overheating Chinese economy as well as a speculative bubble. Consumption inflation is also likely to head towards double digits soon, even though official statistics still portray low inflation. Some sort of crisis may already be inevitable. But, by delaying remedial action, trouble, when it arrives, will only be bigger. If China's banks are to avoid whiplash, unflinchingly tough action needs to be taken on raising interest rates and capital adequacy ratios.

Red hot real estate “My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”The latter piece is written by Andy Xie, The problem is that behind that housemaid there are several hundred million Chinese living in extreme poverty, and who represent a massive potential demand pool. In the American bubble, housing construction outran new household creation. In China, you could build at the current pace for years and still not provide every citizen with adequate urban housing. In America, home price increases outran income growth. But in China, growing at over 10% per year, who's to say that incomes won't be more than adequate to justify today's prices in just a few years?

China Real Estate  - LA Times: In China, real estate fever is rising Taxi drivers boast of owning multiple flats for investment. Billboards hawk developments with names such as Villa Glorious and Rich Country. Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints. Average home values in Hefei soared 50% last year.While pricey by local standards, that's still a fraction of what homes cost in the capital.And on speculators: [In a building that is sold out, Guo Hongbing, a marketing consultant for several developers] was interested in estimating how many were left empty by investors. His unscientific method? Looking for curtains. "See, less than half that building is occupied," he said, pointing to one block with several bare windows. "These speculators want to buy as many possible."A few key points: In China, apartments are sold as bare walls. There is a thriving industry of companies that finish apartments after they are bought.  As the LA Times article mentions, investors have few alternatives. There are no property taxes, and I believe no capital gains taxes. So investors buy properties and are willing to just let them sit empty.

China Considers U.S.-Style Property Tax - China is considering introducing new or higher taxes on real estate, possibly even a U.S.-style property tax, which would mark a significant escalation of its struggle to cool down a booming property market now widely being described as a bubble. How authorities handle any kind of property tax—the prospect of which is fiercely opposed by some property developers—will have significant implications for China's economy, and will ripple through global markets. The construction boom is the main driver of the current recovery in China, and is one of the few parts of the world economy growing strongly right now.

I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie – BusinessWeek - China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China’s real-estate market a “bubble” isn’t denying China’s development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time. When it is about to burst, I’ll let you know. Expectations of a Chinese currency revaluation are, perhaps, the most important force inflating the bubble. First, it plays to the latent human desire for a free lunch. You just need to exchange your money for Chinese yuan. According to all the experts on Wall Street, you can only gain. The money has been gushing into China. Second, the revaluation story has kept Chinese money inside the country. The dollar has always been the safe-haven asset for Chinese. This is why Chinese banks had a large dollar deposit base. Of course, anybody who was somebody had dollars offshore. Now all that money is back. More importantly, any income, legal or otherwise, now stays in China.

HSBC Chief: London And New York Are 'Yesterday's News' In The New World Of Finance - In a speech to the American Chamber of Commerce in Hong Kong, Mike Geoghegan, HSBC chief executive, forecast the rapid rise of Hong Kong and Shanghai as financial markets, the soaring influence of emerging market currencies, and the dominance of their economies.  "I believe the 2010s will bring about the close of the Western-centric mindset," he said. "We have now reached a point of no return. In a few years time, who'll remember the G7? We'll remember the E7 – China, India, Brazil, Russia, Mexico, Indonesia and Turkey. These are the ones which will matter."

Shanghai's Back on Top of the World - TIME - For China's most dynamic, most cosmopolitan and sassiest city, this is a time to celebrate. After decades of hibernation following the founding of Mao Zedong's People's Republic in 1949, Shanghai is returning to its roost as a global center of commerce and culture. This year Shanghai, as host of Expo 2010, is squarely in the international spotlight. The fair opens May 1, and organizers expect more than 70 million visitors over six months.  Shanghai's style is to do things big. Its population of 19 million makes it one of the largest metropolises on the planet. More than 750 foreign multinational companies have offices in the city. The skyline counts more than 30 buildings over 650 ft. (200 m) tall. Stroll down certain streets, and you can easily imagine that you are in midtown Manhattan — so much so that on visiting the city in 2007 for the MTV Style Gala, Paris Hilton was moved to declare, "Shanghai looks like the future."

China can avoid becoming Japan - One counterpoint I often hear about the renminbi’s role in rebalancing China’s economy is “but hey, look at Japan: It’s had a flexible exchange rate for years and, yet, its growth is still reliant on external demand”.True. So let’s see what’s going on in Japan, whether there are any differences with China and whether the case for renminbi appreciation still stands from an economic rebalancing perspective.One reason behind Japan’s lackluster consumption growth has been a stagnant growth in real wages: Real wages have barely moved for more than a decade, even while labor productivity growth has actually been strong. As a result, the labor share of income in Japan has declined steadily—some 5-6% of GDP since the mid 1990s.The reasons for this were explored in a recent IMF working paper

Japan and the World Interest Rate - When we are talking about ten-year interest rates, there is no depth to the forward market in foreign exchange. So if there is a world interest rate, it rests on uncovered interest parity. So, right now ten-year Japanese government bonds yield less than 1.5 percent, while ten-year U.S. government bonds yield close to 4 percent, for a difference of 2.5 percentage points (money managers multiply by one hundred to call this 250 basis points). If there is a world interest rate, then investors expect the dollar to decline by 2.5 percent per year for 10 years, for a total decline of 25 percent. I suspect that in fact there is not a world interest rate. I suspect that Japanese savers are willing to accept a lower rate of return on Japanese government bonds than on U.S. government bonds.

News And Notes From G-20, IMF and World Bank Meetings In Washington - World financial leaders are gathered in Washington for three days of meetings on the global economy. Among the issues greeting them: the Greek debt crisis, unwinding the stimulus measures put in place during the financial crisis and whether to tax banks for funds to protect against future crises. On Saturday, Greek financial officials were slated to hold bilateral talks with the U.S., Brazil and Russia and meet with IMF Managing Director Dominique Strauss-Kahn. The International Monetary Fund’s International Monetary and Financial Committee also meets to provide direction to the IMF’s policies, including possible expansion of its mandate and giving developing countries more power within the institution. Saturday’s events follow a G-20 meeting of finance ministers, where leaders failed to reach any specific agreements

G20 growth forecasts don't add up  (Reuters) - The world's major economies all seem to think their growth prospects are brightening. Some of them are bound to be disappointed. The International Monetary Fund cautioned the Group of 20 against overconfidence this weekend after reviewing countries' forecasts for the next three to five years to see whether proposed policies would produce a stable mix of growth in rich and emerging economies. "When we put the figures together, they're rather consistent, but they're rather optimistic," IMF Managing Director Dominique Strauss-Kahn said on Saturday. "And in our view, they may be a little too optimistic." High unemployment and even higher government debt, the consequence of the deep recession and $5 trillion rescue, will drag on demand in most advanced economies, and they are all looking to growth abroad to take up the slack. "What the IMF is worried about is how it all adds up,"

OECD: Factblog: Housing – end of a long boom - House prices in many OECD countries rose for more than a decade from the mid-1990s –  an unusually long and steep climb. Previously, booms typically lasted for about six years and house prices rose by about 45%; by contrast, the recent boom went on for  twice as long and prices increased by an average of 120% The recession ended all that,causing house prices to fall in many countries. In the United States, prices had already begun to fall before the recession and much earlier than in other OECD countries, led by the sub-prime crisis – compare the first quarter of 2006 with 2008. Indeed, that US fall, which undermined the value of products like mortgage-backed securities, helped trigger the financial crisis. see “A Bird’s Eye View of OECD Housing Markets” – a working paper from the OECD’s Economics department

Albert Edwards: Global economy to roll over in six to nine months’ time - SocGen’s Albert Edwards was out with a note today which is in line with my calls for a marked slowing of the economy toward the end of this year. He indicates that the rate of change in leading indicators in the real economy and in markets is rolling over right now. Edwards writes that this suggests softness in six-to-nine months I like his analysis because it depends on first derivatives or the rate of change rather than absolute levels which are misleading at turning points (see Has the increase in U.S. jobless claims peaked? from March 2009 for an example of first derivatives presaging the end of recession).  Remember, a recession begins from a cyclical peak in economic activity. So, the economy is rising until that point. Analysts looking at absolute levels only will miss the slowing in the rate of change.

For nations living the good life, the party's over, says IMF -  In the lingo of the International Monetary Fund, the future of the world hinges on "rebalancing and consolidation," antiseptic words that would not seem to raise a fuss. Who doesn't want more balance in their life? But the translation is a bit ruder, something on the order of: "Suck it up. The party's over."  To keep the global economy on track, people in the United States and the rest of the developed world need to work longer before retiring, pay higher taxes and expect less from government. And the cheap imports lining the shelves of mega-chains such as Wal-Mart and Target? They need to be more expensive.  That's the practical meaning of a series of policy papers and statements issued in recent days by IMF officials...

The IMF Has "a long history of stabilizing economies and solving global financial problems"? That's what the Washington Post told readers this morning. This claim would news to hundreds of millions of people around the developing world. Back in the 90s the IMF came to be known as the "Typhoid Mary" of emerging markets as its policy prescriptions led to sharp economic downturns in one country after another. It tried to impose a harsh austerity plan on Argentina in 2001 and did everything it could to sabotage its economy when the country refused to go along. Its sabotage effort included economic growth projections that were likely politically motivated, since they consistently under-projected growth. The theme of the article is that people in wealthy countries will have to accept lower living standards, as indicated by its headline: "for nations living good life, the party is over, IMF says." Of course, nations don't live the good life, individuals within nations do.

IMF head's economy warning for UK - There were fears that Britain could follow Greece into a financial crisis after a global finance chief warned of economic "contagion" spreading across Europe. The head of the International Monetary Fund urged politicians to finalise a bail-out for the debt-laden Mediterranean country, saying that every day lost in resolving the problems risked spreading the impact "far away". Dominique Strauss-Kahn's comments came amid more evidence of Europe's mounting fiscal problems after Spain's debt was downgraded - a move recently applied to its under-pressure neighbour Portugal as well as Greece. On Wednesday, shadow chancellor George Osborne raised the spectre of the crisis affecting the public finances of the UK, which faces dealing with its own £163 billion mountain of public borrowing.

Greece gets help, but debt quicksand is all around - After five months of struggling to stay afloat in the quicksand of a debt crisis, Greece has finally asked the European Union and the IMF to throw it a lifeline.  Some might think that’s the end of it — Greece now has access to up to 45 billion euros in special funds, it can finance its deficit and refinance its debts at better rates, and speculators (who have metaphorically been stepping on Greece’s head while it thrashes around in the quicksand) have to beat a retreat. But not so fast. Greece is just one link in the chain of 16 countries using the euro single currency. As such — and under the terms of the rescue package the euro zone agreed for Greece this month — the 15 others share a part in hauling Athens out of its predicament. While Germany, France, Sweden and the Netherlands may have the financial strength to do that, other euro participants are far weedier and are already up to their knees or ankles in quagmires of their own. Portugal, Spain, Italy and Ireland have all already been mentioned as potential targets for speculators/investors who are ready to short their bonds and buy debt insurance (in the expectation that credit default swap prices will rise) . Belgium now too is on the radar screen

Euro risks losing long-term friends (Reuters) - Failure to stem investor concern about Greece's ability to repay debt risks making outflows from European stocks and the euro disorderly, and would scare away even long-term supporters such as reserve managers. A request from Greece to trigger a European Union/IMF aid package on Friday brought only a muted response from the region's asset markets, with the euro and stocks paring gains and five-year Greek debt yields rising. Investors anxious about Greece's ability to pay its debt have been steadily pulling money out of the euro zone. Fund tracker EPFR's data shows Europe equity funds saw outflows for the 11th week in a row in the week ending April 21.

