U.S. Fed's balance sheet rises in latest week (Reuters) - The U.S. Federal Reserve's balance sheet rose for the first time in four weeks, Fed data released on Thursday showed. The Fed's balance sheet climbed to $2.318 trillion in the week ended May 12 from $2.308 trillion in the week ended May 5. The balance sheet had been accumulating mass early this year amid the Fed's asset-buying program, or quantitative easing. The program was aimed at holding down credit rates while the economy recovered from the worst recession in 70 years.The balance sheet hit a record high of $2.322 billion in the week ended April 14.The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) were $1.098 trillion on May 12, up slightly from $1.097 trillion the previous week.
Fed's Kohn: Balance sheet hasn't sparked spending (Reuters) - The U.S. Federal Reserve's massive addition of reserves to the banking system to combat the financial crisis should not be inflationary unless bank lending or inflation expectations jump, the Fed's No. 2 official said on Thursday. Fed Vice Chairman Donald Kohn said although some believe that extra bank reserves could translate into additional borrowing and spending by businesses and consumers, that does not seem to have happened.The large quantity of bank reserves are largely seen as a byproduct of extensive asset purchases by the Fed in an effort to boost the economy. The Fed's purchase of assets such as Treasuries was undertaken after the U.S. central bank cut interest rates to almost zero percent.Policy makers viewed expanding reserves as unlikely to have an independent effect on financial markets and the economy, unless bank lending picked up, releasing those reserves into circulation, or if the sheer size of the balance sheet sparked inflation fears.
Federal Reserve to test plan to offer banks CDs - The Federal Reserve will soon begin testing a new tool to soak up vast sums of money it injected into the economy to stem the financial crisis.The Fed said Monday it will offer the equivalent of five small certificates of deposit for banks, beginning as early as mid-June.A trial run of the so-called "term deposit program" is intended to give banks a chance to learn how the program works. Once the economy is on firmer footing, the term deposits program will be one of the Fed's tools for tightening credit.The term deposits will pay interest and provide banks with an incentive to keep their money at the Fed. Otherwise, circulating it through lending could cause higher inflation.
Fed Hinting on Mortgage-Bond Sales Brings Bernanke Tightening… (Bloomberg) -- Words may speak louder than actions for Federal Reserve Chairman Ben S. Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet. Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs. That means Fed officials may be more likely than traders anticipate to keep the benchmark federal funds target rate near zero through the end of the year, according to former Fed Governor Laurence Meyer. Bernanke’s challenge is to calibrate communications so he and his colleagues retain the flexibility to pace and time their actions to the strength of the recovery.
Morning Rant: ‘What ARE [U.S. Economists] Looking At?’ – In light of the recent developments in Greece, the Fed’s Dennis Lockhart was sheepish at a conference yesterday that had the stated theme, ‘after the crisis’. He admitted that the theme was chosen earlier in the year when Europe’s sovereign debt troubles were not fully anticipated. In defense of the folks choosing the title, the conference was about the mortgage crisis, not general financial markets.However, Lockhart’s admission as a member of the Fed about not fully anticipating sovereign issues is telling nonetheless. So we’ve got at least one member of the Fed admitting he didn’t appreciate the issue. We’d throw [Jeffrey] Lacker and [Thomas] Hoenig in the same pile. And it’s not just the Fed members. This week, a major U.S. bank [Morgan Stanley] backtracked on its rate call, also using the cover of new developments in Greece. We recently went to a conference at which three U.S. economists from three major banks spoke, figuratively tripping over each other in calling for the first Fed rate hike by [the third quarter]. None mentioned Greece. None mentioned U.S. federal fiscal policy uncertainty...
Fed’s Evans: Monetary Policy Is ‘Appropriately’ Very Accommodative - Federal Reserve Bank of Chicago President Charles Evans said Friday he’s confident the central bank will act to keep inflation under control, although he also said he doesn’t expect to see much in the way of price pressures, suggesting no urgency in tightening policy. “Policy is, appropriately, very accommodative,” Evans said, although “eventually, we will have to return to a more normal stance.” The official explained the decision to move away from the current zero% interest rate stance “will be based on careful monitoring of business activity and an alert eye out for signs of changes in the inflation outlook.” But so far, it looks like there aren’t any problems on that front. “Inflation will remain relatively stable” and “the current low rates of resource utilization strongly point to lower inflation,” Evans said
Bernanke Faces This-Time-Different Disinflation - High unemployment and low inflation -- a combination unprecedented since at least World War II -- will keep Fed Chairman Ben S. Bernanke from raising rates until the second quarter of 2011, Kasman and Feroli say. Their prediction is far later than the November increase forecast by 47 economists in an April 1-8 Bloomberg survey. With the jobless rate above 9 percent since May 2009, workers’ ability to bargain for higher wages has been sapped, along with consumer demand that would allow companies to raise prices. “The inflation process is going to move slowly,” said Kasman, chief economist and a managing director at JPMorgan Chase, which purchased the failing Bear Stearns two years ago. “The job is to reflate the economy in an environment where there are powerful disinflationary forces. You need a reasonably long period of growth for that.”
Fed’s Evans Plays Down Euro-Zone Debt Impact On US - The sovereign debt crisis that has enveloped three European nations and threatens to spread to others will slow U.S. economic growth, but the impact will be “minimal to modest,” the president of the Federal Reserve Bank of Chicago said Friday.Charles Evans said he expects austerity measures aimed at reducing budget deficits in Greece, Portugal, and Spain will be painful for those countries and will likely slow growth across the European continent. That, in turn, will hinder exports from the U.S. But the effect on U.S. exports shouldn’t be severe, according to Evans. U.S. officials are “looking very carefully” to assess domestic exposure to Europe’s economic problems, Evans said.
The Reactivation of US Federal Reserve Swap Lines - Well here's some humbling news from those of us who believe the euro was becoming an alternative currency to the US dollar. At the start of the year, I wrote on how the swap lines that the Federal Reserve had opened to improve dollar liquidity as the US financial crisis was underway were due to be shut down. More precisely, they were opened on 12 December 2008 and closed on 1 February 2010. This closure was little noticed at the time, but it seems that the Americans have been as keen on mitigating the global financial markets' current bout of panic as a still-unattributed 1000 point drop in the Dow Jones Industrial Average occurred last week. When in doubt, blame "the speculators."No matter; up on the Fed site is a press release detailing how the swap lines have been opened once again to ringfence Euro-troubles:
Fed to reopen dollar swap program - The Federal Reserve is going to reopen a program set up during the financial crisis, to make sure foreign banks have the dollars they need, the European Central Bank announced late Sunday. The Fed will ship dollars overseas through the Bank of Canada, the Bank of England, the ECB and the Swiss National Bank. The Bank of Japan will be considering similar measures soon, the ECB said. The facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and other financial centers, the ECB said in a statement on its web site. The ECB said the first repurchase operations for dollars against ECB-eligible collateral would be carried out on Tuesday.
Return of the swap lines – Atlanta Fed macroblog -Swap lines are not new tools for central banks. In fact, we covered the basics of swap arrangements in September 2008, explaining the rationale at that time for the facilities thus: An underlying aspect of a currency swap is that banks (and businesses) around the world have assets and liabilities not only in their home currency, but also in dollars. Thus, banks in England need funding in U.S. dollars as well as in pounds."However, banks recently have been reluctant to lend to one another. Some observers believe this reluctance relates to uncertainty about the assets that other banks have on their balance sheets or because a bank might be uncertain about its own short-term cash needs. Whatever the cause, this reluctance in the interbank market has pushed up the premium for short-term U.S. dollar funding and has been evident in a sharp escalation in LIBOR rates. "The currency swap lines were designed to inject liquidity, which can help bring rates down.
Federal Reserve opens credit line to Europe - The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent. Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort. The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone's weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in "dysfunctional" markets.
Interbank lending: Déjà vu - EIU - In response to the “re-emergence of strains in US dollar short-term funding markets in Europe,” today the Federal Reserve reactivated liquidity swap facilities with central banks in the euro area, UK, Switzerland, Canada and Japan. Announced alongside the €750bn support package unveiled by officials in the European Union, banks’ share prices soared. The Fed’s facility allows foreign central banks to provide dollar-denominated financing directly to local banks. When interbank lending markets seized up during the depths of the credit crunch, the Fed established swap lines with 14 other central banks. At its peak in December 2008, outstanding swaps were worth more than US$580bn, or around 25% of the Fed’s total assets. (This handy primer from the New York Fed, highlighted by Real Time Economics, explains the history and mechanics of the facility.)
Fed Posts Terms Of Unlimited FX Swaps With BOE, ECB And SNB | zero hedge - Late yesterday, the FRBNY posted the full terms of the various FX swaps that it instituted as part of the bailout of the Euro, and of various French and German banks. The specifics of the rescue agreements with the BOE, the ECB and the SNB are below while the Bank of Canada and BOJ swap details are still pending. One thing we know is that all swap arrangement will have a maximum duration of 88 days. Surely at that point they will merely be rolled over as the Euro could be facing parity and various European banks will all be on the verge of bankruptcy due to the $6 trillion USD/EUR underfunded mismatch which the BIS and Zero Hedge have previously discussed. Yet a critical missing item is the full size of each specific swap, leading us to believe that the Fed's latest swap lines are limitless in size. If the expectation is that the Fed should not be constrained by how large any given swap line can get (and even in the first European bailout round each swap line had a hard ceiling), one can speculate that the Fed fully anticipates European dollar funding needs well into the trillions. Which of course would mean that the Fed's balance sheet is about to go up by 50% on behalf of rescuing Europe... And that FR banks will make double the expected $1.25 trillion in interest on excess reserves. Thank you US taxpayers
A Primer on the Fed’s Swap Lines With Europe - The Federal Reserve Bank of New York has a useful primer explaining how the Fed’s swap lines with foreign central banks work. The Fed reopened this program Sunday to help alleviate financial pressure growing out of Europe’s fiscal crisis. Here are some helpful nuggets from the Fed primer, which was published before Sunday’s decision:: “The swaps involved two transactions. At initiation, when a foreign central bank drew on its swap line, it sold a specified quantity of its currency to the Fed in exchange for dollars at the prevailing market exchange rate. At the same time, the Fed and the foreign central bank entered into an agreement that obligated the foreign central bank to buy back its currency at a future date at the same exchange rate. Because the exchange rate for the second transaction was set at the time of the first, there was no exchange rate risk associated with the swaps. The foreign central bank lent the borrowed dollars to institutions in its jurisdiction through a variety of methods, including variable rate and fixed-rate auctions. In every case, the arrangement was between the foreign central bank and the institution receiving funds. The foreign central bank determined the eligibility of institutions and the acceptability of their collateral. And the foreign central bank remained obligated to return the dollars to the Fed and bore the credit risk for the loans it made. At the conclusion of the swap, the foreign central bank paid the Fed an amount of interest on the dollars borrowed that was equal to the amount the central bank earned on its dollar lending operations.”
International Monetary Fed - Is the Federal Reserve pushing the limits of its authority? In re-opening swap lines to other central banks, the U.S. central bank has made another open-ended commitment to grease the wheels of banking, particularly in Europe. Containing debt contagion is a worthy goal, but such interventions have downsides – including potential inflation and moral hazard. As European leaders raced to agree to a 750 billion euro bailout over the weekend, Fed Chairman Ben Bernanke pitched in by promising to provide an unspecified amount of dollar funding to other central banks. Some European banks, for instance, wanted out of risky securities like Greek sovereign bonds and into safer investments like U.S. Treasuries.
Fed to mull sterilizing currency swap lines-Lacker (Reuters) - The Federal Reserve has yet to decide whether to offset the impact of currency swap lines on its balance sheet, a top Federal Reserve official said on Tuesday.The Fed late on Sunday said it was reopening currency swap lines with the European Central Bank and other central banks to ease any liquidity strains from an escalating sovereign debt crisis in Europe. The move will further increase the Fed's balance sheet, which more than doubled during the recent global financial crisis."We are going to have to think about whether we are going to sterilize them," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after speaking at a Piedmont-Triad Regional Economic Outlook conference.The Fed has a number of tools it could use, he said, adding he did not expect political backlash from reopening the swap lines as the Fed conducted these operations during the crisis.
Catching Up With the Philadelphia Fed’s Charles Plosser - WSJ - We caught up with Charles Plosser, president of the Federal Reserve Bank of Philadelphia, to talk about the Fed’s decision this weekend to restart an overseas lending program and other issues. For a primer on the Fed lending program, click here. Here are some of the main takeaways from our conversation with Mr. Plosser. We paraphrase him, and mark direct quotes:
New swap lines at Fed total $9.2 billion -The Federal Reserve had lent $9.2 billion in U.S. dollars to foreign central banks as of Wednesday, after reviving its swaps program over the weekend in conjunction with the European Union's rescue plan, the Fed reported Thursday. Under the swaps program, the Fed swaps dollars for euros, yen, pounds, Swiss francs or Canadian dollars to give five foreign central banks access to U.S. dollars demanded by banks in their countries. At maturity, the dollars will be returned, with interest.
Guest Contribution: Checks and Balances at the Fed - WSJ - Congress is considering changes to the way the Federal Reserve operates. Jon Faust, director of the Center for Financial Economics at Johns Hopkins University, argues that more political control over the rate-setting Federal Open Market Committee ignores the logic of checks and balances.
Interview with Randall Wray: Truths and Myths of the Federal Reserve = Is the Federal Reserve an almighty-like “creature” or rather extremely limited in its essential operations? In an interview with Lars Schall of MMNews, Randall Wray answers questions on the Fed and central banks in general.
$Trillion Bailout of Euro, Greece Shows Need to Audit the Fed - The timing of the sellout by Senator Bernie Sanders (I-Vt.) last Thursday, May 6, on legislation to audit the Federal Reserve could not have been more auspicious — or more suspicious. After pledging for months that he was going to offer an amendment in the Senate identical to "Audit the Fed" legislation in the House (H.R. 1207) authored by Congressman Ron Paul (R-Texas), Sanders caved in to pressures from the Obama administration and the Federal Reserve. In a last-minute switch, Sanders agreed to substitute a watered-down version of the audit as an amendment to financial reform legislation sponsored by Senate Banking Committee Chairman Christopher Dodd (D-Conn.). The new Sanders amendment would provide the administration, the Fed, and Members of Congress with a certain level of cover, allowing them to claim that they had supported auditing the Fed, while at the same time allowing the Fed to continue most of its operations in secret, beyond the scrutiny of Congress and the public.
Alan Grayson Comedic Stand Up Special On The Bankrupt Red Roof Inn Chain And Its Proud Owner, The Federal Reserve - When we disclosed that the Fed was getting crammed down last week on Red Roof Inn foreclosures, little did we know that Alan Grayson was going to take the material and make pure comedic poetry out of it. One more reason to applaud the brilliance of our corrupt and moronic Senators for preventing the much needed and long-overdue audit of the Fed. Enjoy.
Senate Backs One-Time Audit of Fed’s Bailout Role - The Senate on Tuesday voted unanimously to require a one-time audit of the Federal Reserve’s emergency actions during and after the 2008 financial crisis as part of broad legislation overhauling the nation’s financial regulatory system. The amendment would require the Government Accountability Office to scrutinize some $2 trillion in emergency lending that the Fed provided to the nation’s biggest banks. The vote was 96 to 0. “At a time when the Federal Reserve has provided the largest taxpayer bailout in the history of the world, the largest financial institutions in this country, trillion-dollar institutions, the Sanders amendment makes it clear that the Fed can no longer operate in the kind of secrecy that it has operated in forever.”
Congress and the Fed: Why the Bark is Worse Than the Bite - Thoma - What some people are forgetting, however, is that this is an intentional feature of the system. The Fed is supposed to do things that politicians cannot do themselves because of the voter outrage it would cause. The idea is that politicians have very short-run horizons. Their goal is to get reelected, and they will generally do whatever it takes to try to ensure that outcome. Thus, policies that are best for the nation in the long-run but have short-run costs that would interfere with reelection will not be implemented by politicians.But the Fed can do these things — Federal Reserve Board members have fourteen year, non-renewable appointments to help them to take the long-run rather than the short-run view. And it is expected that when the Fed implements policies directed at the long-run, those who are unhappy with the policy because of the costs it imposes on them or the people they care about will protest loudly.
Senate Votes to Audit Fed Emergency Steps, Rejects Wider Probe…(Bloomberg) -- The Senate approved an amendment to the regulatory-overhaul bill authorizing a one-time audit of the Federal Reserve’s emergency-lending programs, and defeated a second proposal that would have allowed continuous inquiries. Lawmakers voted 96-0 today for Senator Bernard Sanders’s proposal to let a congressional watchdog conduct an audit of every Fed emergency action since December 2007. The Senate rejected a measure from Louisiana Republican David Vitter that would have permitted unlimited reviews. The Sanders amendment is closer to what Federal Reserve Chairman Ben S. Bernanke told legislators he would support.
Fed Wins Supervision of Small State Banks in Key Vote - The Federal Reserve scored a major political victory Wednesday morning when the Senate approved an amendment by Sens. Kay Bailey Hutchison (R., Texas) and Amy Klobuchar (D., Minn.). The amendment, which passed 90-9, allows the Fed to retain supervision over state-chartered banks.Senate Banking Committee Chairman Christopher Dodd (D., Conn.) voted against the amendment, as he’s said the Fed should stay focused on monetary policy.Previously, the broader Senate bill authored in large part by Mr. Dodd would have required any state-chartered bank with less than $50 billion of assets to be supervised by the Federal Deposit Insurance Corp. That means the Fed would only have supervision of roughly 100 banks and the FDIC would have been able to regulate close to 5,000 state-chartered banks.
Optimal currencies: America’s euro | The Economist - A NUMBER of economic writers have been making the point that one of the reasons the euro zone is struggling is because it's not an optimal currency area. Business cycles have differing impacts across the euro area, which lacks the necessary fiscal institutions to cushion the blow in places hit relatively hard. Paul Krugman makes this point in his most recent column, in which he explains how federal government transfers across states fill in the gaps left by the common monetary policy. States that are struggling more receive more in transfers from the federal government, which prevents, say, California from suffering from a dramatically worse recession than the rest of the country, of the sort that would generate Greece-like complications. This story is correct, but it's not the whole story. As Greg Mankiw writes today, another key to American success is the thinness of state borders.
Inflation makes a poor stain remover - PIMCO CEO Mohammed El-Erian called US Treasuries the “least dirty shirt” in the fetid pile of laundry we call sovereign debt markets. Meaning that the fiscal future of America may not look so good, but it’s better than any other alternative. But that should not provide much comfort to policy makers. Willem Buiter reckons the American debt situation has gotten so bad that future policy makers will face two options: default or inflate. That’s certainly a possibility, but not yet inevitable. If the American economy experiences reasonably high growth in the future (at least on par with the last few decades) AND the government miraculously summons the political will to cut entitlements, America can spare itself a sovereign debt crisis. Social Security and Medicare are what makes American debts structurally unsustainable (back to the least dirty shirt—Europe and Japan’s demographic challenges are even worse).
The Press Misleads on a Gold "Record" - Yesterday, the Financial Times, the most-sophisticated business newspaper in the world, published this head-slapper: Gold hits fresh record on inflation fears That’s the headline. The story says “Gold prices continued to set fresh highs… gold reached a fresh peak… hit a fresh all-time high…” We learn from this that the FT likes the word “fresh.” What we don’t learn anywhere in the story is that gold didn’t really set a record—or get anywhere near it. In fact, gold only hit a nominal record of $1219 on Tuesday. If you adjust for inflation, which you must, it’s still a whopping 47 percent below the real record, which was hit more than three decades ago at an inflation-adjusted $2309. In other words, the FT is full of it.
The Center Cannot Hold - Today we are going to return to a paper from the Bank of International Settlements, often thought of as the central bankers' central bank. (http://www.bis.org/publ/work300.pdf?noframes=1) The paper looks at fiscal policy in a number of countries and, when combined with the implications of age-related spending (public pensions and health care), determines where levels of debt in terms of GDP are going. The authors don't mince words. They write at the beginning:"Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."
IMF Says Rising Public Debt Risk ‘Cannot Be Ignored’ (Bloomberg) -- The International Monetary Fund urged governments to cut public debt to prevent higher interest rates and slower economic growth, saying the fiscal crisis in Europe shows such risk “cannot be ignored.” Debt in developed economies will expand to about 110 percent of gross domestic product by 2015, from 73 percent in 2007, the IMF said in a fiscal review released today. For the Group of Seven countries, the ratio is the highest since World War II, it said. “As economic conditions improve, the attention of policy makers should now turn to ensuring that doubts about fiscal solvency do not become the cause of a new loss of confidence: recent developments in Europe have clearly indicated that this risk cannot be ignored,” the IMF said. “Major fiscal consolidation will be needed over the years ahead.”
MisIMFormation? - Krugman - The IMF has a new report (pdf) on fiscal troubles ahead; it’s characteristically full of useful information. But the way it’s written, it’s actually quite hard to figure out what’s going on — and when you do decipher it, the story is quite different from the impression most people will get.You see, what the report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren’t there before. So spending cuts and tax increases loom.But here’s the question: where are those structural deficits coming from? It’s not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: It takes careful reading to discover what’s really going on:
U.S. Debt Shock May Hit In 2018, Maybe As Soon As 2013: Moody's - The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America's 'AAA' status haven't added much clarity — until recently.In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory
China's Wen Says Sovereign-Debt Crisis Deepening, Recovery Weak (Bloomberg) -- Chinese Premier Wen Jiabao struck a cautious note about the world economy, saying the sovereign-debt crisis in some countries is “deepening” and the foundations of a global recovery are not yet “solid.”“We should never underestimate the gravity and complexity of this crisis and its far-reaching impact on the world political and economic landscape,” Wen said Global economic uncertainties may delay any Chinese move to revalue the yuan. Adjustments to China’s interest rates and currency policy may be delayed because “there is a growing risk that the Greek debt crisis will worsen and spread,” China International Capital Corp. economists led by Ha Jiming said on May 11.Wen said the financial crisis was leading to “profound changes in the international balance of power.” “We should recognize that as a result of this once-in-a- century financial crisis, the world political and economic landscape is undergoing major adjustments and transformation,”
Where the Debt Is Coming From - That’s from an International Monetary Fund report released today titled “Navigating the Fiscal Challenges Ahead.” The takeaway from this chart is that the surging public debt in advanced countries is driven mostly by huge declines in taxes as a result of less economic activity in the last few years. From the report: Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09 (which led to an unfavorable interest rate-growth differential during that period, in spite of falling interest rates; see pie chart below).
U.S. Exposure to EU Bailout: $50 Billion and Counting (CNBC) - US taxpayers could be on the hook for $50 billion or more as part of the European debt bailout, which is likely to be a close cousin to the strategy used to rescue the American financial system. And that doesn't count the added exposure created by the Federal Reserve's decision over the weekend to participate in currency swaps to provide liquidity to jittery European banks. But one rule-of-thumb formula puts potential US exposure at $54 billion should the entire IMF loan fund be tapped. And that doesn't count the added exposure created by the Federal Reserve's decision over the weekend to participate in currency swaps to provide liquidity to jittery European banks. The swaps move resembles the Term Auction Facility the Fed instituted when the worst of the US financial crisis hit in 2007-08.And the entire bailout package has been nicknamed "Le Tarp" by some for its similarity to the Troubled Asset Relief Program that bailed out US companies with taxpayer-backed loans.US involvement in the European crisis already has drawn critics from Congress and economists who think the domestic financial issues should be cleared up first.
Uncle Sam's debt load - HERE is the situation. Developed world nations all face similar challenges: relatively slow growth, aging populations, and large debt burdens exacerbated by the recent deep recession. Some developed nations have fallen into crisis as a result of these challenges. It is therefore assumed that these challenges lead inevitably to crisis. And this has led many writers to declare that Greece's problems will soon be America's problems.Surprisingly, the astute David Leonhardt has fallen into this trap:The people are, he says, because they prefer a high level of services and low taxes. Indeed, America's primary deficit is clear evidence that they prefer this; otherwise, they'd vote tax increases and service cuts until the budget balanced. They haven't, just as the Greeks didn't, and so the trajectories appear similar.
US faces same problems as Greece, says Bank of England - Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences I have been to at the Bank.What with all the excitement yesterday over our new Government, I never had time to remark on the Inflation Report press conference. Most of our attention was on what King said about the Government’s fiscal plans (a ringing endorsement). But, as Jeremy Warner has written in today’s paper, it was as if King had suddenly been unleashed. Bear in mind King is usually one of the most guarded policymakers in both British and central banking circles. Not yesterday.
Fannie and Freddie Make the US Look a Lot Like Greece -As Americans shake their heads at the Greek debt crisis, they think, "Well, that could never happen here." Greece was hiding their debt so that investors didn't know the full extent of their fiscal problems. The U.S. wouldn't do something like that, would it? The government's current policy to leave a great deal of its liabilities off-balance sheet makes the U.S.'s current debt levels look a lot more favorable than they really are. Future entitlement costs, for example, are already accrued, but remain included as unfunded liabilities, so aren't taken into account when the government talks about its debt. Today, in his New York Times column, David Leonhardt examines the problem this poses for the future, saying: The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall
US must avoid Greece-style crunch: Orszag - U.S. lawmakers must act quickly to tackle a large budget deficit if the United States wants to avoid the kind of debt crisis that hit Greece, the White House's top budget official said on Wednesday. "We want to make sure we never wind up facing the sorts of choices that Greece now faces," White House budget director Peter Orszag told Reuters Insider in an interview. While the United States was in "no imminent danger" of a crisis of Greek proportions, Orszag said "I would prefer to be addressing this sooner rather than later." The U.S. budget deficit hit $1.4 trillion in 2009, just shy of 10 percent of gross domestic product, when the economy was in a deep recession. The gap could be even larger this year. "Right now, there is no imminent danger, but to try to predict exactly when that will shift is a fool's errand."
Are We Greece? - Krugman - David Leonhardt tries to draw parallels. But how strong is the parallel, really?I would really question this comparison:The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.Um, that’s comparing a (highly uncertain) projection of debt 20 years from now — a projection that’s based on the assumption of unchanged policy — with actual debt now. Actual US federal debt is only about half that high now. And it’s worth pointing out that Greek debt is projected to rise to 149 percent of GDP over the next few years — and that’s with the austerity measures agreed with the IMF
We’re Not Greece - Krugman - NY Times: It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need. The truth, however, is that America isn’t Greece — and, in any case, the message from Greece isn’t what these people would have you believe. One answer is that we have a much lower level of debt — the amount we already owe, as opposed to new borrowing — relative to G.D.P. ... Even more important, however, is the fact that we have a clear path to economic recovery, while Greece doesn’t.
America: really not like Greece - I DON'T think David Leonhardt is getting it: [T]o get our budget in order, we would need to come up with revenue equal to more than 6 percent of gross domestic product, either through tax increases or spending cuts. In essence, the country needs to figure out how to pay for the government that its citizens want. It’s a version — albeit a less extreme one — of the problem facing Greece right now. On the face of things, the problems are similar: revenues minus spending equals a negative number in both America and Greece. But the differences are crucial. Greece needs to come up with that 6% right now, in the space of a couple of years, in an environment of negative economic growth, because markets are close to refusing to lend Greece any additional money. America needs to close that 6% gap over the space of several decades, during which time it is likely to grow at a real annual rate of about 2.5%.
The USA Does NOT Have a ‘Greece Problem’ - The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad,. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of "too big to fail" banks, and the asymmetric nature of banker compensation ("heads I win, tails the taxpayer loses"). This stands in marked contrast to America's feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker's bonus that they didn't like. But when it comes to matters of "fiscal sustainability" King sounds no better than a court jester (or, at the very least, a member of President Obama's National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph, the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:
NYT vs. NYT on the Big Fat Greek Question - It’s New York Times columnist vs. New York Times columnist, again. Back in April, it was Paul Krugman and Andrew Ross Sorkin who were feuding—Krugman didn’t like the way Sorkin described his position on bank nationalization. This time, it’s Krugman vs. David Leonhardt, and the feud appears to be far less personal. But the question that divides them—Is the US like Greece?—has quickly become a divining rod for a related debate about the nature of U.S. debt and what should be done about it. The gentlemen from the Times aren’t the only ones to be weighing in on this issue
Export Our Way Out of Debt? - Over at Fed Watch, Tim Duy reminds us to be keenly aware of the subtleties of international finance — and simpleton thinking that there are quick fixes. If everybody tries to export their way out of their finance problem all will lose. So too if even a bunch of countries try. It is one thing to be rightfully worried about Europe and the PIIGS, but we need also add in worries later this year about the USA and California, NY, and other states (also counties and municipalities). For those of us who have lived long enought to have assets, where do we find a "safe haven"? Or do we? At Clusterfuck Nation, James Howard Kunstler believes that it is "over," meaning Western Civilization. Kunstler believes that we have finally pumped up the ultimate bubble, government debt pretty much worldwide, and that all bets are now off. We'll see!
The Twilight of the Welfare State? - Room for Debate Forum - NYT - The debt crisis in Greece may have been temporarily eased by the European Union’s infusion of aid, but many analysts think that Europe’s debt problems and America’s are just beginning. Several analysts have noted that the welfare states in Greece, Spain and Portugal were greatly expanded in the 1990’s, leading to an extraordinary rise in the standards of living in those countries but also unsustainable spending. David Leonhardt of The Times and Robert Samuelson of The Washington Post this week compared the welfare state obligations in Europe to the entitlement burden in the United States. How much should Americans fear the national debt as an aging population demands more services? What’s to be learned from the Greek experience, if anything?
- Tyler Cowen, economist, George Mason University
- James K. Galbraith, economist, University of Texas
- Heather Boushey, economist, Center for American Progress
- Jeffrey A. Miron, economist, Harvard University
- Dean Baker, co-director, Center for Economic and Policy Research
- Gayle Allard, economist, IE Business School in Madrid
What’s the deal with professional economists? - Why are so many blind to the obvious? Economics is a difficult, complex field, requiring substantial brain power to understand even the basics. There are no unintelligent professional economists. They are exposed to consumption theory, capital theory, the theory of economic growth, and the analysis of labor markets. Yet, many don’t understand the simple truths that all money is debt, and a growing economy requires a growing supply of debt. Professional economists learn general equilibrium analysis, social choice and welfare economics, cooperative, noncooperative game theory and repeated games and economics of information. Yet, many believe federal borrowing reduces the availability of lending funds.They immerse themselves in time series analysis, ARMA models, VARs, and detrending, dynamic stochastic general equilibrium models of business cycles, and New Keynesian theories. Yet, many say a balanced federal budget is more prudent than a federal deficit. They author and publish papers on linear/non-linear regression theory on estimation, consistency, asymptotic properties and hypothesis testing. Yet, many believe federal taxes pay for federal spending, our children and grandchildren will pay for federal deficits, and the US will have difficulty finding lenders.
Deficit Commission working groups - Deficit Commission working groups--tax group, but no practicing or academic tax lawyer. One of the strange results of treatment of economists as central policymakers over the last four decades or so of the "Washington Consensus" and the dominance of Chicago School freshwater economists has been the distortion of policy making on taxes to favor economic arguments over fairness and statutory construction that results in a coherent Code. You'd think that people would want a range of perspectives from tax academics and practitioners. Many tax academics are in the "economic efficiency is the only measuring stick that matters for tax policy" camp, but many aren't. Obama's deficit commission appears to be following the trend of treating economists and businessmen (CEOs) and even union leaders as more appropriate to have input on tax issues than tax experts.
U.S. posts 19th straight monthly budget deficit (Reuters) - The United States posted an $82.69 billion deficit in April, nearly four times the $20.91 billion shortfall registered in April 2009 and the largest on record for that month, the Treasury Department said on Wednesday.It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.
Treasury says April federal deficit is largest on record for the month - The Treasury Department said Wednesday that the federal deficit for April soared to $82.7 billion, the largest imbalance for that month on record. That was significantly higher than last year's April deficit of $20 billion and above the $30 billion deficit that private-sector economists had expected. The government generally runs surpluses in April, as millions of taxpayers file their income tax returns. But income tax payments were down this April, reflecting the impact of the recession, which has pushed millions of people out of work. Total revenue for April was down 7.9 percent from a year ago, dipping to $245.3 billion. The Obama administration forecast in February that the deficit for this year would hit $1.56 trillion, surpassing the record of $1.4 trillion set last year. Many private-sector economists think that this year's imbalance will be closer to the $1.4 trillion set last year and that deficits will remain high for years to come.
U.S. deficit skyrockets to record high in April, $30 bln higher than expected - The United States tax deficit soared to $83 billion in April, the highest deficit for that month ever recorded. The tax income was $245.3 billion, 7.9% below the total recorded last April, while spending was $328.0 billion, up 14.2% year-over-year. A year ago in April, the deficit was $20.9 billion, meaning that the deficit quadrupled. While tax receipts were down 7.9% YoY, the individual Income tax was down 21.5% YoY. Total spending went up 14.2%, with national defense up 17%, Medicare up 39.4%, Social Security up 4.2% and General Government up 5.6%.Interest payments were down 9.5%.The financial situation of the U.S. is thus worse than ever, and after the temporary distraction on the other side of the Atlantic ocean disappeared, investors around the world could wake up to the emergency.
The Treasury non-conundrum, or why yields are trading below 3.6% - SocGen economist Aneta Markowska affects bemusement at the benign bond yield environment in the US. As she put it in a recent note. Fundamentally, countries with large twin deficits are most vulnerable because they have to rely heavily on foreign investors to finance their government budget gaps. Based on these criteria, the US is right up there with the most vulnerable economies. So why are Treasury yields trading below 3.6 per cent?And as economists are wont to do, Markowska provides three major reasons as a potential explanation for the phenomenon: 1 – Inflation trends remain very low. Core CPI was flat in Q1 and the y/y trend now looks set to dip below 1% 2 – Fed has been very slow to embrace the cyclical recovery and shift to a more neutral policy stance. The “extended” language is a green light for bond investors to remain in carry trades.3 – Treasuries and the dollar have benefited from safe haven flows. Of course, this being a SocGen note, there’s a caveat: Markowska believes those three factors “are very transitory and the risks for bond yields are skewed largely to the upside.”
The IMF's New Fiscal Monitor - Last year, the International Monetary Fund introduced a new regular report called the Fiscal Monitor. It provides a lot of useful data on fiscal conditions in various countries and how they are dealing with the massive run-up in debt we have seen over the last couple of years.The latest report was issued this morning and presents some new estimates on the impact of a rise on the debt/GDP ratio. Previously, the IMF staff had estimated that a 10 percentage point rise in the debt/GDP ratio would lead to an increase in long-term real interest rates of 50 basis points (one percentage point is 100 basis points). With the US debt level projected to rise from about 60 percent of GDP before the crisis to almost 110 percent of GDP in 2015, according to the IMF, this suggests that we can expect real interest rates to rise by 2.5 percentage points over the next five years.
Using Sticker Shock to Clarify the Costs of Deficit Spending The reason why deficit financing of government spending and tax cuts proliferates is because it’s (falsely) perceived as “free”–or at least as less painful (less costly) than having to come up with offsetting tax increases or spending cuts. When in fact, economically at least, exactly the opposite is true. Even leaving aside the riskiness of high deficits and debt to the stability of our entire economy, there’s at least the objective and easy-to-quantify cost of the compounding interest on the added debt. So what if every time a deficit-financed spending program or tax cut is proposed, the CBO puts a “price tag” on it that is not just the standard legislative cost of the spending or tax cut, but the gross-of-interest amount, maybe under various assumptions about how long paying down that debt will be put off?
It’s Still True: The Health Care Cost Problem Is the Deficit Problem - I’ve said it myself, as have many others. It is worth repeating. And Krugman just did. [W]hen you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do. …Care for a figure with that? Here’s one from the Health Care Budget Deficit Calculator, produced by the Center for Economic and Policy Research. It shows the effect on the U.S. budget deficit as percent of GDP of a continuation of baseline health care cost trends (yellow line) and of a change to health cost trends of high income OECD countries (blue line).
The real deficit crisis: Jobs -Lots of high-powered attention has been paid in recent weeks to the nation's long term deficit woes. President Obama convened a bi-partisan commission to make recommendations for addressing the budget gap expected in 2015 and the even bigger gap thereafter. Federal Reserve Chairman Bernanke and various past and present directors of the Congressional Budget Office testified that bold steps need to be taken to tackle a deficit crisis that awaits the nation down the road. Their arguments were repeated at a second high-profile forum that featured former President Clinton, his Treasury Secretary, Robert Rubin, and his director of the Office of Management and Budget, Alice Rivlin, among others.Strangely, few of these participants have had anything to say about the actual deficit crisis immediately at hand - the jobs deficit. They are so worried about the storm on the horizon that they've ignored the hailstorm crashing around them right now.
Tax Expenditures Need to Be Cut… If we are serious about cutting the deficit, we need to cut tax expenditures too. Tax expenditures are government spending programs that deliver subsidies through tax exemptions, deductions, credits, exclusions, deferrals, preferential rates, and so on for selected beneficiaries, for example, the oil industry.1 Tax expenditures cost the government more than $1 trillion in fiscal 2011,2 which is almost as much as our projected deficit. If Congress eliminated all tax expenditures, it would cut corporate and individual income tax rates by greater than 20 percent and still generate 20 percent more revenue.3 Despite the importance of tax expenditures, they are hidden, so there is little or no discussion of them in the mainstream media. Lobbyists and Congress use tax expenditures as an easy way to subsidize a favored few at the expense of the ordinary taxpayer. Once tax expenditures are enacted, they are not subject to annual appropriations analysis of whether they are justified, and there is no limit on the amount of the expenditure
Peter Peterson Wants to Cut Social Security - That could have been the title of this CNNMoney.com piece that touted the idea of "fixing" Social Security. The peice begins by quoting Robert Bixby, the director of the Concord Coalition, an organization that was founded by Peter Peterson and is still partially funded by him. Mr. Bixby described fixing Social Security as "low-hanging fruit" when it comes to deficit reduction. The piece then went on to Mr. Peterson himself: "While a Social Security fix would cure only a small part of the country's long-term fiscal shortfall, it could pay big dividends in terms of the U.S. standing internationally, deficit hawks say. 'It would be a confidence builder with our foreign lenders,' said Pete Peterson at a recent fiscal summit organized by his foundation, the Peter G. Peterson Foundation.
The Deficit Problem Is Not “We, the People,” It is “You, the Incompetent Elite” - New York Times columnist David Leonhardt told readers today that the problem of the debt is “we, the people.” Is that so?Was it we the people who were too dumb to see an $8 trillion housing bubble and recognize that its collapse would wreck the economy? No, that was the job of the great Maestro Alan Greenspan and his sidekick Ben Bernanke, the brilliant scholar of the Great Depression. It was also the job of all the economists who do research and opine to the public on the macroeconomy. Virtually all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time. Our deficit today is due to the collapse of this bubble. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).
Galbraith: ‘The danger posed by the deficit ‘is zero’ - James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He's also a skeptic of the prevailing concern over America's long-term deficit. With many people now comparing America's fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.
Deficit Falconry - Maxine Udall (girl economist) - Why the mindless devotion to reducing deficits when unemployment is at 10%? billy blog nails it, I think. Everyone understands that if they do this with their own personal finances, they are grasshoppers not ants, spendthrifts, profligate ne'er-do-wells.But individuals are not governments, they are households. And even households would and do run deficits to tide them over a temporary downturn. Here's Paul Krugman on whether the US is so profligate that we're Greece. He thinks not. He's right that the US must rein in health care costs, but we should also rein in investment banks and stop creating unfettered moral hazard. Reining in bankers seems way more important and immediate to me than reining in health care costs. After all, as Galbraith points out, when we're spending 30% of GDP and everyone else is spending 12%, "we can always buy Paris and all the doctors and move all our elderly there." I wonder if we could sell them our investment bankers? Give them our investment bankers? Pay them to take our investment bankers?
The Post Makes Stuff Up in the News Section to Push Its Deficit Reduction Agenda - The Washington Post (a.k.a. Fox on 15th Street) pulled out the stops in pushing its deficit reduction agenda today. Its news section includes a lengthy story on the euro crisis that makes things up in order advance the Post line about evil budget deficits. It starts by misrepresenting the central problem: "and the currency that was designed to rival the U.S. dollar for power and influence is foundering because of a lack of fiscal discipline among its weakest members." While Greece's problems can be attributed in large part to a lack of fiscal discipline, this is clearly not the case with Spain and Ireland, both of whom had budget surpluses and low debt to GDP ratios prior to the downturn. Portugal is a more ambiguous case. The euro would not be facing a crisis if only Greece and Portugal, two relatively small economies, were facing difficulties.
Fighting the Deficit, With Military Land Policy - NYTimes - My initial suggestion was to sell off some of the radio spectrum now used for television broadcasts. And I’m happy to say that the Federal Communications Commission recently proposed a version of this idea to support its national broadband initiative. So here’s another paid-lunch idea. This one is intended to increase the efficiency of the military and its ability to serve the country — all while reducing military spending. Similar in spirit to the spectrum proposal, it boils down to a simple principle: To allocate resources efficiently, decision makers must make choices based on true market values. For the military, that means taking land prices into account in choosing sites for bases. It may be time to sell off some prime real estate.