Greece in limbo will keep markets volatile (Reuters) - Until investors have a clear idea of exactly how much money Greece will receive from the European Union and the IMF -- and when -- uncertainty stemming from the Hellenic Republic's growing fiscal despair will weigh on global markets. For Greece, the situation is critical as the cost of insuring its debt against default jumps from record to record, and the cost of raising capital to pay off old debts and run the country has spiraled out of control. For the euro, the situation is in desperate need of repair. Each headline that sews even the slightest doubt in the mind's of investors that any plan to help Greece is delayed or insufficiently sized pushes the currency ever lower.

Sunday afternoon Greece: "Most important week of Europe’s monetary union" - On Greece, from the Financial Times: Greek aid depends on budget cut plans Greece has been told to produce detailed plans this week to meet its budget deficit reduction targets in 2011 and 2012, as well as this year, before it can qualify for a ... rescue package ... And from Wolfgang Münchau at the Financial Times: Greece is Europe’s very own subprime crisis This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone. Münchau suggests three things to watch: 1) to see if Greece presents a credible plan (Münchau says what he has heard is "deeply discouraging"), 2) that the loan package has to be substantially more than €45bn (Münchau says €80bn) and 3) the situation in Germany (Angela Merkel is still struggling for support).

World leaders scramble to negotiate $60 billion rescue plan for Greece… European and International Monetary Fund negotiators were racing Friday to hash out a $60 billion rescue package for Greece after its prime minister, who called his country a "sinking ship," put out an urgent call for help to prevent a national default.  In making the appeal, Greek Prime Minister George Papandreou dropped his long-standing resistance to an international bailout. But the pending rescue was not enough to calm investors' fears of an economic collapse that could spread to other heavily indebted nations. The doubts about Greece also spread on Friday to Portugal, Spain and other financially troubled European nations, putting their bonds under pressure and underscoring how concerns over national indebtedness have replaced the banking crisis as the primary problem in the global economy. A default in Greece could also ripple across the Atlantic, hitting banks and pension funds holding Greek bonds and heightening investor worries about the national debt of the United States.

Germany, France signal hard line with Greece German Finance Minister Wolfgang Schaeuble warned Greece that a tough restructuring of its economy was "unavoidable and an absolute prerequisite" if Berlin and the EU were to approve the aid Greece has requested."The fact that neither the EU nor the German government have taken a decision (on providing aid) means the response can be positive as well as negative," Schaeuble told the Sunday edition of German daily Bild. Schaeuble's French counterpart Christine Lagarde promised to hold Greece accountable for "unsuitable economic policies" ... She described the aid package as a "cocktail of indulgence and great strictness," telling the Journal du Dimanche weekly that Greece's partners would closely monitor its progress in restoring order to its creaking finances.

Rogoff Says Greece Won't Be Last IMF Rescue as Ireland, Spain `Vulnerable' (Bloomberg) -- Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff. “It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.” 

Greece: 10-Year debt yield spread widens to new record - From The Times: Pressure mounts on Greek Government as cost of borrowing rises above 9 per cent The bond markets hammered Greek government debt this morning, raising the cost of borrowing for the eurozone nation above 9 per cent.From the WSJ: Cost of Insuring Greek Debt Soars [T]he gap in yields between 10-year debt from Greece and Germany—the euro-zone's most solid borrower—swinging out to a new record of 6.11 percentage points. That yield spread stood at 5.63 percentage points after Greece asked to activate the aid package Friday.  On May 19th, €8.5bn of Greece's bonds mature - so there is very little time left to work out the details of a loan package.

Greece: Dead Man Walking? - Yves Smith -   I’m mystified as to the cheerleading in some circles on Greece. It is not clear that its €45 billion EU-IMF band-aid will be deployed (among other things, it faces a legal challenge in Germany) and even if it is, it falls well short of Greece’s anticipated needs beyond one year. More important, a successful deal does not mean the rescue will prevent default. The austerity program for Greece (in terms of reduction of fiscal deficit) has no successful precedents, and street protests indicate that the populace is not on board. And Ed Harrison sees eerie parallels to the rescue of CreditAnstalt, which kicked off more bank runs, ultimately precipitating the second leg down of the Great Depression. And in the UK, several savvy investors told me they expect a 20% pound depreciation once the election is over. Europe is clearly on a deflationary path. More like minded commentary, first from Wolfgang Munchau of the Financial Times:

Is Greece’s tragedy in its final act? - After months of market turmoil, Greece's government succumbed to reality and asked for a $60 billion bailout from its Eurozone compatriots and the International Monetary Fund. The rescue, once it is finalized, will likely calm markets for a while, since it will at the very least ensure Greece won't default on its massive pile of sovereign debt in the short term.I'd like to be the bearer of good tidings (for a change) and declare the Greek debt crisis officially over. But unfortunately I can't. Greece is far from out of the danger zone. And for that matter, neither is the entire Eurozone. The Greek debacle is raising some serious questions about the future of Europe's monetary union, questions, I fear, the Europeans aren't really prepared to answer.

New Austerity a Precondition for Greek Aid: Germany - Greece must agree to tough new austerity measures before it receives any financial aid from the European Union and failure to do so would endanger such support, German Finance Minister Wolfgang Schaeuble told a newspaper.Opposition to aid for Greece runs deep in Germany and Chancellor Angela Merkel, who faces a crucial regional election on May 9, has been at pains to stress that aid will only flow if Athens takes further steps to cut a budget deficit which soared to 13.6 percent of gross domestic product (GDP) last year.  Schaeuble said a “tough restructuring program” for the next years was “unavoidable and an absolute prerequisite” if Germany and the EU were to approve the aid Greece has requested.

German hostility to Greek bailout increases - News Briefing -This has the potential to go badly wrong: opposition in Germany to the bail out plan is rising; the CSU, junior coalition partner in Merkel’s government, wants Greece to leave the eurozone; a poll says 86% of Germans are opposed to the package; Schauble said response to Greece can be positive as well as negative; Social Democrats reject fast-track legislation, which means that Germany’s contribution, if it comes at all, would be delayed; Schauble plans to talk to parliamentary leaders today; the package could go ahead without German contribution initially, though it still would require Merkel to vote in favour; Greek finance ministers says package will be agreed in early May; says investors should not expect restructuring or rescheduling; Wolfgang Munchau says this is going to be the most important week in the history of the eurozone; the ECB, meanwhile, changes the transparency rules for asset backed securities pledged as collateral at the central bank;

Expect Contagion in Europe, Greek Debt Crisis Will Spread; New Wave of Riots in Greece - Given that the European Commission has been 100% wrong 100% of the time in its ability to yap away the problems in Greece, I take the opposite side of Greek Debt Crisis Won’t Spread Through Europe, Officials Say European Central Bank officials dismissed speculation that Greece’s budget crisis will spill over to other countries in the euro region. Concern that Greece’s woes could spread to other indebted euro-area countries has been pushing up borrowing costs of nations including Portugal and Spain. The countries’ budget deficits as a share of gross domestic product were more than three times the European Union limit of 3 percent last year.

Greece under pressure as Germany drags feet - German Finance Minister Wolfgang Schaueble over the weekend said Germany would make no final decision on the country's 8.4 billion euro ($11.2 billion) share of the loan package until Greece provides a more detailed program of additional austerity measures, the Financial Times reported. German Foreign Minister Guido Westerwelle on Monday said Berlin opposes providing financial aid to Greece without Athens presenting a credible debt-reduction program, Agence-France Presse reported. Westerwelle heads the Free Democratic Party, the coalition partner of German Chancellor Angela Merkel's Christian Democratic Union

Greece hit by new riots as pressure grows to quit euro  - Riots erupting during workers’ protests over planned public spending cuts, just hours after Greek Premier George Papandreou sought emergency £35billion of loans from eurozone countries and the International Monetary Fund. The Greek government was finally forced to ask for international help after the cost of its borrowing spiralled to a new high, making it prohibitively expensive to borrow money to service existing debts. Leading members of Germany’s Christian Social Union, sister party in Bavaria to Chancellor Angela Merkel’s Christian Democrats, said Greece should be forced out of the euro.

For Greece’s Economy, Geography Was Destiny THE debt crisis that caused Greece to ask for an international bailout on Friday has been attributed to many things, all economic: Greece’s budget deficits, its lack of transparency and its over-the-top corruption, symbolized by the words “fakelaki,” for envelopes containing bribes, and “rousfeti,” political favors. But there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography. Greece is where the historically underdeveloped worlds of the Mediterranean and the Balkans overlap, and this has huge implications for its politics and economy. For northern Europe to include a country like Greece in its currency union is a demonstration of how truly ambitious the European project has been all along. Too ambitious, perhaps, many Germans and other Northern Europeans are now thinking. That Europe’s problem economies — Greece, Italy, Spain and Portugal — are all in the south is no accident.

Greek Contagion Concern Spurs Sovereign Default Risk to Record (Bloomberg) -- Greece led an increase in European sovereign credit risk on concern the bill for bailing out the region’s most-indebted nations will surge as they struggle to finance swollen budget deficits.Credit-default swaps on Greece soared as much as 98.5 basis points to a record 713 and Portugal jumped 39 basis points to an all-time high of 318, spurring the Markit iTraxx SovX Western Europe Index of swaps on 15 governments to 117 basis points, according to CMA DataVision. Contracts on Spain climbed 10.5 basis points to 184 and Ireland increased 16.5 to 200.Portugal, Ireland and Spain are “conspicuously vulnerable” and may need funding, according to former International Monetary Fund chief economist and Harvard Professor Kenneth Rogoff. Greece has asked the IMF and European governments for a $60 billion emergency aid package to help fend off default when debt payments come due next month.

Maastricht madhouse fuels EMU-wide contagion from Greece – - If the chief purpose behind the EU-IMF bail-out for Greece – or for banks exposed to Greece – is to prevent a "full-blown and contagious sovereign debt crisis", the market verdict must be a sobering surprise. The relief rally fizzled shortly after Greece folded its bad poker hand and invoked aid. Bond risk as measured by Markit's 5-year credit default swaps jumped to fresh records of 280 for Portugal and 177 for Spain. Irish CDS contracts rose 13 points to 185.  This was an entirely logical response to the twisted events that are unfolding. The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU's initial €30bn package. Ireland must find €491m, Spain €3.7bn.

The daily Greece news -WHAT Greece needs now is market confidence that some combination of austerity and external assistance will prove enough to solve the country's budget mess without a debt restructuring. But you can't always get what you need: Investor confidence in Greek assets sank again on Monday amid uncertainty over an international bailout, even though Germany promised it could pass legislation to free up the lion’s share of the money quickly. Added to questions about when the aid package of up to €45 billion, or $60 billion, might be delivered, are increasing fears that even with funds in place, Greece will have to restructure its debts, with investors liable to book losses and see the duration of the assets they hold extended.