Two More Reasons to Like a VAT, Other Than for the Money - Nearly a year ago I posted on Len Burman’s idea of implementing an add-on value-added tax to fund health care reform, commenting on what a good idea it was to combine tax reform and health reform, because tax reform on its own could probably never be enacted if anything more than revenue neutral. This Thursday I was at a meeting of tax policy experts which included Len, at which he suggested a couple other reasons to like the VAT, besides for the revenue it could raise which we so badly need:
- The “announcement effect” would be good stimulus for the recovering but still-weak economy.
- The intergenerational distribution of the burden of a VAT would work to offset the distributional effects of the federal entitlement programs that disproportionately benefit the elderly.
Tattling for Dollars: The Ranks of IRS Tax Informants Grows - The numbers of people who are informing the IRS about delinquent taxpayers is growing.The agency gets about 40 to 50 tips a month from ex-spouses, disgruntled business associates and other individuals angry at someone they believe is cheating Uncle Sam, reports Bloomberg, because they can get a potential reward of 15% to 30% of the money collected in excess of $2 million.Ever since Congress passed The Tax Relief and Health Care Act of 2006, the Internal Revenue Service has been inundated with tips from people eager to help the agency recoup back taxes because of the possible rewards. Previously, it was up to the government's discretion whether a tipster would get a payout, which was capped at $10 million. Now, there's big money to be made.
Carried Interest: prospects? - At the ABA Tax Section meeting in Washington last weekend, there was surprisingly little talk about the carried interest proposal. Carried interest, for those who don't work often in the partnership area, is the way that managers of real estate, hedge, and equity partnerships receive a generous payment for managing the fund--usually a "2 and 20" 2% of the assets under management annually and 20% of profits fee for services. The 20% is claimed to be gains from asset dispositions rather than services (providing a preferential rate in some cases, as well as no payroll taxation) and often has been deferred through offshoring. Various tax experts have called for taxing both the fee and carried interest as ordinary compensation subject to payroll taxes and always taxable at ordinary rates. That proposal has been suggested in Congress at various times as a revenue raiser, but it has not yet been enacted as part of a bill, since the Senate has not included the House-passed version.
Extend the Bush Tax Cuts—WSJ: This is not the time for a tax increase. But unless Congress acts, under current law the existing income tax rates will rise sharply at the beginning of next year. Congress should vote now to extend all of the current tax rates for two years, including the tax rates on dividends, interest and capital gains. Limiting the resulting tax-rate cuts to two years would reduce the projected future fiscal deficits. The sooner Congress acts, the stronger our prospects for continued economic recovery. A tax increase next year could easily derail the current fragile expansion. ... A 2011 tax increase that reduces economic incentives and household spending would raise the risk of a new economic downturn.
Estate Tax: leave it alone, - We are almost halfway through 2010, the weirding time under the GOP's estate tax plan when there is no estate tax and the step-up in basis is gone. They had, of course, intended to eliminate the estate tax for good, but knew that it would cause huge deficits and so didn't want to pass that along with the rest of their 2001 tax cuts that already amounted to more than a trillion dollars. So they left it for later. Repeal was a bad idea to start with. Most of the mythology around the estate tax is just that--sob stories ginned up by the coalition of wealthy families who want to shirk their responsibility to the country for taxes. This is where the President and the Democratic Party should use the bully pulpit to inform people about how the estate tax works. It is relevant for only the largest estates. It doesn't cause family farms to be lost, no matter how many
Tax bills in 2009 at lowest level since 1950 -- Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found.Some conservative political movements such as the "Tea Party" have criticized federal spending as being out of control. While spending is up, taxes have fallen to exceptionally low levels.Federal, state and local income taxes consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.
Are taxes at a 60-year low?- This USA Today article, which talks about the average personal tax rate being at a 60-year low, is getting a lot of attention. The conclusion is pretty fascinating:Americans paid their lowest level of taxes last year since Harry Truman's presidency,But are those numbers right?Many commentators have been quick to jump on the findings. Kevin Drum, over at Mother Jones, points out that the USA Today analysis leaves out payroll taxes, like Social Security. Add those in and taxes go up to about 17% of personal income.Still, the broader point of the story—that the average person is paying less in taxes—isn't necessarily wrong
Raise the petrol tax - GREG MANKIW quotes from a Wall Street Journal piece by Holman Jenkins on the virtues of a petrol tax relative to subsidies for electric and hybrid cars: Even if you believe saving gasoline is a holy cause, subsidizing electric cars simply is not a substitute for politicians finding the courage to jack up gas prices. Think about it this way: You can double the fuel efficiency of any car by putting a second person in it. You can increase its fuel efficiency to infinity by refraining from frivolous trips.These are the incentives that flow from a higher gas price. Exactly the opposite incentives flow from mandatory investment in higher-mileage vehicles. You paid a lot for a car that costs very little to operate—so why not operate it? Why bother to car pool? Why not drive across town for a jar of mayonnaise? I agree with that completely. The tricky part is that increases in petrol tax rates are highly unpopular, and I think they're unpopular in part because there are so few good substitutes to driving in America—when prices rise, it is difficult to change behaviour to reduce exposure to higher petrol costs.
Are Democrats Plotting To Steal Your 401(K)? - The Department of Labor has issued a "request for comment" on what they can do to encourage more people to annuitize their 401(k)s, rather than actively managing personal investments. The responses are due out soon, and somehow Republicans have turned this into a worry that Democrats are plotting to get their hands on our retirement savings. I've read the RFC in question, and I don't see that it says anything of the kind. It is true that Argentina used a nominally similar dodge to grab the contents of peoples' retirement accounts, but the situation is rather different than what DOL is suggesting; Argentina folded the private accounts into its bankrupt public pension scheme in order to temporarily shore up the finances of the latter. DOL is simply saying it wants to encourage people to take a big hunk of cash out of their 401(k)s and buy annuities with it.
Fed’s Kocherlakota: Tax Banks Based On Risk They Create -“Bailouts will inevitably happen during financial crises to prevent runs and systemic collapse,” Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Monday. “We need to structure financial regulation so as to limit the size and occurrence of these bailouts,” he said.“Although bailouts are inevitable, their magnitude can be limited by taxes on financial institutions,” the official said. Some firms appear certain to receive a government bailout during times of crisis because their failure could cause a collapse in the financial system, Kocherlakota noted. The government needs to find a mechanism to redress this imbalance, which inevitably leads to more risk-taking from the financial institution, he said.The official said the government should charge a given firm “a tax that is exactly equal to the expected discounted value of the firm’s bailouts.”
A Fed president for a bank tax - The president of the Federal Reserve Bank of Minneapolis — Narayana R. Kocherlakota – came out in favor of a bank tax today: Bailouts are inevitable. … Why do I say this? There are many forces at play, but I believe that the strongest has to do with the very nature of financial intermediation. Investors in financial institutions always want the ability to pull out their funds quickly. For this reason, financial institutions’ liabilities often take the form of short-term debt and deposits. But such short-term financing instruments are intrinsically prone to self-fulfilling crises of confidence that economists term “runs.” …Even if they only kick in during financial crises, these guarantees change this natural market relationship between risk and cost. The depositors and debtholders are now partially insulated from increases in investment risk, and so do not demand a sufficiently high yield from riskier firms
Bernanke Letter to Lawmakers on Swaps Spin Off - The following is the full text of a letter sent by Fed Chairman Ben Bernanke to Sens. Christopher Dodd (D., Conn.), Richard Shelby (R., Ala.) and Kirsten Gillibrand (D., N.Y.) on a proposed financial overhaul provision to require commercial banks to wall off or limit their swaps businesses
CDS As WMD: From "Fat Man" to "Fat Finger" - Warren Buffett, before a Galileo-like recantation and rebaptism in the church of TBTF finance, was a pioneer in recognizing derivatives as financial weapons of mass destruction. Like the nuclear weapons of WWII, modern WMD are examples of tremendous leverage- tiny amounts of fissile material or premium, respectively, explode with enormous yield, wrecking horrific damage. Unlike atomic weapons, whose direct effects are limited to a blast and radiation radius, modern WMD, like CDS use high speed connectivity and computer driven hedging as transmission mechanisms. The "Fat Finger" ignites a "critical price deviation" forcing hedgers of naked CDS to (try to) sell what might be many multiples of available securities. Fortunately, just as atomic weapons require radioactive cores, so too do our CDS WMD. In the latter case, the underlying core (financial entity) must be highly leveraged. Instability, either at an atomic or financial level, is key to explosive yield. Trying to force default in an unleveraged, highly solvent financial entity would be about as fun as using carbon-12 instead of uranium-235 in an atomic bomb.
Banks Must Be Barred from Dealing Derivatives: It's NOT a Normal Part of the Business of Banking - The furor over the inclusion of Senate Agriculture Chairwoman Blanche Lincoln's amendment in the Senate bill is becoming somewhat ludicrous. The controversial part of the amendment - section 716 - would ban Federal Reserve assistance through a credit facility or the discount window or loan or debt guarantees by the FDIC to any dealer in swap contracts. This would mean that banks that are insured by the FDIC - including the large banks that now dominate the market - would have to spin off their derivatives desks. Like the Volcker rule itself, the intent is to remove risky activities from the core banking functions that are essential to the economy and to ensure that those risky activities will not trigger the need for a bail out to prevent systemic collapse in the future as they did in the 2008 crisis.
Lincoln to the Rescue - Robert Reich - Right now, the biggest battle in bank reform is over a provision introduced by Senator Blanche Lincoln of Arkansas that would force the giant Wall Street banks to give up their lucrative derivative trading businesses if they want the government (i.e. taxpayers) to continue insuring their commercial deposits. The five biggest Wall Street banks have had the derivatives market (derivatives are bets on whether the price of certain assets will rise or fall, bets thereby “derived” from asset prices) almost entirely to themselves. Last year their revenues from derivatives trading totaled a whopping $22.6 billion. Their advantage comes from their large size, plus government insurance of their commercial deposits that allows them to raise money more cheaply than other financial institutions. Derivatives lie at the point where the basic saving-and-lending function of commercial banking meets the private casino of Wall Street investment banking.
The Origins of Blanche Lincoln's Disastrous "Section 106" Proposal - Bloomberg has an excellent story on the origins of Blanche Lincoln's disastrous swaps proposal (the infamous "Section 106") — Bloomberg: How ‘Hard to Fathom’ Derivatives Rule Emerged in U.S. Senate. Short version:The idea arose from a mix of policy debate, campaign politics and personal relationships -- and little consideration of the business or economic implications, according to interviews with Senate aides, administration officials and industry lobbyists. Read the whole article. Oh by the way, Paul Volcker has now also come out against Section 106. Sheila Bair penned a letter to Lincoln sharply criticizing Section 106 last week, and the Fed circulated a memo on the Hill a couple weeks ago arguing that Section 106 should be deleted.Of course, it looks like the usual suspects on the left will still loudly support it, because right now, pretending to fight Very Important battles with Wall Street on financial reform is really all they care about.
Close Call - Last Wednesday, Arkansas Senator Blanche Lincoln took to the Senate floor and delivered about as fiery a speech as you’ll hear in the chamber, at least on the subject of financial reform. “Currently, five of the largest commercial banks account for ninety-seven percent of the [derivatives market],” she said. “That is a huge concentration of economic power, which is why I am in no way surprised that several individuals are seeking to remove it from the bill.”The “it” these unnamed individuals were bent on removing is a provision Lincoln wrote that would force banks to spin off their derivatives business if they want access to federal deposit insurance and other safeguards. Lincoln stunned the financial world when she unveiled the hawkish proposal last month and promptly pushed it through the Senate Agriculture Committee, which she chairs. But then something unforeseen happened: Legendary Fed Chairman Paul Volcker, a hero to Wall Street reformers and scourge of megabanks, penned a letter to Banking Committee Chairman Chris Dodd proclaiming that the Lincoln approach overreached.
Joe Stiglitz on Derivatives Reform and Section 716 - SAFER has put out a letter responding to Bernanke on Section 716, which is the Section 106 fight. This is language to remove swap dealers from Federal insurance like FDIC and the Federal Reserve discount window. This language is still in the derivative bill so far, though it has come under attack recently. And Roosevelt Institute Chief Economist and Senior Fellow Joe Stiglitz lays out his case defending Section 716 in a 5 page letter located here. You should read both because they are the strongest defenses of this language that reformers have produced to answer the last round of critiques from the administration. Here’s a quote from Stiglitz’s letter:
BP: From Oil Spilling to Financial Reform Killing - Oil giant BP may be overwhelmed with the clean-up from the collapse of its Deepwater oil rig in the Gulf of Mexico. But the corporation has still found time to fight tougher financial reforms on Capitol Hill. The corporation is a member of the Coalition for Derivatives End-Users, a collection of companies actively pushing for a loophole in new regulations governing derivatives, the complex and opaque products used to hedge risk and bet on fluctuations in the financial markets. Derivatives, experts say, exacerbated the 2008 financial crisis, and lawmakers and the White House have sought to drag that market into the sunlight. The financial reform legislation now in Congress, says President Obama, will “close the loopholes that allowed derivatives deals so large and risky they could threaten our entire economy.”Not if BP has its way. The corporation, along with the US Chamber of Commerce, Business Roundtable, and other large advocacy groups, wants to ensure that it is exempted from a new provision in derivatives regulation that would increase transparency and make derivatives trading less risky. (BP did not respond to a request for comment.)
The pros and cons of financial innovation - Innovate or die. The phrase, popularized in Silicon Valley in the nineteen-nineties, has since become a mantra throughout the business world, and nowhere has it been more popular than on Wall Street, which in recent years has churned out a seemingly endless stream of new ways to manage capital and slice and dice risk. But, while Silicon Valley’s innovations have brought enormous benefits to society, the value of Wall Street’s innovations seems a lot less clear. (The former Fed chair Paul Volcker has said, for instance, that the last valuable new product in banking was the A.T.M.) The Valley gave us the microprocessor, Google, and the iPod. The Street gave us the C.D.O., the A.B.S., and the C.D.S.—not to mention the kind of computerized trading that enabled last week’s stock-market nosedive. Not surprisingly, then, the whole notion of “financial innovation” is being looked at with a gimlet eye, and Congress is now considering various ways to rein in the banking industry’s excesses. Given the tumult of the past few years, the barter system is starting to look good
Known unknowns - ONE of my hobby horses is the extent to which discussion of the potential costs and benefits of financial innovation tends to lack empirical estimations of what, numerically speaking, those costs and benefits might be and whether the costs are bigger than the benefits or the other way around. One of the most cited defences of financial innovation, this paper by Brookings' Bob Litan, basically takes a pass on the question. Sure there are bad innovations, he writes, and then he provides a list of good ones. But this is completely unhelpful. The reason we don't want to take an aggressively sceptical approach to financial innovation, it is argued, is that we'll end up filtering out many innovations that would have turned out to be helpful. But if we can't quantify the extent to which there are net benefits to innovation, then it's hard to see that this argument is based on anything other than blind faith...
Reinstate Glass-Steagall: Roubini says yes - I have been keeping an eye on various proposals to "reinstate" Glass-Steagall for quite some time. Sometime I ought to post a more comprehensive list as to who is in favor (and in what sense) and who is opposed. Clearly the folks at New Economic Perspectives (from Kansas City and Beyond) are so inclined. So too Nouriel Roubini, as reported by Tech Ticker, 4/11:Roubini supports the 'Volcker Rule' which would force banks to stop proprietary trading. "Why should you use taxpayer money to essentially subsidize risky prop trading?," he asks. Roubini goes even further, saying Congress should reinstate Glass-Steagall which separated commercial banking from investment banking. "If Goldman Sachs wants to be a hedge fund, so be it, but there should be a level playing field," he argues. "Other hedge funds don't borrow at zero rate with the guarantee of the government." Paul Krugman's ideas seem to differ a bit, and seem to be where the Obama Administration is trying to lead Congress. Here's Krugman, Financial Reform 101,
On The Death Of Brown-Kaufman -With the failure of the Brown-Kaufman amendment to cap bank size and break up the largest banks, reformers have reason to be discouraged, but they're not back to square one. Take a look at the vote yesterday, and you'll see a fascinating coalition -- liberals and conservatives, Democratic leadership and three Republican conservatives. Interestingly, all but four of 13 Democratic incumbents facing re-election voted in favor of the bill, and of the four who didn't, two are the senators from New York. This suggests the issue remains politically salient. What does the failure signal for bill-strengthening measures going forward?
Death of Brown/Kaufman a Huge Blow -Taibbi - I was in DC watching the debate on the Senate floor yesterday and there was little to the naked eye that suggested the whole thing was a farce.In general I got the sense that many of the members on both sides of the aisle were genuinely freaked out by the snowballing corruption on Wall Street and wanted to sink at least one real fang or two into the problem, though they differed on how to get there. In the FinReg business I talked to more members and aides who believed there was real room for something genuine to happen, if only because the political/financial situation in Europe (and the serendipitous timing of the Goldman case) is putting wind at the back of previously dead or dormant reform proposals. Then last night came to pass, or not pass, as it were. To me there are three really big parts of the bill.
Round One to the Banks, More to Come - Although the defeat of Brown-Kaufman was crushing, it was, nonetheless, an indicator of the strength of the populist call to break up the banks and reduce Wall Street power. A sign of Wall Street's ongoing dominance on Capitol Hill had been its success in defining the call to break up the banks as outside the bounds of legitimate debate. Wall Street succeeded in the House, which did not seriously consider proposals to break up the banks. But it could not block the issue from an airing in the Senate; and once aired, the break-up-the-banks proposal gained substantial support, notwithstanding opposition from the White House and the chair of the Banking Committee, Chris Dodd.
The Treasury-Financial Complex - WSJ - The Dodd bill is perfectly designed to create the largest and most powerful crony system in history. It’s not that the people, regulator or regulated, are personally corrupt. It’s that the system will itself select for, reward and enforce corruption. No financial professional will be able to turn down a “request” for a campaign contribution, and all financial institutions will hire former staffers as advisers or directors. No regulator can afford to antagonize a potential future employer. Regulators themselves must kowtow to Congress, which can use them for under-the table subsidies to favored groups. None of this is new to politics, of course, but the scale and lack of defined powers are.
The Big Bank Lobby: Too Big to Bear? -240 former legislators, bank committee staffers, and Treasury officials deployed to lobby. $600 million spent in lobbying, trade association activity and political contributions since March 2008. And that is just from the six biggest banks. The entire financial industry is spending an estimated $1.4 million a day, hiring 70 former members of Congress to make their case.These figures, drawn from a new report released by the Campaign for America's Future (which I co-direct), would be shocking if they weren't so sad and predictable. As the Senate moves towards passing financial reform legislation, it is worth focusing on how the lobby works. Bailed out by taxpayers, the big banks -- Goldman Sachs, Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley and Well Fargo -- are emerging from the financial crisis larger and more concentrated than ever.
Bailouts: When Will They End? - I've been against bail-outs from the beginning. So should have all economists. It's reasonable to debate the merits of contracyclical monetary policy. It's not reasonable to debate the merits of rewarding failure on a grand scale.Alas, in "practical politics" almost no one's interested in figuring out whether we took the wrong course two years ago. Instead, it's all about the latest crisis - and the next crisis on the horizon. It really does seem like the crises just keep getting bigger: Wall St., Greece, then what? Italy? My point: One bailout seems to lead to another, but bailouts have to stop eventually. What begins as "too big to fail" eventually becomes "too big to save."
Interchange Amendment Passes Senate 64-33 - Interchange legislation is on the move. An amendment the Restoring American Financial Stability Act of 2010, sponsored by Senator Durbin passed the Senate on a roll-call vote of 64-33. The amendment instructs the Federal Reserve to regulate debit interchange fees and requires that the fees be reasonable and proportional to the costs of the issuer or the payment network. The amendment also restricts certain merchant restraint rules for credit and debit payments. It prohibits restrictions on minimum and maximum transaction amounts for credit and debit, and it prohibits restrictions on merchants offering discounts to steer transactions among networks or to other forms of payment (the existing Cash Discount Act does not clearly protect debit discounting, for example, and the card networks' rules largely frustrate discounting as it is). The amendment doesn't address all of the problems with interchange, and I would have preferred to see surcharging, rather than discounting, but it's a very good start
FDIC to ask big banks to write funeral plans - Today, the Federal Deposit Insurance Corporation, the independent federal agency headed by Sheila Bair that regulates banks and insures deposits, announced it plans to ask a number of big banks to write “living wills” or “funeral plans,” which it describes as “analysis, information, and contingent resolution plans that address and demonstrate [the institution's ability] to be wound down or resolved in an orderly fashion.”In a statement, Bair said, “We must recognize that not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities. There were significant shortcomings in our approach that permitted excessive risks to build in the system. Critically, the lack of an effective resolution process for the large, complex financial institutions limited regulators’ ability to manage the crisis. As we now know, early planning and preparation is the key to avoiding bailouts. This [resolution] moves us forward to address these gaps.”
Proposal Calls for Banks to Draft 'Living Wills' - WSJ - The Federal Deposit Insurance Corp. has proposed to require the country's largest banks to create a plan for their own liquidation in the case of financial stress.By planning for the organized breakup of the country's top 40 banks, the government hopes to avoid some of the chaos and costly bailouts that marked the recent crisis. The FDIC's proposal dovetails with similar efforts underway on Capitol Hill and in the Federal Reserve.The FDIC proposal may lead to a clash with large banks, which are concerned that regulators are becoming overly prescriptive and might use information provided by the banks to take a more aggressive regulatory stance.The plan would require large bank holding companies, such as Citigroup Inc., J.P. Morgan Chase & Co., and Bank of America Corp., to show how their bank could be cleanly separated from the parent firm, and then dissolved by regulators. The banks all declined to comment.
SSRN-Why Did Rating Agencies Do Such a Bad Job Rating Securities?… Abstract: Why did rating agencies do such a bad job rating subprime securities? The conventional answer draws heavily on the fact that ratings are paid for by the issuers: Issuers could, and do, “buy” high ratings from willing sellers, the rating agencies. The conventional answer cannot be wholly correct or even nearly so. Issuers also pay rating agencies to rate their corporate bond issues, yet very few corporate bond issues are rated AAA. If the rating agencies were selling high ratings, why weren’t high ratings sold for corporate bonds? Moreover, for some types of subprime securities, a particular rating agency’s rating was considered necessary. Where a Standard & Poor’s rating was deemed necessary by the market, why would Standard & Poor’s risk its reputation by giving a rating higher (indeed, much higher) than it knew was warranted? Finally, and perhaps most importantly, giving AAA ratings to securities of much lower quality is something that can’t be done for long. A rating agency that becomes known for selling its high ratings will soon find that nobody will be paying anything for its ratings, high or low.
Payday lenders and check cashers fight financial reform - Payday lenders and check cashers blanketed Capitol Hill last week to challenge the scope of the financial reforms under debate in Congress and combat the industry's reputation as the pariahs of the financial system. During the "Hill Blitz" organized by the Financial Service Centers of America, a trade group, about 40 industry executives pushed to exempt check cashing from the purview of a proposed bureau that would oversee consumer financial products. Meanwhile, Democrats launched a new effort to contain the industry by limiting the number of payday loans that consumers can take out.
Payday lenders go to Washington - It’s completely insane that a system which protects the relatively well-off customers of banks might include a carve-out specifically excluding the unbanked from any federal consumer protection. They are, after all, the people who need such protection most. And I’m particularly tickled that the payday lenders seem to think that the fact that they’re banned in some states is a good reason for a federal consumer protection agency not to regulate them at all. The worrying thing about all this, however, is that the less-government-is-better-government crowd is likely to lap it up. And it seems that the consumer-protection rules were drafted far too sensibly, which means that as the payday lenders achieve success in their lobbying efforts, they’ll weaken the final agency far too much.
Payday lenders pressure borrowers to get political -- As legislation advances in Congress to crack down on consumer-unfriendly lending practices, staffers in the offices of California Sens. Barbara Boxer and Dianne Feinstein noticed a funny thing this week: Customers of payday lenders were calling by the hundreds to oppose the bill, and all seemed to be repeating the exact same phrases.The staffers were right to be suspicious. Payday lenders are notorious for their high fees and interest rates, and they may face new restrictions as part of efforts to overhaul the financial services industry and create a Consumer Financial Protection Agency. Yet customers of these companies were calling to demand that government authorities leave the industry alone and allow consumers to make their own financial decisions. "My offices were getting hundreds of calls from the same few phone numbers, and the callers all seemed to be reading from the same script," Boxer told me…
How financial reform could impact your wallet - The planned creation of a consumer financial protection agency isn't the only aspect of financial regulatory reform that could impact your wallet. Although much of the legislation working its way through the Senate is aimed at Wall Street, among nearly 200 proposed amendments are dozens that address consumer issues. From capping credit card interest rates and ATM fees, to limiting third-party access to your credit report, senators have put forth an array of proposals that could affect your financial life. Here are some of the most notable:
Pre-Emption Deal in the Works? - Keep an eye out for a deal that would allow for pre-emption of state consumer financial protection laws by federal regulators, a rumored development that should disturb financial reformers. The CFPA at the Fed seemed to be in a good position, with Dodd working to make it as strong as possible while being housed at the Fed, efforts to replace it with something ineffectual defeated, and a potential last minute move to bring it out of the Fed. But if allowing the CFPA to preempt state laws is in the works, that’s really bad for the overall effort to the idea of consumer financial protection.Here is a letter from Elizabeth Warren and Illinois Attorney General Lisa Madigan:Here’s some stuff I wrote on preemption and the nightmare it created for Georgia earlier. Why is preemption worth fighting against, which is to say why should states be able to write consumer financial protection laws against national banks?
Editorial - They Have to Do Better on Financial Reform - NYTimes -Banks ahead, American taxpayers lagging behind. That’s the disappointing reality here after the first week of Senate action on the financial reform bill. Senators overwhelmingly rejected an important provision that would have required large financial firms to pay $50 billion upfront to create a so-called resolution fund, which would have been used to dismantle big banks at risk of failure. Instead, the bill now authorizes regulators to borrow the needed cash from the Treasury to be paid back later, mainly by selling off assets of the failed firm. That’s better than a bailout, but taxpayers would still be in the line of defense against catastrophic collapse. In another setback, senators defeated an amendment that would have imposed caps on the size of big banks. That’s unfortunate, because reform should reduce banks to a less-threatening size.
Is financial reform good or bad for business? - As the Senate continues debating financial-industry reform this week, I'd like to re-iterate a point I first made in a Time.com article: lots of businessmen are in favor of a sweeping overhaul.You wouldn't necessarily know that from reading the headlines, since headlines tend to capture the highest profile lobbying—like what comes from the U.S. Chamber of Commerce. Those stories usually say that companies are wary of financial-industry reform, typically because of the fear that the cost of doing business will rise.But that attitude is far from pervasive. Many business groups, such as the South Carolina Small Business Chamber of Commerce and the U.S. Women's Chamber of Commerce, have been out arguing that stronger laws are exactly what we need—even in the form of an independent Consumer Financial Protection Agency (CFPA), which often gets painted as the antithesis of what companies would want.Why would a business welcome new oversight? Well, partly because if consumers aren't protected from hazardous financial products, then they won't, in the long run, have as much money to spend at companies selling goods and services. Another reason: business owners themselves rely on financial products.
Businesses Should (And Do) Like Financial Reform - There's a bit of a lost message in the financial-reform debate right now: American businesses will benefit from the Wall Street overhaul currently before Congress. Time's Barbara Kiviat looks at why the Consumer Financial Protection Agency will help firms:Why would a business welcome new oversight? Well, partly because if consumers aren't protected from hazardous financial products, then they won't, in the long run, have as much money to spend at companies selling goods and services. Another reason: business owners themselves rely on financial products. The creation of a strong, independent Consumer Financial Protection Agency will benefit businesses, especially small businesses, which create most of the nation's new jobs. It's too often forgotten that small-business owners frequently rely on personal credit – such as personal credit cards and home equity loans – to start, run and expand their businesses."Kiviat has also looked at how businesses can benefit from derivatives reforms.
Moody’s, Berkshire and The SEC - Moody's revealed that it received a Wells Notice from the SEC in a filing Friday. That's not all that unusual. What's unusual is that it received the Wells Notice in March.In July 2008, Moody's acknowledged that it had an error in the way it rated constant proportion debt obligations, or CPDOs, that would have lowered AAA ratings given to the 11 CPDOs to AA territoryMoody's found that some members of its CPDO monitoring committee in Europe considered factors other than credit--namely whether changing the rating would be embarrassing to Moody's or affect another market participant. Ok, that looks material. So why disclose it now, when the notice was received in March?Well, let's see - does it take a couple of months to file a Form 8-K? I don't think so.Does it take a while to read the Wells Notice and recognize that it's an official document? Again, I don't think so.But what else do we know about Moody's - and Berkshire, to be specific?Well, we know that Berkshire sold a bunch of Moody's stock - in March. $6.2 million worth, to be exact
SEC Chief’s Big Bet on Goldman - Once the enforcement team laid out its recommendation to sue Goldman—arguing that the firm had misled investors about highly complex securities linked to the cratering mortgage market—the commissioners questioned the lawyers on the strength of the evidence. They also debated whether the SEC was essentially sailing into uncharted territory by attacking a relatively new financial product. The enforcement staff argued that it could build a record strong enough to support the fraud charges. Finally, SEC Chairman Mary Schapiro called for a vote, even though it was obvious there was serious disagreement among the commissioners. In the end, the two Democratic commissioners voted for the case to proceed and the two Republicans against. Ms. Schapiro, an independent named by President Obama, cast the deciding vote to go ahead.
Frank Partnoy Has Bad Day, Attacks Goldman Persecution in Financial Times - Yves Smith - Frank Partnoy, derivatives salesman turned law professor, took an ill fated star turn in the Financial Times today. In a comment titled, “Goldman is wrong target for official censure,” he writes (among other things): “Goldman is not to blame for the financial crisis,” a straw man if I ever saw one.I hate to say it, because I like and admire Partnoy, but this piece is the writing equivalent of a bad hair day. It’s hard to understand how this article came about, since Partnoy has been a long-standing critic of both the dubious products and sales techniques that have become widespread in the financial services industry. He is also normally a scrupulous, diligent researcher; his book Infectious Greed, for instance, provides a detailed, compelling account, not only of numerous financial services industry scandals in the 1990s, but also the successful efforts to stymie reforms. But Partnoy, despite his keen insights, has some peculiar blind spots.
Goldman to ’sue for peace’ on Abacus charges - As part of the move on negligence, Goldman will insist that there will be no admission of wrong-doing but that it will be willing to pay a financial penalty for poor processes, for example. The SEC claims that Fabrice Tourre, a Goldman banker, mislead investors in the Abacus vehicle. He is accused of not telling long investors in the deal, ACA Management and the German bank IKB, that Paulson, the hedge fund run by John Paulson, had taken a short position, betting that house prices would fall. Goldman has denied the charges, saying they are wrong both in fact and law.
Goldman Sachs Has First Quarter With No Trading Loss (Bloomberg) -- Goldman Sachs Group Inc.’s traders made money every single day of the first quarter, a feat the firm has never accomplished before.Daily trading net revenue was $25 million or higher in all of the first quarter’s 63 trading days, New York-based Goldman Sachs reported in a filing with the U.S. Securities and Exchange Commission today. The firm reaped more than $100 million on 35 of the days, or more than half the time.Goldman Sachs, which is facing a fraud lawsuit from the SEC related to the sale of a mortgage-linked security in 2007, generated $9.74 billion in trading revenue in the first quarter, exceeding all of its Wall Street competitors. Trading accounted for 76 percent of first-quarter revenue. The lack of trading losses could add to the perception that Goldman Sachs has an unfair advantage in the markets, said one shareholder
Unfuckingbelievable: Goldman Has Zero Trading Loss Days In Last Quarter | zero hedge - In the quarter ended March 31, Goldman made money on every single trading day. The firm did not record a loss of even $0.01 on even one day in the last quarter. That's 63 days profitable out of 63 trading days. The statistic probability of this event is itself statistically undefined. Goldman is now the market - or, in keeping with modern market reality, Goldman is the house, it controls the casino, and always wins. Congratulations America: you now have far, far better odds in Las Vegas that you have making money with your E-Trade account. Adding to the alice in wonderland insanity of this announcement, the firm made over $100 million daily on 35 different days. Of Goldman's $9.7 billion in total Q1 revenue, 76% came from trading.
JPMorgan Traders Match Goldman Sachs's First Quarter With No Trading Loss - (Bloomberg) -- JPMorgan Chase & Co.’s traders matched those at Goldman Sachs Group Inc. in making money every day of the first quarter, a first for both companies. Daily trading revenue averaged $118 million on each of the 64 days in the first quarter, JPMorgan said in a regulatory filing yesterday with the U.S. Securities and Exchange Commission. JPMorgan’s trading revenue from investment banking, its chief investment office and consumer lending division exceeded $90 million on 39 of those days, or more than half the time, according to the filing. Trading revenue surpassed $180 million on nine days, or 14 percent of the time, the second-largest U.S. bank said.
4 Big Banks Score Perfect 61-Day Run - NYTimes - Despite the running unease in world markets, four giants of American finance managed to make money from trading every single day during the first three months of the year. Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball. On Sunday, Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history. But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.
‘Perfect Quarter’ at Four U.S. Banks Shows Fed-Fueled Revival (Bloomberg) -- Four of the largest U.S. banks, including Citigroup Inc., racked up perfect quarters in their trading businesses between January and March, underscoring how government support and less competition is fueling Wall Street’s revival.Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., the first, second and fifth-biggest U.S. banks by assets, all said in regulatory filings that they had zero days of trading losses in the first quarter. Citigroup Inc., the third-largest, doesn’t break out its daily trading revenue by quarter. It recorded a profit on each trading day, two people with knowledge of the results said.“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”
Rigged-Market Theory Scores a Perfect Quarter(Bloomberg) -- Score another triumph for the rigged- market theory. In a feat that would seem to defy the odds, Goldman Sachs, JPMorgan Chase and Bank of America this week each said its trading desk made money every day of the first quarter. Goldman said its daily net trading revenue topped $100 million 35 times last quarter out of 63 trading days. JPMorgan and Bank of America disclosed similar eye-popping stats. Citigroup, too, recorded a profit on each trading day, Bloomberg News reported, citing unnamed people who knew the results. The intrigue is high. If a too-big-to-fail bank’s traders were able to make money every day of a quarter, were they really trading in any normal sense of the word? Or would vacuuming be a more accurate term? What kinds of risks do such incredible profits entail, for the banks and the rest of us taxpayers? And are results such as these too good to be true?
Big Bank Perfect Trading Quarters - The Real Story - You've probably heard by now that four of the biggest banks racked up "perfect quarters" in their trading businesses. I can't recall a story of more importance that the blogosphere has done a more miserable job of covering than this one. While the financial blogosphere has put itself on the map by doing the analysis that mainstream media couldn't or wouldn't do, the lack of in depth analysis on this one has been striking. Perhaps its because trying to navigate the 10Qs which were released, each nearly 200 pages, is extremely difficult and tedious. Only TWENTY PERCENT of these earnings that we're talking about are coming from equities businesses! By focusing the anger on the wrong "causes," we guarantee that we won't change the patterns. People have a right to be angry about these earnings - but not because of banks manipulating equity markets - it's because the Fed is feeding them with free money and asset price support.
Huge, Ongoing Wall Street Subsidy Allows Banks to Coin Money Every Day at Savers' Expense (video & text) Trading, of course, is supposed to be a risky business: You win some, you lose some. That's how traders justify their gargantuan bonuses--their jobs are so risky that they deserve to be paid millions for protecting their firms' precious capital. (Of course, the only thing that happens if traders fail to protect capital is that taxpayers bail out the bank and the traders are paid huge "retention" bonuses to prevent them from leaving to trade somewhere else, but that's a different story).But these days, trading isn't risky at all. In fact, it's safer than walking down the street.Why? Because the US government is lending money to the big banks at near-zero interest rates. And the banks are then turning around and lending that money back to the US government at 3%-4% interest rates, making 3%+ on the spread. What's more, the banks are leveraging this trade, borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets. Which means the banks can turn relatively small amounts of equity into huge profits--by borrowing from the taxpayer and then lending back to the taxpayer."
Wall Street banks investigated over links to ratings agencies - An allegedly "cosy" relationship between top Wall Street banks and credit rating agencies is under investigation by New York's attorney general, who has issued a flurry of subpoenas to examine whether leading financial institutions cheated in the hunt for valuable triple-A grades. New York's prosecution chief, Andrew Cuomo, is scrutinising the behaviour of eight leading banks, adding to a rapidly spreading web of criminal investigations into Wall Street's questionable ethics in the run-up to the global financial crisis. Many financial experts believe that overly optimistic assessments by ratings firms were a key factor in creating an overblown market for derivatives and mortgage-backed securities.
Were the Ratings Agencies Duped Rather than Dumb? - The line of thinking that underlies an investigation by New York attorney general Andrew Cuomo is a challenge to conventional wisdom about the financial crisis. The prevailing view is that since credit ratings were one of the single biggest points of failure in the crisis, the ratings agencies were one of the biggest, if not the biggest, perp. Now this crisis had many parents, with the cast of characters including Alan Greenspan, Bob Rubin, Phil Gramm, Gaussian copula models, negative basis trades, captured regulators, undercapitalized banks and dealers, and of course, ratings agencies. And the ratings agencies DO deserve a lot of blame. They played a compromised role in the structured credit market, via assisting in the design of deals they ultimately rated. In addition, the traditional ratings system which is hard wired into a lot of investment processes does not translate very well into structured credit deals.
Credit rating agencies: The real villain in the financial crisis? -So this morning's news that New York Attorney General Andrew Cuomo -- picking up the disgraced Elliot Spitzer's role as the bane of Wall Street -- has issued subpoenas to several of those big banks raised few eyebrows.However, you should also note that Cuomo has issued subpoenas to the three major credit rating agencies: Standard & Poor's, Moody's and Fitch. Some people think the rating agencies are the real villains of the financial crisis. Every one of those exotic investment vehicles that Wall Street banks created was rated by one of the agencies, which assessed its credit-worthiness and assigned a grade. Ratings are among the most important attribute of an investment -- it is a stamp of approval or a warning sign. A high credit rating from one of the big three has for years been considered equivalent to the Good Housekeeping seal of approval -- if an investor saw a high rating, they should feel comfortable putting their money in.
Wall Street Faces Call to Stop Betting Against Customers – WSJ - Lawmakers are considering legislation that would ban investment banks from betting against their customers in many circumstances, in a further ripple effect for Wall Street from Goldman Sachs's troubles.In a statement to The Wall Street Journal, Sen. Carl Levin (D., Mich.) said he is drafting legislation to prevent conflicts of interest by "prohibiting companies from taking the opposite side of the deal for their own account," at least when they are marketing investments they have created themselves. At a Senate hearing last month in which senators grilled Goldman executives, Mr. Levin focused much of his scrutiny on a handful of deals where he said that Goldman was both constructing subprime-mortgage securities and effectively betting they would fall in value.
Morgan Stanley Under Criminal Investigation for Using CDOs to Bet Against Clients Among the deals that have been scrutinized are two named after U.S. Presidents James Buchanan and Andrew Jackson, a person familiar with the matter says. Morgan Stanley helped design the deals and bet against them, but didn’t market them to clients. Traders called them the “Dead Presidents” deals Among the Morgan Stanley deals that have been scrutinized are the Jackson and Buchanan CDOs, created in mid-2006. Those deals essentially were portfolios of derivatives that aped the performance of dozens of residential and commercial mortgage-backed securities. Morgan Stanley helped to create the deals, which each issued about $200 million in bonds and were underwritten and marketed to investors by Citigroup Inc. and UBS AG, respectively….One feature of the Morgan Stanley deals was a structure that could increase the magnitude of the bullish investors’ exposures to the underlying mortgage bonds. This feature, which was disclosed in some offering documents, made it more likely that such investors could lose money if the underlying bonds performed poorly.
Banks' Municipal Debt Trades Face Preliminary Probe, WSJ Says (Bloomberg) -- U.S. regulators are exploring possible conflicts of interest for banks that sold municipal bonds and bet the securities would fail, the Wall Street Journal reported, citing unidentified people familiar with the matter. The U.S. Securities and Exchange Commission and state authorities opened a preliminary probe into municipal credit- default swap trades by banks, the newspaper said. The inquiry seeks to determine whether banks used their own capital to bet against bonds they sold and if the practice was disclosed properly to buyers, the newspaper said. The move comes as the SEC widens its investigation, started at least a year ago, into whether banks including Goldman Sachs Group Inc. and Morgan Stanley misled investors when selling mortgage-linked securities in the lead-up to the collapse of the subprime mortgage market and global credit crisis
The silliest derivatives probe yet - The civil and criminal investigations of Evil Financial Products Which Destroyed The World have now officially reached the stage of farce, with “federal regulators and state officials” reportedly investigating the fact that banks traded municipal CDS at the same time as underwriting municipal bonds. The case here is so weak that I can only imagine that the ultimate goal lies in the shadow of the law, in the realm of a global settlement caused by the sheer weight of investigations. The banks can’t afford to laugh this kind of thing off, no matter how ridiculous it is on its face.
Wall Street Probe Widens - Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter. The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals... Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal. At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs.