Greece's Banks May Run Out of ECB Collateral, Citigroup Says (Bloomberg) -- Greece's banks may run out of the collateral used to get funding from the European Central Bank as Greek sovereign debt falls in value, according to Citigroup Inc. Chief Economist Willem Buiter.Greek banks probably get most of their short-term funding from the ECB, using mainly Greek sovereign debt as collateral, Buiter said in a note yesterday. When the value of the state debt falls in the secondary market, the decline in the mark-to- market value of the collateral may trigger margin calls -- or demands for more collateral, Buiter said."Eventually the Greek banks could run out of additional collateral acceptable to the ECB/Eurosystem," Citigroup said. "Their funding needs are likely to be exacerbated by a withdrawal of deposits that could become a run."

Europe May Need 150 Billion Euros For Greece, Goldman Sachs Says (Bloomberg) -- The European Union and the International Monetary Fund may have to lend Greece 150 billion euros ($201 billion) over three years to keep the nation from the bond markets, Goldman Sachs Group Inc. said.The EU and the IMF will need to inject more than three times the existing $60 billion aid package to give Greece the time to enact economic reform including reducing nominal wages by as much as 20 percent, Erik Nielsen, chief European economist with Goldman Sachs wrote in a note to clients today. Even a 75 billion-euro, 18-month lending program implies “important risks and could lead to debt restructuring,” he wrote

Default and Greece: History’s Judgment - Greece has defaulted or rescheduled its debt five times since gaining independence in 1829, the economists wrote in their paper “This Time Is Different,” published in 2008 and recently expanded into a book. Spain has the lead in Europe at 13 times since 1476. Germany and France have both done it 8 times, while the U.K. has never done it since William the Conqueror invaded in 1066. Greece, however, has existed in a “perpetual state of default” since its independence, the economists write, having spent 50.6% of those years in default or rescheduling, easily tops in Europe. Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times.

S&P cuts Greek rating to junk, outlook negative (Reuters) - Standard & Poor's downgraded Greek bonds into junk territory on Tuesday, citing concerns about the euro zone member's ability to implement reforms to slash its massive debt. Greece has suffered multiple ratings downgrades since its fiscal crisis started in October but this is the first time that an agency cut its debt to junk status, increasing pressure on already record high Greek bond yields."It's an indication of the continued uncertainty over Greece's prospects and particularly the uncertainty over when and whether it will actually receive the rescue package that the ECB and the IMF have been discussing," S&P cut the rating by a full three notches to BB-plus, the first level of speculative, or junk, status. The outlook is negative, meaning the agency could downgrade Greece again.

S&P Downgrades Greece and Portugal - From MarketWatch: S&P cuts Greece ratings to junk status Standard & Poor's said Tuesday it cut Greece's ratings to junk status. The ratings agency lowered the long-term sovereign credit rating on Greece to BB+ from BBB+. The outlook is negative. From CNBC: S&P downgraded its rating on Portugal's debt by two notches to A-minus.

Portugal Suffering Greek Contagion Pressures EU Bonds (Bloomberg) -- Portugal risks becoming the new Greece. With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala. “We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.” Standard & Poor’s today cut its long-term local and foreign currency sovereign rating for Portugal to A- from A+ and said the outlook was negative. Portuguese spreads, the extra yield that investors demand to hold its debt rather than German equivalents, rose to 260 basis points, the most since at least 1997.

News Analysis - For Greek Debt, Best of Bad Options - Only a few weeks ago, the idea that Greece might restructure its debt seemed like the nuclear option. Now restructuring — a polite alternative to outright “default” — is not only thinkable, but even likely. And one way or another, many economists say, bondholders are expected to bear some of the burden. In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate seriously. But even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could have dire consequences for the euro zone and the region’s beleaguered banks, which hold most of Greece’s bonds.

Most Greeks disapprove of EU/IMF aid deal-poll - (Reuters) - A majority of Greeks disapproves of their government's decision to ask for financial aid from European Union and the International Monetary Fund, the first poll taken since the request showed on Tuesday. Of 1,400 people surveyed, 60.9 percent said they were against the government's decision on Friday to ask for the aid package, the poll, by agency Greek Public Opinion for Mega TV, showed.The survey showed 70.2 percent did not agree with the IMF's involvement in the deal, which offers Greece 45 billion euros in emergency loans to help it avoid defaulting on its 300 billion euro debt pile.

Rogoff Says Greece May Not Be Europe’s Last Bailout (Bloomberg) -- Greece is unlikely to be the last euro nation to need an International Monetary Fund bailout, with Ireland, Spain and Portugal “conspicuously vulnerable,” said Harvard Professor Kenneth Rogoff.  “It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.” Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate. Greece on April 23 triggered a 45 billion-euro ($60 billion) rescue package from the IMF and the euro region after its soaring deficit sent borrowing costs surging and sparked concern about a default.

Greek unions to strike May 5 against austerity (Reuters) - Greek civil servants and private sector workers will strike for 24 hours on May 5 to protest against austerity measures, private sector union GSEE said on Tuesday."We decided to strike for one day on May 5 together with the public sector union ADEDY to fight government policies which hurt workers and deepen the recession," GSEE spokesman Stathis Anestis told Reuters. ADEDY and GSEE together represent about 2.5 million workers, half of Greece's workforce. The walkout will be their third joint strike against the government's deficit-cutting plans since the beginning of the year.

Is it now too late to save Greece? - When Goldman Sachs noticed a pattern of regular losses in its mortgage book at the end of 2006, it decided to start going short, in a move which helped to position it as the most successful bank in the financial crisis. The markets have learned their lesson: now that Greece and Portugal have been downgraded, the rush to the exits is palpable: the flight to quality is on, and bond yields in the European periphery are going stratospheric. Greece’s bonds can still be used as collateral at the ECB: Moody’s hasn’t (yet) downgraded them. But S&P’s sovereign-ceiling principles mean that all of Greece’s banks now have a junk rating, and it’s surely now only a matter of time until Moody’s and Fitch follow S&P’s lead and Greek debt becomes a speculative credit instrument rather a government bond which is safe in anybody’s eyes.

The Cohesion Crisis - Paul Krugman -Greece seems to be spiraling over the edge into default; I just don’t know how it steps back from that edge now. Might it also leave the euro? That would be a total mess, inviting the mother of all bank runs, although as I’ll explain in a moment that may be happening anyway. Now, Portugal. Scary spike in bond yields — with the downgrade more following than causing the trend, I’d say:  Portugal’s budget woes aren’t nearly as severe, on the surface, as Greece’s. But it had a big real estate bubble, and now the market thinks the banks are in trouble. Via Business Insider, the CDS spreads on banks:  The question now is how far this will spread. I’m looking at the spread between Italian and German bonds:  It’s getting a bit scary out there.

Greek 2-year Yields Hit 18% on S&P Cut; Contagion Hits Portugal; Credit Swaps on Sovereign Debt at Record Highs; Blind Panic? - Mish - It did not take too long for contagion to spread (one day), smack in the face of EU statements that contagion was no risk. Why the EU would put themselves in a position to look so foolish is beyond me. Here is a series of articles to consider.

The euro crisis: You say speculator, I say investor - The Economist - I AM in London for much of this week. The Greek euro zone crisis looks different from here, I can report: even the vocabulary is strikingly different. Reading a bunch of continental newspapers on the Eurostar here, I saw headlines like: "The markets attack Portugal", and articles examining the motives of "speculators" in shunning Greek two year debt, sending interest rates to new record highs. In the belly of the Anglo-Saxon beast, I find people talking about "investor confidence" collapsing in Greek short term debt, as markets price in the likelihood that Greece will need to restructure some of its public debts in the near future.  To me, this goes a bit beyond the use of language betraying simple partisan positions, along the lines of: you say terrorist, I say freedom fighter. I think this goes to the heart of an interesting question: can markets lay claim to being legitimate decision-makers?

Greece Bond Losses to Be ‘Significant,’ Buiter Says (Bloomberg) -- Greece is likely to default or inflict “significant” losses on bondholders unless it receives more generous terms on its planned aid package, according to Willem Buiter, chief economist at Citigroup Inc. Yields on Greek bonds soared close to 14 percent on the benchmark two-year security amid concern investors will lose out as the country grapples with the highest debt ratios in the European Union. The cost to protect Greek debt against default surged to a record along with credit-default swaps on Portugal and Spain.  Greece asked the European Union and the International Monetary Fund last week to activate a 45 billion-euro ($60 billion) emergency support package. The nation may manage to avoid a formal default if it gains more favorable terms for the financing than the rate of 300 basis points or 400 basis points over benchmarks that’s on offer, Buiter wrote.

Roubini on Greece - Nouriel Roubini, it can be safely said, gives good panel — especially when the subject is the eurozone and the possible disintegration thereof. He’s been bearish on the PIGS in general and on Italy in particular for many years now, but I don’t think it comes as much surprise to him or to anybody else that Greece is the first country really in the firing line. One of the most interesting things about the status quo post-downgrade is that no one seems to have a clue what the base-case scenario is. Are the markets still expecting Greece to get bailed out, but adding on an ever-increasing yield premium to account for the possibility that it won’t be? Are they, like panelist James McCaughan, expecting an orderly debt restructuring later this year, with an effective haircut in the 20-40% range? They certainly don’t seem to be expecting anything worse than that — Greece’s bonds are trading at high yields, yes, but not at distressed levels, and there’s still room to lose a lot of money on those 2-year bonds if they end up defaulting.

Even more trouble ahead - THINGS are beginning to look very ugly in southern Europe. Standard and Poor's has downgraded Greek debt to junk status, and Portugal's debt has now been downgraded as well. Greek yields are through the roof. Here's your money quote: Greece’s two-year borrowing costs are now higher than those of Argentina, at 8.8 per cent, and Venezuela, at 11 per cent, two countries that have been shunned by many international investors because of the mismanagement of their economies. Investors said that the Greek bond market was now in effect pricing in a government default as two-year bond yields were trading more than 12 percentage points higher than German Bunds, Europe’s benchmark market. And Germany is once more signalling its intent to play hardball. I was interested to read Felix Salmon's thoughts on Greece, and on why he has become bearish on the country's debt:

The depressing outlook for Greece - I just had a very interesting conversation poolside at the Beverly Hilton with a couple of high-profile delegates at the Milken Global Conference. I walked away from the conversation decidedly bearish on Greece. Why?   It’s not in the interest of Germany’s politicians to bail out Greece. It’s not even narrowly in the interest of Germany to bail out Greece. If Germany cares only about itself, rather than the full European Union, then in many ways the best-case scenario for Germany is to see Greece and Portugal default, leave the euro, and then re-enter a few years later at a more competitive exchange rate. That’s better than using German funds to try to sustain the national debt of those countries at their present elevated levels. If Germany can’t be sure that Greece will avoid default, it would be much better off simply letting Greece go its own way, and then bailing out its domestic banks if Greek did end up defaulting.