Prosecutors Ask if 8 Banks Duped Rating Agencies - NY Times: The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities..The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation. Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America. The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.
The CDO-prosecution bandwagon gathers more steam - Louise Story says that Andrew Cuomo, NY attorney general and would-be governor, is piling onto the CDO bandwagon, sending subpoenas to eight (count ‘em) banks, asking if they misled the ratings agencies when they were putting together their structured products. It’s a long article, and notably the substance of Cuomo’s investigation is left until the very last paragraph:A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.I’d love more detail on this because it seems a little weird to me. The ratings agencies knew exactly which bonds were being put into in the CDOs and it really should have been up to them to check on things like geographical diversification.
Covering the Bank Investigations: A Cautionary Tale - The story of the banks that created investments and then bet against them has reached a particularly unedifying stage. Every day seems to bring another  headline  about a bank or hedge fund that is "under investigation" by one authority or another. Such stories can be built around a wispy fact or two. They typically feature indignant denials and lots of caveats, and are often sourced to the always-revealing "people familiar with the case."But we should all be aware that this work is particularly subject to pitfalls. Stories about investigations often leave the impression that authorities are running full tilt at malefactors.
Schapiro, Bair, Warren: Female Sheriffs of Wall Street But what happened next drove home a deeper point: the lectern in the marbled hall at the U.S. Treasury known as the Cash Room was cleared away so that a panel of women could take their seats. Among them was Sheila Bair, the chair of the Federal Deposit Insurance Corporation (FDIC) and one of the first federal regulators to publicly sound the alarm about the collapse three years ago. She sat next to Securities and Exchange Commission (SEC) chair Mary Schapiro, the first woman to hold that post and the deciding vote to initiate the agency's recent lawsuit against Goldman Sachs. Across the stage sat Elizabeth Warren, chair of the panel bird-dogging the Troubled Asset Relief Program (TARP) bank bailout and the chief advocate for new consumer-finance regulations that banks and their allies have spent millions to oppose. Suddenly, something else became clear: these women may not run Wall Street, but in this new era, they are telling Wall Street how to clean up its act.
Is That A Cop Investigating Big Banks? - If so, it's about damn time...(Bloomberg) -- U.S. prosecutors and the Securities and Exchange Commission are cooperating in a preliminary criminal probe into whether banks misled investors about their participation in mortgage-bond deals, the Wall Street Journal said, citing a person familiar with the matter. The list is a who's who of the big banks. JP Morgan, Deutsche Bank, UBS, Citigroup, Goldman, Morgan Stanley. All in all eight banks are being scrutinized by both the toothless SEC but more-importantly Andrew Cuomo, who wields a fairly nasty set of powers through NY's Martin Act.Cuomo is investigating whether Goldman, Morgan Stanley, UBS, Citigroup, Credit Suisse, Credit Agricole SA, Deutsche Bank and Bank of America Corp.’s Merrill Lynch misled rating companies to obtain higher ratings, the New York Times said. Cuomo issued subpoenas on Wednesday, the newspaper reported. Hmmmm... now that's a good sign.
Why Goldman Sachs Is The Big Winner From The Wall Street Investigations - EVERYONE on Wall Street is under some kind of investigation.In the last couple days, news of probes into Morgan Stanley (MS), Citigroup (C), JPMorgan (JPM), Bank of America (BAC) and others has come out.Among the big-time firms, so far only Goldman Sachs (GS) has seen charges brought against it, but we're now sure we'll see more action. There's too much smoke for there not to be fire. So who wins in all this?That's right. Goldman. Think about it, barring some actual criminal conviction (and remember, there aren't even criminal charges against it), the only way these charges will REALLY damage the firm is by hitting its reputation. And no, we're not talking about whether readers of the New York Times think Goldman is seedy. That's not that important. If everyone is guilty, nobody is guilty. Well, that principle doesn't apply in a legal sense, but we think it applies in a reputational sense. There's no good reason to leave Goldman for some other firm, if in the end their behavior was very similar. Once again, the government bails out Goldman Sachs.
Market Inquiry Focuses on One Trader - NYTimes -Regulators examining the causes of the brief stock market free fall last Thursday are looking closely at heavy selling in the market for stock-index futures by a single trader, beginning 10 minutes before stock prices began to plummet. Gary Gensler, the chairman of the Commodity Futures Trading Commission, said at a Congressional hearing on Tuesday that during that crucial time period, the futures trader, whom he would not identify, accounted for about 9 percent of trading volume in the most actively traded stock-index derivative contract, known as the 500 e-mini futures contract. All of the trader’s orders were to sell, Mr. Gensler said, while most of the other 250 traders who were active in the same market that day were both buying and selling securities. As the trader’s orders went through, the futures index on the Chicago Mercantile Exchange began to plummet.
Kansas Mutual Fund Is Linked to Market’s Plunge - Futures trades by Waddell & Reed, a conservative 70-year-old mutual fund based in Overland Park, Kan., have been linked to the plunge, during which the Dow dropped hundreds of points in a matter of minutes. The company was identified in a Chicago Mercantile Exchange document, according to Reuters. In a statement, Waddell & Reed said it was among the firms that traded the stock index futures contract suspected of being a crucial link in the cascade of events leading up to the plunge that began shortly after 2:30 p.m. “On May 6, as on many trading days, Waddell & Reed executed several trading strategies, including index futures contracts, as part of the normal operation of our flexible portfolio funds,” the firm said. “Like many market participants, Waddell & Reed was affected negatively by the market activity of May 6.”
SEC: Exchanges agree on "structural framework" to strengthen circuit breakers - From the SEC: Statement on Meeting With Exchanges "This morning, SEC Chairman Mary Schapiro had a constructive meeting with the leaders of six exchanges — the New York Stock Exchange, NASDAQ, BATS, Direct Edge, ISE and CBOE — and the Financial Industry Regulatory Authority to discuss the causes of Thursday's market events, the potential contributing factors, and possible market reforms."As a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades."Why not use technology to slow down price changes on individual stocks? It is amazing that we still don't have an explanation for the weird price changes last Thursday.
SEC: Exchanges agree in principle to new rules -The major securities exchanges put aside some of their differences Monday and agreed to coordinate trading rules to prevent stock plunges like last week's historic dive.The Securities and Exchange Commission said the six exchanges agreed in principle during a meeting with regulators to a uniform system of "circuit breakers." Those are restrictions that would curb trading when a stock index or individual stock or other security rises or falls to a specified level in the course of a trading day.
Trading in Hubris: Pride, Overreach, and the Inevitable Blowback and Consequences - The hubris associated with the trading crowd is peaking, and heading for a fall that could be a terrific surprise. It seems to be reaching a top, trading now in a kind of triumphant euphoria after the European capitulation and the recent equity market volatility. I had a conversation this morning with a trader that I have known from the 1990's, which is a lifetime in this business. I have to admit that he is successful, more so than any of the popular retail advisory services you might follow such as Elliott Wave, for example, which he views with contempt, a useful distraction for the little guy. I remember a time when some of the more obvious market shenanigans used to bother his conscience a little. But he is well beyond that point now. His tone was ebullient. The Street has won, it owns the markets. They can take it up, and take it down, and make money on both sides, any side, of any market move. I have to admit that in the last quarter his trading results are impeccable.
Big TARP Banks Not Helping Small Businesses: Warren - The government's bank bailout program may have helped big financial institutions weather the credit crisis but has failed in getting money to small businesses, the head of the commission overseeing the fund told CNBC. Elizabeth Warren called it "infuriating" that the Troubled Asset Relief Program has not achieved its objective in funneling some of the $700 billion in appropriations to small businesses. A report the commission released Thursday found that big-bank lending portfolios to small businesses dropped 9 percent from 2008 to 2009, more than double the 4.1 decrease of its overall lending portfolio. "Two out of every three new jobs created in America come out of a small business. Fifty percent of the private work force is in small business," Warren said in an interview. "If they don't have access to credit it's not only a problem to them now, but they can't help fund the recovery."
What Business is Wall Street In ? - The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible. The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market. I recognize that one is illegal, the other is not. That isn’t the important issue.
Banks failing to lend is not the problem - One of the big myths of the current downturn is that the reason the slump persists is that banks are refusing to lend. The story goes that because the banks have taken such big hits to their capital as a result of the collapse of the housing bubble and record default rates, they no longer have the money to lend to small- and mid-sized businesses.We then get the story about how small businesses are the engine of job creation, responsible for most new jobs. Therefore, if they can't get capital, we can't expect to see robust job growth.This story of banks not lending is used to justify all sorts of special policies to help out small businesses and banks. In fact, the Obama administration has plans to make a special $30bn slush fund available to banks if they promise to lend it out to small businesses. In reality, every part of this argument is completely wrong.
Treasury gets a pound of flesh, at last - Here's an encouraging bit of news: it turns out Treasury has been smarter than many had expected in pushing the banks to pay up for the privilege of being bailed out. You can read today's testimony by the deputy special inspector for TARP (SIGTARP) here, and you can read my article on this Wednesday at the Fiscal Times. Oddly, the SIGTARP's main message was to whine about the lack of transparency and how hard it was for investigators to figure out how Treasury was negotiating with the banks. But the striking part is how cagey and successful Treasury officials were in persuading banks to pay top dollar to buy back stock warrants they gave the government when they got their TARP loans.
The Dark Magic of Structured Finance - In Too Big To Save Robert Pozen gives a clever example, based on an excellent paper by Coval, Jurek and Stafford, which explains both the lure of structured finance and why the model exploded so quickly.Suppose we have 100 mortgages that pay $1 or $0. The probability of default is 0.05. We pool the mortgages and then prioritize them into tranches such that tranche 1 pays out $1 if no mortgage defaults and $0 otherwise, tranche 2 pays out $1 if 1 or fewer mortgages defaults, $0 otherwise. Tranche 10 then pays out $1 if 9 or fewer mortgages default and $0 otherwise. Tranche 10 has a probability of defaulting of 2.82 percent. A fortiori tranches 11 and higher all have lower probabilities of defaulting. Thus, we have transformed 100 securities each with a default of 5% into 9 with probabilities of default greater than 5% and 91 with probabilities of default less than 5%.Now let's try this trick again. Suppose we take 100 of these type-10 tranches and suppose we now pool and prioritize these into tranches creating 100 new securities. ...
Tranches of tranches…of tranches - How did MBS all go so very very wrong? Here’s the visual answer: Yes, what you’re looking at is AAA rated securities being created out of debt that, if the system were to be under financial stress, would likely be (depending on the exact structure of the security) among the last 4 per cent to be paid. You buy a AAA security, and if the default rate on subprime mortgages hits 4 per cent, the security is worthless. The chart, originally released by UBS, was republished today in a paper by John Hull, finance professor at the University of Toronto. The paper, as others have before it, finds that $90 of AAA-rated securities were created from $100 of BBB rated instruments.
It’s baaack! -Usually I abhor exclamation marks, but this one seems appropriate. Little noticed by most of the financial press, the first private label US RMBS deal since the crisis closed a little while ago. Dow Jones reports: The first residential mortgage bond to come to market after the housing bubble burst was sold on Friday to strong investor interest.Bidding for the $222.4 million triple-A-rated deal from Redwood Trust was so strong that investors were willing to accept a lower yield–3.75% instead of the original 4%.The deal is composed of particularly attractive mortgages–jumbo loans made to high-net-worth borrowers with good credit histories who put more than 20% as down payment. 80% LTV jumbos to high FICO borrowers does sound like reasonable risk. The AAAs, though, were attached at 6.5%, which gives a relatively thin layer of credit protection – yet the deal was apparently eight times oversubscribed.
S&P Cuts to Junk Mortgage Bonds It Rated AAA in 2009 (Bloomberg) -- Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year by Credit Suisse Group, Jefferies Group Inc. and Royal Bank of Scotland Group Plc. The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009, the New York-based ratings company said today in a statement. About $150 million of the debt issued last year, as recently as July, with top rankings were lowered below investment grades, according to data compiled by Bloomberg. “The downgrades reflect our assessment of the significant deterioration in performance of the loans backing the underlying certificates,”
JPMorgan Chase Warns Investors About Underwater Homeowners Walking Away In a Monday filing with the Securities and Exchange Commission, JPMorgan Chase told investors and regulators that homeowners who owe more on their mortgages than their homes are worth may not continue to make their payments -- even when they're able to."Declining home prices have had a significant impact on the collateral value underlying the firm's residential real estate loan portfolio," the bank stated. "In general, the delinquency rate for loans with high LTV [loan-to-value] ratios is greater than the delinquency rate for loans in which the borrower has equity in the collateral."While a large portion of the loans with estimated LTV ratios greater than 100% continue to pay and are current, the continued willingness and ability of these borrowers to pay is currently uncertain."
Ignoring the Elephant in the Bailout - NYTimes - IF you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state. Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position. The news caused nary a ripple in the placid Washington scene. Perhaps that’s because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don’t notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie’s latest request.
Fannie Mae seeks $8.4B in aid after 1Q loss-- Fannie Mae has again asked taxpayers for more money after reporting a first-quarter loss of more than $13 billion. The mortgage finance company, which was rescued by the government in September 2008, said it needs an additional $8.4 billion from the government to help cover mounting losses.Fannie Mae says it lost $13.1 billion, or $2.29 per share, in the January-March period. That takes into account $1.5 billion in dividends paid to the Treasury Department. It compares with a loss of $23.2 billion, or $4.09 a share, in the year-ago period. The rescue of Fannie Mae and sister company Freddie Mac is turning out to be one of the most expensive aftereffects of the financial meltdown. The new request for aid will bring Fannie Mae's total to $83.6 billion. The total bill for the duo will now be nearly $145 billion.
Fannie, Freddie Aid Cost Unclear: Regulator (Reuters) - It is unclear how much U.S. taxpayers will eventually have to shell out to help mortgage finance giants Fannie Mae and Freddie Mac, the regulator of the two companies said on Tuesday. "The actual cost I do not know," Federal Housing Finance Agency Acting Director Edward DeMarco said in response to a question from Kentucky Republican Senator Jim Bunning at a Senate Finance Committee hearing. Fannie Mae said on Monday it would need an additional $8.4 billion from the U.S. Treasury. The two firms have now tapped about $145 billion from the government and the Obama administration has said it will backstop losses, no matter how high they go, through 2012.
Fannie Mae: $11.5 billion loss, sees no profits for "indefinite future" - From Fannie Mae: Fannie Mae (FNM/NYSE) reported a net loss of $11.5 billion in the first quarter of 2010, compared with a net loss of $15.2 billion in the fourth quarter of 2009. Including $1.5 billion of dividends on our senior preferred stock held by the U.S. Department of Treasury, the net loss attributable to common stockholders was $13.1 billion ...Foreclosure activity is increasing: We acquired 61,929 single-family real estate-owned properties through foreclosure in the first quarter of 2010, compared with 47,189 in the fourth quarter of 2009. As of March 31, 2010, our inventory of single-family real estate owned properties was 109,989, compared with 86,155 as of December 31, 2009.
Bankrupt Fannie Gets Even More Bankrupt, Announces May Not Survive | zero hedge - The bankruptcy of America is getting borderline hilarious, even as stock capitalization surges by about $1 trillion based on funny money to be printed by the ECB with the Fed's assistance. In the second coming of moral hazard, one piece of news that some may have missed is Fannie Mae's earlier announcement that the mortgage lender is now more bankrupt than ever before - the firm lost $13.1 billion in net income on $3 billion in revenue. "The first-quarter loss resulted in a net worth deficit of $8.4 billion as of March 31, 2010, taking into account a $3.3 billion reduction in our deficit related to the adoption of new accounting standards, as well as unrealized gains on available-forsale securities during the first quarter. The Acting Director of the Federal Housing Finance Agency has therefore asked Treasury to provide us $8.4 billion on or prior to June 30, 2010." Additionally, the Fed backstopped entity also announced that "there is uncertainty regarding future of business after conservatorship terminated and expect this uncertainty to continue." But since in America asset prices have not reflected fundamentals in over a year, nobody gives a rat's ass.
The Fannie/Freddie conversation begins - Yesterday, Fannie Mae said that it would need another $8.4 billion to cover losses on the home loans it backs, and today the head of the Federal Housing Finance Agency, which oversees both Fannie and sibling Freddie Mac, said that the ultimate taxpayer tab of supporting the two housing giants is still unclear.Senators McCain, Shelby and Gregg are pushing their amendment to wind down Fan and Fred over the next 15 years—although all the commentary I read says that there's little chance that amendment will pass.Nonetheless, it seems the Fannie/Freddie conversation is finally starting to get moving. As this much-awaited moment arrives, let's keep in mind that though we may currently loathe the amount of taxpayer money we're plowing into these companies, we did get many, many years of upside in return, through home loans that were a lot cheaper than they would have been otherwise. Reforming Fannie and Freddie is surely a good idea, but one likely consequence is higher-priced mortgages
Senate Democrats Defeat Amendment to Unwind Fannie, Freddie - Lawmakers have cast their ballots in favor of keeping mortgage giants Fannie Mae and Freddie Mae intact. In a 56 to 43 vote Tuesday essentially split down party lines, Democratic senators defeated an amendment to the financial regulatory reform package that would have set a finite end date for taxpayers’ support of the GSEs and laid out a 15-year plan for the companies’ ultimate wind-down and dissolution. Together, the two mortgage financiers have drawn $110 billion in taxpayer dollars since they were put into conservatorship in September 2008. Last week, they asked the Treasury for $20 billion more.
The Ongoing Follies of Fannie and Freddie - One of the most active fronts of the Bailout continues to be the looting of taxpayer money through the government-supported entities (GSEs), Fannie Mae and Freddie Mac and a few others. Since August 2008 alone the government has thrown nearly $140 billion down the GSE rathole, and the hemorrhaging continues. Fannie and Freddie both recently announced further losses and made new requests for government handouts. Fannie just declared a first quarter loss of $11.5 billion and asked for another $8.4 billion. This followed on Freddie’s begging for $10.6 billion after reporting an $8 billion loss. These “losses” are nothing but money laundering to banks who refuse to hold loans or take risks themselves but will “lend” when the GSEs promise to guarantee the risks or just directly buy up the mortgages.
The Fannie-Freddie Housing Subsidy -- In this Yahoo Tech Ticker clip, Barry Ritholtz and Dean Baker discuss a concept I've advanced: that, effectively, Fannie (FNM) and Freddie (FRE) (or as we call them around here, FanFredron) are being run at a loss to create a false housing economy via subsidization. They do put forth an additional point that I have not harped on as much, that one added benefit of this "policy" is that our financial oligarchs win... again.If we ever get back to a world where the private sector is truly a part of the financing of the housing market it is going to be mighty interesting to see where the true rates will be set, now that "strategic default" is part of the American lexicon. But with government now supporting some 95% of all home financing this is an issue that won't face us for many years. Until then, we will get even more below-market rates offered by the two institutions that can gladly lose money forever... ponzi style.
Fannie, Freddie, FHA REO Inventory Surges 22% in Q1 2010 - The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 22% in Q1 2010 from Q4 2009. The REO inventory (foreclosed homes) increased 59% compared to Q1 2009 (year-over-year comparison). This graph shows the REO inventory for Fannie, Freddie and FHA through Q1 2010.Even with all the delays in foreclosure, the REO inventory has increased sharply over the last three quarters, from 135,868 at the end of Q2 2009, to 153,007 in Q3 2009, 172,357 at the end of Q4 2009 and now 209,500 at the end of Q4 2010.These are new records for all three agencies.
Recovery Proving Elusive For Commercial Real Estate Market - The United States real estate market is one of the largest markets in the world, and world economic activity is to a large extent dependent on this significant market, as evidenced by the sub-prime crisis and the eventual global financial crisis of 2008/09. The market is broadly classified into two sectors, Residential and Commercial, and was one of the worst hit industries in the recession. What's new? A more serious debt maturity crisis is looming large for the commercial real estate sector, looked upon as a second phase of the real estate collapse. The weakness in the real estate industry can be largely attributed to the housing bubble, although one cannot deny that certain policy decisions also played a major role.
Distressed Retail Mortgages Present CMBS Special Servicers with Unique Challenges - Up until recently, lenders and special servicers have done little to deal with the mounting volume of distressed mortgages in CMBS pools because it is so difficult to get all interested parties on the same page. But now the sheer volume of distress is forcing their hand. In March, the unpaid balance on CMBS loans transferred to special servicing reached a trailing 12-month high of $79.83 billion, of which retail loans accounted for about 25 percent of that total, according to Realpoint LLC, a Horsham, Pa.-based credit rating agency.Overall, special servicers remain reluctant to liquidate distressed loans because that would mean selling foreclosed properties at a loss. So far this year, the loss severity on liquidated retail loans has averaged 47.9 percent, according to Realpoint. In an effort to keep loans alive for as long as possible, servicers have tried all sorts of tactics.
Foreclosures hit 6,560 Chicago rental buildings in 2009 - More than 125 apartment buildings in Chicago on average went into foreclosure each week of 2009, affecting tenants living in almost 21,000 rental units, according to a new report.The study, by the nonprofit Lawyers' Committee for Better Housing, found that lenders began foreclosure proceedings against owners of 6,560 multiunit rental buildings last year.The problems were particularly dire for renters in nine city neighborhoods, where foreclosure actions were filed against more than 200 buildings during the yea
CMBS Loan Delinquencies Keep Rising, Moody's Says - The delinquency rate on loans included in U.S. commercial mortgage-backed securities continued to climb in April, rising by 60 basis points from the previous month to 7.02%, Moody's Investors Service said.The balance of delinquent loans had a net increase of nearly $3.7 billion in April, as 415 loans totaling $5.9 billion became delinquent. At the same time, 230 loans totaling about $2.3 billion became current or were worked out, Moody's said. The hotel sector recorded the highest delinquency rate of any commercial property type in April, rising 171 basis points to 12.98%. The multifamily housing sector was close behind with a 12.87% delinquency rate following a 68 basis-point increase. The retail sector's delinquency rate increased by 29 basis points to 5.86%, while the industrial sector's delinquency rate jumped 67 basis points to 5.24%. The office sector had the lowest delinquency rate, rising 46 basis points to 4.58%.
Struggling Commercial Real Estate Helplessly Waits Around For The Slaughter Of 2010 - While many other parts of the U.S. economy are in an apparent uptrend, commercial real estate still faces continued deterioration this year. According to Fitch ratings, the default rate for commercial real estate loans packaged within mortgage-backed securities hit 8% in Q1 of this year, up from 6.6% in December.There have now been $31 billion of commercial mortgage-backed securities (CMBS) defaults over the last 39 months.Shopping centers, apartments, hotels and offices make up the lion's share of struggling properties, and default rates are highest in Texas, Florida, Arizona, and California. The data will get a lot uglier before it gets better:
Median home prices nearly flat - The median price of single family homes rose in 91 of 152 major metro markets during the first three months of the year compared with the same period in 2009. Despite those gains, the nationwide median home price fell 0.7% to $166,100, according to the National Association of Realtors (NAR). The price decline wasn't worse because a handful of places reported unusual robustness. Saginaw, Mich., for example, saw prices rise more than 100%. In the first three months of 2010, the median price jumped to $60,800 from just $30,300 last year. All told, 29 places recorded double-digit gains, lead by: Akron, Ohio + 90.2%; Cleveland + 53.8%; and San Francisco + 28.9%.
Prices Fall in the Wake of the Tax Credit - Now that the homebuyer tax credit has passed into history, many are starting to wonder whether many buyers were tacking the value of the credit onto their sales price. Prices now are falling in many markets and had buyers waited until the credit expired, they could have bought the same house without Uncle Sam’s help.The National Association of Realtors reported last week that in the first quarter, 91 out of 152 metropolitan statistical areas reported median prices for existing single-family houses were higher than they were a year ago. Some 29 MSAs experienced double-digit increases. NAR chief economist Lawrence Yun credited the homebuyer tax credit for boosting sales in the opening months of the year. Sales activity is down in many markets, like Albany, NY where showings are half of what they were in April tax credit expired in the first week of April, and fears have existed for months that the end of the credit will spur a decrease in sales that could lower prices as much as 5 percent over the next year or so.
U.S. Home Seizures Reach Record in Sign Recovery Is Delayed - (Bloomberg) -- U.S. home foreclosures climbed to a record in April, a sign that government mortgage relief efforts have yet to turn the tide of property seizures, according to a report by RealtyTrac Inc. A record 92,432 bank repossessions were reported in April, up 45 percent from a year earlier and 1 percent from March, Irvine, California-based RealtyTrac said today in a statement. Foreclosure filings, including default and auction notices, were 333,837. One out of every 387 U.S. households got a filing.Unemployment of 9.9 percent and a rising percentage of U.S. homes worth less than the mortgages on them are combining to thwart a housing recovery, according to RealtyTrac. About 5 million delinquent loans will probably end up in the foreclosure process in addition to the 1.2 million homes already taken back by lenders,
Foreclosure continue to rise as banks work on backlogs - More people lost their homes to foreclosure in April as banks worked through a backlog of troubled borrowers, according to data released Thursday. The number of homes repossessed, the final stage of the foreclosure process, reached 92,432 in April. That is flat from March, up just 1 percent, but represents a jump of 45 percent from April 2009, according to RealtyTrac, an online service that estimates it tracks about 90 percent of the housing market. Foreclosures have been suppressed over the past year by government and industry efforts to keep people in their homes. But those efforts have largely faltered, leaving millions of distressed borrowers facing foreclosure. Now more people are expected to lose their homes as lenders work through a backlog of delinquent borrowers. Home repossessions this year are up 27 percent compared with the first four months of last year, according to RealtyTrac, a foreclosure-listing firm in Irvine, Calif. They will probably continue to climb, company officials said.
A Surprise Tax Hit on Foreclosures - WSJ - As the U.S. economy continues struggling with the fallout of the debt-induced housing crisis, millions of homeowners like Ms. McDaniel are discovering that their decision to walk away from a mortgage could result in tax bills running into the thousands or tens of thousands of dollars.The upshot: anyone weighing whether or not to seek a mortgage modification—or debating whether to abandon a house that is worth less than the mortgage—should consider the tax treatment carefully before making a move. The same holds for any form of consumer debt that a bank ultimately cancels, including credit-card balances or an auto lease.
Report: 11.2 Million U.S. Properties with Negative Equity in Q1 - First American CoreLogic released the Q1 2010 negative equity report today. CoreLogic reported today that more than 11.2 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the f irst quarter of 2010, down slightly from 11.3 million and 24 percent from the fourth quarter of 2009. An additional 2.3 million borrowers had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for over 28 percent of all residential properties with a mortgage nationwide.
Pain of Real-Estate’s Far Reach to Continue – WSJ - Highflying property prices drove the most-recent economic boom, and a collapse in real-estate values hammered it back down. Now, as the economy struggles to regain strength, real estate is expected to continue to act as a brake, rather than an accelerator. Despite clear signs of revival in the larger economy, including upturns in manufacturing and consumer spending, the nation's market for homes and office buildings remains mired in foreclosures and oversupply. That imbalance will be worked out over time, but in the meantime, it is slowing the recovery in myriad ways. Here's how it breaks down:
Housing Stories and Market Update - A couple housing stories ... the first provides analysis from Barclays analysts that suggests distressed sales will stay elevated for some time. Barclays defines the shadow inventory of foreclosures as loans in 90-plus day delinquency or already in the foreclosure process.The shadow inventory should reach its height in the summer in 2010 before falling gradually as the market absorbs 130,000 distressed properties per month, according to the report. Over the next three years, analysts forecast 4.7m distressed sales with 1.6m in 2010, another 1.6m in 2011 and 1.5m in 2012.The second is from Diana Olick at CNBC: Home Buyer Tax Credit Takes its Toll..."I've been househunting for a few months now...we totally got caught up in the "tax credit frenzy"....thank God we took a deep breath and relaxed...EVERY SINGLE HOME we had our eye on dropped in price this week...
In City of Homes That Sit Empty, Building Booms - Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale. Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more. Las Vegas is trying to recover by building what it does not need. Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.
Mortgage Holders Owing More Than Homes Are Worth Rise to 23%… (Bloomberg) -- More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter as repossessions climbed to a record, according to Zillow.com. Twenty-three percent of owners of mortgaged homes were underwater during the period, up from 21 percent in the previous three months, the Seattle-based property data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in March, the highest rate in Zillow data dating back to 2000. Underwater homes are more likely to be lost to foreclosure because their owners have a harder time refinancing or selling when they fall behind on loan payments. U.S. home values dropped 3.8 percent in the first quarter from a year earlier, the 13th straight period of year-over-year declines, Zillow said.
Negative Home Equity by State Q1 2010 (bar graph)
Is Obama Underwater? - Calculated Risk reported earlier this week that 11.2 million properties in the United States were in negative equity territory as of the first quarter of 2010, meaning that their current estimated value is less than that recorded when their owner's mortgages were written. Our lead chart today, borrowed from CR, shows the state by state breakdown by the percentage of homeowners "underwater" on their mortgages, or nearly so. We wondered if United States President Barack Obama was among them. To find out, we went back into our previous analysis of the value of the President's primary residence in Chicago, Illinois, and updated it using the Federal Housing Finance Agency's latest revised data for how housing prices have changed in the Chicago metropolitan area over time. (Note: the agency has changed its name since our previous analysis - it was known as the Office of Federal Housing Enterprise Oversight back in October 2008.) Using that revised and updated data, we found that the value of President Barack Obama's Chicago house is nearly $500,000 underwater compared to the amount he paid for it back in the second quarter of 2005.
60 Minutes on walking away - The weekly news magazine doesn’t break any new ground, but publicity like this may encourage many more to walk away. If this becomes common behavior among underwater borrowers, it could lead to a deflationary spiral. That would be very bad news for banks and, ultimately, the paper wealthy.
BBC News – US home repossessions hit all-time high - The number of US homes being repossessed hit an all-time high last month, but is set to start falling, says the body that tracks the figures. Banks took control of 92,432 properties in April, up 1% from March, and a 45% rise from a year earlier, said RealtyTrac. While actual repossessions rose, the number of new notices started against struggling homeowners declined. New repossession cases fell 9% from March and 2% from April 2009
Mortgage Delinquencies Show First Quarterly Drop Since 2006: TransUnion The rate of late mortgage payments dropped in the first quarter for the first time since 2006, according to credit reporting agency TransUnion.The 60-day delinquency rate slipped to 6.77 percent, from 6.89 percent in the fourth quarter of 2009. That was the first decline after 12 consecutive quarters of steady increases, TransUnion said.The first-quarter figure still represents a substantial jump from a year ago, when delinquencies were at 5.22 percent.
More move, but not long distance - More Americans moved last year than in the previous year, but most didn't go far, a sign that foreclosures and housing costs are still keeping people close to home. About 37.1 million Americans — 12.5% of the population — changed addresses from 2008 to 2009, the Census Bureau reported Monday.The rate is a modest increase from 11.9% the previous year, when the rate was at its lowest since the agency began tracking the data in 1948."You should not put rose-colored glasses on," says William Frey, demographer at the Brookings Institution. "This is still a low point in mobility, which is the lifeblood of our labor market and is important for young people."
Migration Data Suggest Homeowners Becoming Renters - The mover rate, which is the percentage of people who report a move, increased to 12.5% last year from 11.9% in 2008 (that was the lowest mover rate since at least 1945, when the Census started keeping track of the data).That would seem to be a positive increase since jobs are one of the biggest reasons people move, but a look below the numbers shows that’s not the case. The mover rate within counties increased to 8.4% last year, the highest since 2003. But the mover rate across county lines and between states is still mired in levels unseen since at least the 40s, and probably since the Great Depression, according to an analysis of Census data by William Frey, a demographer at the Brookings Institution. Simply put: The data are showing that millions of people who have lost their homes are moving nearby to rent, but that jobs were still scarce enough that few people made the state-to-state move.
Metro Affordability Ratios - In my previous post I calculated the adjusted rent ratio for the US by scaling Census reported median contract rent by the ratio of average owner occupied household size to average renter occupied household size. Since owning households are generally larger than renting households, unmodified median contract rent tends to skew rent ratios higher and makes homes look slightly less affordable than they otherwise would. With this in mind I set out to calculate adjusted price-to-rent ratios for all cities with Census household data that NAR reports median sales price data for. The results are below. The data comes from NAR's 4Q 2009 sales report and 2008 Census ACS statistics. I've also calculated how these measures change in time (as an index) in the affordability section. (US cities table)
Consumer Credit in U.S. Increased $2 Billion in March (Bloomberg) -- Consumer borrowing in the U.S. unexpectedly rose in March for the second time in three months, indicating Americans are becoming more optimistic about the recovery. The $2 billion rise during the month followed a revised $6.2 billion decline in February that was smaller than previously reported, the Federal Reserve said today in Washington. Credit was forecast to fall $3.7 billion in March, according to the median estimate in a Bloomberg News survey. Confidence to finance spending may grow as more people are hired after the creation of 290,000 jobs in April, the most in four years. Consumer purchases, which account for about 70 percent of the economy, rose at the fastest pace in three years during the first quarter, pointing to a broadening of the economy.
Consumer Credit Use Unexpectedly Rises in March, Though Revolving Debt Declines - Americans' use of credit unexpectedly rose in March as total consumer debt increased by 1% or $1.95 billion, though revolving debt, the category that includes credit card use, declined, the U.S. Federal Reserve announced Friday. In the past 12 months, total consumer debt has fallen 3.4% to $2.451 trillion from $2.536 trillion in March 2009. However, that's lower than the 4% year-over-year rate of decline recorded in February. In March, revolving debt, which includes most credit cards, actually fell 3.7% or by $3.2 billion to $852.6 billion; revolving debt totaled $935.1 billion in March 2009. Non-revolving debt, which includes auto loans and personal loans, increased 3.3% or by $5.2 billion to $1.598 trillion; non-revolving debt totaled $1.601 trillion in March 2009.
From Fashionista to Frugalista: The Next Generation of Female Spenders - Even as their outlooks on the economy are brightening and their own finances beginning to improve, women ages 18 to 39 are increasing their savings, paying off debt and catching up with overdue bills in a larger proportion than those over 40 years old, according to the survey released Tuesday. Specifically, 61% plan to reduce their level of debt over the next six months, compared with roughly half of older women. Some 48% said they are saving and investing more today than they were previously, compared with less than a third of older women. And 43% say they will put extra cash towards overdue bills, compared with 29% of women over 40 who plan to do the same. And it appears these aren’t just earnest resolutions, but indicative of actual behavioral shifts. More than two-thirds of young women report they have already made progress reducing debt levels, for example, compared with 61% of older women.
US bankruptcies resume upward path in 1st quarter (Reuters) - U.S. bankruptcy filings resumed their upward climb in the first quarter, nearly equaling their highest level since 2005, as high unemployment and a still-strained housing market squeezed consumers.There were 388,148 filings between January and September, up 17 percent from 330,394 a year earlier, according to data released Friday by the Administrative Office of the U.S. Courts. Consumer filings rose 18 percent to 373,541, while business filings edged up 2 percent to 14,607.Filings also rose 4 percent from last year's fourth quarter, the government data show. That had been the first period with a quarter-to-quarter drop in filings since 2006.For the 12 months ended March 31, there were 1.53 million filings, up 27 percent from a year earlier and the most since 2006. Some experts expect the number to stay above 1.5 million in future periods.
Recession hits adult sex lives, cheating: poll - The global economic crisis is taking a toll on older Americans' sex lives, according to an AARP survey.Between 2004 and 2009, the percentage of people in their 50s who say they have sex at least once a week took about a 10-point plunge for both sexes.Women dropped to 32 percent from 43 percent, and men to 41 percent, from 49 percent, in the sex survey of 1,670 Americans aged 45 and older."It's hard for some people to feel warm and sexy when they are afraid of losing their home or they have already lost their job. People complain of feeling distant, disconnected, and emotionally bound up," she added. Most other age groups saw a drop in their frequency of sex, too, according to AARP, a non-profit membership organization for people 50 years and older.
Canadian Consumer Debt Hits $1.41 Trillion In December 2009 - Despite the recent recession and the global financial crisis, Canadians went deeper into personal debt. According to a report released Tuesday by the Certified General Accountants Association of Canada, the household debt of Canadians peaked at $1.41 trillion in December 2009. On a per capita basis, it translates into a debt of $41,740 per resident – 2.5 times higher than in 1989. Based on this data, the CGA-Canada computed for Canadians’ debt-to-financial assets ratio among 20 nations belonging to the Organization for Economic Cooperation and Development. The association found that Canadians’ debt-to-income ratio reached 144 percent in 2009, which is the highest among OECD members
Moving in circles - In 1994, the United States government launched an ambitious social experiment: Federal officials offered thousands of families who were receiving housing subsidies — and living in some of the nation's highest-crime neighborhoods — the opportunity to move away.And so, housing vouchers in hand, about 5,000 American families in five cities — Baltimore, Boston, Chicago, Los Angeles and New York — moved to nicer urban and suburban locales, looked for jobs, entered new schools, and renewed their lives, courtesy of the government’s $80 million “Moving to Opportunity” (MTO) program.However, geography is not destiny. The MTO experiment did not so much transform lives as produce unanticipated results: It helped girls more than boys, for instance. Parents enjoyed major drops in anxiety and depression — but not gains in incomes. All told, better surroundings appear valuable but not sufficient conditions for climbing out of poverty.
A Rich New Poverty Measure - Most of us dislike the official poverty lines used to determine who, exactly, qualifies as poor. Most of us can recite at least five reasons why these measures (based on a mid-1960s assessment of the costs of a minimal food budget) are narrow, out of date and downright misleading. Most of us can also expound on how current methods of measuring poverty make it difficult, if not impossible, to accurately assess the impact of anti-poverty policies. The Census Bureau recently announced plans to develop a new Supplemental Poverty Measure (S.P.M.), also referred to as a Supplemental Income Poverty Measure (SIPM).
More Kids Eat Dinner From Uncle Sam - The number of Americans who live in food-insecure households — which at times don't have enough nutritious food — rose from 36 million people in 2007 to 49 million in 2008, according to the most recent report from USDA's Economic Research Service.Among those, 16.7 million were children, up from 12.4 million in 2007. Nearly one in four children in the U.S. are food insecure and about one in five live in poverty, according to a report from Feeding America, a network of 200 food banks around the country. "As the economy gets worse, we're seeing more and more kids," said Beth Baldwin-Page, executive director of the Boys & Girls Club of Brattleboro.
Food-stamp tally nears 40 million, sets record (Reuters) - Nearly 40 million Americans received food stamps -- the latest in an ever-higher string of record enrollment that dates from December 2008 and the U.S. recession, according to a government update.Food stamps are the primary federal anti-hunger program, helping poor people buy food. Enrollment is highest during times of economic distress. The jobless rate was 9.9 percent, the government said on Friday.The Agriculture Department said 39.68 million people, or 1 in 8 Americans, were enrolled for food stamps during February, an increase of 260,000 from January. USDA updated its figures on Wednesday.
At Small Businesses, Hiring Still Drags - WSJ - April marked the 27th consecutive month in which small businesses either shed more or the same number of jobs that they added, according to a monthly survey to be released Tuesday by the National Federation of Independent Business, a trade group in Washington, D.C. Since July 2008, employment per firm has fallen steadily each quarter, logging the largest reductions in the survey's 35-year history. Going forward, more small-business owners say they plan to eliminate jobs compared with those that expect to create new jobs over the next three months.
Jobs Picture Still Bleak for Small Business - April job numbers based on NFIB’s monthly economic survey released on Tuesday, May 11. “The steep recession will unlikely be followed by a steep recovery, the numbers just aren’t moving in that direction. Average employment per firm first turned negative in April of 2007. It has been negative for 10 of the last 12 quarterly readings ending with a negative 0.18 in April 2010 (seasonally adjusted). Since July 2008, employment per firm fell steadily each quarter, logging the largest reductions in the survey’s 35-year history. “Eleven percent (seasonally adjusted) of small business owners reported unfilled job openings in April, up two points but historically very weak. Over the next three months, 7 percent plan to reduce employment (unchanged), and 14 percent plan to create new jobs (down one point), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs.
Treasury Releases Details on Mortgage Program for Unemployed - The U.S. Treasury has issued a new Supplemental Directive introducing its payment relief program for homeowners who have lost their jobs.The Home Affordable Unemployment Program (UP), initially announced by the administration in March, becomes effective July 1, 2010, and offers eligible unemployed borrowers a forbearance plan to temporarily reduce or suspend their mortgage payments for a minimum of three months.To be eligible for UP, a borrower must meet the Home Affordable Modification Program (HAMP) eligibility criteria as well as be without a job and receiving unemployment benefits in the month of the UP forbearance plan effective date, and must request a UP forbearance plan before they become they miss three monthly mortgage payments
The Case For Economic Doom And Gloom - Brenner’s analysis of the current downturn can be boiled down to a fairly simple point: that the underlying cause of the current downturn lies in the “real” economy of private goods and service production rather than in the financial sector, and that the current remedies—from government spending and tax cuts to financial regulation—will not lead to the kind of robust growth and employment that the United States enjoyed after World War II and fleetingly in the late 1990s. These remedies won’t succeed because they won’t get at what has caused the slowdown in the real economy: global overcapacity in tradeable goods production.In the nineteenth century, the redundant and less productive firms would have folded, and as wages fell, and profit rates went back up, the economy would start to revive. But that no longer happens. Firms have become too big and powerful to fail; and the citizens of democratic nations will justifiably no longer tolerate unemployment above 20 percent. Instead, the average rate of profit falls, private and public debt rises, and the danger of a large crash looms.
"Jobs" Drops to No. 2 on Americans’ List of Top Problems – Gallup-- After two months as the clear No. 1 perceived problem facing the country, unemployment/jobs dipped to No. 2 in May, while "the economy" in general moved back into the top position. At the same time, Americans grew more likely to name immigration (including illegal immigration) as the nation's most important problem, moving that issue into fifth place. Gallup measures public perceptions of the nation's most important problem every month. The 10% citing immigration or illegal immigration in the latest poll, conducted May 3-6, is the highest Gallup has recorded in more than two years. Of the top 10 "most important problems" named this month, the economy, unemployment, healthcare, government leadership, and immigration are each mentioned by at least 10% of Americans. Except for the federal budget deficit/federal debt, at 9%, all other issues in the top 10 receive fewer than 5% of mentions
So Did Non-Farm Payrolls Really Increase By 290,000 Jobs?: Americans deeply distrust government these days, and sure enough, multiple bloggers have challenged the accuracy of the Bureau of Labor Statistics's claim that 290,000 jobs were added in April. So, were that many new jobs really created last month? Maybe. Does the reported number convey useful information about the job market? Yes. The bloggers focus on one adjustment the BLS made: Net jobs from business "births" minus business "deaths." New jobs from new businesses can't be captured in the survey because the new businesses take a few months to show up in the database that allows them to be contacted as part of the survey. The blogs focus on the +188,000 job birth/death adjustment used in calculating April's 290,000 number to claim that the report is wildly inflated. So How Fuzzy Is the Math?
Fun With Math: Mea Culpa Edition - OK, we should have known that nothing in making up the monthly Employment Situation reports possibly could be as simple as simple addition and subtraction, and our Fun With Math: April Employment Edition post roundly, and rightly, has been criticized for "employing" some fuzzy math of its own. As we have been reminded, the Bureau of Labor Statistics (BLS) factors in a guess about how many monthly jobs are being created by businesses being formed and how many jobs are lost by businesses closing shop, the so-called "Birth-Death" model. A net positive number for the month, such as the +188,000 in April, means the BLS is theorizing this many new jobs were created by newly formed enterprises above and beyond those lost from businesses which have called it quits.The Birth-Death adjustment, as the BLS notes in a FAQ section, is applied only to the Non-Seasonally Adjusted data, the raw numbers which then are black-box massaged into a Seasonally Adjusted estimate of jobs gained or lost...
The Economy Shifts, Leaving Some Behind - NYTimes - For the last two years, the weak economy has provided an opportunity for employers to do what they would have done anyway: dismiss millions of people — like file clerks, ticket agents and autoworkers — who were displaced by technological advances and international trade. The phasing out of these positions might have been accomplished through less painful means like attrition, buyouts or more incremental layoffs. But because of the recession, winter came early. Pruning relatively less-efficient employees like clerks and travel agents, whose work can be done more cheaply by computers or workers abroad, makes American businesses more efficient. Year over year, productivity growth was at its highest level in over 50 years last quarter, pushing corporate profits to record highs and helping the economy grow. But a huge group of people are being left out of the party.
Firms Pay More to High-Skill Foreign IT Professionals than to their U.S. Colleagues, Shows Management Insights Study – Contrary to public assertions, IT professionals in the U.S. who are not citizens actually earned more than their American colleagues from 2000-2005 and therefore did not depress the salaries of American citizens, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®).“Are Foreign IT Workers Cheaper? U.S. Visa Policies and Compensation of Information Technology Professionals” is by Professors Sunil Mithas and Henry C. Lucas, Jr. of the Robert H. Smith School of Business, University of Maryland, College Park.Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal. Their study, the authors maintain, “provides indirect evidence that visa and immigration policies so far have not had any adverse impact on the wages of American IT professionals due to any relatively lower compensation of foreign IT professionals.”
Jobs Vs. Wages -Despite the jump in hiring over the last two months, the job market remains extremely weak. It still has an enormous number of jobs to recover. That’s an argument for Congress to pass some of the additional stimulus that it has been considering recently.Oddly, though, the weakness in employment hasn’t translated into anywhere near as much weakness for wages. One of the distinguishing features of this recession continues to be the contrasting fortunes of people who have held onto their jobs — and haven’t even taken much of a pay cut — with those who have lost their jobs and are struggling mightily to new find a new one.Look at these two charts. The first, from a recent post by Catherine Rampell, compares job losses in this recession to those in other recent recessions:The second compares inflation-adjusted average hourly pay of rank-and-file workers, who make up about four-fifths of the work force, in the three worst recessions of the last 40 years.
Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories as provided by the BLS: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.Note: The BLS reports 15+ weeks, so the 15 to 26 weeks number was calculated.This really shows the change in turnover - there was more turnover in the '70s and '80s, since the 'less than 5 weeks' category was much higher as a percent of the civilian labor force than in recent years. This changed in the early '90s - perhaps as a result of more careful hiring practices or changes in demographics or maybe other reasons - but if the level of normal turnover was the same as in the '80s, the current unemployment rate would probably be the highest since WWII.
BLS: Low Labor Turnover, More Hiring in March - From the BLS: Job Openings and Labor Turnover Summary There were 2.7 million job openings on the last business day of March 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 2.0 percent. The hires rate (3.3 percent) was little changed, and the separations rate (3.1 percent) was unchanged in March. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people. The following graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS.
Structural unemployment - A FEW weeks ago, The Economist published a long piece of mine on the state of the American labour market which explored, among other things, whether there was a developing structural element to current American unemployment. It's too early for there to be a clear cut answer to this question, but a number of datapoints are suggestive. One factor indicating there might be a problem is that recent growth in the number of job openings has not been matched by growth in hires. That employers haven't been able to fill open positions immediately, given the huge number of unemployed Americans, could indicate that structural factors are preventing job matches.The latest BLS data undermine this somewhat:
Jobs Never Coming Back - One of the recurring themes that Dave Schuler and I have advanced since the global recession began is that we’re seeing a massive realignment of the economy and that many of the lost jobs will never come back. That’s especially true of the financial sector. There will simply be fewer people making big money moving money around, speculating on stock and commodities futures, and all the rest in 2017 than there were in 2007. And it’s not at all clear what the rebounded economy — which will eventually happen — will look like.A front page piece in today’s NYT by Catherine Rampell makes a related point: The global meltdown is speeding up the permanent abolition of jobs that were eventually going to go away, anyway.
Jobs That Aren’t Coming Back - I had an article today about structural unemployment — the idea that some people are out of work not only because demand is relatively weak, but because their skill sets don’t match what employers want (for example, they are highly specialized auto workers, but the only local job opening is for an oncologist). The typical causes of structural unemployment are the three T’s: trade, technology and changing tastes (e.g., consumers want more iPods and fewer C.D. players). We care about structural unemployment because it means many of the jobs lost during the Great Recession may not come back in the recovery. And that has important implications for public policy, and how the government can or should be helping the jobless.
Millions of jobs lost during recession will never come back - Millions of jobs lost during the recession are gone forever, according to a report on MSNBC, and they're not just manufacturing jobs. Many jobs lost in the retail and advertising industries are likely gone for good too.High productivity and cautious consumer spending are slowing job creation, according to the MSNBC story. As business becomes more efficient, it can make do with fewer employees, slowing job creation. Less consumer spending means fewer jobs in manufacturing and retail. According to Labor Department data, retailers have lost 1.2 million jobs that existed before the recession, as many companies went out of business
Is the High Unemployment Cyclical, Structural, or Both? - One of the remarkable features of the U.S. recession has been the dramatic collapse in demand. This collapse has yet to fully recover, but progress is being made as can be seen in the following figure. This figure shows the year-on-year growth rate of U.S. domestic demand (click on figure to enlarge): Given this modest recovery in demand one would think there would be a similar recovery in the labor market. But alas, unemployment remains stuck near 10% and the level of employment is where it was back in1999. Some observers are now wondering if more than demand is behind this lack of recovery in labor markets. Ryan Avent, for example, makes this point in a recent article in The Economist: It looks increasingly likely that America’s labour market has developed structural problems that may explain why it is struggling to respond.Others making this argument include Tyler Cowen and Arnold Kling. Their bottom line is that in this current recession there is limit to what stabilizing demand--my preferred goal for monetary policy--can do for unemployment.
A safety net for structural unemployment - Ryan Avent thinks we should start thinking about safety nets that are targeted at structural unemployment. Many of the safety nets we have in place are best suited for unemployment bouts resulting from aggregate demand shocks. Workers collecting unemployment and spend it, which makes them better off and supports aggregate GDP, but doesn’t really do anything for structural unemployment. There are retraining programs and such, but there’s not a lot of evidence that these are effective. So what policies could we pass to make the unemployed better off and incentive them in a way that speeds up the structural unemployment adjustment process?One idea is relocation vouchers. If you offer relocation vouchers to unemployed workers who move a minimum distance from their current residence, then you could incentivize labor to move where it is needed away from where it is no longer needed. The demand for this type of voucher can be seen in the piece from Catherine Rampell on structural unemployemt that Avent was commenting on
Doublethink - Yesterday I read an article by Noam Chomsky – Rustbelt rage – which documents the decline of the American dream and extends the malaise to Chinese workers. The hypothesis is that the workers in each country signed up for what they thought was a social contract where if they worked hard they would enjoy secure retirements. Then the meltdown undermines their jobs and they are forced to live on pitiful pensions. And while they watch the top-end-of-town enjoying the benefits of billions of bailout money from government the beneficiaries of these bailouts are leading the charge to take the pensions of the workers and turn them into “financial products” (privatised social security). This raises the concept of doublethink (a term coined by George Orwell) – which “means the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them”. That was what interested me today (in blog terms).
Unemployed workers outnumber job openings 5.6-to-one in March - This morning, the Bureau of Labor Statistics released the March report from the Job Openings and Labor Turnover Survey (JOLTS), showing that job openings increased by 47,000 to 2.7 million in March. However, this improvement was more than offset by a downward revision of 76,000 to the February data. From the Current Population Survey, we know that the number of unemployed workers increased by 134,000 in March to 15.0 million. This means that in March, the ratio of unemployed workers to job openings was 5.6-to-one. This was unchanged from the revised February ratio but remains a significant improvement over the high of 6.2 job seekers per job opening last November. However, it is still far above where it needs to be to put this country’s unemployed workers back to work.
April 2010 Jobs: Teens Surge, Young Adults Flounder - In April 2010, the total number of Americans counted as being employed grew to 139,455,000, up some 550,000 from the level recorded in March. Nearly 8.7% of that increase was represented by teens, which is significant since teens account for just 3.26% of the entire U.S. workforce! Meanwhile, the job market for young adults Age 20-24 turned south, as 92,000 fewer jobs existed for individuals in this age group in April 2010 than did in March. That's a surprising outcome especially given what we've observed following the six months businesses took to fully adjust to the latest increase in the federal minimum wage back in July 2009.
Young Adults: Recession Won’t Cause Lasting Damage - Some 44% of people between the ages of 18 and 29 said the job market would improve for people their age and the slump wouldn’t have a lasting negative impact on their earnings potential or career, according to an Allstate/National Journal poll released Wednesday. But 42% said the state of the job market would likely set them back for years. Research, by the way, indicates the group in the minority is likely correct. A downtrodden economy could drag down their wages for years, at least for recent college graduates.
Same Job, Less Pay: Employees Learn to Swallow Their Demotions Three years ago, employees were being rewarded for their years of loyalty to a particular company with raises, promotions and increasing amounts of paid leave. Today, those workers who are lucky enough to avoid being laid off are rewarded for their years of service with big pay cuts and spikes in the cost of their health care."My company didn't eliminate my job, they just eliminated my salary," wrote marketing creative director Mike Cheaure in an email to HuffPost. "I was back at work as a freelancer the next day working at 1/4 the pay and no benefits."
Economic Recovery Starts With Good Jobs - Tired of seeing its residents struggle to get by with low wage work and frustrated by the lackluster impact of other remedies to get the economy moving, Pittsburgh has stepped up with a new approach for creating good jobs. Rather than hoping the tax breaks and subsidies the city uses to help jump-start economic development will trickle down to the community, the city council passed a law to ensure the jobs created with these tax dollars will pay family-sustaining wages. In doing so, the new city-wide measure will help boost consumer spending in the local economy and move workers and their families off of public assistance for food, housing and health care.The innovative Pittsburgh policy is a start at addressing a disturbing trend that undermines our economy and plagues our society – the growth of the working poor. Six percent of the country’s workforce – more than 8.9 million men and women – are living in poverty despite having a job. And millions more Americans are living in near-poverty because of low paying jobs.
Anti-porn provision sinks Dem jobs bill -House Democrats had to scrap their only substantive bill of the week Thursday after Republicans won a procedural vote that substantively altered the legislation with an anti-porn clause. Democrats had labeled their COMPETES Act -- a bill to increase investments in science, research and training programs -- as their latest jobs bill. It was the only non-suspension bill Democrats brought up all week. But the Republican motion to recommit the bill -- a parliamentary tactic that gives the minority one final chance to amend legislation -- contained language prohibiting federal funds from going "to salaries to those officially disciplined for violations regarding the viewing, downloading, or exchanging of pornography. Democrats accused Republicans of playing politics with a bill designed to create jobs through investments in research and development.
Michigan Companies Can't Find Seasonal Help - Landscape workers can earn about $12 per hour in Michigan and would make $480 per week before taxes working full-time, or about $350 per week after taxes. In addition, full-time landscape workers would face transportation costs and other work-related expenses. But collecting unemployment benefits and working zero hours per week, many of those unemployed workers can receive $255 per week tax-free for almost two years, which is only $95 less per week than if they worked full-time. For some workers who are getting the maximum of $387 per week in jobless benefits, they can receive even more from collecting benefits than they would get paid going back to work full-time.So in the state with the highest jobless rate in the country, landscaping companies in Michigan are actually finding it difficult to hire seasonal workers this year, partly because of “the most generous safety net we’ve ever offered nationally,” according to Michigan economist David Littmann.
Detroit to Use Federal Money to Demolish Thousands of Abandoned Homes Detroit is finally chipping away at a glut of abandoned homes that has been piling up for decades, and intends to take advantage of warm weather and new federal funding to demolish some 3,000 buildings by the end of September.Mayor Dave Bing has pledged to knock down 10,000 structures in his first term as part of a nascent plan to “right-size” Detroit, or reconfigure the city to reflect its shrinking population.Mr. Bing hasn’t yet fully articulated his ultimate vision for what comes after demolition, but he has said entire areas will have to be rebuilt from the ground up. For now, his plan calls for the tracts to be converted to other uses, such as parks or farms.Even when the demolitions are complete, Detroit will still have a huge problem on its hands. The city has roughly 90,000 abandoned or vacant homes and residential lots, according to Data Driven Detroit, a nonprofit that tracks demographic data for the city.
The Tax Foundation - State Revenue Changes from 2008 to 2009 (tables) As the economic recession continued through fiscal year 2009, state tax revenues fell significantly, with only five states collecting more in 2009 than they had in 2008. Among the 45 states that collected less in 2009, many saw declines of more than 10 percent--all this despite the many tax hikes that states enacted. In addition to presenting new Census data for 2009 and comparing it to 2008, we take a look back at the last decade, examining tax revenue by type to identify the sources of tax volatility.
Texas budget shortfall widens to $18 billion -The state government's fiscal outlook worsened Tuesday as the chief budget writer in the House said a projected shortfall facing lawmakers is at least $18 billion. The latest estimate by House Appropriations Committee Chairman Jim Pitts, R-Waxahachie, was considerably higher than previous projections and came on a day filled with mostly bad news as Pitts' committee looked toward the looming budget crunch. House Speaker Joe Straus, appearing at the outset of the committee hearing, warned that a 5 percent budget cut already imposed on state agencies was "just the beginning."
Illinois Budget Woes Come to a Boil – WSJ - Illinois lawmakers were in disarray Thursday as they groped for stopgap measures to address a $13 billion deficit equaling nearly half of the state's general-fund revenue. The state faces one of the nation's worst budget crises, spilled over in part from the broader national economic crunch, and its current bond ratings lag only California's. But the confusion in the legislature indicates that serious steps to fix state finances won't be taken until after the November elections—if then. Illinois lawmakers have little appetite for drastic spending cuts. An income-tax increase proposed by Democratic Gov. Pat Quinn is going nowhere. Even temporary steps, such as borrowing to make pension payments, have stalled. Illinois is months late on many of its bills and has no plan for catching up.
Crushed by deficit, Ill. government hones new strategy for overdue bills: don't pay them.- Paralyzed by the worst deficit in its history, the state has fallen months behind in paying what it owes to businesses and organizations, pushing some of them to the edge of bankruptcy.Illinois isn't bothering with the formality of issuing IOUs, as California did last year. It simply doesn't pay. Plenty of states face major deficits as the recession continues. They're cutting services or raising taxes or expanding gambling to close the gap. But Illinois is taking the extra step of ignoring bills.
Next governor faces 'colossal' crisis with $3B budget hole - Bold promises will collide with harsh reality in 2011 when one of six candidates in the May 18 Democratic and Republican primaries will be sworn in as Pennsylvania's 46th governor.The primary winners square off in the November general election, with Democrats hoping to hold onto the governor's mansion after two terms by Gov. Ed Rendell and Republicans hoping eight years of Rendell leaves voters ready for a change.With deficits forecast at $3 billion next year, as federal stimulus dollars disappear and state and teacher pension costs soar, there's a sharp divide on how four Democratic candidates and two Republicans would address the crisis. GOP front-runner Attorney General Tom Corbett of Shaler and Rep. Sam Rohrer, R-Berks County, vowed not to raise state taxes. Four Democrats support taxing natural gas extraction.
N. Y. Lawmakers Weigh Worker Furloughs in Stop-Gap Spending Bill (Bloomberg) -- New York legislative leaders said they expect an emergency spending bill to pass today, forcing 100,000 state workers to take an unpaid day off each week. The furloughs, to save about $30 million a week, follow Governor David Paterson’s decision to withhold a 4 percent pay raise last month from about 130,000 employees. Both measures aim to cut spending while lawmakers search for agreement on ways to close a $9.2 billion budget gap for the year that began April 1. “Neither the Senate nor the Assembly has been able to reach the amount of deficit reduction in their plan that would enable us to pass a budget,” Paterson said May 7 in a radio interview broadcast by WHAM in Rochester. The two chambers have agreed on about $7 billion of deficit-closing actions, he said.
New York Legislature approved the furlough of 100,000 state workers. -Despite their strong objections, New York lawmakers voted to approve unprecedented furloughs for state workers to contend with a fiscal crisis, as thousands of workers rallied against furloughs across the state. The crowd of New York State workers chanted "We will remember in September," over and over again in Manhattan Monday afternoon. "I won't be able to pay my bills. We won't be able to do our jobs," said NY State worker Bob Pugliese. "There could be other ways they can look into this issue of balancing their budget," insisted state worker, Luenda Hurditt.The mandatory furlough of 100,000 state workers is part of an emergency spending plan that lawmakers plan to vote on Monday in Albany. It's designed to keep state government from shutting down, since the budget is more than a month overdue and more than $9 billion in the red.
NY state workers' furlough fight could become a costly one — New York’s powerful public worker unions took the state to court today in what could become a costly and lengthy battle to stop one-day-a-week furloughs for state employees. The Public Employees Federation and the Civil Service Employees Association unions, representing hundreds of thousands of white- and blue-collar workers, are seeking a temporary restraining order to block the cost-saving measure approved by the Legislature Monday night. That’s the first step in the court challenge to furloughs for about 100,000 state workers, which the union argues would violate their labor contracts. Many lawmakers who reluctantly authorized the furloughs said in floor speeches that the unions will likely win in court.
Judge Temporarily Blocks Furlough of State Workers - A federal judge on Wednesday temporarily blocked a one-day furlough of state workers scheduled by Gov. David A. Paterson for next week, reversing a plan that Mr. Paterson has said is necessary to keep the state from running out of money at the end of the month.Judge Lawrence E. Kahn of Federal District Court issued a temporary restraining order against Mr. Paterson, after unions representing state employees and public university teachers filed a lawsuit alleging that the furloughs, approved by the Legislature on Monday, were illegal.Judge Kahn’s ruling (see below) also bars Mr. Paterson from seeking any further furloughs pending a hearing in his chambers, scheduled for May 26.In his ruling, the judge wrote that the furloughs, which could cost roughly 100,000 state workers a day’s pay, would cause irreparable harm if put into effect and that the unions were likely to win their case in court, two conditions for issuing a temporary restraining order.
New York Minorities Frisked 9 Times as Often, Data Find – NYTimes - Blacks and Latinos were nine times as likely as whites to be stopped by the police in New York City in 2009, but, once stopped, were no more likely to be arrested. The more than 575,000 stops of people in the city, a record number of what are known in police parlance as “stop and frisks,” yielded 762 guns. Of the reasons listed by the police for conducting the stops, one of those least commonly cited was the claim that the person fit the description of a suspect. The most common reason listed by the police was a category known as “furtive movements.”
Deep cuts likely in updated state budget - The state budget crisis has been quiet for the past few months but will return to center stage this week as Gov. Arnold Schwarzenegger prepares to belt out some bad news.The governor is scheduled to release an updated budget plan Friday that will probably include even deeper cuts than those he proposed in January, when he called for reductions in health and human services, prisons, education and state worker pay, among other areas. Unexpected gains in state revenues that leaders hoped would significantly cut the deficit evaporated in the last few weeks. State Controller John Chiang reported Friday that revenues coming into state coffers from personal and corporate taxes fell $3.6 billion short of what was projected in April, the month when the bulk of revenues are collected.
Schwarzenegger Preps ‘Terrible Cuts’ to Close Deficit - (Bloomberg) -- California Governor Arnold Schwarzenegger will seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011, his spokesman said. Schwarzenegger, who will introduce his revised budget plans on May 14, has said he won’t seek tax increases to bolster California’s finances. The Republican’s forecast for the budget gap may rise after revenue fell short of his targets last month. “We can’t get through this deficit without very terrible cuts,” Schwarzenegger spokesman Aaron McLear told reporters in Sacramento. “We don’t believe that raising taxes right now is the right thing to do.”
California's redevelopment agencies must fork over $1.7 billion today to county auditors - Redevelopment agencies throughout California are expected to relinquish "under protest" $1.7 billion to counties' auditors today to meet a deadline for helping fund local education during the state budget crisis.The California Redevelopment Association last week lost its initial bid to block a Sacramento Superior Court ruling requiring the payments. The first of two payments is due today, another $350 million is due for the next fiscal cycle, which ends June 2011
Schwarzenegger: Eliminate Welfare and most Child Care, reduce Health Care - From the SacBee: Schwarzenegger budget would eliminate welfareGov. Arnold Schwarzenegger asked lawmakers Friday to eliminate the state's welfare program starting in October and dramatically scale back in-home care for elderly and disabled as part of his May budget revision to close a $19.1 billion deficit.He also proposed cuts to state worker compensation. Schwarzenegger proposed eliminating state-subsidized child care for all but preschoolers ...From the LA Times: Schwarzenegger unveils austere budget plan Gov. Arnold Schwarzenegger outlined a stark vision Friday of a California that would no longer lend a helping hand to some of its poorest and neediest citizens, proposing a budget that would eliminate the state's welfare-to-work program and most child care for the poor
California's Kids Fall Deeper into Poverty, Homelessness - These are some of the grim findings from a recent statewide poll of a representative sample of 87 principals conducted by UCLA's Institute for Democracy, Education and Access (IDEA) and the University of California All Campus Consortium on Research for Diversity (ACCORD). The indicators are coming in thick and fast:
- One in four California students lives in poverty, compared to one in six before the recession began.
- Students’ health, psychological and social service needs have increased with the recession.
- An epidemic of hunger grips many counties – a lot of students don’t eat at all when they go home.
- Homelessness among students is growing.
Schwarzenegger compares California's woes to euro zone - The movie star turned governor said California, the most populous U.S. state with an economy that would be the eighth largest in the world, faced the same dilemma of dismal growth and budget gaps as Greece, Spain and Ireland. California's government has been living beyond its means and has little choice but to cut $12.4 billion in spending over the remainder of this fiscal year and the next, Schwarzenegger told a press conference in Sacramento."You see what is happening in Greece, you see what is happening in Ireland, you see what is happening in Spain now," Schwarzenegger said, referring to swelling deficits and austerity measures that have concerned investors worldwide. "We are left with nothing but tough choices."
California fact of the day - Chug sends a good link to me, on default estimates, here is the bottom line: The six with rankings more worrisome than California are Venezuela (the worst), followed by Argentina, Pakistan, Greece, Ukraine and the Emirate of Dubai. California ranks ahead of the Republic of Latvia, the Region of Sicily and Iraq. As sovereign debt crises unfold, you will see increasingly innovative attempts to avoid uttering the simple words: "The government spent too much money here." See also here for a list of "sovereign tighteners" and "sovereign wideners."
Slouching towards neofeudalism - The financial crisis that grips our nation's states and cities has a malicious source, and Governor Tim Pawlenty recently named that source: public school teachers. The school teacher, the policeman, the firefighter - these are now the faces of what is wrong with America today. It doesn't matter that studies by the Bureau of Labor Statistics say otherwise, America can no longer afford their overpaid, middle-class salaries.At least that is what the right-wing media is telling us. Tea party members also want to see a drastic pay cut for the same people who teach their children. A familiar comment on the internet is, "I took a pay cut last year. Why shouldn't they?" This attitude goes beyond schadenfreude and goes straight to the crabs in a bucket mentality. Strangely enough this attitude of "if I can't have it, neither should you" only extends to working class people who live next door. For some reason none of the jealousy and malice is reserved for the people who actually broke the budgets of the states and cities, i.e. the people who deserve it.
School districts lack $1 billion to pay retiree health benefits, grand jury says - Twelve of Sacramento County's 13 school districts don't have enough money in their coffers to pay the health benefits promised future retirees and are not setting aside money to pay for them, according to a grand jury report released Monday.Collectively, the county's school districts have a staggering $1 billion in unfunded retiree health benefits, according to the report. School officials are effectively ignoring the mounting debt, the report concludes, and barring a drastic change of course, could end up bankrupting their districts or stiffing retirees on health benefits.
Illinois Teachers Urge Lawmakers to Raise Taxes - Educators across the state continue to push for a tax hike.The Illinois Federation of Teachers says a tax increase could be the only way to offset the loss of federal funds for education. Nearly one and a half billion dollars in stimulus money is running out. Right now, lawmakers aren't supporting Governor Quinn’s income tax hike or borrowing plan.Officials say as many as 20 thousand teachers could lose their jobs if new funding isn't secured
Gov. Paterson delays doling out $1.5B in school aid so cash-strapped state can pay its bills - Gov. Paterson plans to delay another $1.5 billion in school aid to keep the cash-strapped state from going broke next month.Budget Division boss Robert Megna said the school money must be held back because the state faces a $1 billion cash shortfall next month - and needs the school money to pay the billsStill, team Paterson finds itself in a pickle: State law requires the school aid to be handed out by June 1.Paterson will seek approval from the Legislature next week to circumvent the deadline.
Don’t go to college - Some facts: Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years…For college students who ranked among the bottom quarter of their high school classes, the numbers are even more stark: 80 percent will probably never get a bachelor’s degree or even a two-year associate’s degree.Of the 30 jobs projected to grow at the fastest rate over the next decade in the United States, only seven typically require a bachelor’s degree…And one thought provoking quote:Professor Vedder likes to ask why 15 percent of mail carriers have bachelor’s degrees, according to a 1999 federal study. “Some of them could have bought a house for what they spent on their education,” he said.There is much more in this article on increasing calls for alternatives to four-year colleges.
New Programs Let Students Get a Bachelor's Degree In Three Years…For years, the amount of time it takes to earn a bachelor's degree has been going up: less than one-third of students at four-year colleges graduate within four years, Education Department data show. But now, a growing number of residential colleges and universities have begun offering accelerated three-year degrees. In the past 15 months alone, at least a dozen schools have rolled out three-year programs including the University of North Carolina, Greensboro, and Hartwick College in Oneonta, N.Y. The programs are a drawing card for the driven, high-achieving students every college wants. Most screen out applicants unlikely to succeed on a fast track and dangle carrots to lure those who can, offering not only cost savings but coveted priority-registration privileges and special advisors.
State CalPERS cost $3.9 billion, up $600 million - The state contribution to CalPERS should increase to $3.9 billion in the new fiscal year beginning July 1, up $600 million from the current year, actuaries for the giant public pension fund calculate.The recommendation to the CalPERS board next week comes as Gov. Arnold Schwarzenegger is scheduled to issue a revision Friday of the state budget he proposed in January, which assumed a $200 million CalPERS increase to $3.5 billion.
$34 billion shortfall estimate sparks renewed talk of taxpayer help for PBGC - A new report that showed the Pension Benefit Guaranty Corp.'s deficit could swell to $34 billion in the next 10 years has sparked fresh debate as to whether a multibillion-dollar infusion of taxpayer cash will be required to keep the agency afloat. “The realistic option is that Congress will have to provide a bailout,” James Keightley, a former PBGC general counsel who is now a partner at the law firm Keightley & Ashner LLP, Washington, said in an interview. “After the money they (federal agencies) have thrown at saving financial institutions, $30 billion is chump change,”
“Fiscal Tsunami” Threatens State Budget - Raleigh, N.C. – Crippling state debt and unsustainable monetary commitments are painting a bleak financial picture as the General Assembly returns to Raleigh this week according to a new study released today by the Civitas Institute. State budget writers face an uphill battle as they deal with a $4.3 billion structural shortfall over the next 26 months. Civitas Institute Policy Analyst Brian Balfour cites several reasons for the financial crisis: $391 million below budgeted General Fund revenue for fiscal year 2009-10; $788 million less revenue available for the coming fiscal year than previously anticipated; and a $2.9 billion drop-off in revenue for fiscal year 2011-12 due to an end to federal stimulus funds and temporary state taxes.The recent passage of federal health care reform will also directly affect North Carolina’s budget. Taxpayers will be saddled with an additional annual Medicaid burden starting at $245 million in 2017, growing to at least $490 million by 2020 due to legislation expanding Medicaid enrollment
Schwarzenegger's revised budget plan is expected to eliminate health programs - Gov. Arnold Schwarzenegger is expected to present a revised budget plan Friday that would dismantle some of California's landmark healthcare programs after efforts to scale them back have been reversed by federal courts.The rulings, issued mostly over the last two years, have already forced the state to unwind roughly $2.4 billion in cuts approved by the governor and Legislature and have alarmed other financially strapped states seeking ways to balance their budgets.Schwarzenegger has lashed out at the federal judges, saying they've been "going absolutely crazy" and accusing them of interfering with the state's ability to get its finances in order
Medicare Advantage Competitive Pricing: The Political Failure of a Good Idea - Few Americans should be satisfied with the way the government pays private health insurance plans that participate in the Medicare Advantage program. Taxpayers pay 14 percent more to insure a beneficiary through the Advantage program than through traditional, fee-for-service Medicare, the program’s “public option.” The new health reform law–the Affordable Care Act--will reduce, but not eliminate, the additional payments to Advantage plans. Medicare beneficiaries are concerned about the reductions in Advantage plan availability and generosity that will result from those payment cuts. There should be a better way to pay Advantage plans, one less likely to be a taxpayer rip-off or to contribute to swings in plan availability and generosity. In fact there is, and Medicare’s prescription drug program uses it successfully: competitive pricing (also called competitive bidding).
Insured Workers' Health Costs Still Rising - Out-of-pocket costs for the millions of Americans with employer-based health coverage rose again in the past year, although at a slower pace than the year before, according to a new industry report released Tuesday. However, as employers prepare to make health reform's mandated changes to their benefits plans later this year, the changes could shift some costs away from workers and raise them for companies.American workers spent 7.4% more on their health care coverage over the past year, according to the sixth annual survey conducted by health care consulting firm Milliman Inc. The increase translates to about $506 more that workers contributed to their care - $321 for their company's health plan and $185 for employee out-of-pocket expenses.
How Health Reform Helps Reduce the Deficit - CBPP - The new health reform law will extend coverage to over 30 million uninsured Americans and provide important consumer protections to tens of millions of insured Americans whose coverage may have critical gaps. These coverage expansions will be more than paid for by specific reductions in spending for Medicare, Medicaid, and other federal programs and by additional tax revenues.Overall, health reform will reduce the deficit by $143 billion over 2010-2019, according to the Congressional Budget Office.  Excluding CLASS, the new long-term care insurance program, health reform will still reduce the deficit by $73 billion over that period, as shown in the table on the next page. In the 2020-2029 decade, the law will reduce deficits by about one-half of 1 percent of gross domestic product, or about $1.3 trillion
More on Discretionary Spending in the Final Health Care Legislation - Two days ago CBO provided some additional information about the potential effects of H.R. 3590, the Patient Protection and Affordable Care Act (PPACA, Public Law 111-148), on discretionary spending. In response to questions from Congressional staff members, CBO released a further explanation of those figures yesterday. The potential discretionary costs identified two days ago include many items whose funding would be a continuation of recent funding levels for health-related programs or that were previously authorized and that PPACA would authorize for future years. CBO estimates that the amounts authorized for those items exceed $86 billion over the 10-year period (out of the roughly $105 billion total shown in the table provided yesterday). Thus, CBO’s discretionary baseline, which assumes that 2010 appropriations are extended with adjustments for anticipated inflation, already accounts for much of the potential discretionary spending under PPACA.
The Health Care Reform Already Costs More than We Thought it Would - There's been a spate of bad news recently about the health care bill. Henry Waxman canceled his War on Accounting, not because there was a sudden breakout of common sense on Capitol Hill, but because his committee's investigation revealed that companies had begun exploring whether they should drop their health insurance plans entirely--a move that would cost over $100 billion thanks to the huge new subsidies the government would have to dole out. Meanwhile, the CBO just came out and said that the health care reform was slated to cost $115 billion more than they said it would. Why? Because they didn't have time to calculate the effects on discretionary spending such as new administrative capacity, demonstration projects, and continuation of successful short-term initiatives. As my fiance notes, Olympia Snowe's demands to slow down the process suddenly seem a lot more reasonable.
Sentences to ponder, discount babies edition - The paper finds the cost of adopting a black baby needs to be $38,000 lower than the cost of a white baby, in order to make parents indifferent to race. Boys will need to cost $16,000 less than girls. Presumably that holds at the margin only, not for all parents. Here is more, from Allison Schrager. It seems that most couples prefer to adopt non-black girls. Here is Allison's Twitter feed. Here is a related story on rabbinical rulings.
Lilly, others cut U.S. tax bills through transfer pricing - Over the past three years, Pfizer Inc. was an earner without profit in its own country. The maker of cholesterol medication Lipitor, the world’s top-selling prescription drug, reported almost half its revenues in the United States for 2007 through 2009, while booking domestic pretax losses totaling $5.2 billion. Abroad, it was another story....Pfizer is one of thousands of American companies that bolster their profits by attributing income to subsidiaries in countries with lower income tax rates, legally cutting their tax bills. Indianapolis based Eli Lilly and Co. and Oracle Corp. were among other big companies that helped drive a 70-percent increase in accumulated earnings abroad that weren’t taxed in the U.S. from 2006 to 2009, according to data compiled by Bloomberg
Self-defeating Regulations - Obama sees electronic medical records (EMRs) linked into electronic health record (EHRs) networks as a major factor in controlling costs and improving quality in the U.S. health care system.The stimulus act includes significant funds for physician groups and hospitals to purchase and implement EMRs in the next several years. There are penalties for providers not on board within five (5) years.In order to qualify providers have to buy “certified” systems and engage in “meaningful use” of those systems. (Most providers will select the Medicare track, others (pediatricians) will select the Medicaid option).And therein lies a huge problem.
The statute directed the various bureaucracies to write implementing regulations for the certification and meaningful use of EMRs and EHRs. The recently published draft regulations are (not surprisingly) long and wildly complex. Make that very long and very wildly complex.
Loss of wildlife threatens food supplies – UN - The latest report on global biodiversity gives a more bleak picture than ever before of the state of the natural environment. In the last 35 years there has been a 30 per cent decline in the number of mammals, birds and other vertebrates on the planet, while the human population has doubled. It is impossible to count the loss of plants and insects because there are so many, but scientists fear millions of species could have been lost before they are even discovered. Already major 'tipping points' are being crossed that will catapult the world into further irreversible loss, such as the decline of the Amazon rainforest, Arctic tundra and coral reefs.
Third of plants and animals 'face extinction' - The world's biodiversity is threatened by the economic growth of countries like China, India and Brazil, the study will say. While Western countries are increasingly aware of the need to protect endangered species, the developing world's appetite for raw materials is destroying vulnerable ecosystems, the report's authors will warn. Population growth, pollution and the spread of Western-style consumption are also blamed for hitting plant and animal populations.
U.N. Report: Eco-Systems At 'Tipping Point' (CNN) -- The world's eco-systems are at risk of "rapid degradation and collapse" according to a new United Nations report.The third Global Biodiversity Outlook (GBO-3) published by the Convention on Biological Diversity (CBD) warns that unless "swift, radical and creative action" is taken "massive further loss is increasingly likely."Ahmed Djoghlaf, executive secretary of the CBD said in a statement: "The news is not good. We continue to lose biodiversity at a rate never before seen in history."The U.N. warns several eco-systems including the Amazon rainforest, freshwater lakes and rivers and coral reefs are approaching a "tipping point" which, if reached, may see them never recover
Academics urge radical new approach to climate change - A major change of approach is needed if society is to restrain climate change, according to a report from a self-styled "eclectic" group of academics. The UN process has failed, they argue, and a global approach concentrating on CO2 cuts will never work. They urge instead the use of carbon tax revenue to develop technologies that can supply clean energy to everyone. Its central message is that climate change can be ameliorated best by pursuing "politically attractive and relentlessly pragmatic" options that also curb emissions. These options include bringing a reliable electricity supply to the estimated 1.5 billion people in the world without it using efficient, low-carbon technologies.
Economists, Environmentalists, and the “Value Gulf” - Collier will apparently try to play the role of referee between two factions- romantics and ostriches. Romantics are skeptical of growth and want to preserve at all costs, while ostriches will plunder nature for the cause of economic growth.Although many may not admit it, I think there are a lot of both types within the margins of the environmental discussion. There are enough, in fact, to build the mistrust I was posting about. Collier attributes the existence of both camps to a misinformed public. Interestingly, though, he seems to ascribe more blame to economists, who treat nature “as they do any other asset…to be exploited for the benefit of mankind.” He then aptly cites Nicholas Stern (whose higher carbon price has been mostly ignored since its release in 2006), who has argued that the issues with climate change “are not technical, but ethical.”
What’s Not Important for a Good Climate Bill - As with any big issue in Washington, climate policy has its share of sideshows and special-interest pet projects. If somebody’s favorite policy can be plausibly (or even implausibly) tied to climate, it’s a good bet they’ll attempt to do so. Conversely, if someone wants to hijack the climate debate, they may try to attach an unpopular issue to it. There are also a good number of perfectly well-intentioned ideas that, in reality, won’t make much difference in terms of climate policy. Our goal in this post is to identify these issues: those that we feel are just political distractions, and those that won’t make much difference.
Senate Climate Bill Makes Its Debut - Senators John F. Kerry, Democrat of Massachusetts, and Joseph I. Lieberman, independent of Connecticut, plan to roll out their long-delayed proposal to address global warming and energy later today. The nearly 1,000-page plan provides something for every major player – loan guarantees for nuclear plant operators, incentives for use of natural gas in transportation, exemptions from emissions caps for heavy industry, free pollution permits for utilities, modest carbon dioxide limits for oil refiners and expansion of offshore drilling for those states willing to accept the risks. The bill’s overall goal is to reduce greenhouse gas emissions by 17 percent from 2005 levels by 2020 and 83 percent by 2050. The targets match those in a House bill passed last year and the Obama administration’s announced policy goal. It is impossible to know now whether all the concessions will add up to the 60 votes needed to thwart an attempt to filibuster the bill
A First Look At The Details Of The Kerry-Lieberman American Power Act - Last night, the Wonk Room published a summary of the provisions of the American Power Act, the comprehensive climate and clean energy legislation being introduced today by Sen. John Kerry (D-MA) and Sen. Joe Lieberman (I-CT). This post delves deeper into the legislation’s specific provisions. The following table compares key elements of Obama’s campaign promises from 2007 and 2008, the Waxman-Markey American Clean Energy and Security Act as passed by the House of Representatives, and the elements of the Kerry-Lieberman draft legislation, as based on leaked summaries.
The Senate Climate Bill Misses an Opportunity - John Kerry (D-MA) and Joe Lieberman (I-CT) introduced a climate bill yesterday that, among other things, establishes a cap-and-trade program for greenhouse gases. The virtue of a cap-and-trade program is that it establishes a market price for a pollutant and allows flexibility within and across regulated entities in how to reduce emissions. But any cap-and-trade program must decide whether to allocate the pollution allowances for free or through a government auction, as well as how to distribute both the allowances and any auction revenue. As I wrote previously for TPC’s “Desperately Seeking Revenue” event, a full auction of allowances, which in turn uses the revenues to reduce high marginal tax rates or reduce deficits, lowers the overall cost of any cap-and-trade program. In this link, I show how the Senate bill distributes the allowances. Unfortunately, the measure gives away most for free and devotes very little revenue to reducing either high marginal tax rates or deficits.