Greece Downgrade: What Shoes Will Drop Next?- Yves Smith - Those who called Greece a subprime borrower were more correct than they knew. One of the factors that made subprime losses so devastating has been the high loss severities. The real risk here is to Eurobanks. They ran with even higher leverage ratios than US banks, they are believed to have recognized less of the losses thus far on their books than their US peers. Even worse, readers report that the major dealers (and the Eurobanks were part of this cohort) are carrying toxic assets at prices that are vastly above likely long-term value. Eurobank exposure to Greece is over $190 billion, and total periphery country exposure is roughly $900 billion. In the subprime crisis, many pundits and the Fed itself thought the losses would be contained, unaware that for every $1 in BBB subprime bonds, another $10 in CDS had been written, and that many of these exposures sat with highly levered firms, namely insurers and dealers, who were not able to take much in the way of losses. The gross level of exposures looks much worse here and the banks most at risk have not done much (save take government handouts) to rebuild their balance sheets. \

Greece – GIIPS – Eurozone - Big Problem – Rebecca Wilder - The original bailout will likely be offered to satisfy Greece’s near-term obligations. However, in the meantime the probability that the liquidity crisis spreads across the GIIPS (Greece, Italy, Ireland, Portugal, and Spain) - especially Portugal with a 2009 current account deficit equal to 10.3% of GDP, making it shockingly susceptible to capital outflows - is rising.We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:First, there is a liquidity crisis in Greece (already underway).Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash. So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany

IMF Warns Greeks Face 'Untenable Situation' Without Bailout -  "If we do not help them, they are going to be in an untenable situation," IMF managing director Dominique Strauss-Kahn said in an interview posted on the paper's website and due to appear in Wednesday's edition."I am not saying that if we help them it will be easy. It will be difficult. The Greeks have to be aware that sorting out their public accounts, after several years of reckless overspending, will be painful and difficult."But there is no other solution," Strauss-Kahn said. Greek officials are warning that their country will not be able to meet a key debt deadline unless it receives a bailout in the next three weeks.

Euro area under massive speculative attack - European sovereign debt crisis worsen and spreads – with Greek two-year bond yields up at 19%, and Portuguese bonds also under attack; latest dose of panic was caused by a decision from S&P to downgrade Greece to junk status; S&P warns that debtors might only recover 30-50% of their investments, a situation of severe default; negotiations with IMF are likely to be completed within the next few days; Trichet and Strauss-Kahn have descended on Berlin for emergency talks with Merkel; Wolfgang Munchau argues that the German chancellor has set out to destroy the eurozone, and is about to succeed; the estimate by market participants about the loans needed to save Greece is rising by the day – and vastly exceeds the most optimistic estimates coming out of the negotiations in Athens; Bloomberg says the on European bonds is about to spin out of control, as markets in Italy and Ireland have also come under attack; Wolfgang Schauble has already handed out draft legislation, but a vote will not be taken until after the May 9 elections in North-Rhine Westphalia; Kathimerini says the Greek has not enough to explain the urgency of the situation to the Greek people; Willem Buiter, meanwhile, argues that the only way out of this mess is for a negotiated restructuring of Greek debt – and the speedy set up of a European Monetary Fund.

The Holy Roman Eurozone--That's what I wrote yesterday. Now back to today. It's not just Greece; I now think the Eurozone has gone. Not gone completely; it will live on in some form, just like the Holy Roman Empire, a shadow of the original, comprising maybe Germany, France, and Benelux. Normal countries have their own central bank. In an emergency, if there's a run on the country's government bonds, the central bank can and will print money to buy unlimited quantities of those bonds. Provided those bonds are promises to pay the domestic currency, which the domestic central bank can print, the debt can always be paid. Just print whatever you have promised to pay. Another way of saying this is that a normal government, with its own central bank, does not have a binding nominal budget constraint.

Spain’s Debt Rating Cut, Heightening Concerns Over Europe… The ratings agency Standard & Poor’s lowered the debt rating of Spain on Wednesday, its third downgrade of a European country in two days.  The downgrade came one day after the S.& P. cut the ratings of Greek and Portuguese debt, moves that set off a flight by investors away from global equities and into fixed income securities, particularly those in United States dollars.  The S.&P. downgraded Spain’s debt one step, to AA, with a negative outlook.  With Greece inching closer to the brink of financial collapse, fear that the debt crisis will spread rattled global markets for a second day on Wednesday as investors awaited a signal from financial leaders gathering in Berlin.

Spain’s Debt Rose 33.9% in 2009 - Spain’s outstanding government debt totaled 461.99 billion euros ($619 billion) at the end of 2009, rising 33.9 percent from the level at the end of the previous year due to measures taken to deal with the recession, central bank figures released Monday show. The sharp rise in public debt was a result of programs created to stimulate the economy and deal with the severe recession, the Banco de España said. Spain also dealt with a higher level of debt amortization last year than in 2008, Banco de España monetary policy department chief Javier Maycas said. Net debt issuance totaled 116.88 billion euros ($156.6 billion) in 2009, well above the 51.75 billion euros (slightly more than $69.35 billion) in debt issued in 2008.

Asia Bond Risk Surges to Two-Month High After Greece Downgrade - The cost of protecting Asian bonds from default surged to the highest in two months after Standard & Poor’s downgraded Greece’s credit rating to junk. The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan jumped 10 basis points to 110.5 basis points as of 7:50 a.m. in Singapore, its highest since Feb. 26, according to Deutsche Bank AG and CMA DataVision in New York. “Markets hate uncertainty and the Greek situation has brought uncertainty back in full force,” said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. “The sovereign risk spreading through Europe is having a global impact and Asia-Pacific benchmarks are paying the price.”

Czechs Delay Eurobond as Greek Debt Crisis Hurts Risk Appetite  (Bloomberg) -- The Czech government is delaying a sale of international bonds after credit-rating downgrades in Greece and Portugal fuelled concern about European sovereign debt, driving investors from assets in emerging markets.“We are waiting for better conditions” on the market before selling the euro-denominated bonds, Deputy Finance Minister Ivan Fuksa said in an interview in Prague today. Investor concern that a European Union-led bailout package won’t stop Greece’s debt crisis from spreading sent the euro toward its weakest level against the dollar in a year as emerging-market stocks plunged for a second day.

Greece bans short-selling as panic spreads - The price of insuring Greece's debt against default soared to the highest rate in 14 years today as the country's securities regulator banned short-selling in Greek shares to halt a crisis of confidence. The yield on Greek sovereign bonds rocketed to 10.149 per cent after the credit rating agency Standard & Poor’s downgraded the country's debt to junk status. S&P also reduced the sovereign rating for Portugal, and this morning the Lisbon stock market fell by 5.7 per cent as traders feared that a virus of insolvency and bad debts would infect the rest of Europe.In Greece, the securities regulator announced a ban on short-selling in Greek shares on the Athens market until June 28.

ECB May Have To Turn To 'Nuclear Option' To Prevent Southern European Debt Collapse - The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of Southern European bond markets, with ominous signs of investor flight from Spain and Italy.... Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds. This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities. This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”

Greece Bondholders May Lose $265 Billion as S&P Sees 70% Loss (Bloomberg) -- Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s. The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, data compiled by Bloomberg show.The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.

ECB's Trichet: 'Presently Activating' Greek Debt Aid Talks - Negotiations aimed at finalizing a financial loan package for debt-laden Greece are continuing, but the President of the European Central Bank would not say much else about the crisis during a Tuesday afternoon appearance at Northwestern University.  Trichet said earlier in the day that default of an E.U. nation's sovereign debt was "out of the question." However, credit default swap spreads for Greece expanded to record wide levels on Tuesday, reflecting soaring costs for insuring Greek debt against default. Credit default swap spreads also widened significantly Tuesday for Portugal and Italy.

Eurozone edges to endgame as Greek contagion catches Portugal - The eurozone "lurched towards the endgame" yesterday as Standard & Poor's finally relegated Greece's sovereign credit rating to "junk" status, downgraded Portugal by two steps to A-, and the yields on Greek debt climbed beyond 15 per cent, a signal that the market regards a default as virtually certain. The contagion that many feared is threatening to overwhelm the entire single currency area in a remarkably short time. The course of events has parallels with the banking crises of the autumn of 2008, when successive institutions came under attack and their interrelationships and size devastated confidence in the financial system, famously so after the failure of Lehman's.

Amid Rush to Aid Greece, Spain Looms as Bigger Problem - NYTimes Hoping to quell its biggest crisis since the Asian woes of 1997, the International Monetary Fund promised on Wednesday to increase the 45 billion-euro aid package for Greece to as much as 120 billion euros over three years.   The fund is racing to conclude an agreement for more painful austerity measures from Greece by Monday, clearing the way for the government to receive funding and reassuring investors worldwide that European debt is safe. On Wednesday, Dominique Strauss-Kahn, the I.M.F.’s forceful managing director, made the higher aid pledge in a private meeting with German legislators. The package would be the equivalent of up to $160 billion and would come from both the I.M.F. and from other countries using the euro.  But as has frequently been the case during Europe’s debt crisis, the promise of help was overshadowed by more disturbing news — in this case a cut in the debt rating of Spain by a major agency just a day after downgrades for Portugal and Greece.

BBC News - Could the UK face the same problems as Greece? The increasingly perilous state of Greece's economy has at least provided the British press with the chance to indulge in some laboured puns. Wednesday's Times newspaper led the way, with a gloomy banner across its front page proclaiming that we have reached "Acropolis Now". But while the big news is Athens seeing its credit rating becoming the first in the eurozone to be slashed to junk status - the development is also prompting serious questions to be asked about whether the UK could be facing up to its own Greek tragedy.

It’s gut check time for Europe - So now Europe may have a real crisis on its hands. It's been clear to financial markets for months that the debt woes in Greece could spread to the Eurozone's other financially unsound PIIGS (Portugal, Italy, Ireland and Spain). But the Eurozone's leadership didn't bother to take heed. Instead of dealing with the zone's problems head on, they've dodged, dilly-dallied, and obfuscated, apparently based on the delusional belief that Greece's debt crisis could be contained, no major reform to the Eurozone was necessary and everyone would miraculously live happily ever after. Well, the market turmoil of the last couple days is telling us that Europe has to yank its collective heads out of the sand. On Tuesday, rating agency Standard & Poor's downgraded Greece to “junk” status, and also knocked down the sovereign rating on Portugal. Those moves should have come as a surprise to no one.

How Reversible Is The Euro? - Paul Krugman - For a long time my view on the euro has been that it may well have been a mistake, but that bygones were bygones — it could not be undone. I was strongly influenced by the view expressed by Barry Eichengreen in a classic 2007 article (although I had heard that argument — maybe from Barry? — long before that piece was published): as Eichengreen argued, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. So the idea of a euro breakup was a non-starter. But now I’m reconsidering, for a simple reason: the Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway? In that case the marginal cost of leaving falls dramatically, and in fact the decision may effectively be taken out of policymakers’ hands.

Breaking Up Is Hard To Do: TBTF, the Euro and Gold - Recent news about Greece's financial travails reminded me of a conversation I had with Helmut Schlesinger as the Asian Crisis was unfolding in 1997. Over a few drinks at the Long Bar in Singapore's Raffles Hotel, Mr. Schlesinger regaled me with his views on inflation, monetary integration and "realignments" (devaluations).   As President of the Bundesbank from 1991-93 Mr. Schlesinger had a wealth of experience on monetary integration (with East Germany), realignment within the ERM (European Exchange Rate Mechanism), and disintegration (as Britain left the ERM). On the side of the "economists" in the debates over EMU, he argued, presciently, as the Greek situation demonstrates, that the "monetarists'" view- monetary integration prior to complete political integration wouldn't be a problem- was not historically grounded. Nor was he sanguine about the German reunification of East with West- 13 years hence East Germany continues to lag the West.

Greek instability threatens to topple Merkel's government - Growing opposition from the German public to a planned bailout of Greece is jeopardising Angela Merkel's chances in a key state election next week and could ultimately undermine the stability of her coalition government. The country's most populous state of North Rhine Westphalia goes to the polls on 9 May. At the moment, the conservative Chancellor's Christian Democrats are in government with the liberal Free Democrats in North Rhine Westphalia in a coalition which mirrors Ms Merkel's federal government. But they are facing a stiff challenge from a possible coalition of Social Democrats and Greens. With less than a fortnight to go before the ballot, opinion polls in the state put the two political groupings either neck and neck or with leads so small as to make any accurate prediction of the outcome impossible.