Climate bill has new drilling protections - The energy and climate bill Sens. John Kerry (D-Mass.) and Joseph I. Lieberman (I-Conn.) will unveil Wednesday will give states the right to veto offshore oil drilling in a neighboring state, according to sources briefed on the plan.The two senators, who are going ahead and introducing the bill without their longtime ally GOP Sen. Lindsey Graham (S.C.), have tweaked the bill in a few ways to address concerns raised by the recent oil spill in the Gulf of Mexico. It requires an Interior Department study to determine which states could be economically and environmentally affected by a spill.Those affected states would then be able to veto drilling by passing a law. Those states that are able to go ahead with drilling will retain 37 percent of the federal revenue generated by that activity.Any state will be allowed to opt out of drilling that would occur in waters within 75 miles of its shore.
U.S. agency lets oil industry write offshore drilling rules… The oil industry, not the federal agency that regulates it, plays a crucial role in writing the safety and environmental rules for offshore drilling, a role critics say reflects cozy ties between an industry and its regulators that need to be snapped.Nearly 100 industry standards set by the American Petroleum Institute are included in the nation's offshore operating regulations. The API asserts its standards are better for the industry's bottom line and make it easier to operate offshore than if the Minerals Management Service set the rules.
Coal Combustion Residuals - Coal Combustion Residuals, often referred to as coal ash, are currently considered exempt wastes under an amendment to RCRA, the Resource Conservation and Recovery Act. They are residues from the combustion of coal in power plants and captured by pollution control technologies, like scrubbers. Potential environmental concerns from coal ash pertain to pollution from impoundment and landfills leaching into ground water and structural failures of impoundments, like that which occurred at the Tennessee Valley Authority’s plant in Kingston, Tennessee. The need for national management criteria was emphasized by the December 2008 spill of CCRs from a surface impoundment near Kingston, TN. The tragic spill flooded more than 300 acres of land with CCRs and flowed into the Emory and Clinch rivers.EPA is proposing to regulate for the first time coal ash to address the risks from the disposal of the wastes generated by electric utilities and independent power producers. EPA is considering two possible options for the management of coal ash for public comment.
Chesapeake Bay Settlement Has EPA Agreeing To Enforce Pollution Reduction Goals - The Environmental Protection Agency will be legally bound to clean the soiled waters of the Chesapeake Bay after reaching an agreement Tuesday to enforce tough new standards for pollution reduction. The settlement reached to end a lawsuit brought by bay advocates has potentially far-reaching consequences for the bay's watershed, a huge sweep of territory from Upstate New York to the Shenandoah Valley. The pollution reductions could affect how lawns and farm fields are fertilized; how livestock is managed; what sewage treatment costs taxpayers; where housing developments, office complexes and shopping centers can be built; and other aspects of life with the potential to taint the water that flows into the 200-mile-long bay.
Lizards facing extinction because of climate change - If current trends continue 20 per cent of all species could disappear by 2080, according to the findings published in Science. The researchers developed a model of risk using lizard numbers and rising temperatures which accurately predicted specific locations in North and South America, Europe, Africa, and Australia where local populations have already become extinct. The drop in the lizard population could cause an explosion in the numbers of insect they normally feed on as well as devastating creatures higher up the food chain which rely on them for food. Evolutionary biologist Professor Barry Sinervo said: "Our research shows the ongoing extinctions of lizards are directly due to climate warming from 1975 to the present."
E.P.A. Announces New Greenhouse Gas Emission Rule - NYT - Starting in July 2011, new sources of at least 100,000 tons of greenhouse gases a year and any existing plants that increase emissions by 75,000 tons will have to seek permits, the agency said. In the first two years, the E.P.A. expects the rule to affect about 15,550 sources, including coal-fired plants, refineries, cement manufacturers, solid waste landfills and other large polluters, said Gina McCarthy, the agency’s assistant administrator. She said the rule would apply to sites accounting for about 70 percent of the nation’s greenhouse gas emissions. “We think this is smart rule-making, and we think it’s good government,” she said.
Bill Gates Funds Geoengineering Company That Will Make Clouds Out of Sea Water - Basically a fleet of ships equipped with screens & vacuums pump up millions of gallons of ocean water and using high-powered water canons introduce the water some 3000 feet in the air, where clouds are formed. The added moisture content would increase the thickness of the water vapor, making the clouds whiter and thus more reflective. Of course this, as all other geoengineering solutions, are not without environmental impacts. No one really knows exactly what happens when humans alter the atmosphere in such a way. A global coalition of environmentalists called HOME (Hands Off Mother Earth) is calling for a moratorium on geoengineering experiments until the international laws on geoengineering being discussed this week in a UN scientific meeting in Nairobi are clarified.
The Three-Layered Chess Box -,A central question of global economics concerns the architecture of policy institutions. If you regard the global socio-economic system as a single unit -- a not entirely unreasonable assumption, perhaps -- then it is strikingly obvious that the system's optimal management would call for much stronger global governance functions than exist today. Global economics calls for efficient global monetary and fiscal policy, global financial regulation, enforceable global solutions to the global climatic issues, the rapid loss of biodiversity, overfishing, and so on. This just does not happen. The 2007-2009 crisis of the global economy was perhaps the best chance so far to create on overarching economic policy umbrella for the world economy, an opportunity left unused despite the multitude of summits ending with the Great Leaders' press conferences, which in turn were followed by uniformly unilateral action. The failure of Copenhagen ... speaks of similar ineptitude when it comes to managing the climate. Why is this? Why are sovereign states so reluctant to coordinate policy, let alone give up power for the protection of the shared economic and ecological commons?
Glacier National Park turns 100, but may not last another 10… Age has not been kind to Glacier National Park.The gorgeous million-acre park in northwestern Montana celebrated its 100th birthday on Tuesday. But many of its glaciers have melted, and scientists predict the rest may not last another decade.The forests are drier and disease-ridden, leading to bigger wildfires. Climate change is forcing animals that feed off plants to adapt.Many experts consider Glacier Park a harbinger of Earth's future, a laboratory where changes in the environment will likely show up first.
South Pole Has Warmest Year on Record - The South Pole experienced its warmest year on record in 2009, according to newly released data from the Amundsen-Scott South Pole Station. The average temperature at the South Pole last year was still a bone-chilling minus 54.2 degrees Fahrenheit (minus 47.9 degrees Celsius) in 2009, making it the warmest year on record since 1957, when temperature records began at the South Pole, as was reported by Peter Rejcek, an editor for The Antarctic Sun, a part of the U.S. Antarctic Program funded by the National Science Foundation. The previous record high was minus 54.4 F (minus 48 C), recorded in 2002. Last year was also the second warmest year on record for the planet, according to NASA measurements of global surface temperatures released earlier this year. The global record warm year, in the period of near-global instrumental measurements since the late 1800s, was 2005
Greenland Glacier Slide Speed 220% in Summer (Reuters) - A glacier in Greenland slides up to 220 percent faster toward the sea in summer than in winter and global warming could mean a wider acceleration that would raise sea levels, according to a study published Sunday.A group of experts led by Ian Bartholomew at Edinburgh University in Scotland said the variability was much stronger than earlier observations of glacier movement in Greenland. The study, published in the journal Nature Geoscience, is a new piece of a puzzle to understand the world's second biggest ice sheet behind Antarctica. Greenland has enough ice to raise world sea levels by about 7 meters (23 ft) if it all melted.
Wind power actually brings electricity prices down! - Bloomberg has a somewhat confusing article about the newest complaint about wind power, but the gist of it is that wind power is an issue for the industry because it brings their revenues down:After years of getting government incentives to install windmills, operators in Europe may have become their own worst enemy, reducing the total price paid for electricity in Germany, Europe’s biggest power market, by as much as 5 billion euros some years, according to a study this week by Poeyry, a Helsinki-based industry consultant.Implicit in the article, and the headline (which focuses on lower revenues for RWE) is the worry that wind power will bring down the stock market value of the big utilities - which is what the readers of Bloomberg et al. care about.But despite the generally negative tone of the article, it's actually a useful one, because it brings out in the open a key bit of information: wind power actually brings electricity prices down
Tainted nuke plant water reaches major NJ aquifer - Radioactive water that leaked from the nation's oldest nuclear power plant has now reached a major underground aquifer that supplies drinking water to much of southern New Jersey, the state's environmental chief said Friday.The state Department of Environmental Protection has ordered the Oyster Creek Nuclear Generating Station to halt the spread of contaminated water underground, even as it said there was no imminent threat to drinking water supplies.The department launched a new investigation Friday into the April 2009 spill and said the actions of plant owner Exelon Corp. have not been sufficient to contain water contaminated with tritium.Tritium is found naturally in tiny amounts and is a product of nuclear fission. It has been linked to cancer if ingested, inhaled or absorbed through the skin in large amounts.
The triple crises of civilization - The evidence is overwhelming. We are facing triple crises. Global warming is already happening. We are at or close to being at peak oil (and some say as result peak money) production. We have exceeded our carrying capacity and still adding 3 million people to the U.S. population and eighty million to the earth each year. Between the two of us we have read almost all of the books below and are deeply impressed that so many prominent environmentalists, scientists, spiritual leaders, and educators have written so many books about crisis and collapse in just the last few years.We urge all who care about the future to read at least one book from each of the categories
Gulf Wildlife 'Dead Zone' Keeps Growing - An over 7,000-square-mile wildlife "dead zone" located in the center of the Gulf of Mexico has grown from being a curiosity to a colossus over the past two decades, according to the National Wildlife Federation (NWF), and scientists are now concerned the recent oil spill and other emerging chemical threats could widen the zone even further.The NWF describes the dead zone as being "the largest on record in the hemisphere in coastal waters and one of the biggest in the world." During the summer months, it is nearly devoid of wildlife, save for the dead bodies of crabs, shrimp and other marine species that succumb to oxygen depletion in the polluted water.Animal toxicology experts believe the Gulf dead zone is a man-made monstrosity."Outside of widespread impacts from oil release, the drainage of the Mississippi River into the Central Gulf has deposited massive amounts of agricultural chemicals and fertilizers from agricultural activities in the Central United States,"
"The Gulf Oil Spill: An Extinction Level Event?" Reports about the massive Gulf of Mexico oil spill have been largely underestimated, according to commentators, including Paul Noel, a Software Engineer for the U.S. Army at Redstone Arsenal in Alabama. He believes that the pocket of oil that's been hit is so powerful and under so much pressure that it may be virtually impossible to contain it. A recent story from the Christian Science Monitor (CSM) reports that many independent scientists believe the leak is spewing far more than the 5,000 barrels, or 210,000 gallons, per day being reported by most media sources. They believe the leak could be discharging up to 25,000 barrels (more than one million gallons) of crude oil a day right now. The riser pipe that was bent and crimped after the oil rig sank is restricting some of the flow from the tapped oil pocket, but as the leaking oil rushes into the well's riser, it is forcing sand with it at very high speeds and "sand blasting" the pipe (which is quickly eroding its structural integrity).According to a leaked National Oceanic and Atmospheric Administration memo obtained by an Alabama newspaper, if the riser erodes any further and creates more leaks, up to 50,000 barrels, or 2.1 million gallons, per day of crude oil could begin flooding Gulf waters every day.
BP suffers snag in Gulf oil containment effort - BP Plc suffered a setback on Saturday in an attempt to contain oil gushing into the Gulf of Mexico with a huge metal dome when crystallized gas filled the structure, a blow to hopes of a quick, temporary solution to a growing environmental disaster.Word of the snag came as balls of tar appeared in waters off a popular Alabama island beach in what may be the first evidence of spilled oil washing into a populated area.BP engineers have moved the four-story containment dome -- which was seen as the best short-term way to stem the flow from a ruptured oil well -- off to the side on the sea floor and will take two days trying to come up with a solution, Doug Suttles, chief operating officer, told reporters.The problem is gas hydrates, essentially slushy methane gas that would block the oil from being siphoned out the top of the box. As BP tries to solve it, oil keeps flowing unchecked into the Gulf in what could be the worst U.S. oil spill.
BP's Oil-Collection Chamber Clogs, Removed From Well (Bloomberg) -- BP Plc’s latest effort to prevent oil leaks from damaging wildlife and tourism on the U.S. coast has been stymied as cold and pressure a mile below the surface of the Gulf of Mexico formed ice that clogged a containment device. The device, a 40-foot-tall steel chamber BP hoped would capture the oil gushing from a damaged offshore well and funnel it to a ship at the surface, was blocked by an icy mixture of gas and water near the seafloor, the company said. An estimated 5,000 barrels of crude are spilling each day from the well, threatening shrimping and fishing grounds, tourism and wildlife along the U.S. Gulf Coast.
Ice Crystals Thwart Oil Spill Containment Operation -A novel but risky attempt to use a 100-ton steel-and-concrete box to cover a deepwater oil well gushing toxic crude into the Gulf of Mexico was aborted Saturday after ice crystals encased it, an ominous development as thick blobs of tar began washing up on Alabama's white sand beaches.The setback left the mission to cap the ruptured well in doubt. It had taken about two weeks to build the box and three days to cart it 50 miles out then slowly lower it to the well a mile below the surface, but the frozen depths were too much for it to handle.Still, BP officials overseeing the cleanup efforts were not giving up just yet on hopes that a containment box - either the one brought there or a larger one being built - could cover the well and be used to capture the oil and funnel it to a tanker at the surface to be carted away.
Oil Washing Ashore at Island Off Louisiana Coast - Oil is washing up on the shores of New Harbor Island off the coast of Louisiana. An Associated Press reporter saw a pinkish oily substance washing up Thursday on the sands and into the marshland at this part of the Chandeleur barrier islands chain. It was at least the second time the AP has confirmed oil coming ashore. Oil was seen washing up at the mouth of the Mississippi last week. On New Harbor island, birds are diving into the oily waters, but they didn't seem to be in any distress. It's nesting time for sea gulls and pelicans and the danger is they may be taking contaminated food or oil on feathers to their young. There are also numerous dead jellyfish, including some that have washed up on the beach.
Spill could devastate U.S. Gulf Coast oyster reefs (Reuters) - The lowly oyster, a tasty delicacy to seafood lovers but a curiosity to more squeamish diners, is also the backbone of marine life along the U.S. Gulf Coast and among the most vulnerable creatures now threatened by a giant oil spill.The region's oyster beds are the vital foundation of a commercial and recreational fishing industry -- including shrimp, crabs and other shellfish -- that generates $6.5 billion in annual revenues, according to one recent estimate.The networks of reefs built up in shallow waters by these unassuming bivalves are like the Gulf of Mexico equivalent of the Caribbean's coral reef system, only with oysters at the base of the pyramid instead of live coral.In addition to providing shelter and food for a complex web of undersea species, the way coral reefs do, oyster beds serve a number of other important functions by virtue of their proximity to land."It is not only the economic engine of this region, it is a real indicator of the environmental and ecological health of the Gulf Coast area,"
AP: Oil Blowout Preventers Known to Fail - Cutoff valves like the one that failed to stop the Gulf of Mexico oil disaster have repeatedly broken down at other wells in the years since federal regulators weakened testing requirements, according to an Associated Press investigation. These steel monsters known as blowout preventers or BOPs - sometimes as big as a double-decker bus and weighing up to 640,000 pounds - guard the mouth of wells. They act as the last defense to choke off unintended releases, slamming a gushing pipe with up to 1 million pounds of force. While the precise causes of the April 20 explosion and spill remain unknown, investigators are focusing on the blowout preventer on the Deepwater Horizon rig operated by BP PLC as one likely contributor.
Caution Required for Gulf Oil Spill Clean-Up, Bioremediation Expert Says - With millions of gallons crude oil being spewed into the Gulf of Mexico from the Deepwater Horizon oil spill, the focus now is on shutting down the leak. However, in the cleanup efforts to come, "extreme caution" must be exercised so as not to make a bad situation even worse, says a leading bioremediation expert with the Lawrence Berkeley National Laboratory. The concentration of detergents and other chemicals used to clean up sites contaminated by oil spills can cause environmental nightmares of their own," says Terry Hazen, a microbial ecologist in Berkeley Lab's Earth Sciences Division who has studied such notorious oil-spill sites as the Exxon Valdez spill into Alaska's Prince William Sound."It is important to remember that oil is a biological product and can be degraded by microbes, both on and beneath the surface of the water," Hazen says. "Some of the detergents that are typically used to clean-up spill sites are more toxic than the oil itself, in which case it would be better to leave the site alone and allow microbes to do what they do best."
Deepwater Horizon Rig Disaster Threatens Drilling - Should the heaviest portion of the spill come ashore, it may cause damage rivaling the 1989 wreck of the Exxon Valdez in Alaska's Prince William Sound, despoiling the breeding grounds of species in the fragile coastal-buffer zone that provides hurricane protection. Already, the oil is threatening some of the most productive and profitable shrimping and fishing grounds in the world, part of a Gulf industry that provides a quarter of the seafood in the U.S. A sheen of oil was confirmed on the Chandeleur Islands off Louisiana by the Coast Guard. Should efforts to seal the well go awry, they could cause even larger volumes of oil to spill. In some scenarios, the Gulf of Mexico loop current could even carry the oil around Florida and up the East Coast. The unfolding environmental disaster might yet become the worst in U.S. history.
Rig firm’s $270m profit from deadly spill - THE owner of the oil rig that exploded in the Gulf of Mexico, killing 11 people and causing a giant slick, has made a $270m (£182m) profit from insurance payouts for the disaster. The revelation by Transocean, the world’s biggest offshore driller, will add to the political storm over the disaster. The company was hired by BP to drill the well. The “accounting gain” arose because the $560m insurance policy Transocean took out on its Deepwater Horizon rig was greater than the value of the rig itself. Transocean has already received a cash payment of $401m with the rest due in the next few weeks
Officials look to Mississippi River to help in oil-spill fight - Louisiana state officials and the Army Corps of Engineers are considering increasing the flow of water from the Mississippi River to help keep the Gulf of Mexico oil spill from reaching land.Currents from the USA's longest river are believed to have already played a role in pushing the oil away from shore since an exploration rig exploded off the Louisiana coast two weeks ago, says Garret Graves, an adviser to Louisiana Gov. Bobby Jindal.A series of dams, locks and spillways regulate both the flow of water and exactly where the river exits the Mississippi Delta into the Gulf. Graves says that Louisiana has already "flipped on" sites it controls to increase water flow, and scientists are studying which of the larger sites controlled by the Corps of Engineers might also have a positive effect.
Graham Calls for ‘Pause’ in Pursuing Energy Bill - Senator Lindsey Graham, one of the chief sponsors of a nascent plan to address energy and climate change in the Senate, said Friday that the proposal had no chance of passage in the near term and called for a “pause” in consideration of the issue. But his two co-sponsors, Senators John Kerry, Democrat of Massachusetts, and Joseph I. Lieberman, independent of Connecticut, vowed to press forward with a broad energy and global warming plan next week. Mr. Graham, Republican of South Carolina, said that the current political climate had made it impossible to consider such a difficult subject. In a statement Friday, he said that the oil spill in the Gulf of Mexico had heightened concern about expanded offshore drilling, which he considers a central component of any energy legislation. Mr. Graham also said that Democratic insistence on taking up immigration policy before energy had chilled his enthusiasm for any global warming measure.
Since spill, agency has given 27 waivers to oil companies in Gulf - Since the Deepwater Horizon oil drilling rig exploded April 20, the Obama administration has granted oil and gas companies at least 27 exemptions from doing in-depth environmental studies of oil exploration and production in the Gulf of Mexico.The waivers were granted despite President Barack Obama's vow that his administration would launch a "relentless response effort" to stop the leak and prevent more damage to the Gulf. One of them was dated Friday - the day after Interior Secretary Ken Salazar said he was temporarily halting offshore drilling.The exemptions, known as "categorical exclusions," were granted by the Interior Department's Minerals Management Service, or MMS, and included waiving detailed environmental studies for a British Petroleum exploration plan to be conducted at a depth of more than 4,000 feet and an Anadarko Petroleum Corp. exploration plan at more 9,000 feet.
Oil production hit for decades after BP spill -The rising backlash against deepwater drilling – anything over 500 meters, far too deep for divers to work should anything go wrong – is unlikely to damage the industry as much as the noise on Capitol Hill would suggest, because it is too vital to the oil supply. According to analysts Douglas Westwood, deepwater oil production has soared from under two million barrels per day in 2000 to eight mb/d in 2010, almost 10 per cent of global consumption, and must rise further as onshore and shallow offshore production declines. "They can't ban deepwater because the industry has nowhere else to go", says chairman John Westwood. Last year, 500 deepwater wells were drilled, costing up to $100m each, and Douglas Westwood predicts $167bn will be spent on deepwater development to 2014.
Gulf of Mexico oil spill prompts worries about Arctic drilling… With the spotlight shining on the BP oil spill in the Gulf of Mexico, and on the executives sizzling in the hot seat on Capitol Hill, environmental advocates are looking north.They’re worried that Shell Oil will start drilling in the Chukchi Sea off Alaska before the U.S. government reports on BP’s Deepwater Horizon drill rig disaster. And the environmental groups are not comforted by Interior Secretary Ken Salazar’s reassurances that no new drilling will take place until the government report is completed by May 28.“The May 28 report deadline still leaves ample time should the Department of the Interior choose to allow this ill-advised drilling to move forward in extreme Arctic conditions, where spill response faces additional challenges of sea ice, seas of up to 20 feet, darkness and a virtual lack of infrastructure from which to stage a response,”
Tread carefully, Mr Obama. You need big oil (includes video)…America imports about 12 million barrels a day, 57 per cent of US demand for liquid fuels, according to the US Energy Information Administration. There was a time in the mid-1980s when American oil companies were pumping nine million daily barrels but the output is in decline, reaching a nadir of 4.2 million a day in 2005. BP’s big discoveries in Alaska helped to rescue American necks from Opec boots in the 1980s. At one stage, the Prudhoe Bay oilfields on Alaska’s north shore were producing close to two million daily barrels but this has dwindled to 600,000. Meanwhile, the old prospects onshore in Texas and Oklahoma are waning rapidly.
Sex & Drugs & the Spill - Krugman - For years, the Minerals Management Service, the arm of the Interior Department that oversees drilling in the gulf, minimized the environmental risks of drilling. It failed to require a backup shutdown system that is standard in much of the rest of the world, even though its own staff declared such a system necessary. It exempted many offshore drillers from the requirement that they file plans to deal with major oil spills. And it specifically allowed BP to drill Deepwater Horizon without a detailed environmental analysis. Crucially, management of Interior was turned over to ... J. Steven Griles, a coal-industry lobbyist who became deputy secretary and effectively ran the department. Given this history, it’s not surprising that the Minerals Management Service became subservient to the oil industry — although what actually happened is almost too lurid to believe. According to reports by Interior’s inspector general, abuses at the agency went beyond undue influence: there was “a culture of substance abuse and promiscuity” — cocaine, sexual relationships with industry representatives, and more. Protecting the environment was presumably the last thing on these government employees’ minds.
Million gallons of oil a day gush into Gulf of Mexico – An extraordinary account of how the Deepwater Horizon disaster occurred emerged yesterday in leaked interviews with surviving workers from the rig. They said that a methane gas bubble had formed, rocketed to the surface and caused a series of fires and explosions which destroyed the rig and began the gushing of millions of gallons of oil into the Gulf of Mexico, Word also came yesterday that the oil spill may be five times worse than previously thought. Ian MacDonald, a biological oceanographer at Florida State University, said he believed, after studying Nasa data, that about one million gallons a day were leeching into the sea, and that the volume discharged may have already exceeded the 11 million gallons of the 1989 Exxon Valdez disaster, widely regarded as the world's worst marine pollution incident. Mr MacDonald said there was, as of Friday, possibly as much as 6,178 square miles of oil-covered water in the Gulf.Meanwhile, at the site of the ill-fated well, a mile beneath the surface, a massive metal chamber had been positioned over the rupture so it could contain and then capture the bulk of the leaking oil. But last night, the formation of ice crystals meant the dome had to be moved away from the leak.
BP using toxic chemicals to ‘disperse’ spilled oil - The chemicals BP is now relying on to break up the steady flow of leaking oil from deep below the Gulf of Mexico could create a new set of environmental problems. Even if the materials, called dispersants, are effective, BP has already bought up more than a third of the world’s supply. If the leak from 5,000 feet beneath the surface continues for weeks, or months, that stockpile could run out. On Thursday BP began using the chemical compounds to dissolve the crude oil, both on the surface and deep below, deploying an estimated 100,000 gallons. Dispersing the oil is considered one of the best ways to protect birds and keep the slick from making landfall. But the dispersants contain harmful toxins of their own and can concentrate leftover oil toxins in the water, where they can kill fish and migrate great distances
Gulf Spill: Did Pesky Hydrates Trigger the Blowout? - Methane-trapping ice of the kind that has frustrated the first attempt to contain oil gushing offshore of Louisiana may have been a root cause of the blowout that started the spill in the first place, according to University of California, Berkeley, professor Robert Bea, who has extensive access to BP p.l.c. documents on the incident. If methane hydrates are eventually implicated, the U.S. oil and gas industry would have to tread even more lightly as it pushes farther and farther offshore in search of energy. Bea, who has 55 years of experience assessing risks in and around offshore operations, says "there was concern at this location for gas hydrates. We're out to the [water depth] where it ought to be there." The deeper the water, the greater the pressure, which when high enough can keep hydrates stable well below the sea floor. And there were signs that drillers did encounter hydrates. About a month before the blowout, a "kick" of gas pressure hit the well hard enough that the platform was shut down. "Something under high pressure was being encountered," says Bea—apparently both hydrates and gas on different occasions.
Gulf spill reminds America: The era of 'easy oil' is over…— To meet the world's boundless thirst for oil, drillers are searching in the sand and mud of remote western Canada, the tough shale rock of North Dakota and more than a mile under the seas off the southern U.S. coast, where a drilling accident has sent hundreds of thousands of gallons of crude spewing into the Gulf of Mexico. Why are we going nearly to the ends of the earth and the bottom of the seas for oil?The answer, say many experts, is that we're consuming as much oil as we ever have but the era of "easy oil" is in our rearview mirror and receding fast. Production from onshore oilfields in the U.S. has been declining since the 1970s, and near-shore production along the Gulf of Mexico peaked more than a decade ago. While Americans remain tethered to a petro-driven economy and surging demand from China and other emerging markets is driving up global demand, the quest for new sources requires more money and technological wizardry than ever before. As anyone tracking the massive gulf spill can attest, it brings greater risks as well.
FACTBOX-Oil industry spent big on Senate panel members - Thirty-two of the 40 Democrats and Republicans who sit on the Energy and Natural Resources Committee and the Environment and Public Works Committee have collected millions of dollars from BP or other oil and gas interests during election campaigns dating to 1990, public records show. BP interests alone -- including the oil giant's political action committee and associated individuals -- contributed nearly $320,000 to lawmakers who are now scrutinizing the company's actions. That works out to $10,000 per senator. Lawmakers who count oil and gas interests as major donors collected $5.9 million from the industry as a whole in just the past five years, according to reports filed with the Federal Election Commission.
The Very Picture of a Very Public Problem - economistmom - For inside-the-Beltway-obsessed (“DCist”) types, here’s a picture worth at least a thousand words and several billions of dollars that ought to get your attention: the size of the BP oil spill superimposed over the DC metropolitan area.This is clearly not just BP’s problem or that of any other private interest who could be blamed, and we’re all going to have to pay to clean it up as best we can, as we all should. Wow.
BP could pay entire cost of cleanup with 3.8 days of profits…British Petroleum, the company whose drill site is spewing thousands of gallons of oil into the Gulf of Mexico each day, could pay for the entire costs of its cleanup thus far with just 3.8 days of profits, according to a new analysis. The Washington Post reported Tuesday that the company is spending about $17.5 million a day on cleanup and mitigation efforts, which are aimed at stemming the flow of oil from a now-leaking well and containing the existing spill. The sum total of the firm's expense has been about $350 million. This compares with $93 million -- a day -- the company earned in the first quarter of 2009.
System safety engineering and the Deepwater Horizon -The Deepwater Horizon oil rig explosion, fire, and uncontrolled release of oil into the Gulf is a disaster of unprecedented magnitude. This disaster in the Gulf of Mexico appears to be more serious in objective terms than the Challenger space shuttle disaster in 1986 -- in terms both of immediate loss of life and in terms of overall harm created. And sadly, it appears likely that the accident will reveal equally severe failures of management of enormously hazardous processes, defects in the associated safety engineering analysis, and inadequacies of the regulatory environment within which the activity took place. The Challenger disaster fundamentally changed the ways that we thought about safety in the aerospace field. It is likely that this disaster too will force radical new thinking and new procedures concerning how to deal with the inherently dangerous processes associated with deep-ocean drilling.
BP's Relief Wells Bring Risk of an Even Bigger Oil Spill in Gulf of Mexico (Bloomberg) -- BP faces the risk of an even bigger oil spill as it attempts to drill two so-called relief wells to plug a leak on the seabed of the Gulf of Mexico that’s gushing 5,000 barrels a day into the ocean. The relief wells will pump cement into the leak to seal it. To do that, BP will need to first drill into the same deposit of oil and gas that caused a pressure surge known as a blowout at the original well, igniting an explosion that killed 11 workers and sank a $365 million drilling rig. In a regulatory filing BP made to drill the relief wells it estimates another blowout could release as much as 240,000 barrels of oil a day into the ocean. That’s almost 50 percent more than the company’s worst-case estimate for the first well and equivalent to two-thirds of supply pumped daily from Prudhoe Bay, the largest U.S. oil field.
BP considers "junk shot" to clog Macondo well in Gulf - BP chief operating officer Doug Suttles today described a “junk shot”, where BP would essentially pump materials like rubber and other junk into the crippled blowout preventer (BOP) to try to clog it. “It’s like plugging up a toilet,” Suttles said. Suttles said that BP has already manufactured the equipment it would need to inject cement and fluid into the well and it is being shipped to the location. It is understood that BP has two cement skids already on Helix’s Q4000 semi-submersible platform, which is already on site to try to place a containment dome over the oil leak. In a similar option, an industry source told UpstreamOnline that BP may try to fill the broken BOP with cement, using a slurry that will flash set in seconds. After the BOP is plugged, the company could tap into the choke and kill valves on the subsea wellhead to pump heavy fluid and cement down into the wellbore and kill the well. A third option may be to shear the lower marine riser package and stab a new BOP on top of the existing one. “That also is a very, very complicated task and also brings risks with it,” Suttles said.
Estimating the oil spill's impact in the Gulf - In this past week's SouthPoint, the Atlanta Fed's regional economics blog, we discussed some of the economics behind the oil spill in the Gulf of Mexico. We were careful to note that determining the impact of the spill is impossible because there are simply too many variables at work: the amount of time before the leaks are capped, the direction of the wind, wave action, water currents, the amount of oil that reaches the coast, the effectiveness of dispersion efforts, the efficiency of clean-up efforts on shore, the amount of federal spending, etc. Measuring the cost of the spill is simply out of reach at the moment.We can measure the number of jobs at risk, however. Across Florida, Louisiana, Alabama, Mississippi, and Texas—the states likely to be affected most directly—total employment in tourism-related industries and agriculture was about 2.6 million (in 2008), or about 14 percent of total employment in those states. However, if we narrow our scope to metropolitan statistical areas along the Gulf Coast of the most affected states, the numbers are much smaller—just under 132,500—with most being in the accommodation and food services industry.
Gulf oil spill ‘tiny’ compared to ‘very big ocean’: BP boss - BP chief executive Tony Hayward claims that the Gulf of Mexico oil spill is relatively 'tiny' but admits that his job is at risk over the incident blamed on his company.Hayward told Friday's Guardian newspaper that the leaked oil and the estimated 400,000 gallons of dispersant that BP had pumped into the sea to try to tackle the slick should be put in context. "The Gulf of Mexico is a very big ocean. The amount of volume of oil and dispersant we are putting into it is tiny in relation to the total water volume," Hayward said
Is the press undercovering the oil spill? - Part of the explanation here is that BP has been quite deft at managing appearances. For one, they've poured more than 300,000 gallons of chemical dispersants to break up the oil before it can reach the beaches, causing it to sink down to the sea floor. In some cases, these dispersants may be more harmful, ecologically speaking, then letting the oil wash ashore. We don't know what is in these chemicals and there's a very high potential that they could do a lot of damage to the food chain in the Gulf. That's precisely why Exxon was constrained from using dispersants in Prince William Sound back in 1989. But, from BP's perspective (and the Obama administration's), avoiding the sort of graphic imagery that Exxon had to deal with in Alaska has an undeniable appeal.
Oil leak is 5 times greater than reported by officials - The amount of oil gushing from BP's Deepwater Horizon oil disaster is five times more than what the oil company and the U.S. Coast Guard are currently estimating, said a Florida State University oceanography professor on Saturday. At an oil spill environmental forum at the Hilton Pensacola Beach Gulf Front, Ian MacDonald said the blowout is gushing 25,000 barrels a day.The Coast Guard and BP estimate 5,000 barrels a day of crude is spewing into the Gulf. MacDonald said his estimate is based on satellite images and government maps forecasting the slick's trajectory.
Fear over Gulf oil spill: What happens if they can't stop it? | McClatchy (video) With a quick solution ominously uncertain, the oil spill in the Gulf of Mexico is on track to become an unprecedented economic and environmental disaster with millions of gallons of oil destroying an ecosystem as well as a way of life. BP America said Monday that it would take another 75 days to finish one of two relief wells it's drilling to shut down the flow. By then, if the spill doesn't worsen and the relief well stops the leak, some 20 million gallons of oil will be swirling in the gulf, nearly double the Exxon Valdez spill in 1989. Unlike the Alaska spill, which coated a rock-strewn bay, BP's oil will cling to a sponge-like coast, entering the pores of mangrove forests and sea-grass beds and the breeding grounds for crabs, shrimp and oysters.
Disaster unfolds slowly in the Gulf of Mexico - (40 photos total) In the three weeks since the April 20th explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico, and the start of the subsequent massive (and ongoing) oil leak, many attempts have been made to contain and control the scale of the environmental disaster. Oil dispersants are being sprayed, containment booms erected, protective barriers built, controlled burns undertaken, and devices are being lowered to the sea floor to try and cap the leaks, with little success to date. While tracking the volume of the continued flow of oil is difficult, an estimated 5,000 barrels of oil (possibly much more) continues to pour into the gulf every day. While visible damage to shorelines has been minimal to date as the oil has spread slowly, the scene remains, in the words of President Obama, a "potentially unprecedented environmental disaster."
A volcano of oil erupting - Mainstream reports are starting to discuss the fact that the oil slick rising from the oil well blowout in the Gulf of Mexico simply has to be a whole lot larger than first reported. My first report on this stated that the total could easily be 5,000 barrels per day. I said this when the report was that only 1,000 barrels per day was the stated total. I was being cautious because I knew the total was much higher and I knew the public would not believe the real totals. Most people simply could not imagine a well of the size involved. Now I will discuss the real facts that are known and what the educated guesses on the topic indicate. Prepare to get your jaw off of the floor. The facts are stunning.
Obama Echoes George H.W. Bush On Oil Spill Response (VIDEO) - There are striking similarities and differences between the press statement issued by President Obama on Friday in response to the Gulf oil spill and George H.W. Bush's news conference in the wake of the Exxon-Valdez oil spill more than 20 years ago, according to footage from CSPAN's archives. The tone and the message of each are remarkably parallel: full attention being paid to the economic and environmental damages of the spill, demands that the company responsible be held to account, and a sense that all hands are on deck for the clean-up and recovery process.
U.S. Said to Allow Drilling Without Needed Permits - The federal Minerals Management Service gave permission to BP and dozens of other oil companies to drill in the Gulf of Mexico without first getting required permits from another agency that assesses threats to endangered species — and despite strong warnings from that agency about the impact the drilling was likely to have on the gulf. Those approvals, federal records show, include one for the well drilled by the Deepwater Horizon rig, which exploded on April 20, killing 11 workers and resulting in thousands of barrels of oil spilling into the gulf each day. The Minerals Management Service, or M.M.S., also routinely overruled its staff biologists and engineers who raised concerns about the safety and the environmental impact of certain drilling proposals in the gulf and in Alaska, according to a half-dozen current and former agency scientists.
Gas surge shut well a couple of weeks before Gulf oil spill - Powerful puffs of natural gas, called kicks, are a normal occurrence in many deep-ocean drilling operations.But one intense kick of natural gas caused the Deepwater Horizon drilling rig to be shut down because of the fear of an explosion just weeks before a similar release succeeded in destroying and sinking the platform and sent millions of gallons of oil on a collision course with Louisiana and the rest of the northern coast of the Gulf of Mexico. Shortly before the accident, engineers argued about whether to remove heavy drilling mud that acted as a last defense against such catastrophic kicks, and the decision to replace the mud with much lighter seawater won out.
BP rig's safety valve failed test before oil spill explosion - BP officials told an official hearing that the rig's safety device - known as a blowout preventer - had highlighted problems before the accident. The Deepwater Horizon rig operated and owned by contractor Transocean caught fire and sank almost three weeks ago, leaving BP responsible for clearing up the huge spill. At US congressional hearings this week, BP and Transocean, the contractor, blamed one another for "a cascade of failures" that led to the massive oil spill threatening America's south-eastern coastline. BP continues its efforts to seal the leak, which is gushing 5,000 barrels per day into the ocean. It emerged yesterday in the testimony of James Dupree, BP's senior vice president for the Gulf, that tests before the blast showed "discrepancies" in pressure levels. These tests are meant to ensure the integrity of cement poured into the well to keep out natural gas. Another contractor, Halliburton, had just finished cement work hours before the blast.
Gulf oil spill: firms ignored warning signs before blast, inquiry hears - BP was aware of equipment problems aboard the Deepwater Horizon rig hours before the explosion pumped millions of gallons of oil into the Gulf of Mexico, a congressional hearing was told yesterday .In a second day of hearings, the House of Representatives's energy and commerce committee said documents and company briefings suggested that BP, which owned the well; Transocean, which owned the rig; and Halliburton, which made the cement casing for the well, ignored tests in the hours before the 20 April explosion that indicated faulty safety equipment. "Yet it appears the companies did not suspend operations, and now 11 workers are dead and the gulf faces an environmental catastrophe," Henry Waxman, the chair of the energy and commerce committee, said, demanding to know why work was not stopped.
Oil spill science: The smoking gun » Science journalist Mark Schrope is aboard the research vessel Pelican, which is spending the week studying the Deepwater Horizon oil spill in the Gulf of Mexico. Check back to The Great Beyond for daily mission updates. "You've got to see this," says Vernon Asper, an oceanographer with the National Institute for Undersea Science and Technology team, rushing into the main lab on board the Pelican. Soon after, to those gathering in the small room where readings from the sampling rosette come through on monitors, he points to the source of his excitement. In a manner of speaking, the team had struck oil, or at least that was the best guess. Both the transmissometer, which measures particle levels, and the fluorometer, which detects dissolved oil (see previous posts), were showing very large concentrations of something at about 1,000 metres down, something we had not seen anywhere else. "That, my friend, is the smoking gun," says Asper, "We've got to home in on this. You never see signals like that in the open ocean."
Gulf of Mexico oil spill spawns tide of lawsuits - The companies also face lawsuits brought by fishermen, restaurants, charter boat companies, hotels and rental property owners. Gulf Coast states could also sue, as could municipalities, for lost tax revenues, and shipping companies if traffic into major ports or the Mississippi River is disrupted."You're talking about the entire economic structure of five states and all their ancillary businesses," said Tim Howard, a Tallahassee lawyer who last week filed one of Florida's first class-action suits over the oil spill."You're talking maybe about close to a half a trillion dollar economy here," Howard added. "This is why you do not mess around and play around with something toxic."
Revelations of Multiple Deepwater Horizon Failures; Criminal Charges Coming? - We had this gradual discovery during Hurricane Katrina, where a natural disaster eventually became seen as what it was, a man-made failure. And now, what was called an “act of God” and a freak accident by the defenders of the pollution industry is now being labeled, proof positive, as the consequence of design failure. Not only did the blowout preventer under the Deepwater Horizon well have a leak in it, not only did it include a dead battery, not only were the tests on it falsified for years, but when engineers actually needed to use it and tried to activate it, they didn’t have the right schematics
Seven hours of data missing from Deepwater Horizon operations just prior to explosion - A "black box" can reveal why an airplane crashed or how fast a car was going in the instant before an accident. Yet there are no records of a critical safety test supposedly performed during the fateful hours before the Deepwater Horizon oil rig exploded in the Gulf of Mexico.They went down with the rig.While some data were being transmitted to shore for safekeeping right up until the April 20 blast, officials from Transocean, the rig owner, told Congress that the last seven hours of its data are missing and that all written logs were lost in the explosion.The gap poses a mystery for investigators: What decisions were made -- and what warnings might have been ignored? Earlier tests, which suggested that explosive gas was leaking from the mile-deep well, were preserved.
Criminal charges likely from Gulf oil spill, legal experts say - Federal investigators are likely to file criminal charges against at least one of the companies involved in the Gulf of Mexico spill, raising the prospects of significantly higher penalties than a current $75 million cap on civil liability, legal experts say. The inquiry by the Homeland Security and Interior Departments into how the spill occurred is still in its early stages and authorities have not confirmed whether a criminal investigation has been launched.But environmental law experts say it's just a matter of time until the Justice Department steps in - if it hasn't already - to initiate a criminal inquiry and take punitive action. "There is no question there'll be an enforcement action," said David M. Uhlmann, who headed the Justice Department's environmental crimes section for seven years during the Clinton and Bush administrations. "And, it's very likely that there will be at least some criminal charges brought."
Obama Sends Bomb Inventor, Mars Expert to Fix BP Oil Spill (Bloomberg) -- U.S. Energy Secretary Steven Chu signaled his lack of confidence in the industry experts trying to control BP Plc’s leaking oil well by hand-picking a team of scientists with reputations for creative problem solving. Dispatched to Houston by President Barack Obama to deal with the crisis, Chu said Wednesday that five “extraordinarily intelligent” scientists from around the country will help BP and industry experts think of back-up plans to cut off oil from the well, leaking 5,000 feet (1,500 meters) below sea-level. Members of the Chu team are credited with accomplishments including designing the first hydrogen bomb, inventing techniques for mining on Mars and finding a way to precisely position biomedical needles
Marine scientists study ocean-floor film of Deepwater oil leak - One analysis suggests gusher is 70,000 barrels daily, or an Exxon Valdez every four days, and 12 times more powerful than estimates by Coast Guard or BP. Marine scientists were carefully viewing footage of oil and gas billowing out of a ruptured well on the ocean floor today, to try to deliver the first reliable estimates of the crude gushing into the Gulf of Mexico – it could be as much as 70,000 barrels a day.The video could help resolve the increasingly contentious debate about the scale of the disaster, and the oil companies' willingness to give access to any information.BP has claimed repeatedly there is no way of measuring the scale of the leak. The US Coast Guard, meanwhile, has stuck to an early estimate of 5,000 barrels a day.
Gulf Spill Could Be Much Worse Than Believed : NPR (video) The amount of oil spilling into the Gulf of Mexico is far greater than official estimates suggest, according to an exclusive NPR analysis. At NPR's request, experts analyzed video that BP released Wednesday. Their findings suggest the BP spill is already far larger than the 1989 Exxon Valdez accident in Alaska, which spilled at least 250,000 barrels of oil. BP has said repeatedly that there is no reliable way to measure the oil spill in the Gulf of Mexico by looking at the oil gushing out of the pipe. But scientists say there are actually many proven techniques for doing just that. Steven Wereley, an associate professor of mechanical engineering at Purdue University, analyzed videotape of the seafloor gusher using a technique called particle image velocimetry.
Gulf Oil Spill Far Greater Than Thought, Some Experts Say (NPR video) NPR's Richard Harris has learned that much more oil and natural gas, 70,000 barrels a day or more than ten times the official estimate, is gushing into the Gulf of Mexico from the Deepwater Horizon pipe, based on scientific analysis of the video released Wednesday. That's the equivalent of one Exxon Valdez tanker full every four days.The U.S. Coast Guard has estimated that oil was gushing into the ocean at the rate of 5,000 barrels a day. But, again, NPR has been told that estimate is very low
Is 70,000 barrels a day a possibility for oil spill - NPR is now reporting that the oil spill could be 70,000 barrels of oil a day, which is considerably greater than the estimate of 5,000 barrels per day currently being reported. What is the view of Oil Drum readers regarding the likelihood of the higher estimate being accurate? According to the story: The analysis was conducted by Steve Werely, an associate professor at Purdue University, using a technique called particle image velocimetry. Harris tells Michele Norris that the method is accurate to a degree of plus or minus 20 percent. That means the flow could range between 56,000 barrels a day and 84,000 barrels a day.Another analysis by Eugene Chiang, a professor of astrophysics at the University of California, Berkeley, calculated the rate of flow to be between 20,000 barrels a day and 100,000 barrels a day.
Size of Oil Spill Underestimated, Scientists Say - NY Times: Two weeks ago, the government put out a round estimate of the size of the oil leak in the Gulf of Mexico: 5,000 barrels a day. Repeated endlessly in news reports, it has become conventional wisdom. But scientists and environmental groups are raising sharp questions about that estimate, declaring that the leak must be far larger. They also criticize BP for refusing to use well-known scientific techniques that would give a more precise figure. The figure of 5,000 barrels a day was hastily produced by government scientists in Seattle. It appears to have been calculated using a method that is specifically not recommended for major oil spills. The criticism escalated on Thursday, a day after the release of a video that showed a huge black plume of oil gushing from the broken well at a seemingly high rate. ...
Lies, damn lies, and oil spill statistics - Justin Gillis has a great story about how no one with the ability to do anything about it seems remotely interested in measuring the severity of the oil spill in the Gulf of Mexico. The ubiquitous 5,000-barrels-a-day number seems to be a massive underestimate, and the stated reason for not getting a better figure is weak indeed: A spokesman, David H. Nicholas, said in an e-mail message that “the estimated rate of flow would not affect either the direction or scale of our response, which is the largest in history.” …“I think the estimate at the time was, and remains, a reasonable estimate,” Why is the NOAA backing BP up on this? Knowing the size of the problem may or may not help in terms of being able to fix this particular problem. But it’s certainly going to be important going forwards. What’s more, the current estimate could hardly have been friendlier towards BP if it had tried:
BP Spill May Exceed Estimates, U.S. Congressman Says (Bloomberg) -- U.S. Representative Edward Markey said he is concerned BP Plc’s well in the Gulf of Mexico may be leaking as much as 70,000 barrels of oil a day, compared with previous estimates of 5,000 barrels. Underestimating the spill may hinder efforts to control it, the Massachusetts Democrat said in a statement yesterday. Markey said he plans to investigate how much oil is gushing into the Gulf and send a letter to the company asking about their methods of determining the size. “If you don’t understand the scope of the problem, the capacity to find the answer is severely compromised,” said Markey, chairman of a House Energy and Environment subcommittee. Estimates have risen to as much as 70,000 barrels a day, he said, citing “independent analyses reported in the media.”
Check the math - In just a few weeks, we’ve gone from “Drill, Baby! Drill!” to “Spill, Baby! Spill!” to “Burn, Baby! Burn!” and finally to “Scrub, Baby! Scrub!” Oil spills like the one in the Gulf are not unprecedented, so it should come as no surprise when environmental disasters like this happen at an offshore rig. What’s surprising is that in over twenty years since the Exxon accident, we’re still no better equipped to clean up major oil spills. Let’s consider some of the options by the numbers. [a bunch of math]... So there you have it. For the cost of 1.4 trillion seagulls and enormous environmental damage, you get about 1/600th the energy that you would by installing an environmentally friendly wind farm. Book of Odds - Numbers Blog: Oil on the Lamb—er—Fish
‘Junk Shot’ Is Next Step for Leaking Gulf of Mexico Well - Can golf balls save the gulf? That question hangs in the air here at a BP crisis center as hundreds of engineers and scientists work to cap the undersea well that for more than three weeks has spewed oil into the Gulf of Mexico. Officials with BP and other companies involved in the effort, who discussed the plans in detail at some of the operations rooms, said the best of several options included a “junk shot,” which could be tried within the week. The method involves pumping odds and ends like plastic cubes, knotted rope, even golf balls — Titleists or whatever, BP isn’t saying — into the blowout preventer, the safety device atop the well.
Where's the oil? Much of it may be gone- For a leak that’s spilled millions of gallons, the oil from the Deepwater Horizon disaster is pretty hard to pin down. Satellite images show most of an estimated 4.6 million gallons of oil has pooled in a floating, shape-shifting blob off the Louisiana coast. Some has reached shore as a thin sheen, and gooey bits have washed up as far away as Alabama. But the spill is 23 days old since the Transocean Ltd.-owned, BP-operated rig exploded April 20 and killed 11 workers, and the thickest stuff hasn't shown up on the coast. So, where's the oil? Where's it going to end up?
Scientists find oil plume below Gulf's surface -Since the Gulf of Mexico oil spill began three weeks ago, most eyes and cameras have been focused on the widening, orange slick. But now, as experts argue that the flow rate could far exceed the government's estimate of 210,000 gallons a day, a team of independent scientists studying the water in and around the disaster zone have found another problem: stores of leaked oil lingering beneath the surface in long, stringy filaments and snowflake-like collections. "It doesn't float right up on top as you would think," Raymond Highsmith of the National Institute for Undersea Science and Technology tells AOL News. "Some of it floats right under the surface, and some of it now looks like it's quite a ways down." Highsmith and his team, formed by a joint venture between the University of Mississippi and the University of Southern Mississippi, had been planning a seafloor mapping expedition when news of the spill began to get worse and worse. Their focused turned immediately to what might be happening to the oil as it rushed out. Given the depth of the source, they figured the leaked hydrocarbons wouldn't take a direct path to the surface.
Oil spill could hasten loss of Louisiana's marshes(Reuters) - As blobs of tar wash up on Louisiana's outer shoreline three weeks into a huge oil spill, the focus is on protecting the fragile, disappearing marshes at the heart of much of the state's economy and culture."The vegetation in the coastal area is like the glue that holds the sand and the mud together," said Garret Graves, who chairs the state's Coastal Protection and Restoration Authority. "So you lose that vegetation, and you have mud."The steady erosion of Louisiana's fragmented shoreline and marshlands over the years, hastened by a recent string of powerful hurricanes, will be accelerated further if the oil spill in the Gulf of Mexico spreads into the state's vulnerable estuaries, experts say.Oil can be removed relatively easily from the surface of sand but it is toxic to plant life.
Tiniest victims of the Gulf of Mexico oil spill may turn out to be most important -To the watching world the environmental threat that BP's oil disaster poses to the nature-rich Louisiana coast is captured in images of beautiful birds or furry creatures crippled by thick black goo. But scientists who know these estuaries best are more concerned about a less photogenic community. The grass, microscopic algae and critters living in the wafer-thin top layer of marsh mud - called the benthic community - are the fuel that drives the whole system. If it's covered with oil, everything above, including birds, fish and cute, furry critters, will be in trouble. And so will the humans who rely on the marsh for storm protection and seafood production. "The top two millimeters of that marsh muck is where the action is in a coastal estuary," said Kevin Carman, dean of the College of Basic Sciences at LSU. "That's the base, the food that fuels the whole system. If you lose that in a large enough area it could have a disproportionate impact on the food web, and everything that depends on it: fish, shrimp, oysters, all the species that rely on the estuary."
Oil spill on ice not worth the risk The oil platform was drilling an exploratory well for British Petroleum in the Gulf of Mexico when there was a blowout, resulting in the loss of 11 workers’ lives and uncontrolled releases of fuel and crude oil. The tragic results occurred despite some of the best technology and spill response capabilities in the world, including 32 spill-response vessels and skimming capacity of more than 171,000 barrels per day, among many other advances and planning systems. In a few short months, Royal Dutch Shell is set to begin exploratory drilling in the Arctic—another rich and fragile region. The Arctic acts as Earth’s air conditioner, but it is warming twice as fast as the rest of the planet due to climate change. Little or no capacity exists to handle accidents and oil spills in ice-filled seas. In fact, the U.S. Coast Guard acknowledges that there is no proven technology available today to contain and clean up an oil spill where sea ice is present.
Senators want offshore drilling on West Coast banned forever - Six West Coast senatorsinstroduced legislation Thursday that would ban permanently new oil-and-gas drilling off of the California, Oregon and Washington state coasts. Citing the catastrophic blowout now fouling the Gulf of Mexico, the six Democratic lawmakers called for making permanent what has been a long-standing moratorium on new Outer Continental Shelf energy exploration and development along the West Coast. "We simply cannot afford the risk posed by oil drilling off our magnificent coast," Sen. Barbara Boxer, D-Calif., said. Boxer's Washington state colleague, Sen. Maria Cantwell, added that "it is simply unacceptable to risk irreparable harm to our coastal communities, economies and ecosystems just to feed our oil addiction with a short-term fix."
Imported Oil Falls to 69.6% of U.S. Demand for Oil... Average daily U.S. consumption of oil in 2009: 17,479 thousands of barrels Average daily U.S. production of crude oil in 2009: 5,309 thousands of barrels Oil imports as a share of U.S. consumption in 2009: 69.62% U.S. "dependence on foreign oil" fell to a five-year low of 69.62% of U.S. demand for crude oil in 2009, down from the peak of 72.65% in 2007, and the lowest level since 2004 (see chart above, data from EIA for U.S. consumption of crude oil and U.S. production of crude oil).
It ain’t about Greece - A $10-per-barrel drop in oil prices seems a curious response to the ongoing disaster at BP’s Deepwater Horizon wellhead, and to its potentially devastating repercussions on future world oil supply. But when the Dow loses 1,000 points in the same week, there’s obviously something else going on.If the world’s economic outlook is the same as Greece’s, both stock and oil markets have every right to be concerned about valuations. Brutal fiscal austerity and the general strikes and growing social unrest it triggers are not normally the ingredients for a sunny outlook for world oil demand, nor, for that matter, world anything demand. Given where Greece’s economy is likely to be heading, its citizens will consume less oil, not more, in the future.
Peak Oil: The End - Matthew Simmons sees peak oil as the end of energy supplies as we know them. The following is a transcript of the conversation I had with Matthew Simmons on the April 27 episode of Turning Hard Times into Good Times and with Paul Michael Wihbey on the May 4 episode of my radio show. Simmons presented his continuing thesis that the lights on western civilization are about to go out. Contrasting that notion is Paul Michael Wihbey, who provides a much more optimistic view of prospects for keeping the lights on, not from foreign imported oil, but from abundant sources right here in North America.
China continues oil sands shopping spree - Penn West Energy Trust is partnering with Chinese Investment Corp. to develop the Calgary company’s bitumen assets in the Peace River region. The deal is worth $1.25 billion and marks the latest foray by a state-owned Chinese company into the oil riches of Alberta. CIC is investing $817 million to buy a 45% interest in the joint venture.It will also buy Penn West units worth about $435 million. As the investment arm of the Chinese government, CIC views the deal as an investment, not as a move to get involved in the operations of the partnership, said Hilary Foulkes, senior vice-president of business development for Penn West.
India Feeds Its Hunger For Coal India is hungry for coal and domestically there is neither the quantity nor the quality to feed the country’s needs. The situation is exacerbated because coal consumption has soared in the construction (steel, cement) and power generation sectors. Given ongoing high demand, the problem is expected to become even more pressing. Following China’s example, India is seeking new and distant coal locations in the US, Colombia and Russia to add to supplies from Indonesia, Australia and South Africa, the usual sources of the recent past. It is expected that American and Colombian coal will be shipped to India before the end of the year. China, paving the way, has imported several million tons of coal from Colombia this year. The Chinese generally blaze the coal import trail for India to follow. This is a routine that is already happening in South Africa. India imported 1.4 million metric tons (Mt) from South Africa in February, double the January figure of over 720,000 Mt.
China's coal bubble...and how it will deflate U.S. efforts to develop "clean coal" The conventional wisdom in energy-and-environment circles is that China's economy, which is growing at a rate of eight percent or more per year, is mostly coal powered today and will continue to be so for decades to come. Coal is cheap and abundant, and China uses far more of it than any other nation. The country is trying to develop other energy sources fast—including nuclear, solar, and wind—but these won't be sufficient to reduce its reliance on coal. That's one of the reasons it is important for the U.S. to develop "clean coal" technology, which China can then begin to adopt so as to reduce the horrific climate impacts of its coal-heavy energy mix. Most of this conventional wisdom is correct, but some of it is plain wrong—so wrong, in fact, that environment-, economic-, and energy-policy wonks are constructing scenarios for the future of U.S. and world energy, and for the global economy, that bear little or no resemblance to the reality that is unfolding.
US trade agreements threaten emerging markets’ stability - At the recent annual meeting of the Asian Development Bank Taiwan’s Central Bank governor Perng Fai-nan urged emerging market nations in Asia to use capital controls to promote financial stability. Yesterday, this call was echoed by Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific. She singled out China, India, Singapore, Indonesia and South Korea as the most vulnerable nations in need of controlsPart of the stigma attached to capital controls has been dampened by the new tune at the International Monetary Fund (IMF). In a February 2010 staff position note and in the IMF’s Global Financial Stability Report (GSFR) the IMF said that capital controls are a legitimate part of the toolkit for emerging markets.
Trade Deficit increases in March - The Census Bureau reports: [T]otal March exports of $147.9 billion and imports of $188.3 billion resulted in a goods and services deficit of $40.4 billion, up from $39.4 billion in February, revised. March exports were $4.6 billion more than February exports of $143.3 billion. March imports were $5.6 billion more than February imports of $182.7 billion.The first graph shows the monthly U.S. exports and imports in dollars through March 2010.On a year-over-year basis, exports are up 20% and imports are up 24%. This is an easy comparison because of the collapse in trade at the end of 2008 and into early 2009. The second graph shows the U.S. trade deficit, with and without petroleum, through March. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.
U.K. Trade Deficit Widened in March on Import Jump - The U.K. trade deficit widened in March as imports jumped the most in six months, led by demand for goods from cars to engineering equipment. The Bank of England is counting on a weak pound to boost exports and support economic growth it helped manufacturing jump the most since 2002 last month. The sovereign debt crisis in Europe has darkened the outlook for U.K. exporters at a time when domestic demand may come under pressure from measures to tackle the public finances.The U.K.’s trade deficit with the European Union widened to 3.4 billion pounds in March, a three-month high, from 2.9 billion pounds in February. Bank of England Governor Mervyn King yesterday cautioned that the U.K. economy remains vulnerable to the fiscal crisis in the euro area, its biggest trading partner.
Sign of the Times: Emerging Asia Surpasses EU as U.S. Export Destination - Yet John Lonski, chief economist at Moody’s Investor Service, points out an interesting nugget within the March trade figures, released on Wednesday by the Commerce Department, in a note to clients today. March was “a watershed month,” he says, as “For the first time in recorded history, the moving 12-month sum of $227.6 billion of U.S. merchandise exports to Asia’s emerging market countries surpassed the… $223.7 billion of such exports to the European Union.”In the year through March, he notes, U.S. merchandise exports to emerging Asia — which includes China, India, Hong Kong, Taiwan, Korea plus a handful of smaller nations — rose by 3.7% while shipments to the EU dropped by 13.9%. In other words, U.S. exports to Europe have already been dwindling while Asia has become an increasingly important destination for U.S. goods. That should help U.S. companies avoid too much of a hit from euro zone woes.
China’s April Trade Surplus Shrinks 87% on Imports –(Bloomberg) -- China’s trade surplus shrank 87 percent in April from a year earlier as imports grew faster than exports because of stimulus-driven domestic demand. A 79 percent decline in the trade surplus in the first four months of 2010 from a year earlier may ease pressure for gains in the yuan and support Premier Wen Jiabao’s argument that the currency isn’t undervalued. The sovereign-debt crisis in Europe that today prompted a loan package of almost $1 trillion to help nations under attack from speculators may also encourage Chinese officials to delay ending the yuan’s peg to the dollar.
Baltic Dry Index: A Wild Ride Higher - Given that it tracks the cost of shipping goods around the world, the Baltic Dry Index is often looked to as a leading indicator of the global economy. However, if the global economy was anywhere near as volatile as this index, we'd all be a lot more stressed. While the index is considerably higher today than it was a year ago, it has been on a wild ride. Following the 49% decline back in the Summer of 2009, the Baltic Dry Index rallied 113.5% before once again falling 44.5% from November through February. Since then, the index has rallied 51% and is up 8% in the last week alone.
gulfnews : Nigeria, China sign 23 billion dollar refinery deal…Abuja: Nigeria and a Chinese state firm have signed a 23 billion dollar deal to build three refineries and a petrochemical complex in Nigeria, a world's major oil exporter, an official statement said Friday.Nigerian National Petroleum Corporation (NNPC) and China State Construction Engineering Corporation Limited (CSCEC) signed the deal Thursday to jointly seek 23 billion dollars in financing and credits from the China Export & Credit Insurance Corporation and a consortium of Chinese banks for the projects
China May Expand Yuan Settlement to 18 More Provinces (Bloomberg) -- China plans to expand settlements of international trade using yuan to as many as 18 more provinces and cities to meet rising demand from companies, two bankers involved in the program said.Cross-border transactions using the currency have been allowed in Shanghai and Guangdong since July last year, to reduce reliance on the U.S. dollar. Authorities may permit them in areas including Guangxi in the south and Heilongjiang in the north, said the executives at Chinese state-controlled banks, who asked not to be identified before a government announcement. A statement may come as soon as this month, said the bankers, who were briefed by regulators this week.“More and more Chinese companies want to use the yuan in international trade because of higher volatility in foreign currencies,”
Reject the Consensus: ‘V’ Means Vulnerable – Andy Xie - East Asian export-oriented countries reported even stronger data than those in the West. As a group, they probably grew twice as fast as the United States. And their second-quarter reports are likely to reflect similar strength. Meanwhile, the International Monetary Fund has upgraded its global, 2010 GDP growth forecast to 4 percent. All these positive statistics raise an important question: Are we in the midst of a V-shaped recovery following the economic collapse that began in the second half 2008? The answer is no. I think the current recovery is merely based on government stimulus and low-base effect. And given the amount of stimulus spending, this is not a strong recovery. More importantly, structural problems exposed by the financial crisis were merely covered up, not resolved, by stimulus spending. This is why the recovery is not sustainable.
Migration Information Source - Chinese Immigrants in the United States - The United States is home to about 1.6 million Chinese immigrants (including those born in Hong Kong), making them the fourth-largest immigrant group in the United States after Mexican, Filipino, and Indian immigrants. Although Chinese immigration to the United States dates back to the 19th century, the Chinese immigrant population grew rapidly during the 1990s and 2000s. Today there are almost as many native-born US citizens who claim Chinese ancestry as there are Chinese immigrants. Chinese immigrants are heavily concentrated in California and New York (for more information on immigrants by state, please see the ACS/Census Data tool on the MPI Data Hub). Compared to other immigrant groups, the Chinese foreign born are better educated and less likely to live in poverty than the immigrant population overall, but Chinese immigrant men are less likely to participate in the labor force than other immigrant men. )see map & analysis)
Inflationary Pressures Rise in China - China released data on Tuesday showing explosive growth in some parts of its economy, renewing concerns that Beijing may have to do more to prevent it from overheating. The National Bureau of Statistics said that retail sales and bank lending soared in April, inflationary pressure ticked up, and home prices jumped a record 12.8 percent from a year earlier, despite a rash of measures aimed at cooling the sizzling property market. Analysts say the new data are likely to increase pressure on Beijing to raise interest rates and allow its currency, the renminbi, to appreciate against the U.S. dollar — a move that would make imports of commodities cheaper but exports more expensive
Surging prices stoke inflation fears – Xinhua -- China's consumer price index (CPI), a main gauge of inflation, hit an 18-month high in April, a rise of 2.8 percent over a year earlier, adding to fears of the econo-my overheating and fueling speculation of a possible hike in interest rates. According to a statement released by the National Bureau of Statistics (NBS) Tuesday, April consumer prices are 0.4 percentage points higher than March's 2.4 percent rise, with food prices, which account for about a third of the CPI's weighting, leading the rise with a 5.9 percent jump from a year earlier. The figure represents the sixth consecutive month of positive growth for the indicator, following nine months of negative growth, and challenges the Chinese government's goal of keeping the CPI's rise below 3 percent for the whole year.
The Illusion of a Chinese Bubble - Recently on Project Syndicate we got to hear an opinion regarding speculations on the Chinese economy from a source not often seen in Western media – one from inside the Chinese economic apparatus. Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China. His comments on the “illusion” of an imminent trade bubble, given proper monetary policy and containment measures, are as follows:
Raise interest rates first, not exchange rate - Andy Xie - China needs to exit the stimulus policy as soon as possible. Otherwise, inflation may reach double digits in the near future. The right way would be to raise interest rates first and move the exchange rate, if needed, second. A small increase in the value of the RMB won't solve two pressing problems: inflationary pressure at home and political pressure from the US. A small appreciation will further attract hot money, adding to inflationary pressure. Consumption is too small a share of imports for CPI to be affected by a small currency appreciation. In a normal economy currency appreciation cools inflation by decreasing import prices. However, China's imports are mainly raw materials, equipment, and components, so a small currency appreciation would do virtually nothing. The odds are that a small appreciation would only make the property bubble bigger and inflation worse.
China May Start Easing Monetary Policy, BNP Says (Bloomberg) -- China’s policy makers may start easing monetary policy in the coming months as bond yields signal that the economy is heading for a “hard landing,” BNP Paribas said.The curve tracking the difference between the yields on 2- and 5-year bonds has “collapsed” in the past 10 days and an inversion may signal a recession in China, BNP strategists Clive McDonnell and Ryan Tsai said in a report today. That outcome would be “unthinkable” for China, they said.“While the yield curve is telling us that the economy is heading for a hard landing, we believe there is no appetite among policy makers for such an outcome,”
Beijing property prices collapse - The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter.In the last weeks of April, the transaction volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.
Beijing’s stop-and-go measures – Pettis - As I have said many times before, I suspect we will see a lot of discontinuity in policymaking this year – amid lots of panicking – and recent events show just how. In the past few months Beijing seems to have become so worried about signs of overheating that, after trying unsuccessfully many times to pare growth carefully, it has given up the scalpel and has brought out the sledgehammer.
Revisiting China’s ‘Empty City’ of Ordos - Famously dubbed China’s “empty city” in a November 2009 report by Al-Jazeera English, the town of Ordos in Inner Mongolia has become the favored example of those convinced that China is in the midst of a runaway property bubble unmoored from reality. But rather than the poster child for a national property bubble, Lu sees Ordos’ economic circumstances as mostly unique, and largely caused by the huge wealth it has reaped from its wealth of coal. In fact, he argues, the city is an interesting example of how a resource-rich area has fairly successfully handled the enormous windfall it has seen in recent years, and avoided the “natural resource curse.” Once poor, Ordos has been blessed by the commodity boom: It has one-sixth of all of China’s coal reserves, and one-third of is natural gas reserves. Its gross domestic product has grown a “staggering” 25% a year over the last eight years, Lu reports, more than twice as fast as the national average. The city may well be the richest in China: Its per-capita GDP of $21,600 is more than twice than of Beijing, and is likely under-reported.
Divorce, a way round China’s second-home restrictions – In mid-April, the State Council, or the Cabinet, ordered banks nationwide to raise the down payment for a family to buy a second home to a minimum 50 percent of the value from 40 percent, with a mortgage rate no less than 1.1 times the benchmark interest rate. "After we get divorced, my wife will claim our house, so that I can apply for a mortgage as a first-home buyer since I don't have a house under my name. And we will remarry after that," Li said, adding that he got the idea from a real estate agency. The new regulation allows first-home buyers to pay a minimum 30 percent of the property price if the apartment is 90 square meters or larger.
Foreign Investment in China Jumps for a Ninth Month on Recovery…(Bloomberg) -- Foreign direct investment in China, the world’s fastest-growing major economy, climbed for a ninth month in April as the government relaxed rules to lure investors amid a sustained economic expansion. Investment rose almost 25 percent from a year earlier, the official Xinhua News Agency reported today, citing a China News Service report posted on its website. That compares with the 21 percent median forecast of six economists surveyed by Bloomberg News. For the first four months, spending climbed 11.3 percent, the report said. The report did not provide the actual amount. China’s growth quickened to 11.9 percent in the first quarter, the fastest pace in almost three years, driven by stimulus spending and a credit boom unleashed last year. Land price discounts and investor expectations that the Chinese currency will appreciate may attract more foreign investors.
China Threatens to Break into U.S. Auto Industry This Year - Chinese automakers are finally making their move on the U.S. auto scene. Geely Automotive in March finalized a deal to buy Swedish automaker Volvo from Ford. And BYD, the fastest growing Chinese automaker, has opened an office in Los Angeles and hopes to deliver its first vehicles to California consumers by the end of 2010. BYD is perhaps the most ambitious of the Chinese automakers, with proclamations from its leadership that it aspires to become the world's biggest automaker by 2025. BYD, which started out as a battery company, sold 449,000 vehicles last year in China, and began exports to South America, Africa and the Middle East. This December, the company plans to begin selling electric crossover vehicles through a small dealer group in California to establish its beachhead in the U.S.
Op-Ed - Red China, Green China - NYTimes - WITH the disastrous oil spill in the Gulf, talk has once again turned to clean energy. What few people appreciate is that the demand for everything from solar panels to energy-efficient light bulbs is already booming. Worldwide, $162 billion was spent in new clean-tech investments in 2009 alone. The United States, with its expertise, capital and entrepreneurial spirit, is well positioned to dominate what could easily be the biggest market of the 21st century. But as the most recent delay over the Senate energy bill shows, the country is missing a key ingredient in shaping an effective clean-tech policy: the political will to encourage the innovation, manufacturing and investment necessary to bring these new technologies to market. And the longer America drags its feet, the more it cedes this enormous potential source of national wealth to the only other country able to capture it — China.
China Farmers' Subsidies for Rat-Proof Refrigerators Feed Appliance Boom - Farmers are benefitting from more than 15 billion yuan ($2.23 billion) in subsidies this year for appliance purchases by rural residents as the government tries to boost domestic consumption and ease a reliance on infrastructure spending and exports. That more than doubled first-quarter profit at Qingdao Haier Co., part of China’s biggest appliance maker.Farmers using subsidies bought 41.7 billion yuan in household appliances during the first four months of this year, a 510 percent increase from a year ago, the government said. Manufacturers shipped about 163 billion yuan worth of products under the program last year.
Arab world needs $144bn to meet food needs Arab countries need to invest $144 billion in agriculture between now and 2030 to meet the demand for food for their growing populations, said an Arab official. Arab states need to secure half of this amount from private investors to meet the demand of the combined population that is expected to reach 550 million in 2030, said Tareq Al Zadjali, director general of the Arab Organisation for Agriculture Development in an interview in Jeddah this week. Al-Zadjali said the gap in the Arab world will reach $71 billion in 2030 and without encouraging business to increase investment it can’t be narrowed.
Japan's Child Population Drops To Record Low The number of children under the age of 15 in Japan is estimated to have dropped 190,000 from a year earlier to 16.94 million as of April 1, marking a record low for the 29th straight year, according to a government report released Tuesday. The report by the Ministry of Internal Affairs and Communications, released a day ahead of the Children’s Day national holiday in Japan, showed that children comprised 13.3% of the population, declining for the 36th consecutive year and remaining at the lowest level worldwide. By gender, the number of boys aged 14 or younger stood at 8.68 million while girls totaled 8.26 million. By age group, the number of children aged 12-14 was the largest with 3.56 million
Japan's gov't debt hits record high Y883 tril - The outstanding balance of Japan’s central government debt hit a record high of 882.92 trillion yen at the end of fiscal 2009 through March 31 as the government issued more bonds amid the economic downturn, the Finance Ministry said Monday. Per capita debt came to about 6.93 million yen based on Japan’s estimated population of about 127.39 million as of April 1.The year-on-year increase of 36.43 trillion yen was due mainly to the issuance of more government bonds to cover a decline in tax revenues amid the economic deterioration. The central government’s debt is likely to reach about 973 trillion yen at the end of fiscal 2010 due to an increase in national budget expenditure coupled with a further fall in tax revenues
Japan May Increase Reliance on Foreign Bond Buyers, Kaizuka Says - Japan may need to increase reliance on foreign buyers of government bonds in the long term, a Finance Ministry official said today. Masaaki Kaizuka, director of debt management at the ministry, told a conference in Tokyo that flexibility and transparency are important for bond sales. More than 90 percent of Japan's sovereign debt is held by domestic investors.
Sovereign ratings on UK, US, Japan under fire from credit investors - After Greece, Portugal and Spain suffered rating downgrades in April due to escalating fiscal problems, investors ask if the same standards are being applied to advanced economies. While there is a broad agreement among investors that credit rating agencies were justified in downgrading peripheral European sovereigns last month, investors are questioning why advanced economies such as the UK, the US and Japan – which face mounting fiscal problems of their own – have managed to retain their triple-A ratings. According to the International Monetary Fund, US debt-to-GDP is predicted to hit 109.7% in 2015, up from 83.2% at the end of last year. Over the same period, the UK’s debt ratio is expected to increase from 68.2% to 90.6%; while Japan’s debt burden is forecast to reach 248.8% in 2015, up from 217.6% at the end of 2009.
5 Myths about the European debt crisis - Just when the American economy appeared to be on the mend, a new crisis is stressing global financial markets. Greece's difficulty in financing its bloated budget deficit -- and the prospect that its debt troubles will spread throughout Europe and beyond -- is dominating the news. The euro has shed 12 percent of its value this year, and U.S. stock markets have shuddered in response, with the Dow declining almost 6 percent in the past week alone. The authorities have stepped in, with the European Union and the International Monetary Fund putting together a $141 billion rescue plan that compels Athens to swallow some tough austerity measures. Will it work? Or will the problems spread? To answer those questions, it helps to first tackle the myths that have emerged surrounding this latest financial crisis.
Papandreou: ‘We can do this. We must do this. We will do this together’ - Here’s the Greek prime minister’s statement to Friday evening’s Eurogroup heads of state and government meeting in Brussels. It’s short and rather moving. Click to enlarge.
Debt crisis: EU leaders announce €70bn plan to protect euro - EU leaders have agreed a financial defence plan in an attempt to protect the eurozone countries from speculative attacks in the wake of the Greek debt crisis.The German cha ncellor, Angela Merkel, and the French president, Nicolas Sarkozy, said today that an "intervention unit" designed to preserve financial stability in the 16 eurozone countries would be in place by Monday when the markets reopen.The creation of the unit, which will have up to €70bn at its disposal to shield the euro against further market speculation, comes after the shared currency's value fell amid fears that member countries such as Spain and Portugal could suffer similar debt problems to Greece.Today's announcement follows an agreement yesterday by the eurozone leaders for a €110bn (£95bn) EU-International Monetary Fund rescue package for Greece to prevent its debt crisis from spreading.
Odious Debt - Barry Eichengreen writes, Only the delusional can believe that, when everyone else is taking swingeing cuts, Greece's creditors can continue receiving 100 cents on the euro. It beggars belief that Greek government debt can top out at 150% of GDP, as the IMF envisages. At this point the government will be transferring well more than 10% of national income to the creditors. In a time of severe austerity, this outcome is unsustainable both economically and politically. Sooner or later, the creditors will have to exchange their existing bonds for new ones worth at most 50 cents on the euro. This will leave Greece with more public money for basic social services. That in turn will make it a tiny bit easier to achieve social consensus on the needed austerity measures. It will show the Greek in the street that he is not simply making sacrifices to pay the banks.
The Greek Economy Explained – WSJ - The Greeks are giving the world a good taste of their modern politics. Periclean democracy, meet Athenian mob rule: Tens of thousands are rampaging through the capital and other large cities this week in protest against €30 billion in austerity measures needed to secure the €110 billion bailout for the bankrupt country. The nationwide strike—led by government-employee unions, which threaten further disruptions after parliament yesterday approved the rescue package—was a timely show for Greece's prospective rescuers in Germany and at the International Monetary Fund. The medicine for Greece's deficit and debt woes (at 13% and 124.9% of GDP, respectively, and rising) won't go down easily in Athens. We continue to think the country needs to restructure its debts and adopt wholesale economic reforms. If you want to understand the reason, as good a source as any is the annual World Bank "Doing Business" survey for 2010. The spark for this financial crisis has been decades of overspending and cooking of the public books, but the survey reveals the underlying causes of the Greek disease.
Greek Debt Woes Ripple Outward, From Asia to U.S. - What was once a local worry about the debt burden of one of Europe’s smallest economies has quickly gone global. Already, jittery investors have forced Brazil to scale back bond sales as interest rates soared and caused currencies in Asia like the Korean won to weaken. Ten companies around the world that had planned to issue stock delayed their offerings, the most in a single week since October 2008. The increased global anxiety threatens to slow the recovery in the United States, where job growth has finally picked up after the deepest recession since the Great Depression. It could also inhibit consumer spending as stock portfolios shrink and loans are harder to come by.
Euro-Bankers to Greece: The Wealthy Won’t Pay their Taxes, So Labor Must Do So - The "Greek bailout" should have been called what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.)This windfall is to be paid by taxpayers – ultimately those of Greece (in effect labor, because the wealthy have been untaxed) – to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending.
British taxpayers ordered to bail out euro - All 27 EU finance ministers have been summoned to Brussels on Sunday to sign up to a “European stabilisation mechanism. Britain will be unable to veto this as it will be put through under the “qualified majority voting” system. The deal, effectively to shore up the euro, was denounced as a “stitch-up” last night after it emerged Nicolas Sarkozy, the French President and Angela Merkel, the German Chancellor, had devised it behind closed doors and were attempting to push it through at a time when there is no clear government in Britain. The decision was taken as David Cameron was locked in talks with the Liberal Democrats to try to form a government. Alistair Darling, the Chancellor, will fly to Brussels for the meeting after promising to keep George Osborne and Vince Cable, his Tory and Lib Dem counterparts, informed. EU finance ministers have been given the deadline of midnight tonight to agree the highly sensitive but rushed proposals to protect the single currency from financial turbulence from the Greek debt crisis.
Coalition Government: British Banks Face Break-Up In Just One Year - Britain's giant lenders are facing the threat of extinction after the new coalition Government pledged to establish an independent commission to decide whether to break up the banks. The commission was the centrepiece of the Conservative and Liberal Democrat agreement on banking reform, which included a pledge to introduce an extra tax on the industry and "robust action to tackle unacceptable bonuses". It has been given "an initial time frame of one year to report" on whether separating retail and investment banking will "reduce systemic risk". Both parties have argued for a break-up, but the Tories want to limit the split to the "casino" activities of proprietary trading while the Lib Dems wish to go further and "separate low-risk deposit taking banking from high-risk investment banking".
The Agenda For Emergency Economic Strategy Discussions This Weekend - Europe needs a new recovery plan, bigger and broader than anything put together so far. This weekend is the perfect time to put such a plan together. But be wary of committing official resources too early in this market downdraft – smart policymakers will calmly let the markets fall further, in order to benefit from the rebound potential. In the last few days, bond markets have decided that the deflationary adjustments needed in large parts of the eurozone are not politically feasible. The deflationary spiral that will come with fiscal cuts causes political turmoil and reduces revenues – that in turn makes it ever harder to service debt; see Greece this week. Eurozone countries running large budget deficits with substantial outstanding public debt are finding they are cut off from credit markets as a result. This is a solvency issue, not a liquidity issue. But do not rush into this gap. There is a good rule for foreign exchange intervention: you intervene to buy a currency at a time when you think you can really shift events...
EU Readies Emergency Fund Said to Be $645 Billion to Fight Off `Wolfpack' -May 9 (Bloomberg) -- European Union finance ministers pledged to stop a sovereign-debt crisis from shattering confidence in the euro as they held an emergency summit to hammer out a lending mechanism that may be worth around $645 billion. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed on the backstop yesterday and told ministers to get it ready before Asian markets open. The European facility may be worth around 500 billion euros, said an official familiar with the talks. “We are going to defend the euro,” Spanish Economy Minister Elena Salgado told reporters as she arrived to chair today’s Brussels meeting. “We think we have a duty for more stability for our currency. We will do whatever is necessary.”
Guest post: El-Erian on a critical weekend for Europe and the economy - So far, the attempts at rescue-including last Sunday’s dramatic EUR 110 billion announcement-have have been incomplete with respect to both design and implementation. They were thus viewed as insufficient and not credible by analysts and markets. As a result, the Greek crisis morphed in the following days into something much more sinister for Europe and the global economy.This explains this weekend’s shift in the EU to a “whatever it takes” mindset. We are seeing evidence of a significant step-up in crisis management. Yet the question is not whether a step-up is required-it clearly is. The question is whether the strengthened rescue attempt will prove sufficient. With Greece (as well as Portugal and some other countries) now visibly drowning in a sea of debt, the question is whether the rescuer (EU/IMF) can pull off the rescue or, instead, get pulled down with all parties drowning.
Europe prepares nuclear response to save monetary union - Are Europe's leaders grasping the nettle at last? Faced with the imminent disintegration of monetary union, they appear poised to create the beginnings of an EU debt union and authorize the European Central Bank to step in immediately to stabilize the eurozone bond markets Great caution is in order. German Chancellor Angela Merkel has so far said little. The descriptions of the deal agreed by EU leaders in the early hours of Saturday are coming from the French bloc and EU bureaucrats. How many times during the Greek saga of the last four months have we heard claims from Brussels that turned out to be a distortion of what Germany had actually agreed, causing each relief rally to falter within days? They had better get it right this time
A crisis of evasion - I’m Italian, and I’m an economist, so as European leaders work feverishly to save the Euro, I’ve been wondering: what would happen if the feared contagion occured and my own country saw its finances melt down just as Greece’s have? The short answer is that this would generate a fatal shock to the Euro, given the size of Italian public debt and the fact that a large share is owned by other Euro countries.Of course, such an event is by no means a foregone conclusion. But I can’t help noticing an ominous correlation. The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.