Roubini: "In a Few Days time, There Might Not Be A Eurozone For Us To Discuss" - When it comes to the PIIGS, Dr. Doom is in full-on doom mode.  Felix Salmon has some good notes on a PIIGS panel from the Milken Global Conference, which included Nouriel Roubini, who is in his wheelhouse when talking about sovereign debt crises. Nouriel, of course, takes that kind of thinking to its logical conclusion, and kicked off the panel by announcing that it was just in time: “in a few days,” he said, “there might not be a eurozone for us to discuss.” There's no way that Greece can implement the 10% spending cut it needs to do in order to stop its debt spiralling out of control at current interest rates — and even if it did, the economic effects would be disastrous.Nouriel's base case, then, is Argentina 2001: after all, Greece has a much higher debt-to-GDP ratio, much higher deficit-to-GDP ratio, and much higher current-account deficit than Argentina had back then. And if that's the base case, there's no way that Greek debt should be trading anywhere near its current levels. And guess what: Spain is worse than Greece, says Roubini. Ugh.

Roubini Says Rising Sovereign Debt Leads to Inflation, Defaults  (Bloomberg) -- Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults. Almost $1 trillion of worldwide equity value was erased April 27 on concern that debt will spur defaults and derail the global economy, data compiled by Bloomberg show. German Chancellor Angela Merkel and the International Monetary Fund pledged to step up efforts to overcome the Greek fiscal crisis, after bonds and stocks fell across Europe in the past week. “The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”

Milken: Nouriel Roubini and Mike Milken on What’s Next - video - There was some good stuff in the lunch discussion between Nouriel Roubini and Mike Milken at the Milken conference today. Note: It's long, and some segments are less interesting than others. Then again, there is the bit where Mike suggests the solution to the U.S's deficits & entitlements problem is in obesity -- the biological kind.

Greece is just the 'tip of the iceberg', Nouriel Roubini warns - Professor Roubini, the New York-based academic who was one of the few to anticipate the scale of the financial crisis, told a panel in California that the buildup of debt is likely to lead to countries defaulting or resorting to inflation to ease the burden on their populations.  “While today markets are worried about Greece, Greece is just the tip of the iceberg,” Roubini told the Milken Institute Global Conference in Beverly Hills, California. "The thing I worry about is the buildup of sovereign debt.” Although Greece's misreporting of the scale of its own debt has helped shatter investors' faith, the southern European country is not alone in its struggle. The depth of the property bust in both Spain and Portugal has prompted the ratings agency Standard & Poor's to downgrade the creditworthiness of both.

Who’s exposed to Greece - Readers wondering which countries stand to lose the most from a Greek default can turn to Germany’s Spiegel, which providedthe following graphic on Wednesday:

Who’s exposed to Greece? (II) Want further detail on which countries stand to lose the most from a Greek default? Then look no further than the following research report from Barclays Capital.The bank’s analysts breakdown exposure (including domestic exposure) to Greek bonds according to country and type of institution:

Who’s exposed to Greece? (III) We’re closing in on the specific banks who are most exposed to potential haircuts on Greek debt — notwithstanding reports of an enlarged aid package for Athens. Fortis, Dexia and SocGen seem to have the highest exposure relative to their tNAV, with 64%, 35% and 14%, respectively. The three Spanish banks (SAN, BBVA and POP), have declared zero exposure. Lloyds and Unicredit have also said their exposure is “marginal”, and CASA [Credit Agricole] less than €0.5bn.Credit Agricole controls the Greek bank Emporiki as as subsidiary, while SocGen maintains stakes in Greek lenders as well — as we’ve previously noted. Evolution Securities’ analysts continue: The impacts can be material for some banks, marginal for the sector. We assume three scenarios: 30%, 50% and 70% default (S&P estimates a 30-50% recovery). To this, we add 10% loss on Emporiki’s €24bn loans for CASA. The worst potential impacts are at Fortis (10-24% of our SotP FV), Dexia (5-12%), CASA (7-8%) and SocGen (3-6%). The average impact for the sector is 0.7-1.6%. These impacts could be increased or reduced depending on which side of the CDS trade some banks have chosen – but here the visibility is non-existent.

European debt crisis: the possible domino effect - As Spain's credit rating is downgraded a day after Standard & Poor's cut its ratings on Greek and Portuguese debt, how far could the eurozone's debt contagion spread? (slide show) – Fears rise for Hungary’s fiscal position - Mr Orban said Hungary’s fiscal deficit would be higher than the target set by the International Monetary Fund, which bailed out the country last year.He added Hungary should negotiate with the IMF to widen the deficit further in an attempt to boost growth.Lars Christensen at Danske Bank said the remarks only confirmed his view that the positive reaction on the Hungarian markets to Fidesz’s win was overdone. “Fidesz’s victory will lead to a loosening of fiscal policy, which is rather more negative than positive for Hungary,” he said.

We’re back in crisis — all we can do is argue that everything is under control – "Utter panic" is how one analyst described the market for shorter-term government debt yesterday.  There were virtually no buyers for Greek bonds due for repayment in two years and the interest rate on similar Portuguese bonds rocketed by a fifth. Like it or not, Ireland is back in this crisis. Our two-year yields rose by almost half a percentage point to 3.44pc. They have gone up 1.7 percentage points against German yields since the Greek drama began.Such rates, along with steep rises in the cost of insuring government debt, represent heavy bets that some or all of the peripheral euro countries will fail to pay their debts in full over the next two years. The other alarming thing for European leaders must be the way in which bond yields in the core euro countries fell, even as the peripherals were going through the roof.  The eurozone now looks like two zones and what is a single currency is being traded as though it were two.

Greek debt crisis spreading ‘like Ebola’ and Europe must act now, OECD warns – The Greek debt crisis is spreading “like Ebola” and Europe must act now to protect the stability the financial markets, according to the Organisation for Economic Co-operation and Development. “It’s not a question of the danger of contagion; contagion has already happened,” OECD secretary general Angel Gurria said. “This is like Ebola. When you realise you have it you have to cut your leg off in order to survive,” he added, saying the crisis is "threatening the stability of the financial system".

Can Europe Save Itself? – Johnson & Boone- NYTimes - When Jean-Claude Trichet (head of the European Central Bank) and Dominique Strauss-Kahn (head of the International Monetary Fund) rushed to Berlin this week to meet Chancellor Angela Merkel and the German Parliament, the moment was eerily reminiscent of September 2008 — when then-Treasury Secretary Henry Paulson stormed up to the United States Congress, demanding $700 billion in relief for the largest American banks.Remember the aftermath of that debacle? Despite the Treasury argument that this would be enough, much more money was eventually needed, and Mr. Paulson left office a few months later under a cloud. The problem this time is bigger. It is not only about banks; it is about the essence of the euro zone, and the political survival of all the public figures responsible.

Greece Debt Crisis: How to Rescue Euro-Zone Nation? - TIME… Little, it seems, will convince the markets that Greece is a safe bet. Investors have been jostling the country since the start of the year, raising the cost of Greek debt while forcing the euro down against the dollar. Not even the Greek government's austerity measures or a long-delayed $60 billion rescue package has been able to quell the market jitters. When credit-rating agency Standard & Poor's downgraded Greek debt to junk-bond status on Tuesday, the move sent the markets into a new tailspin. And now, as European Union officials scramble to assure investors that Greece is on the right track, the focus has moved to the euro: Can the single currency be saved before rapacious speculators tear the euro zone apart?

FT Alphaville » Buiter on Greece and a blueprint for a new Europe - Citi’s global economist, Willem Buiter, has done some serious, serious thinking on the issue of sovereign debt problems in the eurozone. And here are the fruits of his labour — starting with Greece: In the ‘game’ between Greece and the Euro Area member states (EA) (where EA is shorthand for all the other parties at the other side of a potential conditional financial rescue effort for Greece), we argue that the only plausible outcome is where Greece does not default unilaterally but adjusts, most likely with restructuring of its debt, where the EA offers financial support with tough conditionality (‘tough love’).

No Wonder the Eurozone is Imploding -  You might assume that the reason for the implosion in the Eurozone is a mystery. But it’s not. There Wouldn’t Be a Crisis Among Nations If Banks’ Toxic Gambling Debts Hadn’t Been Assumed by the World’s Central Banks There wouldn’t be a crisis among nations if banks’ toxic gambling debts hadn’t been assumed by the world’s central banks. As I pointed out in December 2008:The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks. BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:

Reminder: It's Not Sovereign Debt That Folks Are Freaking Out About, It's A Run On The Banks - We ran this chart earlier, but it's worth running again, considering the Europe-wide carnage we saw today. This is not just about sovereign debt. This is about a major freakout about the banking system. The word from S&P is that Greek debt holders will take a major haircut on their holdings, and that means serious problems for banks. (See the full list of victims here)Ths surging CDS of Portuguese and Spanish banks is a major red flag.From CMA Datavision:

Banks run eurozone crisis scenarios as S&P cuts Greece to junk – With markets anticipating a Greek debt restructuring, bank traders and risk managers are preparing for a wider crisis that could drag in northern European countries, tip the euro into a tailspin or even threaten the eurozone’s integrity. Banks are shorting the euro, along with German and French government bonds, as a hedge against an escalation of the Greek debt crisis. Their fear is that a Greek restructuring is inevitable and will scare investors away from other vulnerable members of the eurozone. One obvious consequence would be a weakening of the single currency, but banks have entertained a variety of other, wilder scenarios as they seek to immunise their books against a possible Europe-wide crisis.

El-Erian says Greece will default - Mohamed El-Erian has an important piece on Greece in tomorrow’s FT; if you want to boil his 750-word article down to 3, it’s basically “Greece will default”.El-Erian comes to this conclusion using three logical steps. The first:A number of things have to happen very fast over the next few days to have some chance of salvaging the situation. At the very minimum, the government in Greece must come up with a credible multi-year adjustment plan that, critically, has the support of Greek society; EU members must come up with sizeable funds that can be quickly released and which are underpinned by the relevant approval of national parliaments; and the IMF must secure sufficient assurances from Greece (in the form of clear policy actions) and the EU (in the form of unambiguous financing assurances) to lead and co-ordinate the process. And a squadron of flying pigs dropping 100-euro notes from helicopters across both the Greek and Iberian peninsulas would probably help too.

Feldstein Says Greece Will Default and Portugal May Be Next (Bloomberg) -- Harvard University Professor Martin Feldstein said Greece will eventually default on its bonds and other euro-area nations may follow, most probably Portugal.“Greece is going to default despite all the talk, despite the liquidity package,” Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said in an interview with Tom Keene on Bloomberg Radio today. Greek officials are hammering out the terms of a three-year rescue package with European Union and International Monetary Fund officials that will probably give the country a loan of 45 billion euros ($59 billion) for 2010 alone. Greek bonds have plunged on concern about the country’s ability to pay its debt despite denials from officials that a default is in prospect

Why Greece Will Default - Greece will default on its national debt. That default will be due in large part to its membership in the European Monetary Union. If it were not part of the euro system, Greece might not have gotten into its current predicament and, even if it had gotten into its current predicament, it could have avoided the need to default. Greece’s default on its national debt need not mean an explicit refusal to make principal and interest payments when they come due. More likely would be an IMF-organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds. Or it could be a “soft default” in which Greece unilaterally services its existing debt with new debt rather than paying in cash. But, whatever form the default takes, the current owners of Greek debt will get less than the full amount that they are now owed.

Greece and the Euro: Going, Going . . The most terrifying words I've seen written so far about the growing crisis in Greece were penned by Yves Smith yesterday:  "So the whole idea that the financial crisis was over is being called into doubt. Recall that the Great Depression nadir was the sovereign debt default phase. And the EU's erratic responses (obvious hesitancy followed by finesses rather than decisive responses) is going to prove even more detrimental as the Club Med crisis grinds on." The Great Depression was composed of two separate panics.  As you can see from contemporary accounts----in 1930 people thought they'd seen the worst of things.   Unfortunately, the economic conditions created by the first panic were now eating away at the foundations of financial institutions and governments, notably the failure of Creditanstalt in Austria.  The Austrian government, mired in its own problems, couldn't forestall bankruptcy; though the bank was ultimately bought by a Norwegian bank, the contagion had already spread.  To Germany. 

The Euro money supply - I agree with Ambrose Evans-Pritchard and Jacques Cailloux. It's what I was trying to say yesterday. And on Thursday. It's probably gotten too big for Germany, France, the IMF, whoever, to fix. Only the European Central Bank has enough money to fix the Eurozone problem; because it can print it. What's ironic is that what they call "The Nuclear Option" is what first year economics textbooks describe as the normal way that central banks increase the money supply. We call it "Open Market Operations". Print money and use it to buy Eurozone government bonds.But I don't think that will happen.  It's not so much the rules about what the ECB is and is not allowed to buy, or accept as colateral, (which, despite commenter JP's help, I still don't really understand); it's because it is ultimately a political decision. Who has the authority to say that the ECB may risk its seigniorage revenue on buying Greek or other countries' sovereign junk, when that revenue belongs to all Eurozone governments? Nobody.

Greece Turning Viral Sparks Search for EU Solutions  (Bloomberg) -- European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc. With Greece’s budget turmoil infecting markets from Rome to Madrid, economists are urging German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet and other officials to come up with unprecedented measures. Other steps could see governments guaranteeing bonds and the ECB abandoning collateral rules or reviving unlimited lending to banks, the economists said.

Already Holding Junk, Germany Hesitates - Germany’s financial institutions hold some 28 billion euros, or $37 billion, in Greek bonds, according to estimates by Barclays Capital, extrapolating from International Monetary Fund data. Germany’s regulators and many of its banks do not disclose precise figures, but an informal survey on Wednesday of the largest banks indicates that about half of that debt — rated as junk by Standard & Poor’s since Tuesday — appears on the balance sheets of institutions that are owned or controlled by the German government. And so Germany’s exposure to Greek debt already exceeds, by far, the $11 billion the country would lend to Greece as part of an initial European Union plan to help the country avoid default on its debt — though not the $32 billion that may eventually be needed from Germany.

Merkel’s Cabinet Meets on Greece as Pressure for Action Grows - Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid. Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world. Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

Merkel’s complacency turns to panic, as the eurozone catches fire - S&P downgrades Spain, as the crisis dramatically spreads through southern Europe; Strauss-Kahn and Trichet try to persuade Merkel that the situation is serious; speaking to German MPs, Strauss-Kahn says rescue package will have to be $120bn for three years, no rescheduling/restructuring, no super seniority; German opposition says it will vote against legislation, and accuses Merkel of lying to the German public; Spanish banks find their access to market funding curtailed; southern European banks are subject to a quiet bank run, as depositors lose confidence in government guarantees; FT Deutschland editorial argues that Merkel’s procrastination has increased the cost of crisis resolution; the Lex column says EU committed the mistake of turning a manageable peripheral crisis into an uncontrolled crisis of confidence in the eurozone; Jurgen Stark says there is no way the ECB is going to buy Greek bonds; the Greek labour minister rejects calls by the European negotiators to eliminate the 13th and 14th salary; Portugal is stepping up debt reduction measures; the European Parliament, meanwhile, is postponing legislation to force banks to raise their capital ratios.

Merkel’s Cabinet Meets on Greece as Pressure for Action Grows - Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid. Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world. Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

BBC News - Germans baulk at 'bottomless pits' of bail-outs…There are so many zeros on the front page of the tabloid Bild, you almost need a calculator to understand the story. The headline declares: "25,000,000,000 Euros!" and "Now the Greeks want even more of our money!" Twenty-five billion euros is rumoured to be the cost to Germany of participating in a three-year bail-out of Greece. "Is Greece now a bottomless pit for taxpayers' money?" the paper continues. It is not just the tabloids that are fuming. So is the German public. Nearly every day, opinion polls in newspapers and on TV show that most Germans oppose the idea of their country bailing out Greece. European solidarity has gone out of the window. Germans find it hard to understand why they have to pour billions of German euros into Greece, when it is Greek profligacy that is to blame for the mess in the first place.

Merkel Reaches Her Overdraft Limit: Greek Bailout Could Push German Debt Through the Roof – SPIEGEL - When Chancellor Angela Merkel's current government came into power, Germany was just emerging from the economic crisis. But despite pledges to curb deficit spending, Merkel's administration has been running up debt at a record pace -- and bailing out Greece will only exacerbate the situation.In the autumn of 2008, German Chancellor Angela Merkel stated clearly: "In the long term, people cannot live beyond their means." At the time, the economic and financial crisis appeared to have reached its peak. Since then, though, the chancellor has lost her iron budget discipline.Fast forward to April 2010. The end of the spiral of debts is nowhere in sight. It just continues to grow -- and soon it will grow further if Germany provides €8.4 billion ($11 billion) in financial aid to Greece.

Sovereign Default - Who is at Fault? - I am watching the Greek crisis as it takes its painful course, and have noted that there are some views which seem to suggest that Germany has an obligation to rush to the rescue. A Guardian article is typical, though the extract below does not really capture the overall sentiment of the article: What we are seeing is a pass the parcel of blame, and Germany looks like will be left holding the package. However, all of this is to lose sight of the reality of the situation. The Greek debt is the fault of Greece, and nobody else.There have been suggestions that somehow Greece was enticed into debt, that it really is not their fault. It is the view that Greece is like a consumer persuaded into a dodgy Hire Purchase agreement, without realising the consequences of signing on the dotted line. However, in this case, our consumer has lied about their level of debt on the application form.

Digging Deep and Seeing Greece’s Flaws - NYTimes - He sees far too much mismanagement and corruption. Greece’s shadow economy is the largest in the European Union. Bribing government officials is routine. And tax evasion is a national sport. “We did this to ourselves,” said Mr. Koptides, 37. “It is our problem. It’s not Germany or Europe’s fault. We did this to ourselves.” Greeks seem to be engaged in national soul-searching these days, wondering whether traits they once found amusing might have led to many of their difficulties now. Some say their country may have been unprepared to join the European Union in the first place. Some focus on how European Union funds sent to Greece were spent on wasteful projects. Greece’s last administration hid the extent of its debt.

So, What Happens if Greece Can't Pay Up? - Here are three disaster scenarios I found from Reuters if Europeans cannot figure out how to stave off Greek capitulation. These are arranged in terms of increasing anarchy and improbability: Analysts and traders have outlined a range of options for Greece, or any other euro zone country that might face a similar position, if it is unable to make payments on its bonds. NEGOTIATED DEBT RESTRUCTURING - PROBABILITY: most likely in the medium to long term; UNILATERAL DEBT RESTRUCTURING PROBABILITY: highly unlikely; OUTRIGHT DEFAULT - PROBABILITY: highly unlikely

Greece Fire = Sub-Prime, Circa 2007: Neither Are "Contained" - As we learned that government-sponsored mortgage giants Fannie Mae and Freddie Mac “might” need some assistance, maybe, kind of, sort of, and not two months later they were placed into government receivership, setting up the mother of all financial blazes as sub-prime fire left one institution after another reduced to smoldering ashes and the resulting sparks openly spread to otherwise sound (at least, so it was thought) financial entities, igniting even those who assumed they were “well-hedged.” At this point, only 18+ months ago with fire alarms ringing everywhere, U.S. first-responders Bernanke and Paulson and their European counterparts dashed into the breach with extra-wide, heavy duty fire hoses, pumping trillions of created (Fed) and borrowed (Treasury) dollars onto the burning system, and the oft-repeated story of their heroics almost has become tiresome as we rebound economically along the right side of that V-shaped recovery. But the fire is not yet quenched, and Greece (think, “sub-prime”) was one of a number still-smoldering ember hidden in the soaked wreckage of the global financial system which so rapidly has been rebuilt. Another “hot-spot”

Europe Faces New Banking Crisis on Greek Debt Concern (Bloomberg) -- Europe’s banking industry is threatened with a replay of the credit squeeze that sent the region into its worst recession since World War II, UBS AG said.  Banks are unwilling to lend to counterparts they suspect of having loans in Europe’s most indebted nations after Standard & Poor’s this week cut Greece’s credit rating to junk and lowered the grade on Portugal and Spain, according to Brian Kim, a currency strategist at UBS in Stamford, Connecticut. The banks’ reticence matches their caution on lending to rivals that held collateralized debt obligations two years ago, he said. “Recall how in March and September 2008 interbank lending began to show signs of stress as counterparty risk jumped, with banks unwilling to lend to their peers for fear that counterparties were excessively burdened with illiquid assets such as CDOs,” Kim wrote in a report yesterday. “Replace ‘CDO’ with Greek or Portuguese bonds, and this is the risk that now looms.”

Run on the Eupopean banks? - When/if word gets out that depositors can lose, that contagion spreads across the euro zone with a general run on the banking system to actual cash, gold, and other currencies, which doesn’t create a cash shortage but drives the euro down further, and further weakens the credit worthiness of all the national govts.As previously suggested, the endgame is a shut down of the payments system and a reorganization of the entire system with credible deposit insurance and central funding. My proposal still seems the only one I’ve seen that makes any sense at all, and it’s still not even a consideration.

Help is on the way - SPEAKING of Greece, it's worth noting the latest developments from Europe:An emergency multi-annual loan programme for Greece from its eurozone partners and the International Monetary Fund would be concluded in the next few days, the European Commission said on Thursday. In a statement apparently aimed at reassuring financial markets that eurozone governments and the IMF were aware of the need to act swiftly, Olli Rehn, the monetary affairs commissioner, said the rescue package would give Greece “breathing space from the pressure of financial markets to decisively restore the sustainability of its public finances”.It's a little disturbing that euro zone governments and the IMF felt the need to reassure markets that they got how serious things have become. Doesn't say much for their policy reactions to date.

Will a Greek Bailout Stop the Contagion? Greek debt has rallied on the news that the EU and the IMF are close to agreement on a €120 billion ($159 billion) rescue package.  Other PIIGS sovereign debt is also getting a breather.  This has been the pattern throughout the crisis:  there's some positive development, there's a rally, and then everyone remembers that Greece is still anchored right smack in between of Scylla and Charybdis, and yields shoot back up again. The idea of the bailout is to prevent contagion to other countries.  But will it?  In a way, the Greek rescue package makes it less likely that anyone else is going to get help from their eurobrethren.  The IMF and the constituent governments only have so much money that they can pour into Club Med, and Greece is taking really quite a lot of it.  Forget Spain, which is too large for anyone to launch a Greek-style rescue; even Portugal will be a stretch.

Greece: Moody's holds off on rating revision - Ratings agency Moody's says it will wait to see details of an EU-IMF rescue package before a possible revision of Greece's credit rating, but warns a "multi-notch downgrade" remains likely. Moody's said Thursday it will maintain its A3 sovereign bond rating for Greece -- well within investment grade -- until it considers details of the package currently being negotiated in Athens. Greek officials say the talks are likely to be concluded by the end of the week. On Tuesday, ratings agency Standard & Poor's downgraded Greek bonds to junk status, jolting world markets on renewed fears of a Greek default

Greece Agrees to Austerity Plan - From the Financial Times: Greece agrees €24bn austerity package Greece has agreed the outline of a €24bn austerity package, including a three-year wage freeze for public sector workers, in return for a multibillion-euro loan from the eurozone and the International Monetary Fund ...The final details are still being worked out, but apparently the value-added tax (VAT) will be increased, public sector workers will lose their two large bonuses, and the retirement age will be increased significantly among other measures. This is intended to reduce the budget deficit by 10+ percentage points over 3 years

Official: Germany expects to receive Greek austerity plan by Sunday - Germany says it expects Greece to present its austerity plan hammered out in negotiations with the European Union and International Monetary Fund by Sunday. Finance Ministry spokesman Michael Offer told reporters Friday once the plan is distributed, Germany will review it on a national level and then consult with eurozone finance ministers in a conference call. The call is also expected to take place Sunday.Germany has stressed it needs to review the Greek plan before it can move ahead with legislation deemed necessary to free up the euro8.4 (US$11.1) billion loan it is pitching in to help bail out Greece.

Greeks face tax, pensions and pay misery in austerity plan - An increase in the retirement age from 53 to 67, a three-year wage freeze and cuts in public sector pay are understood to be among the austerity measures agreed to by the Greek Government in exchange for a €24 billion (£21 billion) rescue package. The measures include severe cuts in Civil Service wages, with public servants losing their “13th and 14th” months’ salary and pension entitlements, a reduction of state benefits and tax increases on alcohol and tobacco to help cut the deficit. Final details were still being decided last night with officials from the International Monetary Fund, the European Commission, and the European Central Bank. A final draft should be ready for approval by the Greek Parliament next week.

Greeks Protest Budget Cuts as Bailout Package Nears (Bloomberg) -- Greeks protested “unprecedented” budget cuts as euro-region countries and the International Monetary Fund move toward agreement on a 120 billion-euro ($159 billion) bailout package for the debt-stricken nation.  Thousands of demonstrators in Athens used the May Day holiday to call for job security and the defense of worker rights, prompting the deployment of riot police around government buildings including the finance ministry. Isolated clashes took place, some involving tear gas.  Greece faces “unprecedented” austerity and must brace itself for “very demanding tasks” as the government wraps up talks with the European Union and IMF on conditions for a three- year financial rescue, Finance Minister George Papaconstantinou said yesterday. “We are at a critical point in the history of our country,” he said.

BBC News – Athens clash at finance ministry over budget cuts - Protesters in Athens clashed with police as a group tried to force its way into the Greek finance ministry.  Police fired tear gas to disperse the crowd as the unrest flared over austerity measures that may be taken in return for a massive bailout deal. The European Union (EU) has said it is close to approving the details of an emergency plan to help tackle Greece crippling debt. EU commission chief Jose Manuel Barroso said "rapid progress" was being made. "I'm confident that the talks will be concluded soon, meaning in the next days," Mr Barroso told a news conference following the clashes.

Rioting Greeks throw petrol bombs at police - Several hundred protesters waving red flags and wearing red bandannas confronted the police in the Greek capital on Saturday morning. Two petrol bombs were hurled at the police lines, and armed police fired tear gas to dispel the crowd. Angry protesters set fire to rubbish cans and two television broadcast vans.  "No to the IMF's junta!" protesters chanted, referring to the military dictatorship which ruled Greece from 1967 to 1974.  "Hands off our rights! IMF and EU Commission out!," the protesters shouted as they marched to parliament

Portuguese workers unite to resist austerity measures - The red flags, unashamedly decorated with the hammer and sickle, that fluttered on the nearby headquarters of the local Portuguese communist party were a clue to the immense political battle awaiting prime minister José Sócrates as he tries to see off a Greek-style debt debacle.The communists head a red-green coalition that governs this and a swath of large, battered industrial towns on the south bank of the Tagus, across from the capital Lisbon. "They are not real communists any more," said Da Silva, who spent five years in the jails of former dictator Salazar. "But they are all we've got."It is in these smoke-stack towns, with their ailing shipyards, run-down iron-mills and empty factories, that the long-running drama of Portugal's troubled adjustment to the globalised economy has been most painfully played out. One in eight workers in the region cannot find jobs – a rate 25% higher than the national average.

Threats Of Civil War - Just reported: Greece will not cut public salaries or there wll be civil war. There's the gauntlet folks.  It means that no "assistance" can actually succeed, because it is not possible to get the fiscal situation under control without significant cuts in public spending. This, incidentally, is the same problem we have in the US, and why attempts to deal with our fiscal situation at both state and federal levels is going to end up in the same place eventually.  The majority of our budget is comprised of handouts of one form or another, whether they be Social Security, Medicare, or public-sector salaries.The "unified opposition" by public-sector employee unions (just look at what Florida teachers ran when their pension handouts and tenure were threatened) says everything you need to know. Greece has to be cut loose.  The best way to do it is for Germany to walk away from the Euro and return to the Mark for its currency, leaving the rest of Europe to twist in the wind.

Greece Faces 'Unprecedented' Cuts as $159 Billion Rescue Nears - May 1 (Bloomberg) -- Greek Finance Minister George Papaconstantinou said Greece faces “unprecedented” budget cuts as the euro region and International Monetary Fund near approval of a 120 billion-euro ($159 billion) bailout for the debt- stricken nation.Greece must brace itself for “very demanding tasks,” Papaconstantinou said yesterday in Athens, where the government is wrapping up talks with the IMF and EU on conditions for the three-year loans. “We are at a critical point in the history of our country.”European finance ministers plan to meet tomorrow to approve their share of the bailout meant to stop the biggest crisis in the euro’s 11-year history. While Greek stocks and bonds rebounded after German Chancellor Angela Merkel said April 28 the EU must speed up its response, the crisis rippled through the euro area. Standard & Poor’s downgraded Greece to junk this week and followed with cuts to Portugal and Spain.

Has Greece hired restructuring advisers? - Euroweek’s Southpaw column starts off explosively: A mandate advising Greece on a potential restructuring — understood to have been won by Lazard — is the highest profile piece of business going for bankers working for government clients. This would seem to imply that Greece has been shopping around this mandate for some time now, and has already settled on Lazard as the bank it’s going to go with. It’s a smart choice: Lazard did a spectacular job recently in both Ecuador and Ivory Coast. But the mere decision to hire advisers sends the message to the market that default is more than just an option. Greece, it seems, is happy to spend serious money on high-priced bankers right now to work out whether and how to do

How much would a Greek devaluation help? - Arnold Kling is skeptical and while I am on board with the economics of the anti-Euro crew, and I think Greece should leave the Euro, I believe the anti-Euro argument is now being pushed too far. For instance, contra Paul Krugman, I don't see Euro membership as, in this regard, the main economic difference between the British and the Greeks.  Who has the Elgin marbles and how did they get there?  What longer-run historical and cultural forces does this reflect? Keep in mind there is nothing stopping Greece from cutting the nominal prices of its exports, right now, thereby altering its real terms of trade.  Those prices just aren't *that* sticky, especially if the business model of the country is falling apart.

Why Devalue? - Krugman - Think for a moment about Greece’s predicament now, even if it were to default on its debt. It’s running a huge primary deficit, so even if it were to stop paying any debt service it would be forced to slash spending and/or raise taxes, to the tune of 8 or 9 percent of GDP.This would have a massively contractionary effect on the Greek economy, leading to a surge in unemployment (and a further fall in revenues, making even more belt-tightening necessary).Now, if Greece had its own currency, it could try to offset this contraction with an expansionary monetary policy — including a devaluation to gain export competitiveness. As long as it’s in the euro, however, Greece can do nothing to limit the macroeconomic costs of fiscal contraction.

The Pain In Spain… isn’t nearly as severe as a casual reading of the news might suggest. Or more accurately: Spain’s economy is a mess, with immense unemployment, but there has actually been remarkably little contagion so far from Greek concerns. It comes as a bit of a shock, actually, to discover that the interest rate on Spanish 10-years is only 4.03 percent; it’s up about 25 basis points since Greece went pear-shaped, but that’s not bad, considering.The point is that whatever else is going wrong — and a lot is — Spain is actually doing quite well in terms of maintaining fiscal credibility.

Spanish Unemployment Rate Tops 20%, Undermining Deficit Fight (Bloomberg) Spain’s unemployment rate rose above 20 percent for the first time in more than a decade, undermining Prime Minister Jose Luis Rodriguez Zapatero’s fight to cut the euro region’s third-largest budget deficit.Spanish borrowing costs have surged in the past two weeks on concern the state will struggle to rein in the deficit. Standard & Poor’s cut the country’s credit rating on April 28, saying the government was underestimating its fiscal problems and overestimating growth prospects. Adding to public spending, Zapatero has extended benefits for the long-term unemployed. “I suspect employment will continue falling for most of the rest of this year,”“Clearly it has knock-on implications for fiscal policy.”Spain’s budget deficit was the third-largest in the euro region last year, at 11.2 percent of gross domestic product. S&P said it expects the shortfall to remain above 5 percent in 2013, the year the government has pledged to cut it to the EU’s 3 percent limit.

Europe’s strained marriage - On Monday, I looked at Germany’s attitude to Greece from a nationalist/tactical perspective, and promptly got slapped down by dsquared: “Congratulations,” he wrote, “you’ve proved the impossibility of not only the 2004 and 2007 accessions, but also of the Common Agricultural Policy.” But the fact is that the Europe which grew in 2004 and 2007, and the Europe which came together to create the CAP, now looks as though it is falling apart. Philip Stephens has an essay in today’s FT which diagnoses this well, and which captures the sudden shift that we’ve seen of late, from the “reassuringly ineluctable” EU of a couple of years ago to something much more precarious today:

Wall of Maturities :: Greece's Debt Distribution (% GDP)The charts below show the debt distribution of Greece and Germany as a percentage of their respective GDP. Germany should serve as a kind of risk free benchmark: The data are from Bloomberg and IMF's World Economic Outlook Database (2010e) Click here (Greece) and here (Germany) for the actual amount outstanding per year.

The Euro Trap, by Paul Krugman - NY Times: Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary union. ... Oops..., right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that’s looking like an open question. To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.

The End of Euroland? - Like Paul Krugman, I was swayed--if not convinced--by Barry Eichengreen's argument that leaving the euro would trigger catastrophic bank runs in any country that did so, and was therefore unlikely.  Perhaps, I thought, my earlier euroskepticism had been overdone. But today Krugman makes a very good point:  the countries now at risk of leaving the euro are going ahead and having the financial crisis anyway (to varying degrees).  Which may mean all bets are off.  Once Greece has to place "emergency" restrictions on bank withdrawals in order to halt runs, bolting the currency union starts to seem much more thinkable.  And allegedly, the runs have already started.  In fact, the euro is making them worse, because you can move your money to another country's banks without taking any currency risk (to the downside, anyway.  Depositors who are sensible enough to stash their cash in Germany will get a nice boost if Greece devalues). I now think it's much more likely than not that Greece will ultimately leave the euro--if not this year, then soon.

Europe Is Finished Unless It Changes The Rules Fast - The current Greek crisis has shown all too starkly the limits of the euro zone's sanction and support mechanisms. If the monetary union is to have a future, it needs new rules to keep members in line and bail them out if necessary. Europe is in the worst crisis of the postwar era. For months, the governments of the European Union member states have proven to be incapable of developing a convincing solution for the serious debt problems of individual countries, as well as for the reduction of imbalances within the monetary union. Uncertainty among investors has grown in recent weeks, which is primarily attributable to the helplessness of political leaders, and only secondarily to the influence of speculators.

El-Erian Says Sustainable Solution Needed for Greece (Bloomberg) -- Pacific Investment Management Co., the world’s biggest manager of bond funds, won’t buy the debt of Greece until there is a sustainable solution to the nation’s fiscal crisis. Greek leaders must first make fiscal adjustments along with maintaining economic growth and employment creation, Mohamed A. El-Erian, chief executive and co-chief investment officer of Newport Beach, California-based Pimco, said in Bloomberg Radio interview with Tom Keene today. They must work quickly with European and International Monetary Fund officials to coordinate the response and implement an aid package, he said. “The most critical thing is for the Europeans to understand that when you allow a crisis to fester it morphs and it morphs into something much more difficult to control,” said El-Erian, a former IMF deputy director. “First and foremost, the Europeans need to understand how urgent the situation is.”

To Save The Eurozone: $1 trillion, European Central Bank Reform, And A New Head for the IMF – Johnson & Boone - When Mr. Trichet (head of the European Central Bank, ECB) and Mr.  Strauss-Kahn (head of the International Monetary Fund, IMF) rushed to Berlin this week to meet Prime Minister Angela Merkel and the German parliament, the moment was eerily reminiscent of September 2008 – when Hank Paulson stormed up to the US Congress, demanding for $700bn in relief for the largest US banks.  Remember the aftermath of that debacle: despite the Treasury argument that this would be enough, much more money was eventually needed, and Mr. Paulson left office a few months later under a cloud.The problem this time is bigger.  It is not only about banks, it is about the essence of the eurozone, and the political survival of all the public figures responsible.  If Mr. Trichet and Mr. Strauss-Kahn were honest, they would admit to Ms. Merkel “we messed up The underlying problem is the rule for printing money:  in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks

With $2 Trillion In 3 Year Funding Needs By the PIIGS, The IMF Is Helpless To Do Anything But  Sit Back And Watch - Total PIIGS funding needs (defined as the sum of debt maturities and budget deficits) over the next 3 years amount to $2 trillion. Total PIIGS funding needs in 2010 alone amount to $600 billion. Total IMF bail out capacity: around $700 billion. Sorry - it simply does not compute. Below is a table summarizing the funding needs of just the PIIGS. On Tuesday all the PIIGS had essentially entered the unfundable zone as each's cost of funding surged, meaning the IMF would have to guarantee or bail them all out. We will certainly see this contagion again as the PIIGS now commence spending with unprecedented profligacy, knowing full well they will be bailed out when the time comes.

How the Greek crisis is the ECB’s fault - Peter Boone and Simon Johnson have a long and dense post on the eurocrisis today, which has a lot of different diagnoses and conclusions. I don’t agree with all of it, but I do think they touch on something important when they trace it all back to the way that the ECB became a quasi-fiscal agent: The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels. This same structure directly distorts the incentives of commercial banks: they have a backstop at the ECB, which is the “lender of last resort

The Euro crisis - According to Paul Krugman, the Euro is one of the main factors behind the crisis in Greece and other European countries. The fact that Greece (and Portugal, and Spain and Ireland) cannot devalue their currencies is having a negative impact on their growth which lowers tax revenues, increases government deficits and raises the possibility of default. Martin Feldstein goes one step further and argues that if Greece could devalue, they would easily avoid default.  I understand their argument, that exchange rate misalignments can have negative economic consequences but I think that blaming the Euro for the imbalances in government accounts is misleading. The work of Reinhart and Rogoff, summarizing eight centuries of financial crises is full of examples of countries with flexible exchange rates where governments default. There are also plenty of cases of countries with fixed exchange rates and large devaluations that not only do not avoid default but might be responsible for it (as liabilities where denominated in a foreign currency).

Eurozone breakup would trigger the mother of all financial crises - Adopting the euro is effectively irreversible. Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises. National households and firms would shift deposits to other euro-area banks producing a system-wide bank run. Investors, trying to escape, would create a bond-market crisis. Here is what the train wreck would look like.

As Europe Struggles, China Has Reason to Worry - NYTimes - Spreading problems in Europe’s sovereign debt markets pose potential challenges for China, which has been stepping up its investments in European government bonds and relies on Europe as its biggest export market.   The turmoil that Europe’s difficulty has caused in financial markets already appears to have caused tens of billions of dollars in paper losses in China’s foreign exchange reserves. And the problems may complicate the timing of an expected Chinese move to break the informal peg of the Chinese renminbi to the dollar, Yet, officials in Beijing have almost completely avoided public comments and are showing little enthusiasm for playing a direct role in the complex diplomatic and financial negotiations as Greece, Portugal and Spain struggle to respond to downgrades in their sovereign debt ratings. China’s role, if any, would probably come via its participation as a big contributor to the International Monetary Fund, economists and bankers say.

We Can’t All Be (Net) Exporters - The Greek crisis, which helped further extend the Dollar's uptrend in place since the beginning of the year, is a reminder that global imbalances are still with us - and, if not corrected, will eventually threaten the sustainability of the global recovery. Indeed, how sustainable can any recovery be if the vast majority of nations are pursuing an export oriented growth strategy? After all, clearly that is not a game all can play - there needs to be a net importer to offset the net exports. Who wants to fill that role? If the US is pushed into filling that role, we have simply come full circle over the past three years.  From the Wall Street Journal: President Barack Obama's goal of doubling U.S. exports over the next five years will be difficult to meet, business leaders and economists say, because of the lack of momentum on demolishing trade barriers and the shift by more American companies toward producing overseas.

Why Isn't Britain In More Trouble?  - Krugman - There have been various versions of the “Britain is the next Greece!” story out there; a good rundown at FT Alphaville. As they note there, however, the CDS and bond markets don’t seem to agree: So is Britain different, and why?Some of the raw budget numbers are daunting: according to Eurostat, Britain ran a primary deficit — that is, a deficit not counting interest payments — of 9.5 percent of GDP last year. That’s larger than Greece’s 8.5 percent. Against that, Britain had debt of “only” 68 percent of GDP, compared with Greece’s 115 percent. But the really big difference is in economic prospects. Britain’s recovery hasn’t been as strong as one would like — but the economy is growing, and since deflation looks unlikely thanks to the floating exchange rate, Britain can expect to see growth of several percent a year in nominal GDP. Greece, on the other hand, is in the euro straitjacket

Warning Signal on U.K. Debt? - Investors bought a net $443 million of credit-default swaps to insure against a U.K. default last week, according to data compiled by the Depository Trust and Clearing Corp., taking the total outstanding to $8.2 billion. That was easily the biggest gain among sovereign borrowers. The size of protection on the U.K. has roughly doubled since the year began, a move that far outpaces the run-up in Greek CDS last fall. That was easily the biggest gain among sovereign borrowers. The size of protection on the U.K. has roughly doubled since the year began, a move that far outpaces the run-up in Greek CDS last fall.

Income Tax Must Be Raised By 6p To Return Britain's Economy To Health, NIESR Warns - In a bombshell report with less than a week to go until the general election, the National Institute for Economic and Social Research (NIESR) warned that all three political parties were not ambitious enough with their plans to slash the deficit. It advised that, on top of their radical plans to slash spending and reduce the shortfall in the government accounts, the election winner should "gradually raise income tax by 6p in the pound."  The advice is unlikely to be welcomed by the parties, which have already committed to spending cuts which are as deep as any since the 1970s and, in the Tories' case, since the 1920s. However, Ray Barrell, director of macroeconomic research at NIESR, said that if they intended to bring the deficit down to levels which would leave the country equipped to deal with a "future crisis or war", much more ambitious plans would be necessary.

Greece’s fiscal woes threaten the U.S. - latimes - A widening financial crisis in Europe is threatening to put a damper on the economic recovery here and abroad just as the American economy is gathering steam.A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece's, as Standard & Poor's cut the Madrid government's credit rating, just one day after slashing Athens' bonds to "junk" status and downgrading Portugal's debt as well. European officials pledged Wednesday to act swiftly on a hefty package of loans for Greece, but skepticism remained that Germany, the continent's strongest economic power, would ultimately agree to the plan. Even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other tough measures to get their fiscal affairs in order. "It'll take years of savage spending cuts, wage cuts and welfare-pension reform to eventually grow out of the debt situation,"

Live From New York: ECB's Trichet & Bob Rubin - I almost missed this speaking engagement that the ECB's chief had at the Council for Foreign Relations in New York. Welcoming him is none other than the rather famous Goldman Sachs alum and former Treasury Secretary Robert Rubin. Needless to say, it's important stuff touching on the goings-on in the European Monetary Union (EMU). If the length deters you, there's a highlight clip on the CFR website.

The Euro: Why Should We Care? : NPR - (Rogoff interview 4.5 minutes) One day after the debt ratings for Greece and Portugal were downgraded, Standard & Poor's on Wednesday has cut the credit rating for Spain. The move sparked a sell-off of stocks in markets all over the world, pulled the euro to its lowest point in a year, and diminished hopes in Europe that the debt crisis could be contained. Michele Norris talks to Ken Rogoff, a Harvard economics professor and former chief economist of the International Monetary Fund, to find out how this could affect the financial picture in the U.S.

Three Reasons The Euro Crisis Matters For The U.S. - 1. The crisis could mean fewer U.S. jobs.The crisis could hurt U.S. exports to Europe, which in turn would mean fewer U.S. jobs. When the euro falls against the dollar, American products get more expensive in Europe. About a fifth of our exports go to Europe. 2. The U.S. is the biggest funder of the IMF, so taxpayers are on the hook for a chunk of the IMF bailouts. 3. Europe's problems are a reminder that, sooner or later, the bell may toll for us. Here's how the economist Ken Rogoff put it on All Things Considered yesterday...

Greece: Deja Vu All Over Again - I blogged yesterday about the disaster in Greece, and its rapid spread to other European countries.  Today the fish-eye is turning on countries outside of the PIIGS, including Japan, Britain . . . and us.  According to the Financial Times, "The Fund has calculated that almost all advanced economies need to tighten fiscal policy significantly in the coming decade in order to stabilise debt at 60 per cent of national income by 2030 and the tightening needed in the US, Japan and the UK is just as bad as that required in Greece, Spain, Ireland and Portugal." So perhaps naturally, I've been thinking more about the parallels to the Great Depression that I talked about yesterday.

Wake The President - Simon Johnson - Everything you knew or thought you believed about the European economy – and the eurozone, which lies at its heart – was just ripped up by financial markets and thrown out of the proverbial window. While you slept, there was a fundamental repricing of risk in financial markets around Europe – we’ll see shortly about the rest of the world.  You may see this called a “panic” and the term conveys the emotions involved, but do not be misled – this is not a flash in a pan; financial markets have taken a long hard view at the fiscal and banking realities in Europe.  They have also looked long and hard into the eyes – and, they think, the souls – of politicians and policymakers, including in Washington this weekend. The conclusion: large parts of Europe are no longer “investment grade” – they are more like “emerging markets”, meaning higher yield, more risky, and in the descriptive if overly evocative term: “junk”.

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