EU Preps $645 Billion Fund to Fight ‘Wolfpack,’ Debt Crisis - May 10 (Bloomberg) -- European Union finance ministers moved toward agreement on an unprecedented loan package worth at least $645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis and shattering confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, the 16 euro governments sketched out plans to make 440 billion euros ($570 billion) available, with 60 billion euros more from the EU’s budget, according to three officials at the talks in Brussels. An additional, unspecified sum may come from the International Monetary Fund, the officials said. “We are going to defend the euro,” “We think we have a duty for more stability for our currency. We will do whatever is necessary.”
E.U. Details $957 Billion Rescue Package - NYTimes-— European leaders agreed on Monday to provide a huge rescue package of nearly $1 trillion in a sweeping effort to combat the debt crisis that has engulfed Europe and threatened markets around the world. In an extraordinary session that lasted into the early morning hours, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately. Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008. Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the establishment of instruments known as swap lines. The swaps are intended to ease pressure on European banks and money markets by providing more liquidity.
Europe Slaps Nearly a Trillion on the Table to Bail Out...Uh... Itself? - And the Federal "Firefighter not Arsonist" Reserve slipped out a little note late on a Sunday that they'd be ready with bucketloads of "dollars" to "help out". Hands across the world now, kids, we're in this together...Bloomberg: European policy makers unveiled an unprecedented loan package worth nearly $1 trillion and a program of securities purchases as they spearheaded a drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators
Europe’s QE is sterilised and sensitive - Here’s something intriguing about the European Central Bank’s overnight statement. It’s being lauded as European quantitative easing by some market commentators — but there’s a key difference to the kind of government bond-buying that has been carried out in the UK, US and Japan. The ECB plans to sterilise its purchases of debt; thereby divorcing the monetary aspect from the credit aspect. This old series of charts showing US QE, from Bank of America, should show the difference:By sterilising — selling assets such as German bunds — the ECB should be able to limit the effect of the bond purchases on Europe’s monetary base while simultaneously supporting Club Med debt. It’s very reminiscent of what the Bank did for covered bonds in 2009.
Summary Of The Biggest Bail Out Ever: Even Keynes Is Spinning In His Grave - Europe has now followed the Fed in its all in move to prevent the disintegration of the euro and of Europe. As we expected, the EU was leaking various rumors to gauge market interest, and as speculated earlier, the final cost ended up being just short of one trillion. Here are the key summaries:
- EU Crafts $962 billion show of force to halt crisis
- Full blown monetization: ECB will buy public and private bonds
- Fed reactivates swap lines with Bank of Canada, BOE, ECB, BOJ, and the SNB
In other words, total and unprecedented monetary lunacy, as every cental bank, under the orchestration of the Federal Reserve, will throw money at the problem until it goes away, which it won't. As we have long expected, Bernanke is now willing to sacrifice the dollar at any cost to prevent the euro unwind. This is nothing than a very short-term fix, whose half life will be shorter still than all previous ones.
Text on EU's Financial Stabilization Mechanism - Continuing from the previous posts, here is the statement detailing what was agreed to by the EU finance ministers. While the fine detail is still lacking--who gets what when and where in terms of contributions--the European Council has nevertheless made a pretty impressive show of strength that is calming financial markets at the moment. From Reuters comes a copy of the entire text (there's another on the EU website as well):
The ECB Takes a Very Big Step – WSJ - The European Central Bank, in a stunning change of position, said Sunday night it will buy government and private debt on “dysfunctional” European markets as part of a concerted show of force by European authorities to persuade financial markets that they are, in fact, responding to the spreading sovereign debt crisis in the euro zone. http://www.ecb.int/press/pr/date/2010/html/pr100510.en.html Here’s some early reaction:
Shock and awe euro rescue lifts global markets - A $1 trillion global emergency package to stabilize the euro unleashed a spectacular rally in world stocks on Monday but analysts said EU leaders had only bought time to tackle deep-seated fiscal problems.The "shock and awe" rescue plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- triggered the biggest one-day rise in European shares in 17 months after panic selling last week. Wall Street also surged as confidence returned, at least temporarily. The Dow Jones Industrial average jumped 3.63 percent and the narrower Standard & Poor's financial share index was up 4.7 percent amid relief among banks.The package of standby funds and loan guarantees that could be tapped by euro zone governments shut out of credit markets, plus central bank liquidity measures and bond purchases to steady markets impressed financial analysts by its sheer scale.
EU Crafts $962 Billion Show of Force to Halt Euro Crisis - May 10 (Bloomberg) -- European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied. Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
EU ministers agree €500bn fund to save euro from disaster - European governments early this morning approved a €500bn deal to save the euro after 11 hours of talks that took place against the prospect of the single currency drowning in a tidal wave of debt and default fears, and even a question mark over the whole European Union.EU finance ministers meeting in Brussels had quickly agreed a modest "stabilisation mechanism" worth €60bn for eurozone countries in trouble. But early this morning the Spanish finance minister Elena Salgado announced that the ministers had agreed to make a further €440bn available, a proposal suggested by Berlin and Paris, which would also involve the International Monetary Fund and come in return for pledges of swingeing spending cuts from countries needing support.
Euro bailout. Now banking risk morphs into geo-political risk -The euro bailout deal consists of several massive moves and, as far as the eurozone is concerned, signals a fundamental change. But not the end of the global crisis. If 2008 transferred global risk from banking to state finances, this transfers instability from the sphere of state finances to the sphere of global and social politics Here is my first shot at explaining what they have done. Pitch in if you think I have got bits wrong as we are all still struggling with the detail. To counter the risk of the Greek crisis spreading to Spain, Portugal and Ireland the 27 EU countries have created an emergency loan facility of 60bn euros. That means that the debt markets no longer have them by the throat next time they need to go and issue bonds. The fact that this is called a "special purpose vehicle" - a term we all remember from Enron, Lehman and the London Tube PPP - gives the game away. Like all SPVs it is designed to make unclear who ultimately shoulders the risk.
The “E” and the “M” of the EMU - They say “do not believe anything until it’s been officially denied”. Just last Thursday, ECB President Jean-Claude Trichet categorically denied that the ECB had discussed buying government bonds of peripheral eurozone members. A market sell-off and a hectic weekend later, it was time for a complete about-face… Per the ECB’s press release on Sunday night, “in view of the current exceptional circumstances prevailing in the market, the Governing Council decided [among other things]To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. […]The significance of this move is huge, as far as killing speculators goes, but here I want to focus on a key policy dilemma that has emerged since the subprime (and now the eurozone) crisis ever began: The need for a separation between monetary and fiscal policy—what Trichet referred to as the difference between the “E” and the “M” of the EMU
Is the Eurozone Shock and Awe Enough? (Updated) - 05/10/2010 - Yves Smith - The EU announced a €750 billion salvage operation, funds to shore up economies in economic difficulty, with the program consisting of €440 billion of loans from eurozone nations, €60 billion from an EU emergency fund, and €250 billion from the IMF.There are several layers of complicating factors, however. The first is that the German electorate has signaled its unhappiness with bailouts. Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece. That means her government is set to lose its majority in Germany’s upper house. Second, even though the rescue is intended for the 16 eurozone members, it requires approval of the EU, which includes 11 non-eurozone members like the UK (presumably, that is for the €60 billion EU loan). The message from the UK seems to be that it will support this deal, but don’t expect any future help. But what is most striking is the European Central Bank’s vagueness.
"We shall defend the euro whatever it takes" (Olli Rehn - Union's commissioner for economic affairs) - European finance ministers and central bankers agreed late Sunday on a new loan program that could top 750 billion euros ($970.6 billion), designed to keep the Greek debt crisis from spreading to other vulnerable European countries. European finance ministers hammered out a safety net worth as much as 500 billion euros for struggling governments. The International Monetary Fund could contribute an additional 250 billion euros, officials said. The deal came after a full day and night of closed-door meetings in Brussels. The finance ministers held a joint press conference shortly after the opening of Asian markets -- well after midnight local time -- to discuss the program.
El-Erian on Europe’s ‘massive policy response’ - Pimco’s chief executive Mohamed El-Erian reacts to news that the European Union and IMF had agreed a €720bn emergency funding facility. His earlier guest post is available here. The announcements coming out of Europe tonight are dramatic, and they confirm that policymakers have shifted to a “whatever it takes” approach to crisis management. The result is a massive policy response by the EU and ECB aimed at calming markets and safeguarding the euro. Other central banks are lending a helping hand. The immediate reaction in global markets is to reverse some of last week’s moves that were caused by concerns about Greece, sovereign risk, and related risk aversion. Market participants will now spend a lot of time analyzing the minutiae of this dramatic policy response … this with a view to assessing its immediate impact, its durability, and the potential range of unintended consequences. Many questions will need to be answered...
Shock and Uh?- Krugman - OK, big plan from Europe. What will it do? What won’t it do? Some initial thoughts, probably a bit heavy on jargon (I don’t have the time to do a full translation into English.)So, let’s consider a generic cohesion country — call it Speece, or Grain. It had 7 fat years after the creation of the euro, experiencing large capital inflows and relatively high inflation. Now the bubble has burst, government revenue has collapsed, and pain looms.What the country must do, regardless of how it’s accomplished, is achieve relative deflation — reduce its costs and prices compared with Germany and France, regaining competitiveness. With German inflation low, this means an extended period of deflation, with high costs in employment and output. It also means fiscal difficulties, requiring spending cuts and tax increases that deepen the slump.
The plan we've been waiting for? - THE top news today is the announcement of a massive, €750b plan to end the panic over European debt and its potential to generate crisis. The deal was put together in a dramatic, all-night meeting of officials from euro zone countries (Charlemagne has the details here). The plan consists of several parts. Euro zone nations agreed to the creation of a special entity that can raise up to €440b by issuing debt, which will be guaranteed by European governments. That money could then be lent out to countries struggling with debt (who would not be a part of the system of guarantees). The IMF chipped in an additional €250b, and the European Union—including, interestingly, the EU governments not a part of the euro zone—has ponied up €60b, from the EU budget, which can be used immediately.
Europe is unprepared for austerity - Europe has bought itself time with its €750bn bail-out for the euro. But the long-term problem remains. Most of the European Union is living beyond its means. Government deficits are out of control and public-sector debt is rising. If European governments do not use their new breathing space to control spending, financial markets will get dangerously restless again. Unfortunately, European voters and politicians are simply unprepared for the age of austerity that lies ahead. I used to think Europe had got it right. Let the US be a military superpower; let China be an economic superpower - Europe would be the lifestyle superpower. It was a great strategy. But there was one big flaw in it. Europe cannot afford its comfortable retirement.
Do you feel shocked and awed? Well do you, punk? - So, the question of the day is, will bond markets feel suitably shocked and awed by the eurozone's decision to throw more than $950 billion at the Greece problem in order to prevent the spread of contagion? For some reason, I can't get this scene from Dirty Harry out of my head when I think about the answer. To paraphrase it for our purposes, wouldn't this whole drama be easier if some eurozone finance minister could confront bond traders with the following speech: I know what you're thinking. Is this my last rescue package, or do I have another source of credit in reserve? Well, to tell the truth, in all this excitement I kinda lost track myself. But being this is a €720bn rescue package, the most powerful one in the world, and would wipe away any short position you've taken in the past week, you've got to ask yourself one question. 'Do I feel lucky?' Well do you, punk?" The thing is, Dirty Harry is a lot more convincing than Angela Merkel
Simple thoughts on Europe - 1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance. 2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged. The mechanics of the so-called "shadow banking system" -- namely the ability of short-term creditors to flee on a moment's notice -- remain in place. 3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared ****less. 4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.
The European bailout - As Europe and the IMF announce close to a trillion dollar rescue package, Megan McArdle asks, what's the benefit to the countries providing the funding? Here are my thoughts. The Economist calls attention to a new IMF staff report that lays out the challenges ahead for Greece. According to the report, the Greek government's primary budget deficit in 2009 was 8.6% of GDP. That represents the amount by which spending would have to be cut or taxes raised in order to balance the budget last year even if Greece were to repudiate all its outstanding debt. Interest expense on the outstanding debt added another 5.0% of GDP to the 2009 government budget deficit. The IMF calculates that even if austerity measures amount to 10.9% of GDP by 2013 (turning the primary deficit into a primary surplus), the interest burden on Greek's debt would still grow to 8.1% of GDP by 2013. One logical response to these circumstances would have been for Greece to abandon the euro, and at a minimum pursue major debt restructuring such as converting outstanding debt to drachma at some rate.
Megan McArdle asks - But I still don't see what the rest of the eurozone is getting out of it. The Greek bailout, that is. I view it as a bit like the U.S. in Afghanistan. Whether it will yield anything useful from here on in can be debated for a long time. But if we pull out precipitously, and the Taliban take over, it will be seen as a big U.S. loss (whether that's worth the cost is not the question of concern here, only that it is a gross cost, whether or not it is a net cost, all things considered). Since Afghanistan once attacked us (sort of), our entire deterrent would be much less credible.Going back to Europe, without the bailout no German or French commitment to another European nation, or another European collective project, would be worth very much for a very long time. Boo hoo you may say, but in the European world that is perceived as a very high cost indeed. It would mean writing off the major narrative of European collective progress since the end of World War II.
The thin veneer - The general hopelessness of european policymakers is just too evident. We don’t have a fiscal head, a SecTreas, to make reassuring noises. We have a cacophony of differing national agendas, and a bunch of governments up for re-election. Arguably reasonable when they do stuff separately, when they act together everything they do has an air of compromise, half measure, and to the uncharitable, incompetence. The ECB, as the heir of the Bundesbank, should have a certain astringency when it comes to dealing with crisis — which in Europe hasn’t come about very often — that the Fed has long since abandoned. If the Fed, especially under Greenspan, was always the loving Mommy, the Bundesbank was the harsh Prussian Vater, prepared to let its kids die if they thought it was good for them. We think that’s what the ECB is supposed to be like, but we just don’t know.
Primary Budget Deficits of EU - A primary budget deficit refers to the amount by which government spending exceeds government tax revenues. It does not include the additional cost of debt interest payments on the government bonds. This is why you sometimes hear different statistics. For example, the primary budget deficit of Greece is about 9% of GDP, but with debt interest payments, this budget deficit rises to over 12%. Clearly, with the rise in bond yields on Greek debt, the difference between the primary deficit and actual budget deficit widens and it becomes more difficult for goverment to make an impact on actual debt.
The Latest US Taxpayer Bill To Save Europe, And Specifically The French Banks: $57 Billion - The latest (and certainly not last) IMF portion of the European bail out is E220 billion, or $287 billion at today's exchange rate. As the US and its taxpayers represent roughly 20% of total IMF funding, today's 3% loss in dollar purchasing power to the middle class will cost the middle class $57 billion. Paying for the privilege of being able to purchase less sure sounds like a squid-pro-quo type of deal for us here. Politicians everywhere applaud this most recent rape of America's working class, even as communism is now the global ideology. Who needs TheOnion.com when reality is now 10 times more surreal. And the direct recipients of taxpayer generosity: SocGen, AXA, Dexia, CA and all other French and German banks, which right now are all up ~20%.
Europe’s Debt Crisis: Your Questions Answered - On Sunday we invited your questions about the Greek debt crisis and its potential effects on markets and governments in the rest of Europe and beyond. Even as questions were being sent, the European Union moved to provide a huge rescue package intended as a “shock and awe” commitment to prevent the crisis from spreading. Markets reacted favorably, but many questions remain.To address them, Economix invited three panelists to respond to selected questions. They are Simon Johnson, the former chief economist at the International Monetary Fund, an author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown,” and a Daily Economist here at Economix; Carmen M. Reinhart, an economic historian at the University of Maryland whose recent book, “This Time Is Different,” chronicles 800 years’ worth of debt crises and sovereign defaults; and Yves Smith, the financial analyst behind the “Naked Capitalism” blog and “ECONned,” who heads Aurora Advisors, a management consulting firm specializing in corporate finance advisory and financial services.
Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency - The eurozone self-rescue plan announced last night has three main elements:
- 750bn euros in a fiscal support program, with 1/3 coming from the IMF (although this was apparently news to the IMF).
- The European Central Bank promises to buy bonds in dysfunctional markets.
- Swap lines with the Federal Reserve, to provide dollars.
At first pass this package might seem to be in with what we recommended a week ago and again on Thursday. But the European central banks have come in very early – with government bond prices still high – and there is no sign yet of credible fiscal adjustment for Spain and Portugal. The eurozone apparently did not even discuss the situation in Ireland, which seems increasingly troubling.This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit. The Europeans promise to unveil a mechanism this week that will “prevent abuse” by borrowing countries, but it is hard to see how this would really work in Europe today.
Second Thoughts? – Krugman - Yes, I know — the point is not to lift the euro. Still, the exchange rate is a quick measure of the impact on eurozone confidence, which bounced with the policy announcement but doesn’t seem to be staying up …
Shock and awe may not be enough to save Europe. -The European finance ministers are attempting to emulate the G20 summit in London back in April 2009, and to give the impression of throwing a massive amount of cash at the problem.The provenance of the actual money is questionable. There are two plans under consideration here: 1. An extension of an already existing fund which was already used to help Latvia, Hungary and others by Eur60bn. 2. A far bigger plan to pledge around Eur 440bn of bilateral loans from eurozone members to support each. However, there is very little detail at all on where the money would come from, and the detail we do have is slightly suspicious (for instance, the fact that the euro members need to set up Special Purpose Vehicle to do this is not at all encouraging).
Complexity Abhors Volatility - I’ve never been a huge fan of the Eurozone, as longtime readers know, and as this old piece indicates. When times are volatile simplicity is rewarded and complexity punished. Hard guarantees are favored over softer implied commitments. Simple funding structures are favored when times get tough. What then, to make of the humongous bailout plan proposed by the Eurozone, and aid proffered by the ECB? First, it is by no means certain that all of the Eurozone governments will cooperate with the agreement. It is not in the interest of most Eurozone countries to agree with the aid package. Better to use the money at home and support debtors and banks at risk of failure, than support those that do not elect you. With some countries, lending money to Greece on these terms may prove unconstitutional.
First 20bn, then 45bn, then 110bn, now half a trillion – Eurozone leaders strive for a meaning for “whatever it takes” -Eurozone leaders last night agreed with the European Commission and the IMF on a €750bn emergency funding facility in loans and credits to stabilise the eurozone. This package was followed by the ECB’s announcement early Monday morning that the ECB would intervene in government bond markets and reactivate extra facilities to ensure liquidity. Here are the measures in more details put together from the FT, Bloomberg and Spiegel online:
The Market, the EU bailout, and the VIX - Kalpa -A mere week ago, Europe was about to melt down and bring the rest of the global economy with it. Liquidity had disappeared in some foreign banks. Global central banks were starved for dollars. Our own U.S. stock market reacted with a grand performance of its own on Thursday, one which will go down in the history books. Was it a meltdown or a meltup? The Friday following the market event showed some volatility but stabilization.Then, over the weekend (thank God for weekends), Obama had the chance to make a couple of important long distance phone calls telling a couple of key European leaders that we've got to maintain our markets or this thing is over (or something to that effect). Throw another trillion at the latest problem and off we go again. The solution is always the same.
Neville Chamberlain Lives—In Euroland - Newsweek - It's an old European habit: persist in a long period of denial and then, finally, try to appease the aggressor and buy him off. Which, of course, never works. Nor is it likely to work now. The nearly trillion-dollar euro-rescue package announced this week is an impressive ratcheting up of unity by European governments. But it hardly touches the underlying tensions that continue to tear at the euro zone. Is it unfair—even outrageous—to compare the current euro rescue to Neville Chamberlain's pathetic efforts in the 1930s to appease Adolf Hitler (and by implication to liken global financial markets to the Nazis)? Yeah, it is, but maybe not as outrageous as you think.
The EU bailout: Too much, too late - Is the massive EU bailout a case of “too much, too late”? At $1 trillion, give or take (depending on the highly-uncertain value of the euro), it’s certainly enormous: Mohamed El-Erian calls it “a completely new level and dimension” in terms of European policy response. But the late-night negotiations of European finance ministers might yet fail to pass muster with national governments. After all, as Kevin Drum notes, the $700 billion TARP bill was initially voted down by the House of Representatives. Meanwhile, Peter Boone and Simon Johnson have some very scary numbers about Greece in particular: it will have to cut spending by a whopping 11% of GDP; its debt-to-GDP ratio will rise to at least 149% of GDP in a best-case scenario; and realistically Greek GDP could fall by 12% between now and 2011. Now that’s a recession.Meanwhile, Lee Buchheit and Mitu Gulati have a paper out showing just how easy it would be for Greece to default.
An ever-closer Union? - If we are to take this package at face value, the rules of European Monetary Union have been fundamentally re-written. For governments, being in the eurozone means something very different today than it did just a few weeks ago. As we have seen, the role and responsibilities of the European Central Bank (ECB) have changed radically as well. If this deal is what it is cracked up to be, countries like Germany may have to fundamentally change the way they think about monetary union - and, ultimately, the way they think about economic growth as well. However, it is not clear that the tired officials who came up with this deal early this morning have really thought that far ahead.
The First Step Toward a Euro Treasury? - So the Eurozone is getting its $ 1 trillion "shock and awe" rescue package and markets are responding with enthusiasm. There has been a lot of discussion about this package, but one potential implication of this plan that has received little attention is that it may put in motion the beginnings of a Euro treasury market. Among other things, the plan calls for the creation of special purpose vehicle that will be able to raise up to $440 billion by issuing debt backed by the Eurozone countries. This description sounds to me a lot like a centralized fiscal authority for the Eurozone. Yes, it has been given only a three-year life, but once folks see that this entity is essentially a Eurozone Treasury it could morph into something more permanent--especially if it plays a key role in preserving the monetary union. And if that happens, a Euro treasury market will emerge that could provide stiff competition to the U.S. treasury market. Moreover, should there arise a Euro Treasury then the Eurozone will have eliminated a key barrier that prevents it from being an optimal currency area.
Up against the wall - THE dilemma in which the European Central Bank found itself this year borders on tragic. As Charlemagne notes, it had, up to this point, had a very good crisis, showing itself as creative and forceful as the Federal Reserve in responding to the market mayhem while remaining a worthy custodian of the Germanic monetary discipline it had inherited.Then it faced a Hobson’s choice of abandoning that discipline or risk seeing the entire euro experiment collapse.Ironically, if the ECB had bought bonds a year ago as part of a quantitative easing operation as the Fed and Bank of England did, it could have credibly called it monetary policy since the aim would have been expansionary. In fact, it now plans to avoid any expansionary impact from its purchases of government and private bonds, presumably by shrinking private refinancing operations or issuing bills of its own. This qualifies as fiscal policy because the clear intent is to enable member governments to borrow who otherwise could not.
Europe’s Finance Firms Hold $78 Billion Greek, Portuguese Bonds (Bloomberg) -- European financial companies hold more than 61 billion euros ($78 billion) in Greek and Portuguese sovereign debt, the worst-performing European government bonds so far this year. The companies also hold more than 73 billion euros in Spanish government bonds, according to figures provided to Bloomberg News in interviews and e-mails, or culled from company reports and presentations. Greek government bonds lost investors 28 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Moody's sees European contagion (Reuters) - Moody's Investors Service, in an unusual move regarding its sovereign ratings process, said on Monday it may downgrade its ratings on Portugal, and Greece's rating could fall to as low as junk. Moody's in a "special comment," called the sovereign debt crisis "unprecedented." European Union finance ministers agreed to an emergency loan package on Monday that with IMF support could reach 750 billion euros ($1 trillion) to prevent a sovereign debt crisis spreading through the euro zone. The rating company said a drawn-out process for building support for Greece's debt crisis has increased the cost to Greece of regaining control of its public finances, particularly over the last three months.
PIMCO: Greek Woes Will Keep Spilling Over - How much has this situation spilled over to really have an effect on a global level? El-Erian: It is spilling over, and we should expect it to continue to spill over. One of the parallels is with subprime. At the beginning of '07 the general view was subprime is containable, it's isolated. We heard those same words being applied to Greece on the basis that Greece was just 3% of the GDP of Europe. However, what we're learning is that we live in a very connected world and that a major disruption somewhere in the world has to be taken seriously because of this connectivity. And what we've seen happen is what started out as a Greek crisis has become a European crisis, and is now morphing into a global crisis.
Bank Swaps, Libor Show Doubts on Europe Bailout: Credit Markets (Bloomberg) -- Money markets and the cost of protecting bank bonds from losses show investors are concerned the almost $1 trillion rescue plan announced by European leaders may not be enough to contain the region’s sovereign debt crisis. The Markit iTraxx Financial Index of credit-default swaps on European banks was last at 146 basis points compared with 107 basis points for the Markit iTraxx Europe Index of 125 investment-grade companies, a benchmark it traded an average 10 basis points below for three years, according to CMA DataVision. The three-month Libor-OIS spread, which widens as banks’ willingness to lend decreases, advanced to 19.09 basis points from 18.92 yesterday and 6 basis points on March 15.
More debt won't solve crisis, warn analysts - THE markets might be happy with the €750bn rescue package, but analysts and commentators were far from enthusiastic about the latest plan to solve Europe's debt problems by more borrowing. "The last thing you give a drunk is another drink," said Jeremy Batstone-Carr from London-based Charles Stanley stockbrokers."Put differently, you cannot make any nation that is unable to service its accumulated debts more credit worthy by extending more credit."'Black Swan' author, hedge fund adviser and university professor Nassim Taleb said: "The crisis came from debt and you don't escape it with more debt." Prof Taleb told Bloomberg: "We're in a situation where we had a patient who we discovered had cancer a year-and-a-half ago and all we've been giving the patient is painkillers. Governments will only bring about an end to the credit crisis through the "blood, sweat and tears of cutting the amount of public debt", he added.
Euphoria ends as investors suspect another shameless EU confidence trick - The euphoria is evaporating. Market commentators have taken a closer second look at the package, and they start not to like it. In our view the sentiment was best expressed by what Kevin Gaynor chief markets economist of RBS who called the EU’s strategy “Bailouts rather than integration”. They are not solving the problem, they are throwing money at it. Another appropriate comment came from Marek Belke, the EU head at the IMF, who compared the rescue package to a dose of morphine with the purpose to stabilise the patient. The real hard stuff has yet to happen. After the euro surged against dollar and yen yesterday, this morning the euro already fell back by 0.3% against the yen. South European bond markets improved yesterday, but as it turned out the only buyer was the European System of Central Banks.
Greek Debt and Backward Induction - What European leaders seem to be attempting is to buy Greece more time, essentially to smooth the potential amount of this restructuring and its impact on the banking system, perhaps three or four years from today when, hopefully, Greece has smaller deficits and the ability to operate without new borrowing.While this is a hopeful scenario, backward induction is not kind to it. Put yourself in the position of a holder of Greek government debt a few years out, just prior to a probable default. Anticipating a default, you would liquidate the bonds to a level that reflects the likelihood of incomplete recovery. Working backward, and given the anticipated recovery projected by a variety of ratings services and economists, one would require an estimated annual coupon approaching 20% in order to accept the default risk. For European governments and the IMF to accept a yield of only 5% is to implicitly provide the remainder as a non-recourse subsidy
Time for Greece to play by the E.U.'s rules… For the time being, the markets have been pacified. For the moment, the riots in Athens have subsided. Only "hundreds" of demonstrators came out over the weekend, fewer than the rioters who killed three people during a violent petrol bomb attack on a bank last week. But this temporary truce in Greece has been bought at a high price -- by which I don't just mean that it was expensive. In front of me as I write is a draft version of the Council of the European Union's most recent "decision" on Greece. It isn't a classified document: Bits of it have been in the newspapers; the Greek parliament has already voted to pass some provisions; and a similar, though less comprehensive, decision was published last February. Yet while it's not secret, no one is talking much about its political significance either. For this is no ordinary piece of Euro-bureaucracy: This is the kind of thing a surrendering field marshal signs in a railway car in the forest at the end of a bloody war.
Editorial - Europe’s Bailout - NYTimes - Europe’s leaders stared into the abyss and finally decided to act. The nearly $1 trillion bailout package, arranged over the weekend, is intended to head off Greece’s default and stop the crisis from dragging under other weak economies — Portugal, Spain, Ireland and Italy are all vulnerable. It was certainly the right thing to do. Coupled with the European Central Bank’s promise to buy bonds from stricken European countries, it arrested the financial turmoil — at least for now. There is good reason to question whether even these steps will be enough. The strategy’s biggest weakness is that it assumes that badly hobbled countries, starting with Greece, can regain their ability to service their debts by slashing their budget deficits. These economies are already struggling; some are still caught in recession. The International Monetary Fund expects Greece’s economy to shrink by 2 percent this year and by 1 percent in 2011. Overly harsh budget cuts will make the situation worse — making it even harder for Greece, and others that request the bailout, to honor their debts.
Debt crisis: Crisis averted? | The Economist - With the plans on the table, Greece can avoid an immediate default, and it can continue to finance its deficits. But it still faces an enormous fiscal adjustment. No European country in recent memory has managed to close a fiscal gap as large as 11% of GDP—with the ability to depreciate or without it. If you want to get yourself especially discouraged, read the staff report produced by the IMF in conjunction with its decision to offer aid. Many, many things can go wrong. Greece can expect to suffer through deep contraction this year and next year. Thereafter, growth will depend on significant deflation: The needed adjustment in prices is expected to come from domestic demand tightening, both through fiscal adjustment and efforts to moderate public wages and pensions, and other costs in the economy. Greece must push through large packages of tax increases and spending cuts, and these measures won't generate the needed budgetary improvement unless the government can manage to produce major structural fiscal reforms, including the collection of taxes on the country's large shadow economy. Here's how things will look if everything goes right:
If the euro is to survive the decade, Greece cannot happen again - VoxEU - This weekend’s plan has been received positively by the markets, but it is too early to call it a success. Future monetary historians may judge it either a brilliant move or the first step on a slippery slope to ruin. The EU needs to set up an independent institution to vet fiscal plans of Eurozone governments and apply a sliding scale of sanctions. If the euro is to survive the current decade, Greece cannot happen again.
Roubini Says European Resolution an ‘Open Question’ (Bloomberg) -- European leaders still face difficult choices even after policy makers unveiled an unprecedented loan package worth almost $1 trillion to stop a sovereign-debt crisis, New York University professor Nouriel Roubini said. “While money is available now on the table, all this money is conditional on all these countries doing fiscal adjustment and structural reform,” Roubini said in a Bloomberg Radio interview today with Tom Keene. “Whether they’ll be able to do it fast enough over time is going to be an open question.” Pressured by last week’s slide in the euro and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels. The 16 euro nations agreed to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
Bailout Is 'Nail in the Coffin' for Euro, Rogers Says (Bloomberg) -- Investor Jim Rogers said Europe’s bailout of indebted nations to overcome the sovereign-debt crisis is just “another nail in the coffin” for the euro as higher spending increases the region’s debt.The 16-nation currency weakened for a second day against the dollar after rallying as much as 2.7 percent on May 10, when the governments of the 16 euro nations agreed to make loans of as much as 750 billion euros ($962 billion) available to countries under attack from speculators and the European Central Bank pledged to intervene in government securities markets.“I was stunned,” Rogers, chairman of Rogers Holdings, said in a Bloomberg Television interview in Singapore. “This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency, you have all these countries spending money they don’t have and it’s now going to continue.”
Eurozone crisis: What Vox columnists said - As early as 2008, Vox columnists provided research-based warnings that the global crisis could lead to a Eurozone crisis. This column provides a recap of the contributions on this site where leading economists used economic logic and a firm grasp of the facts to think ahead about Europe. The main outline of today’s crisis was plain months ago; EU leaders’ dilatory response made things worse.
Why The Eurozone Is Doomed - Beneath the endless announcements of Greece's "rescue" lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.The key imbalance is between export powerhouse Germany, which generates huge trade surpluses, and its trading partners, which run large trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain. Those outside of Europe may be surprised to learn that Germany's exports are roughly equal to those of China ($1.2 trillion), even though Germany's population of 82 million is a mere 6% of China's 1.3 billion. Germany and China are the world's top exporters, while the U.S. trails as a distant third. Spain, with about half the population of Germany, has a $69 billion annual trade deficit and a staggering $151 billion budget deficit. Fully 23% of the government's budget is borrowed.
European debt hits danger levels: IMF - European levels of government debt have hit danger levels and vigorous action will be needed to get them down again, the International Monetary Fund warned on Tuesday.The IMF, fresh from a trillion=dollar European debt bailout package with Brussels, said debt levels had to be reduced and national budgets brought back into balance over the medium-term.Radical action in the short-term had to be avoided as it risked "a relapse into recession," the IMF said in a report on Europe.
Why Greece might not default any time soon - Anna Gelpern has the smartest take on why Greece won’t default, which kicks off with this powerful truth: As a descriptive matter, the global political commitment behind the no-restructuring option is without precedent. And sovereign debt is nothing but political commitment. She adds a number of other good points, including that default wouldn’t actually do Greece all that much good: A debt restructuring now is unlikely to bring needed debt relief for Greece. Among other things, Greek banks are massively exposed and would need to be recapitalized by the defaulting government or the foreign public sector. True, Argentina did it before, but it got the benefit of stiffing a bunch of foreigners for free in the bargain, which is not a foregone conclusion here. And Argentine officials could afford to stick
Greek Economic Contraction Seen Deepening - The Greek economy remained in recession in the first quarter and is expected to continue contracting in the months ahead as the government imposes stiff spending cuts in the face of persistent resistance. The biggest Greek private-sector and public-sector unions issued a statement declaring continued defiance. Greece's two main umbrella unions on Wednesday announced a new general strike for May 20—the fourth since February—against austerity cuts and pension-system reforms. Many of those cuts were demanded by the International Monetary Fund and the European Union as a condition for continuing to draw from a €110 billion ($139.51 billion) aid package.
The euro crisis: Europe's 750 billion euro bazooka / The Economist- AT two in the morning on May 10th, European Union finance ministers agreed a huge increase in their political will to defend Europe's single currency, backed by a stunning €750 billion in aid for weak links in the 16 member eurozone. Simultaneously, the European Central Bank took a revolutionary shift away from its inflation-fighting mission, announcing a scheme to buy up government bonds on the financial markets. The more troubling news is that it took 11 hours of bitter wrangling to get the ministers to that point, and—thanks to continued German anxiety about undermining eurozone discipline by bailing out the profligate—there will be three separate mechanisms to deliver that €750 billion, of such fiendish complexity that EU officials are still not quite sure how it will all work. Does the good news trump the troubling news? Yes: as long as lingering disagreements and uncertainties do not hold up the rescue plan. Europe is building its own financial bazooka to warn off the markets, to borrow Hank Paulson's image. If it is ready to fire when needed, then complexity probably does not matter for now.
And Chicks for Free? - The European Union came up with a trillion dollar bail-out for itself at the dawn's early light. Plus, each member gets a Latvian prostitute, gratis. The Germans will love this. It already goosed the Euro back above $1.30 -- just when they hoped a lower Euro would help them move a few more export goods off the shelves. I expect that Mrs Merkel is already catching an earful. A few hours earlier, her coalition of Christian Democrats and free Democrats got their joint ass kicked in a North Rhine - Westphalia local election.... The question begging itself here, of course, is how Europe intends to come up with roughly a trillion in bail-out money. Sell Portugal to China? Cut Greece up into bait and catch whatever fish are left in the Mediterranean Sea? Frankly, I'm stumped. Talk about robbing Peter to pay Paul.... All the European nations are already so hopelessly enmeshed in chains of unfulfillable counter-party obligations that the bail-out might as well be a game of musical chairs played in the Large Hadron Particle Collider.
Alford: EU Shock and Awe Violates Powell Doctrine -Unfortunately, there is no agreed-upon set of criteria to grade or evaluate financial rescue packages. The stakes are high, decisions must be made with imperfect information and in a dynamic setting, and there are numerous uncertainties. Hence the decision to mount this financial rescue package and decisions to go to war have much in common. This suggests that it might be useful to examine this financial rescue package in light of what has become known as the Powell doctrine. Named after the former US Secretary of State Gen. Powell Colin, it specified the criteria under which the US would take military action. It provides a pre-existing, independently determined set of criteria by which complex international decisions can be judged. The Powell Doctrine consists of eight criteria, all of which must be satisfied for the US to take military action. Unfortunately, a quick review suggests that the EU and the IMF would not be able to justify this rescue package if the Powell doctrine were employed as a test.
Was the euro saved by a call from Barack Obama? - Talks on the scale of a bailout deal to rescue the single currency were wavering – then the President intervened. French presidential sources insist that the hero of the hour was Nicolas Sarkozy but that his newly-adopted policy of presidential decorum prevents him from blowing a whole brass section of trumpets, as he would have done a couple of months ago. The whole deal almost collapsed just after midnight, when EU finance ministers had already been meeting for nine hours. The Italian Prime Minister is said to have brokered a telephone compromise between Mr Sarkozy and Germany's Angela Merkel, which allowed an agreement to be announced just as the Tokyo markets were opening at 2am Brussels' time.There appears to be some truth in all these claims but the most startling – and most pivotal role – may have been played by Barack Obama, according to both American and French officials.
Debt Aid Package for Europe Took Nudge From Washington – NYT - Weeks of hesitant half-steps to address Greece’s debt problems had only worsened market worries about the euro, and were threatening the still-fragile economic recoveries in the United States and Asia. Now, Mr. Obama told Mrs. Merkel that the Europeans needed an overwhelming financial rescue to end speculation that the euro — and European unity — could crumble. That call was part of what a senior Treasury Department official called “one long conversation” with European leaders, who over an extraordinary weekend of late nights and early mornings overcame German resistance and agreed to a wholesale expansion of the bloc’s political and financial mission. Bending the rules, they backed the stability of all 16 countries that use the euro with loan guarantees adding up to nearly $1 trillion.
Governments up the stakes in their fight with markets - Governments are playing double or quits in their game with financial markets. The package they announced last weekend is dramatic. But the question is whether it is more than a temporary solution. The answer is: no. As initially designed, the eurozone has failed. It will succeed only if radically reformed. Will the plan work? On the assumption that it is ratified, the answer should be yes, as markets concluded. It greatly increases the cost of betting against the debt of weak governments. The public debt of the eurozone is slightly lower than that of the US, relative to gross domestic product. If the creditworthy governments decide to support the less creditworthy ones, they can do so, for now.
Europe banks: Liquid fuel - EIU - Surrounded by wolves, the group readied its bazooka. It may sound like a fever dream but this, in a sense, is what European Union officials were up to in the wee hours of May 10th. The €750bn support package that the officials unveiled in the middle of the night was meant to scare off predators—bond investors—from savaging the euro area's weakest members when markets opened for trading. (See "In with the kitchen sink".) The long-term effect of the EU's bazooka-brandishing is not yet clear, but the wolves have been cowed, for now.
"The European Union's Dangerous Game" - The agreement by the European Union and International Monetary Fund to provide up to $960 billion of support to the weaker economies, as well as to financial markets, has appeared to calm investors worldwide for now.But this does not resolve the underlying problem, even in the short run. The problem is one of irrational economic policy. The Greek government has reached an agreement with EU authorities (which include the European Commission and the European Central Bank) and the IMF that will make its economic problems worse.This is known to economists, including the ones at the EU and IMF who negotiated the agreement. The projections show that, if their program "works," the country's debt will rise from 115 percent of GDP today to 149 percent in 2013. This means that in less than three years, and most likely sooner, Greece will be facing the same crisis that it faces today.
French Cracks in the Euro-Zone Core - At nearly 80%, France had the fourth-highest ratio of government debt to gross domestic product in the euro zone in 2009. It is rising inexorably, forecast by BNP Paribas to hit 90% in 2012. French government refinancing this year is more onerous than the U.K.'s. France's budget deficit, forecast at 8% of GDP for 2010, is above the euro-zone average of 6.6%. And French tax receipts as a proportion of GDP are already the highest in the euro zone, making it risky to raise taxes without throttling a sluggish recovery" "But financing France's ballooning social-security deficit, forecast at €10.5 billion this year, is the long-term budgetary challenge. Mr. Sarkozy, his authority weakened by a poor midterm election results, faces powerful public-sector unions and a Socialist opposition set against major change, notably increasing the retirement age above 60, the best solution in the long run.
El Pais: France Threatened to Leave the Euro - French President Nicolas Sarkozy threatened to pull his country out of the euro zone unless other members promised to help Greece at the crucial meeting of ministers in Brussels last Friday, according to a report in Spain's El Pais. Details of the meeting were apparently revealed by Spain's prime minister, Jose Luis Rodriguez Zapatero, as he met behind closed doors with Socialist party leaders on Wednesday. An unnamed source at that meeting relayed Zapatero's account that at one point in Brussels, Sarkozy "banged his fist on the table and threatened to leave the euro, which obliged [German Chancellor] Angela Merkel to bend and reach an agreement." Another source at the meeting with Zapatero relayed that "France, Italy and Spain formed a common front against Germany and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."
Sarkozy, the new king of Europe - Berliner Zeitung - At one fell swoop, Germans last weekend surrendered positions they’d considered sacrosanct until recently. Things are shaping along the lines drawn in Paris: so the euro Stability Pact, a German invention, is now outmoded. What is currently keeping the single currency on an even keel isn’t the pact, but the €110 billion rescue package for the Greeks plus the €750 billion parachute for other potentially skint states. Even the no-bailout rule has been de facto thrust aside. The Germans had been toting that clause around like a holy monstrance these past few months to ward off any objections from Karlsruhe [seat of the German constitutional court]. Suchlike qualms, however, were alien to the French, who in the end prevailed. Sarkozy is also getting closer to his goal of forging a European economic government out of the 16 eurozone states. It was that group that passed the key resolutions over the weekend.
Merkel insists treaty changes are essential - Angela Merkel has insisted that European treaty changes are the only way to achieve the kind of EU budgetary surveillance and discipline measures Berlin is seeking. Yesterday’s suggestions from the European Commission have divided her government: while Dr Merkel called them “an important step in the right direction but not sufficient”, her junior coalition partner described the proposals as too sufficient by half. “We need a stronger oversight mechanism for the stability and growth pact and the European Commission can only make suggestions below treaty change,” said Dr Merkel. “We believe that anyone aiming for a durable and robust stability pact has to take treaty change into account.”Her remarks reflect growing concern in her government of its parliamentary majority ahead of next week’s vote on the €700 billion eurozone stability package agreed at the weekend.
Germany, France May Hurt AAA Ratings in 'Ponzi Game' - (Bloomberg) -- Germany and France are among top- rated euro-area states that may compromise their AAA grades by standing behind the debts of weaker members with their 750 billion-euro ($955 billion) stabilization fund.The package is “making debt profiles deteriorate, potentially damaging the ratings of core sovereigns,” said Stefan Kolek, a strategist at UniCredit SpA in Munich. “It’s a kind of Ponzi game at the highest level.”The unprecedented loan package was designed by the European Union and the International Monetary Fund to halt a sovereign- debt crisis that threatened to push Greece, Portugal and Spain into default and shatter confidence in the euro. As part of the support plan, Germany’s Bundesbank, the Bank of France and the Bank of Italy started buying government bonds yesterday.
ECB risks its reputation and a German backlash over mass bond purchases – The European Central Bank risks irreparable damage to its reputation by agreeing to the mass purchases of southern European bonds in defiance of the German Bundesbank and apparently under orders from EU leaders. Jean-Claude Trichet, the ECB's president, denied there had been any political interference. "We are fiercely and totally independent," he said. It is clear, however, that the two German members of the ECB's council voted against the move, a revelation that may cause a catastrophic political backlash in Germany.
Germany might have to foot entire euro aid bill-SPD - BERLIN, May 11 (Reuters) - Germany's opposition Social Democrats (SPD) said on Tuesday they had not decided whether to support a European rescue package for the euro, and warned the country could end up footing the entire cost of the bill.The package -- 440 billion euros in guarantees from euro states plus 60 billion euros in a European stabilisation fund -- includes some 123 billion in loan guarantees from Germany, a German government source told Reuters on Tuesday.Another source said Chancellor Angela Merkel's cabinet had approved Germany's share in the aid, which has been strongly criticized by conservative media and could face a legal challenge at the country's highest court.
Merkel's expensive dirty weekend - This was an expensive weekend for Angela Merkel, financially and politically. For months she had basked in her image as Germany’s new Iron Chancellor – “Madame Non”, as the French press had come to call her. She enjoyed the adulation of the fiscally righteous in her own party. She fell ominously silent when anti-Greek xenophobia broke out across Germany. It was all a big bluff, a giant political miscalculation, costing the eurozone a cool €750bn. Why did she do it? Was it just about those elections in North-Rhine Westphalia last Sunday? I think the answer is No, but the elections played a part. On February 11, when Ms Merkel signed a political agreement in support of Greece, it had seemed vaguely plausible that the main capital market test would not come until mid-May. She may have calculated that the day of reckoning could be postponed at least until that time.
'The Rescue Package Has Bought Nothing But Time' - der SPIEGEL - With the massive 750 billion euro rescue package, the European Union is hoping to reinvigorate the ailing euro. But not everyone thinks it can be done. German commentators on Tuesday voice their doubts. Christoph Schmidt, head of the economic research institute RWI, told the tabloid Bild that European governments "have merely bought themselves time, nothing more." He added that the package was missing clear measures for helping heavily indebted euro-zone countries reduce their sovereign debt, a problem seen at the root of the common currency's current difficulties.
ECB Risks Its Reputation And A German Backlash Over Mass Bond Purchases -The European Central Bank risks irreparable damage to its reputation by agreeing to the mass purchases of southern European bonds in defiance of the German Bundesbank and apparently under orders from EU leaders.Jean-Claude Trichet, the ECB's president, denied there had been any political interference. "We are fiercely and totally independent," he said. It is clear, however, that the two German members of the ECB's council voted against the move, a revelation that may cause a catastrophic political backlash in Germany.
Britain On Its Own If Market Strikes: France -Britain may find itself on its own if it comes under pressure from the markets, France's chief financial regulator warned Tuesday, after London refused to join Europe's rescue package.Britain is not part of the eurozone single currency bloc and refused to help pay for the 750-bil-lion-euro ($952 billion) package put together this week by its European Union partners to shore up debt-ridden economies like Greece."The British will certainly find themselves targeted, given the political difficulties they have," said Jean-Pierre Jouyet, head of France's AMF market regulator, as Britain's political parties struggle in London to negotiate a coalition...the French official said that by standing outside the European rescue package, Britain had left itself alone to face a possible onslaught by currency traders on the pound
FT Alphaville » Oh, those evil, speculative… European officials - The most recent and rather brazen example of doublespeak — in which speculation regarding the solvency of a country or the strength of a currency is fine only when they’re doing it — comes courtesy of Jean-Pierre Jouyet, on the subject of the UK. Quoth the chairman of France’s financial regulator, L’Autorité des marchés financiers, according to the Daily Telegraph on Tuesday:“The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you. If you don’t want to show solidarity to the eurozone, then let’s see what happens to the United Kingdom,” he told Europe 1 radio.(The UK, a non-eurozone state, declined to commit funds to the euro rescue plan. European policymakers are not pleased.)
Europe's fiscal Fascism brings British withdrawal ever closer… The European Commission is calling for EU powers to vet budgets of the 27 member states before the draft laws have been presented to the House of Commons, the Tweede Kamer, the Folketing, the Bundestag, the Assemblee Nationale, or other national parliaments. It applies to Britain even though we are not in EMU.Fonctionnaires and EU finance ministers will pass judgement on the British (or Dutch, or Danish, or French) budgets before the elected bodies of these ancient and sovereign nations have seen the proposals. Did we not we not fight the English Civil War and kill a king over such a prerogative?Yet again we are discovering the trick played on our democracies by Europe’s insiders when they charged ahead with EMU, brushing aside warnings by their own staff economists that monetary union was unworkable without fiscal union. Jacques Delors knew perfectly well that this would lead inevitably to a crisis, but it would be the “beneficial crisis” that would force sovereign parliaments to submit to demands that they would never otherwise accept.
They Have Made a Desert - And called it successful adjustment. Estonia is being hailed for its fiscal rectitude, which qualifies it for entry into the euro. Meanwhile we learn that Latvia is often cited as an example for Greece as it undergoes a brutal internal devaluation while keeping its currency pegged to the euro. So how are these role models doing? Unemployment in Estonia is 19.8%; in Latvia, 20.4%. And here’s a little comparison of the depths of recession in three cold countries: Yes, that’s right: the oh-so-virtuous Baltics have done worse than Iceland. But their money is sound
Argentina Backs Off $1 Billion Bond Sale Plan as Yields Surge (Bloomberg) -- Argentine Economy Minister Amado Boudou said last week’s jump in bond yields may prompt the government to shelve plans to sell as much as $1 billion of bonds, its first international offer since defaulting in 2001.The government aimed to price new 8.75 percent dollar bonds due in 2017 on May 14, part of its proposal to restructure $20 billion of defaulted debt left out of a 2005 settlement. Any sale would set a benchmark rate and isn’t needed to raise funds, Boudou said at a press conference last night in New York. “If the conditions are not acceptable to our country, we won’t do it,” Boudou said. “Argentina can change the deadline. We can postpone it because it is a very complex week.”
EU imposes wage cuts on Spanish ‘Protectorate’, calls for budget primacy over sovereign parliaments - Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5pc this year and frozen in 2011. "We must make an extraordinary effort," he said. Pension rises will be shelved. The country’s €2,500 baby bonus will be cancelled. Aid to the regions will be slashed and infrastructure projects will be put on ice. Mr Zapatero’s own monthly pay will fall 15pc to €6,515. Mariano Rajoy, the conservative opposition leader, said years of ostrich-like denial by the Zapatero team had reduced the country to an EU "protectorate".
Spanish PM makes debt crisis U-turn with emergency cuts - Spain's prime minister, José Luís Rodríguez Zapatero, performed a radical U-turn in his policy of trying to survive the financial crisis without applying painful measures by announcing emergency cuts to civil service pay and public investment this morning. Civil servants will have their pay cut by 5% this year, with a freeze next year. Zapatero and members of his socialist government will take a 15% cut. There will also be cuts in spending on child welfare, home care for the elderly and a freeze on some pensions next year. A total of €6bn (£5.1bn) of investment spending will disappear over the next two years as part of an attempt to cut a further 1.5% off next year's deficit in order to bring it down to 6% of GDP in 2011.
Negative core inflation in Spain adds to pressure Economy… - In an environment where markets are poring over every piece of data that comes out of the euro-zone's struggling southern peers, a negative turn in core inflation for Spain was not about to go unnoticed. Final April consumer price inflation data released on Friday showed that for the first time in the series of the data, the core inflation rate turned negative to - 0.1% on an annual basis from 0.2% in March.
Portuguese government readies 'fiscal shock' - The Portuguese government prepared Thursday to announce a “fiscal shock” in the form of tax hikes and deep wage cuts to speed up a deficit reduction drive, press reports said here.“All taxes are going up,” reported Diario de Noticias.The economic journal Jornal de Negocios described the move as a “fiscal shock” coming a day after neighouring Spain unveiled harsh public sector wage and budget cuts for the same reason.Portugal and Spain, like Greece, are struggling to stabilise deficit-plagued public finances that have eroded market confidence and driven up their borrowing costs, sparking fears of a default.
How bad off are the PIIGS? - The crisis in Europe was sparked by the widespread belief among investors that Greece's financial woes were just the tip of a much bigger debt iceberg in the Eurozone. The fear has been that other member nations – Portugal, Ireland, Italy and Spain, which, along with Greece, are called the PIIGS – were also buried in debt and could tip over into crisis just as Greece has done.But is that really the case? Are all the PIIGS in the same hot water as Greece? Barclays Capital economists ran some figures in a recent report analyzing the chances that the various PIIGS would fall into Greek-like debt meltdowns. What did the findings show? Though the other PIIGS are better off than desperate Greece, most of them unfortunately are very, very vulnerable.
E.U. Plans Peer Review for Member States' Budgets - Seeking to capitalize on the momentum generated by Europe’s huge rescue plan for its single currency, the European Commission on Wednesday outlined ambitious proposals to give countries that use the euro a say over each other’s budget plans. Proposing the most far-reaching integration ever envisaged for the 16-country single-currency zone, the European Commission president, José Manuel Barroso, warned Europeans that they “can’t have monetary union without having economic union.” “Member states should have the courage to say whether they want an economic union because, if they don’t want that, it is better to forget monetary union altogether,”
A far reaching proposal for eurozone governance reform - This is the potentially best news we have heard during this crisis yet. The Commission yesterday published a total overhaul of the governance procedures of the eurozone, the biggest since the start of the single currency eleven years ago. Given the importance of the issue, the best reference are the not media reports but the Commission’s 11 page document itself. The main drift of the proposal is a much broader policy co-ordination process that extends far beyond the current focus on annually reported deficit. Specifically it includes an upgrading of the debt sustainability criterion in the Maastricht Treaty, and a more automatic application of the penalty procedures of the stability pact. Furthermore, the Commission proposes early-stage co-ordination in budgetary processes. At the moment, member states only present their budgets as a fait-accompli, after they have been decided. There are no proposals for a common European bond, though this could still happen within the co-ordination mechanisms proposed in the paper.
IMF report predicts long, painful road ahead for Greece - After years of growth fueled by low-interest borrowing available after Greece adopted the euro, the country must now go through years of "internal devaluation" -- falling wages, rising unemployment rates and stunted growth. As a member of the 16-nation European Monetary Union, the country does not have its own currency. But using local economic conditions, the IMF staff estimated that the country's "effective exchange rate" was overvalued by as much as 30 percent -- an excess that will have to be squeezed out of the economy in a "long and painful process." The first round of adjustment is already underway in the form of government spending cuts and tax increases equivalent to more than 8 percent of the country's economic output. Though intended to make the economy more productive in the long run, the size of those initial steps will first serve as a drag, keeping the country in recession for at least another year and helping drive the unemployment rate to near 15 percent in 2011.
Deutsche Bank chief casts doubts on Greece’s solvency - Here’s how Financial Times Deutschland (FTD) is reporting it (my translation below): Deutsche Bank chief Josef Ackermann does not believe that Greece will be able to fully repay its loans."I doubt whether Greece will really be in a position to generate this [economic] performance," Ackermann said on ZDF. That would require "unbelievable efforts". The manager did not join in allegations that the German government acted too slow. Even if he does not believe in a repayment, Greece had to be stabilized, said Ackermann. If the country "collapsed", this would almost certainly spill over into other countries and could lead to "a kind of meltdown." The important thing is that everything is being done so that a restructuring for Greece will not be necessary. This would hit exactly the banks in Germany, "which are now essentially state-owned.”
If you can’t grow, you can’t pay back what you owe - The CEO of Deutshe Bank echoed today what many of us know but European officials and the ECB don’t want to admit as evidenced by the historic bailout plan. In an interview he said “I would doubt that Greece over time will be in a position to come up with the economic potential” to pay its debts. If Greece, Portugal and others can’t generate nominal GDP growth above its cost of funding, they enter a debt death spiral that can only be rescued by debt extinguishment thru restructuring which then lays the foundation for future growth.
Greece forced to buy arms: MEP - France and Germany, while publicly urging Greece to make harsh public spending cuts, bullied its government to confirm billions of euros in arms deals, a leading Euro-MP alleged Friday.Franco-German lawmaker Daniel Cohn-Bendit said that Paris and Berlin are seeking to force Prime Minister George Papandreou to spend Greece’s scarce cash on submarines, a fleet of warships, helicopters and war planes.“I met Mr Papandreou last week. I was in Athens. I’ve known him for a long time,” Cohn-Bendit told reporters, accusing Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy of blackmailing his friend.
Can Greece Cut Its Deficit by 10% of GDP? - Greece needs money fast. The International Monetary Fund (IMF) and members of the Euro-zone have that money. But before they lend it to Greece (at very favorable interest rates), they are demanding that Greece get its fiscal house in order.As a result, Greece is proposing an austerity plan that would reduce its out-of-control budget deficits (currently standing at more than 13% of GDP) by at least 10-11% of GDP.You might wonder whether that’s possible. History suggests the answer is yes, at least in principle. Indeed, several countries have achieved even larger deficit reductions.According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:
The Battle Lines - The small points of light amid the sea of darkness, the lonely calls to resistance like in Greece, are the only light by which it’s possible to see any hope for humanity. The Greek bailout is a new evolution of the Bailout, as it must become ever more aggressive to propagate itself. Here we see the exact same battle lines which are so clear in Bailout America replicated on the stage of the great globe itself. The battlefront in the hominid civil war is stark. We have the kleptocracy – the big banks, all other corporate rackets, all Western governments, and the rootless globalization cabals like the IMF and the EU which never had any authority or legitimacy even in theory, all of these basing their strength upon the financialization of all economy and politics. This financialization assault, nothing other than the modern form of criminal looting, is upon humanity itself, upon all peoples, all taxpayers, all workers, upon all real, productive economic activity, upon all human politics, all democracy, all true freedom.
Moody's Says 80% Chance Greek Credit Rating Will Be Cut Again (Bloomberg) -- Moody’s Investors Service said there is a “greater than” 80 percent chance it will cut its rating on Greece’s debt again as the government struggles to push through measures to reduce its budget deficit. “A multi-notch downgrade is likely,” Moody’s said in a statement. The rating company cut Greece to A3 from A2 on April 22 and said today that an upgrade is “unrealistic in the foreseeable future.” The debt crisis in Greece and the risk it may spill over to other indebted euro-area nations prompted the bloc’s governments to unveil an unprecedented financial lifeline with the International Monetary Fund of almost $1 trillion earlier this week. Standard & Poor’s on April 27 cut Greece’s credit rating three steps to junk, marking the first time a euro member lost its investment grade since the currency’s 1999 debut.
About That Mediterranean Work Ethic - According to many accounts of the financial crisis in Europe, one reason intervention has been slow is that it is hard to convince Germans, widely seen by themselves and others as hard-working, thrifty and virtuous, to "bail out" those lazy, spendthrift Greeks. This bit of OECD data on hours worked per worker (via Economix) runs contrary to the stereotypes. That is, according to the OECD, the average Greek worker logs 2120 hours per year - 690 more than a German worker.
Euro Will Resume Decline to $1.20, Barclays, UBS Say - The advance in the euro this week will be “temporary” as policy in the region is becoming “very unfavorable,” said UBS AG, the second-largest currency trader. The euro strengthened today after European policy makers announced an unprecedented loan package worth nearly $1 trillion and unveiled a program of bond purchases.“We remain euro bears,” David Forrester, a currency economist at Barclays Capital in Singapore, wrote in a note to clients. The agreement means “the ECB will have to play a larger role in terms of keeping monetary policy loose for longer in order to help euro area countries to grow out of their fiscal problems.”
Euro May Slide to 1999 Debut Level on Deficits, SMBC’s Uno Says - (Bloomberg) -- The euro may tumble back to its starting level of $1.18 in January 1999 as widening deficits in the European Union jeopardize the single currency’s status, according to Sumitomo Mitsui Banking Corp. The euro’s emergence as an alternative to the dollar as a major currency is in doubt because none of the European member states “follow budget deficit rules set by the Maastricht Treaty,” said Daisuke Uno, chief strategist at the unit of Japan’s third-largest banking group. The treaty stipulates that EU states should keep their budget deficits within 3 percent of gross domestic product.“The time has come to reconsider the status of the euro,” Uno said. “The currency needs to go back to the drawing board and start over.”
Euro could reach parity with dollar: German economist - "As long as uncertainty over Greece and other countries on the periphery of the euro area continues, the euro will remain under pressure," Thomas Mayer, chief economist at Deutsche Bank, told the Bild am Sonntag weekly."I think we could soon see 1.20 against the dollar and a further decline in the direction of parity is definitely possible," added Mayer. On Friday, as volatile markets closed for the week, the euro fetched 1.2755 dollars as investors warned that failure to nail down a credible rescue plan at Sunday's meeting of EU finance ministers could pressure the euro even more.Meanwhile, other economists warned of the dangers of inflation returning in Germany in the wake of the Greek crisis.
Who is Europe really bailing out? - Tyler Cowen has some smart thoughts on the European Union's announcement of a $750 billion euro bailout fund: 1. The fundamental cause of the financial crisis has been people and institutions thinking they are wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance. More here. Remember that this is no more a bailout of Greece and Spain and Portugal than TARP was a bailout of subprime borrowers. The indebted countries are still looking at low growth, painful budget cuts, aching recession, high-borrowing costs, and an inflexible currency that will stop them from increasing their exports. Remember what Desmond Lachman said. Rather, this is a bailout of the European banking system (and possibly some international banks), much like TARP was a bailout of our banking systems (and some international banks).
Euro Package Leaves Governments Out of Ammunition (Bloomberg) -- Big problem, big number. The leaders of the euro-area countries have thrown 750 billion euros ($963 billion) at shoring up confidence in the single currency. But it doesn’t matter how many zeros you put on the end of a bad idea. It’s still a bad idea. The new stability package suffers from the same problem as all the other ones the European Union has come up with in the months since the Greek crisis started rattling the markets last year: It tries to fix the symptoms, not the causes. Greece has exposed deep structural problems within the euro. There is no mechanism to stop governments breaking the rules. There is no popular support for massive fiscal transfers between countries. The rules for the euro area have turned out to be unreliable. And there is no way to start stimulating economic growth again in the heavily indebted nations. Those are the hard questions. Even 750 billion euros won’t get close to answering any of them.
Volcker: Europe Must Become More or Less Integrated - White House economic advisor Paul Volcker said Thursday that the lesson of Europe’s current woes is that the euro zone will have to integrate to a greater or lesser degree than its present state. At an event in London, Volcker said the euro’s problems had been visible from the outset, because it had a common monetary policy but not a common fiscal policy, and had been anticipated to some degree in the stability and growth pact. “Clearly, I think we have to say that the euro failed and fell into a trap that was evident at the beginning,” Volcker said. “I think Europe’s going to have to decide in the end whether to get more integrated or to get less integrated, in which case the euro is the question.”
Volcker Sees Euro ‘Disintegration’ Risk From Greece (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said he’s concerned that the euro area may break up after the Greek fiscal crisis that sparked an unprecedented bailout by the region’s members. “You have the great problem of a potential disintegration of the euro,” Volcker, 82, said in a speech in London yesterday. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.” European leaders pledged a rescue package of almost $1 trillion this week to counter a mounting debt crisis and restore confidence in the currency. Former U.S. Treasury Secretary John Snow said this week the euro may need a common fiscal policy to survive, a comment echoed by Norman Lamont, who was U.K. finance minister when Britain opted out from the euro in 1992.
Volcker Talks of Possible EU Breakup (Loose Lips Sink Ships Edition) - Yves Smith - I would imagine that some EU policymakers are not happy right now. We’ve put up links in Links from various European media outlets yesterday and today which describe the unusual lengths (by modern geopolitical standards) that Obama took to push Eurozone leaders to agree on a bailout package last weekend. Obama reportedly depicted the financial markets as a hostile force: Dealing with the markets was like dealing with a military enemy, Mr Obama said. You had to use “overwhelming force”. He also offered help from Washington to buy up euros for dollars and ease the pressure on European central banks. So it looks as if Paul Volcker is a turncoat. It’s one thing for people in the private sector to express negative views about the future on the Eurozone, quite another for someone of Volcker’s stature who is playing a policy role for the Administration to undermine an initiative deemed so important that the President has thrown its weight behind it.
Euro Breakup Talk Increases as Germany Loses Its Currency Proxy (Bloomberg) -- Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said.Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending. The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart.
Merkel Warns of Europe's Collapse - In a dramatic appeal for Europeans to come together to address the common currency crisis, Chancellor Angela Merkel warned Thursday that if the euro collapses, so will the idea of European unity. She also described the current euro crisis as Europe's greatest test since the collapse of communism. "We have a common currency, but no common political and economic union," she said. "And this is exactly what we must change. To achieve this -- therein lies the opportunity of the crisis." European governments, she said, promised their citizens stability for the common currency, the euro, "and we must keep that promise." Merkel described the current crisis as the "greatest test for the EU since the collapse of communism." If we do not succeed in mastering this crisis, she warned, it will have "unforeseeable consequences"
ECB Keeps Markets 'in the Dark' About Government Bond Purchases (Bloomberg) -- The European Central Bank stripped out details of its bond-purchase plan from a daily report on euro-region liquidity conditions, disguising the size of its market activity.The ECB said in a market notice today that asset purchases were excluded from the category titled “Outstanding Open Market Operations.” A central bank spokesman declined to comment. Executive Board member Jose Manuel Gonzalez-Paramo said yesterday the ECB won’t say how much it bought when it announces details of how it plans to sterilize the purchases next week. The Frankfurt-based central bank said May 10 it will buy government and private bonds as part of an unprecedented bid to rescue the euro after Greece’s fiscal crisis spread to other indebted nations in the bloc. The move came in tandem with the unveiling by European finance ministers of a financial lifeline worth almost $1 trillion.
What the ECB has been buying - Europe’s central banks began buying peripheral European debt on Monday. Yields almost immediately dropped on Greek, Portuguese, Spanish and Irish debt. But what have the central banks been buying exactly, and what effect has it had on the liquidity of the bonds. Remember that the European Central Bank’s (ECB) bond-buying is meant to ease the strain in the sector. And what strain. For much of last month, before the announcement of the EuroTarp bailout package, you could drive a chariot through Bid/Ask spreads on Greek debt. We don’t have an old table but we’re told by Marc Ostwald over at Monument Securities that there wasn’t even much of a market last week.
Europe aid package boosts bonds, not euro - Five days is a short time to judge a nearly $1 trillion aid package, but so far efforts by the European Union to put a halt to a financial market crisis have indeed stopped a precipitous drop in government bond prices -- but done little to shore up the value of the euro. "I suppose if you want to be really simplistic about it, the European Central Bank is buying peripheral bonds and it's not buying the euro," said Rob Carnell, chief international economist for ING in London. "The euro is more a reflection of the overseas investor view of the whole package, and it seems to be registering a healthy degree of skepticism."
Barack Obama, the president of the European Council - Herman Van Rompuy n’est plus le président du Conseil européen des chefs d’État et de gouvernement. Il a été victime, la semaine dernière, d’un coup d’État mené avec succès par le président américain qui a décidé de prendre les affaires des Européens en mains, lassé de voir ces sales gosses incapables de se mettre d’accord pour sauver leur monnaie unique au risque de déclencher un tsunami susceptible de ravager la planète (trans Fr: Herman Van Rompuy is no longer the President of the European Council of Heads of State and Government. He was victim, last week, a-State successfully led the American President who has decided to take cases of Europeans in hands, tired of seeing these dirty kids unable to agree to save their currency to the risk of triggering a tsunami would ravage the planet)
Geithner on Europe: “Subprime is Contained” Redux? - Yves Smith - Most of the major figures in the financial crisis have had an “insert foot in mouth and chew” moment, although none have yet proven as memorable as Irving Fisher’s “Stock prices have reached what looks like a permanently high plateau.” less than a week before the Great Crash of 1929 commenced. Bernanke’s was his March 2007 Congressional testimony, in which he argued that the subprime crisis was contained. He further estimates losses at $50 to $100 billion. Similarly, Hank Paulson contended when he asked for authority to rescue the GSEs that it was more powerful if it was substantial: “If you’ve got a squirt gun in your pocket you may have to take it out … If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.” Paulson put Fannie and Freddie into conservatorship less than two months after his comment.Geithner’s moment may have arrived. In a Bloomberg TV interview (to be aired), the Treasury Secretary maintained that Europe could surmount any sovereign debt related challenges and the US economy would be unscathed:
How Republicans Would Stop U.S From Funding IMF Loans to Greece - An evolving Republican proposal — which the Democratic House leadership is unlikely to bring to a floor vote — would direct the Treasury secretary to vote against any IMF assistance to European Union nations until every member of the EU brought its debt-to-gross-domestic-product ratio down to below 60%. According to the IMF figures, many European countries are way above that figure, as is the U.S. — suggesting the Republicans are looking for a way to make sure the U.S. never votes for European support at a time when Europe might need the money.With the anti-bailout feeling deep in the U.S., the Treasury is taking the challenge seriously, putting a “fact sheet” that notes, correctly, the “the IMF has made no formal commitments under Europe’s newly announced support program.” In fact, the IMF can’t. The IMF doesn’t make blanket commitments to any region. It approves loans by individual countries. So far no euro-zone country outside of Greece has asked for a loan. The U.S. backed that one.
It's Not About You - So Republicans are coming out to oppose US participation in a bailout of Greece — which is interesting, given that nobody is asking us to participate. (Yes, we’re part of the IMF, which will provide part of the money — but that’s a fraction of a fraction, and it’s a really bad idea for IMF members to start picking and choosing which programs they’re part of.) Aside from the dumbness of the thing, though, what strikes me about this is the delusion — all too common in America, especially though not only on the right — that everything is about us, springing from a misconception of just how super a superpower we really are.
Republicans introduce bill to prevent Euro bailout After a week of preemptive attacks on a possible IMF bailout of Greece, Rep. Mike Pence (R-Ind.) introduces the European Bailout Protection Act, aimed at preventing taxpayer dollars from going to a rescue plan."This legislation would require that countries like Greece cut spending and put their own fiscal house in order," says Pence, backed up by other members of the House GOP, "instead of looking to the United States for a bailout. We face record unemployment and a debt crisis of our own, and American taxpayers should not be forced to bear the risk for nations that have avoided making tough choices."The full release is below the fold, with the detail that the bill "does not permanently prohibit the IMF from lending" to the troubled counties. Nevertheless, Ezra Klein is not a fan of this proposal...
Market Edge: Debt Crisis Enters Second Phase (Video) The global debt crisis is in its second stage as governments deal with the debt absorbed from the private sector, and record gold prices have been reflecting these worries, according to SCM Advisors strategist Max Bublitz. Laura Mandaro reports.
Return to the Abyss – Roubini - One interpretation of financial crises is that they are, in Nassim Taleb’s phrase, “black swan” events – unplanned and unpredictable occurrences that change the course of history. But, I show that financial crises are, instead, predictable “white swan” events. What is happening now – the second stage of the global financial crisis – was no less predictable.Crises are the inevitable result of a build-up of macroeconomic, financial, and policy risks and vulnerabilities: assets bubbles, excessive risk-taking and leverage, credit booms, loose money, lack of proper supervision and regulation of the financial system, greed, and risky investments by banks and other financial institutions.History also suggests that financial crises tend to morph over time. Crises like those we have recently endured were initially driven by excessive debt and leverage among private-sector agents – households, banks and financial institutions, corporate firms. This eventually led to a re-leveraging of the public sector as fiscal stimulus and socialization of private losses – bail-out programs – caused a dangerous rise in budget deficits and the stock of public debt
New slump in euro tests Europe's resolve: Do they really want a stronger currency? - Europe’s rescue plan for its weakest member states stabilized the continent’s stock and bond markets this week. But if the goal was to stop the euro’s slide, the rescue is fizzling. When they announced their rescue plan on Sunday, European leaders talked about the importance of defending the 11-year-old euro. But they also know that allowing the currency to slide further could help their economy longer-term by making their exports cheaper. Germany, in particular, stands to benefit from a falling euro because of its huge export business.
Central banks are losing credibility - John Taylor - Whether or not one believes that the €750bn European rescue plan will stabilise financial markets, its consequences for Europe’s economies are surely negative. Indeed, while many cheered the initial rebound in equity markets, the reactions in currency markets on the first trading day after the announcement were a harbinger of these negative consequences: the initial gains of the euro were erased by the end of the trading session. Of course, the bail-out for holders of Greek government debt – and now possibly Spanish and Portuguese government debt – raises familiar problems of moral hazard that will increase risk-taking and encourage irresponsible government policy in the future. The loans and loan guarantees from other countries in Europe do not deal with the simple fact that the Greek government cannot service its debt and will eventually need to restructure it. At best the package gives officials some breathing room as they endeavour to reduce deficits and eventually restructure debts, though it is more likely that the adjustment problem will be made worse by being pushed down the road.
ECB May Kiss Credibility Goodbye - (Bloomberg) -- There is an old saying among central bankers that credibility is earned in years of hard work, but can be lost overnight. On Sunday night, the European Central Bank may have said goodbye to its credibility when it agreed to buy the government bonds of euro nations in trouble. This casts a dark shadow over the euro area’s 750 billion- euro ($980 billion) stability package, which was dressed to impress, and seems to have worked so far. Markets will probably advance in the near term as short positions need to be covered. A major casualty of the emergency decisions was the ECB. With its move to prop up the failing bonds of governments in financial distress, it has allowed itself to be transformed into an agent of fiscal policy. The intention to sterilize bond purchases means, in effect, that it taxes euro-area private borrowers to support governments in difficulty. In the long run, this is likely to undermine confidence in the ECB and the euro.
Understanding the Eurozone crisis - VoxEU - Fiscal crisis, contagion, breakdown of the Euro... Let’s try to understand what is going on. In the past few days, the scenarios discussed in the media have been changing so rapidly and dramatically that for many it may be hard to grasp the reason behind them. But in emergencies such as the one we are currently experiencing, they way to escape the worse scenarios and find an exit strategy is stick to clear-headed thinking.
Snow Says Euro Faces 'Tough' Survival Without Budget (Bloomberg) -- Former U.S. Treasury Secretary John Snow suggested the euro may not survive unless member nations agree to merge policies from budgets to labor markets.The common currency has weakened against the dollar this year amid investor concern on how indebted nations will cut budget deficits and access aid if needed. European Union officials agreed to a $1 trillion bailout this week to keep Greece from defaulting and stem a rout in government debt that jeopardized the ability of Spain and Portugal to borrow.“For the euro to be able to survive long term, fiscal consolidation of some kind -- tax policy consolidation, fiscal policy consolidation -- is probably necessary,” he said. “But that’s not enough, you really need one labor market, one capital market. Europe is going to face hard choices in the future to make this thing work.”
Euro Has No Future Without a Political Union - (Bloomberg) -- Since the eruption of the Greek crisis, a feeling of doom and gloom about the future of the euro area has preoccupied analysts and financial markets. The $1 trillion financial-assistance program that was put together on May 9 by the European Union’s Ecofin Council might have stemmed the prevailing panic, but it hasn’t taken away the sense that the common currency is doomed. There is a strong feeling that the collapse may have been avoided for the moment but that it will implode sooner or later. Why this sudden pessimism? Just after the outbreak of the banking crisis, euro-member countries were congratulating themselves about the protection that the region provided its members. All this is gone now. The euro area has appeared to be peculiarly fragile in coping with the sovereign-debt crisis. It’s certainly not the size of government debt and budget deficits of the region as a whole. The debt-to-gross-domestic- product ratio in the euro area is now smaller than that of the U.S., and it is increasing much slower as well.
Ignoring The Elephant In the Euro - Krugman - When the idea of the euro was first broached, there was extensive debate about whether Europe constituted an “optimum currency area”; the key question was whether European nations would have an adequate way to adjust to “asymmetric shocks”, which left some economies more depressed than others. When countries have their own currencies, they can deal with such shocks, at least in part, by devaluing — an argument made most eloquently by none other than Milton Friedman (pdf). Lacking that alternative, something else is needed. So now we have a euro crisis, which — to me at least — hinges crucially on that very issue. .
Welcome to the OECD debt trap - George Magnus’ most recent report on the upcoming global structural crisis to come is so good, we thought it was worth highlighting some additional extracts.Consider, for instance, the charts below. According to the UBS senior economic adviser, these reflect the makings of a potential debt-trap in not one, but numerous over extended OECD governments the world over: As he explains:There is little on offer in the underlying details of most governments’ deficit and debt arithmetic moreover that would suggest these debt ratios are about to peak and then decline to more manageable levels in the period ahead.Indeed on current policy settings the evidence suggests that debt-to-GDP ratios will continue to climb. The reasons are two-fold and relate to conventional textbook definitions of a ‘debt-trap1’
Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust - Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it's both. China's property and infrastructure bubbles are massive; that is for certain. Moreover, China's biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs.While it's doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest. Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not.
When risk becomes uncertainty - It’s going to be another panicky weekend in Europe after today’s torrid market action: the positive effects of last weekend’s emergency meetings clearly didn’t last even until Friday, and the ever-weakening euro is now dragging down the continent’s bourses. This isn’t (just) a sovereign-credit issue any more: the financial markets have worked out that there’s a pretty simple trade-off between fiscal austerity and economic growth.At the same time, markets clearly don’t believe that fiscal austerity is going to be a reality either: Greece’s CDS spreads are now back out over 600bp, and the rest of sovereign Europe seems to be gapping out too.Most worryingly of all, the biggest losers today on European stock exchanges have been the banks — which means that we could be heading for a reprise of the 2007 credit crunch.
Why it makes sense to fear Greek default - Is everybody overstating the consequences of a Greek default and/or devaluation? The Economist points out that Europe has seen quite a few defaults in recent decades (Russia, Poland) and also break-ups of currency unions (Czechoslovakia, Yugoslavia) — and that none of these events caused a lot of lasting damage. I’m not convinced, if only because the Russia default caused the collapse of LTCM and a serious crisis; if it weren’t for tough arm-twisting by the Fed and billions of private-sector dollars from America’s biggest banks, it could have been much worse. More generally, financial markets are good at taking the collapse of risky assets in their stride: what they’re bad at is dealing with the collapse of assets they thought were safe. The euro was designed to be a super-safe currency; as such, the repercussions of it falling apart would surely be many orders of magnitude greater than anything we saw in the wake of the collapse of the unlamented Yugoslav dinar.
Greek Lessons for the World Economy – The $140 billion support package that the Greek government has finally received from its European Union partners and the International Monetary Fund gives it the breathing space needed to undertake the difficult job of putting its finances in order. The package may or may not prevent Spain and Portugal from becoming undone in a similar fashion, or indeed even head off an eventual Greek default. Whatever the outcome, it is clear that the Greek debacle has given the EU a black eye. Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.
Davos Is for Wimps, Ninnies, Pointless Skeptics: Michael Lewis (Bloomberg) -- It's become almost obligatory for the world's most important economic people, at the beginning of each year, to travel joylessly to the base of a Swiss ski slope and worry. And to worry not privately, with dignity, but publicly, to anyone who will listen. `The system is becoming very complex. The risk of some crisis happening is rising,'' says Nouriel Roubini, chairman of Roubini Global Economics. ``The world isn't pricing risk appropriately,'' says Steven Rattner, co-founder of Quadrangle Group. ``Excessive borrowing and risk-taking,'' intones Juergen Stark, chief economist for the European Central Bank. ``The last time we talked,'' says William Rhodes, senior vice chairman of Citicorp Inc. (in case you didn't hear him the first time), ``I mentioned we're going to get some adjustments some time in the future. So this is a time to be prudent.'' To which Stephen Roach, chief economist of Morgan Stanley adds, ``What's occurring right now in markets and policy circles is a dangerous degree of complacency.''
What Makes a Successful Currency Union? - World Bank - Market movers and shakers are beginning to seriously consider the possibility of a eurozone breakup (or, at the least, a Greek exit). Up till now, the voices arrayed against the euro have typically been euro-skeptics from the start---voices such as the four German professors who took the German government to court over its entry into the eurozone, euro perma-bear Marty Feldstein, and, most famously, Milton Friedman, who ventured that the euro would not survive its first crisis. The price of the euro---along with expected future prices---have responded accordingly.(see figure). Many commentators have adopted a "told-you-so" attitude to their analysis, raising the familiar refrain that the eurozone does not satisfy the classic conditions necessary for a successful monetary union: In particular, that Europe does not have sufficiently flexible labor markets and that direct fiscal transfers between member states are undeveloped and, hence, unavailable for offsetting the inevitable growth differentials.[*] Without these policies, it is argued, the eurozone cannot continue.It is useful, then, to think about just how important these supposed sustainability mechanisms are.
U.S. National Debt Is High and Worrisome, but Europe Is Much Worse Off - As Europe's debt woes play out in a disturbing fashion, investors on this side of the Atlantic are wondering if the same thing could happen in America. With a public debt to GDP ratio of 90% and climbing, the U.S. isn't so far behind Greece's 115% mark, after all. And there's no shortage of high profile doomsayers on this front, either. Harvard historian Niall Ferguson, for example, has long warned that Greece is a preview of things to come in the U.S. A celebrated new book by Ferguson's colleague Ken Rogoff, an economist, warns of the inevitable dangers that come with mounting government debt.. Sure, there are a handful of similarities between Greek and American circumstances. But evaluating the risks that public debt poses is a highly complicated proposition not easily boiled down to a few correlations. And the best illustration of that may be the surging popularity of the Japanese yen, a currency that rallied sharply in the wake of European debt jitters.
World Markets Panic Over Eurozone Investor panic hit markets worldwide as fears grew that austerity measures facing troubled eurozone countries would derail recovery and spark social unrest. Markets were jittery all day but an accelerated sell-off began in late trading following strongly worded comments from Axel Weber, a senior policymaker at the European Central Bank and head of Germany's Bundesbank. "It is important not to underestimate the dangers to financial stability that still exist," he said in a speech in Rio de Janeiro. "The focus of markets has shifted in recent months towards concerns about the situation of public finances in a number of countries across the globe."
ECB President Trichet sees economy in deepest crisis since WWII - German news weekly Der Spiegel reported that Jean-Claude Trichet said that since the beginning of the financial crisis in 2008 "we have experienced and we are experiencing really dramatic times." Trichet was quoted as saying that there was no doubt the economy "is in its most difficult situation since World War II or perhaps even since World War I."In an interview to be published Monday, Trichet said the recent exacerbation of the eurozone's debt crisis had provoked a market reaction similar to that at the height of the global financial crisis in 2008."The markets didn't function anymore, it was almost like in the wake of the Lehman (Brothers) bankruptcy in September 2008," he was quoted as saying.
The Second Leg of the Great Depression Was Caused by European Defaults - Many Americans know that the Great Depression was started by the bursting of the giant Wall Street bubble of the 1920's (fueled by the use of bank deposits on speculative gambling, which is why Glass-Steagall was passed) , which in turn caused a run on American banks.But most Americans don't know that the second leg of the Depression was caused by European defaults. As Yves Smith reminds us:Recall that the Great Depression nadir was the sovereign debt default phase. The second leg down of the Depression was larger than the first, as shown by this chart of the Dow: