week ending May 22

Fed Assets Reach Record $2.35 Trillion on Mortgage Purchases (Bloomberg) -- The Federal Reserve’s assets rose 0.6 percent to a record $2.35 trillion as the central bank recorded purchases of mortgage-backed securities on its balance sheet.Assets rose by $14.8 billion in the week ended yesterday, the central bank said today in a statement. The balance sheet reached the previous record level of $2.34 trillion April 14.The balance sheet reported $9.21 billion of liquidity swaps with foreign central banks, opened to ease funding pressures for European banks in the aftermath of Greece’s fiscal crisis. The swaps will settle today, and the Fed will be left with about $1.2 billion, Fed Governor Daniel Tarullo said in testimony before Congress today.Holdings of mortgage-backed securities rose by $21.1 billion to $1.12 trillion. The Fed finished buying mortgage- backed securities and agency debt at the end of March, and is still waiting to settle on about $38.2 billion in net purchases of securities, according to today’s statement. The Fed has closed almost all of its remaining emergency liquidity programs this year

A Look Inside the Fed’s Balance Sheet - Assets on the Fed’s balance sheet expanded a bit in the latest week, rising to $2.333 trillion from $2.318 trillion. Most of the expansion came from an increase in the value of the Fed’s mortgage-backed securities. The central bank has stopped new purchases of the securities, but the portfolio valued at more than $1 trillion still posts gains and losses. Despite a high-profile re-establishment last week of central bank liquidity swaps to allow foreign central banks access to dollars, the program was flat in the latest week at around $9.2 billion. Direct-bank lending continued its decline, getting closer to the precrisis levels of 2007.In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed. See a full-size version.

Federal Reserve Has a Plan for Asset Sales The Federal Reserve indicated that it would wait until after it started raising interest rates before selling the huge store of assets that it acquired in response to the financial crisis. The goal would be to gradually complete the sales about five years after they begin. While that strategy is not yet definitive, it is preferred by a majority within the Federal Open Market Committee, the Fed’s policy-making arm, according to minutes released Wednesday from the committee’s most recent meeting, on April 27 and 28. But the minutes also revealed disagreements over when the sales should begin and how quickly the assets should be sold. For now, the committee did not make any decisions, agreeing that the Federal Reserve Bank of New York, which conducts the Fed’s open market operations, should continue its current practice of rolling over Treasury securities as they mature and of allowing the Fannie Mae and Freddie Mac debt to mature and the mortgage bonds to be prepaid over time. If that practice were to continue without any change in policy, it could take decades for the Fed’s balance sheet to return to normal.

Fed majority in no rush to sell assets: minutes The Fed (MW) -- A majority of members on the Federal Open Market Committee are in no rush to sell housing-related assets, according to the minutes of the April 27-28 meeting released Wednesday. The majority favored deferring asset sales "for some time" after the Fed increases its target for short-term interest rates. There is general agreement among Fed officials for steps to reduce the size of the Fed's balance sheet over time and return it to only Treasury securities. The Fed's assets ballooned in the wake of the financial crisis, especially after the central bank purchased $1.25 trillion in mortgage-backed securities to keep long-term interest rates low.

Downside risks - THE Federal Reserve has just released the minutes from its April meeting, which include the FOMC's economic projections. A glance at their figures suggests that the Fed has grown more confident in the state of the American recovery. The 2010 growth projection was revised up significantly from January while the likely range for the unemployment rate was nudged downward. Inflation, for its part, is behaving just as the Fed expects (though its unclear why the Fed is so content with inflation below 1%). But is the Fed underplaying the potential risks to the economy? The problem is that these undesirable contigencies increasingly mirror reality. Southern Europe is embracing crash austerity. Crisis has clearly had an adverse effect on financial markets in America, as well as in Europe and China. And falling commodity prices indicate that markets believe that there is a real risk to global recovery. Meanwhile, foreclosures have continued to rise, and home prices are falling.

Fed expects GDP to expand, unemployment rate to fall this year - The Fed's leaders now expect gross domestic product to expand to 3.2 to 3.7 percent this year, according to a forecast released Wednesday by the central bank, up from 2.8 to 3.5 percent projected in January. They also expect the unemployment rate to fall to the 9.1 to 9.5 percent range by the end of the year. The rate was 9.9 percent in April. The revised forecast highlights the gathering strength of the recovery, which was slow and fragile when it began nearly a year ago. The nation added jobs in five of the past six months, including 290,000 in April. Retail sales have risen as consumers gain confidence to make major purchases. Production in the industrial sector is rising rapidly. But Fed leaders and private economists also see an emerging risk from the European debt crisis, which is causing a new wave of panic in world financial markets and could create new challenges for exporters in the United States.

FOMC Minutes: On Greece and Housing - From the April 27-28, 2010 FOMC meeting. On Greece:  If other European countries responded by intensifying their fiscal consolidation efforts, the result would likely be slower growth in Europe and potentially a weaker global economic recovery. Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on U.S. financial markets, which could also slow the recovery in this country. On Housing: [T]he recovery in the housing market appeared to have stalled in recent months despite various forms of government support. Although residential real estate values seemed to be stabilizing and in some areas had reportedly moved higher, housing sales and starts had leveled off in recent months at depressed levels. Some participants saw the possibility of elevated foreclosures adding to the already very large inventory of vacant homes as posing a downside risk to home prices

Fed Watch: Fed Disconnect - Federal Reserve Governor Daniel Tarullo's recent testimony on the European debt crisis illustrates a significant inconsistency with between the Fed's outlook and its policy.  Honestly, if Tarullo actually believes with he says, the Fed needs to be pursuing a much more aggressive policy.  But the FOMC is actually debating the opposite - when and how to reverse its swelling balance sheet.Tarullo highlights the two obvious negative channels by which the European crisis will feed into the US economy.  The first is financial: The second is via trade linkages: Tarullo acknowledges that the European crisis is largely a European problem, while the Fed is reduced to a limited supporting role.  What caught my attention was first this section regarding the potential for financial disruption: The fact that aggregate bank lending continues to contract, that the Fed is obviously aware of this, and that, according to Tarullo, the European crisis has the potential to aggravate an already existing problem all clearly point toward a more aggressive quantitative easing program than in place.  Actually, what is happening is the Fed is considering a quantitative tightening program:

Fed’s Pianalto: No Need to Raise Rates Soon - The Federal Reserve is unlikely to raise interest rates any time soon given what is likely to be a slow move out of recession, a U.S. central bank official said Tuesday. “For the next couple of years, I expect employment levels to remain well below what I would consider full employment,” and inflation will “only gradually drift up from its currently low level” to a mark that will nevertheless remain “subdued,” Federal Reserve Bank of Cleveland President Sandra Pianalto said. “This outlook warrants exceptionally low levels of the federal funds rate for an extended period of time,” she said. But she also noted there is “more uncertainty than usual around my outlook” and policymakers will need to apply more discretion than is typically the case. “It will be critical to monitor incoming information and respond as necessary to promote economic recovery and price stability,” Pianalto said.

Greek Crisis Is Latest Excuse for Fed’s 0% Rate (Bloomberg) -- There is never a good time for central banks to raise interest rates. Some times are worse than others. A crisis qualifies as the worst of times, providing an opportunity, and excuse, to keep rates low. What happens when crises start to run into one another? At some point, the Federal Reserve will have to depart the safety of its near-zero-percent interest-rate mooring, balancing the financial system’s current readings with the potential for gathering storms. The Fed responded to Europe’s troubles by reopening its swap lines to European banks. “Crisis” can now be added to the list of reasons to keep the federal funds rate at near zero: “substantial resource slack” (shorthand for high unemployment and low utilization rates); a tepid recovery (a forecast); stable inflation expectations (a hope); and a contraction in credit (a reality).

Europe events create new uncertainties for Fed outlook - Europe’s woes and financial market tumult are creating new challenges and uncertainties for the Federal Reserve. The troubles may render moot the Federal Reserve’s newly upgraded economic outlook. They also highlight the central bank’s limited options to confront another U.S. economic downturn. As part of the minutes for their late April Federal Open Market Committee meeting, central bank officials raised slightly their outlook for growth, while trimming where they expect the unemployment rate to be. Nothing changed enough to dislodge the existing Fed expectation of a moderate recovery beset by high rates of unemployment and low inflation, but it did show a stronger endorsement of the rebound.Events of the last several weeks may render that outlook dead on arrival, and reinforce the probability interest rates will stay at rock-bottom levels for months to come.

What if Ben Bernanke were in charge? -  It’s worth thinking about where we are in the Great Recession, relative to the same time period in the Great Depression.

• 1.a  October 1929, stocks crash on sharply falling expectations of NGDP growth. 

• 1.b  October 2008, stocks crash on sharply falling expectations of NGDP growth.

• 2.a   Early 1931, stocks rise on signs of recovery

• 2.b  Early 2010, stocks rise on signs of recovery

• 3.a   May 1931, stocks fall as European banking/sovereign debt crisis begins

• 3.b  May 2010,  stocks fall, as European banking/sovereign debt crisis begins

Can't Get Their Stories Straight - Five days ago: "Geithner Sees Europe Managing Crisis Without Fallout for U.S. Economy" (Bloomberg) Treasury Secretary Timothy F. Geithner expressed confidence that Europe will resolve the debt crisis buffeting the region and said the U.S. economy is strong enough to withstand any fallout. Today:"Fed Official: Europe's Crisis Poses Risks To US" (Associated Press) Europe's debt crisis poses serious risks to the unfolding economic recoveries in the United States and around the globe, a Federal Reserve official said Thursday. In a worst case scenario, financial turmoil "could lead to a replay of the freezing up of financial markets that we witnessed in 2008," he said. That contributed to the worst global recession since the 1930s. Can't you guys get your stories straight?

Fed's Pianalto: "Subdued" Recovery, Unemployment Rate to decline "Gradually" - From Cleveland Fed President Sandra Pianalto: Forecasting in Uncertain Times As we are all aware, we're emerging from the deepest and longest recession since the Great Depression. Our models would tell us that the deeper the downturn in the economy, the more rapid the recovery. You've probably heard this referred to as a V-shaped recovery. However, my outlook is that our journey out of this deep recession will be a slow one because we face two primary headwinds that I expect will temper growth for awhile. The first is the effect of prolonged unemployment, and the second is a heightened sense of caution on the part of consumers and businesspeople.

Fed's Dudley on the Economy - From NY Fed President William Dudley's commencement speech at New College of Florida: [T]he recovery is not likely to be as robust as we would like for several reasons.First, households are still in the process of deleveraging. The housing boom created paper wealth that households borrowed against. This pushed the consumption share of nominal gross domestic product to a record high of about 70 percent. When the boom turned into a bust, those paper gains evaporated. In fact, many households now find that the value of their homes is less than the amount of their mortgage debt. This has created a difficult time for many families and has caused the hangover to last longer. Second, the banking system is still under significant stress. This is particularly the case for small- and medium-sized banks that have significant exposure to commercial real estate loans. This stress means that banks have been slow to ease credit standards as the economy has moved from recession to recovery.

FRB: Press Release--FOMC statement: Federal Reserve, European Central Bank, Bank of Canada, Bank of England, et al - In response to the reemergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the reestablishment of temporary U.S. dollar liquidity swap facilities. These 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 financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

Bernanke: Liar (Again) - From The Fed: In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the re-establishment of temporary U.S. dollar liquidity swap facilities.There's been no "strain" in dollar funding markets.There has been an extreme level of strain in Euro funding markets.But see, the Europeans just announced they're going to use an SPV - that is, a secret off-balance sheet funding vehicle with over €400 billion in it. Who's going to provide the €400 billion?  The Fed?  (Yes, I know what the Euro folks said.  Now how about some transparency?  You see, I trust them as much as I trust OUR political and banksters - that is, not at all.) With what authority does Bernanke effectively appropriate?Was there an appropriation bill that I seem to have missed by Congress?

Mosler: Fed’s Currency Swaps – A Backdoor Way to Lower US Interest Rates - Libor is set in London when the British Bankers Association collects rates paid by the largest banks to borrow dollars that day, and posts the average rate paid according to its formula to determine that “average” rate. So when the Eurobanks are faced with higher costs of borrowing dollars, those higher dollar interest rates can cause the dollar Libor settings to rise. That in turn causes a variety of US domestic interest rates to increase including the rates paid on home mortgages and other wholesale and consumer lending indexed to Libor, directly or indirectly. In other words, Eurobanks paying higher rates of interest on dollar loans causes interest rates to rise in the US.The Fed’s response was to fund those troubled banks at lower interest rates, thereby lowering the Libor settings. The Fed did this through dollar swap lines which are functionally nothing more than unsecured dollar loans to foreign central banks, who then pass through the rate set by the Fed to their member banks.

The shape of things to come (SF Fed) Economic recoveries from the past two recessions have been much more gradual than the rapid V-shaped recoveries typical of earlier downturns. Analysis of the factors that determine economic growth rates indicates that recovery from the most recent recession is likely to be faster than from the two previous recessions, but slower than earlier V-shaped recoveries.

Drifting between a U and a V - Staff at the Federal Reserve Bank of San Francisco, home to Janet Yellen, the freshly-nominated Fed vice-chair, have just offered some fresh insight into their thinking on the shape of the US recovery.In a 4-page letter published today, researchers Justin Weidner and John Williams took a close look at the pace of economic rebounds from previous recessions, starting in the post-second world war period, and conclude that this time around, US growth will reach nearly 4 per cent this year, and about 3.5 per cent next year.This would be slower than the much-vaunted “V-shaped” recoveries that occurred from the 1960s to the 1980s, when real GDP grew at a rate of 5.5 per cent, but faster than the “U-shaped” recoveries between 1988 and 2005, when real GDP grew at a rate of 2.9 per cent.

Can’t spot an asset bubble? - Donald Kohn, the outgoing Fed vice chairman, told an ECB meeting today, “Judging when an asset is getting away from its fundamental value is almost impossible.” (via Reuters).It’s a step away from William Dudley, New York Fed president, calling for the Fed to take a more proactive approach in addressing asset bubbles. But if, as Mr Kohn says, you can’t identify them, you certainly can’t act against them. (Mr Kohn also warned, according to Reuters, that trying to do so would lead to “more volatility in output and inflation,” though it’s hard to imagine more volatility in output than we saw at the end of the last bubble.)So how hard are housing price bubbles to identify? Looking at US housing prices over the past few decades, it’s not immediately obvious why a bubble would be difficult to identify. Housing prices may stray from rental prices, but in the long run, they return to the rental levels. Here’s nationwide home prices (Case Shiller 10-city) compared to rents since 1987:

The Fed's Voodoo Economics - In its latest outlook, the Fed said: “Even though the recovery appeared to be continuing and was expected to strengthen gradually over time, most members projected that economic slack would continue to be quite elevated for some time,” according to the report, which doesn’t identify the specific governors or regional-bank presidents making comments. They believe that as long as there is excess industrial capacity, we won't have inflation.The hot topic running through the halls of the Fed is: When should it dump the $1.1 trillion of mortgage related debt and securities it bought? In a program which tried to suck bad assets out of the banks to create liquidity in the system, the Fed went on a buying spree of these assets which ended in April of this year.The data reveals that their policy has been a failure because bank credit and money supply are still declining. The result of their policy was to inject the trillion dollars in the pockets of the big banking houses who were more than pleased to dump these "toxic" assets as they were then called.

Two Experiments - I have argued in the past that the Fed is not likely to remove stimulus prematurely.  We have the bad providence that Ben Bernanke is Fed Chairman, and has the wrong view of the Great Depression, and also the wrong view of monetary policy.  He will leave rates low for too long, and buy long duration assets for the Fed, and be reluctant to sell them. The Fed always delays trouble in the modern era.  Slow to tighten, quick to loosen.  No wonder that we built up a mountain of debt, because the Fed would always ride to the rescue of crises, but never let the pain settle in that would liquidate poor investments. We need fewer banks, fewer homebuilders, and fewer auto companies.  But guess what we bailed out?  We bailed out the very things that were the least productive in our economy, and taxed those more productive to do so.  Monstrously dumb. While I’m on the topic of monetary policy, what if the money markets are beginning to run ahead of the Fed?  The Euro is an experiment, but so is unbacked paper money.  Both are undergoing a lot of stress at present; it will be interesting to see if either survives.

Steven Roach Calls for New Monetary Policy - Stephen Roach, Chief Economist of Morgan Stanley, have been a critic of the Fed for many years. In a Financial Times op-ed he makes the case for exiting the current monetary policy regime once and for all:“it is high time to banish the moral hazard of macro policy – the false sense of security provided by open-ended fiscal and monetary accommodation as the world lurches from crisis to crisis.”Roach identifies easy money as the main underlying cause of the unsustainable bubbles witnessed during the last decades:“Each crisis has its poster child – from Thailand, to dot-com, to subprime. But they all have one thing in common – easy money. The ‘Greenspan put’ – the notion that central banks would be quick and aggressive in backstopping financial market disruptions – was the short-term anaesthetic that repeatedly set the stage for the next crisis.”Roach spells out the doomsday scenario of current monetary policymaking...

Central bankers get with the politics The financial unraveling of the past three years has cast doubt on some certainties of orthodox economics. Central-bank independence is one. Before 2008, the idea that central banks should be shielded from politics, given an anti-inflation mandate, then left to run monetary policy as they saw fit was little doubted – by economists, anyway. In 2010 this looks neither desirable nor even possible. Governments and central banks would rather avoid a proper discussion of this sensitive subject. But in the light of all that has happened, whether central banks should be above politics is a question that needs a fundamental rethink. In this respect, the issue is an exception, because most of what you read about the “crisis of economics” is nonsense. Of course, financial regulation needs tightening – but no paradigms need to shift for that. Pro-market orthodoxy will be pressed more cautiously and apologetically for a while, but even its most hyperventilating critics want to tweak not bury it.

Despite audit, Federal Reserve's scope may widen with Senate Bill… As the debate over how to overhaul financial regulation heated up last year, there was one thing Democrats and Republicans seemed to agree on: that the Federal Reserve had made major mistakes that contributed to the financial crisis and needed to have its wings clipped.Yet as the legislation has made its way through Congress, including with a round of amendments approved on the Senate floor last week, increasingly it appears that the changes to the Fed will be relatively minimal, and largely viewed as acceptable to leaders of the central bank. The reasons things are turning out this way vary depending on the specific provision. But they reflect at their core a combination of a subtle but savvy campaign by Fed officials to make arguments about what they view as flaws in some proposals; a less subtle but perhaps more savvy effort by financial firms, especially small banks, on the same issues; and a recognition by senators that some of their proposals may have reflected more populist anger than sound policy.

Fed’s ‘Main Street’ Message Protected Its Authority (Bloomberg) -- Senator John Ensign went into a Capitol Hill meeting with four Federal Reserve bank presidents and emerged to say he was convinced of their “concern for Main Street.” The presidents “argued very vociferously” that a Senate proposal to limit the Fed’s supervisory authority to banks with assets of $50 billion or more would make it “too New York- centric,” the Nevada Republican said after he and other lawmakers attended the May 5 meeting. A week later, Ensign joined 89 senators in voting to let the central bank keep its authority over 5,000 banks. The vote was another victory for the Fed, which months ago faced one of the biggest challenges to its power and independence in its 96- year history as lawmakers responded to public anger over bailouts of Wall Street firms. The amendment Ensign supported was included in the financial regulatory bill the Senate approved yesterday.

On Ron Paul and the Fed - Another interview on CNBC this morning with Ron Paul: Fed to Blame for Everything Let me come clean: I basically share the man's distrust of heavy concentrations of power. And I think that secular stability in the general level of nominal prices is probably a good idea too. Thus, it appears that we share a number of beliefs. So why does the guy make my eyes roll whenever I hear him speak? His problem, in a nutshell, is this: He ascribes too much power to the Fed. The power in the U.S. resides in Congress. It is Congress that spends, taxes, and issues treasury debt.  Ah yes, but the Fed has greater power than this. It can "lend to its friends" and "let its enemies fail." I presume he is talking about the Fed's emergency lending facilities, all of which have now wound down, with a healthy profit for the U.S. taxpayer. But I am missing the point: The Fed has the ability to create money "out of thin air!" Whenever I hear this expression, I chuckle. We all have the power to create debt out of "thin air."  If you bum a beer from a friend and promise to repay him next week, you create a debt obligation "out of thin air." Ooooo..."out of thin air!"

The Mysterious Stagnation of M2 Money Supply I always make sure that I have taken all my pills before I look at the end-of-month money supply figures, which turned out to be a good idea, because M2 growth has been, as they say, quite anemic for the past several months.I think it’s bad news, which seems paradoxical because I am always screaming my head off about how inflation in the money supply is a bad thing, because inflation in the money supply causes inflation in prices, which is The Thing To Be Feared (TTTBF) because that is going to destroy us, and yet here I am whining in Real Mogambo Terror (RMT) because the money supply is NOT increasing, thus apparently proving, as my wife says, that I “cannot be pleased.”Perhaps you realize that this must be bad news because you, too, are dizzy from the unexpectedness of it all, as you would think the money supply would be going To The Freaking Moon (TTFM), what with Fed Credit still increasing at almost $20 billion a month, the national debt taking a monstrous leap of $184 billion in April alone, and Consumer Installment Debt actually going up by a few billion in March,

 Monetary Base and Money Supply - shadow stats charts.

Producer Costs in U.S. Unexpectedly Dropped in April (Bloomberg) -- Wholesale prices in the U.S. unexpectedly dropped in April, the second decrease in three months, signaling the global recovery from the worst recession in the post-World War II era has yet to stoke inflation. The 0.1 percent decline in prices paid to factories, farmers and other producers followed a 0.7 percent increase in March, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices climbed 0.2 percent, compared with 0.1 percent gains in the previous two months. Cost pressures are diminishing as goods make their way up production lines to consumers, showing companies have enough idle capacity to prevent bottlenecks even as sales rebound. The European debt crisis will probably also help restrain prices, one reason why economists are pushing back forecasts for when Federal Reserve policy makers will raise interest rates.

Flation - Paul Krugman Blog - NYTimes - Ever since the economic crisis began there have been two schools of thought about inflation prospects. One school basically has a Phillips curve, aggregate demand view: because major economies are operating far below full employment, we should expect disinflation, and possibly deflation. The other is basically monetarist with a touch of Austrianism: look at all the money central banks are printing and governments are borrowing, it says, inflation — maybe even hyperinflation — is just around the corner.Guess who’s been right so far?“Spain joins therefore Slovenia, Portugal and Ireland in the number of countries where core prices are falling compared to the previous year,” said Luigi Speranza, an economist at BNP Paribas. What about the US? Well, various measures of core inflation — like the Dallas Fed trimmed-mean deflator, the Cleveland Fed median CPI, and indexes excluding food and energy have all fallen from 2.5-3 percent inflation at the start of the crisis to around 1 or lower. If the trend continues — which it will unless the recovery is stronger than I fear — deflation is in our future, maybe next year.

A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR - If the chart below doesn’t grab your attention then few things will. In my opinion, the performance of the dollar is the surest evidence of the kind of environment we’re currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world.The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high. The recent 16% rally in the dollar is a sign that investors are once again worried about the continuing problem of debt around the world and they’re reaching for the safety of the world’s reserve currency – the dollar. As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.This is exactly the kind of market action we saw leading up to Lehman Brothers

Consumer prices dip, support Fed's low rate vow (Reuters) - Consumer prices fell for the first time in a year last month and the closely watched core inflation rate posted its smallest annual gain since 1966, pointing to a lack of price pressure as the economic recovery gathers steam.The Consumer Price Index unexpectedly slipped 0.1 percent in April, the Labor Department said on Wednesday, which analysts said should allow the U.S. Federal Reserve to focus on supporting growth, especially as Europe's debt crisis looks set to slow economies in that region.An industry report released separately showed demand for loans to buy homes sank 27.1 percent to a 13-year low last week after the expiry of a home buyers tax credit, suggesting a recovery in housing will be painfully slow."The inflation picture is very well controlled and that's going to give the Fed an opportunity to stay accommodative for a longer period of time. It's a good environment to help keep the economy here growing,"

U.S. Inflation at 44-Year Low as Retail Prices Fall - NYTimes - Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report on Wednesday. The decline was the first since March 2009. Prices rose by 0.1 percent in March 2010. The downturn was led by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said. Food prices rose 0.2 percent, mostly because of higher costs for meat, poultry, fish and eggs. But without the volatile prices for food and energy, the core index for consumer prices remained flat, as they did in March. Over the 12-month period that ended in April, the core index rose 0.9 percent, which economists said was the lowest it has been since the 1960s.  Other costs that fell in that period included housing, down 0.7 percent, and apparel, down 0.9 percent, the largest decline of all the nonenergy components.

Sticky-price CPI up slightly in April... Wait, what? - Atlanta Fed's macroblog - No matter how you cut the April report on consumer prices, retail inflation keeps coming up zero. 

• The consumer price index (CPI) fell a tiny bit in April but has remained essentially unchanged since January.
• The core CPI (excluding food and energy) hasn't posted a significant increase dating back to last October, and its 0.9 percent rise from a year ago is its smallest 12-month increase since 1966.
• The Federal Reserve Bank of Cleveland's median CPI continued a trend of essentially no change since October and is up a mere 0.5 percent from a year ago—a new year-over-year low for the series.

Oh, and the sticky-price CPI was up only 1.25 percent (annualized) in April. Maybe we ought to explain this last one a little more..

Are Some Prices in the CPI More Forward Looking Than Others? We Think So - Cleveland Fed - Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change. We explore whether these two sets of prices—sticky and flexible—provide insight on different aspects of the inflation process. We find that sticky prices appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis, while flexible prices respond more powerfully to economic conditions—economic slack. Importantly, our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading.

Economists see marginally lower near-term prospects: Longer-term inflation forecasts remain unchanged - Atlanta Fed -The second-quarter survey of professional forecasters shows core inflation averaging about 1.4 percent on a consumer price index (CPI) basis, and 1.3 percent on a personal consumption expenditures (PCE) basis over the next four quarters. These measures are less than projected in the first quarter, by about 0.1 percentage point. Over the next five years, the survey of professional forecasters sees CPI and PCE inflation of 2.2 percent and 1.8 percent, respectively. Over the next ten years, the group puts the two inflation measures at 2.4 percent and 2.2 percent. These long-term projections are essentially unchanged from the first quarter.

Inflation: Look out below | The Economist - IT'S time once again for our monthly(ish) look at inflation data. Today, the Bureau of Labour Statistics released its latest consumer price data, which showed a seasonally-adjusted decline in headline prices of 0.1%. Here's a look at the 12-month percentage change in core prices:The disinflationary trend continues unabated. During the last two months, core prices haven't budged. To the extent that the Federal Reserve is targeting a 2% rate of inflation, it's failing.

Feeling Deflated - Krugman - I’ve written before about why some form of core inflation — looking at prices with a lot of interia — is the right way to go. With this morning’s CPI, the evidence of declining core inflation got even stronger. Here are 1-year rates as measured either with the standard core or with the Cleveland Fed measure, which strips out large changes in either direction: The core rate is now clearly below 1 percent; it’s not hard to see Japan-style deflation emerging if the economy stays weak.The danger of a lost decade remains quite real.

Slouching towards zero - THE deflation meme is back. Today the Bureau of Labour Statistics reported that headline consumer prices fell in April, though they’re up 2.2% from a year ago. Excluding food and energy, core prices were flat and up just 0.9% from a year earlier, the lowest rate of annual core inflation in either 44 or 49 years, depending on who's counting. Some folks argue the drop in inflation is exaggerated by the large weight given to owners’ equivalent rent. Rents have been depressed by the large stock of vacant units. Morgan Stanley notes that excluding shelter, core inflation is still 2.2%, and it predicts shelter costs will start to rise given recent firming in industry surveys of apartment rents. But J.P. Morgan retorts that industry surveys are biased to large, multi-unit apartment buildings whereas single houses are more important to OER and their rents are rising more slowly. Goods prices, unusually firm until now, are starting to soften.

End of Rent Slump in U.S. May Protect Economy From Deflation (Bloomberg) -- A slump in rents that has curbed inflation in the U.S. may soon end, protecting the economy from further slowdowns in consumer prices or a destructive bout of deflation, say economists at Morgan Stanley and UBS Securities. The consumer-price index fell 0.1 percent in April, and so- called core costs, which exclude food and fuel, climbed over the past 12 months at the slowest pace in four decades, a Labor Department report showed yesterday. Owners-equivalent rent, one of the categories designed to track rental prices, was unchanged in April and fell 0.2 percent from a year earlier, the first decline since records began in 1982. Lower vacancy rates, gains in employment and rising real- estate investment trusts all indicate rents are about to bottom, if not turn higher, economists and analysts said. Those monthly house payments account for about 40 percent of core prices, meaning stabilization in the industry will put a floor under inflation.

FT Alphaville » On the edge of a deflationary precipice - The world should be discussing deflation, not inflation. The world should be dicussing buying 30-yr govts, not continually wondering like a stuck record where the first rate hike will appear.Albert Edwards agrees with the depressionistas at RBS.Amid the recent euro-related turbulence, the SocGen bear says not enough attention has been paid to the rapidly vanishing core CPI inflation rates in the US and the eurozone. And it should be because Edwards reckons were are only one cyclical mishap from joining Japan in outright deflation.Gulp.Of all the inflation data released this week, the one that caught the markets’ attention was the UK’s dramatically higher than expected 3.7% yoy rise for April. While many commentators proceeded to berate the Bank of England for consistently underforecasting inflation in recent years, many also saw the first signs of the quantitatively eased pigeons coming home to roost.But I would argue that in a year or so, we will see the UK’s relatively high inflation rate as a godsend.

If you want signs of inflation, you will find signs of inflation - Krugman - The core inflation rate is holding steady at 0.9 percent, the lowest rate in 44 years. The United States actually experienced a month of deflation in April. Still, yesterday, The New York Times felt it fitting to warn that the Federal Reserve — all too aware of the above statistics — might be overlooking other data points that suggest creeping inflation and a need to raise interest rates sooner rather than later. The piece warns, “If the Fed is behind the game, there’s a good chance everyone will suffer.” The first “leading economic indicator” mentioned? Whole Foods, purveyor of richly priced organic onions and other groceries, last week raised its best estimate for same-store sales growth this year to as much as 7 percent from as little as half that. Its shares have gained 45 percent this year, while those of price-conscious Wal-Mart are down a bit.

Sticky Goodness - Krugman - Since we’re talking about core inflation lately, I should give a shoutout to recent work by Bryan and Meyer. In my post on core inflation, I explained the Platonic ideal of what we’re trying to measure: it’s prices that aren’t revised often, and are therefore set with future inflation in mind. The standard measure of core inflation tries to get at this ideal in a rough and ready way, by excluding food and energy; other measures exclude all prices that have changed a lot in any given month. But Bryan and Meyer use a more direct approach, looking at goods whose prices can be shown directly not to change very often; these core goods make up about 70 percent of the CPI.Nice work. And what their work shows is that core inflation, measured this way, has behaved pretty much the same as other core measures, down from around 3 percent inflation at the start of the crisis to 0.9 percent over the past 12 months.

U.S. sees record capital inflow (Reuters) - Foreigners bought a record $140.5 billion of long-term U.S. securities in March, the Treasury Department said on Monday, and more than doubled purchases of U.S. government bonds.China remained the largest holder of Treasury debt and added to its holdings for the first time in seven months. Net Treasury purchases by all foreign investors jumped by $108.47 billion in March from $48.1 billion in February."Long-term purchases exceeded our best expectations and clearly show foreign investors have not satiated their appetite for U.S. securities," March's net long-term inflow was roughly three times the $47.1 billion inflow in February and shattered a previous record set in May 2007. The Treasury began compiling the data in the 1930s.

Bond Bears Reverse Rate Forecasts on Dollar Demand (Bloomberg) -- Europe’s sovereign debt crisis is prompting some of the Treasury market’s biggest bears to reverse calls for Federal Reserve interest-rate increases this year.Morgan Stanley, Wrightson ICAP and Pierpont Securities LLC say the Fed will keep interest rates near zero percent after the European Union unveiled an almost $1 trillion loan package to halt a slide in the euro and local bonds that threatened to shatter the currency union. Futures show traders place a 40 percent likelihood that the central bank will raise borrowing costs by December, down from 73 percent a month ago. “This is a mea culpa from me on our rate call,” James Caron, global head of interest-rate strategy at Morgan Stanley, wrote at the start of a May 13 report. The New York-based firm, the most pessimistic among the Fed’s 18 primary dealers, reduced its year-end 10-year note yield forecast to 4.5 percent from 5.5 percent. “We did not appropriately discount the sovereign risk conditions which have contributed to keeping yields low.”

Abandoning Treasurys for safer bets overseas - Today, with a financial maelstrom saddling the United States and rival industrial powers with unprecedented debt obligations, even the monolithic dominance of Treasurys is in doubt. "U.S. Treasurys are perhaps not the risk-free assets they once were," said Michael Hasenstab, who manages the Templeton Global Bond Fund. Countries that didn't have the massive amounts of leverage and indebtedness before the recession "are coming out of this a lot quicker and without the overhang and inhibitors the U.S. is experiencing." From Australia to Brazil, an emerging crop of nations that are in comparatively better fiscal shape are increasingly seen as a surer return on the investment.

China Grabs More Treasurys - China's official holdings of U.S. government bonds rose for the first time since last September, the Treasury Department said Monday.  China bought a net $18 billion worth of Treasury bills, notes and bonds in March, according to the monthly Treasury International Capital report. That brings its world-leading Treasury hoard to $895 billion. The Chinese weren't alone. Japan, the second-biggest holder of Treasury debt, bought $16 billion worth of Treasurys in March to bring its total to $785 billion. The biggest increase in Treasury holdings came in the U.K., where purchases of $66 billion brought the total holdings to $279 billion.

China boosts holdings of US Treasury debt by 2 percent - China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt.The Treasury Department reported Monday that China's holdings of U.S. Treasury securities rose in March 2 percent to $895.2 billion, the first increase since last September.Total foreign holdings of Treasury securities rose 3.5 percent to $3.88 trillion.The government reported that net holdings of long-term securities, which includes the debt of U.S. companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007.

What is a "reserve currency" anyway? - I just realised I don't really know; that's why I'm asking.With the Eurozone troubles, the US dollar has been rising against the Euro. That's not so surprising. But the US dollar is rising not just against the Euro; it seems to be rising against other currencies as well, like the Canadian dollar. And gold is rising too, even against the US dollar. As Scott Sumner notes, it's looking a bit like a replay of late 2008. On a much smaller scale so far, but it's still worrying. I can understand this at one level. In a financial crisis, there's a rush into money. And at a global level, the US dollar is the most "moneyish" of all moneys, so there's a rush into US dollars. But what does it really mean to say that the US dollar is the most "moneyish" of all monies?

Dollars per Euro at 4 year low - From The Times: German shocks to the market push euro down again The euro ... slid even further to $1.212, its lowest level against the greenback since April 17, 2006, after Germany instituted a ban from midnight last night on the naked short sale of shares in the country’s top financial institutions and the bonds of eurozone countries.  Germany also prohibited the purchase of credit default swaps (CDS) on eurozone government bonds, other than for hedging purposes.  That calls for an updated graph ...The Euro has only been around since Jan 1999. The graph shows the number of dollars per euro since Jan 1, 1999. The dashed line is the current exchange rate. This is the lowest level for the euro against the dollar since April 2006.

Euro still overpriced … and the Aussie dollar is set to crash, relative to the greenback. This is the surprising implication of analysis from a former chief economist at Wamco. Scott Grannis has essentially compared currency movements with the ‘true’ value of that currency. He’s done this by picking one exchange rate he considers fair, and then adjusting both currencies for inflation and working out the resulting exchange rate over time.Arcane? Maybe. But the result is useful. Even if he has picked an unrepresentative date, the curvature of the PPP line should be correct, if the inflation rates are right. Just tilt your head and parallel shift the green line. With the euro reaching a four-year low today, the small gap between blue and green lines might now have closed. But the notion that the euro is correctly valued seems shocking

Euro at Dollar Parity ‘Sooner Or Later,’ CLSA Says -(Bloomberg) -- The euro will be on par with the U.S dollar “sooner or later” as the region’s debt crisis worsens, according to Christopher Wood, chief equity strategist at CLSA Asia Pacific Markets. European finance ministers return to Brussels today a week after agreeing to a $1 trillion financial lifeline for the euro region. Ministers are under pressure to show they can reduce deficits fast enough to satisfy investors and then police budgets effectively once targets are met.“The euro will be a fundamentally weak currency,” Wood, the second-ranked Asia strategist in Institutional Investor magazine’s annual poll, said at a CLSA forum in Shanghai. “The euro will sooner or later go to parity with the U.S. dollar.”China will revalue the yuan before the G20 meeting next month, Andy Rothman, CLSA’s China Macro strategist, said at a CLSA media briefing. The Chinese currency may gain at an annualized rate of between 5 percent and 7 percent against the dollar once that happens, Rothman said.

IMF Official: Euro’s Slide Not a Problem - A top International Monetary Fund official said Wednesday that the euro’s recent falls bring the currency nearer to what should be considered a more balanced level for the medium term, suggesting the IMF doesn’t view the unit’s slide as a threat to the global economy. “The euro’s latest moves have actually brought it closer to what we would consider consistent with medium-term equilibrium from a period in which it’s been rather on the strong side,” IMF First Deputy Managing Director John Lipsky told Dow Jones Newswires in an interview. Lipsky stressed that the IMF doesn’t comment on individual exchange rate pairs, but said that in a broad sense, the euro’s recent weakening “does not seem to be a source of difficulty.”

What Does a Euro Depreciation Mean for the US? -The euro has been depreciating against the dollar over the past few weeks. The implications of this development for the US depend critically on (1) the extent of the depreciation, (2) the duration, and (3) the source of the depreciation. (See Jim's post for other links.) The euro has depreciated since the 2009M11 average, by about 10.5% in log terms, and about 16.1% versus 2008M07, just before the Lehman bankruptcy. What the graph makes clear is that the first flight-to-safety induced dollar appreciation faded after about a year. This second dollar appreciation might be construed as another flight-to-safety. How lasting will this appreciation be? Much depends upon how and whether the euro area governments resolve the current crisis. It also depends upon the desirability of US dollar denominated assets, including Federal government debt.Since I am less pessimistic than some others regarding the short to medium term deficit outlook for the US [0], I think that the upward appreciation of the dollar against the euro might be fairly persistent.

China boosts holdings of US Treasury debt by 2 pct - China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt. The Treasury Department reported Monday that China's holdings of U.S. Treasury securities rose in March 2 percent to $895.2 billion, the first increase since last September.Total foreign holdings of Treasury securities rose 3.5 percent to $3.88 trillion.The government reported that net holdings of long-term securities, which includes the debt of U.S. companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007.The big increase was influenced by two factors: a flight to safety by investors increasingly worried about the debt crisis in Europe; and a rebounding U.S. economy which has sparked greater interest by foreigners in purchasing U.S. corporate debt.

Financing Needs of Advanced Economies Remain Exceptionally High - The International Monetary Fund released its latest Fiscal Monitor last week. As expected, the headline message was quite grim for the advanced economies, many of which face grueling fiscal adjustments in coming years.One of the IMF’s most important findings is that the government financing needs of many advanced economies “remain exceptionally high.” As illustrated in the following chart, Japan will have to sell debt equivalent to 64% of GDP this year in order to rollover maturing debt (54% of GDP) and finance new deficits (10% of GDP):The United States comes in second, needing to sell debt equivalent to 32% of GDP in order to rollover maturing debt (21% of GDP) and cover new deficits (11% of GDP). Why does the USA come in ahead of more troubled economies such as the UK and the PIIGS? Because our debt has a much shorter average maturity.

Exorbitant privilege rocket jetpack or Wile E. Coyote moment? -What explains the continued extraordinary high prices of U.S. Treasury securities given a massively disfunctional U.S. political system and Republican Party? Is global demand for dollar assets in a safe haven the equivalent of a rocket jetpack for the U.S. economy, or are we waiting for a Wile E. Coyote moment?

Return of the Bond Market Vigilantes - Remember the bond market vigilantes, that frightening band of financial marauders who once roamed the earth like a fearsome herd of Tyrannosaurus rex? They were so scary that in February 1993, as President Bill Clinton struggled to reduce the federal budget deficit, James Carville quipped that he wanted to be reincarnated as the bond market so he could intimidate everybody.Well, they're baaack! From a long-run perspective, the bond market vigilantes have it right. Greece, Europe, the U.S. and other countries must take serious steps to get their budget deficits under better control. And the long-run budget problems of many nations are too large to be solved exclusively on either the tax side or the expenditure side.  The U.S. is a case in point. Under continuation of current policies, our budget deficit and national debt would soar to impossible heights. (Ask the oracle: the Congressional Budget Office.) The amount of deficit reduction needed to stop this incipient explosion is so large that no serious person should believe we can do it without both spending cuts and higher taxes.

Roubini Says U.S. May Face Bond ‘Vigilantes’ Within Three Years (Bloomberg) -- The U.S. may fall victim to bond “vigilantes” targeting indebted nations from the U.K. to Japan in a potential second stage of the financial crisis, New York University professor Nouriel Roubini said. “Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits,” Roubini said at an event at the London School of Economics yesterday. “The chances are, they are going to wake up in the United States in the next three years and say, ‘this is unsustainable.” The euro slid to the lowest level in more than four years against the dollar today as a German ban on some speculative trading fueled concern the European debt crisis will worsen. Roubini suggested the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.

China tells US to put fiscal house in order  (Reuters) - Europe's debt crisis has laid bare the fragility of global finances and the United States, too, must tame its fiscal deficit, a senior Chinese official said on Thursday, spelling out Beijing's concerns before talks with Washington.With China facing U.S. criticism for yoking its currency to a de facto dollar peg, Assistant Finance Minister Zhu Guangyao shifted attention to Beijing's own worries about the euro zone's woes and Washington's rising indebtedness, ahead of the two countries' Strategic and Economic Dialogue next week

Geithner tries to reassure China over US deficit: US Treasury Secretary, Timothy Geithner tried to reassure China, ahead of his talks in Beijing, that the United States will get its deficit in order. In an interview released on Saturday, China's official Xinhua News Agency reported Geithner as saying that the Obama administration is ``going to tackle its deficit issue seriously.'' Geithner and Secretary of State Hillary Rodham Clinton are leading a delegation of nearly 200 officials to Beijing as part of an effort to help President Barack Obama deliver on his pledge to double US exports within five years and create 2 million jobs.

Sovereign Debt and Confidence - The problem of what is a sustainable sovereign debt load is complex. There are (at least) two states of the world. In one state, investors have confidence in the country's economy and politics, and the country can sustain just about any debt load. In another state, investors have lost confidence, and the country has to really tighten its fiscal policy--and quite often the country cannot do so, which is why investors lost confidence in the first place. Samuelson argues for balancing the budget in non-recessionary times. There is no purely economic theory that requires this. However, from a political economy perspective, some focal point is needed in order to discipline budgets. I think returning to a full-employment surplus of zero might be a good focal point.

US faces one of biggest budget crunches in world – IMF - Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating. Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP

America Will Pass $13 Trillion In Total Debt Next Tuesday; $397 Billion In Debt Rolled Month To Date - Total US debt just hit $12,987,823,000,000, $13 billion from lucky $13 trillion. As next week the US Treasury is auctioning off another gross $140+ billion in Bonds, we will pass this totally irrelevant resistance level on May 25, when Timmy issues another $42 billion of 2 Year Notes. The next important support level of $14 trillion will be surpassed around the time the Democrats get destroyed in the mid-term elections, while the statutory debt limit of $14.3 trillion will likely have to be raised in January 2011 by a new Republican majority, an action which will promptly reduce popular republican support following their election victory, thus starting the pointless D->R->D->R etc cycle all over again. Also, at approximately that time headlines that US debt is now 100% of GDP will take the US bond vigilantes out of hibernation and will send US interest rates soaring, assisted by Ben Bernanke's most recent announcement that the Fed will be "forced" to purchase another $1.5 trillion in treasuries and mortgages. Stepping away from the Ouija board, we also notice that so far in April, the Treasury has rolled another unsustainable amount of Treasuries: $397 billion, of which $$359 billion is in Bills.

Federal Debt as a % of GDP - On Tuesday, I showed a chart of National Debt by President. Several readers said a more informative chart would include control of Congress. Enter Doug Short — he directed me towards that exact chart — including party control of Congress. My only disagreement with Doug is he blames “spending.” I think that is half right — anything that is unfunded — spending, tax cuts, wars, entitlements — should be blamed for the Debt. You can allocate government revenues however you like — but allocating for any usage beyond revenues is how you create debt. Regardless, the chart is quite fascinating:

Can Federal Debt Rise Forever? - A few days ago Ezra Klein interviewed lefty economist James Galbraith (John Kenneth's son) and asked him whether the long-term growth of the federal deficit was a problem. He said no:  But that's the less interesting of the two things he said in the interview. Here's the more interesting one: Government does not need money to spend just as a bowling alley does not run out of points. What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it. [Italics mine.]This strikes me as wrong. I don't know when Galbraith Sr. made that (typically witty) comment, but I imagine it was in the 50s or 60s, when inflation was restrained, the deficit was low and federal debt was shrinking, global capital flows were more regulated, and government bonds were mostly sold domestically. But that's no longer the case

How Would You Tame the Debt? - Show of hands, please: Do you think you can do a better job with the federal budget than our leaders in Washington?OK everyone, put your hands down. And put that confidence to the test by clicking over to the new Stabilize the Debt exercise from the Committee for a Responsible Federal Budget.The exercise gives you a goal–getting the federal debt down to 60% of GDP by the end of 2018–and a lengthy menu of policy options that you can use to get there. How tough is this? Pretty hard. The CRFB’s baseline has the debt at 66% of GDP in 2018, implying that we need $1.3 trillion in spending cuts and tax increases to hit the 60% target. But that’s assuming that all the 2001 and 2003 tax cuts expire at the end of the year and that discretionary spending will grow only at the rate of inflation over the next decade. As a political matter, a more plausible baseline might be to assume that the tax cuts get extended except for high-income folks and that Congress enacts the President’s proposed levels of discretionary spending. In that case, the debt would be 82% of GDP in 2018. And you, the beneficent budget dictator, would have to find $4.6 trillion in spending cuts and tax increases.

Debt Saturation Equals Diminishing Growth, Employment, and Capacity Utilization - I have been pointing out the continuous series of lower highs on that chart that gave way to a phase transition into negative territory at the debt saturation point. I’ve presented descriptions of a debt saturated environment and noted that employment and production should fall once saturation is reached and still more debt is added. This is due to the fact that new income must be used to service existing principal and interest payments. I even theorized that the recent “jobless” recoveries are part and parcel of debt saturation. As debt begins to permeate the economy, the stimulation effect diminishes as was thoroughly demonstrated in the last article on THE Most Important Chart of the Century

The Roof Is On Fire -The Euro Zone is in serious trouble, and Britain and we are next. The game's up folks. Many people talk about us "printing" money.  Indeed, there's a large brokerage that runs advertisements on CNBS with that exact claim, over and over and over.  Ron Paul and Peter Schiff have run this mantra for years.This chart says something else entirely:  THERE HAS BEEN NO PRINTING GOING ON! No, what's been happening is worse. Worldwide governments have borrowed and spent huge percentages of their GDP in a puerile attempt to protect a criminal class that has looted the public and bribed the legislature - THE BANKS.There was always a point where this would fail, but it is flatly impossible for anyone to know exactly where it was beforehand.

Op-Ed - Root Canal Politics - NYTimes - DEATH NOTICE: The Tooth Fairy died last night of complications related to obesity. Born Jan. 1, 1946, the Tooth Fairy is survived by 400 million children living largely in North America and Western Europe, known collectively as “The Baby Boomers.” “We’ll certainly miss the Tooth Fairy,” one of them said following her death, which coincided with the 2010 British elections and rioting in Greece. The Tooth Fairy had only one surviving sibling who will now look after her offspring alone: Mr. Bond Market of Wall Street and the City of London. Sitting in America, it’s hard to grasp the importance of the British elections and the Greek riots. Nothing to do with us, right? Well, I’d pay attention to the drama playing out here. It may be coming to a theater near you.

Should It All Be Greek to Us? -The IMF’s Fiscal Monitor released on Friday should be troubling to us Americans for what it says about the required adjustments we’ll have to make to get to sustainable levels of public debt–because it puts us in the same category as Greece.  From page 32 in the report:26. The extent of fiscal adjustment required to achieve certain debt targets varies significantly across advanced economies.The adjustment is highest—close to or above 10 percent of GDP in the baseline scenario described above—in countries with high initial CA primary deficit and debt levels (Greece, Ireland, Japan, Spain, the United Kingdom, and the United States) (Figure 13 and Appendix 2).…and yet the report also explains why the U.S. will find such a large adjustment especially difficult to achieve given our projected age-related spending needs.  From page 36, where Figure 14 shows the U.S. as the top-rightmost data point in a graph that plots the required fiscal adjustment against projected age-related spending increases:

We are not Greece - "We are not Greece". Many government officials from different countries have been claiming that their fiscal problems are not as bad as those of Greece: Portugal, Spain, Ireland or the U.S.Given the importance of credibility and "labels" in financial markets, many government are trying to distance themselves form the "Greek" label to ensure that their interest rate spreads remain under control.It is hard to deny that the situation of the Greek government is one of the most difficult ones among advanced economies, but how bad is it compared to other countries? The most recent IMF analysis of fiscal policy provides a nice summary of the difficulties ahead. One way to summarize the many tables that the report contains is to look at Figure 14 (below). This figure looks at two dimensions of the necessary adjustment in economies around the world:

The U.S. Is Not (Yet) Greece. - I can’t resist jumping into the ongoing debate between New York Times economic columnists David Leonhardt and Paul Krugman. David worries that there are troubling similarities between the current Greek debt crisis and huge ongoing deficits in the U.S. “Nonsense,” replies Paul, who argues that the two nations have about as much in common as souvlaki and cheeseburgers.   My take: The U.S. is not Greece. But this does not mean we cannot learn lessons from a nation that is marked by both great beauty and regular bouts of fiscal madness. First: Why we are not Greece:

Lost Decade Looming? - Krugman - NY Times: Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan. For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates. The truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade,... a prolonged era of high unemployment and slow growth.

Crying Fire! Fire! In Noah's Flood - Krugman - Early reaction to today’s column has been curious, though not unexpected: I’m getting a lot of rage from people who want their deficit-and-inflation crisis, and won’t take no for an answer.Let’s back up here. By spring 2009 a sharp division had emerged among economic commentators. On one side, many people looked at big budget deficits and the rapid expansion of the monetary base, and saw terrible things happening to interest rates — who will finance all that government borrowing? — and inflation — look at all that money the Fed is printing! On the other, some of us — especially those of us who had studied Japan in the 1990s — argued that this wasn’t that kind of situation. With the economy depressed and short-term interest rates up against the zero lower bound, government deficits would not crowd out private spending, but rather promote it. And when you’re in that situation, expanding the monetary base isn’t inflationary. On the contrary, the danger was deflation from excess capacity.

US posts 19th straight monthly budget deficit; April deficit nearly four times higher than in 2009 (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.The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

When the Fiscal Crisis Will Hit - In my Forbes column this week I try to answer the question of when we will have a fiscal crisis. It will happen, I believe, when the credit rating agencies begin to seriously threaten a downgrade of Treasury debt. They have told us when that will happen: when interest on the debt reaches 20% of revenues (not spending). Under current CBO projections, we will hit that level in 2019/2020. But long before then, the credit rating agencies will be issuing stern warnings—far more stern than those we have seen in the past—about a downgrade that will raise rates and roil markets. Furthermore, I think the CBO is overly optimistic about its forecast of interest payments because I think it has underestimated the impact of the inevitable Fed tightening, which will raise the Treasury bill rate more than CBO has forecast.

James Galbraith on Deficits: Dick Cheney of the Far Left - Ezra Klein interviewed James Galbraith, who argued quite forcefully that “the danger [posed by the long-term deficit] is zero.  It’s not overstated.  It’s completely misstated.”We now have an answer to the trivia question, “What do James Galbraith and Dick Cheney have in common?”  Cheney famously said, “Reagan proved deficits don’t matter.”Cheney didn’t try to defend his argument.  He simply offered to take his critics hunting, which ended the discussion. Galbraith, however, is absolutely convinced that he’s right and almost the entire economics profession is wrong.

Guest Contribution: Galbraith Defends Deficit Comments - Actually, my position on this comes in two parts. First, the Congressional Budget Office baseline forecast that interest payments will hit 20% of GDP depends on (a) short-term interest rates rising, while (b) overall inflation stays very low. I don’t believe it can happen. If inflation stays below two percent, there will be (in the first place) no good reason for short-term interest rates to rise to five percent, and the scary deficit/debt scenario simply won’t occur. Second, if interest rates did rise, then the flow of interest payments would boost total spending and inflation, lowering the debt-to-GDP ratio by raising nominal GDP. Either way, the CBO forecast isn’t going to occur. I don’t favor the inflation scenario, but it would be easy to avoid it, by two straightforward measures. First, control health care costs — not by cutting Medicare, a measure that unfairly targets the elderly — but by controlling the cost of health care. Second, don’t jack up those short-term interest rates

Cost Estimate for the American Jobs and Closing Tax Loopholes Act - Director's Blog - CBO and the staff of the Joint Committee on Taxation (JCT) have prepared an estimate of the budgetary effects of H.R. 4213, the American Jobs and Closing Tax Loopholes Act, as posted on the Web site of the Committee on Ways and Means on May 20, 2010. CBO and JCT estimate that the legislation would increase budget deficits by about $123 billion for fiscal years 2010 and 2011, by about $141 billion over the 2010-2015 period, and by about $134 billion over the 2010-2020 period.The legislation would reduce federal revenues by about $23 billion in 2010 and 2011, but would lead to a net increase in revenues totaling about $40 billion over the 2010-2020 period

Jobs Bill With Buyout Tax Faces Friction Over Deficit (Bloomberg) -- A jobs bill that includes provisions to more than double taxes on managers of buyout firms would add $134 billion to the federal budget deficit, according to a report likely to sharpen debate on the measure’s price tag.The legislation would raise government spending by $174 billion and increase tax revenue by $40 billion -- with the difference added to the deficit, according to the nonpartisan Congressional Budget Office. The report comes as many Democrats express concern over the bill’s cost.“We’ve got a huge debt building out there,” said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat. “When I look at a package of this size, I think we have to be tough about narrowing it down.”

Don’t Let Deficit Concerns Derail Jobs Bill - Misplaced budgetary concerns are impeding major legislation that would create and preserve jobs, continue unemployment and health benefits for those who are out of work, and fix Medicare’s flawed payment formula for physicians for several years. Our nation’s short- and long-term budget issues may look similar, but they are fundamentally different.  Current budget deficits are not a problem.  In fact, large deficits are needed in a deep economic downturn such as this one.  The problem is that our current fiscal path is unsustainable over the longer term. As Chad Stone and I explained in a paper yesterday, the jobs bill would provide a needed boost to the economy in the near term, but it wouldn’t add significantly to long-term deficits because its provisions are largely temporary.  Those provisions — including extending unemployment benefits, subsidized COBRA health insurance, and fiscal assistance to states — are widely recognized as effective ways to boost the economy and create jobs when the economy is operating well below capacity.

Politicians ignore Keynes at their peril - Most wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the US and many eurozone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.The outcome of this story is not pretty. Cutting deficits means raising taxes and/or cutting spending. In either case, it means pulling money out of the economy at a time when it is already well below full employment. This can lower deficits, but it also means lower GDP and higher unemployment. This might be OK if we could show some benefit from lower deficits, but this is a case of pain with no gain. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.

Volcker Says Time Is Running Out for US to Tackle Fiscal Woes (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker, a top outside adviser to President Barack Obama, said time is “growing short” for the U.S. to address problems ranging from its budget deficit to Social Security obligations. "We better get started,” the 82-year-old former central banker said in a speech yesterday in Stanford, California. “Today’s concerns may soon become tomorrow’s existential crises.” Volcker, speaking hours after the euro fell to a four-year low against the dollar, said Europe demonstrates for the U.S. the hazards of “uncontrolled borrowing.” The European currency slid below $1.22 for the first time since April 2006 as a ban by German authorities on certain bearish investments fueled concern the region’s sovereign debt woes will worsen

Hire deficits - The bad news is that unemployment rose from 9.7 to 9.9 percent because more people are seeking work — over 800,000 entered the labor force in April, dwarfing the increase in jobs. The true unemployment rate is over 17 percent if you count part-time workers who want full-time jobs plus those who have given up because the job search has become pointless, with more than five applicants for every job opening.The economy needs a half million new jobs every month for the next four years, just to return to the prerecession unemployment rate of 2006. And that economy was nothing to brag about, with average wage growth lagging behind inflation since 2001.Perversely, austerity has become the cure du jour. Top administration officials say there will be no new jobs initiative, because deficit reduction is needed to reassure the bond market. President Obama’s new fiscal commission is expected to recommend cutting services and raising taxes.

Weekly Audit: Will Obama Squander Wall Street Success By Gambling On Social Security? After nearly a year of debating and haggling, Congress is finally about to take a modest, positive step forward with its bill to overhaul Wall Street. But by readying social security cuts and tax breaks for big corporations, the Obama administration is setting up an economic disaster that could have been crafted by President George W. Bush. While the road to our current economic mess has been three decades in the making, we know how we got here. Washington pushed policies that favored short-term Wall Street profits over the living standards of our citizens, eroding the middle class and destabilizing our entire financial system in the process. Economists’ blind faith in the power of markets is so strong that they cannot envision market systems in which the rules are systematically broken for profit on a massive scale.

The Revenue Limits of Tax and Spend – WSJ -  Washington has repudiated two centuries of U.S. fiscal prudence as prescribed by the Founding Fathers in favor of the modern Greek model of debt, dependency, devaluation and default. Prospects for restraining runaway U.S. debt are even poorer than they appear. U.S. fiscal policy has been going in the wrong direction for a very long time. But this year the U.S. government declined to lay out any plan to balance its budget ever again. Based on President Obama's fiscal 2011 budget, the Congressional Budget Office (CBO) estimates a deficit that starts at 10.3% of GDP in 2010. It is projected to narrow as the economy recovers but will still be 5.6% in 2020. As a result the net national debt (debt held by the public) will more than double to 90% by 2020 from 40% in 2008. The current Greek deficit is now thought to be 13.6% of a far smaller GDP. Unlike ours, the Greek insolvency is not too large for an international rescue.

Maule and Pappas on progressive taxation and the decreasing burden on the rich - As Maule shows in his posts, the rich have an increasing share of the income (an even larger share of the economic income--because they benefit much more than ordinary folk from tax expenditures in the Code, from capital gains preference to charitable contribution deduciton to mortgage interest deduction to life insurance exclusion, and more of adjusted gross income, a tax concept that excludes much of economic income). But they pay a much smaller proportion of that income in taxes now than they did in the period when our country was the most prosperous shortly after WWII--a decline from about 50% of the income in taxes to less than 20% of it paid in taxes. Meanwhile, our country has slid into a deficit spiral from the combination of gigantic tax cuts under Bush that were of primary benefit to the ultrarich (the 2001 tax cuts were projected to cost about $1.6 trillion over the first decade) and the huge increase in government under Bush from militarization and his "preemptive war" policy (running to the multiple trillions--especially when long-term health needs of Vets and replacement costs for the expensive equipment is factored in).

The Effect of Tax Cuts and Tax Hikes on Economic Expansions - Right about now, the U.S. economy appears to be recovering from a recession (and a nasty one at that). It’s not smooth sailing though; the recovery is still very fragile, and there are plenty of problems at home and abroad that can still derail the recovery. Depending on which economist or politician or pundit you ask, there are a number of prescriptions for what to do in times like these, but there’s one thing that just about all these worthies agree on, namely that lowering marginal income tax rates (or at least not raising them) is vital. But the fact that everybody believes something doesn’t make it true. So in this post, I’m going to show three graphs. The first shows the length (in months) of every expansion since 1929. The second looks at the annualized growth in real GDP per capita for each expansion period, and the third looks at the total growth rate in real GDP per capita over the length of the expansion period.

An Estate Tax Deal: Pay Now, Die Later - News reports suggest that the Senate may soon consider restoring the estate tax with an option allowing people to prepay their tax before they die. Details are apparently still in flux as senators negotiate. We—and maybe they--don’t know yet what they’ll propose for the basic estate tax but it’s unlikely to be harsher than the 2009 version.Right now, we have no estate tax. When the Senate failed last year to extend the 2009 rules—a $3.5 million exemption and 45 percent tax rate—the tax disappeared as scheduled by the 2001 tax act. But when the full 2001 law sunsets at the end of this year, the estate tax will reappear in all of its pre-2001 glory—a $1 million exemption and a 55 percent top rate. Those who favor the smallest possible estate tax don’t have the votes to repeal it entirely and hope instead to shrink it. They also know that deficit hawks will oppose changes that increase the deficit, so they have to find palatable tax increases to offset the reductions they want. And, according to Tax Notes, they’re limiting their search for offsetting revenue to the estate tax itself

An Alternative to the Alternative Minimum Tax - To avoid Greece-like fiscal woes, Congress needs to raise more revenue and cut spending. A value-added tax or a tax on carbon make economic sense, but implementing either could take years. Broadening the income tax base seems politically unrealistic, and Congress already upped tax rates to pay for the health care bill. One option for more revenue is a simplified Alternative Minimum Tax (AMT).  The current AMT isn’t a minimum tax at all; it’s simply a parallel tax. Relative to the regular income tax, the AMT is a mostly flat rate applied to a different tax base with a large standard deduction. The result is that about 4 million upper-middle income taxpayers, often with children and living in high-tax states, pay more under this parallel tax system.  Congress could improve the current system by creating a true “minimum tax”:

How to attack the mortgage-interest tax deduction - Barbara Kiviat is right that (a) it makes perfect sense to abolish the mortgage-interest tax deduction, and that (b) it’s not going to happen any time soon. But rather than get defeatist about this, I think the answer is to take Paul Volcker’s advice and embark on an ambitious root-and-branch overhaul of the way that debt is treated everywhere in the tax code. Remember that the overall tax rate on equity finance is 36.1%, while the tax rate on debt finance is negative 6.4%. No wonder American businesses, just like American homeowners, are overleveraged! (Frankly, it’s a wonder to me that American companies aren’t more leveraged than they are, given how attractive the tax treatment of debt is: maybe this is just a function of how easy it is to avoid taxes in less dangerous ways.)

Volcker Muses About "New Tax" Options, Including a VAT - Breitbart.tv has posted an interview that White House economic recovery advisor Paul Volcker gave in London last week, where he muses about the U.S.'s fiscal situation. Volcker notes that federal tax revenues have been about 18.5% of Gross Domestic Product (GDP) each year in recent history, and that the recent jump in spending to around 25% of GDP means that "you can't avoid thinking about taxes." He notes that the U.S. corporate income tax is the highest in the world, and argues that there's "no potential" in the income tax or payroll tax, leaving you "with a new tax." He lists a carbon tax, energy tax, or value-added tax as possible options. Volcker's interview is a typical example of rhetorically setting up the inevitability of tax increases. Assuming that spending can't be cut, and assuming that entitlement programs can't be reformed, and assuming that income tax reform can't happen, therefore a VAT is inevitable. Audio of his remarks in the video below.

Is a VAT good for exports? - In a recent CNBC interview, former President Clinton endorses the idea of a value added tax.  (Click here.  The discussion of the VAT is around minute 2:45.) One of President Clinton's main arguments is that a VAT would improve our trade balance, because it is rebated on exports and imposed on imports.  The problem is that this argument is well-known, at least among economists who specialize in this topic, to be a fallacy.  Here is Alan Viard on the topic: None of this means that a VAT is a bad idea.  But the argument in favor of it should not rely on the fallacious claim that it would promote exports and discourage imports.

There’s a tax angle to everything–including the DeepWater Horizon oil spill - Senator Grassley wants to know just what the tax benefits and subsidies for the major contractors in the spill have been.  See Grassley letter to chair of BP, May 17, 2010, asking for an accounting of all tax breaks/subsidies and royalty relief from 2005 to the present and what benefits, tax and otherwise, are received by DeepWater Horizon's operating under the flag of the Marshall Islands; Grassley letter to chair of TransOcean, May 17, 2010, asking for the same information about TransOcean and information about its other rigs operating under foreign flags (and who made the decision to replace mud with seawater, leading to the explosion, among other things) .  Sounds like a good line of questioning to pursue to me.  When we see the greed-centered decision-making of companies like BP and TransOcean, we should see as clearly as possible the way we've provided tax expenditure "handouts" to them over the years.  Welfare for corporations is a growing item in our budget--that will likely be added to by the "extenders" bill under consideration at this time in Congress.

Down The Memory Hole – Krugman -Richard Green flies into a rage over remarks by Peter Wallison, who declares that Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations.Green points out that growth has actually been slower since the big rightward shift circa 1980. You can see why: the facts are embarrassing. Here’s a rough-cut version. The blue line, left scale, shows median family income in 2008 dollars; the red line, right scale, shows the top marginal tax rate, a rough indicator of the overall stance of policy. Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

The orthodox loss of faith - I think we are witnessing the biggest silent shift in macroeconomic thought since the Second World War. For 70 years we have taught, and believed, that we would never again need to suffer a persistent shortage of demand. We promised ourselves the 1930's were behind us. We knew how to increase demand, and would do it if we needed to.The orthodox have lost faith in that promise; only the heterodox still believe it. And the heterodox have nothing in common, except for keeping the faith.The orthodox haven't lost hope. They hope that monetary and fiscal policy will be enough to get us out of this recession, and that the limits on monetary and fiscal policy will not be binding this time around. And they are probably right. But they have lost faith that monetary and/or fiscal policy will always be enough - that there are no limits.And if the Eurozone too turns Japanese, they may start to lose even that hope.

The financial bailout: small change – EIU - A deep recession has ushered in a new era of austerity in much of the west and, in some cases, threatened the solvency of some states. Even so, the direct cost of fixing the proximate cause of the crisis—the near-collapse of the banking sector—is modest by historical standards, argues Deutsche Bank in a recent report. The initial commitments pledged by governments to support the financial sector reached 20-30% of GDP in major developed markets. Effective outlays, however, have amounted to only 3.5% of GDP for G20 countries, roughly equivalent to the cost of the Swedish banking bailout of the early 1990s.Of course, the direct fiscal costs of the crisis—equity injections, debt assumed by the state and emergency liquidity support for banks—tell only part of the story. But given the broader economic damage wrought by the financial crisis, any shred of good news is welcome. In short, it could be worse

Roubini at the LSE - governments run out of policy bullets - The LSE was packed tonight for a talk and discussion with Nouriel Roubini. It was an occasion to help launch his latest book “Crisis Economics” and Roubini started by arguing that financial crises are now more common than is supposed. Economics textbooks pay lip-service to crises and the conventional wisdom is that systemic crises in the markets are irregular and few and far between. Dr Doom takes a completely different stance believing that the sorts of crises that have dominated the headlines in recent years are best described as White Swans rather than the Black Swans beloved of Nicholas Taleb. The Roubini lecture is now available on video using this link

Roubini on CNBC May 20, 2010 - on a worldwide "double dip"

The Price of Clarity - Finance has always been opaque, quite apart from the motive of swindling the investing public. “Double-entry bookkeeping” is one of the great discoveries of European civilization, but five centuries later most people are still muddled about assets and liabilities. Without such knowledge, technical terms like “balance-sheet recession” and “rebuilding balance sheets” are meaningless. Opacity has grown with complexity. The explosion of derivative instruments has demanded such an effort at understanding that metaphorical language is needed. Think of collateral debt obligations (CDOs) as poisoned sausages, says the economist Nouriel Roubini, with sub-prime mortgages as the rat meat in them. With a mental effort, the layperson can then imagine these poisonous sausages, otherwise known as “toxic assets,” spreading through the world’s banks, ruining their digestions and crippling the economies they are meant to serve.

Pethokoukis Blaming Congress - From his perch at Reuters, James Pethokoukis writes (and this is his title) about 4 ways Congress caused the financial crisis. He quotes from a paper by Ross Levine. I have not read the Levine paper yet but the abstract does seem to indicate what Pethokoukis wrote. If I understand Pethokoukis correctly, his view is that Congress caused the financial crisis by forcing private sector players to behave recklessly, which it did by not regulating them. Which seems odd to me. Particularly since, having read a lot of what Pethokoukis wrote over the years, I cannot believe he would have advocated having Congress do more regulating of ratings agencies, banks, investment banks, or even Fannie and Freddie. (Which would almost imply Pethokoukis is in favor of financial crises of this magnitude, wouldn't it?) And he certainly wouldn't have credited Congress had Congress engaged in more regulating and things turned out well. (Who would?)

The Feeling is Mutual - Mankiw - A friend sends along this story: Majority Of Government Doesn't Trust Citizens Either - WASHINGTON—At a time when widespread polling data suggests that a majority of the U.S. populace no longer trusts the federal government, a Pew Research Center report has found that the vast majority of the federal government doesn't trust the U.S. populace all that much either.According to the poll—which surveyed members of the judicial, legislative, and executive branches—9 out of 10 government officials reported feeling "disillusioned" by the populace and claimed to have "completely lost confidence" in the citizenry's ability to act in the nation's best interests.

Blanche Lincoln Neglects to do Her Homework - It's peculiar to me that Sen. Blanche Lincoln (D-Ark.) would invest so much time and energy in repealing the estate tax. With an enormous budget deficit, and a budget in which scarce resources are needed for a variety of policy goals, pushing tax cuts that exclusively benefit millionaires and billionaires seems to reflect misguided priorities. But Lincoln has worked on this issue for years, and whether it makes sense or not, she's not giving up the fight.Sen. Blanche Lincoln (D-Ark.) on Thursday told The Hill that a fix for the estate tax should be aimed at helping small businesses, and not wealthier taxpayers since they have the resources to weather whatever tax rate Congress throws at them. [...] That may sound reasonable at first blush, but Pat Garofalo explains that Lincoln's description of the policy is simply wrong

Financial Reform Update - Dodd offered a compromise at the last minute on Blanche Lincoln’s disastrous Sec. 716, which would require regulators to study whether banks should be forced to spin-off their swaps desks, and then essentially make a recommendation to the Treasury Secretary. The banks are not at all happy with Dodd’s compromise though. Personally, I think they’re being ridiculous — this is the legislative equivalent of striking the language entirely. The Republicans will probably offer a second-order amendment to Dodd’s compromise, which will weaken it even further, and that will probably be enough to get some Republicans on board. As to all the Merkley-Levin nonsense, I’m obviously not upset that it failed. It was a bad amendment, and Wall Street would have eviscerated it without even breaking a sweat. (And memo to Merkey’s office: if you think you were just respecting the principle of “international comity,” then you got rolled by the banks’ lobbyists. You were not.)

Caught In Trap Of Own Making - If Blanche Lincoln's tough derivatives provision was just a gimmick to ward off her primary challenger from the left and if the plan all along was to gut the provision once she made it through the primary, then Lincoln and Dodd and whoever else hatched this plan are now in an exquisite squeeze. Even the best-laid plans can succumb to the political whirlwind. Since her derivatives proposal was introduced the broader political environment has become even more toxic for Wall Street. Lincoln isn't out of the woods yet back home, having been forced into a runoff last night. Hoping to thread the needle, Dodd made his move yesterday to water down the provision, but was met with howls from more progressive senators already threatening to abandon the overall bill as too weak.

A Response on Merkley-Levin - Yesterday I highlighted an argument from the finance lawyer who writes the Economics of Contempt blog that the Merkley-Levin legislative language seeking to implement the “Volcker Rule” won’t actually work and it would be better to rely more on regulatory discretion. Merkley’s office, as you’ll imagine, isn’t buying it and they sent me a response. I’m going to post the whole thing below the fold because the argument is somewhat technical and nature and it’s important to capture all the details. The key points, however, are that though no legislative vehicle can be 100 percent airtight, the alleged potential gaps in Merkley-Levin would exist under the un-amended language anyway, and that the “specific permitted activities” are a floor rather than a ceiling so regulators will have the ability to take additional measures if they deem them necessary

Why Merkley-Levin Is Necessary - Mike Konczal - Given that section 619 of the Dodd Bill makes provisions for Volcker Rule, why is the Merkley-Levin Amendment (SA 3931) necessary? Section 619 right involves the Council of regulators, which includes (and will likely be overly influenced by) the Federal Reserve, Treasury and the OCC, would come together and do a study, and then decide what if any restrictions they want to impose. The bank regulators would then go about implementing them. The problem is that the Council, the way the Dodd Bill is written, has very broad authority to determine what type of regulations they want to impose and what kinds of exemptions they want to give. It allows the Council can rewrite the rules as they see fit. The Section 619 language also doesn’t have conflict-of-interest language at all.

Yes, Merkley-Levin Is Still a Joke - Even though Merkley-Levin didn't make it into the Senate bill, there's still a chance that the Merkley-Levin language will make it into the conference report, so I want to respond to the defenses of the amendment that were offered. (My original post is here.) Mike Konczal wrote a post defending Merkley-Levin that was badly confused, on several levels. First, Konczal writes:I think Merkley-Levin is way ahead of this critique, and what EoC doesn’t mention is that the bill provides for this. In case they excluded too much from permitted activities at the statutory level, regulators can add some provided it meets a certain threshold. If there are activities that could be justified in promoting safety and soundness, regulators can include them into the bucket of permitted activities. Note that this is a fairly high bar to hurdle, so regulators have to make a fairly good excuse to go for it.This is not a point in Merkley-Levin's favor, and I have no idea why Konczal thinks it is. The point I made was that the 9 categories of "permitted activities," which function like exceptions to a ban on proprietary trading, were way, way too broad, and would effectively swallow the prop trading ban.

Derivatives Update 5/14: SAFER and A Loophole Fix? - Konczal -  SAFER has put out a letter responding to Bernanke on Section 716, which is the Section 106 fight. And 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. Two weeks ago we discussed Potential Derivative Loophole #1: Trading Facility, where a swap execution facility no longer means a “trading facility” but just a “facility.” Though just a one word deletion, it had the potential to radically change the function of the bill.According to Bloomberg Business, there’s now an amendment to fix this loophole. Senate Amendment Would Again Take Phones Out of Swap Trading:

The Breakdown: What Are Derivatives? - Derivatives, derivatives, derivatives! Throughout the financial crisis, the word derivatives has popped up in every corner, every hearing, every news broadcast related to the crash. Yet, they remain one aspect of the crisis shrouded in mystery; they are under-explained, difficult to comprehend and maligned by many. This week, the Senate defeated an amendment to the financial regulation package that would have weakened its controversial, but crucial derivatives language. But what are these derivatives, and why is it so important they be regulated? On this week's edition of The Breakdown, DC Editor Christopher Hayes asks Commissioner Bart Chilton of the Commodity Future's Trading Commission to delve into this devious derivatives market.

Should We Ban Naked CDSs?, by Brad DeLong: I say, narrowly, no--that if we can get proper clearing, transparency, and capital adequacy requirements in place banning naked CDOs would not do any good and would do a little bit of harm. But it is a close call. And if we can't get proper clearing, transparency, and capital adequacy requirements in place then we should ban them. Let's go back to first principles. The direct benefits of having more developed, liquid, and sophisticated financial markets are threefold:

Naked Truth on Default Swaps - Should people be able to bet on your death? How about your financial failure? In the United States Senate, Wall Street won one this week when the Senate voted down a proposal to bar the so-called naked buying of credit-default swaps. If that were the law, you could not use swaps to bet a company would fail. The exception would be if you already had a stake in the company succeeding, such as owning a bond issued by the company. On the other side of the Atlantic, Germany announced new rules to bar just such betting — but only if the creditors were euro area governments. None of this argument would be taking place if regulators had done their jobs years ago and classified credit-default swaps as insurance.

Wall Street Threatens Washington as Reform Vote Approaches; Europe Acts Pre-emptively Against Fraud - Naked shorting is illegal in the US, and for very good reasons. On a larger scale, it is used for price manipulation, and is the equivalent of counterfeiting. The removal of the uptick rule by the SEC on July 6, 2007, which had been created in 1938 as part of the New Deal regulatory reforms, cleared the way for its more heavy handed uses and control frauds. The ban on naked short selling was not enforced by regulators who were willing to turn a blind eye to blatant market manipulation. Under the DTCC regime it turned epidemic. The alarm was raised by many whistle blowers who were either ignored or vilified by the corporate media. Let me be clear on this. I am not opposed to short selling. It is a trade that has many legitimate uses. It is naked short selling that lends itself so readily to abuse, particularly when there are not limits on position sizes and massed selling to drive down prices. The deregulatory movement, based on such lofty principles, has become nothing more than a means to a fraud, systematically knocking down all the regulatory safeguards that were put in place to protect the public during the Great Depression.

Naked Credit Default Swaps - Floyd Norris has an interesting column today in the Times, arguing that speculative (i.e., "naked") credit default swaps should be outlawed. As I've long noted, credit default swaps (CDS) do have problematic effects on the bankruptcy system. CDS can encourage creditors to file involuntary petitions that trigger the swaps. CDS also discourages out of court resolution of financial distress, since a bankruptcy filing is more valuable to a creditor with CDS, as many North American CDS contracts will not be triggered by a non-bankruptcy restructuring. And nobody has studied the effects of receiving a CDS payout on post-petition creditor behavior. But none of these bad effects are the result of an investor who holds CDS without owning the underlying debt -- indeed, these effects only arise from hedged creditors, not holders of naked CDS positions. Such CDS investors have no direct role in the reference entity's bankruptcy case or workout, and only can hope that the CDS market will influence the debtor's fate. Moreover, I continue to struggle with the attacks on naked CDS, because on some level they are really not that different from pork belly or orange juice futures bought by those who don't indulge in either pork or OJ.

Nations Over Banks (Who Serve Only Themselves) - Are you listening Mr. Obama? First, let's look at the idiocy among so-called "reporters" Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets Desperation?  Or is it more like this?Merkel Seeks EU Rules After German Short-Selling Ban (Update1) You know, like the rule of law, for instance?“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world,” Merkel told lawmakers in Berlin today. “The market alone won’t correct these mistakes.” Yes indeed.  But the profit motive isn't evil or bad.  It's only bad and troublesome when it comes with lawlessness and conflicts of interest.

“Dark pools”: The menace of rising opacity in financial markets - VoxEU - Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.

Financial Regulation Getting a Little Sidetracked? - Presumably, the goal of financial regulation overhaul is to prevent future crisis. If so, then legislators certainly seem to be getting a little sidetracked lately. Case in point is a new amendment coming out of the House that takes detour into price controls, restricting the Visa and Mastercard fees that businesses pay to banks for debit card transactions:Sixty-four senators, including 17 Republicans, agreed to impose price controls on debit transactions over the furious objections of the beleaguered banking industry…The Durbin amendment gives the Federal Reserve new authority to regulate and limit the fees that businesses pay to card companies. It specifically addresses payments processed through the Visa and MasterCard networks…The legislation directs the Fed to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions.

Why financial reform won’t hurt employment - Meredith Whitney is trying to make an updated case that we can’t pass financial reform because it would cost jobs. I don’t buy it, partly because I simply don’t believe her numbers, which kick off with two interlinked claims: States will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months. First, there hasn’t been much ballooning going on. Let’s look at the numbers here: there were 17.3 million state and local government workers counted in the latest jobs report. That’s down from 17.6 million a year ago. In terms of percentages, state and local government now accounts for 13.3% of total nonfarm employment, unchanged from a year ago.  It’s simply not credible that state and local governments are going to reduce their total job count by between 6% and 11% over the next year.

Congress Gets It Right on Credit Rating Agencies - Thanks to Senator Al Franken it appears the Senate took the obvious step to end the conflict of interest associated with issuers paying the credit rating agencies for rating their new issues. The Franken amendment to the financial reform bill requires the Securities and Exchange Commission (SEC) to assign the raters. This would mean that the rating agency has no reason to bend its rating to curry the favor of the issuer, since the issuer does not control whether they get hired in the future.The Post reported on this amendment and then gave the rating agencies complaint, that this will remove the rating agencies incentive to improve their ratings. This is not true. As my friend Peter Eckstein has pointed out, it would be very easy for the SEC to keep a record of the accuracy of ratings (scoring upgrades and downgrades) and then assign business in proportion to the agencies' relative track record. This will ensure that the agencies have incentive to improve their rating systems.

Paul Krugman: An Upward Trend - A funny thing has been happening on Capitol Hill: lately, the Democrats have started exceeding expectations. Health reform, pronounced dead by all the usual suspects, happened (all hail Nancy Pelosi, arguably the greatest Speaker ever.) Now financial reform seems set to pass, in a stronger version than almost anyone expected:  But the big picture is that a strong new consumer protection regulator and a move to force over-the-counter derivatives through clearing houses and onto electronic exchanges are set to be included in law in the face of a multi-million dollar lobbying effort from banks and the US Chamber of Commerce. Neither seemed likely at the end of last year when the received wisdom was that the Senate would eventually pass a watered down version of the House bill to placate moderate Democrats and draw the support of Republicans.

A patch for Wall Street's bad habits - The Senate is poised to vote this week on amendments to the financial reform bill that will determine whether Wall Street's banks will serve the American economy or whether the American economy will continue to serve Wall Street's banks. As they prepare to vote, senators might look at the latest report from the Congressional Oversight Panel on the TARP, chaired by Elizabeth Warren. Last week, the panel released a study of how America's banks used TARP funds to provide loans to small businesses. Lending by the biggest banks -- those with assets of more than $100 billion, which received 81 percent of government bailout funds -- declined, while lending to small businesses from medium-size banks, with assets of $10 billion to $100 billion, which received 11.4 percent of the bailout, increased. The money that goes to Wall Street, apparently, stays on Wall Street -- one very good reason Wall Street's relationship with the rest of us is up for revision

Let states set consumer protections - As Congress rewrites consumer lending laws, some senators are working closely with Wall Street lobbyists to develop new ways to restrain states trying to protect their citizens from abusive lenders. That would be a terrible mistake. Instead of handcuffing state consumer protection efforts, Congress should see states as partners in preventing another lending crisis and should free states to enact and enforce consumer financial protection rules as they see fit.One lesson of the subprime crisis is that federal regulators did not understand how best to protect borrowers. That is understandable, to some extent: Lenders can create new types of loans swiftly and push those loans harder in areas of the country where the lenders can make the most money. Meanwhile, federal lawmakers need time to identify the best rules for an entire nation.

Warren on Looming Pre-Emption Compromise: “States Ought to Be Able to Enforce Their Own Laws” - The Senate will take up two amendments that would weaken the Consumer Protection bureau housed inside the Federal Reserve. Tom Carper (D-DE) has been working for weeks on an amendment that would set a federal standard for consumer protection and let federal regulators pre-empt the ability for Attorneys General to enforce their own state laws. .Elizabeth Warren, the brainchild behind the consumer protection agency, strongly opposes a pre-emption measure. She said in a joint press event with Sen. Jack Reed (D-RI) today that pre-emption is “designed to weaken consumer protection, in terms of the rules and their enforcement. It’s designed to take cops off the beat and that’s not a good idea.”

NYT Editorial - The Senate at the Finish Line on Financial Reform - It is a bad sign, as the Senate enters the home stretch on financial regulatory reform, that there are so many unresolved issues since weaknesses and ambiguities in the legislation play into the hands of opponents of reform at this late date. It is especially disturbing that the vital area of reform — the regulation of derivatives trading — is being left to last. This multitrillion-dollar market in largely unregulated derivatives was at the heart of the speculation that inflated the bubble, amplified the bust and led to the bailouts. Unless they are reined in, derivatives are bound to endanger the financial system again, no matter what other reforms are adopted. Many derivatives are now traded as private, bilateral contracts, outside the purview of regulators and other investors. Lack of oversight has fostered recklessness and abuse. It also fostered huge profits, as the five banks that dominate the business  have been able to keep clients in the dark about what other clients pay for similar products and services.

Congress blocks indiscriminate IMF aid for Europe – Europe may have to clean up its own mess after all. The US Senate has voted 94:0 to block use of taxpayers’ money for IMF rescues that make no economic sense or bail-outs for countries like Greece that far are beyond the point of no return.“This amendment will help prevent American taxpayer dollars from underwriting dysfunctional governments abroad,” said Texas Senator John Cornyn, the chief sponsor. “American taxpayers have seen more bailouts than they can stomach, and the last thing they should have to worry about are their hard-earned tax dollars being used to rescue a foreign government. Greece is not by any stretch of the imagination too big to fail.”Co-sponsor David Vitter from Louisiana said America had run out of money. “Our country already owes trillions of dollars in debt. We simply can’t afford to take on other countries’ debt in addition to our own.”

Bank Bosses Should Go After ‘Massive Fraud,’ Filmmaker Says… (Bloomberg) -- The chief executives of U.S. investment banks that led to the financial crisis should be removed from their jobs, a documentary shown at the Cannes Film Festival advocates. “Inside Job,” directed by filmmaker Charles Ferguson, says Wall Street bosses should be as accountable as those executives who were imprisoned for the collapse of U.S. savings-and-loans institutions. “I think it’s inexcusable that they still have their jobs,” said Ferguson in a Cannes interview. “There haven’t yet been adequate or full criminal investigations, which is partly why we can’t say exactly who should go to prison, but it is extremely clear there was massive fraud.”

Goldman Sachs Publicly Supports Financial Reform, But Fights It With Lobbyists - For all of Goldman Sachs' professed support for an overhaul of financial regulations, the megabank hasn't exactly withdrawn its army of lobbyists. Far from wearing out its welcome, the firm is busier than ever safeguarding its interests while a Wall Street crackdown takes shape in Washington.Goldman has an unrivaled and influential network of lobbyists, including about 50 people with close ties to Congress and past White Houses, a Huffington Post Investigative Fund analysis of lobbying and campaign records shows. The lobbyists are challenging reforms aimed at Goldman's profit centers, including the trading of complex contracts known as derivatives. The Senate this week will continue debating proposed regulations of derivatives, which are blamed for fueling the financial crisis.

Thinking About Financial Reform - There are three contending narratives regarding the financial reform legislation that this week approaches its final hurdles in the US Senate. The first narrative is “the reforms would make things worse.”  This view, advanced recently by some Republican leadership, seems to have receded in recent weeks – at least with regard to systemic risk – particularly after Senator Ted Kaufman dealt with it rather brutally on the Senate floor.  For the most part, this line has sunk down to the level of sneaky astroturf campaigns. The second narrative is “Obama administration as heroes.”  The problem with this story is that – even in the official version – the only people who have been trying hard to strengthen reform, beyond the initial proposals, over the past year are those relatively outside the main White House-Treasury team: Gary Gensler and Paul Volcker. More broadly, of course, all of these reforms add up to little more than “baby steps”. 

Financial-Reform Bill: No Easy Passage in House, Senate - The conventional Beltway wisdom is that financial reform is definitely going to happen, but well-placed sources tell me ... Actually, well-placed sources tell me the same thing. Everyone in Washington seems sure that no one in Washington wants to look like a tool of Wall Street. So reform is supposedly unstoppable. Last month, I was skeptical. But now that sources who are much closer to the process than I am and know much more about finance than I do assure me reform is inevitable. Well, I'm still skeptical. (See seven key elements of financial reform.) It's mostly an Occam's razor thing. Every House Republican voted against the bill the House passed last year. Every Senate Republican signed a letter opposing the bill the Senate is debating now. Big Finance is spending $1.4 million a day to fight reform, with a lobbying army that includes 70 former Congressmen and just about everyone who ever staffed a congressional banking committee.

Finally, The Republicans Come Out To Fight. Where Is The President? - The Senate Republicans are refusing to allow a vote on the Merkley-Levin amendment, which would put a meaningful version of the Volcker Rule into law (splitting off proprietary trading from major banks).After weeks of dancing around, the Democrats finally have a signature issue on which to fight.  Senator Carl Levin frames it exactly right: “It’s a sad day when the power of Wall Street can overwhelm the power of the American people in the US Senate.”This is the opportunity that White House claims it has long sought – to have an intense fight on a financial reform issue that everyone can understand.  Paul Volcker made his determination long ago: the big banks are too big and must, in this fashion, be broken up.  Senators Merkley and Levin negotiated the precise language of their amendment in good faith.  The Republicans have made their answer clear: No way

How Financial Reform Gets Done (Not) - Yves Smith -Today provided yet another example of how the best government money can buy works. The Senate majority leader Harry Reid suffered an embarrassing defeat when his effort to pass a motion for cloture, which would have stopped debate on the financial reform bill, failed due to two Democrat and one Republican defection among the votes he thought he had. And the naysayers are the typical “teki no teki wa mikata” (enemy of enemy is friend) alliances that are routine in politics. The Republicans are virtually united against the bill (the only defections are the two senators from Maine); the two rogue Democrats, Maria Cantwell (Washington) and Russ Feingold (Wisconsin) are opposed because the feel the bill is not tough enough (Cantwell wants votes on two amendments).This tempest in a teapot is engaging distraction. Why have political commentators been hesitant to connect the dots between the “no incumbent left standing” movement and the lack of meaningful financial reform?

Does Regulation Always Tighten? - Here’s Robin Hanson’s regulation ratchet theory: Look, in any area where we let humans do things, every once in a while there will be a big screwup; that is the sort of creatures humans are. And if you won’t decrease regulation without a screwup but will increase it with a screwup, then you have a regulation ratchet: it only moves one way. So if you don’t think a long period without a big disaster calls for weaker regulations, but you do think a particular big disaster calls for stronger regulation, well then you might as well just strengthen regulations lots more right now, even without a disaster. Because that is where your regulation ratchet is heading. That’s true as a matter of logic. But it’s false as a matter of reality. Isn’t our experience, at least in certain areas, that regulations tend to weaken (or effectively weaken) as special interests go to work on them? There is something to regulatory capture, isn’t there? How ’bout in the area of finance? Which way did regulations tend over the last several decades?

The Regulation Ratchet, Revisited - After some back-and-forth in the comments, Hanson clarified the scope of his regulation ratchet theory in an addition to his original post. I’m not saying there there aren’t many other reasons/factors influencing regulatory changes, and I’m not saying regulation never gets weaker.  I’m saying that this particular factor, the existence or not of a recent disaster, is often a ratchet factor, since many folks seem unwilling to consider reducing regulation because of a lack of recent disasters, yet are willing to increase it because of a recent disaster.  This is a clear bias, though it might of course be countered by other opposite biases. So, there are other factors. This I agree with. But I’m still not convinced of the one-way ratchet theory with respect to disasters or lack thereof.

Holy Cow! We're going to have financial reform  - Voting 59 to 39, the Senate passed Senator Chris Dodd's sprawling bill to clamp down on the Wall Street excesses that nearly destroyed capitalism. Here is my initial quick take in the Fiscal Times.    But let me amplify a bit here.   For all its compromises and omissions and special exceptions, this is a strong bill that will make life a lot less free-wheeling and lucrative for the big banks and, with a little perserverence, a lot safer for consumers and  the economy as a whole.      Go ahead and call me naive.   Critics of the banks like Simon Johnson and James Kwak of Baseline Scenario will undoubtedly complain that the Senate capitulated to Wall Street because it didn't try to break up the giant banks or properly clip their wings in areas like derivatives.   And to some degree, Johnson and Kwak are right.   One of the underlying causes of the crisis was that institutions like Goldman Sachs and Citigroup had become too big to fail, and many of them took reckless risks because they assumed on some level that the government would bail them out. 

Obama Senate Finance Reform Bill Win, But It’s Complicated… The Senate passed a historic finance reform bill on Thursday night, fulfilling a major goal of the administration. But, Eric Alterman writes, the legislation is a thicket of compromises.Whatever you think about the financial regulation bill that finally passed in the Senate Thursday night, you can't say it’s not a big deal. It’s 1500 pages long, and just take a look at Journal’s précis of its major provisions.When was the last time Congress passed a bill so large that even its significant provisions resisted summarization, both for reasons of complexity and enormity? If you said “health care,” well, perhaps you’re noticing a pattern. Once again, Democrats spent the better part of a year playing three-dimensional chess with themselves, lobbyists, and Republicans to pass a middling bill whose ultimate effect no one can confidently predict.

Bill Passed in Senate Broadly Expands Oversight of Wall Street… The Senate on Thursday approved a far-reaching financial regulatory bill, putting Congress on the brink of approving a broad expansion of government oversight of the increasingly complex banking system and financial markets. The legislation is intended to prevent a repeat of the 2008 crisis, but also reshapes the role of numerous federal agencies and vastly empowers the Federal Reserve in an attempt to predict and contain future debacles. While there are important differences — notably a Senate provision that would force big banks to spin off some of their most lucrative derivatives business into separate subsidiaries — the bills are broadly similar, and it is virtually certain that Congress will adopt the most sweeping regulatory overhaul since the aftermath of the Great Depression.

Thank You, Lloyd Blankfein - Krugman - FinReg: what do I think? I think Ed Andrews has it right: not all it should have been, but better than seemed likely not long ago, thanks to a changed climate. Wall Street in general, and Goldman in particular, provided scandals at just the right time. Thank you, Lloyd Blankfein.What’s good? Resolution authority, which was sorely lacking last year; consumer protection; derivatives traded through clearinghouses; ratings reform, thanks to Al Franken; tighter capital standards for big players, although with too much discretion to regulators. What’s missing? Hard leverage limits; size caps; not much in the way of restoring Glass-Steagall. If you think that too big to fail is the core problem, it’s disappointing; if you think that shadow banking is the core, as I do, not too bad.

The great news from the Senate - It’s almost enough to restore your faith in government. The details have yet to be worked out — and you can be sure that after letting the Senate deliver its own bill on its own terms, Treasury will be deeply involved in the reconciliation process, trying to marginalize any measures it doesn’t like. But the outlines of financial regulatory reform are now clear — the NYT has the best chart, I think — and I have to admit that it’s much, much better than anything I dared hope for even just a few weeks ago.Amazingly, and wonderfully, the Volcker Rule has made it through the Senate, and will surely not be opposed by the House, which never got an opportunity to vote on it. While Treasury might weaken or abolish Blanche Lincoln’s amendment forcing banks to spin off their swap desks, it now seems very likely that there will be some kind of legislation attempting to reduce the amount of speculation and gambling that goes on at regulated, too-big-to-fail institutions.

Preventative measures - Last night the Senate approved a major financial reform bill almost a year in the making. A few hours before the vote, the president hailed the legislation, which he said ensures that “the American people will never again be asked to foot the bill for Wall Street’s mistakes.” He elaborated:  There will be no more taxpayer-funded bailouts--period. If a large financial institution should ever fail, we will have the tools to wind it down without endangering the broader economy. And there will be new rules to prevent financial institutions from becoming “too big to fail” in the first place, so that we don’t have another AIG. But is this really true? Does the financial reform bill really solve the problem of “too big to fail”? The answer is: “Sorta,” but not quite in the way the bill’s supporters suggest.

The hidden changes in financial reform - TIME -The Senate passed its financial reform bill. Huzzah! What did the Senate wind up with after three weeks of such intense lobbying and debate? First, I'll run through the big, headline-grabbing changes. Then the real fun begins: the changes that are coming which you probably haven't been hearing as much about. Just remember that Congress still has to mesh together the Senate bill with what the House passed in December. This isn't necessarily the final say.

The Senate reform bill is much kinder to Wall Street than it deserves - The Senate's passage Thursday night of extensive financial reform is being portrayed as a big loss for the financial sector. "No End to Banks' Capitol Punishment," reads the headline in the Wall Street Journal. But everything's relative. Wall Street wanted no reform at all. And this bill seems like harsh punishment only because the default situation for the last 30 years has been that the financial sector gets precisely the regulation it wants. What may be most striking to average Americans about the bill is actually how un-punitive it is. Given what the financial sector put the nation through in the past three years, the case for strong punishment was very compelling. But while there are provisions that the financial sector doesn't like, the legislation that is now headed to a House-Senate conference is in fact relatively tame. Consider what's not in the bill.

How the finance bill affects consumers.- For consumers trying to figure out what the financial overhaul bill means for them, the legislation the Senate passed Thursday offers some tantalizing possibilities. Merchants might offer more discounts to people who pay cash. You could get a free credit score every time a lender or landlord penalizes you with a high interest rate or rejects your application because your score is not up to snuff. Many mortgage prepayment penalties would go away. And there will be a consumer financial protection agency, despite many efforts to kill it off. One last-minute Senate addition would lower the fees that merchants pay to process many debit card transactions. If banks lose revenue as a result, they could make up for it by adding fees to checking accounts or cutting back on rewards programs. Retailers say that once card costs fall, they will hire more workers and hold the line on prices. There is a fair bit of disagreement about who has the better argument. It will not be clear until there is a final bill — and perhaps not for years afterward — how much money the measures will put in your pocket or whether they will keep it from being picked. But the basic outlines are clear, so here are the areas to watch as a final bill emerges.

Capping Interchange Fees Is Not In Your Best Interest - On May 13, the Senate voted 64 to 33 to raise the fees on your credit card.  Indirectly, of course. Senator Durbin’s amendment to S. 3217, the “Restoring American Financial Stability Act of 2010,” limits interchange fees and mandates that they are proportionate to the charges incurred.  Interchange fees, also known as “swipe fees,” are the fees that a merchant pays to a cardholder’s bank for the cost and risk of offering credit to consumers.    Reducing interchange fees appears like you are helping small businesses and reducing the cost of credit transactions.  In actually, you are forcing credit card companies to increase their fees and decrease the issuance of credit cards. Todd Zywicki, of the Mercatus Center at George Mason University, explains it this way in WSJ: “Credit cards are essentially a closed economic system:  A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs.  For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.”

Of reform, US bank ratings, and repo - Sweeping US finance reform is on the verge of being enacted into law, after Senate approval of a final bill. Which means further curbs on too-big-to-fail banks……and that is likely to mean ratings danger for large US financial institutions. As Moody’s er, somewhat vaguely announced on Friday:Though it is unclear what provisions will be included in the final legislation, Moody’s expects that there will be elements that are both positive and negative to banks’ stand-alone credit profiles…Currently, seventeen banks in the US receive some ratings ‘lift’ from Moody’s based on indications of systemic support. But how much lift has there been, and what might happen if this is removed?According to Barclays Capital on Friday, possessing TBTF status has lifted banks’ debt by three to four notches more than their balance sheets would suggest.

So We Now Have "Financial Reform"? - Who are these guys trying to kid? The most-important part of the bill, stopping derivative abuse, was watered down to the point of irrelevance.  The exceptions and exemptions that remain for OTC trading are big enough to drive 200 West Street through - sideways - and Goldman will do exactly that. Nor did we re-impose a hard leverage cap.  You know, the one that existed before 2004?Nor did we reinstate a hard deposit cap limitation.Nor did we fix The Fed illegally usurping the appropriation power of Congress or impose an actual audit on them.Nor did we fix the off-balance sheet or "mark to fantasy" BS - in short, the outright lies printed in so-called "financial reports" every quarter

Focus On This: Merkley-Levin Did Not Get A Vote - After 9 months of hard fighting, yesterday financial reform came down to this: an amendment, proposed by Senators Jeff Merkley and Carl Levin that would have forced big banks to get rid of their speculative proprietary trading activities (i.e., a relatively strong version of the Volcker Rule.) The amendment had picked up a great deal of support in recent weeks, partly because of unflagging support from Paul Volcker and partly because of the broader debate around the Brown-Kaufman amendment (which would have forced the biggest 6 banks to become smaller).  Brown-Kaufman failed, 33-61, but it demonstrated that a growing number of senators were willing to confront the power of our biggest and worst banks. Yet, at the end of the day, the Merkley-Levin amendment did not even get a vote.  Why?

Prometheus bound: Financial reform and the Fed - THE decision of the European Central Bank to start buying government bonds follows a path trodden by the Federal Reserve in 2008 and 2009. Both entered politically charged territory to save the financial system at great risk to their reputations. For the Fed, one consequence is that the big financial-reform bill making its way through the Senate—a vote was expected after The Economist went to press—will leave it more powerful but more beholden to Washington, DC. The Fed has fought for, and kept, its supervision of banks. It acquires important new powers to regulate big non-bank financial companies and even to break up firms deemed a threat to the financial system. Its only significant loss of turf is direct oversight of consumer protection. The Fed keeps its emergency-lending powers, though it needs the Treasury’s approval to use them The price of these powers, though, is to be drawn closer into politicians’ embrace.

Volatility: The flipside of moral hazard - Jim Surowiecki today looks at the flipside of the moral hazard trade: if you can’t count on governments to bail you out in extremis, then you’re likely to have volatile and unpredictable markets. Surowiecki is saying not only that Merkel should have bailed out Greece with alacrity and that Paulson should have bailed out Lehman: he goes on to praise successful interventions in the markets such as the Clinton/Rubin bailout of Mexico, Hong Kong’s successful 1998 intervention in its own stock market, and the Obama Administration’s decision to preserve as much equity and debt value of the banking system as it could. In all these cases, government intervention was used to prop up market prices — of Mexico’s bonds, of Hong Kong equities, and of US bank stocks and preferred debt. And yes, when there’s a government put, volatility goes down. But that doesn’t mean that government puts are a good idea: after all, it’s not the job of government to reduce market volatility.

Exclusive: Waddell is mystery trader in market plunge - A big mystery seller of futures contracts during the market meltdown last week was not a hedge fund or a high-frequency trader as many have suspected, but money manager Waddell & Reed Financial Inc, according to a document obtained by Reuters. Regulators and exchange officials quickly focused on Waddell's sale of 75,000 e-mini contracts, which the document said "superficially appeared to be anomalous activity."Waddell manages the $22.1 billion Ivy Asset Strategy fund, which is well-known for hedging with equity index futures when manager Mike Avery, who is also chief investment officer at the company, feels uneasy about the market.Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said in congressional testimony on Tuesday that it had found one sale that was responsible for about 9 percent of the volume in e-minis during the sell-off in the U.S. markets. Gensler said there was no suggestion that the trader, whom he did not identify, did anything wrong in only entering orders to sell. Gensler said data showed that the trades appeared to be part of a bona fide hedging strategy.

Waddell & Reed Says It Didn’t Mean to Disrupt Markets (Bloomberg) -- Waddell & Reed Financial Inc., the mutual-fund manager started in 1937, said it didn’t intend to disrupt markets on May 6 when the plunge in stocks temporarily erased more than $1 trillion of value. Waddell & Reed traded index futures contracts as “part of the normal operation” of its funds, according to a statement today from the Overland Park, Kansas-based firm. The firm said it believes it was among more than 250 firms that traded “e- mini” contracts during the time the market sold off. The U.S. stock market, fueled by computer-driven trading, last week had its biggest intraday decline since the crash of October 1987. During the market drop, Waddell & Reed sold 75,000 e-mini contracts, which are tied the Standard & Poor’s 500 Index, Reuters reported today.

Investment fund denies disrupting markets - An investment firm that was a heavy seller of stock market futures during the sudden market plunge last week, said on Friday that it was a “‘bona fide hedger’ and not someone intending to disrupt the markets”.In a statement, Waddell & Reed Financial, a Kansas-based mutual fund company founded in 1937, said: “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.” Since last Thursday, when the S&P 500 index plunged nearly 5 per cent over a 20-minute period in the late afternoon, regulators and exchanges have been scrutinising trading activity in the hopes of understanding how it occurred. Reuters on Friday earlier reported that documents identified the firm as the mystery market participant described by Gary Gensler, Commodity Futures Trading Commission chairman, in his testimony before the House Financial Services subcommittee on Tuesday.

Raptors at the Liquidity Fence, and the Big Whoosh - There are strange whooshy feelings in capital markets these days. I wrote last week about the run on the shadow liquidity system which, in part, led to the Big Whoosh: Thursday's "flash crash". Except the run hasn't really stopped.What is going on? It's a testing process. Markets -- and traders -- are trying to figure out where the liquidity weaknesses are: How far down, in what stocks, and at what times, do things have to be bent/folded/spindled before they bust again? Where are the real liquidity replenishment and cut-over points? At what point will liquidity again disappear, in what stocks? The market is, like raptors in Jurassic Park, testing the fences. It has discovered a major set of coupled, equity-related weaknesses in the shadow liquidity system, in the absence of a central market limit order book, in the best price national market system, in exchange-traded fund arbitrage, and in off-exchange trading networks. It will try to exploit those weaknesses again, which is the other side of why I hear non-stop from opportunistic sorts who have already positioned themselves accordingly in distant put/call land on the SP500.

Speedy New Traders Make Waves Far From Wall Street - After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation’s financial markets is drawing new scrutiny. Over the last decade, these high-tech operators have become sort of a shadow Wall Street — from New Jersey to Kansas City, from Texas to Chicago. Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day. These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.

Biggest Exchanges Propose Circuit-Breaker Trial for Next Month (Bloomberg) -- The biggest U.S. equity markets will urge regulators to begin a program next month for temporarily halting individual stocks that swing more than 10 percent, two people familiar with the matter said.  The circuit breakers would be triggered in all markets when individual stocks in the Standard & Poor’s 500 Index moves 10 percent over five minutes, said the people, who asked not to be identified because the plans aren’t public. The test would begin June 7, under the plan being sent to the U.S. Securities and Exchange Commission.  Regulators are examining ways to slow down trading during investor panics after the market plunge on May 6 showed how conflicting rules across as many as 50 different U.S. equity venues may worsen selloffs. The SEC is scheduled to release a preliminary report today on the crash, which sent the Dow Jones Industrial Average down almost 1,000 points and erased about $1 trillion in stock value before losses were pared.

Trading curbs to be imposed on US shares after ‘flash crash’ – The new rules, subject to sanction by the Securities and Exchange Commission (SEC), would pause trading in the shares of specific companies if the price moved by 10pc or more in a five minute period. The pause would allow market makers to seek extra liquidity for the company's shares and ensure that trading in the share in question is orderly. The temporary halt – similar to pauses already enacted on the London Stock Exchange – would apply to companies in the S&P500 index, 30 of which fell by more than 10pc on May 6. Although the SEC has yet to publish a definite reason as to why the "flash crash" occurred, Mary Schapiro, the regulator's chairman, said: "We continue to believe that the market disruption ... was exacerbated by disparate trading rules and conventions across the exchanges."

Ban Market Orders! - The SEC, in their 150 page report on the May 6th crash, has section (around page 75) on "potential regulatory responses".  I found this interesting, since I've been constantly repeating that we should ban market orders if we want to protect people from themselves:"We are considering ways to address the risks of market orders, and their potential to contribute to sudden price moves. Areas under consideration include: (1) requiring market order “collars,” thereby effectively converting market orders into limit orders; (2) prohibiting or limiting the use of market orders; (3) requiring broker-dealers to specifically warn retail customers about the risks of market orders, particularly in volatile markets; and (4) pursuing investor education initiatives as to the risks of market orders." I'd be shocked if they implemented #2, but it's the simplest and most effective solution, and removes any and all potential excuses from the execution side of things.  I've specifically discussed all four of the potential changes the SEC detailed in that paragraph above. 

SEC's Circuit Breaker Rule: Idiotic - There's dumb, and then there's criminally insane.  Shapiro fits the second category with this:Under the proposed rules, which are subject to Commission approval following the completion of the comment period, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. Doesn't sound so awful, right?  Well, wait - read the next paragraph: The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breaker as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable. What?  S&P 500 stocks only?The SEC wants public comments?  I'll make one: That's criminally insane.If you're going to impose a circuit breaker rule on individual issues you must also impose the same rule on every instrument that includes or references that issue.

Emergency Powers!!??!  - From the NY Times' Dealbook: "Federal market regulators are still unsure about the cause of the sharp stock market drop two weeks ago, and that worries Senator Jim Bunning." Let me interrupt here - I'll tell you the cause of the sharp drop:  more sellers than buyers! If we're talking about the aberrant prints, like 1c in ACN, you don't need Sherlock Holmes for that one either:  sellers came in to sell stock regardless of price, and there were no buyers.  "Mr. Bunning, Republican of Kentucky, told Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, that she should request emergency powers from the Senate to do whatever is necessary to prevent another market plunge until the cause of the May 6 flash crash can be determined. Senator Bunning - there's an easy fix for this:  make sure that retail traders know that "market order" means "regardless of price."  Make sure that retail traders know that "stop orders" become "market orders" when their stops are triggered.  Once you protect the retail traders, no one care if the professionals shoot themselves in the foot with bad order types.  Yet, Bunning wants the SEC to have "EMERGENCY POWERS!" 

A Credit Union That Played With Fire - WHEN Wall Street is accused — as it has been so often these days — of selling risky products to unwitting customers, it usually argues that investors in such exotic stuff are sophisticated adults capable of assessing any hidden dangers. So it goes with collateralized debt obligations, or C.D.O.’s, which are bonds, loans and other assets that the Street pools together and sells as packages of securities. Purveyors of C.D.O.’s maintain that buyers who lost billions in these mortgage-related instruments were, of course, sophisticated.  But as a recent report from the inspector general of the National Credit Union Administration shows, it is neither credible nor factual that only savvy investors bought C.D.O.’s. The report analyzes the April 2009 collapse of the Eastern Financial Florida Credit Union. Based in Miramar, Fla., this state-chartered institution was created in 1937 to serve the Miami employees of what later became Eastern Airlines. The institution added other Florida employee groups and was serving 208,000 members when it failed last year.

Whistle-Blowers Become Investment Option for Hedge Funds - Informants who turn in tax cheats have to wait years to get their share of any reward from the I.R.S.’s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. They are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers. The surging size of the potential awards is driving all the interest. Three years ago, the I.R.S. began offering bigger rewards — 15 percent to 30 percent of whatever money the government recovered — in a move that has turbocharged the agency’s whistle-blower program. Where it once handled only a trickle of tips, often involving relatively small amounts of unpaid taxes, I.R.S. offices now receive a torrent of big money claims. Accountants and company employees have taken to trooping in bearing computer records and boxes of documents to back up their claims of underpayment by big companies.

Greece Considering Action Against U.S. Banks for Crisis (Bloomberg) -- Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Papandreou said.  “I wouldn’t rule out that this may be a recourse,” Papandreou said, in response to questions about the role of U.S. banks in the crisis, in an interview on CNN’s “Fareed Zakaria GPS.” The program, scheduled for broadcast today, was taped on May 13. Neither Papandreou nor Zakaria mentioned any banks by name. Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.

Euro Pain Could Blow Back on Big U.S. Banks - The biggest threat is that the European rescue operation proves insufficient and problems spread from smaller euro-zone countries to bigger economies like France or Germany. That may threaten the viability of the euro, potentially paralyzing credit markets globally, just as happened following the collapse of Lehman Brothers. If so, this could spell big trouble for five of the biggest U.S. banks—J.P. Morgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Exposures to France and Germany, along with second-tier euro countries, is equal to about 81% of the banks' combined Tier 1 common capital, a buffer to absorb losses, according to first-quarter and year-end securities filings.Which countries should investors in U.S. banks worry about? Take Ireland, Spain and Italy. Exposures of the big-five to these three are equal to about 25% of the banks' combined Tier 1 common capital. In particular, U.S. banks have to worry about banks in these countries being hit. Exposure to banks in Spain and Ireland, for example, exceeds risks to government or private entities. An even bigger risk is if any European crisis blows back on the bulwarks of the euro: France and Germany. It's not impossible for that to happen

Goldman Sachs Hands Clients Losses in ‘Top Trades’(Bloomberg) -- Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse. Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

Goldman Sachs Seeks Bigger Share of 401(k) Accounts (Bloomberg) -- Goldman Sachs Group Inc., fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors, is trying to persuade more Americans to trust the firm with their retirement funds.  The New York-based company is promoting alternative asset funds and designing target-date funds that provide guaranteed income to grab a bigger piece of the $2.7 trillion 401(k) market, “We understand risk and we understand asset allocation,” said McDermott, who joined the firm in February to strengthen its retirement-plan products and marketing. “We’re looking to leverage that for the 401(k) market.”  Goldman’s 401(k) plan assets totaled $17.5 billion as of March 31, according to the company. Fidelity Investments, the largest 401(k) asset manager, had $347.8 billion as of December 31. Assets in 401(k) plans are estimated to increase 41 percent, to $3.8 trillion, by the end of 2014, according to data from Cerulli Associates in Boston.

Goldman Sachs Settlement May Hinge on How SEC Justifies Penalty (Bloomberg) -- Analysts predict Goldman Sachs Group Inc. will pay $1 billion or more to settle a Securities and Exchange Commission fraud suit that triggered a 26 percent drop in the firm’s stock. Extracting such a record-setting penalty may be easier said than done. When it comes to presenting a settlement for court approval, the SEC will have to “have a good explanation and justification for the number,” said Donald Langevoort, a former SEC attorney who teaches securities law at Georgetown University in Washington. Looming over negotiations between the SEC and Wall Street’s most profitable investment bank is a reminder from Judge Jed Rakoff that courts can reject settlements -- even when the SEC’s adversary is willing and able to pay. Rakoff, a U.S. district court judge in Manhattan, refused to sign off on a $33 million accord with Bank of America Corp. in September, noting that the SEC didn’t adequately explain how it came up with the dollar amount.

Goldman Sachs Did Nothing Illegal: Clinton - Former President Bill Clinton says it is "time to lower the rhetoric and talk about the facts," in reference to the government's scrutiny of Wall Street. In an exclusive interview with Maria Bartiromo, Clinton noted that while many financial firms are being questioned by the Securities and Exchange Commission, he does not believe that Goldman Sachs or CEO Lloyd Blankfein did anything illegal, based on what he's seeing. The SEC has been probing the mortgage operations of major banks, but so far has only charged Goldman with civil fraud. The firm has said it will fight the charges and has vigorously denied any wrongdoing.

Never Give a Sucker An Even Break - Curiously, the basics are fairly relevant to the ongoing financial crisis and corporate shenanigans that have made this such an interesting age to experience. Almost all crime is committed in hot blood on the spur of the moment. The thought process works like this - I could nick that... I've nicked it.

• 1. There are no brilliant criminal minds. Almost all crime - violent, property-related, financial - is all about opportunism. Man sees thing not nailed down, steals thing, usually trades at heavy discount for cash to buy heroin or alcohol; Man needs cash, usually for heroin or alcohol, robs granny; Man has opportunity to dip into the till at work, dips into the till. Schemers and plotters make better careerists than criminals.
• 2. Hence, there are very, very few brilliant criminal plots. The major difference between criminals and law-abiding citizens is that most criminals are incapable of self-control or weighing up deterrents. Oh, for a pound every time I've heard of some murderer saying some variation of But I only stabbed him, I didn't mean to kill him. Criminals and consequences are strangers, until the staff sergeant shuts that cell door.

Goldman Sachs Revolving Door: The New Edition - How times flies! Almost a year ago, we reported on Goldman Sachs's close ties to the government, highlighting the firm's long tradition of executives going to work in public service (as well as the reverse), noting that the links raised questions about potential conflicts of interest for a firm that benefited from a multi-billion-dollar bailout. Since then, the scrutiny of Goldman has risen to a whole new level, with the SEC alleging that the firm committed securities fraud, federal prosecutors probing its subprime-mortgage-related activites and lawmakers grilling the firm's top executives.And the revolving door continues to turn -- plenty of former Goldman staffers now work at a range of agencies from the SEC to the Treasury Department. To win friends and influence people in Washington -- and sway the pending financial reform legislation -- Goldman fields a deep bench of lobbyists with plenty of experience in politics, as noted by CBS News and the HuffPost Investigative Fund.Check out our slideshow of Goldman's Revolving Door.

Brilliant Quants Beside Us and Their Perfect Quarter... Ms. Rule, author of The Stranger Beside Me, at Seattle's Suicide Hot Line, worked with a man she described as brilliant and handsome. His name was Ted Bundy (yes, that one). Despite an early, avid interest in crime-fighting, which led her to undergraduate minors in criminology and psychology, Ms. Rule failed to see the budding serial-killer in her co-worker.Her positive impression was so strong that, even after multiple arrests (and escapes), she couldn't quite believe the man she knew was a killer. She describes the moment of revelation in an interview: Bundy fooled everybody. So did Bernie Madoff. So did many other fund managers, financial quants (experts in financial mathematics) and, I'm sure many will soon discover, so did the CEOs of major banks.  But how?

Bank Profits Skyrocket; Big Banks Lead The Way - Bank profits soared to their highest level in two years as near-zero interest rates and lower reserves for future losses allowed U.S. banks to book an $18 billion quarterly profit in the midst of a prolonged economic downturn.  Big banks led the way, accounting for $15.6 billion, or nearly 87 percent, of the industry's total first-quarter profit, according to a Thursday report by the Federal Deposit Insurance Corporation. Defined as banks with more than $10 billion in assets, they account for about 78 percent of the industry's total assets.Boosted by the lower cost of funds they enjoy versus their smaller competitors, the big banks' margin on interest rates -- the difference they pay in interest versus what they charge -- jumped to its highest level since 2002. Banks with more than $10 billion in assets also tripled their return on assets relative to the same period a year ago. It's the highest level since the third quarter of 2007

An Ode to Crisis Economics - Reading through Nouriel Roubini’s new book, “Crisis Economics”, is like tasting a sample of what Nouriel does best: Explain economics in such straightforward English that makes the intricacies of the dismal science feel like an effortless walk in the park. Equally effortless is the walk through the crisis itself and the vast array of policies undertaken to address it. In what amounts to a series of “crash courses” in every aspect of crisis economics, the reader is rewarded with all sorts of gems:Nouriel’s tone changes when it comes to policy prescriptions. Here we no longer hear “Roubini the cool minded professor” but the passionate, militant and, often, unedited policy commentator he has recently become known for. (“[..] banks have been able to pretend that their crappy assets are worth far more than any sane assessment would suggest.”)

Richard Abrams: debunking free marketarianism -I've often written here about the problems of the naive, black-or-white view of economics that has been fostered by the Chicago School and Milton Friedman acolytes who talk of "free markets" as though markets exist in vaccum tubes unaffected by the social, cultural and legal context around them. Debunking that "free market myth" is important, because without understanding the mythology of it most ordinary Americans will continue to be misled and fooled by those who devise and enact policies that affect our everyday lives. From "tea partyers" to Congress, from "the national association of manufacturers" to the US Chamber of Commerce, the "free market" is spoken of with almost reverent tones as though the market works on its own, as though businesses always do everything better than government, as though human liberty were intimately connected with letting mutlinational corporations set their own standards and make their huge profits without protections for the little guys along the way. Wrong, wrong, wrong--this pseudo-concept of free market has little to do with human liberty and lots to do with corporate profits for managers and shareholders. Time that ordinary Americans understood that.

FDIC saddled with $400 million in CDOs: WSJ = The Federal Deposit Insurance Corp. has inherited collateralized debt obligations with a face value of more than $400 million from failed lending institutions, The Wall Street Journal reported. About 250 contracts have been inherited by the agency from two dozen lenders that went bust in the recent crisis, the report said. However, the number of CDOs winding up on the agency's balance sheet is on the rise, with few signs that the stream of toxic assets -- purchased by small institutions, many of which remain in financial distress -- will let up, the report said. The FDIC is planning to auction the CDOs this summer, but it may have to write off those it can't unload, a move that would mean taxpayers absorb the losses, the report said

Conspiracy of Banks Rigging States Came With Crash (Bloomberg) -- A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market.  The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds.   West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks. They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money. “The whole investment process was rigged across the board,”

Wall Street’s gone rogue, says Grantham – Jeremy Grantham, co-founder of Grantham, Mayo van Otterloo & Co. LLC, which has $106 billion in assets under management, set the mood with remarks titled “The Ethical Hole in Finance.”  “It has become a rogue industry,” Mr. Grantham said in slamming the banks and brokerage firms who execute his firm's trades. “Today, the ethical standard is: Don't go to jail if you can possibly avoid it.”  Mr. Grantham, long known for his pessimistic views about the market and its participants, called on his fellow investment professionals to direct more business to the “most ethical firms,” which he defined as banks or brokers that don't exploit information gleaned from clients by trading for their own accounts. ... “Shame on us,” Mr. Grantham thundered to a hushed audience. “We have allowed the deterioration in ethical conduct to take place. We have made no fight as we slid down the rathole.”

Study: Bonuses Entice Cheating - Want to get a grown up to cheat at work? Just offer him or her a bonus to meet a certain goal, Canadian researchers say.Paying employees to improve their performance entices cheating, says a new study by Ryerson University and the University of Guelph. The study is based on an experiment in which 200 students were asked to play a word game and given one of three types of bonuses depending on their performance. Students receiving bonuses for meeting certain pre-set goals were “significantly more” likely to cheat compared to students offered bonuses based on their performance compared with their peers or based on each word created, the study showed. “The dark side of behavior can be affected by pay-for-performance schemes,” said Fei Song, one of the study’s co-authors. “Faced with certain types of incentives, some people are tempted to make up or misrepresent their performance numbers"

Mike Whitney: Why Rescue Bankers? -Only a small portion of the nearly-$1 trillion bailout will go to Greece. And, even that pittance comes with strict "belt-tightening" conditions. The bulk of the funds will be held in an structured investment vehicle (SIV) as a way to ward off speculators who smell blood in the water and think they can make a killing by toppling sovereign bond markets in Portugal, Spain and Italy. Obama's concern is that a Greek default will put pressure on French and German banks (which have 110 billion-euro exposure) that will start the dominoes tumbling again. According to Dow Jones, "JP Morgan's holdings of non-U.S. government bonds increased by $36.5 billion in 2009, while Citigroup's increased by almost $40 B." So, despite the  news this week that all four of the nation's biggest banks (Bank of America, Goldman Sachs, JP Morgan, and Citigroup) racked up perfect quarters off their trading desks, (showing that the Fed's liquidity and zero-rates has restored profitability) the banking system is still so weak that the President of the United States has to spend his whole weekend hectoring heads-of-state throughout Euroland to beef up their bailout or the whole financial system will come crashing down. What does that tell us? It tells us that the whole "recovery" meme is a fraud.  It tells us that the banks (where lending is down 20 per cent, and foreclosures are running at 300,000 per month) are once again engaged in the riskiest type of speculation; that they're using complex financial assets and repo to maximize leverage to goose profits in the middle of a slump. And, it tells us that Obama is Wall Street's  biggest champion, a real "enabler" in chief.

The Fat Cat Hypothesis -The claim that chief executives’ pay has soared in recent years because C.E.O.’s have figured out how to game the corporate compensation system is sometimes referred to as the fat cat hypothesis. The environment that C.E.O.’s operate in is not the large, impersonal, competitive marketplace of economics textbooks, but a corporate landscape dominated by large companies with interlocking directorates, wielding substantial market power.An excellent analysis of how this environment facilitates predatory extraction of surplus comes from the Harvard law professor Lucian Bebchuk, who emphasizes the incentives to pursue short-run rather than long-run gains. (He also offers pretty specific advice about how to address the problem.) The impact of concentrated economic and political power on the banking environment is thoroughly documented by Simon Johnson and James Kwak in “13 Bankers.”

Class Warfare: Hundreds Protest Outside Bankers’ Houses In DC  - Huge angry mobs converged outside bank employees' houses on Sunday afternoon to demand banks stop lobbying against Wall Street reform. "Bank of America: bad for America!" shouted community leaders outside the house of Bank of America general counsel Gregory Baer.The Chicago-based grassroots organization National People's Action, in coordination with the SEIU, bused more than 700 workers from 20 states to Baer's neighborhood, one of the wealthiest corners of Washington. The action kicks off several days of protests targeting K Street for lobbyists' role in financial reform. Baer himself apparently tried to blend in with the crowd until a neighbor outed him. The mob booed loudly as he walked into his house. "I don't have time for you," he said,

Treasury Takes $1.6 Billion Loss On Chrysler Loan - The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009.Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.Treasury said Monday that Chrysler repaid $1.9 billion of a $4 billion loan, which was extended before the company filed for Chapter 11. The government hopes to get another $500 million from the company that emerged from bankruptcy, Chrysler Group LLC.Treasury officials said that the government had no plans to boost its stake in the new Chrysler to cover those losses. It also acknowledged another $1.9 billion in potential losses from a separate loan that had been made to the company that went through bankruptcy proceedings. It indicated slim hopes of recouping much if anything from that separate $1.9 billion loan.

Chrysler loan loss may be pebble on road to $34 billion taxpayer hit - If you think the $1.6 billion loss that the Treasury Department said it was taking today on its loan to Chrysler last year was bad, consider it a down payment on the losses yet to come. Losses on taxpayer loans and investments in Chrysler and General Motors are expected to rise as high as $34 billion, the Associated Press points to congressional auditors as having said.The "old" Chrysler has repaid taxpayers $1.9 billion of its $4 billion in loans, which were extended before the company filed for a Chapter 11 bankruptcy reorganization. The government wants more: The AP says the government hopes to get another $500 million from the company that emerged from bankruptcy, now officially known as Chrysler Group LLC and controlled by Italy's Fiat.

Data hint U.S. recovery pace is moderating (Reuters) - The pace of the U.S. economic rebound may be slowing, manufacturing data suggested on Monday, as concerns grow about the impact of Europe's debt crisis on global growth. A disappointing profit forecast by the second-largest U.S. home improvement store chain, Lowe's Cos, also clouded the recovery outlook, and the company's chief executive was cautious about an economic recovery.But a rise in U.S. homebuilder sentiment according to an industry gauge to the highest level in more than two years offered a glimmer of optimism and some hope for housing after a long slide.The New York Federal Reserve said its gauge of manufacturing in New York state showed the pace of growth slowed in May, though the jobs index component rose to its highest level in about six years

Number of the Week: 0% Growth Without Temporary Factors -- Zero — First quarter GDP growth, minus the temporary factors of government stimulus and inventories, as estimated by Goldman Sachs.With the economic recovery already nine months old, it’s easy to forget just how tenuous it remains. Consumers are spending and businesses are investing, but an uncertain amount of that activity depends on temporary lifts, most notably the American Recovery and Reinvestment Act of 2009.Estimates of how much the government’s spending is actually stimulating growth vary wildly — some economists contend it has no net effect at all. But if you believe the economists at Goldman Sachs, who have spent a lot of time poring over the details, the effect is quite significant: about two percentage points of annualized growth in both this quarter and the last. Indeed, if one subtracts that stimulus effect and the boost from changing inventories — also a temporary factor — there’s been no recovery at all. Growth in the first and second quarters of 2010 would be zero

Leading Index in U.S. Unexpectedly Dropped in April (Bloomberg) -- The index of U.S. leading economic indicators unexpectedly declined in April, a sign the economic expansion may slow in the second half of the year. The 0.1 percent decrease in the New York-based Conference Board’s measure of the outlook for three to six months followed a revised 1.3 percent gain in March. It was the first decline for the index in a year. The initial factory-induced rebound from the worst recession since the 1930s, which is broadening to include advances in consumer spending and service industries, still faces hurdles. A slump in building permits, little letup in firings and retreating stock prices highlight risks to the strength of the recovery as concern over the European debt crisis mounts.

EconomPic: Leading Economic Indicators Negative for First Time in a Year - With everything else going on in the world, the markets did not take the following well. Daily Markets details: Thursday morning, the Conference Board released its report on leading economic indicators in the month of April, showing that its leading economic indicators index unexpectedly declined for the first time in more than a year.The report showed that the leading economic index edged down by 0.1 percent in April following a downwardly revised 1.3 percent increase in March. The decrease came as a surprise to economists, who had expected the index to increase by 0.2 percent.

U.S. Economy: Leading Indicators Drop in Sign Recovery to Cool (Bloomberg) -- The index of U.S. leading economic indicators unexpectedly declined in April, a sign the economic expansion may cool in the second half of the year.  The 0.1 percent decrease in the New York-based Conference Board’s measure of the outlook for three to six months marked the first drop in a year and followed a revised 1.3 percent gain in March. Other reports showed more Americans filed for jobless benefits and manufacturing in the Philadelphia region expanded. The initial factory-induced rebound from the worst recession since the 1930s, which is broadening to include advances in consumer spending and service industries, still faces hurdles. A slump in building permits, little letup in firings and retreating stock prices highlight risks to the strength of the recovery as concern over the European debt crisis mounts.

Problem bank list hits 775 - The government's list of troubled banks climbed to its highest level since 1992 in the first quarter, although the pace of growth moderated, according to a government report published Thursday. The numbers, published as part of a broader survey on the nation's banking system by the Federal Deposit Insurance Corporation, revealed that the number of banks at risk of failing climbed to 775 during the first quarter. That figure stood at 702 in the fourth quarter of 2009. A year ago, the number of banks on the FDIC's watch list was 305. Loan losses, particularly in areas like commercial real estate, have hit many lenders hard.

FDIC Q1 Banking Profile: 775 Problem Banks - The FDIC released the Q1 Quarterly Banking Profile today. The FDIC listed 775 banks with $431 billion in assets as “problem” banks in Q1, up from 702 banks with $403 billion in assets in Q4, and 305 banks and $220 billion in assets in Q1 of 2009.Note: Not all problem banks will fail - and not all failures will be from the problem bank list - but this shows the problem is significant and still growing.The Unofficial Problem Bank List shows 725 problem banks - and will continue to increase as more formal actions (or hints of pending actions) are released.This graph shows the number of FDIC insured "problem" banks since 1990. All data is year end except Q1 2010.

FDIC Still As Bankrupt As Ever, DIF-to-Deposit Ratio At -0.38%- The FDIC's quarterly banking profile has been released. In between all the fluff we find that the deposit "insurance" agency has exactly negative $20.7 billion to satisfy any upcoming bank runs and liquidations. Thank god for that ongoing Treasury lifeline. Atatched is a chart of the Deposit Insurance Fund-to-Deposit ratio. Negative is, well, bad. Luckily, depositors decided to get the hell out of deposits in the last quarter, pulling out $29 billion from the not all that Too Big To Fail any longer.

Unofficial Problem Bank list hits 737 -  Here is the unofficial problem bank list for May 21, 2010. Changes and comments from surferdude808: As anticipated, the OCC released its actions for April 2010, which contributed to an increase in the number of institutions on the Unofficial Problem Bank List. The list includes 737 institutions with aggregate assets of $363.5 billion, up from 725 institutions with assets of $363.1 billion last week. The FDIC released its industry profile this week and they reported 775 institutions with assets of $431 billion on the official problem bank list. With the industry release, we were able to update assets for the first quarter of 2010. For institutions on the unofficial list last week, their combined assets fell by $8.3 billion during the quarter.

Should we get rid of deposit insurance? - Rajan's argument is that deposit insurance ensures a steady flow of cheap financing to banks—it's essentially a government subsidy. The bigger the banks grow, the more subsidy they get. It's a back-door way of encouraging largeness.Now, Rajan is not one of those economists who thinks having really big banks is inherently a bad thing. As he points out, after the Depression we thought have thousands of geographically dispersed small banks was the problem.Nonetheless, he is against government gently nudging banks to get bigger and bigger, as, he holds, it does through deposit insurance. So we should get rid of it.Well, not entirely. If we had no deposit insurance, then everyone would flock to the banks deemed the safest—probably the big ones. In order to preserve the very important presence of smaller, community banks, they would still get to offer deposit insurance for their accounts.

How Can The Economy Grow Without Bank Loans? -The economy seems to be picking up steam, yet bank lending does not seem to be keeping pace. Also, money stock growth does not give off positive signals in terms of how people are allocating their short-term assets in the banking system. The question is: can the economy continue to pick up if people are staying very conservative in terms of their asset allocation in the banking system and the banks, themselves, continue to stay out of the lending market?Overall, the total assets in the banking system (according to the H.8 release from the Federal Reserve System) have only grown modestly in recent months, up 1.3% from March to April at all commercial banks in the United States, with large banks (the twenty-five largest banks in the United States) showing a 2.1% rise and all other banks increasing at a 1.0% rate. Over the past year Total Assets at all commercial banks are down by -1.5%, decreasing by 0.8% in the largest banks and rising 1.0% in the larger banks.

Bank relationships matter - In a recent study, Tansel Yilmazer, assistant professor in the MU Department of Personal Financial Planning, found that relationships between small businesses and financial institutions affect both the borrower's decision to apply for a loan when in need, and whether the institution approves the loan. The impact of relationships on loan rates, however, varies with the economic climate."The findings suggest that when in a recession, such as now, when loan rates are already low, good relationships between the business and the financial institution do not really matter," said Yilmazer. "However, when in an economic expansion, positive relationships allow loan officers to lower the loan rate." Researchers also found that small businesses are more likely to apply for loans, and financial institutions are more likely to grant loans if there is an existing relationship between the two. These results are unaffected by the economic climate ¬and exist during both recession and expansion years. Recently, "communication" was added to a list of criteria that lenders use to determine whether or not to grant a loan.

Is the European Crisis a Net Positive for the US? - How will the European crisis feed into the US outlook? I clearly recall JP Morgan making a recession call in the wake of the Asian Financial crisis, predicting a US recession on the back of a drop in net exports. While a drop in net exports did occur, domestic growth more than absorbed the impact. The US recession was delayed until the impact of tighter monetary policy, higher energy prices, and the popping of the tech bubble all came home.I can see a similar pattern of events evolving now.  First off, I think it unlikely that an export demand shock alone is sufficient to push the US economy back into recession. Menzie Chinn tackled this issue back in 2007, arguing at the time it was unlikely a rise in exports would stave off a recession. The reverse logic holds as well; US recessions look to be driven by sharp declines in domestic absorption, not exports.That is not to say that slowing exports would not crimp US growth

Negative Linkage - Tim Duy has an interesting point about the impact of the euro crisis on the United States: in the short run, it may help, not hurt, our prospects for recovery. Many of us have noticed that the US exports only a bit more than 1 percent of GDP to the euro zone, limiting the direct negative impact. Meanwhile, as Duy points out, the immediate impact of the euro crisis has been (a) a fall in oil prices (b) a fall in long-term interest rates. Both of these are actually positive for the US. Against that you might set fear of financial disruption, which may drive up borrowing costs for some private sector players. But Duy is right: it’s not at all clear that this hurts prospects for growth over the next few quarters.

Is the European crisis good for America? - Tim Duy has a provocative thesis: the Europe crisis is good for the US economy, at least for the next few quarters. Bottom Line: The European crisis, by keeping US interest rates in check and oil prices low, may do more to help the US recovery than hurt it. In the process, however, we would expect the flip side of the resulting capital inflows into the US to emerge – namely, a rising external imbalance. Arguably, this simply shifts the ultimate adjustment to sometime in the future. Again. Is this really true? Interest rates can hardly be any lower than they are, so for the time being they’re exactly where they would be even if there wasn’t a European crisis. The situation in Europe might at the margin make the Fed slightly more reluctant to start tightening, but it’s not going to make any real-world difference for a while yet, if ever.

Debt crisis: A silver American lining? | The Economist - THE European crisis seems like bad news for everyone, but Tim Duy argues that Americans may end up benefitting slightly, on net, from the drama: First, the weaker Euro has taken a bite out of oil prices, which fell back below $70 today. Make no mistake - keeping a lid on oil prices offers continued support for US consumers. And while we can all dream of a more balanced economy less dependent on household spending, for now it remains the best game in town...Likewise, the rush to Treasuries is keeping a lid on US interest rates...Add a lid on interest rates via a steady surge of capital flows to sustained job growth, and the odds of sustainable recovery look better every day. Sure, cheaper oil and increased American purchasing power offset some of the damage from the crisis, but I don't buy that it's good news for America overall. For one thing, if it were we'd expect to see American markets rising, and that clearly hasn't happened.

More on the European Impact, by Tim Duy: Some clarification and expansion of my recent off-consensus analysis of the implications of the European debt crisis is in order. In short, I noted that lower energy costs and interest rates were generally positive for the US. Responses came from Scott Sumner, Felix Salmon, Ryan Avent, and Paul Krugman. The context in which I considered my remarks are well described by Michael Pettis, in his rebuttal to claims that China should avoid currency revaluation in light of the Euro's decline. He argues that the Euro's decline makes the a shift in Chinese currency policy all the more critical.

Senate rejects $400 billion Freddie Mac cap -The Senate on Monday evening rejected a measure that would have re-established a $400 billion cap on taxpayer assistance to Fannie Mae and Freddie Mac. The Obama administration had removed a previous $400 billion cap on taxpayer exposure to Fannie Mae and Freddie Mac in late 2009. The rejected measure was introduced by Sen. Mike Crapo, R-Idaho. It also would have required the federal budget to include the costs to U.S. taxpayers of Fannie Mae and Freddie Mac.

Dear GOP: Fannie, Freddie Did Not Cause the Financial Crisis -  It's time to put to rest a lingering myth that, all evidence to the contrary, just won't die. On the Senate floor this morning, Senate Minority Leader Mitch McConnell (R-Ky.) repeated, for the umpteenth time among Republicans and conservatives, a pernicious misconception that places most, if not all, of the blame for the financial crisis on the government-sponsored housing corporations, Fannie Mae and Freddie Mac:Not only is McConnell's basic grasp of storytelling wrong—if Fannie and Freddie are to blame, shouldn't they be the antagonists?—but his understanding of what caused the financial crisis is deeply flawed. Sadly, this misconception is a longstanding meme among Republicans and conservatives.

What’s big, risky, and losing billions? - THIS WEEK, the Senate rejected a $400 billion cap on the taxpayer bailout of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, better known as Freddie Mac and Fannie Mae. Let’s start with the basic question: Why should Fannie and Freddie exist at all? Supporters made two standard arguments. The simpler one is that Freddie and Fannie increase homeownership by making borrowing cheaper. It is surely true that if the federal government guarantees mortgages against default without charging enough for that guarantee — which is what happened — then this underpriced guarantee is yet another implicit subsidy for home borrowing and homeownership. But a policy isn’t wise just because it promotes homeownership. There are more transparent ways of doing so, such as a direct annual homeownership tax credit. Besides, how much promotion does homeownership need? The home mortgage-interest deduction already encourages people to overborrow to bet on the housing market.

Lenders Repurchase $3 Billion in Mortgages from GSEs in Q1 - During the first three months of this year, Fannie Mae and Freddie Mae required lenders to buy back $3.1 billion in mortgages they’d sold to the two firms.  Lenders repurchased approximately $1.8 billion in loans from Fannie in Q1, measured by unpaid principal balance, according to a recent filing by the GSE with the Securities and Exchange Commission (SEC). During the same period last year, Fannie forced lenders to buy back $1.1 billion in bad loans. “We conduct reviews of delinquent loans and, when we discover loans that do not meet our underwriting and eligibility requirements, we make demands for lenders to repurchase these loans or compensate us for losses sustained on the loans, as well as requests for repurchase or compensation for loans for which the mortgage insurer rescinds coverage,” Fannie wrote in the regulatory filing.

Honesty Doesn't Pay, but It Sure Has Its Uses -The FHLB System, which is a major if little-known player in the mortgage business, offered no explanation for Bowsher's departure. So Weil made a phone call, then reported what he learned in a (subsequently award-winning) column: "I was not comfortable as an audit-committee member in signing off on the financial statements, after I became aware of the standards and processes for valuing the mortgage-backed securities," Bowsher told me.In short, the FHLB was using the fact that many of the mortgage securities on its books were only occasionally traded as an excuse to pretend that they hadn't lost value at all (a practice followed by lots of banks, with the encouragement of their regulators, over the past couple of years). Bowsher was uncomfortable with the practice, so he left. "He was," Weil told the accountants at the awards ceremony, "the only person at one of these systemically important institutions who resigned rather than sign off on the numbers."Bowsher is perhaps not the best possible example. His resignation came in 2009, not in the lead-in to the crisis. Still, Weil is onto something. Why did no CFOs or CEOs on Wall Street stand up in 2005 or 2006 or early 2007 and said "I refuse to participate in this insanity"?

Shiller: Fear of a Double Dip Could Cause One - If you believe the price of a good you consume regularly is going to go up in the future, the best thing to do is to stock up now. If everyone else shares that belief, that will drive the price up, just as you thought. Thus, even if the expectation of an increase in the price was driven by nothing more than speculation and rumor, the expected change in the price will be self-fulfilling. Beliefs about the future will be validated by observable events, and this will tend to reinforce the beliefs (this is one way a bubble could get started, but the point here is simply that expectations can be self-fulfilling).Robert Shiller says there is a growing belief that the economy will have a double-dip recession, and that this belief may cause the outcome people are worried about

Fear of a Double Dip Could Cause One - Robert J. Shiller - NY Times -THE risk of a double-dip recession hasn’t abated, even after news of the huge European bailout in response to the Greek debt crisisIn fact, there is still a real risk of a double-dip recession, though it can’t be quantified by the statistical models that economists use for forecasts. Instead, the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures. Ultimately, the risk resides largely in social psychology. It is the fear of fear itself, of which Franklin D. Roosevelt famously spoke.  From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating. Since mid-2009, it has been replaced by the milder worry of a double-dip recession, as a count of Web searches for those terms on Google Insights suggests. And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.

Bankers bristle at regulatory stance on CRE loans – In late 2006, federal financial agencies including the Office of the Comptroller of the Currency, Department of the Treasury and Federal Deposit Insurance Corp. issued regulatory guidance, or advice, recommending that regulators take a tougher risk management stance on banks across the country with heavy commercial real estate concentrations in their loan portfolios.Today, as the long-term prospect of commercial real estate values remains uncertain, many banks have become hesitant to consider, or have completely stopped considering, new commercial real estate loans because of what many call a harsh regulatory atmosphere. “Bank examiners started getting worried about commercial real estate a couple of years ago because a lot of community bank lending was backed by commercial real estate,” said John Heasley, executive vice president and general counsel for the Texas Bankers Association. “Many banks have been closed because of nonperforming loans associated with commercial real estate.”

Dallas-Fort Worth commercial real estate foreclosures hit 1,649 for year - Commercial real estate properties with almost $880 million in debt are scheduled for foreclosure in the Dallas-Fort Worth area next month. About 256 holdings, including offices, shopping centers, warehouses, apartments and commercial land, are included in the June commercial foreclosure postings, according to data from Foreclosure Listing Service. That brings the total postings for the first six months of 2010 to 1,649. Year-over-year figures aren't available, but in mid-April – before the latest filings were recorded – commercial foreclosures in the D-FW area were up 60 percent from a year ago.

Moody's: CRE Prices Decline 0.5% in March - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 0.5% in March. This is a repeat sales measure of commercial real estate prices. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.
Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).
Commercial real estate values are now down 25% over the last year, and down 42% from the peak in August 2007.

HUD Lobbies for More Federal Funding to Stabilize Housing Markets - HUD Secretary Shaun Donovan is asking Congress to release additional funds to help communities combat the ongoing effects of the housing crisis and home foreclosures. He says the Obama administration is committed to working with lawmakers to secure a third round of funding for HUD’s Neighborhood Stabilization Program (NSP).The federal agency has disbursed $6 billion through NSP — $4 billion in the first round of funding in late 2008, and another $2 billion in early 2010. The money is awarded to state and local governments and non-profit developers to buy and rehabilitate or demolish vacant and foreclosed homes in their communities

FHA will Reduce Allowable Seller Concessions this Summer -These changes have been under discussion for some time ...From HousingWire: FHA Set to Reduce Closing Cost Assistance This Summer The FHA will reduce allowable seller concessions — the percentage sellers can take from the sales price of a home to fund closing costs — from 6% to 3%. According to an announcement in January, the current level of 6% exposes the FHA to excess risk by creating incentives for appraisers to increase the value of these homes. The change will take place in “early summer,” according to the FHA, but a spokesperson said no specific date has been set.In early April, the FHA increased the upfront insurance premiums on FHA-backed loans from 1.75% to 2.25% of the loan amount. Borrowers also have to pay an annual premium based on the LTV and type of loan.

Mortgage Aid Leaves Some Worse Off -The government's mortgage-modification program has left some struggling homeowners worse off than they were before. The Treasury reported Monday that nearly one in four homeowners who were offered lower payments under the Obama administration's 15-month-old effort have been weeded out of the program. Many people were removed from the trials because they failed to make payments, didn't provide all the financial documents needed to qualify or were found to be ineligible. Homeowners are first offered trial modifications under the program, which provides incentive payments to loan servicers, investors and the homeowners. If borrowers make the payments and satisfy other criteria, those trials are made permanent, ensuring a cut in payments for five years. While awaiting answers, some borrowers keep making payments, exhausting their savings in what may be a futile effort to save their homes. They also incur fees from the banks and delay taking action that might give them a fresh start in a more affordable home.

HAMP Update: Twice As Many Homeowners Kicked Out Of Obama Foreclosure Program As Given Permanent Relief, New Data Show - More than twice as many homeowners were kicked out of the Obama administration's signature foreclosure-prevention program last month as were granted permanent relief, new data released Monday show.More than 123,000 homeowners were bounced from the administration's Home Affordable Modification Program in April versus about 60,000 who were offered five-year plans of lowered monthly payments.This is the first month since the administration started reporting cancellation figures that the number of canceled modifications outpaced the number of new permanent modification offers.The number of canceled modifications skyrocketed 82 percent in April compared to March.

U.S. Mortgage Program Stalling, Data Shows - A major effort by the Obama administration to keep homeowners out of foreclosure may be reaching its limits long before the crisis abates. The government’s loan modification program has helped about 300,000 defaulting households get permanent new loans, according to federal data released on Monday. But that is only a small fraction of the estimated four million households in danger of foreclosure and of the 1.7 million households that the governments thinks would qualify for the program. Begun only a year ago, the Making Home Affordable Program already seems to be running low on applicants. The number of borrowers that enrolled in the trial phrase in April was only about a third of the number that signed up in September.

Mortgage Mods Doomed by Back End Debt - Much like America's waistlines, the Treasury Department's monthly report on the Home Affordable Modification Program continues to grow. What started as a four-page report has now reached ten pages, with the latest addition to the "lender accountability" category: Conversion Rate and Aged Trials as Share of Active Trials. Don't get me wrong, these provide a lot of insight into why so many borrowers are not getting permanent modifications. The top four lenders (Bank of America, JP Morgan Chase, Wells Fargo and CitiMortgage) take up the bulk of the bottom slots on the Conversion Rate chart. All four convert less than 26 percent of trial mods to permanent mods. While most don't want to go on the record with me, lest they rile the regulators, Bank of America's Rick Simon says initially, "All the major banks, at Treasury's suggestion, went to non-verified income for verification."

Bailout, Bubble, Bunker - On Sunday the NYT had a story about the demented Las Vegas real estate market, where even as a necropolis of unsold empty residential husks already sprawls out into the desert, builders are apparently rushing to build even more (and even more putatively “luxurious”), claiming there will be a real estate boom any day now. No word on where the buyers or the water’s supposed to come from. Meanwhile Naked Capitalism linked this piece describing the resumption of RMBS bundling. So even as we learn the details of an endless line of fraudulent securitizations from the likes of Magnetar and Goldman, the new models are coming out. This comes after the elite media kept assuring everyone that securitization was dead. This is that same toxic waste polluting the banks’ balance sheets which to this day, so far as I can see, remains the elites’ justification for the Bailout. The problem is supposed to be to find a Yucca Mountain for the waste we’ve already generated...

A real Goldman Sachs scandal - The fact is that Goldman Sachs is an intermediary which hedges its positions and which, as a broker-dealer, will naturally be taking long and short positions in all manner of different securities at different times. This should not be a scandal at all.On the other hand, it really would be a scandal if Goldman Sachs was deliberately and unnecessarily kicking people out of their homes, even when doing so would lose it money. And that seems to be what it’s doing in one case in Ohio. You might recall American Homeowner Preservation, a company I wrote about last month. The idea behind their business is that they negotiate a short-sale with the bank holding a mortgage, find an investor to buy the house in question, and then lease the house back to the original homeowner, who has an option to buy it back, at a fraction of the original mortgage payments. It’s an idea which makes a lot of sense — but which Goldman Sachs seems to have problems with. AHP’s principal, Jorge Newberry, explains:

Foreclosure Law News: Terminate with Extreme Prejudice -  I have been telling you about the document mills which “create” paperwork to support foreclosures. Sometimes the paperwork is created by an employee of the loan servicer, signing on behalf of the “assignor” of the loan, even though the employee doesn’t actually work for the assignor, it works for the assignee or for a servicer employed be the assignee. Sometimes the paperwork is created by an employee of the law firm hired by the assignee, but signed as if by an employee of the assignor. Apparently, the person signing and claiming to be an employee of the assignor doesn’t actually see the loan documents she is purporting to assign, or even have personal knowledge of whether the entity she is purporting to assign from ever had the loan in the first place. In fact, that led to two different banks trying to foreclose on the same mortgage in Florida

14.01% of mortgages delinquent or in foreclosure (MW) -- The percentage of loans in foreclosure or with at least one payment past due was a non-seasonally-adjusted 14.01% in the first quarter, down from 15.02% in the fourth quarter of 2009, the Mortgage Bankers Association said Wednesday.  But mortgages in the foreclosure process hit a record high at a non-seasonally-adjusted 4.63%, up from 4.58% in the fourth quarter. The percentage of loans in the foreclosure process was 3.85% in the first quarter of 2009.  While the seasonally adjusted delinquency rate rose, the figure on a non-adjusted basis dropped in the first quarter. The seasonally adjusted delinquency rate for mortgages on one- to four-unit residential properties, which includes mortgages at least one payment past due but doesn't include those in foreclosure, rose to 10.06%, from 9.47%. The delinquency rate was 9.12% in the first quarter of 2009.

MBA Q1 2010: Record 14.69% of Mortgage Loans Delinquent or in Foreclosure - The MBA reports a record 14.69 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q1 2010 (seasonally adjusted).From the MBA: Delinquencies, Foreclosure Starts Fall in Latest MBA National Delinquency Survey The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 10.06 percent of all loans outstanding as of the end of the first quarter of 2010, an increase of 59 basis points from the fourth quarter of 2009, and up 94 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

Mortgage delinquencies, foreclosures break records-- The mortgage crisis is dragging on the economic recovery as more homeowners fall behind on their payments.Analysts expect improvement soon, but the number of homeowners in default or at risk of foreclosure will have a lingering effect on the broader economy.More than 10 percent of homeowners had missed at least one mortgage payment in the January-March period, the Mortgage Bankers Association said Wednesday. That's a record high and up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier.A big jump in the number of borrowers who have missed three months of mortgage payments drove the increase.

Mortgage Delinquencies by Period and by State - Much was made last quarter about the decline in the 30 day delinquency "bucket" (percent of loans between 30 and 60 days delinquent). Unfortunately the seasonally adjusted 30 day delinquency rate increased in Q1 2010.  Note: there are some questions about the seasonal adjustment, especially for the 90 day bucket since we've never seen numbers this high before, but the adjustment for the 30 and 60 day periods are probably reasonable. Loans 30 days delinquent increased to 3.45%, about the same level as in Q4 2008.Delinquent loans in the 60 day bucket increased too, and are also close to the Q4 2008 level. This suggests that the pipeline is still filling up at a high rate, but slightly below the rates of early 2009.The 90+ day and 'in foreclosure' rates are at record levels. Obviously the lenders have been slow to start foreclosure proceedings - and the 90+ day delinquent bucket is very full. Also lenders have been slow to actually foreclose - and the 'in foreclosure' bucket is at record levels. The second graph shows the delinquency rate by state (red is seriously delinquent: 90+ days or in foreclosure, blue is delinquent less than 90 days).

Home Defaults Decline in April; Credit-Card Defaults Up - Default rates for first and second mortgages and auto loans declined in April from March but rose for the third month in a row for bank cards, to data released today from Standard & Poor’s Ratings Services.The defaulting balances of bank-card loans were 9.1% in April, up from 8.9% in March and 7.7% a year earlier. First and second mortgage default rates were 3.7% and 2.5%, respectively, both down from March. Auto loan defaults were 1.9%, dropping from 2.4%.David Blitzer, chairman of the index committee at S&P Indices, said consumer defaults for mortgages and auto loans bottomed out around the same time as the stock market in early 2009. Bank cards, on the other hand, continue to worsen and are at levels not seen in the history of S&P’s indices. That could spell bad news for consumer spending which has shown improvement in recent months.

MBA: Mortgage Purchase Applications 'Plummet' to 13 Year Low - The MBA reports: Mortgage Purchase Applications Plummet While Refinance Applications Increase in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, decreased 1.5 percent on a seasonally adjusted basis from one week earlier....The Refinance Index increased 14.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 27.1 percent from one week earlier. This is the lowest Purchase Index observed in the survey since May of 1997. ... “Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season.

Mortgage Applications Plummet To 13-Year Low As Tax Cuts Expire The Refinance Index increased 14.5 percent from the previous week and the seasonally adjusted Purchase Index decreased 27.1 percent from one week earlier. This is the lowest Purchase Index observed in the survey since May of 1997. ...Purchase applications plummeted 27 percent last week and have declined almost 20 percent over the past month, despite relatively low interest rates. The data continue to suggest that the tax credit pulled sales into April at the expense of the remainder of the spring buying season. In fact, this drop occurred even as rates on 30-year fixed-rate mortgages continued to fall, and at 4.83 percent are at their lowest level since November 2009,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “However, refinance borrowers did react to these lower rates, with refi applications up almost 15 percent, hitting their highest level in nine weeks

Housing market pulled in two directions, recovery uncertain…Bipolar is what comes to mind when diagnosing the post-homebuyer tax credit market. There are two separate forces pulling it in opposite directions, and experts aren't yet sure which path the market will take. On one hand, sales and prices are rising, indicating recovery. On the other hand, so are interest rates and repossessions, which most certainly do not. And then there are the millions of foreclosures that need to be sold but haven't yet been listed -- so-called shadow inventory -- that could derail a real recovery if they hit the market in floods. The prognosis? Negative short term but turning positive by the end of 2010

The Housing "Recovery" Is Just Another Government Subsidy, Says Whalen (video)In recent months, that recovery has started to wane, but in many parts of the country, prices are still higher than they were a year ago.  And that's welcome news for anyone who owns a house, makes their living selling or building houses, or is underwater on their mortgage.But it's all a mirage, says Chris Whalen, managing director at Institutional Risk Analytics.  Or, more accurately, it's all a product of government subsidies.  House prices have risen, Whalen says, because the government is desperately trying to get them to rise -- to bail out banks who would otherwise be taking even bigger losses on the underwater mortgages.  Similarly, house-building has restarted in earnest because some states are subsidizing house building, in part to address sky-high unemployment.  While these subsidies may have some positive benefits (jobs, happier homeowners), they also come at a cost: Our housing and debt binge will take longer to work through.

First American CoreLogic: House Prices Decline 0.3% in March - From LoanPerformance: CoreLogic Home Price Index Shows Second Consecutive Annual Increase National home prices, including distressed sales, increased by 1.7 percent in March 2010 compared to March 2009, according to CoreLogic and its Home Price Index (HPI). This was an improvement over February’s year-over-year price increase of 0.8 percent.* Excluding distressed sales, year-over-year prices increased in March by 1.9 percent; an improvement over the February non-distressed HPI which fell by 0.2 percent year-over-year. On a month-over-month basis, the national average home price index fell by 0.3 percent in March 2010 compared to February 2010

Mortgages: Cheap or Not? - Stories are legion today about the declining cost of 30-year mortgages. They are touching levels not seen in five months, and not far off their recent lows. So, are they cheap? Well, define cheap. Sure, they're cheap on a pure rate basis -- we're at yields we haven't seen in modern memory. That's a kind of cheap, as the following figure shows. But are we cheap? Ah, you mean in real terms, like what does the money get me in terms of an inflating or deflating housing asset? How much leverage am I getting on my loan? I was hoping you'd ask. Here you go:

China’s new rich set trend buying luxury homes in California with cash - As China’s economy rises, a group of China’s new rich with abundant cash funds appeared in Southern California, mostly businessmen, taking advantage of the housing market downturn bought a lot of foreclosures, short sales or not yet listed houses with cash.China’s new rich like to live in cities with good school district, housing price with the potential of increase and more Chinese dominated areas, such as Diamond Bar the Country communities, Walnut, Arcadia, San Marino, Irvine and other places. The even richer tend to live in the white communities. In coastal Orange County, Newport Beach and Newport Coast are the most popular. Industry rumors said, many mainland China’s corrupted officials and illegal immigrants are mixed in this group of the new rich, began to shift into these luxury residential areas and bought multi-million dollar homes with cash to avoid being noticed.

Shadow Inventory Reaches 4.3 Million Homes - The delinquency rate for mortgages decreased from 10.44 percent in the fourth quarter of 2009 to 9.38 percent this quarter, but when adjusted for seasonal trends the rate actually increased 59 basis points from the fourth quarter of 2009 to a rate of 10.06 percent, and rose 94 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 9.54 percent, decreased slightly from last quarter, but rose 230 basis points from the first quarter of last year.The large number of homes in serious delinquency, or in the foreclosure process, suggest that the so-called “shadow inventory” of properties owned by lenders but not yet on the market has reached 4.2 to 4.3 million homes, said Jay Brinkmann, MBA’s chief economist.

Shadow Inventory To Peak in Summer of 2010: Barclays - The shadow inventory of foreclosures should peak in the summer of 2010 before falling gradually in the later months, according to a new report from Barclays Capital. Barclays defines the shadow inventory of foreclosures as loans in 90-plus day delinquency or already in the foreclosure process. According to the report, there are currently 2.4m loans in 90-plus day delinquency and another 2.1m in foreclosure, totaling 4.5m in the shadow inventory.Analysts measured these loans in reports from Fannie Mae and Freddie Mac, their regulator the Federal Housing Finance Agency (FHFA), the Federal Deposit Insurance Corp. (FDIC), the US Department of Housing and Urban Development (HUD), the Mortgage Bankers Association (MBA) and its own resources. 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.

Housing Starts increase in April - Click on graph for larger image Total housing starts were at 672 thousand (SAAR) in April, up 5.8% from the revised March rate, and up 41% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Single-family starts were at 593 thousand (SAAR) in April, up 10.2% from the revised February rate, and 65% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts are still very low.  Here is the Census Bureau report on housing Permits, Starts and Completions.

Ezra Klein - How bad is the housing situation? - Really bad, at least if you believe new data out of the Mortgage Banker's Association. One in every 10 mortgage holders is now officially "delinquent" -- that is to say, late on at least one payment. That's an all-time high. And that's not the only record we're setting: About one in 20 loans is now in foreclosure, which also qualifies as a first. All in all, about 15 percent of mortgage-holders are now delinquent or in foreclosure. Also worrying is where the problems are cropping up. The problem, at least until recently, was largely concentrated in Florida, Arizona, Nevada, and California . But now we're seeing other states move into the lead: "Washington, Maryland, Oregon, and Georgia showed the greatest overall increases in foreclosures started compared to last quarter,” reports the MBA

Housing markets: What's to come | The Economist - THE Mortgage Bankers Association has released its report on first quarter mortgage foreclosures, and the news isn't that good: The seasonally adjusted delinquency rate increased for all loan types with the exception of FHA loans. On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types.The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.

The Other Foreclosure Menace These foreclosed homeowners are not the families making headlines for taking on mortgages they could ill afford. Families ensnared in the tax sale sometimes are unable to overcome relatively small debts owed to local tax collectors. Rather than collect the overdue money they are owed, many local governments are selling tax liens. Buyers range from behemoths such as JPMorgan Chase & Co, and some regional banks and law firms, to small-fry investors lured by late-night television commercials promising quick riches. Investors generally bid in an auction for the right to collect delinquent taxes and other municipal debts on property owners, sometimes by paying only a few hundred dollars. When owners can't pay, investors can pick up property at bargain prices.

Mortgage Foreclosures Hit Record as Job Losses Strain Budgets – (Bloomberg) -- A record share of U.S. mortgages were in foreclosure in the first quarter as job losses caused homebuyers to fall behind on monthly payments, thwarting government efforts to stem property seizures. The inventory of homes in foreclosure rose to 4.63 percent from 4.58 percent in the fourth quarter, the Mortgage Bankers Association said in a report today. The combined share of foreclosures and mortgage delinquencies was 14 percent, or about one in every seven U.S. mortgages. Job losses have strained budgets, making it difficult for households to pay monthly bills, said Jay Brinkmann, the Washington-based trade group’s chief economist. U.S. unemployment in the second half of 2009 -- when people now in foreclosure would have first fallen behind on their payments -- reached the highest levels since 1983, according to the Bureau of Labor Statistics. The unemployment rate declined to 9.7 percent in the first quarter of this year from 10 percent in the last three months of 2009. “The unemployment rate is the major factor driving the numbers,”

Record US Foreclosures? Excellent News!  -Call it schadenfreude, but I cannot but help applaud news that the United States is suffering record delinquencies and foreclosures (also see the MBA press release). Remember, these are the same folks who tried to impose upon the world "Washington Consensus"-style strictures of liberalization, privatization, and deregulation on the road to some sort of economistic paradise. Yet, when faced with troubles have happened at home, they've undertaken unprecedented deliberalization, nationalization, and reregulation. While this sort of double talk is to be expected from Americans (as other who've aspired to similar hegemonic entitlements in history), the only real question for me is why the rest of the world allows the United States to get away with this boorish behaviour. You can't fix a problem caused by excessive borrowing by borrowing trillions more; Helping wipe out private finance for housing isn't a characteristic of a market economy; Massive losses by Fannie Mae and Freddie Mac indicate the rot of continuing patterns of government involvement in the US housing market;

New Survey Reveals Shocking Increase in Strategic Defaulters - A new survey of homeowners released today found that two out of five, or 41 percent, of homeowners would consider walking away from their mortgages if their homes were worth less than the amount they owed. The survey, by search site Trulia.com and RealtyTrac, the online marketplace for foreclosed properties, demonstrates the growing popularity of “strategic defaults, which were the subject of a 60 minutes segment last Sunday .  The Trulia-RealtyTrac survey produced the highest number yet of potential strategic defaulters.The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009 according to new data released two weeks ago from the team of researchers at the University of Chicago and Northwestern University that first identified the scope of “strategic default” behavior last year.   Some 288,992 foreclosures per quarter are strategic defaults, according to the U of C and Northwestern researchers.

Free to Choose… to Default -The Federal Reserve is nursing the banking system back to apparent health, and the next best thing to an outright injection of capital is to engineer a steep yield curve.  Without naming names, the market heard encouraging words from one leader that the economy is poised for a “strong recovery,” and another said “the worst of the credit cycle is clearly behind us.” All this sounds a lot like the premature “Mission Accomplished” boast by George Bush on the deck of the USS Abraham Lincoln seven years ago. To us, the first battle of the financial crisis may be over, but the war is still ongoing. Case in point: The strength of the consumer is a wonder to behold, as personal consumption has rebounded and the latest headline data out today show that retail sales rose in April for the seventh straight month. But the raft of recent research reports pointing to the phenomenon known as “strategic defaults” turns the concept of consumer creditworthiness on its head.

More Accidental Landlords - From the Chicago Tribune: Renting what you can't sell When Ed Amaya put his Oak Park bungalow up for sale in mid-2007, homes in his neighborhood sold in a matter of days, weeks at the most. Like many homeowners in the housing downturn, Amaya became an unintentional landlord by renting out a property he once hoped to sell.Like so many others, he should have reduced the price! So many residences are now for lease that there is "a saturated rental market," with more available units than potential tenants, "Many people are renting out property, but most are not making money," My definition of "shadow inventory" are units that aren't currently listed on the market, but will probably be listed soon. This includes REOs, foreclosures in process and some percentage of seriously delinquent loans (some will cure, some are already listed as short sales), unlisted new high rise condos (these properties are not included in the new home inventory report) and homeowners waiting for a better market. That last category includes all the accidental landlords that we've been discussing for years.

States: Mortgage Delinquency Rate vs. Unemployment Rate - Here is a scatter graph comparing the Q1 2010 delinquency rate for mortgage loans (including all loans in foreclosure) vs. the April unemployment rate for all states.There definitely is a relationship between delinquency rates and the unemployment rate, although a couple of states really stand out; Florida and Nevada. Florida has a high number of delinquencies because of state specific foreclosure laws - it takes forever to foreclose. The delinquency rate in Nevada is also very high, probably because of the large percentage of homeowners with negative equity. Both states might also have higher than expected delinquency rates because of significant investor activity during the housing bubble.

GM Wants More Subprime Buyers - GM's top North American executive Mark Reuss, under pressure to quickly sell more cars and boost GM's value as it gets ready to sell stock to the public, said a shortage of subprime lending is holding back sales in the U.S. But the automaker's main lender, Ally Financial Inc., has little appetite for risky loans, having spent the last few years cleaning up its own financial mess caused mainly by its failing mortgage lending business. Both companies are majority-owned by the U.S. government. For decades, GM owned Ally, writing its own loans through the so-called captive finance arm. Nearly every automaker makes loans in such a fashion. But a cash-starved GM sold most of Ally -- formerly known as GMAC -- in 2006.

Companies: What Are They Good For? - In his comment on last week’s post, “How Businesses Create Wealth,” Arthur Franke, who seems to have inscribed me on his list of “endangering socialists,” allows that “your economic analysis is flawless, but I am wondering where you are trying to go with this essay.”Actually, I was not trying to go anywhere with my analysis, other than to point out that businesses create value and wealth beyond the usually narrow slice that accrues strictly to the owners. In most firms, the largest fraction of the gross value that businesses create with the goods and services they produce is channeled to employees. That allocation helps create household wealth, which may be held in the form of a home or other real estate, pensions or investments in mutual funds, or highly productive human capital — that is, highly educated offspring.

Half of Canadians struggling to pay off debts, survey finds - About half of all Canadians are struggling to pay off their debts, with a quarter saying their borrowings had increased over the past year, a survey by Manulife Bank found. That’s despite the fact that one-third of respondents said that being debt free was their top priority, Manulife said. A further 36% ranked paying off borrowings as being in eighth or ninth place on a ten-point scale of priorities. Figures show Canadian household debt is now at record levels, hitting $1.41 trillion in December, according to the Organisation for Economic Co-operation and Development (OECD). That puts Canada at the top of 20 OECD nations in terms of debt-to-financial assets, it said.

Wealth gap between blacks and whites increases fourfold in a generation - The gap between the wealth possessed by white and black families grew more than four times larger between 1984 and 2007 — and federal policy is only exacerbating the trend, according to a study released today by researchers at Brandeis University’s Institute on Assets and Social Policy.Not to be confused with income, wealth is a measure of what you possess minus any debts you owe. In the 23-year span under review, researchers found, the median value of assets among whites jumped from $22,000 to $100,000, while the median value of holdings among blacks rose from $2,000 to just $5,000. And the researchers say that’s no accident.Instead, they argue, the quickly growing racial wealth gap “reflects public policies, such as tax cuts on investment income and inheritances which benefit the wealthiest, and redistribute wealth and opportunities.”“Tax deductions for home mortgages, retirement accounts, and college savings all disproportionately benefit higher income families,” they write.

Wealth, Race and the Great Recession - The primal economic divide in America remains the chasm between the wealth of black and white families, and it has widened steadily over the last generation.And that largely reckons — as demographic data trails a year or two behind economic reality — without the toll taken by the Great Recession, which several economists forecast  will most likely deepen this divide. These conclusions arise from a study released today by Professor Thomas M. Shapiro and his colleagues at the Institute on Assets and Social Policy at Brandeis University. They studied the same 2,000 black and white families between 1983 and 2007, and found that the racial wealth gap “has more than quadrupled over the course of a generation.”Mr. Shapiro and his colleagues say their data points to a “stampede toward an escalating racial wealth gap.” Other analysts might pick their own adjectives, but the bones of the study present a disturbing take.

Cutting the Cable as the Economy Pinches – For most New Yorkers, moving into a new home means calling Con Edison, Verizon and the cable company. But some younger New Yorkers are no longer paying for cable television and instead watching their favorite shows, movies and videos online and from on-demand delivery services like Netflix. These early adopters are taking advantage of a growing number of Web sites like Hulu and software including Boxee, which stream many programs available on Cablevision, Time Warner Cable and Comcast, often at no charge.Like the millions of Americans who are ditching their landlines and relying solely on cellphones, these cable cutters are using new technology to redefine what is necessary and what is accessory, watching television when they want as opposed to when it is broadcast, and saving a few dollars.

Too Soon for a Sustained Recovery? -Consumer spending accounts for more than two-thirds of the economy (GDP or economic growth). Therefore, monthly data releases give a good idea of where the economy might be heading before quarterly reports.However, there’s another interesting relationship between consumer spending and the labour market. By plotting the initial unemployment claims (4-week moving average) and retail sales (excluding food services), there seems to be an important link between the two.The following charts include both series. The first one uses monthly data going back to 1992 while the second one uses the monthly data from January 2009 to March 2010 and weekly data from 2010 week 14 to week 18.

Consumer spending trend is a shaky foundation for economic recovery - Increased consumer spending has fueled hopes that the current economic recovery will keep getting stronger, but behind the encouraging numbers is a little-noticed reality: Much of the new spending has come not from America's broad middle class but from a small slice of affluent people at the top.And upper-crust spending, while welcome, can be worrisomely volatile: Since it involves luxuries, not everyday necessities, the buying can suddenly shrink if something such as the recent stock market plunge panics affluent shoppers.What's more, some analysts calculate that another big chunk of the recent spending spurt has come from an even shakier source — delinquent homeowners who have more cash in their pockets because they've stopped making mortgage payments now that their houses are worth less than the loan amounts.Economists' uneasiness over building a recovery on such uncertain foundations is all the greater because the larger fundamentals are also shadowed by uncertainty.

The most damaged part of the American economy—consumer credit—may finally be recovering.- Even though the economy began to expand in mid-2009, the sector that led us into the mess—credit—has remained in recession. The conflagration of debt—soured mortgages, defaulted bank loans, Chapter 11 corporations, huge credit-card charge-offs, student loans, auto loans—drove the economy into a deep recession. Now, nearly a year into the overall economic expansion, there are tentative signs that improvement is coming to the stricken world of consumer credit.

CPI declines 0.1%, Core CPI Flat - From the BLS report on the Consumer Price Index this morning: On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in April... The index for all items less food and energy was unchanged in April, as it was in March. The shelter index and its major components of rent and owners' equivalent rent were all unchanged in April. Owners' equivalent rent (OER) is now down slightly year-over-year.  The disinflationary trend continues - and with all the slack in the system (especially the 9.9% unemployment rate), it is hard to see inflation picking up any time soon. The high unemployment rate and low measured inflation suggest the Fed will hold the Fed funds rate at the current level for some time.

Is there a problem?-  IT HASN'T been the best couple of weeks for the global economy. China is officially in a bear equity market. Europe appears to be headed toward financial crisis or years of sluggish growth, or possibly both. America's housing market stalled out right through the first quarter, despite substantial government support (most of which has now been withdrawn). Leading economic indicators in America unexpectedly faltered in April. American stock markets have dropped over 10% in the space of just a few weeks. (On Thursday alone, the Dow fell nearly 4%.) Commodity prices are flashing a growth warning; oil prices have fallen nearly 20% over the last month. And America's labour market stubbornly refuses to right itself. Initial jobless claims rose by 25,000 last week, leaving the picture of filings looking like this:

Recovery? or We're Gonna Need a Bigger Stimulus? - Sometimes, I hate being right. It gets worse when the people who agree with you are none other than The Giant Vampire Squid. As the Wall Street Journal notes: Zero — First quarter GDP growth, minus the temporary factors of government stimulus and inventories, as estimated by Goldman Sachs.With the economic recovery already nine months old, it’s easy to forget just how tenuous it remains. Consumers are spending and businesses are investing, but an uncertain amount of that activity depends on temporary lifts, most notably the American Recovery and Reinvestment Act of 2009.Looking at state budget projections for next year, the reality that inventories cannot grow indefinitely, the unemployment and discouraged-workers levels, and the growth in long-term unemployment, it's difficult to find engines for growth.Real GDP recovery is described fairly as, at best, lethargic. And now we know that even the lethargic recovery is stimulus-induced, not real

U.S. economy still needs further boost: Romer (Reuters) - The U.S. economy has begun to climb out of the worst downturn since the 1930 Great Depression but still needs additional steps by the federal government to stem a crisis in the job market, a senior economic adviser to President Barack Obama said on Sunday. "What we need now is not the withdrawal of support, but further targeted actions that will help the private sector come back more strongly," Christina Romer, chairwoman of the White House Council of Economic Advisers, said in prepared remarks  Romer urged Congress to a pass a series of measures Obama has proposed to jump-start growth, including the establishment of a lending fund to spur credit to small businesses and providing cash-strapped cities and states with aid to help them avoid layoffs of teachers and other local employees.With the U.S. unemployment rate just under 10 percent, the Obama administration is juggling the need to spur economic growth with pressure to rein in ballooning U.S. budget deficits.

Democrats Shifting Focus Back to Jobs Creation - NYTimes.- A year that Democrats decreed would be about “jobs, jobs, jobs” has produced a far different check list as its sixth month nears: health care, financial regulation, energy, a nuclear arms treaty and a Supreme Court vacancy, as well as investigations into a mine accident, a calamitous oil spill, a failed terrorist attack in Times Square and alleged Wall Street fraud. That crowded calendar of priorities largely explains why the employment bills have languished, Democrats say. They hope to change that starting this week. The House, which in December narrowly passed a $154 billion stimulus package that hit a wall in the Senate, plans to debate a substitute of at least that size that Democratic Congressional leaders have negotiated; it would extend myriad popular business tax breaks and aid for the unemployed and hard-hit states.

God, the Pope, and Unions - Bad news for employers and workers who oppose unions: you’re going to hell. That is according to a group of Catholic scholars who claim that…actions to thwart union organizing campaigns, stifle contract talks, unilaterally roll back wages and benefits, and break existing labor agreements are a “grave violation of Catholic social doctrine on labor unions.”“This violation of Catholic doctrine constitutes material grounds for mortal sin because it stands in grave violation of both the letter and spirit of Catholic social doctrine,” said the document, titled “Union Busting Is a Mortal Sin.” In laying out their argument, the scholars said efforts to deny workers the right to organize violate the First, Fifth and Seventh commandments regarding idolatry, scandal and theft, respectively.

Maybe There is No Fixing the Academic Job Market - What Professor Brown and others fail to understand is any measures that would increase the pay of adjunct professors would only increase the imbalance in the job market. If it were easier for an English PhD to make a living, more of us would have gotten that degree rather than pursuing a different field. I know I would have rather spent my days in college reading and discussing quality (and usually interesting) literature rather than parsing the tax code. I suspect, even today, I'd rather spend my days discussing Hamlet than accelerated depreciation. In making my choice between English and accounting, I listened to the price signal sent by starting salaries and earning potential. Dilute that price signal and many more will opt for a career in the humanities -- which makes sense since the humanities is more intrinsically interesting as a field.

Many jobless can not collect unemployment benefits - Millions of the nation’s unemployed are not collecting unemployment benefits and are not eligible to do so under the laws in their state. Despite historically high unemployment, and record levels of long-term unemployment, only 58% of the unemployed workers in the U.S. were collecting unemployment insurance in the most recent quarter, according to the Department of Labor. That “recipiency rate” includes workers receiving benefits under all of the extensions of emergency unemployment insurance that have been passed during the recession. When the recipiency rate is calculated based solely on the standard 26 weeks of unemployment, it drops to 45%: In other words, without the emergency extensions that have been passed, fewer than half of the country’s unemployed would be collecting unemployment. This unemployment insurance “recipiency rate” varies significantly by state. The Map shows the portion of workers in each state who were receiving benefits in the most recent quarter

Bill aims to expand benefits for the unemployed - People who are out of work for long stretches would get expanded unemployment benefits through the end of the year under a bill Democratic lawmakers plan to pass next week. The bill would also extend, for a year, about 50 popular tax cuts that expired in January.House leaders said they plan to vote on the bill early next week, leaving just a few days for the Senate to act before Congress goes on a weeklong vacation for Memorial Day. House leaders had planned to vote this week, but they were still waiting for some cost estimates, and a few issues were unresolved.Delays in extending the tax breaks have left thousands of businesses unable to plan for their tax liabilities. Delays in passing a long-term extension of emergency unemployment benefits have forced thousands of laid-off workers to live month to month with no certainty of income

The parental home as unemployment insurance - It is well known that in Spain and especially Italy, people in their twenties and even thirties stay with their parents until they find a job, and they often wait for the "perfect" job. This looks like an unemployment insurance with infinite duration with substantial moral hazard, which has lead to sky high youth unemployment rates in Europe. Greg Kaplan is documenting that something similar is happening in the United States. Using the NSLY, he finds that many of those who do not attend college return home during unemployment spells, much like college students return home over the Summer. This analysis is very nicely done with an estimated structural model that features a repeated game between children and altruistic parents. In particular, this allows to understand why the savings rate of young people is so low. As they have the option of returning to their parents, they see no need to build up any precautionary savings. This means also that programs like unemployment insurance have little impact for them.

Why financial jobs have fared relatively well - JP Morgan CEO Jamie Dimon said a month ago that his bank plans to hire almost 9,000 new employees in the U.S. Citigroup, the most troubled of the large banks, basically kept its employment flat in the first quarter of 2010. In addition, wages have been rising in the financial sector. Over the last year, hourly wages for all workers rose by 3% in financial services,  roughly double the 1.6% gain for the economy as a whole. And let’s not forget the big profits reported by Wall Street banks for the first quarter. What does this all mean?  My theory is that as long as the U.S. is running a big trade deficit,  financial sector jobs are going to do very well.  The rest of the world has to lend large amounts of money to the U.S. to keep the global economy going, and all of that money has to be funnelled through Wall Street, which creates well page jobs.

"The Strategic Imperative Not to Hire Anybody" - For about five years now human-resources executives have been telling me, "We've come to realize we don't really want most employees for the whole of their careers. We want their particular set of skills when we need them — but then things change so fast, we don't need that particular skill set any more." And many of these are companies famous for being good at H.R.  Related to this I've been telling my students, particularly my undergraduates, two things: Almost every employee today has to consider him- or herself to be, at least partially, an entrepreneur. You should be looking frequently over your shoulder for competitive threats and opportunities. You should continually be updating your portfolio of skills and assets.  If you don't like this--the insecurity and the risk--do what I do: work for the government.

Defining 'green' jobs is hard, but important - The concept of a "green" job in Ohio sometimes seems as wide as the state itself."Any job can be relatable to a green job," said Tim Haab, an environmental economist at Ohio State University.Not all "green" workers are people who attach solar panels or assemble windmills. Some of them are steelworkers, power-plant employees and farmhands.Because these jobs often benefit from government aid, an expansive definition of "green" has potentially far-reaching consequences.

Factcheck on Immigration and Wages - FactCheck.org has an excellent item on the immigration/wages connection. It’s difficult for me to think of an issue where there’s a better gap between the academic research and popular understanding. But as FactCheck explains, there’s a nearly universal consensus in the literature that immigration grows the economy and increases both average wages (as in higher wages on average) and the wages of the average American worker (as in the median goes up). Many studies also find a negative impact on the wages of people who don’t have a high school degree, although some researchers dispute even that. What’s more, the negative impact appears to be particularly concentrated on the wages of other immigrants. If you try to think about it for a moment or two, you should see that these are all pretty intuitive findings.

Finding Profit From Investing in Workers - Giving pay incentives to low-level workers and investing in their health and well-being can increase companies’ productivity and profits. Moreover, listening to the suggestions of low-level workers can go far to save companies money. Those are among the findings of a six-year international study led by Jody Heymann, who is founding director of the Institute for Health and Social Policy at McGill University and was founding director of the Project on Global Working Families at Harvard.The overarching theme of her report, “Profit at the Bottom of the Ladder,” published by Harvard Business Press, is that it is good business for companies to invest in and listen to their workers — not just high-level ones, but also those on the bottom.

Jobless claims rise by largest amount in 3 months - The number of people filing new claims for unemployment benefits unexpectedly rose last week by the largest amount in three months. The surge is evidence of how volatile the job market remains, even as the economy grows.Applications for unemployment benefits rose to 471,000 last week, up by 25,000 from the previous week, the Labor Department said Thursday. It was the first increase in five weeks and the biggest jump since a gain of 40,000 in February."Although no one expects this volatile series to go in one direction every single week, this is clearly a disappointment," .

Where’s the will to get Americans back to work? - Mass unemployment is a human and national calamity. It destroys families, crushes hopes. The longer it lasts, the more it cripples economic recovery and undermines democracy. Nearly 27 million Americans are unemployed or can't find more than part-time work. Yet legislators are reacting to this reality somewhat like the proverbial deer in the headlights, frozen, hoping not to get run over. Maybe there's a sense that they've already taken care of the problem. Indeed, in a speech in economically beleaguered Buffalo last week, President Obama came close to declaring victory. Beyond giving a perfunctory nod to Americans who are still hurting ("I won't stand here and pretend that we've climbed all the way out of the hole")  Obama wanted to celebrate: "We can say beyond a shadow of a doubt, today we are headed in the right direction. . . . All those tough steps we took, they're working. Despite all the naysayers who were predicting failure a year ago, our economy is growing again. Last month we had the strongest job growth that we'd seen in years

Unemployment Rates, by State: Most Regions Register Improvement - The jobless rate in 34 states and Washington, D.C. fell in April compared to the prior month, even as the nation’s unemployment rate ticked up to 9.9%, the Labor Department said Friday. Meanwhile, six states saw unemployment rate increases, while the rate was unchanged in 10 other states. Michigan’s jobless rate, at 14%, was the highest in the nation, though it nudged down a tenth of a percentage point from a month earlier. Nevada, California and Rhode Island were also among the states with the highest unemployment rates. At the other end of the spectrum, North Dakota and South Dakota had the lowest jobless rates at 3.8% and 4.7%, respectively.Even more states tracked gains in payrolls. Nonfarm payrolls increased in 38 states as well as Washington, D.C., while they dropped in 12 states. See the full interactive graphic.

April State Unemployment Rates: California and Nevada at series highs - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed or slightly lower in April. Thirty-four states and the District of Columbia recorded unemployment rate decreases, 6 states had increases, and 10 states had no change. ...Michigan again recorded the highest unemployment rate among the states, 14.0 percent in April. The states with the next highest rates were Nevada, 13.7 percent; California, 12.6 percent; and Rhode Island, 12.5 percent. North Dakota continued to register the lowest jobless rate, 3.8 percent, followed by South Dakota and Nebraska, 4.7 and 5.0 percent, respectively. The rate in Nevada set a new series high. This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).

32 States Now Officially Bankrupt: $37.8 Billion Borrowed From Treasury To Fund Unemployment; CA, MI, NY Worst - Courtesy of Economic Policy Journal we now know that the majority of American states are currently insolvent, and that the US Treasury has been conducting a shadow bailout of at least 32 US states. Over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states have now borrowed $37.8 billion from Uncle Sam to fund unemployment insurance. The states in most dire condition, are, not unexpectedly, the unholy trifecta of California ($6.9 billion borrowed), Michigan ($3.9 billion), and New York ($3.2 billion). With this form of shadow bailout occurring, one can only wonder how many other shadow programs are currently in operation to fund states under the table with federal money.The full list of America's 32 insolvent states is below, sorted in order of bankruptedness.

Ohio unemployment fund, already broke, additional revenue - Ohio’s unemployment compensation trust fund is broke and owes more than $2 billion to the federal government, yet the fund is losing tens of millions in revenue because the rate for part of the employers’ tax that supports it declined this year, a research organization reported.“Ohio’s system for financing unemployment compensation is broken,” The rate reduction came in what is called the “mutualized rate,” one of three factors included in establishing the unemployment tax rates levied on the first $9,000 in each employee’s earnings, Policy Matters Ohio said. The state uses the mutualized account to pay benefits to former employees of companies that have gone out of business.

The Small Business Credit Crunch - The next several weeks will be critically important for politicians, regulators and the larger U.S. economy. First, over the next week Capitol Hill will decide on potentially game-changing regulatory reform that could result in the unintended consequences of restricting credit and further damaging small businesses.  Second, states will approach their June fiscal year-ends and, as a result of staggering budget gaps, soon announce austerity measures that by my estimates will cost between one million to two million jobs for state and local government workers over the next 12 months.  Typically, government hiring provides a nice tailwind at this point in an economic recovery. Governments have employed this tool through most downturns since 1955, so much so that state and local government jobs have ballooned to 15% of total U.S. employment.  However, over the next 12 months, disappearing state and local government jobs will prove to be a meaningful headwind to an already fragile economic recovery. This is simply how the math shakes out. Collectively, over 40 states face hundreds of billions of dollars in budget gaps over the next two years, and 49 states are constitutionally required to balance their accounts annually. States will raise taxes, but higher taxes alone will not be enough to make up for the vast shortfall in state budgets.

States' Tax Collections Falter, Widening Budget Gaps - April tax collections are falling short of forecasts and even dropping below last year's depressed levels in a number of states, complicating budget troubles and prompting some governors to dip into rainy-day funds. Following several months of modest improvement, the weak April revenue numbers are disappointing for states that hoped for economic recovery soon.Based on reports from more than a dozen states, the figures suggest the recession may have taken a heavier-than-expected toll on employment last year, cutting into income taxes. The shortfalls also are punching fresh holes in state budgets. Widening state deficits could in turn put pressure on the federal government to issue new stimulus funding; a 2009 cash injection from Washington has helped shore up battered state finances, but much of that will dry up by the end of this year.

Senate Rejects Proposal to Prevent Bailouts of U.S. States - The U.S. Senate rejected an amendment to financial-regulation legislation aimed at preventing taxpayer bailouts of state and local governments that have defaulted or are at risk of defaulting on debt..Senator Judd Gregg’s proposal, which would have barred use of federal funds to purchase or guarantee debt or extend lines of credit to governments facing default, failed to win the 60 votes required for adoption..Dodd opposed the amendment, saying the federal government should have the flexibility to extend aid to struggling states. “In certain circumstances, local governments or state governments have made irresponsible choices,” Dodd said. “But you don’t blame the entire population of that state or locality because some leadership has made a bad choice.”

Pennsylvania's "Big-Brother" Amnesty Scares Up $35 Million in Overdue Taxes It looks like the "Big-Brotherish" tactics being used in Pennsylvania's latest tax amnesty push are in fact churning up revenue. According to the Pittsburgh Post Gazette:Although there have been complaints about the "big-brotherish" TV ads being used to publicize the state's current tax-amnesty program, the back-tax collection effort, now three weeks old, seems to be having an effect. The state Revenue Department reported Monday that more than $35 million in overdue taxes has either been collected or is in the process of being sent in. The largest single payment has been $548,000 in overdue corporate taxes. The state hopes to collect at least $190 million by June 18, to help balance the $27.8 billion state budget for fiscal 2009-10, which ends June 30.So scaring the daylights out of Pennsylvania's noncompliant taxpayers has resulted in some past due taxes being paid.That shouldn't be too surprising as we would assume that bold threats from an authority, such as a government department, would result in some form of response.

Candy Taxes Struggle to Define Candy - WSJ - As they struggle with budget deficits, states from New York to Washington are looking to candy and soda taxes to help bridge the gap. Now comes the hard part: Defining candy. More than a dozen states have passed or proposed some sort of candy or soda tax in the 2010 legislative session, and most of them are bound to face some sort of confusion. The problem is many states don’t tax food because food is essential and taxing it can push the poor toward malnourishment or unhealthy eating. That exemption has traditionally extended to candy and soda, but with budgets lean many states are looking to either remove the tax exemption on those foods, or pass new candy and soda taxes altogether.Which is where the confusion comes in.

Gov. Paterson threatens cutting 10K jobs - Gov. Paterson has put massive state employee layoffs "on the radar screen" after being told the no-layoff pledge he signed with public employee unions last year is not legally binding, The Post has learned.The administration has estimated that up to 10,000 job cuts would be needed to reach the governor's target, an official said.Paterson's new tack follows a federal court ruling last week that temporarily blocked his $30 million-a-week plan to put 100,000 workers on furlough.

Texas' $1.2 billion in budget cuts is only the beginning of the pain - The state's top three leaders announced $1.2 billion in reductions in current spending Tuesday in the opening round of cuts to deal with a projected budget shortfall of at least $18 billion. The measures outlined by Gov. Rick Perry, Lt. Gov. David Dewhurst and House Speaker Joe Straus could be just a taste of the stringent remedies needed to balance the state budget over the next two years, fiscal experts warned. "If you didn't like $1 billion, you're not going to like $18 billion," The reductions announced Tuesday apply to spending already authorized for the current 2010-11 biennium. The leadership team is expected to call for further retrenchment during the next several weeks when it issues instructions to agencies preparing their next budgets.

Michigan's fiscal crisis will worsen -- Filling the $1.7 billion state budget hole this year won't come close to solving Michigan's nagging fiscal crisis, economic experts warned Monday. ""Gary Olson, director of the Senate Fiscal Agency, projected that with annual economic growth at 3 percent, the state will face a $1.2 billion, or 13 percent, imbalance in the 2012 budget year; a $1.6 billion, or 17 percent, shortfall in the 2013 fiscal year; and a $1.8 billion, or 19 percent, deficit in the 2014 budget year."What is clear to me is the current budget is not sustainable," Olson said. "There must be massive changes to the revenue side of the equation and spending side as well."

Mayor Says Arson Spree in Flint, Mich., Meant to 'Terrorize' the City -A string of suspicious fires that hit the battered city of Flint, Mich., after more than 20 firefighters were laid off and two firehouses closed were meant to "terrorize the community," the mayor claims. Since the job cuts in late March, 153 of 202 fires – mostly in vacant buildings – were classified as suspected arson, city officials said. The number of arson fires began to decline after a federal grant enabled the city to rehire some of the firefighters. "I don't believe in coincidences," Mayor Dayne Walling told ABCNews.com. A string of 14 suspicious fires erupted the night before the city laid off 23 firefighters and 23 police officers on March 24 in an attempt to close an $8 million budget deficit. Two of Flint's five fire stations were also shut down that night.

New Jersey Income Tax Collections ‘Significantly’ Short (Bloomberg) -- New Jersey’s income-tax collections may fall “significantly below” the levels needed to support the current budget year, which ends in about six weeks, a state fiscal analyst told lawmakers in an e-mail. Collections through a May 11 tax deadline, extended from the traditional April 15 due date for about half the state because of flooding, didn’t produce enough revenue to make up for a $550 million gap through April, said the e-mail from David Rosen, legislative budget and finance officer. Bloomberg News obtained a copy of the e-mail from a legislative aide who received the message and declined to be named. “There is a high probability” that gross income-tax collections for this year “will fall significantly below the levels assumed” in the governor’s budget, Rosen said in the e- mail, which is dated yesterday. Projections for next fiscal year “may have to be tempered as well,” it said.

California Shortfall Now $19.1 Billion - WSJ - Calif.—California Gov. Arnold Schwarzenegger proposed a revised spending plan Friday that pegged the state's budget shortfall at $19.1 billion and called for deep cuts to welfare and health programs—but no tax increases—to close the gap. The new shortfall estimate is higher than the previous projection of $18.6 billion partly because the state collected less tax revenue than expected in April for the 2009 tax year. Court decisions challenging some of Mr. Schwarzenegger's cuts also added to the budget gap. This will be the third straight year that Mr. Schwarzenegger has proposed deep spending cuts. Tax revenue in California has plunged because of the collapse of the real-estate and financial markets. Legislators closed a $60 billion budget gap last year, but not before state officials had to issue IOUs to creditors to keep the state solvent.

Schwarzenegger calls for deep California budget cuts - Gov. Arnold Schwarzenegger (R) on Friday proposed sweeping spending cuts to reduce the state's budget gap – now pegged at $19.1 billion – tapping welfare and health programs for elimination.  "California no longer has low-hanging fruits – we don't have any medium-hanging fruits, and we also don't have any high-hanging fruits," Schwarzenegger said, explaining the cuts Friday at a news conference in Sacramento. "We have to take the ladder from the tree and shake the whole tree."Governor Schwarzenegger's proposed cuts are spread over many public programs, but the largest would eliminate the CalWORKS welfare program and do away with child care funding except for preschool and after-school programs, saving the state $1 billion and $1.2 billion, respectively. State Democrats decried the plan, and promised another fight in the state's legislature this summer. "Now he comes forward with a vision that says children have no value," "To tell 500,000 families they shall be homeless in lieu of delaying corporate tax breaks is hard to understand."

E.U. Has Greece, U.S. Has California; Will We Learn Perils Of Moral Hazard? -How much time will elapse until California becomes America’s Greece? If the EU thinks it necessary to bail out one of Europe’s most profligate state economies, will the U.S. face the same perceived necessity with one of our wayward state governments? What will happen if the Federal Reserve supports government aid to California like the European Central Bank did for Greece? Will worker relief overshadow taxpayer outrage? If the U.S. government performs a ‘California as Greece’ bailout, which states become our Spain, Portugal and Italy? Does every American state get a bailout, the most responsible paying for the least prudent? Are state budgetary woes the start of moral hazard’s next chapter? If so, where are the reform era’s incentives for budget discipline? If states are too big to fail now, what prevents them from being too big to fail after bailouts? Where is the end of it? Is it possible that the histories of the EU and the U.S. are beginning to merge into one dysfunctional tale?

Derivative Disaster Spreads to Local Governments - -- The derivative disaster that devastated Wall Street now stalks state and local governments, threatening pain for teachers, other public employees and those counting on public pensions, according to a range of financial experts and plaintiffs’ attorneys. Over the last decade, their argument goes, state and local officials who lacked expertise in the multi-layered “synthetic” financial instruments so dear to New York’s mega-banks have been seduced into them anyway. The result is that states, cities and counties ended up owning collateralized debt obligations and credit default swaps like those that blew up in the faces of major corporations like AIG during the 2008-2009 financial meltdown. Increasing reports of these deals turning sour, beginning with the 2007 downturn in housing, makes woeful state and local budget outlooks even bleaker, increasing the likelihood of laid off workers and service cut backs ranging from public transportation to sanitation.

Investing in the Poor - The Unincorporated Man is a science fiction novel in which shares of each person's income stream can be bought and sold.  (Initial ownership rights are person 75%, parents 20%, government 5%--there are no other taxes--and people typically sell shares to finance education and other training.)The hero, Justin Cord a recently unfrozen business person from our time, opposes incorporation but has no good arguments against the system; instead he rants on about "liberty" and how bad the idea of owning and being owned makes him feel.  The villain, in contrast, offers reasoned arguments in favor of the system.  In this scene he asks Cord to remember the starving poor of Cord's time and how incorporation would have been a vast improvement: "What if," answered Hektor, without missing a beat, "instead of giving two, three, four dollars a month for a charity's sake, you gave ten dollars a month for a 5 percent share of that kid's future earnings?  And you, of course, get nothing if the kid dies.  Now you have a real interest in making sure that kid got that pair of shoes you sent.  Now it's in your interest to find out if he's going to school and learning to read and write.

School chiefs fear taxes will be too much to bear -Dr. Robert R. Urzillo, Conrad Weiser School District superintendent, sees what's coming, and it's not good. In the next few years, the amount his district - and districts across the state - will need to pay into the Pennsylvania School Employee Retirement System will skyrocket. After increasing 4.78 percent for this school year, it will jump another 8.22 percent next year. For the 2012-13 school year, the increase will soar to 29.22 percent.

Early budget forecast grim for Ohio schools - Several local superintendents say severe cuts in programming or staffing could be on the horizon if state funding for Ohio school districts is drastically cut beginning with the 2011-12 school year.Education funding by the state could be reduced by 22 to 30 percent during the next biennium based on two possible scenarios developed from data from the Ohio Department of Education, the Executive Branch and the Legislative Service Commission. The next biennium budget would take effect from July 2011 through June 2013.The 22 percent decrease is based on a number of assumptions: no federal stimulus money; no revenue from delaying income-tax cuts; loss of additional one-time revenue; and state revenue rising to the level of Office & Budget Management projections from March.The 30 percent decrease keeps everything the same, except that it flatlines revenue projections.

Sacramento, Calif., School District Faces Bankruptcy: Report -(Dow Jones)- The Sacramento City Unified School District in California could go broke if its teachers union refuses to accept contract concessions, a Sacramento County grand jury report said Wednesday."A continued unwillingness to modify some contractual agreements will result in district bankruptcy," according to the five-page report.The report blames the district's problems on two key issues - a reduction in state funding for education and the district school board not recognizing the cost of health plans for retirees.The district faces a $30.6 million budget deficit for the coming fiscal year and is attempting to negotiate a solution with the Sacramento City Teachers Association.

Texas schools board rewrites US history with lessons promoting God and guns - Cynthia Dunbar does not have a high regard for her local schools. She has called them unconstitutional, tyrannical and tools of perversion. The conservative Texas lawyer has even likened sending children to her state's schools to "throwing them in to the enemy's flames". Now Dunbar is on the brink of fulfilling a promise to change all that, or at least point Texas schools toward salvation. She is one of a clutch of Christian evangelists and social conservatives who have grasped control of the state's education board. This week they are expected to force through a new curriculum that is likely to shift what millions of American schoolchildren far beyond Texas learn about their history.The board is to vote on a sweeping purge of alleged liberal bias in Texas school textbooks in favour of what Dunbar says really matters: a belief in America as a nation chosen by God as a beacon to the world, and free enterprise as the cornerstone of liberty and democracy.

Bill in Congress Could Save Teacher Layoffs - Layoff notices have been sent to Georgia teachers at struggling systems across the state. But one thing that could save their jobs for another year is a last-minute attempt to get emergency funding from Congress. The $23 billion Education Jobs Fund is meant to be a one-time injection of federal dollars to help stem the tide of teacher layoffs across the country. Jeff Hubbard with the Georgia Association of Educators says without the funds Georgia schools would lose too many jobs."It will be somewhere between 9- to 10-thousand. That could be teachers and office personnel that could be without jobs next year. So, not only is there a massive academic impact...you're looking at a massive economic impact in these communities." If the bill is passed in Congress, Georgia would get about $730 million.

Teacher's Unions: Still a Huge Obstacle to Reform - It's no secret that I am not fond of the teacher's unions.  I get into a lot of arguments about this, in which I am accused of being uninterested in any school reforms that don't involve breaking the power of the teacher's unions.  Of course, short of the not-very-successful class size reduction schemes, there aren't many proposed reforms that don't involve breaking the power of the teachers' unions.  Exhibit B is Steven Brill's new piece on the teacher's unions in New York, which illustrates just how far the unions are willing to go at the expense of the kids.  (Exhibit A is Brill's piece on the NYC rubber rooms; he's clearly assembling the material for a killer book.)  They cost the state a chance at millions because they were 100% completely opposed to things like performance pay, or allowing the district to transfer teachers where they are needed, rather than where they'd like to be

The drop-out crisis - The United States faces a huge drop-out crisis. In some cities the high school graduation rate is less than 50% -- sometimes as low as 25%. And this means devastating poverty for the drop-outs, as well as continuing social blight for their communities. We might say, though, that the graduation rate is only the symptom of the problem; the causes include high poverty neighborhoods and failed elementary and middle schools, and the effects extend far into the future.So in a way, it is too simple to call it a drop-out crisis; rather, it is a schooling crisis (extending back into the early grades) and a poverty crisis (extending forward for one or more generations for the young people who are affected and their eventual children). And it is a particularly serious national problem, at the beginning of a century where the most important resource will be educated people and talented creators. How can we be optimistic about the prospects for innovation and discovery in the American economy when we are wasting so much human talent? The crisis itself is widely recognized (link). What we haven't figured out yet is a success strategy for resolving the current system of failure.

A Lament for the Class of 2010 - WSJ - Over the next few weeks, hundreds of thousands of Millennials will graduate from institutions of higher learning. They will celebrate for several days, perhaps several weeks. Then they will enter a labor force that neither wants nor needs them. They will enter an economy where roughly 17% of people aged 20 through 24 do not have a job, and where two million college graduates are unemployed. They will enter a world where they will compete tooth and nail for jobs as waitresses, pizza delivery men, file clerks, bouncers, trainee busboys, assistant baristas, interns at bodegas. They will console themselves with the thought that all this is but a speed bump on the road to success, that their inability to find work in a field that is even vaguely related to the discipline they trained in is only a fleeting setback. This is only a temporary reversal. Surely, IBM or the State Department or Morgan Stanley will eventually respond to that glittering resume. After all, every company worth its salt needs a few Gender Studies majors! The sun'll come out tomorrow. Tomorrow. Tomorrow.

The Value of College - A small group of economists and education experts argue that college is overrated. They say that many students who go to college today should not be doing so. An article in The New York Times on Sunday laid out the case that these education skeptics make:“It is true that we need more nanosurgeons than we did 10 to 15 years ago,” “But the numbers are still relatively small compared to the numbers of nurses’ aides we’re going to need. We will need hundreds of thousands of them over the next decade.” College degrees are simply not necessary for many jobs… This argument certainly makes some important points. If nothing else, it’s a good reminder that many colleges are failing at their central mission: turning students into graduates. As a result, some students end up with thousands of dollars in debt and no degree

Plan B - Skip College - NYTimes - The idea that four years of higher education will translate into a better job, higher earnings and a happier life — a refrain sure to be repeated this month at graduation ceremonies across the country — has been pounded into the heads of schoolchildren, parents and educators. But there’s an underside to that conventional wisdom. 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, according to the latest projections from the Department of Education. 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. That can be a lot of tuition to pay, without a degree to show for it. A small but influential group of economists and educators is pushing another pathway: for some students, no college at all.

Is College Overrated? (Cont.) - My colleague and friend Floyd Norris continues the discussion about going to college, and he disagrees with my earlier post on this topic. Over at The Choice blog, Jacques Steinberg also has a new related post. Let me start with what I think is the main area of agreement here: a significant number of high school graduates are ill-prepared for college, and it doesn’t make sense for them to enroll (unless they are going to receive intensive remedial work as part of the equation — which most will not). The latest statistics show that roughly 30 percent of new high school graduates did not enroll in college last fall. Some number of them will enroll later on, but only a small share of this group will end up getting a degree. I’m happy to agree that policy makers and college officials should not be making it their top priority to turn these 30 percent of students — a pretty good approximation of the bottom quarter of high school students — into college graduates. At the other end of the spectrum, about 30 percent of recent high school graduates end up graduating from a four-year college.

The Real Value of College - With Jacques Steinberg’s piece in last Sunday’s Times (Plan B: Skip College), the “Is college really worth it?” meme seems to be in full flower, in part because it’s an interesting issue and in part because the media has a fatal weakness for novelty and counterintuition. In roughly ascending order of importance, here’s how various people are framing the issue: Is college for everyone? This is a dumb question. Of course college isn’t for everyone. Just last week, the Post profiled 17-year old high school senior Bryce Harper, who definitely shouldn’t go to college. Instead, he should (and will) become a professional baseball player and earn millions of dollars. Defining the question in absolute terms does little other than identify the questioner as a sloppy thinker.Does everyone in college need to be there? Again, of course not. There are 19 million people in college; obviously some of them shouldn’t be.Is going to college a bad decision for some students? Sure. Are too many students going to college? This is a question actually worth asking.

A degree of mobility - ADAM OZIMEK disagrees with my take on the value of college educations, and in particular that:…wage premiums indicate that markets are certainly interested in having a larger pool of university graduates from which to hire, and increasing that pool by shrinking the pool of non-graduates would help meet that need while also striking a blow against income inequality. Mr Ozimek writes:I don’t think this particular data point by itself is very valuable. One reason is because the wage premium of college graduates is reflective of two things: innate ability, and the returns to a college education. Thus the gap by itself does not distinguish between the demand for innate ability and the demand returns to education. This is clearly a problem with which economists wrestling with the value of higher education have had to contend. As David Leonhardt summarises here, college seems to actually generate value for attendees, and the college wage premium is not simply reflective of innate ability or composition effects.

Foreclosing on your college degree, ctd. - Over at The Economist, Ryan Avent has a thoughtful rejoinder to my criticisms of his post on the value of a college education. I don’t think Ryan and I are too far apart in terms of both assessing the the facts of the situation and what to do about it, but rather wish to emphasize different things. I want to emphasize that on the margin a lot of people are probably going to college who would be better served doing otherwise, and much of our money and theirs is being wasted. Ryan wants to emphasize that in the long-run, both individuals and society in general benefit when the population is more educated, and so we should work to get people more educated. I think there is truth to both of these and they are not necessarily contradictory ideas. However, I do want to elaborate on some points of disagreement.

College Grads Flood U.S. Labor Market With Diminished Prospects (Bloomberg) -- Ten months after graduating from Ohio State University with a civil-engineering degree and three internships, Matt Grant finally has a job -- as a banquet waiter at a Clarion Inn near Akron, Ohio. Schools from Grant’s alma mater to Harvard University will soon begin sending a wave of more than 1.6 million men and women with bachelor’s degrees into a labor market with a 9.9 percent jobless rate, according to the Education and Labor departments. While the economy is improving, unemployment is near a 26-year high, rising last month from 9.7 percent in January-March as more Americans entered the workforce.  The graduates’ plight has been the subject of high-level discussions within President Barack Obama’s administration, which so far has concluded the best response is to focus on reviving overall employment and bolstering assistance for higher education, said Peter Orszag, the White House budget director.

We invest in research, but what about teaching? - Improving science education requires rethinking academic priorities - Since President Obama’s announcement of the Educate to Innovate program in November 2009, an encouraging number of technology and media companies, non-profit organizations and government agencies have been working in concert to strengthen the nation’s approach to science education. But the reality is that the lion’s share of transformation must come from within: from school systems, in the case of K-12 education, and from the academy, in the case of higher education.A position paper recently issued by the Nature Publishing Group (NPG) illustrates this point in the context of higher education.  Vikram Savkar, Senior VP & Publishing Director for Education Markets at NPG has the story in this repost.A significant majority, 77 percent, of the 450 faculty surveyed for the paper consider their educational responsibilities to be equally as important as research responsibilities. Only 6 percent consider research more important than education. Yet when asked to appoint a hypothetical candidate to an open tenure position in their department, the majority chose a star researcher with poor teaching skills over both a star teacher with little research background and a candidate equally skilled, though not notable, in both teaching and research.

Teaching Candidates Aplenty, but the Jobs Are Few - NYT - The recession seems to have penetrated a profession long seen as recession-proof. Superintendents, education professors and people seeking work say teachers are facing the worst job market since the Great Depression. Amid state and local budget cuts, cash-poor urban districts like New York City and Los Angeles, which once hired thousands of young people every spring, have taken down the help-wanted signs. Even upscale suburban districts are preparing for huge levels of layoffs. School officials and union leaders estimate that more than 150,000 teachers nationwide could lose their jobs next year, far more than any other time, including the last major financial crisis of the 1970s. Juliana Pankow, who just graduated from Teachers College at Columbia University, has sent out 40 résumés since January. A few Saturdays ago, she went to a school in Harlem because she heard the principal would be. “I can’t think of anything else I’d rather do,” said Ms. Pankow, 23, as she waited outside the principal’s office at Pelham Memorial last week, among 619 people applying for one English position. “Which is a problem, because I might have to do something else.”

Trading test anxiety for job market jitters - The class of 2010 will enter a labor market that has not only the highest rate of unemployment in a generation, but also an unusually high rate of joblessness for recent college graduates. The Figure, taken from EPI’s new paper, The Class of 2010, tracks the rate of unemployment among recent college graduates under the age of 25 since 1985. The current unemployment rate of 9.0% for this group is higher than any time over the past 35 years. Unemployment among recent college graduates also rose during past two “jobless” recoveries, but not nearly so much as now. In 1992, this group’s unemployment rate rose to 6.9%; In June of 2003, it peaked at 6.4%.The Class of 2010 paper outlines several damaging consequences of high rates of joblessness among people who have recently graduated from college. Many of these young adults who encounter hard economic times will fall through the public safety net since in most states eligibility for unemployment insurance is contingent on having a recent work history. Research has also shown that graduating during a recession can limit an individual’s lifelong earnings potential.

California pension fund wants state to give $600M more - The board of California's giant pension fund is asking the state to increase its contributions to employee retirement benefits by $600 million in the next fiscal year to help counter massive investment losses.The board made the request during a meeting Tuesday. It comes as California grapples with a $19 billion budget deficit and a threat by Gov. Arnold Schwarzenegger to eliminate its welfare program. It is driven mainly by large investment losses by the California Public Employees Retirement System, which is the nation's largest public pension fund. The fund lost a quarter of its value during the 2008-2009 fiscal year that ended last July. The governor says the pension system is unsustainable and drains money from other state programs.

Dow 28,000,000: The Unbelievable Expectations of California's Pension System - In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state's history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees' Retirement System sold the pension boost to the state legislature by promising that "no increase over current employer contributions is needed for these benefit improvements" and that Calpers would "remain fully funded." They also claimed that enhanced pensions would not cost taxpayers "a dime" because investment bets would cover the expense. What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099

Quinn still pushing borrowing for pension payment - Lawmakers will return to Springfield next week to try to pass a budget, but Gov. Pat Quinn refused to say Friday whether he would sign a spending plan that delayed making the state's pension contributions.The Democratic governor continues to push a borrowing plan to make the $3.7 billion contribution. Lawmakers have been cool to the idea and it would require at least some Republican support.The Senate passed a budget that would delay making the pension payments while the House has rejected borrowing.

Unfunded state pensions face prospect of becoming federal issue -Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade. By 2030, as many as 31 states may not have the money to pay pensions. And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1,000bn, he says."It is more than a local problem," Mr Rauh said. "The federal government could be on the hook." Estimates put the unfunded liabilities at between $1,000bn and $3,000bn after years of states promising benefits but not contributing enough in both good times and bad to cover them."

Is a $1 Trillion Bailout Ahead for State Pension Funds? - The budget woes facing U.S. states may not be as overwhelming as the troubles in Greece. But in a new paper, Northwestern University economist Joshua Rauh says at least seven states are heading toward crushing crises — of the magnitude that would require U.S. bailouts in the next decade — from one cause: state pension liabilities. In some state constitutions, promised pension benefits to state and local government workers take a higher priority than general obligation bonds. Rauh, with the University of Chicago’s Robert Novy-Marx, previously estimated that state pension liabilities stood at $3 trillion at the end of 2008 compared to $1 trillion in other forms of debt. Even if pension funds received 8% annual returns, many large states would run so short — without any overhaul today — that raising state taxes to make up for it would be insufficient, he says. Illinois, for instance, would run out of money in its three primary pension funds by 2018. In the years after, the payments owed to existing state workers would be $14 billion, or more than half of the total revenue Illinois projects in 2010.

State Pension Funds Headed for Crisis of National Proportion - According to new research from the Kellogg School of Management, taxpayers, public workers and state and federal officials alike have cause for serious concern about an issue that often falls under the radar but poses serious risk to the future health of the national economy: state pension liabilities. Data presented today in Washington, DC, at a conference called "New Retirement Realities: Pensions at a Crossroads" demonstrates that several state pension funds will not last the decade, a situation that will place tremendous pressure on the federal government to bail out financially insolvent states at a pricetag likely to match or exceed the recent bailout of the U.S. financial system. In his presentation, Rauh warns that promised benefit payments would be so substantial that raising state taxes to make the payments would be infeasible, offering no other choice than to call on the federal government to bail out the failing states.

Endangered US savers…Americans of working age are far more concerned with cash flow than the return they can expect on their savings. Indeed, a quarter of American households have no net savings whatsoever. Even the median net worth of the wealthiest age group, those within a decade of retirement, was just $254,000, according to a Federal Reserve survey conducted when stock values were near their peak and homes more valuable. Meanwhile, the percentage of disposable income being ploughed back into savings is a paltry 2.7 per cent. Given meagre Social Security benefits and the rarity of defined benefit pensions, this makes a comfortable retirement a pipe dream for most baby boomers. In a 2009 Employee Benefit Research Institute survey, only 13 per cent of Americans were very confident in having enough for retirement.For the median American family with around $120,000 in net worth in 2007, just a third of it financial, growing this into a decent annuity is made more daunting by real interest rates being held down and rising taxes on non-wage income. With 47 per cent of Americans owing no federal tax, the burden of boosting government revenue will fall largely on the minority of Americans who have accumulated some liquid savings.

No Gold Watch - Another generation of US workers, at least significant numbers of them, are being forced into retirement sooner than expected and without ceremony, by the Bust. As Catherine Rampell noted in The New York Times last week, millions of people have been dismissed – file clerks, ticket agents, autoworkers and the like – who might otherwise have stopped working in more orderly fashion.“But because of the recession,” Rampell writes, “winter came early.”This has happened before, notably in the 1980-82 recession, when the steel and domestic manufacturing industries led the casualty list; and, after 1990, when banks and other financial institutions shed millions of jobs. This time clerical and administrative workers have borne the brunt – 1.7 million of them have lost their jobs since the recession began in the fourth quarter of 2007. These are people for whom there was no gold watch. Is there anything for them besides the informal respect and affection of their peers? ...

1,423 Minneapolis retirees ordered to pay back $76M - A judge has ordered two Minneapolis pension funds to recover about $76 million in overpayments to retired police and firefighters or their spouses. Under the order, the 860 retired police officers or their survivors must repay the city an average of $60,000 each, and 563 beneficiaries of the firefighter fund must repay an average of about $43,000 each. City officials who have warned that the funds were headed toward insolvency hailed Monday's ruling by Hennepin County District Judge Janet Poston. But it's a further blow for the retirees who rely on the funds, which have been closed to new hires since the mid-1980s

‘Dependency Ratio’ Set to Spike as Baby Boomers Age - The burden of aging baby boomers will rise sharply over the next two decades and then ease around 2030, according to a Census Bureau report released today. This trend, which has been expected and projected ever since the baby boom generation was born, is sure to play a role in every political and economic issue from immigration to health care costs, the solvency of Social Security and the burden of public sector pensionsThe Census Bureau measures the burden of aging through a metric called “the dependency ratio,” or the number of people 65 and older to every 100 working aged people (people between 20 and 64). That ratio is projected to climb from 22 in 2010 to 35 in 2030, as the baby boomers turn 65 and older. That steep rise will begin to moderate somewhere around 2030, the Census said, hitting 37 in 2050.

Employer Dumping: Is It Happening in Massachusetts? - The notion that employers might stop offering health insurance coverage once decent policies are more readily available on exchanges warrants some concern. It would actually be a good thing if we transition away from an employer-based system, but it would be preferable that the transition occurs gradually. If employers abandon coverage en masse, it could lead to discontent and a dramatic increase in government subsidy costs. Shawn Tully’s recent story in Fortune on this subject is getting some attention. In it he writes that Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill’s critics predicted, and what its champions dreaded: many large companies [including AT&T and Deere] are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government. For large firms that do not offer coverage, those penalty fees would be $2,000 for every employee over 30 that the firm employs. Are those fees too low? Perhaps.

Massachusetts Insurers Post Big Losses - When MassCare passed, it was supposed to lower the average cost of health care by getting relatively cheap young people into the system, and ending the inefficiencies of caring for the uninsured.  Unfortunately, it hasn't quite worked out that way.  The bill for the uninsured only dropped by about 40%; the young, cheap people turned out to almost all need subsidies, and worse, some of them figured out how to game the system by buying insurance, getting a bunch of expensive procedures, and then dropping the insurance again.  There was a brief improvement in insurance prices for the individual market, because Massachusetts, with its community rating and guaranteed issue, had had a pretty sizable problem with adverse selection.  But after a few years, insurance costs were still marching briskly upward, rates were among the highest in the country, and the system was putting heavy pressure on a budget that was already strained to the limit by the recession.

Massachusetts Legislators Take $100 Million from Hospitals - Watching the Massachusetts health care reform unfold is like watching a tragic game of whack-a-mole.  As I noted before, the expected cost-savings have largely not materialized, pushing the thing way over budget, and despite the fact that it already had the highest rates in the country, the cost of insurance is rising at a brisk rate of roughly 10% a year.  The best you can say about this cost problem is the wan defense that I've now heard several times:  that by provoking a crisis, the system may now finally do real delivery service reform that will control costs.
Maybe.  That's not actually what they've done so far; what they've done is appoint a commission, and attempt to control insurance prices.  Now that the providers are, predictably, losing money, the legislators are taking the mallet to the providers.  Hospitals that make too much money are going to have to make a "one time contribution" of $100 million to a fund to help small businesses buy insurance

Threats to Employer-Sponsored Insurance - In today’s Wall Street Journal, John Goodman runs down the various pathways by which the new health reform law will erode employer-sponsored insurance. We’ve seem much of this before, so I won’t rehash all the issues (recall my recent employer-dumping post, one of many). Goodman does raise one issue I’ve considered but haven’t written about yet.Take a hotel with maids, waitresses, busboys and custodians all earning $10 or $15 an hour. These employees can qualify for completely free Medicaid coverage or highly subsidized insurance in the exchange.So the ideal arrangement is for the hotel to fire the lower-paid employees—simply cutting their plans is not an option since federal law requires nondiscrimination in offering health benefits—and contract for their labor from firms that employ them but pay fines instead of providing health insurance. The hotel could then provide health insurance for all the remaining, higher-paid employees.Ultimately, we could see a complete restructuring of American industry, with firms dissolving and emerging based on government subsidies.

Goodbye, Employer-Sponsored Insurance - Millions of American workers could discover that they no longer have employer-provided health insurance as ObamaCare is phased in. That's because employers are quickly discovering that it may be cheaper to pay fines to the government than to insure workers.AT&T, for example, paid $2.4 billion last year to cover medical costs for its 283,000 active employees. If the company dropped its health plan and paid an annual penalty for each uninsured worker, the fines would total almost $600 million. But that would leave AT&T with a tidy profit of $1.8 billion.Economists say employee benefits ultimately substitute for cash wages, which means that AT&T employees would get higher take-home pay. But considering that they will be required by federal law to buy their own insurance in an exchange, will they be net winners or losers? That depends on their incomes.

Medicare drugs up 9.7% in year - The price of brand name drugs widely used by Medicare recipients rose an average 9.7 percent over the past year, according to the latest report from AARP, which notes inflation rose only 0.3 percent.The price increase is the biggest year-over-year jump since AARP began tracking drug prices in 2002.The average annual cost for a single brand name medicine was about $2,190 in the 12 months that ended the first quarter of this year, AARP found. The average price of specialty drugs rose 9.2 percent. This includes biologic and injected drugs used to treat cancer, multiple sclerosis and other serious chronic conditions. The average annual cost for a single specialty medication was more than $34,550, AARP said.

Changes to Medicare Advantage - The Kaiser Family Foundation put out a handy document that explains the upcoming key changes to Medicare Advantage (MA). I’m not going to explain all of them here (see an earlier post on updates to payment rates). I’ll just highlight two things I learned from the Kaiser issue brief.First, one thing I posted yesterday isn’t quite right. I wrote that “local and regional Medicare PPOs attract, respectively, only 8% and 3% of enrollment in all Medicare Advantage plans.” That was true last year, but this year the figures are 12% and 7%. So MA PPOs are growing. The following figure is from the Kaiser issue brief.

Doctors' Medicare payouts to be cut 21% June 1 (CNN) -(w/docs opting out video)- For the fourth time this year, doctors face a potential huge cut in the fees that the government pays them to treat Medicare patients.Physicians will be hit with a 21% cut in Medicare reimbursements as of June 1, unless lawmakers decide to patch over the issue -- as they've done for years. Congress is now debating the matter, and to stop the cut lawmakers would have to vote to pass a new patch sometime in the next two weeks. If the proposed cuts go through, physicians are worried their practices will be so strapped that they'll have to drop some of the 43 million Americans who are covered under Medicare. But, of course, on the other side of the issue is cost to the government at a time when the federal budget is tight.

More Texas doctors dropping Medicare patients— Hundreds of doctors in Texas are dropping out of the federal health care program for senior citizens as physician reimbursement for Medicare declines.More than 300 Texas doctors have dropped the program in the last two years, including 50 in the first three months of 2010, the Houston Chronicle, which compiled the data, reported Tuesday.The Texas Medical Association did a survey in 2008 that found 42 percent of Texas doctors participating in the survey said they were no longer accepting all new Medicare patients. Among primary-care doctors, the percentage was 62 percent. Medical association officials said the Chronicles' new numbers surpassed their expectations."This new data shows the Medicare system is beginning to implode,"  "If Congress doesn't fix Medicare soon, there'll be more and more doctors dropping out and Congress' promise to provide medical care to seniors will be broken." The dropoffs follow years of declining Medicare reimbursement that led to a looming 21 percent cut in 2010. Congress has voted three times to postpone the cut, which is set to begin June 1.

Rational Health Investment? - Maxine Udall - Is it a "free choice" when the (shadow) price of health, the subjective discount rate, and the ROI that condition the choice are determined in large part by a circumstance of birth, early home environment, and even the culture and context into which they live?  What does it mean to hold individuals personally accountable for making the rational choice not to invest as much in current or future health as someone judges they should, given the price they face, the discount rate they have inherited, and the ROI they're likely to realize? If they are rationally not purchasing health insurance should we force them to?  Are we, in effect, requiring them to be irrationally exuberant? To produce more health and to invest more in future health than their price, time preference, or the ROI would warrant? Or do we have an obligation as a society and a community, to counter these "market forces" that are so obviously harmful to less educated, less advantaged individuals and to society? 

Marriage and life expectancy - Marriage is more beneficial for men than for women - at least for those who want a long life. Previous studies have shown that men with younger wives live longer. While it had long been assumed that women with younger husbands also live longer, in a new study Sven Drefahl from the Max Planck Institute for Demographic Research (MPIDR) in Rostock, Germany, has shown that this is not the case. Instead, the greater the age difference from the husband, the lower the wife’s life expectancy. This is the case irrespective of whether the woman is younger or older than her spouse. Related to life expectancy choosing a wife is easy for men - the younger the better. The mortality risk of a husband who is seven to nine years older than his wife is reduced by eleven percent compared to couples where both partners are the same age. Conversely, a man dies earlier when he is younger than his spouse

Reducing niacin intake can prevent obesity - A research team from China examined the role of excess nicotinamide in glucose metabolism using co-loading of glucose and nicotinamide test. They proved that excess niacin intake-induced biphasic response, i.e., insulin resistance in the early phase and hypoglycemia in the late phase, may be a primary cause for the increased appetite in obesity. Their study will be published on May 21, 2010 in the World Journal of Gastroenterology.The study also revealed for the first time that the obesity prevalence among US children and adolescents increased in parallel with the increase of the per capita niacin consumption with a 10-year lag, in which niacin fortification-induced sharp increase in niacin contents in grain products may play a major role. Reducing niacin intake and facilitating niacin elimination through sweat-inducing physical activity may be a key factor in the prevention and treatment of obesity.

A Statistic in Need of a Baseline: A Trillion-Calorie Reduction? -by economistmom - Baselines matter.  And not just to budget geeks or other people who care about budget rules and the pay-as-you-go (PAYGO) standard (with many exemptions, of course).  But they matter to ordinary people, too, to provide perspective on what exactly is being changed and how large or small the change is (and how good or bad).That’s why when I read this story in the Washington Post on Tuesday about the First Lady’s fight against childhood obesity and getting food manufacturers to commit to reducing the calorie content of their foods, I heard myself screaming:  “but what is the baseline?!… and is this big or small, and good or bad?!”  I mean, what the heck does a trillion or a trillion and a half calories mean?… Key points from the article, that yet do not help me understand how significant this is (emphasis added):The Healthy Weight Commitment Foundation, a coalition including Campbell Soup, Coca-Cola, General Mills, Kellogg, Kraft Foods and PepsiCo, will slash 1 trillion calories by the end of 2012 and 1.5 trillion calories by the end of 2015.

There’s that slippery slope - The debate as to whether so-called “nanny state” laws lead down a slippery slope is an empirical question that will be answered; either the paternalistic laws will continue to encroach on personal freedom, or they will reach an equilibrium. Let me file this under evidence that the slippery slope is real:Smoking is already illegal inside the state’s bars and restaurants, and now Kane County will research the legality of implementing an outdoor smoking ban as well.Note that this is not smoking in public places outdoors, but smoking on private property outdoors.  I think it would be useful to for critics of the slippery slope theory of paternalism to demarcate now what future policies would constitute evidence that they are wrong, because my guess is the point of demarcation will move right along down the slope with policy. Several years ago many of todays critics of slippery slope theory would have said that an attempt to regulate salt would constitute evidence. But now, farther down the slope, salt regulation is just sensible policy

Salt and freedom - It has been said by many commentators that the potential regulation that limits the amount of salt in foods does not limit freedom because, after all, you can add salt to anything. So really, it increases net freedom since people who like salt can still add it, and people who don’t now have the option to have less of it. There are several problems with this. First off, I’m no chef, but it strikes me as obvious that for many foods there is a difference between cooking, baking, and generally preparing food with salt as an ingredient and sprinkling it onto food after the fact.  Since I know little to nothing about cooking, I’ll go no further with this except to say that it strikes me as obvious, and ask does anyone seriously disagree with that? If you do, buy some low sodium pepperoni, and then sprinkle salt on top. Same thing as regular pepperoni? I seriously doubt it.

Companies Dodge $60 Billion in Taxes Even Tea Party Condemns - Hurst went home with an amber bottle of Lexapro, the world’s third-best selling antidepressant. The profits from his $99 purchase began a 9,400-mile journey that would lead across the Atlantic Ocean and more than halfway back again, to a grassy industrial park in Dublin, a glass skyscraper in Amsterdam and a law office in Bermuda surrounded by palm trees. While Forest Laboratories Inc., the medicine’s maker, sells Lexapro only in the U.S., the voyage ensures most of its profits aren’t taxed there -- and they face little tax anywhere else. Forest cut its U.S. tax bill by more than a third last year with a technique known as transfer pricing, a method that carves an estimated $60 billion a year from the U.S. Treasury as it combines tax planning and alchemy. (See an interactive graphic on Forest’s tax strategy here.) Transfer pricing lets companies such as Forest, Oracle Corp., Eli Lilly & Co. and Pfizer Inc., legally avoid some income taxes by converting sales in one country to profits in another -- on paper only, and often in places where they have few employees or actual sales.

Did the end of smallpox vaccination cause explosive HIV growth? - Vaccinia immunization, as given to prevent the spread of smallpox, produces a five-fold reduction in HIV replication in the laboratory. Researchers writing in the open access journal BMC Immunology suggest that the end of smallpox vaccination in the mid-20th century may have caused a loss of protection that contributed to the rapid contemporary spread of HIV. Smallpox immunization was gradually withdrawn from the 1950s to the 1970s following the worldwide eradication of the disease, and HIV has been spreading exponentially since approximately the same time period. Weinstein and his colleagues propose that vaccination may confer protection against HIV by producing long term alterations in the immune system, possibly including the expression of a certain receptor, CCR5, on the surface of a person's white blood cells which is exploited by both viruses. Speaking about the results, Weinstein said, "While these results are very interesting and hopefully may lead to a new weapon against the HIV pandemic, they are very preliminary and it is far too soon to recommend the general use of vaccinia immunization for fighting HIV".

Dengue Fever In Florida Portends A Growing Problem - NPR - You may not have heard much about a nasty tropical infection called dengue fever. But that may soon change. Federal health officials have identified the first sizable outbreak of the mosquito-borne disease in the U.S. in 55 years, in the Florida Keys. They say the southern U.S. is ripe for more. The first cases in the recent outbreak occurred last summer and fall. In August, a New York woman recently back from a Key West vacation came down with the characteristic dengue symptoms — fever, wicked headache, chills, muscle and joint pain, and bloody urine. An alert doctor in Rochester, N.Y., diagnosed dengue fever. Around the same time, the virus showed up in a woman and a married couple in Key West, none of whom had traveled to areas where dengue is common. These cases triggered an investigation by the Centers for Disease Control and Prevention and Florida health officials. That uncovered 23 more cases in Key West last summer and fall

Experts: More TB now than ever and U.N. efforts failing - Global efforts to control tuberculosis have failed and radical new approaches are needed, experts said Wednesday.With more than 9 million people infected last year, including 2 million deaths, officials say there is more tuberculosis now than at any other time in history. In a special tuberculosis edition of the British medical journal Lancet published on Wednesday, experts said past failures prove new strategies are required.For years, the World Health Organization and partners have fought TB largely with a program where health workers watch patients take their drugs — even though the agency acknowledged in a 2008 report that this treatment program didn't significantly curb TB spread.Experts said TB isn't only a medical problem, but is intertwined with poverty, as it spreads widely among people living in overcrowded, dirty places. They said TB programs need to go beyond health and include other sectors like housing, education and transportation.

Scientists Find 'Baffling' Link between Autism and Vinyl Flooring… Children who live in homes with vinyl floors, which can emit chemicals called phthalates, are more likely to have autism, according to research by Swedish and U.S. scientists published Monday.The study of Swedish children is among the first to find an apparent connection between an environmental chemical and autism. The scientists were surprised by their finding, calling it "far from conclusive." Because their research was not designed to focus on autism, they recommend further study of larger numbers of children to see whether the link can be confirmed.Bernard Weiss, a professor of environmental medicine at University of Rochester and a co-author of the study, said the connection between vinyl flooring and autism "turned up virtually by accident." He called it "intriguing and baffling at the same time."

Study: ADHD linked to pesticide exposure - CNN-- Children exposed to higher levels of a type of pesticide found in trace amounts on commercially grown fruit and vegetables are more likely to have attention deficit hyperactivity disorder than children with less exposure, a nationwide study suggests.Researchers measured the levels of pesticide byproducts in the urine of 1,139 children from across the United States. Children with above-average levels of one common byproduct had roughly twice the odds of getting a diagnosis of ADHD, according to the study, which appears in the journal Pediatrics.Exposure to the pesticides, known as organophosphates, has been linked to behavioral and cognitive problems in children in the past, but previous studies have focused on communities of farm workers and other high-risk populations. This study is the first to examine the effects of exposure in the population at large.Organophosphates are "designed" to have toxic effects on the nervous system, says the lead author of the study, Maryse Bouchard, Ph.D., a researcher in the department of environmental and occupational health at the University of Montreal. "That's how they kill pests"

Dopamine System in Highly Creative People Similar to That Seen in Schizophrenics, Study Finds — New research shows a possible explanation for the link between mental health and creativity. By studying receptors in the brain, researchers at Karolinska Institutet have managed to show that the dopamine system in healthy, highly creative people is similar in some respects to that seen in people with schizophrenia.  High creative skills have been shown to be somewhat more common in people who have mental illness in the family. Creativity is also linked to a slightly higher risk of schizophrenia and bipolar disorder. Certain psychological traits, such as the ability to make unusual pr bizarre associations are also shared by schizophrenics and healthy, highly creative people. And now the correlation between creativity and mental health has scientific backing. "We have studied the brain and the dopamine D2 receptors, and have shown that the dopamine system of healthy, highly creative people is similar to that found in people with schizophrenia,"

JAMA commentary: Time to rethink causes, possible treatments of mental disorders - It is time to reassess mental disorders, recognizing that these are disorders of brain circuits likely caused by development processes, according to a commentary in the May 19 issue of JAMA, a theme issue on mental health. Dr. Insel and commentary co-author Philip S. Wang, M.D., Dr.P.H., Deputy Director, NIMH, write that compelling reasons to look for genes that confer risk for mental illness come from twin studies demonstrating high heritability for autism, schizophrenia, and bipolar disor­der. "Although there have been notable findings from link­age and genome-wide association studies, with candidate genes and specific alleles [an alternative form of a gene] identified for each of the major mental disorders, those that have been replicated explain only a fraction of the heritability." "Within families, the same copy number variant may be associated with schizophrenia in one person, bipolar disorder in another, and attention-deficit/hyperactivity disor­der in yet another. The genetics of mental illness may really be the genetics of brain development, with different out­comes possible, depending on the biological and environmental context."

JCVI: First Self-Replicating, Synthetic Bacterial Cell Constructed by J. Craig Venter Institute Research -Researchers at the J. Craig Venter Institute (JCVI), a not-for-profit genomic research organization, published results today describing the successful construction of the first self-replicating, synthetic bacterial cell. The team synthesized the 1.08 million base pair chromosome of a modified Mycoplasma mycoides genome. The synthetic cell is called Mycoplasma mycoides JCVI-syn1.0 and is the proof of principle that genomes can be designed in the computer, chemically made in the laboratory and transplanted into a recipient cell to produce a new self-replicating cell controlled only by the synthetic genome. This research will be published by Daniel Gibson et al in the May 20^th edition of Science Express and will appear in an upcoming print issue of Science.

Scientist Craig Venter creates life for first time in laboratory sparking debate about 'playing god' - Dr Craig Venter, a multi-millionaire pioneer in genetics, and his team have managed to make a completely new "synthetic" life form from a mix of chemicals. They manufactured a new chromosome from artificial DNA in a test tube, then transferred it into an empty cell and watched it multiply – the very definition of being alive. The man-made single cell "creature", which is a modified version of one of the simplest bacteria on earth, proves that the technology works. Now Dr Venter believes organism, nicknamed Synthia, will pave the way for more complex creatures that can transform environmental waste into clean fuel, vaccinate against disease and soak up pollution.

US War on Drugs Has Cost $1 Trillion and Ten Times More Deaths Than 9-11 and Met None of Its Goals -After 40 years, the United States' war on drugs has cost $1 trillion and hundreds of thousands of lives (MP: 28,400 in Mexico alone in just the last five years, more than ten times the number of casualties in 9-11, see chart above, data here), and for what? Drug use is rampant and violence even more brutal and widespread. Even U.S. drug czar Gil Kerlikowske concedes the strategy hasn't worked."In the grand scheme, it has not been successful," Kerlikowske told The Associated Press. "Forty years later, the concern about drugs and drug problems is, if anything, magnified, intensified."

The new food pessimism - This LRB article by Jeremy Harding articulates an increasing fear that food markets will not operate smoothly over the next decade or two.  He gives some major reasons (only partially reproduced here) to be pessimistic: The first is the nature and extent of population growth: we are six billion now and by 2030 we’ll be eight billion... The second is ‘the nutrition transition’: generations that once lived on grains, pulses and legumes have been replaced by more prosperous people with a taste for meat and dairy. Crops like maize which once fed many of us directly now feed fewer of us indirectly, via a costly diversion from which they emerge in the value-added form of meat. . The third factor is energy: the industrial production of food is sure to become more expensive as fuel costs rise. It takes 160 litres of oil to produce a tonne of maize in the US; natural gas accounts for at least three-quarters of the cost of making nitrogen fertiliser; freight, too, depends on fuel. Land is the fourth...[Fifth] Alternative fuels are reducing the amount of land available for growing food.

Food Pessimism and Liberty: Rhetoric I'll Bet Against - Tyler makes a strong case that libertarians should take "the new food pessimism" seriously. Tyler's position is rhetorically tempting for libertarians: "There's a horrible problem coming, and only free-market reforms can save us."  But I can't honestly agree.  While I support all the free-market reforms that Tyler mentions, food pessimism just isn't credible.  A century of crummy government policies has already failed to prevent a massive long-run decline in the price of food.  Furthermore, as I've explained before, rational people of all political persuasions should habitually greet any frightening forecast with deep skepticism:

Bio-tech Seeds May Never Take Root - PBS Video - It's planting season and American farmers are making decisions that could affect the food you eat and maybe some of the investments you make. Many farmers are not planting high-tech seeds. They have just gotten too expensive. It's a big problem for companies like Monsanto, Dupont and Dow Chemical. They have spent millions of dollars to develop new high-tech seeds that are resistant to insects and drought. Diane Eastabrook reports.

Oceans’ fish could disappear in 40 years: UN -The world faces the nightmare possibility of fishless oceans by 2050 without fundamental restructuring of the fishing industry, UN experts said Monday."If the various estimates we have received... come true, then we are in the situation where 40 years down the line we, effectively, are out of fish," Pavan Sukhdev, head of the UN Environment Program's green economy initiative, told journalists in New York. A Green Economy report due later this year by UNEP and outside experts argues this disaster can be avoided if subsidies to fishing fleets are slashed and fish are given protected zones -- ultimately resulting in a thriving industry.The report, which was opened to preview Monday, also assesses how surging global demand in other key areas including energy and fresh water can be met while preventing ecological destruction around the planet.

How We Wrecked The Oceans - Like the Indo-Aryan God Shiva, Destroyer of Worlds, marine ecologist Jeremy Jackson is here to turn your comfortable, complacent Mental World upside-down. He's able to do that because we are destroying the Physical World—in this case, the Earth's Oceans. Before I continue, I want you to watch How We Wrecked The Oceans (18:19). What do you say? Too busy, maybe later? Maybe never? If you have any interest, however small, in the future of Life on this planet, including Human Life, I suggest you watch it now.

A Closer Look at the Kerry-Lieberman Cap-and-Trade Proposal - As with the Waxman-Markey bill (H.R. 2454), passed by the House of Representatives last June, there is now some confusing commentary in the press and blogosphere about the allocation of allowances in the new Senate proposal — the American Power Act of 2010 — sponsored by Senator John Kerry, Democrat of Massachusetts, and Senator Joseph Lieberman, Independent of Connecticut.  As before, the mistake is being made of confusing the share of allowances that are freely allocated versus auctioned with (the appropriate analysis of) the actual incidence of the allowance value, that is, who ultimately benefits from the allocation and auction revenue.In this essay, I assess quantitatively the actual incidence of the allowance value in the new Senate proposal, much as I did last year with the House legislation.

What the Senate climate bill would do - The Peterson Institute for International Economics has just put out a great assessment of the Senate climate bill, the American Power Act. Dave Roberts has a post over at Grist with lots of colorful graphs pulled from it, but I thought this drab little chart was maybe the most helpful of the bunch. It shows how we can expect different energy sources to perform under the bill, compared with business as usual: If this thing ever passed, oil consumption would drop quite a bit, coal use would go down, and even natural gas would drop a bit (this despite the fact that the bill has incentives for natural gas, which is the cleanest of fossil fuels). Nuclear does very well. Interestingly, the bill would make virtually no difference to the solar and wind industries. But that's not too surprising—the Senate's renewable energy standard is woefully weak, and not likely to do much to improve on existing state standards. Meanwhile, here's a graph of how the bill would affect energy prices:

Making the Simple Complicated - The basic economics of climate change seems simple. Scientists tell us that carbon emissions put the planet at risk.  In this case, the right tax would equal the worldwide economic damage wrought by emitting carbon or other greenhouse gases. So why is the Kerry-Lieberman climate change bill, the grandly named American Power Act, 987 pages long? This bill is a behemoth for three reasons. First, it tries to do far more than just charge for carbon emissions. The bill starts by providing “incentives for the growth of safe domestic nuclear and nuclear-related industries.” It supports carbon capture in coal plants, expands offshore drilling, establishes an Office of Consumer Advocacy and promotes “clean energy career development.” Standard economics suggests that many of these interventions would be unnecessary if we had the right tax on carbon emissions; if companies pay the full social costs of their actions, they have the right incentives to invest in greener technologies without any further help from Uncle Sam.The second reason that the bill is so big is that it uses a complicated cap-and-trade system rather than a simple Pigouvian tax.

Reducing Greenhouse Gas Emissions: Five Lessons of Economic Analysis - CBO Director's Blog - This afternoon I spoke at a Brookings conference on climate and energy policy. CBO has done a great deal of work in this area, applying the research done by outside experts as well as our own analysis and modeling to help the Congress understand the likely budgetary and economic effects of alternative policy approaches and specific legislative proposals being considered. In my comments today I focused on one particular issue—efforts to reduce emissions of greenhouse gases—and what CBO sees as the lessons of economic analysis for those efforts. (These slides capture the key points that I made today; all of CBO’s work on climate change is available here and relevant links are noted throughout this blog post.) CBO’s analysis focuses on how economic principles would apply to emission-reduction efforts, but following its standard practice, CBO does not make recommendations regarding specific policies.

You get what you pay for - CBO Director Doug Elmendorf has written a blog post detailing five lessons we can learn from economic analysis of the issue of greenhouse gas emissions reductions. It's a fairly standard summary of the basic economic view of climate policy, which is that government should price carbon as simply as possible and get out of the way. I agree that a simple carbon price should be the heart of any emissions reduction policy, but I think there is a good case to be made that government action shouldn't stop there. Deployment of infrastructure public goods is well within the government's job description and should be a part of the effort to cut emissions. But one of Mr Elmendorf's lessons is particularly egregious: Lesson #4: An efficient system for reducing greenhouse gas emissions would probably lower overall GDP, employment, and households’ purchasing power by a modest amount relative to what would occur otherwise (and leaving aside the economic effects of slowing climate change).This isn't a lesson; it's an intellectual belly-flop. Let me try out an analogous "lesson":

The case for strong climate policy is simple. A cap on carbon pollution is, too - Edward L. Glaeser makes the case for simplicity in addressing climate change. I couldn’t agree more with his premise. The basic economics are indeed simple. Climate change might be the largest market failure the world has ever seen. To correct it, put the right incentives in place: correct the fact that we currently treat the atmosphere as a free sewer for our global warming pollution. Problem solved.The how and especially the politics are not quite as straight-forward. Glaeser bemoans that the proposed American Power Act has 987 pages and identifies three culprits: that the Act tries to do more than just put a price on carbon, that it uses a cap-and-trade system rather than a tax, and that the problem has an important international dimension. He is broadly right on one and three but not on two: the issue of a cap versus a tax.A firm limit on global warming pollution does not make the law more complicated. It makes it better.

Op-Ed - NYTimes - Sadly, President Obama seems intent on squandering his environmental 9/11 with a Bush-level failure of imagination. So far, the Obama policy is: “Think small and carry a big stick.” He is rightly hammering the oil company executives. But he is offering no big strategy to end our oil addiction. Senators John Kerry and Joe Lieberman have unveiled their new energy bill, which the president has endorsed but only in a very tepid way. Why tepid? Because Kerry-Lieberman embraces vitally important fees on carbon emissions that the White House is afraid will be exploited by Republicans in the midterm elections. The G.O.P., they fear, will scream carbon “tax” at every Democrat who would support this bill, and Obama, having already asked Democrats to make a hard vote on health care, feels he can’t ask them for another.

Former President Bill Clinton says green energy can grow the nation’s economy - Former President Bill Clinton on Wednesday pushed for retrofitting aging buildings to make them more energy efficient and promoted alternative sources of energy as a way to create jobs and grow the economy. Clinton said studies show a large amount of greenhouse gases that need to be cut can be eliminated simply by being more efficient. In large cities, buildings can account for up to 70 percent of carbon emissions, and older buildings waste massive amounts of energy, he said. “I believe climate change is a huge problem and we have only scratched the surface of what we have to do,” said Clinton, whose foundation launched the Clinton Climate Initiative to help reduce greenhouse gas emissions.

Reducing Carbon the Old Fashioned Way - The EIA has reported that 2009 carbon dioxide emissions in the United States experienced their largest decline–on both an absolute and percentage basis–in 60 years. If you consider the chart I’ve included here, it’s not hard to see why. Measuring total energy consumption from all sources–oil, coal, natural gas, nuclear, hydro, and renewables–US energy consumption fell from a high in 2007 at 101.5652 quadrillion BTU, to 94.8916 quadrillion BTU last year. A financial crisis and its attendant industrial collapse is a very effective way to reduce emissions.What would happen to global carbon emissions, however, if successive industrial collapses or declines meant that the world was progressively relocated away from oil, and into coal? That question, among others, is the subject of my recent work in coal and I am inclined to favor just such an outcome. After all, global oil production has been up against a ceiling for 6 years now. And, the resulting price advance in oil was clearly a key component to the global recession. I see no reason why this can’t be repeated on a serial basis for years, as energy transition itself is at minimum a decade-long proposition.

The Message from the Glaciers - It was not so long ago that the parts of the globe covered permanently with ice and snow, the Arctic, Antarctic, and Greater Himalayas (“the abode of the snows” in Sanskrit), were viewed as distant, frigid climes of little consequence. Only the most intrepid adventurers were drawn to such desolate regions as the Tibetan Plateau, which, when finally surveyed, proved to have the planet’s fourteen highest peaks. Because these mountains encompass the largest nonpolar ice mass in the world—embracing some 46,298 glaciers covering 17 percent of the area’s land and since time immemorial have held water in frozen reserve for the people of Asia—they have come to be known as “The Third Pole.” There was a time when the immensity of such larger-than-life features of our natural world as oceans, deserts, mountains, and glaciers evoked awe and even fear. These days, however, these once seemingly eternal and invincible aspects of our planet’s architecture are on the defensive. And only belatedly are we beginning to understand how fragile and interconnected they actually are with myriad other elements of planetary life.

Greenland Rapidly Rising as Ice Melt Continues -— Greenland is situated in the Atlantic Ocean to the northeast of Canada. It has stunning fjords on its rocky coast formed by moving glaciers, and a dense icecap up to 2 km thick that covers much of the island--pressing down the land beneath and lowering its elevation. Now, scientists at the University of Miami say Greenland's ice is melting so quickly that the land underneath is rising at an accelerated pace.According to the study, some coastal areas are going up by nearly one inch per year and if current trends continue, that number could accelerate to as much as two inches per year by 2025, explains Tim Dixon, professor of geophysics at the University of Miami Rosenstiel School of Marine and Atmospheric Science (RSMAS) and principal investigator of the study."It's been known for several years that climate change is contributing to the melting of Greenland's ice sheet," Dixon says. "What's surprising, and a bit worrisome, is that the ice is melting so fast that we can actually see the land uplift in response," he says. "Even more surprising, the rise seems to be accelerating, implying that melting is accelerating."

Greenland Rising Rapidly as Ice Melts - The ice is melting so fast in Greenland that the giant island is rising noticeably as the weight is lifted. In some spots, the land is rising 1 inch per year. A vast ice cap covers much of Greenland, in some places up to 1.2 miles (2 km) thick. The ice, in place for eons, presses down the land, making the elevation at any given point lower than it would be sans ice. Scientists have documented on Greenland and elsewhere that when longstanding ice melts away, the land rebounds. Even the European Alps are rising as glaciers melt. Now, scientists at the University of Miami say Greenland's ice is melting so quickly that the land underneath is rising at an accelerated pace. Some coastal areas are going up by nearly 1 inch per year, the scientists announced today. If current trends continue, that could accelerate to as much as 2 inches per year by 2025,

NY Times, WSJ, and Washington Post all rejected op-ed/letter from 255 National Academy of Sciences members defending climate science integrity - MSM largely ignored it, but unintentionally clever ploy by Science with polar bear artwork got the anti-science crowd to read it -Last week, I wrote about the remarkable letter in Science supporting the accuracy of climate science, signed by 255 National Academy of Sciences members, including 11 Nobel laureates. The insufficiently-covered letter has been kept alive as a story for two reasons.  First, the editors at Science ran the letter with a ‘photoshopped’ ‘collage’ (see above).  Second, we learned that the authors first tried to get some of the newspapers that have been publishing dubious attacks on climate scientists to publish the piece as an op-ed, but were rejected.

Unprecedented Warming in East Africa's Lake Tanganyika; Lake's surface waters are warmest in 1,500 years - Lake Tanganyika, the second-oldest and second-deepest lake in the world, could be in for some rough waters.Geologists have determined that the East African rift lake has experienced unprecedented warming during the last century; its surface waters are the warmest on record. That finding is important, the scientists state in this week's on-line issue of the journal Nature Geoscience, because the warm surface waters likely will affect fish stocks upon which millions of people in the region depend. "This result is in addition to those from other African lakes showing that changes in regional climate have a significant impact on the lakes, and on the human populations that depend on the lakes' resources,"

NOAA: Warmest April Global Temperature on Record -That's the title from today's top entry on the NOAA website. And if that's not interesting enough, the subtitle reads: "Also Warmest January-April"The combined global land and ocean surface temperature was the warmest on record for both April and for the period from January-April, according to NOAA. Additionally, last month's average ocean surface temperature was the warmest on record for any April, and the global land surface temperature was the third warmest on record. The monthly analysis from NOAA's National Climatic Data Center, which is based on records going back to 1880, is part of the suite of climate services that NOAA provides government, business and community leaders so they can make informed decisions. Here's a summary graph

NASA: Easily the hottest April — and hottest Jan-April — in temperature record - Plus a new record 12-month global temperature, as predicted -It was the hottest April on record in the NASA dataset.  More significantly, following fast on the heels of the hottest March and hottest Jan-Feb-March on record, it’s also the hottest Jan-Feb-March-April on record [click on figure to enlarge]. The record temperatures we’re seeing now are especially impressive because we’ve been in “the deepest solar minimum in nearly a century.” It now appears to be over. It’s just hard to stop the march of manmade global warming, well, other than by reducing greenhouse gas emissions, that is.Most significantly, NASA’s March prediction has come true:  “It is nearly certain that a new record 12-month global temperature will be set in 2010.″Software engineer (and former machinist mate in the US Navy) Timothy Chase put together a spreadsheet using the data from NASA’s Goddard Institute for Space Studies (click here).  In NASA’s dataset, the 12-month running average temperature record was actually just barely set in March — and then easily set in April.

Arctic Team Reports Unusual Conditions Near Pole - Expedition leader Ann Daniels said the ice drifted so much that they eventually covered 500 nautical miles (576 miles) rather than the 268 nautical miles initially envisaged.One possible reason for the rapid drift was a lack of ice, she suggested. Satellite imagery reveals rapidly melting ice sheets in the Arctic, a region which is heating up three times more quickly than the rest of the Earth.The first day the team was dropped off the ice moved so quickly to the south that it took the trio 10 days to make it back to their starting point. "None of us had ever experienced that amount of southerly drift on our previous expeditions, and it continued for such a long period of time. We kept expecting it to stop, we began to pray it would stop,"

Joe Romm: Arctic poised to see record low sea ice volume in 2010 - The big Arctic news remains the staggering decline in multiyear ice — and hence ice volume.  If we get near the Arctic’s sea ice area (or extent) seen in recent years this summer, then this may well mean record low ice volume — the fourth straight year of low volume.  And the latest extent data from the National Snow and Ice Data Center suggests we will. Trends in multi-year ice — ice volume — are what matter most in terms of the long-term survivability of the Arctic ice in the summer (see New study supports finding that “the amount of [multi-year] sea ice in the northern hemisphere was the lowest on record in 2009″).  As we’ll see, even when the ice was supposedly recovering in area 2008 and 2009, it was still rapidly shedding the thickest ice — ice older than 2 years.

Arctic double stunner: Sea ice extent is now below 2007 levels, while volume hit record low for March - Summer poised to set new record - Because they and the media — and even some scientists who don’t follow the subject closely — tend to take a two-dimensional view of the Arctic, they along with much of the public have been fooled into thinking the Arctic “recovered” in the past two years because sea ice extent appeared to recover.  Heck, some even claimed last month the Arctic ice was “recovering” to the 1979-2000 average.Climate Progress readers have long understood that trends in multi-year ice — ice volume — are what matter most in terms of the long-term survivability of the Arctic ice in the summer (see New study supports finding that “the amount of [multi-year] sea ice in the northern hemisphere was the lowest on record in 2009″).CP readers have also understood that Arctic volume did not recover in the last two years.  Quite the reverse — we appear to have been breaking volume records over the past several months according to the Polar Science Center: Total Arctic Ice Volume for March 2010 is 20,300 km^3, the lowest over the 1979-2009 period and 38% below the 1979 maximum. September Ice Volume was lowest in 2009 at 5,800 km^3 or 67% below its 1979 maximum.

Plant study dims silver lining to global warming - So much for a hoped-for bright spot to global warming. Some biologists had theorized earlier that rising greenhouse gas levels would encourage plant growth over the long term because of the increased amount of carbon dioxide in the atmosphere. But plant physiologists from UC Davis may have dashed those hopes. They've shown that too much carbon dioxide, which plants need for energy, actually can inhibit a plant's ability to assimilate nitrates — nitrogen-based nutrients pulled from the soil that plants use to make enzymes and other essential proteins.

Global warming: The final century powered by fossil fuels… There is no doubt that the 21st Century will be the last century powered by fossil fuels. The vigorous debate going on right now is whether the transition will occur at a rapid or leisurely pace--but there's no doubt that it will happen within the lifetimes of many of you who read these words.It won't really be worries about peak oil, peak coal or peak uranium that sets the pace for the conversion that is coming. There is no shortage of fossil fuels lying around--it just depends on the price we're willing to pay. Nor is it, pace those most alarmed by it, going to be global warming that drives the move. Getting 295 countries to agree a strategy that will help some, harm others and give competitive advantage to a few is just too herculean a task. It won't even be naked political desire for energy independence--in a globalized world with fungible fuels, it really is about as important as a desire to be avocado independent. There are now too many sources of supply for bottlenecks to pop up, or to be erected by OPEC.

Energy conservation “nudges” and ideology in the US - VoxEU -How should households be encouraged to reduce electricity consumption? This column presents evidence from the US of a randomised “nudging” strategy – providing energy saving tips as well as information on electricity usage relative to neighbours. It finds that while energy conservation nudges work with liberals, they backfire with conservatives. Certain pockets of Republican registered voters actually increased their electricity consumption in reaction to the nudge.

Gates funds cloud whitening experiments: Global Ban Demanded…As huge cloud-whitening experiment goes public, global coalition urges an immediate halt to geoengineering. Amidst revelations in this weekend’s London Times newspaper[1] that a team of scientists and engineers funded by billionaire Bill Gates are planning to carry out a 10,000 square kilometer field trial of controversial “cloud-whitening” technology, over one hundred civil society groups are urging governments meeting on biological diversity in Nairobi to stop risky geoengineering experiments now. Geoengineering refers to large-scale technological schemes to intentionally alter the planet’s systems as a quick fix for climate change.

'Saving species more urgent than climate change' - The economic case for global action to stop the destruction of the natural world is even more powerful than the argument for tackling climate change, a major report for the United Nations will declare this summer.The Stern report on climate change, which was prepared for the UK Treasury and published in 2007, famously claimed that the cost of limiting climate change would be around 1%-2% of annual global wealth, but the longer-term economic benefits would be 5-20 times that figure.The UN's biodiversity report – dubbed the Stern for Nature – is expected to say that the value of saving "natural goods and services", such as pollination, medicines, fertile soils, clean air and water, will be even higher – between 10 and 100 times the cost of saving the habitats and species which provide them.

HP says 10,000 cows can power 1,000 servers - Reducing energy consumption in data centers, particularly with the prospect of a federal carbon tax, is pushing vendors to explore an ever-growing range of ideas. HP engineers say that biogas may, excuse this, offer a fresh alternative energy approach for IT managers. Researchers at Hewlett Packard Co.'s HP Labs presented a paper (download PDF) on using cow manure from dairy farms and cattle feedlots and other "digested farm waste" to generate electricity to an American Society of Mechanical Engineers conference held this week. In the paper, the research team calculates that "a hypothetical farm of 10,000 dairy cows" could power a 1 MW data center -- or on the order of 1,000 servers.

Cheese-Powered Fuel Cells: The Whey To Greener Electricity -The Economist - IT MAY seem ridiculous, but in the hunt for sources of alternative energy researchers have come up with fuel cells which are powered by cheese—or at least whey, a by-product in cheese making. Whey is rich in lactose, a sugar which Georgia Antonopoulou, a biochemical engineer at the University of Patras, Greece, says can be consumed by cultures of bacteria contained within a fuel cell to generate an electric current. Microbial fuel cells, as such devices are known, are not a new idea but they are attracting more attention.The organic content of whey can pose an environmental hazard and many governments now impose strict regulations requiring factories to pay for its treatment before disposal. Whey constitutes about 70% of the volume of the milk used to make cheese. So, just one small feta facility will need to dispose of as much as 4,000 tonnes of whey in a single year, says Dr Antonopoulou. Microbial fuel cells could help, and not just in the cheese-making industry. Breweries, pig farms, food-processing plants and even sewage works could gain from the technology.

Miniature Nuclear Plants Seek Approval to Work in U.S (Bloomberg) -- Manufacturers of refrigerator-sized nuclear reactors will seek approval from U.S. authorities within a year to help supply the world’s growing electricity demand.John Deal, chief executive officer of Hyperion Power Generation Inc., intends to apply for a license “within a year” for plants that would power a small factory or town too remote for traditional utility grid connections.The Santa Fe, New Mexico-based company and Japan’s Toshiba Corp. are vying for a head start over reactor makers General Electric Co. and Areva SA in downsizing nuclear technology and aim to submit license applications in the next year to U.S. regulators. They’re seeking to tap a market that has generated about $135 billion in pending orders for large nuclear plants.

GM cleanup would exceed $800 million - The Obama administration Tuesday proposed a trust fund of more than $800 million to pay for the cleanup of closed General Motors sites in 14 states. President Obama, speaking in Youngstown, Ohio, which is near a GM assembly plant, called the trust a "landmark agreement to help dozens of communities like Youngstown revitalize and redevelop old, shuttered GM facilities, preparing them for new industries, new jobs and new opportunity." The cleanup plan will help raze or rehabilitate dozens of vacant factories and offices left barren by GM's government-led bankruptcy last year. Montgomery announced the cleanup at a conference on the future of automotive communities affected by the industry's downsizing

Can Real Estate Practices Prevent Oil Spills? -At the very least, this disaster provides a common reference point for corporate America to discuss sustainability.  What can be done to prevent such a disaster from happening again? Is there anything we can do to help?  What will the future bring?  The simple fact is that real estate has a major impact on our energy policy and our environment.  The United States Green Building Council tracks some handy statistics you can use when connecting the dots: In the United States alone, buildings account for:

• •    72% of electricity consumption,
• •    39% of energy use,
• •    38% of all carbon dioxide (CO2) emissions,
• •    40% of raw materials use,
• •    30% of waste output (136 million tons annually), and
• •    14% of potable water consumption.

NPR: Is The Planet Facing A Mass Extinction? - Plants and animals must adapt or go extinct as the climate changes. Paul Raeburn and guests talk about new research on populations of frogs and lizards, and discuss ways that conservation strategies may have to change as habitats shift towards the poles or creep up mountain slopes. Listen to the Story (45 min)

Gates Foundation Suggests Sterilizing Males with Ultrasound- Among the 78 research projects to receive $100,000 grants from the Bill & Melinda Gates Foundation earlier this week as part of the Grand Challenges in Global Health initiative, is an effort by researchers at the University of North Carolina, Chapel Hill, to develop a non-invasive, reversible form of birth control for men — using ultrasound. Based on preliminary trials in rats, researchers James Tsuruta and Paul Dayton hope to develop a technique that would render men temporarily infertile for up to six months after one or two ultrasound exposures.The project is one of 10 to receive grants toward the goal of creating new technologies for contraception.

The Perfect Storm: Six Trends Converging on Collapse - HuffPo - There are dark clouds gathering on the horizon. They are the clouds of six hugely troubling global trends, climate change being just one of the six. Individually, each of these trends is a potential civilization buster. Collectively, they are converging to form the perfect storm--a storm of such magnitude that it will dwarf anything that mankind has ever seen. If we are unsuccessful in our attempts to calm this storm, without a doubt it will destroy life as we know it on Planet Earth! There is a popular saying that "the definition of insanity is doing the same thing over and over again, and expecting a different result." If we keep doing business in the same way as we have for the past century, each of these six trends will continue their steep rates of decline, collapsing the natural systems that form the foundation for our civilization and the lifeblood of the global economy. Perhaps the current Gulf oil spill is the wake up call that mankind needs to snap us out of our complacency, realize that we are soiling our nest and that continuation of "business as usual" will destroy the world as we know it? Time will tell whether we heed this warning, go back sleep once the oil spill is contained, or simply tire of the endless media coverage, numb ourselves, and set these critical issues to the side.

As oil continues to gush into the Gulf, Mississippi offers $75 gas cards to tourists who come to the region. - Mississippi Gov. Haley Barbour (R) has been an outlier amongst Gulf Coast governors, downplaying the BP oil spill instead of working to mitigate the disaster and rethinking the wisdom of offshore drilling. He has claimed that this new spill “it isn’t anything like Exxon Valdez” and is encouraging visitors to “[c]ome on down here and play golf, enjoy the beach, catch a fish.” Now, Mississippi officials are encouraging tourists to use more oil, offering people gas cards if they come to the region:

Barack Obama sends nuclear experts to tackle BP’s Gulf of Mexico oil leak - The US has sent a team of nuclear physicists to help BP plug the "catastrophic" flow of oil into the Gulf of Mexico from its leaking Deepwater Horizon well, as the Obama administration becomes frustrated with the oil giant's inability to control the situation. The five-man team – which includes a man who helped develop the first hydrogen bomb in the 1950s – is the brainchild of Steven Chu, President Obama's Energy Secretary.  He has charged the men with finding solutions to stop the flow of oil.

Expert: Based on video, BP undersea volcano spewing 3 million gallons a day — two Exxon Valdezes a week - BP still channels Goldman Sachs: CEO says, "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." NPR’s Richard Harris has learned that much more oil, 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

Even Fewer Deepwater Horizon Inspections Than MMS Claimed Earlier -The federal agency responsible for ensuring that an oil rig in the Gulf of Mexico was operating safely before it exploded last month fell well short of its own policy that inspections be done at least once per month, an Associated Press investigation shows.Since January 2005, the federal Minerals Management Service conducted at least 16 fewer inspections aboard the Deepwater Horizon than it should have under the policy, a dramatic fall from the frequency of prior years….The inspection gaps and poor recordkeeping are the latest in a series of questions raised about the agency’s oversight of the offshore oil drilling industry…Earlier AP investigations have shown that the doomed rig was allowed to operate without safety documentation required by MMS regulations for the exact disaster scenario that occurred; that the cutoff valve which failed has repeatedly broken down at other wells in the years since regulators weakened testing requirements; and that regulation is so lax that some key safety aspects on rigs are decided almost entirely by the companies doing the work…..MMS officials offered a changing series of numbers….Even using the more favorable numbers for the most recent 64 months, 25 percent of monthly inspections were not performed.

Giant Plumes of Oil Found Under Gulf of Mexico - NYTimes -“There’s a shocking amount of oil in the deep water, relative to what you see in the surface water,” said Samantha Joye, a researcher at the University of Georgia who is involved in one of the first scientific missions to gather details about what is happening in the gulf. “There’s a tremendous amount of oil in multiple layers, three or four or five layers deep in the water column.” The plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes. Dr. Joye said the oxygen had already dropped 30 percent near some of the plumes in the month that the broken oil well had been flowing. “If you keep those kinds of rates up, you could draw the oxygen down to very low levels that are dangerous to animals in a couple of months,” she said Saturday. “That is alarming.”  The plumes were discovered by scientists from several universities working aboard the research vessel Pelican, which sailed from Cocodrie, La., on May 3 and has gathered extensive samples and information about the disaster in the gulf.

Oil spill could go on for years, experts say - The retired chairman of an energy investment banking firm told National Geographic in little-noticed comments Thursday that efforts to stop the oil leak under the Gulf of Mexico could prove fruitless and than oil could gush into the ocean for years.Matthew Simmons, retired chair of the energy-industry investment bank Simmons & Company, said that BP and the US military's engineers are more or less clueless about cutting off the flow."We don't have any idea how to stop this," Simmons said. The former banker mocked a proposal to try and plug the leak with trash, saying it was a "joke." Incoming American Association of Petroleum Geologists chief David Resink says the oil reservoir that is feeding the spill is colossal. "You're talking about a reservoir that could have tens of millions of barrels in it," Resink said. At the current spill rate, it "would take years to deplete," he added

Gulf Oil Leaks Could Gush for Years - Yesterday a smaller dome was laid on the seafloor near the faulty well, and officials will attempt to install the structure later this week. But such recovery operations have never been done before in the extreme deep-sea environment around the wellhead, noted Matthew Simmons, retired chair of the energy-industry investment banking firm Simmons & Company International. For instance, at the depth of the gushing wellhead—5,000 feet (about 1,500 meters)—containment technologies have to withstand pressures of up to 40,000 pounds per square inch (about 28.1 million kilograms per square meter), he said.Also, slant drilling—a technique used to relieve pressure near the leak—is difficult at these depths, because the relief well has to tap into the original pipe, a tiny target at about 7 inches (18 centimeters) wide, Simmons noted."We don't have any idea how to stop this," "We really are in unprecedented waters."

Gulf Oil Spill: Lessons From Alaska - With every passing day, questions go unanswered, the oil well goes uncapped, and the future becomes more uncertain for families and fishermen whose livelihoods depend on the Gulf.But for a fisherman watching from more than 3,000 miles away, the story seems all too familiar. Speaking on a cell phone from his fishing boat in Cordova, Alaska, John Platt, 49, said with every TV newscast, the spill sounds more like what happened off his own coast 21 years ago. "It's a total replay. I've heard BP say, 'Tell us your legitimate claim and we'll make it right,' " Platt said. "It's almost exactly what Exxon said to us."

BP to re-attempt seal of Gulf of Mexico oil spill - BP is poised to make a second attempt to thread a mile-long tube down a gushing oil well in its latest effort to tackle the disastrous Gulf of Mexico spill. The British company earlier hit problems as engineers tried to direct the skinny tube with robotic submersibles operating 5,000 ft below the surface. Doug Suttles, BP's chief operating officer, said that the device was brought back to a ship for re-adjustments but that a second attempt to insert it, in order to siphon off crude, would be made later on SaturdayBP is poised to make a second attempt to thread a mile-long tube down a gushing oil well in its latest effort to tackle the disastrous Gulf of Mexico spill

Some Success in Removing Leaking Gulf Oil - WSJ -BP PLC successfully inserted a tube into the broken pipe leaking oil into the Gulf of Mexico early Sunday, a person close to the containment operation said, increasing the chances that the company will be able to siphon off much of the oil now gushing into the sea.The tube is designed to capture a large part of the oil spewing from the pipe and direct it securely to a ship on the surface.Earlier efforts to contain the spill ran into a series of setbacks. BP made a first attempt to insert the tube late Saturday, but it fell out following a collision between two subsea robots. Before that, a huge dome that was to be lowered onto the leak got clogged up with gas crystals or hydrates.It's still unclear whether the new siphoning operation will work. Even in the best-case scenario, the tube won't capture all the leaking oil.

BP Reports Some Success in Capturing Leaking Oil - After two false starts, engineers successfully inserted a narrow tube into the damaged pipe from which most of the oil is leaking. “It’s working as planned,” Kent Wells, a senior executive vice president of BP, said at a briefing in Houston on Sunday afternoon. “So we do have oil and gas coming to the ship now, we do have a flare burning off the gas, and we have the oil that’s coming to the ship going to our surge tank.” Mr. Wells said he could not yet say how much oil had been captured or what percentage of the oil leaking from a 21-inch riser pipe was now flowing into the 4-inch-wide insertion tube. “We want to slowly optimize it to try to capture as much of the oil and gas as we can without taking in a large amount of seawater,” he said.

BP Says Tube Is Diverting Some Oil From Gulf Well : NPR - BP officials said Sunday that a new mile-long tube is diverting some oil from the Deepwater Horizon well at the bottom of the Gulf of Mexico. It's the first time in more than three weeks that any of the company's strategies have worked to slow the flow. Millions of gallons of crude are already in the water, however, and researchers said the black ooze may have entered a major current that could carry it through the Florida Keys and around to the East Coast. BP engineers remotely guiding robot submersibles had worked since Friday to place the tube into a 21-inch pipe nearly a mile below the sea. After several setbacks, the contraption was hooked up successfully and funneling oil to a tanker ship. Kent Wells, BP's senior vice president for exploration and production, said during a news conference that the amount being drawn was gradually increasing, and it would take several days to measure

Worry that Gulf oil spreading into major current - Oil company engineers on Sunday finally succeeded in keeping some of the oil gushing from a blown well out of the Gulf of Mexico, hooking up a mile-long tube to funnel the crude into a tanker ship after more than three weeks of failures.Millions of gallons of crude are already in the water, however, and researchers said the black ooze may have entered a major current that could carry it through the Florida Keys and around to the East Coast.BP PLC engineers remotely guiding robot submersibles had worked since Friday to place the tube into a 21-inch pipe nearly a mile below the sea. After several setbacks, the contraption was hooked up successfully and funneling oil to a tanker ship. The oil giant said it will take days to figure out how much oil its contraption is sucking up..

Feds: BP’s mile-long oil tube ‘not a solution to the problem’ - BP has succeeded in capturing "some" oil and gas by inserting a mile-long tube into the main Gulf of Mexico leak, but would not say if it was a significant percentage of the gusher or just a dribble. Despite the uncertainty, it was still the first tangible sign of success in more than three weeks of efforts to prevent at least 210,000 gallons of oil from spewing unabated into the sea each day and feeding a massive slick off the coast of Louisiana.BP senior executive vice president Kent Wells refused to be drawn on quantity Sunday, but confirmed that after a temporary hitch in which the tube became dislodged overnight, siphoning operations were up and running once again."We will look to... capture as much of the oil as we can," he told reporters in Houston, Texas. "At this point, we don't know what percentage we will capture" by the process, in which the oil was sucked up as if through a straw to the giant ship. A BP statement said simply that the four-inch (10-centimeter) diameter tube inserted into the 21-inch leaking pipe using undersea robots had captured "some amounts of oil and gas."

Disaster Plans Lacking at Deep Rigs Wall - A huge jolt convulsed an oil rig in the Gulf of Mexico. The pipe down to the well on the ocean floor, more than a mile below, snapped in two. Workers battled a toxic spill.That was 2003—seven years before last month's Deepwater Horizon disaster, which killed 11 people and sent crude spewing into the sea. And in 2004, managers of BP PLC, the oil giant involved in both incidents, warned in a trade journal that the company wasn't prepared for the long-term, round-the-clock task of dealing with a deep-sea spill.It still isn't, as Deepwater Horizon demonstrates and as BP's chief executive, Tony Hayward said recently. It's "probably true" that BP didn't do enough planning in advance of the disaster, Mr. Hayward said. There are some capabilities, he said, "that we could have available to deploy instantly, rather than creating as we go." Without adequately planning for trouble, the oil business has focused on developing experimental equipment and techniques to drill in ever deeper waters, according to a Wall Street Journal examination of previous deepwater accidents. As drillers pushed the boundaries, regulators didn't always mandate preparation for disaster recovery or perform independent monitoring.

BP says it inserts pipe into leaking Gulf well – BP PLC said Monday a four-inch pipe inserted into the gushing pipe on the floor of the Gulf of Mexico is drawing about 1,000 barrels of oil a day from the leak, leaving the spill mostly uncontained for now. "Other containment options continue to be progressed," BP said, adding that deployment could take place "in the next week or so." Among other things, plans continue for a so-called "top kill" operation, in which heavy drilling fluids are injected into the well to stem the flow of oil and gas, followed by cement to seal the well. BP also continues to work on drilling a relief well, which began on May 2; a second was begun on May 16. Each of wells will to take about three months.  The oil major said 650 vessels are involved in the cleanup effort, including skimmers, tugs, barges and recovery vessels.

US says BP move to curb oil leak ‘no solution’ -The success of a move by oil giant BP to curb a leak in the Gulf of Mexico is "not clear" and the technique provides "no solution", the US has said. It was responding to BP's move to siphon oil from the leaking well head to a tanker on the surface. A government statement said it would not rest until the leak was permanently sealed and the spill cleaned up. BP executive Kent Wells earlier said that the siphoning process was "working extremely well". This was the third attempt it had made to insert a long narrow tube into the leaking pipe, using underwater robots. It is thought that BP's 6in-wide (15cm) tube and stopper could capture more than three-quarters of the leak, although a smaller spill nearby also has to be contained.

BP reduces oil leak as scientists find plumes of crude - The oil giant BP declared success in reducing the Gulf of Mexico oil leak last night, allowing it to siphon some of the flow into floating tankers after a delicate seabed operation. Nearly four weeks after an explosion aboard the Deepwater Horizon drilling rig, technicians used underwater robots to insert a 4in pipe into the broken riser — leading out of the well a mile underwater — partially sealing the spill and diverting the oil to the surface. A statement issued by the Deepwater Horizon Joint Information Centre said: “While not collecting all of the leaking oil, this tool is an important step in reducing the amount of oil being released into Gulf waters.” In findings described as “significant and alarming” it emerged that giant columns of spilt oil were hidden below the sea’s surface, providing more evidence to challenge BP’s claims that it had succeeded in minimising the environmental impact from the disaster. While government monitoring has relied largely on aerial monitoring of the surface slick, scientists from the National Institute for Undersea Science and Technology — based on a research vessel in the thick of the spill — have found vast plumes below the water. One measures ten miles long, three miles wide and up to 300ft thick.

BP Capturing About One-Fifth of Oil Leaking in Gulf (Bloomberg) -- BP Plc said it is capturing 1,000 barrels of oil a day from a mile-long pipeline connected to its leaking well in the Gulf of Mexico, about a fifth of the estimated flow rate. “We’ll be ramping this thing up over the next 24 hours,” Doug Suttles, BP’s chief operating officer for exploration and production, said on NBC’s “Today” show. “We can actually get 5,000 barrels a day up that pipe if we can capture it and keep the water out,” he said. The well is leaking at an estimated rate of 5,000 barrels a day, according to BP, the U.S. Coast Guard and the National Oceanic and Atmospheric Administration. That estimate was challenged May 14 by U.S. Representative Edward Markey, a Massachusetts Democrat, citing analysis by independent researchers that it may be more than 10 times higher.

BP Stands for Bad Petroleum - Robert Reich -Saturday the White House warned BP that it expects the oil giant to pay all damages associated with the disastrous oil leak into the Gulf of Mexico, even if the costs exceed the $75 million liability cap under federal law. BP responded Sunday saying its public statements are “absolutely consistent” with the Administration’s request.When you hear dueling public statements like these, watch your wallets. You can safely assume BP’s lawyers are already at work to ensure that the firm pays not a cent more than $75 million — not to taxpayers bearing cleanup costs, not to consumers whose gas bills will rise, not to businesses along the coasts that will lose a fortune. And BP won’t pay more unless or until there’s a law requiring it to. BP has been making public statements about its supposed corporate social responsibility for as many years as it’s behaved irresponsibly. It’s the poster child for PR masquerading as CSR.

What spill? Rig owner approves $1 billion dividend to stockholders - Five days after appearing before Congress to testify about its responsibility in one of the worst oil spills in US history, the Swiss company that owned and operated the oil rig that sunk into the Gulf of Mexico announced that it would shell out $1 billion in dividends to shareholders.The revelation that Transocean is distributing a $1 billion profit to shareholders as one of its drill sites leaks millions of gallons of oil into the sea is sure to inflame an already smarting debate over offshore drilling and the company's role.Transocean has passionately argued that they don't share financial responsibility for the disaster. A clause in a contract they had with BP says that the oil company is obligated to pay for any environmental damage, even though Transocean actually owned the rig. BP was leasing the rig from Transocean at the time of the accident.Transocean's distribution to shareholders was done quietly on Friday at a "closed door meeting."

Judge H. Lee Sarokin: Why Should There Be Any Liability Limitation for Oil Spills? - I did not think that Congress could do anything more craven than granting immunity to gun manufacturers for certain types of lawsuits. With all of the persons, companies and institutions engaged in curing illness and saving lives, Congress chose (out of the myriad entities which contribute to the well-being of our country) to immunize an industry that manufactures a product that kills people. But now along comes the revelation that the Oil Pollution Act of 1990 granted a liability limitation of 75 million dollars to the oil industry for spills by offshore facilities.The statute talks in terms of $75 million per spill "plus removal costs." I did some preliminary research as to what was included in the limitation, but I remain uncertain as to what is or is not covered, and frankly, I don't care. A bill to increase the limit from $75 million to $10 billion was defeated. My question is: Why should there be any limit?

Worry that Gulf oil spreading into major current - Oil company engineers on Sunday finally succeeded in keeping some of the oil gushing from a blown well out of the Gulf of Mexico, hooking up a mile-long tube to funnel the crude into a tanker ship after more than three weeks of failures.Millions of gallons of crude are already in the water, however, and researchers said the black ooze may have entered a major current that could carry it through the Florida Keys and around to the East Coast.BP PLC engineers remotely guiding robot submersibles had worked since Friday to place the tube into a 21-inch pipe nearly a mile below the sea. After several setbacks, the contraption was hooked up successfully and funneling oil to a tanker ship. The oil giant said it will take days to figure out how much oil its contraption is sucking up..

Safety Fluid Was Removed Before Rig Exploded- The investigation into what went wrong when the Deepwater Horizon exploded April 20 and started spilling millions of gallons of oil into the Gulf of Mexico is sure to find several engineering failures, from cement seals that didn't hold back a powerful gas bubble to a 450-ton, 40-foot-tall blowout preventer, a stack of metal valves and pistons that each failed to close off the well.There was, however, a simpler protection against the disaster: mud. An attorney representing a witness says oil giant BP and the owner of the drilling platform, Switzerland-based Transocean Ltd., started to remove a mud barrier before a final cement plug was installed, a move industry experts say weakens control of the well in an emergency.When the explosion occurred, BP was attempting to seal off an exploratory well. The company had succeeded in tapping into a reservoir of oil, and it was capping the well so it could leave and set up more permanent operations to extract its riches.In order to properly cap a well, drillers rely on three lines of defense to protect themselves from an explosive blowout

Air Tests from Louisiana Coast Reveal Human Health Threats - Today the Louisiana Environmental Action Network released its analysis of air monitoring test results by the Environmental Protection Agency. The EPA's air testing data comes from Venice, a coastal community 75 miles south of New Orleans in Louisiana's Plaquemines Parish.The findings show that levels of airborne chemicals have far exceeded state standards and what's considered safe for human exposure.For instance, hydrogen sulfide has been detected at concentrations more than 100 times greater than the level known to cause physical reactions in people. Among the health effects of hydrogen sulfide exposure are eye and respiratory irritation as well as nausea, dizziness, confusion and headache.The concentration threshold for people to experience physical symptoms from hydrogen sulfide is about 5 to 10 parts per billion. But as recently as last Thursday, the EPA measured levels at 1,000 ppb. The highest levels of airborne hydrogen sulfide measured so far were on May 3, at 1,192 ppb.Testing data also shows levels of volatile organic chemicals that far exceed Louisiana's own ambient air standards.

Violent hurricanes could hamper oil clean-up - Meteorologists in the United States are warning of an unusually active hurricane season this summer, stirring concerns that just one severe tempest at sea early on could cripple ongoing operations by BP and the US government to plug the crippled oil well in the Gulf of Mexico and contain the already giant spill. "All efforts on the shoreline and at sea, the booms and structures and rigs involved in clean-up and containment could stop working," said Ian MacDonald, a professor of oceanography at Florida State University. "If a storm comes into this situation it could vastly complicate everything."

BP's bumbling CEO is making the Gulf oil-spill disaster worse -For CEOs in crisis, the playbook includes a proper appreciation of the gravity of the situation, a sense of calm urgency, and confidence-building rhetoric backed by confidence-building action. So far, Hayward is zero for three. From the outset, there's been a sense that Hayward wasn't quite prepared for this and didn't quite grasp what is at stake. The Wall Street Journal reported that Hayward "admitted that the oil giant had not the technology available to stop the leak. He also said in hindsight, it was 'probably true' that BP should have done more to prepare for such an emergency."As the spill worsened, Hayward fretted that he and BP were its victims. "What they hell have we done to deserve this?" he reportedly told fellow executives. Of course, Hayward isn't the victim here. The sea life, the sea itself, the employees who died, the fishermen who are losing their livelihoods, the tourism industry, responsible drillers—they're the victims. Hayward should have been asking himself: What they hell did they do to deserve this? And what am I going to do fix it?

Pictures at a Catastrophe - The more worrisome picture is below. (graph) It depicts the cumulative spill, using the initial estimate, and the more recent estimates based on analyses of the footage of the leaks.The implications of the higher rates are obvious, but to be explicit, here are some threshold dates. Under the original estimate, the Exxon Valdez spill at 250,000 barrels is exceeded on 6/8; under the Wereley midpoint estimate, it was exceeded between 4/22 and 4/23.The biggest Gulf of Mexico event, the 1979 Ixtoc-1 spill (3.5 million barrels), will be exceeded on 6/8 using Wereley estimates. Eugene Chiang (Berkeley) provides an estimate between 20 thousand and 100 thousand barrels per day; the high estimate implies the Ixtoc-1 threshold will be breached within about a week -- on 5/24.The implications of these differing estimates are potentially enormous.

Louisiana oil spill: toxic chemical fear over BP's clean-up efforts - Scientists have raised urgent new concerns over the latest efforts to mitigate the catastrophic oil spill in the Gulf of Mexico caused by the oil rig explosion on BP's Deepwater Horizon. Latest efforts to limit the environmental damage involve an untried deep-water technique, using a toxic dispersant that they believe may damage ocean life. But the new method has so far only succeeded in ratcheting up the growing controversy surrounding the spill.Approval by the US Environment Protection Agency (EPA) for the pumping of tens of thousands of litres of the chemical Corexit 9500 deep on to the seabed early yesterday comes despite warnings from Louisiana state health officials, scientists and fishermen that the technique is untested and potentially hazardous to marine life and the wider ecosystem. Louisiana officials claim BP and the EPA ignored their concerns about how the chemicals may harm the sea floor.

Submerged oil plumes suggest gulf spill is worse than BP claims - Ocean scientists in the Gulf of Mexico have found giant plumes of oil coagulating at up to 1,300 metres below the surface, raising fears that the BP oil spill may be larger than thought – and that it might create huge "dead zones".Members of the National Institute for Undersea Science and Technology have been traversing the area around the scene of the Deepwater Horizon, the rig that exploded and sank on 20 April.Using the latest sampling techniques, they have identified plumes up to 20 miles away from the Deepwater Horizon well head that continues to spew oil into the water at a rate of at least 790,000 litres a day. The largest plume found so far was 90 metres thick, three miles wide and 10 miles long.

BP hopes to siphon up to half of oil in Gulf (AP) -- BP said Monday it hopes to siphon as much as half of the oil leaking into the Gulf of Mexico and is getting ready to shoot mud into a blown-out well later this week to try and stop all of it.\Meanwhile, scientists said they were concerned about the ooze reaching a major ocean current that could carry it through the Florida Keys.BP PLC chief operating officer Doug Suttles said at a press conference that the company will never again try to produce oil from the well, though BP did not rule out drilling elsewhere in the reservoir."The right thing to do is permanently plug this well, and that's what we will do," Suttles said.BP's mile-long tube is funneling a little more than 42,000 gallons of crude a day from the well into a tanker ship.

BP prepares for ‘top kill' to plug well - A relief well aimed at intercepting the bottom of the leaking one in order to flood it with cement is about halfway complete, and drilling began Sunday on a second relief well. The well taps a formation more than two miles below the wellhead.The relief wells will take at least another couple of months, and in the meantime BP likely will try to shut down the well completely late this week using a technique called “top kill,” BP Chief Operating Officer Doug Suttles said at a news conference Monday.The process involves pumping heavy drilling fluids through two 3-inch lines into the blowout preventer that sits on top of the Macondo wellhead a mile underwater. This would first restrict the flow of oil from the well, which then could be sealed permanently with cement.

Oil Arrives on Louisiana Shore - WSJ - Louisiana officials reported the landfall of thick pockets of brownish oil in several parts of the state's fragile coastline, a moment they've been dreading since a blast aboard Transocean Ltd.'s Deepwater Horizon drilling rig unleashed a massive spill in the Gulf of Mexico last month. The marshes, which teem with wildlife, help keep erosion at bay, and if they're damaged by the crude, officials fear that even more of Louisiana's rapidly disappearing coastline would melt away into the Gulf. The arrival of tides bearing crude, one month after the spill began, underscores the heavy and unprecedented environmental toll the Deepwater Horizon incident could have in a region that has long been familiar with oil and gas production. The Macondo deepwater well, which Transocean was drilling for London-based BP, is still gushing crude into the Gulf at an estimated rate of 5,000 barrels a day

Heavy oil hits Louisiana shore (Reuters) - The first heavy oil from a giant Gulf of Mexico spill sloshed ashore in fragile Louisiana marshlands on Wednesday and part of the mess entered a powerful current that could carry it to Florida and beyond.The developments underscored the gravity of the situation as British energy giant BP Plc raced to capture more crude gushing from a ruptured well a mile beneath the surface. The spill is threatening an ecological and economic disaster along the U.S. Gulf Coast and beyond. "This wasn't tar balls. This wasn't sheen," Louisiana Governor Bobby Jindal said after a boat tour to the southernmost point of the Mississippi River estuary. "This is heavy oil in our wetlands."

Louisiana fears oil onshore is just the start (Reuters) - The oil slick that has started sloshing through marsh grass at the southern tip of the Mississippi Delta gives coastal Louisiana a glimpse of what it fears may be its future. In the last few days, acres of oil have penetrated low-lying islands at the point where the river rolls into the sea, forming a dark red band at the bottom of the roseau cane.Thick black sludge blocks at least one inlet, and a much larger area off the coast glistens with a rainbow sheen dotted with oil globules, suggesting that more will reach land soon."This is what we hoped wouldn't happen but we knew would happen," said Andy Nyman, associate professor of wetland and wildlife ecology at Louisiana State University

Public beach in La. closed as oil washes up - GRAND ISLE, La. – Officials closed the public beach here Friday as thick gobs of oil resembling melted chocolate washed up, a very visible reminder of the blown-out well that has been spewing crude into the Gulf of Mexico for a month.Up to now, only tar balls and a light sheen had come ashore. But oil was starting to hit the beach at this island resort community in various forms — light sheens, orange-colored splotches and heavier brown sheets — said Chris Roberts, a local official who surveyed the area Friday morning."It's difficult to clean up when you haven't stopped the source," said Roberts, a councilman for Jefferson Parish, which stretches from the New Orleans metropolitan area to the coast. "You can scrape it off the beach but it's coming right back."

Heavy oil hits Louisiana shore, enters sea current (Reuters) - The first heavy oil from a giant Gulf of Mexico spill sloshed ashore in fragile Louisiana marshlands on Wednesday and part of the mess entered a powerful current that could carry it to Florida and beyond.The developments underscored the gravity of the situation as British energy giant BP (BP.L) Plc raced to capture more crude gushing from a ruptured well a mile (1.6 km) beneath the surface. The spill is threatening an ecological and economic disaster along the U.S. Gulf Coast and beyond."This wasn't tar balls. This wasn't sheen," Louisiana Governor Bobby Jindal said after a boat tour to the southernmost point of the Mississippi River estuary. "This is heavy oil in our wetlands."The marshes are the nurseries for shrimp, oysters, crabs and fish that make Louisiana the leading producer of commercial seafood in the continental United States and a top destination for recreational anglers. The United States has already imposed a large no-fishing zone in waters in the Gulf seen affected by the spill.

Oil's arrival in loop current has Fla. on edge…An outer edge of the massive Gulf of Mexico oil spill has reached a powerful current that could take it to Florida and beyond, according to government scientists. The National Oceanic and Atmospheric Administration said Wednesday that a small portion of the slick from the blown-out undersea well had entered the so-called loop current, a stream of faster moving water that circulates around the Gulf before bending around Florida and up the Atlantic coast. Its arrival may portend a wider environmental catastrophe affecting the Florida Keys and tourist-dotted beaches along that state's east coast.  Even farther south, U.S. officials were talking to Cuba about how to respond to the spill should it reach the island's northern coast, a U.S. State Department spokesman said.

Florida, Gulf States May Suffer From BP Oil Spill, Moody’s Says (Bloomberg) -- Florida and Gulf Coast cities in Louisiana, Mississippi and Alabama may see credit ratings cut because of the BP Plc oil spill if tourism falls and property values drop, Moody’s Investors Service said. The spill may have “severe” effects if it reaches coastal communities in Florida’s northwestern panhandle, since they rely on tourism and the state depends on sales taxes from the region, Moody’s analyst Edith Behr said today in a report.  “Cities, towns, school districts and counties will likely experience a decline in property-tax values, which will necessitate a reduction in services or an increase in other revenue to maintain current rating levels,” Behr said.  Lower ratings may raise borrowing costs for state and local governments in the region as investors in the $2.8 trillion municipal-bond market demand higher yields to compensate for increased risk.

Moody's warns oil spill impact on Florida could be worse than recession - A Moody's report released Tuesday on the potential impact of the oil spill on Florida warns it could hurt the state on a major scale."The state's high dependence on tourism dollars and jobs is significant and a gradually worsening disaster associated with any part of Florida's 1,197 coastline miles could likely have long-term implications even greater than the recent global recession or Hurricane Ivan in 2004," said Moody's Investor Service analyst and senior credit officer Edith Behr.In effect, the impact could simulate a double dip to the economy in a state already struggling more than most to emerge from one of the country's worst recessions.

If BP gave you $50 million, how would you spend it? - Florida, worried about the tourism economy, does it this way: The state’s Department of Tourism has tried to alleviate any public concern about the beaches by posting information about Florida’s destinations on its Web site in real time with beach Webcams, Twitter feeds and photos. Gov. Charlie Crist said he had secured $25 million from BP, which was leasing the oil well that exploded, to finance the tourism advertising campaign after an initial $25 million went to disaster preparation and response. Still, bookings to destinations on Florida’s West Coast declined around 15 percent in the three weeks after the spill, compared with the three weeks before the spill, said Katie Deines Fourcin, a spokeswoman for Expedia.com. She said the trend was slightly worse for the Panhandle region.

New BP Insertion Tube Isn't Working - (video) BP's new insertion tube inside the leaking oil pipe - unfortunately - isn't doing very much. Specifically, the Miami Herald points out that - according to the Coast Guard - the spill is getting worse in spite of the insertion tube: The massive Gulf of Mexico oil spill is growing despite British Petroleum's effort to siphon some of the spewing crude from its ruptured deepwater well, the U.S. Coast Guard official leading the cleanup warned Tuesday.BP doubled its estimate of the amount of crude being captured by a mile-long recovery tube to 2,000 barrels per day - but what percentage of the spill that is remains uncertain. Another video provided the first public view of a second leak much nearer the runaway well's failed blowout preventer spewing oil, too. A BP robot took that video on Saturday and Sunday. The Coast Guard commandant, Adm. Thad Allen, said that despite the siphoning, the spilled oil is spreading and now stretches from western Louisiana to Florida's Key West. The extent of the spill was straining even the substantial resources deployed for one of the worst ecological disasters in recent history, he said.

BBC - US oil spill 'enters Loop Current' with Florida at risk - The first oil from the Gulf of Mexico spill has entered an ocean current that could take it to Florida and up the east coast of the US, scientists say. A "small portion" of oil sheen is in the Loop Current, which circulates in the Gulf, the National Oceanic and Atmospheric Administration (NOAA) said. Diluted oil could appear in isolated parts of Florida if persistent winds pushed the current that way, it added. Satellite images released by the European Space Agency (ESA) depict a streak of oil stretching south from the main slick into the Loop Current - a body of fast-flowing water coming from the Caribbean which the agency says is likely to propel oil towards Florida within six days.

Gulf of Mexico oil slick from disastrous BP leak wading closer to East Coast - Oil from the catastrophic BP oil leak in the Gulf of Mexico may already be heading into the Atlantic and toward the lower East Coast."This can't be passed off as, 'It's not going to be a problem,'" said William Hogarth, dean of the University of South Florida's College of Marine Science.Computer models show the oil, which is gushing up from the sea floor at a stunning rate, is either already in the Gulf Stream, or just three miles away, he said.The powerful, warm current starts in the Gulf as the so-called Loop Current that flows out past the Florida Keys into the Atlantic Ocean, then shoots up the eastern seaboard past New Jersey and New York toward Newfoundland. Miami Marine scientist Ellen Prager said satellite imagery showed some of the oil is being pulled into the Loop Current about 400 miles from Key West.

Gulf Disaster - How Big is the Spill? - BP initially asserted that 1,000 barrels of oil per day (42,000 gallons) were gushing forth from the broken pipeline. The National Oceanic and Atmospheric Administration soon upped the estimate to 5,000 barrels per day (210,000 gallons). Then experts stated the gusher is more likely on the order of 25,000 barrels per day (1,050,000 gallons). Recently a scientific analysis of video of the spill source made available by BP showed that the true figure might be far higher — closer to 70,000 barrels a day. If the wellhead fails completely — which hasn’t happened yet — the spill rate could increase to 6.8 million gallons of oil per day. Even if the worst doesn’t happen, the BP disaster has already become the worst oil spill in U.S. history. On May 16, experts estimated that the spill had already disgorged nearly 30 million gallons of oil into the Gulf — nearly three times the amount spilled during the 1989 Exxon Valdez accident in Alaska.

Gulf recipe: shrimp, crawfish, oil - BBC - Although the restaurant, confusingly, is next to Highway 11, not on a dock, it is only a stone's throw from the Gulf of Mexico. Anthony's uncle and aunt opened the restaurant in New Orleans but moved it to this rather quieter rural location some years ago.  It's a family affair and they're all welcoming and huge fun, but in the wake of the Gulf oil disaster they can't help but be a little worried about the times ahead. They've been to a BP claims centre to see if the company will pay them any money, and they haven't yet heard back. BP have said they will pay all "legitimate" claims, but the case of Dockside shows how difficult that is to define.

Live (?) Video of the Oil Spill - Green Blog - On Wednesday, Representative Edward J. Markey of Massachusetts wrote a letter to Lamar McKay, chief executive of BP America, asking the company to make its real-time camera feed of the gulf oil spill publicly available.BP has complied, and the feed is up at the Web site of the Select Committee on Energy Independence and Global Warming, of which Mr. Markey, a Democrat,  is chairman.Now, the only problem is that the site’s servers are unable to handle the traffic. As of early this afternoon, the video was not viewable.“We’re working around the clock as we speak to fix this,” said Eben Burnham-Snyder, a spokesman for Mr. Markey. “The enormous demand for this video means that it’s now taxing the servers.”

More Than Just An Oil Spill - The vast, sprawling coastal marshes of Louisiana, where the Mississippi River drains into the gulf, are among the finest natural resources to be found anywhere in the world. And they are a positively crucial resource for America. Think shrimp estuaries and bird rookeries and oyster fishing grounds. These wetlands are one of the nation’s most abundant sources of seafood. And they are indispensable when it comes to the nation’s bird population. Most of the migratory ducks and geese in the United States spend time in the Louisiana wetlands as they travel to and from Latin America. Think songbirds. Paul Harrison, a specialist on the Mississippi River and its environs at the Environmental Defense Fund, told me that the wetlands are relied on by all 110 neo-tropical migratory songbird species. The migrating season for these beautiful, delicate creatures is right now — as many as 25 million can pass through the area each day.

Gulf Oil Spill: Government Remains Blind To Underwater Oil Hazard - The Obama administration is actively trying to dismiss media reports that vast plumes of oil lurk beneath the surface of the Gulf of Mexico, unmeasured and uncharted. But the National Oceanic and Atmospheric Administration, whose job it is to assess and track the damage being caused by the BP oil spill that began four weeks ago, is only monitoring what's visible -- the slick on the Gulf's surface -- and currently does not have a single research vessel taking measurements below.The one ship associated with NOAA that had been doing such research is back in Pascagoula, Miss., having completed a week-long cruise during which scientists taking underwater samples found signs of just the kind of plume that environmentalists fear could have devastating effects on sea life of all shapes and sizes. Meanwhile, the commander of the NOAA vessel that the White House on Friday claimed in a press release "is now providing information for oil spill related research" told HuffPost on Tuesday that he's actually far away, doing something else entirely. "We are in the Western Gulf doing plankton research," said Commander Dave Score, reached by satellite phone on his research vessel, the Gordon Gunter. "So I really don't know. I'm just on orders."

Op-Ed - Obama and the Oil Spill - NYTimes - Sadly, President Obama seems intent on squandering his environmental 9/11 with a Bush-level failure of imagination. So far, the Obama policy is: “Think small and carry a big stick.” He is rightly hammering the oil company executives. But he is offering no big strategy to end our oil addiction. Senators John Kerry and Joe Lieberman have unveiled their new energy bill, which the president has endorsed but only in a very tepid way. Why tepid? Because Kerry-Lieberman embraces vitally important fees on carbon emissions that the White House is afraid will be exploited by Republicans in the midterm elections. The G.O.P., they fear, will scream carbon “tax” at every Democrat who would support this bill, and Obama, having already asked Democrats to make a hard vote on health care, feels he can’t ask them for another. I don’t buy it. In the wake of this historic oil spill, the right policy — a bill to help end our addiction to oil — is also the right politics. The people are ahead of their politicians. So is the U.S. military. There are many conservatives who would embrace a carbon tax or gasoline tax if it was offset by a cut in payroll taxes or corporate taxes, so we could foster new jobs and clean air at the same time. If Republicans label Democrats “gas taxers” then Democrats should label them “Conservatives for OPEC” or “Friends of BP.” Shill, baby, shill.

White House Covers Up Menacing Oil "Blob" - Wayne Madsen Report (WMR) has learned from Federal Emergency Management Agency (FEMA) and U.S. Army Corps of Engineers sources that U.S. Navy submarines deployed to the Gulf of Mexico and Atlantic Ocean off the Florida coast have detected what amounts to a frozen oil blob from the oil geyser at the destroyed Deep Horizon off-shore oil rig south of Louisiana. The Navy submarines have trained video cameras on the moving blob, which remains frozen at depths of between 3,000 to 4,000 feet. Because the oil blob is heavier than water, it remains frozen at current depths.FEMA and Corps of Engineers employees are upset that the White House and the Pentagon remain tight-lipped and in cover-up mode about the images of the massive and fast-moving frozen coagulated oil blob that is being imaged by Navy submarines that are tracking its movement.

Why is the Deepwater Horizon Oil Spill an Information Dead Zone? - Yves Smith - It isn’t hard to see that the lack of decent information about how serious the Deepwater Horizon oil spill is is almost certainly due to obfuscation on the part of BP. The puzzling part is how BP can fantasize that it ultimately gains from this conduct, and why the Obama Administration tolerates it.  The frustration with continued BP stonewallling has finally produced serious pushback. The scientific community has ramped up its criticism not simply of BP’s role but of the failure of the National Oceanic and Atmospheric Administration and other federal bodies to make their own assessment of the severity of the leak and resulting damage. From the New York Times: Tensions between the Obama administration and the scientific community over the gulf oil spill are escalating, with prominent oceanographers accusing the government of failing to conduct an adequate scientific analysis of the damage and of allowing BP to obscure the spill’s true scope…Yves here. For a more vivid sense of the stakes, watch the testimony of Sylvia Earle, former chief scientist of the NOAA

Gulf oil spill: Why Obama’s regulatory response falls short - Still, there are two important reasons why the proposed reforms fall short of what’s needed. First, the MMS is not solely responsible for the heavy emphasis on approving oil and gas development. Remember the calls to “drill, baby, drill”? Congress, the White House and coastal state politicians have all had their eyes on the money offshore production brings into government coffers (more than $10 billion in 2009), the hope of energy independence and, no doubt, the political contributions of oil and gas interests. The political pressure to prioritize rapid development over safety won’t evaporate if the MMS is split. The new safety agency would still be under the supervision of the Department of Interior, where it would have to compete with its bureaucratic sibling. Environmental and safety interests have been losing that competition for years. Second, environmental protection is not just a matter of enforcing a clear set of regulations as wells are being drilled or operated. The key environmental questions come much earlier, when the MMS decides where to offer leases, sells those leases and approves permits for exploration and development.

What Does the Gov't Know About the Spill Size? - BP is still using spill estimates that outside experts believe grossly underestimate the size of the disaster in the Gulf of Mexico. Instead of the 5,000 barrel figure BP has given, they believe the spill rate may be closer to 95,000 barrels, or 4 million gallons, every day. The Obama administration has so far echoed those figures, though they've now organized a task force to get an official government estimate.But the watchdogs at Citizens for Responsibility and Ethics in Washington (CREW) and Greenpeace think the government already knows more than it's letting on about the size of the spill. Both the White House and agencies have had access to the live video feeds of the spill site for some time, while the video was only made available to the public and the press today. On Thursday, the groups sent Freedom of Information Act requests to the U.S. Coast Guard, Environmental Protection Agency, Department of the Interior, and the National Oceanic and Atmospheric Administration soliciting all the video, documents, and other records related to the spill and the use of dispersant chemicals."We want to know if what government officials are saying is the same thing that they have had sitting on their desks."

Oil Gushes From BP Well as Scientists Study Leak Size (Bloomberg) -- BP Plc’s damaged well in the Gulf of Mexico is still leaking even after the volume of crude being captured rose to 5,000 barrels a day, the same rate at which the company and government had said oil was escaping. A video feed from the seabed provided by BP showed oil and natural gas flowing into the Gulf where the company has inserted a mile-long pipe to lift petroleum to a ship on the surface. BP said today it will cooperate with a government team assigned to investigate the leak rate. The team will produce a report on the flow rate tomorrow, BP said in a statement.  “BP’s numbers just don’t add up, and the video proved it,” U.S. Representative Edward Markey, a Massachusetts Democrat, said in an e-mailed statement yesterday. “The whole world could see that there must be much more than 5,000 barrels per day coming from BP’s spill.”

Gulf oil spill leak now pegged at 95,000 barrels a day — The latest video footage of the leaking Deepwater Horizon oil spill in the Gulf of Mexico show that oil is escaping at the rate of 95,000 barrels — 4 million gallons — a day, nearly 20 times greater than the 5,000 barrel a day estimate BP and government scientists have been citing for nearly three weeks, an engineering professor told a congressional hearing Wednesday. The figure of 5,000 barrels a day or 210,000 gallons that BP and the federal government have been using for weeks is based on satellite observations of the surface. But NASA’s best satellite-based instruments can’t see deep into the waters of the Gulf, where much of the oil from the gusher 5,000 feet below the surface seems to be floating. Steve Wereley, an associate professor of mechanical engineering at Purdue University, earlier this month made simple calculations from a video BP released on May 12 and came up with a flow of 70,000 barrels a day, NPR reported last week. Werely on Wednesday told a House Commerce and Energy Committee subcommittee that his calculations of two leaks that show up on videos BP released on Tuesday showed 70,000 barrels from one leak and 25,000 from the other.

More on Corexit - Workers fighting the spill are injecting the water with chemicals, known as dispersants, that break the oil into smaller particles so that natural bacteria in the water will digest the oil particles. The dispersant being sprayed most heavily into the gulf is among the more toxic of those authorized by the U.S. Environmental Protection Agency to be used on oil spills, according to an EPA chart. The product—Corexit 9500, made by Naperville, Il.-based Nalco Co.—also is among the least efficient in breaking up the kind of oil typically found in the vicinity of this spill, the EPA says. In a test, the concentration of Corexit 9500 necessary to kill 50% of fish called menidia was less than the concentration of any other dispersant the EPA has authorized for use in oil spills, meaning Corexit 9500 is more toxic, according to EPA data. In another test, Corexit 9500 broke down less of a given amount of crude oil from south Louisiana into small droplets than all but two of the other EPA-approved dispersants, according to the EPA

EPA scolds BP in Gulf oil spill: dispersant is too toxic, change it - The US Environmental Protection Agency reversed course in the Gulf oil spill cleanup effort Thursday, telling BP that had three days to stop using a chemical dispersant that the EPA’s own data suggests is unnecessarily toxic. As recently as last week, the EPA said it had no power to force BP to use a certain dispersant. All it could do, Administrator Lisa Jackson said, was provide a list of approved dispersants from which BP could choose. But the EPA essentially overruled itself Thursday by forcing BP’s hand. The company has 24 hours to “identify a less toxic alternative” and 72 hours to begin using it.

Fishermen Report Illness From BP Chemicals - More and more stories about sick fishermen are beginning to surface after the oil spill in the Gulf of Mexico. The fishermen are working out in the Gulf -- many of them all day, every day -- to clean up the spill. They said they blame their ailments on the chemicals that BP is using. One fisherman said he felt like he was going to die over the weekend. "I've been coughing up stuff," Gary Burris said. "Your lungs fill up." "It was like sniffing gasoline or something, and my ears are still popping," Burris said. "I'm coughing up stuff. I feel real weak, tingling feelings." Marine toxicologist Riki Ott said the chemicals used by BP can wreak havoc on a person's body and even lead to death. "The volatile, organic carbons, they act like a narcotic on the brain," Ott said. "At high concentrations, what we learned in Exxon Valdez from carcasses of harbor seals and sea otters, it actually fried the brain, (and there were) brain lesions."

BP: Oil leak could be stopped by next week - BP Managing Director Bo Dudley said Thursday night the company will pump fluids into the well this weekend in the beginning of a process that -- if successful -- could lead to the leak finally being closed off in a matter of days."If that option doesn't work, we've got a second and a third option we'll do after that,"Earlier in the day, BP acknowledged that the underwater gusher is bigger than estimated to date, as new video showed a cloud of crude billowing around its undersea siphon.Company spokesman Mark Proegler said Thursday that the siphon is now drawing about 5,000 barrels (210,000 gallons) per day up to a ship on the surface of the Gulf -- as much as government and company officials had estimated the spill was pouring into the Gulf every day for a month. Proegler declined to estimate how much more oil was escaping.

FOXNews - Jindal: ‘The Day We’ve Been Fearing Is Upon Us’ -- A chocolate-brown blanket of oil about as thick as latex paint has invaded reedy freshwater wetlands at Louisiana's southeastern tip for the first time, prompting Gov. Bobby Jindal to step up calls Wednesday for building emergency sand barriers.Jindal and Plaquemines Parish President Billy Nungesser led a flotilla of media to inspect the oil encroaching on remote wetlands lining Pass a Loutre, near where the mouth of the Mississippi River empties into the Gulf of Mexico.Oil from the Deepwater Horizon offshore rig disaster had been lapping at the coast before. But this was not the light rainbow sheen or the scattered tar balls seen in previous days.Click here to watch live video of the oil leak.Jindal, sitting at the edge of an airboat, swept a handheld fishing net through the mess and held it up. It was coated with brown sludge, which had stained the lower shafts of the leafy green reeds sticking up to eight feet out of the water.

BP Disaster: Oil reaches Louisiana marshlands - Photos from Louisiana Gov. Jindal's tour of the environmental devastation in coastal marshlands caused by the BP oil disaster. As a friend said, this thing isn't a "spill," it's a fossil-fuel Chernobyl, unfolding in slow motion, thousands of gallons a day.

Did Deepwater methane hydrates cause the BP Gulf explosion? - The vast deepwater methane hydrate deposits of the Gulf of Mexico are an open secret in big energy circles. They represent the most tantalizing new frontier of unconventional energy — a potential source of hydrocarbon fuel thought to be twice as large as all the petroleum deposits ever known.Scientists are well aware of the awesome power of these strange hydrocarbons. A sudden large scale release of methane hydrates is believed to have caused a mass extinction 55 million years ago. Among planners concerned with mega-disasters, their sudden escape is considered to be a threat comparable to an asteroid strike or nuclear war. The Lawrence Livermore National Laboratory, a Livermore, Ca.-based weapons design center, reports that when released on a large scale, methane hydrates can even cause tsunamis.

Scientists Fault Lack of Studies Over Gulf Oil Spill  - NPR - Tensions between the Obama administration and the scientific community over the gulf oil spill are escalating, with prominent oceanographers accusing the government of failing to conduct an adequate scientific analysis of the damage and of allowing BP to obscure the spill’s true scope. The scientists assert that the National Oceanic and Atmospheric Administration and other agencies have been slow to investigate the magnitude of the spill and the damage it is causing in the deep ocean. They are especially concerned about getting a better handle on problems that may be occurring from large plumes of oil droplets that appear to be spreading beneath the ocean surface.

Gulf Oil Spill: Vast Majority of Pollution Could Lurk Below Surface for Months or Years - As little as 1/60th of the oil belching from a blown-out deep-sea BP well could be making it all the way up to the surface of the Gulf of Mexico right away, judging from the results of a field test of a similar scenario conducted in 2000 by a consortium including the Department of the Interior's Mineral Management Service and BP. The test results provide yet another indication that the government and BP were insufficiently prepared for the wide-ranging repercussions associated with a deep-water leak. The findings suggests that oil from the spill could continue to emerge months if not years from now, and hundreds if not thousands of miles away. And the study also provides yet more evidence that the initial official spill estimates were off by at least an order of magnitude.

Obama must get control of rogue oil regulators - OBAMA vastly understated the case last week when he said the Minerals Management Service has a “cozy relationship’’ with oil companies. The agency within the Interior Department, which approves offshore drilling requests, has routinely flouted federal requirements to seek impact assessments from environmental agencies before issuing permits. This flouting of the law began under the Bush administration, and Obama has failed to correct it.On Obama’s watch, according to The New York Times, the minerals service approved nearly 450 drilling plans and seismic blasting projects without seeking reviews from agencies such as the National Oceanic and Atmospheric Administration. Several final approval permits were granted this month, even though Interior Secretary Ken Salazar claimed that he’d stopped granting permits after the April 20 explosion of the Deepwater Horizon oil rig in the Gulf of Mexico.

Why Is BP Still in Charge in the Gulf?: - The Rude Pundit can't get his mind around the fact that the well is still pouring out oil a month later. He can't grasp how BP executives haven't been arrested for, at the minimum, criminal negligence, if not manslaughter, and the well blown up and sealed. He can't understand why BP is even involved in any decision-making here, why any notion of protecting profits and shareholders has had any effect on the solution, why the Obama administration, the Army Corps of Engineers, fucking NOAA hasn't told BP to go fuck itself, that the well's not theirs anymore. And then order the Coast Guard to shoot on sight anyone from BP who gets near it.BP has wasted so much time on efforts to save the oil and its investment in the well that it is just now getting around to attempting to seal the well. It's pretty simple. Fuck BP. Fucking blow it up. Fucking collapse the earth around it. And be fucking done with the spill and get to the clean up.

White House Covers Up Menacing Oil "Blob" - FEMA and Corps of Engineers employees are upset that the White House and the Pentagon remain tight-lipped and in cover-up mode about the images of the massive and fast-moving frozen coagulated oil blob that is being imaged by Navy submarines that are tracking its movement. The sources point out that BP and the White House conspired to withhold videos from BP-contracted submersibles that showed the oil geyser that was spewing oil from the chasm underneath the datum of the Deep Horizon at rates far exceeding originally reported amounts. We have learned that it was largely WMR's scoop on the existence of the BP videos that forced the company and its White House patrons to finally agree to the release of the video footage.

Bush DoJ sheltered BP executives from criminal probe EPA criminal investigator Scott West spent thousands of hours investigating alleged crimes committed by BP -- that would have resulted in felony charges -- but President Bush's DoJ abruptly shut his investigation down, sheltering BP executives from prison.  West spent thousands of hours investigating the an a quarter million gallons of crude -- the second largest spill in Alaska's history that went undetected for nearly a week -- by BP and figured his investigation would result in felony charges against BP and the company's senior executives who ignored warnings from dozens of BP's employees who worked at the Alaska facility. West, who spent nearly two decades in the EPA's criminal division, was told the pipeline would rupture six months before it happened.

Craving a Better Seat on the Seabed - The battle continues over the flow of information about the Deepwater Horizon oil spill, with a new volley on Friday from BP.The issue is underwater video of the spill and who gets to see it. Congressman Edward J. Markey, Democrat of Massachusetts, has been trying to get BP to provide a live video feed on the Web.  Aside from the millions of curious members of the public who might want to view a live feed of the gushing oil, scientists have been asking for it. For example, Steven Wereley, an associate professor of mechanical engineering at Purdue University and an expert in optical flow measurement, made an estimate using snippets of a video that had been released by BP. He counted the number of pixels in the picture of the oil that appeared to move each second. Then he multiplied by the size of the pipe and came up with a total leak estimate, 70,000 barrels per day, plus or minus 20 percent.  But Dr. Wereley said that the video that had been released was compressed and that raw footage would have been more useful. He said that would enable him to estimate the speed of the flow in feet per second within 2 percent accuracy.

‘Too big to fail’ isn’t working out in the energy world - There's an interesting debate going on right now over whether to raise the liability cap on oil companies drilling offshore, and if so by how much. Just last week, Sen. Lisa Murkowski (R-Alaska) blocked an attempt to raise it from $75 million to $10 billion. Yesterday, Sen. James Inhofe (R-Okla.) blocked another attempt. (In related news, Murkowski has receive $218K from oil and gas companies in the last five years; Inhofe has received over $550K.) As Randy recounted, Interior Secretary Ken Salazar seemed to agree with Murkowski about the cap the other day at a hearing.Behind the political bumbling, however, lurk some interesting issues. The main argument against raising the cap is that it will price small, independent oil companies out of the offshore drilling market -- they just can't afford insurance with a cap that high. Which of course raises the question: If they can't afford to insure against the damage they're capable of doing, why should they be allowed to drill?

Oil Already in Loop Current, Headed for Florida Keys - Researchers have evidence that oil from the Deepwater Horizon well accident in the Gulf of Mexico is on its way to the Florida Keys, carried by currents.That evidence comes from computer models, satellite images and an eyewitness observation on a University of South Florida research vessel.That ship, the Weatherbird II, returned Monday after studying plankton levels at the oil spill site.USF Oceanographer Ernst Peebles says computer models show the surface oil has been picked up by the loop current. It flows north from the Yucatan Peninsula into the Gulf, then curves east and then south into the Florida Keys."We saw evidence in mathematical models that the surface oil was starting to become entrained into the loop current and then there was also satellite evidence of the same thing," Peebles said."And there have been scattered reports of observed oil further south, including one made by our own captain," he said

NASA releases new images of Gulf oil spill moving to Loop Current - This week, NASA released two new satellite images showing the Deepwater Horizon oil spill edging into the Loop Current. One photo offers a view of a large column of oil extending Southeast towards the open ocean. NASA once again released high-resolution satellite imagery of the BP oil spill currently spreading across the Gulf of Mexico. They come at a critical moment: the National Oceanic and Atmospheric Administration yesterday announced a "small portion of the oil slick has reached the Loop Current in the form of light to very light sheens."

Florida Gulf oil spill: Plans to evacuate Tampa Bay area expected to be announced  - Plans to evacuate the Tampa Bay area are expected to be announced in the coming days as FEMA prepares for what is now being called the worst oil disaster in the history of the world. Estimates of the rate of BP's Deepwater Horizon oil spill by skyTruth.com, put more accurate numbers at more than 1 million gallons a day, based on satellite and Coast Guard images.Since the April 20th explosion, which resulted in the sinking of the rig, there has been more than 21 million gallons of oil pumped into the Gulf of Mexico.The evacuations will be necessary for the elderly and those with respiratory problems along much of Florida’s coast, including the Tampa Bay area, if plans proceed to set  the massive, approaching oil slick on fire, according to Oilprice.com.

U.S. and Cuba hold talks on Gulf oil spill - U.S and Cuban officials are holding "working level" talks on how to respond to the massive Deepwater Horizon oil spill that is believed to be dumping some 5,000 barrels of crude a day into the Gulf of Mexico, two State Department officials told The Associated Press on Wednesday. The talks add to signs of concern that strong currents could carry the slick far from the site of the spill, possibly threatening the Florida Keys and the pristine white beaches along Cuba's northern coast. They are also a rare moment of cooperation between two countries locked in conflict for more than half a century.

Colliding tragedies and the missing pie slice… While the blame game proceeds in Capitol Hill seeking the cause of the Gulf of Mexico oil spill, some voices are adamant on the larger picture: We demand this product to be cheap so that we can waste it. All of us caused this monstrous accident. The problem is so much worse than this visible tragedy. Few are admitting that the amount of oil from offshore drilling, which could offer up to 15 years of American supply, is swallowed in the shadow of financial uncertainty in producing such oil. The capital risk of exploring and tapping those fields cause great pause to energy companies. Oil companies should be even more hesitant now that deep-sea operations have proven to be like space adventures requiring ceaseless dedication and accountability. That sterling standard is not a great match for companies which have been earning billions per quarter after getting what they want from regulators by having their lobbyists literally sleep with them.  While oil companies have great access to government regulators paid with public funds, they do seem to enjoy great privacy concealing the many strategic vulnerabilities of our oil-based life

Factoring in the Real Cost of Oil - Yes, the oil spewing up from the floor of the Gulf of Mexico in staggering quantities could prove one of the great ecological disasters of human history. Think of it, though, as just the prelude to the Age of Tough Oil, a time of ever increasing reliance on problematic, hard-to-reach energy sources. Make no mistake: we’re entering the danger zone. And brace yourself, the fate of the planet could be at stake. It may never be possible to pin down the precise cause of the massive explosion that destroyed the Deepwater Horizon.  Inadequate governmental oversight of safety procedures undoubtedly also contributed to the disaster, which may have been set off by a combination of defective equipment and human error. But whether or not the immediate trigger of the explosion is ever fully determined, there can be no mistaking the underlying cause: a government-backed corporate drive to exploit oil and natural gas reserves in extreme environments under increasingly hazardous operating conditions.

More evidence that oil isn’t as cheap as it looks - Last year, the National Academy of Sciences estimated that health and related other non-climate costs of gasoline vehicles adds about 29 cents to the gallon -- 29 cents that people aren't paying at the gallon. And if you add in clime change? If you add in uses of oil beyond driving? If you add in economic damage from spills? Well, oil starts looking pretty expensive. So expensive, in fact, that many of these companies might not find it a profitable business, and some of these more energetic efforts to extract oil from remote locations might look worse than doubling down on renewables. But because those costs are hidden from the pump price, oil merrily operates in a market where its risk is underpriced and the costs of catastrophe are borne by taxpayers. In that way, it's a bit like the financial market, at least before the 2008 crash.

EIA-Annual Energy Outlook 2010 - The Annual Energy Outlook presents a projection and analysis of US energy supply, demand, and prices through 2035. The projections are based on results from the Energy Information Administration's National Energy Modeling System. The AEO2010 includes Reference case, additional cases examining alternative energy markets. (links to 10 PDFs)

It's worse than you think: plotting global hydrocarbon collapse…More than 90 per cent of the world’s energy comes from non-renewable sources – and its decline can be projected on a Hubbert bell curve. It’s just that we are more familiar with the concept of peak oil. After all, oil is the world’s largest source of energy, and the size and immediacy of the problem tends to overshadow debate on the remaining energy sources. But Hubbert’s model proves versatile, as the exploitation of any non-renewable resource – from oil to uranium – follows similar patterns. Experts in the fields of coal, natural gas and nuclear power are beginning to talk of vastly inflated reserves figures and pointing to resource depletion within the next two decades. This, if it comes about, would involve all our main sources of energy declining drastically, all within a relatively short timeframe.

Richard Sears: Planning For The End Of Oil (video)

Peak oil production coming sooner than expected - Media, public, governments unprepared for the End of the World (As We Know It) Except for a few stories in financial pages such as London’s Financial Times, this earth-shaking news has yet to reach the Mainstream Media.  While “Peak Oil” researchers have long warned of approaching oil shortages, the difference now is these dire warnings are being validated by the highest government and oil company officials.  Yet, no political leader has had the courage to make a major announcement to prepare the public for what lies ahead.This public blindness is tantamount to the isolationism that gripped the U.S. in the years preceding WWII.  While the highest government leaders did their best to prepare for inevitable war, they were hamstrung by the resistance of a public unable to accept what really lay ahead.  Similar to today, some politicians advanced their own careers by feeding on the public’s desire to believe no coming storm could ever reach them.  Yet, the storm came anyway. The looming crisis we now face is often referred to as “Peak Oil” — a status where global oil production will reach a plateau, then begin its irreversible decline.

Euro's Parity with Dollar is OPEC's Nightmare - Fears over the future of European economy amid the debt crisis and fiscal austerity measures adopted by Greece, Spain and Portugal had pressured crude oil prices over the last days. Oil prices dropped below $70 a barrel Monday in Asia as the euro sank to a four-year low and stock markets tumbled on investor concern that fiscal problems in the Eurozone could lead to a new round of international economic crisis that could affect oil demand. At the same time, the euro sank in the lowest levels of the last 18 months, making oil, that it is priced in dollars, more expensive to investors holding other currencies.According to analysts’ estimates oil will be under pressure as long as the dollar is surging, and if estimates that set euro’s exhange rate to parity with the dollar come true, then the “psychological” limit of $65 per barrel isn’t very far.

Iran Prepared to Block Gulf Oil and Wreck Western Economies - Iran’s recently-concluded war games concentrated on preparations to block the Persian Gulf and wreck Western economies in the event that the United Nations Security Council tries to place harsh sanctions against it.Forty percent of the world’s oil and gas sails through the Persian Gulf, and an Iranian blockade would cause an inflationary spike in energy prices and a fuel shortage that could cause catastrophe for the West, which is dependent on Iranian crude to fuel their gas-hungry economies. Public affairs consultant Lenny Ben-David, a former senior Israeli diplomat in Israel’s embassy in Washington, pointed out on Cutting Edge.com Monday that the Islamic Republic stopped, searched or photographed several Western ships durng the eight-day war games.

The World Can't Live Without Deepwater Oil - Regardless of the environmental and political fallout from BP's (BP) Deepwater Horizon drill-rig disaster, the larger context remains straightforward: The world, and the U.S., increasingly depends on oil and gas produced by deepwater offshore wells. As existing onshore fields keep declining, the need to develop these offshore fields and so-called unconventional oil deposits will only increase.A report issued in April by United States Joint Forces Command (USJFCOM) created a splash by confirming that at least some U.S. military planners have accepted the key premise of "Peak Oil" as a basis for strategic planning. This premise holds that as conventional oil fields are depleted, new sources of oil or new technologies won't fully replace the lost capacity. As a result, global oil production will peak and then slowly decline, even as new production and technologies are brought on-line.

How long will the coal last? The building of the new coal-fired power station Medupi in a sensitive natural environment is an acknowledgement that something is more important – namely that the nation gets sufficient energy. This was the reasoning of both South Africa and the World Bank before the decision to lend SA $3.75 to build one of the world’s largest coal-fired power stations despite international protests. South Africa has mined coal for more than 100 years and has, therefore, used most of its easily mined coal discoveries” says Mikael Höök who performs doctoral research on the world’s coal reserves at Uppsala University. “There is still coal left there but it will be more difficult and expensive to mine in future. But South Africa only has a little oil and natural gas so they are still investing in coal despite that it will be more expensive to extract in future. However, they will be forced to invest in renewable fuels as well, if not other things, because of the international pressure to reduce their carbon dioxide emissions.”

China: Time to Admit To, Then Douse, Our Inflation Fire - Everyone is manipulating their figures of course – especially the Chinese. The stimulus the government provided in China to prevent disaster in 2008 has created an enormous inflation problem which the official numbers completely obscure. All prices are running up and out of control. But the government has capped prices to prevent the official numbers from reflecting the actual levels of inflation. An article in Caixin tells the story.In August of 1971, Nixon, with an eye firmly placed on re-election, announced a ‘temporary’ 90 day freeze on wages and prices because inflation was spiralling out of control. The 90 day freeze turned into nearly 1,000 days.  As inflation took hold anyway, the Nixon Shock ended as a monumental failure. We shouldn’t expect the Chinese to fare any better. Moreover, low interest rates and easy money encourage leverage and speculation. To the degree that consumer prices do not rise, asset prices do. Even more worrying, resource allocation is distorted by these policies as unprofitable businesses and poor stewards of capital receive more than their fair share of investment money. The result over the longer-term is economic underperformance. This is what we are witnessing in China.

China’s bubble waiting to burst – Shanghai, China’s commercial capital, has transformed itself by pouring billions in state-ordained investment into new subways, flyovers, tunnels, bridges and airport terminals. However, some economists dare to say the Expo may be a symbol both of China’s economic might and of flaws in its system.According to Fan Yongming of Shanghai’s prestigious Fudan University, the Expo has accounted for half of the city’s fixed asset investment over the past eight years. Nobody is sure what will take its place.That is exactly the dilemma facing China’s planners, who engineered a stunning 11.9% growth in the first three months of this year while Europe and America struggled with recession and debt.

The Mad Scramble for Chinese Real Estate - The Chinese dream, like the American dream, has taken shape around the promise that each new generation will live better than the one before it. In recent years, that has meant more job options, more material comforts, and increasingly, home ownership. Last fall 80 percent of respondents to a China Youth Daily online poll said that home ownership was a prerequisite for happiness. Today's frenzied housing market in China's top-tier cities is rattling that aspiration, threatening to create a generation of agitated young people who work hard, play by the rules, but feel angry at the system and priced out of their chance at the Chinese dream. With residential prices and commercial prices in top-tier cities jumping 11.7 percent over the last year -- and jumping more than 50 percent in some particularly hot eastern cities -- the government in Beijing is worried.

China Home Sales Down 50% In A Month Authorities have tightened restrictions nationwide on advance sales of new property developments, introduced new curbs on loans for third home purchases and raised minimum down payments for second homes.The Beijing city government has gone even further, limiting families to one new apartment purchase and barring people who have not paid taxes or made social security contributions in the city for one year from getting home loans. Since the capital put in place the austerity measures on April 30, prices have dropped an average 10-15 percent, with the number of home purchases slumping by 50 percent, according to Hu.

Schumer: PRC Must Disclose IMF Verdict on RMB - Yikes! Just when you thought things had quieted down on the China front, our dear senator from New York, one Charles Schumer, is back on the China-bashing warpath together with some of his senatorial colleagues. (Yes, China-bashing is a bipartisan pastime paradise.) With the US-China Strategic Economic Dialogue scheduled for 24-45 May in Beijing, congressional pressure is back on the rise to embarrass the hosts. What is interesting from an IPE angle is that these senators are calling for the Chinese to disclose an IMF report billed as the "smoking gun" pointing to their currency manipulation. Like Bigfoot, the Loch Ness Monster, and Sasquatch, international economics also has its unique legends and folklore.According to the senators, China muzzled disclosure of IMF views of its currency practices during the annual IMF Article IV surveillance of member countries, last performed on China in 2009. Briefly, here is what the IMF had to say on the matter of Chinese currency in the 2009 Article IV report:

U.S. unlikely to push China hard on currency issue (Reuters) - The United States will continue nudging China at top-level talks in Beijing next week to let its yuan currency appreciate but trade issues appeared to be higher on the U.S. agenda ahead of the sessions.Treasury Secretary Timothy Geithner and the department's senior coordinator for Chinese affairs said on Wednesday they will urge China to see yuan appreciation as being in its own interest as well as that of the global economy.But next Monday and Tuesday's Strategic and Economic Dialogue in Beijing is essentially cast as one in a series of gatherings between now and late June in which the Obama administration will try to gently push its point that Beijing should act.

China now top U.S. ag export market (Reuters) - China bought more than $10 billion in U.S. farm goods in the first six months of the year to become the country's No 1 agricultural export market, USDA Secretary Tom Vilsack said on Thursday. Vilsack said farm exports during the first half of fiscal 2010 totaled $59 billion, "the best six months ag trade has had." With the strong start, the U.S. Department of Agriculture will probably raise its forecast of sales for the year, he said. The forecast now is $100 billion for total U.S. agriculture exports for the fiscal year ending September 30, up from the recession-hit $98 billion tallied in 2009 and second to the record $115 billion of 2008. USDA will update its export forecast on May 27.

US commerce secretary urges China to import more - US Secretary of Commerce Gary Locke said Wednesday the United States was lagging many developed countries in terms of exports as he urged Chinese consumers to buy more American products.Locke was in Shanghai leading the first cabinet-level US trade mission since US President Barack Obama announced an ambitious target in March to double US shipments within five years to promote job growth."Part of the strategy of reducing the trade deficit is of course to increase exports from the United States to all over the world, including China," Locke said. Washington's trade deficit with China stood at 226.8 billion dollars last year -- down more than 40 billion dollars from 2008 due to the global financial crisis, but still its largest with any country.

THE Riddle Has Been Solved - What riddle?Why is the industrialized world in the mess it's in?Mr. Witt, writing at The Baseline Scenario answers this question, in my view, correctly. We're in the mess we're in because there are no easy solutions. There haven't been easy solutions for quite a few decades as all of the "low hanging fruit" of industrialization currently being harvested in countries like China has long ago been harvested in the west. Industrialization for economies is like adolescence for humans. There are easy solutions for adolescents and young adults but as we age our choices are more often an exercise in finding the lesser evil.So it is, I believe, for US (and European and Japanese) economic policy makers. Shifting away from a financially centered economy will be painful. Wealth will be lost, interest rates will rise, and investment capital will become more scarce. We'll have to compete again, which tends to difficult for those who have grown accustomed to dominating. "What evil," you might be wondering, "makes the above the better option?"The alternative, in my view, is all of the above, but worse, and with less ownership. We won't be competing, we'll be sharecropping, as Warren Buffet once quipped.

China, America and a New World Order - For many years, the major strategic question regarding China has been whether, as it grows in economic, political, and military might, it will embrace the post–World War II order: the treaties, multilateral institutions, and norms developed largely with United States leadership. The answer is no. China will not adapt to the existing global That is the conclusion I draw from a recent trip to Beijing and meetings with people in the highest levels of the Chinese Communist Party and government. For them, this is not an irrational approach to transacting affairs on the world stage. For us, this presents numerous challenges that might imperil our own interests.

China Restricting Entry by U.S. Firms – Doing business in China will keep getting harder for foreign companies. Beijing is leveraging its huge government purchasing power to encourage homegrown firms to develop import substitutes, with the aim of creating national champions to compete against multinationals both in China and worldwide. A growing number of procurement rules from central government ministries insist that foreign firms hand over sensitive technology to Chinese partners or government regulators. Those that comply run the risk of having their intellectual property compromised and used to compete against them. Companies that refuse risk the loss not only of sales to Beijing but also to state owned enterprises, which still make up one-third of the economy, as well as to provincial and local governments.

German Export ‘Juice’ Should Guide U.S. in China (Bloomberg) -- German and U.S. trade delegations crisscrossed Shanghai yesterday, competing to persuade customers in the world’s fastest-growing major economy to buy more imported cars, airplanes and solar panels.  Germany was winning even before its president, Horst Koehler, and U.S. Commerce Secretary Gary Locke landed in China’s commercial capital this week for dueling trade missions. China’s demand for Siemens AG trains, Daimler AG sedans and BASF SE chemicals means that its two-way trade with China -- 82.4 billion euros ($100.3 billion) last year, according to the European Union’s statistics office -- is close to being in balance. Last year, the U.S. posted a $227 billion trade deficit with China. Boeing Co. and General Electric Co., two of the biggest U.S. exporters, say the U.S. needs to do a better job promoting exports if it wants to follow Germany’s example.

India Also Practices Tech Protectionism vs China - It appears that what goes around comes around. A few months ago, multinationals operating in China were all angry about Circular 618, a law mandating that government bodies preferentially purchase technology products from local firms. It was the old "infant industry" strategy dolled up for a newer age. However, lots of pressure from foreign firms eventually resulted in a relaxation of these procurement requirements.Interestingly, it appears that India, also keen on developing homegrown technology industries, is applying similar limitations on Chinese firms seeking to diversify their telecommunications business portfolio beyond borders. That old guise of protectionism, "security concerns," joins anti-dumping measures in a concerted effort to limit inroads made by Chinese suppliers. Indeed, their fear of China is such that phone companies are being made to buy from Western competitors even if it means higher costs. From Businessweek:

India Cbank Study Says Yuan Far From Reserve-Ready - A more international role for the Indian rupee could expose it to significant volatility, while the Chinese yuan is "far from ready" to gain reserve currency status, a Reserve Bank of India study said on Tuesday. Rather, it said China's yuan was likely first to become a regional currency as trade links with its neighbours expand."However, India needs to take steps to increase the role of the Indian rupee in the region to catch up with the growing influence of the Chinese Renminbi," the study said.

Rupee As Global Currency: RBI Study Dwells On Pros And Cons - Amid the worldwide financial crisis throwing open a debate on global currencies other than dollar, an RBI study on Tuesday said India should carefully assess if rupee could run for such a status.The study said among emerging market currencies yuan and rupee are natural contenders for an international currency status.However, while China is "far from ready" to achieve the reserve currency status at the moment, India needs to meet "all the necessary preconditions...before (it) could proceed further". Listing the unpreparedness of the Indian currency to become a global reserve, RBI said, unlike China, which runs a large current account surplus, India generally runs a significant trade and current account deficits.

How I Almost Stumped William Easterly (Really) -It's been a particularly hectic week here at the LSE lecture circuit. On Tuesday, Nouriel Roubini came along, presented, and signed copies of his new book (you can listen to a podcast of his presentation here). On Wednesday, William Easterly then paid a visit and talked about the intriguingly titled "We Don't Know How to Solve Global Poverty and That's a Good Thing."  From listening to Easterly, you would get the impression that five-year plans are a Soviet-era laughingstock. The truth, however, is more complicated. China and India are often held as exemplars of today's developmental successes. Unfortunately, I was unable to ask Easterly about what he makes of these Chinese and Indian policy documents. In my conversations with Chinese and Indian colleagues, they still tell me to read five-year plans carefully to glean the finer points of government policy. So, if Easterly is justified in mocking five-year plans, he would need to demonstrate at least one of the following:Chinese and Indian five-year plans are meaningless documents with little or no policy implications; or China and India have been able to succeed despite government efforts to implement five-year plansSomehow, I think these five-year plans are not just cosmetic

How hot is too hot in Brazil? - The word “overheating” dominates talk about Brazil’s economy these days. Inflation and growth forecasts are being revised upwards, the central bank is widely expected to continue raising interest rates and the government last week announced R$10bn in spending cuts.But Carlos Maggioli, the head of sales and trading at Itaú BBA, says that even if Brazil’s economy grows as fast as 9 per cent, the threat of overheating won’t kick in until growth accelerates past India and China.If growth goes up to 10 per cent, “then you will see overheating,” Mr Maggioli told beyondbrics in an interview at the investment bank’s annual conference in New York. But that’s unlikely, he added, because an infrastructure bottleneck will keep growth in the range of 5 to 9 per cent.

Taiwan Outpaces China With Fastest Growth in 30 Years (Bloomberg) -- Taiwan’s economy grew at the fastest pace in more than 30 years last quarter on surging sales of computer chips and display panels to China, as it heals ideological wounds with its neighbor in favor of trade ties. Gross domestic product rose 13.27 percent in the three months to March 31 from a year earlier, the most since 1978 and more than the median estimate in a Bloomberg News survey for an 11 percent gain, the statistics bureau said yesterday in Taipei.  Taiwan, Singapore and Japan all reported yesterday that growth accelerated in the first quarter, boosted by a rebound in global trade. In Taiwan, which outpaced China’s 11.9 percent expansion, policy makers are weighing the risk of raising interest rates from a record low against fallout from the debt crisis sparked by Greece, after April export orders from Europe fell 11 percent from the previous month.  “Taiwan benefited a lot from a rebound in the Chinese economy,”

Asia: The Challenge of Capital Inflows - iMFdirect - Looking ahead, our growth projections suggest that Asia is expected to outperform advanced countries. As a result, the region is likely to continue to attract significant capital inflows, assuming that fallout from the euro zone sovereign debt crisis is contained and that the recent spike in global risk aversion abates. So is there a downside risk to this deluge of foreign capital? History has shown that persistent and large capital inflows can be a double edged sword. While they bring with them numerous benefits, they do pose risks and policy dilemmas. Continued large capital flows pose, for example, the risk of overheating and runups in asset prices that may subsequently render the region vulnerable to outflows and asset price busts.

The World trading system without US leadership - VoxEU - Since the end of the Second World War, the US has been the world leader in promoting the reduction of trade barriers and establishing international trading rules. This column argues that by remaining on the sidelines of the Doha Round negotiations, the US risks losing influence over how important international economic matters are decided. This loss of economic influence will be followed by a loss of political influence.

All the dogs that didn't bark - Rising protectionism, over-regulation of markets, nationalization of private industry! All these were shouted as warnings about the probable consequences of the financial crisis. But as we have seen, many of these dogs simply haven't barked. The first case in point is protectionism. As Harvard Professor Dani Rodrik argued in a column late last year, rising protectionism is simply a myth. Or as he rather colorfully put it: The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.But rising protectionism wasn't the only dog that didn't bark. A new note on privatization trends from the World Bank (based on data through early 2009) finds that governments did not nationalize (or re-nationalize) large chunks of private industry

Don't misread the trade implications of the euro crisis for China - How much does the Greek crisis matter for China?  There are, as far as I see, broadly two schools of thought.  One school says that the Greek crisis is largely a problem internal to Europe, and its impact on Europe and the rest of the world is too small to matter much.  In support they point to limited bilateral trade relationships between China and the most affected European countries.The second school focuses on the impact of the Greek crisis on the real exchange value of the RMB and the threat of diminished demand in Europe’s deficits countries.  Thanks to the collapse of the euro, they point out, the RMB has already revalued in real terms and this, combined with expected weakness in the European market for imports, means that China should be more cautious than ever in adjusting the value of the currency.  An article in Monday’s South China Morning Post makes this point:

Europe’s Debt Crisis Is Casting a Shadow Over China - The pain of the European debt crisis is spreading as the plummeting euro makes Chinese companies less competitive in Europe, their largest market, and complicates any move to break the Chinese currency’s peg to the dollar. Chinese policy makers reached a consensus last month about breaking the dollar peg, agreeing to let it rise in value somewhat, which would make American goods more competitive against Chinese products. But Chinese officials have not yet put that intended policy into place. And in light of the euro’s nose dive, allowing China’s renminbi to rise against the dollar now would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe. The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002.

Forget Europe, Worry About China: Hugh Hendry (CNBC) China’s 13 trillion yuan ($1.9 trillion) of lending in the last 16 months is leading to industrial capacity growth in the same way as Japan in the 1920s "when ultimately the whole system collapsed," Hendry said. "China could precipitate a much greater crisis elsewhere in the world.” Following Europe’s debt crisis it is “now commonly accepted that the magnitude of the financial problems confronting the world economy are so great that in all likelihood we will be confronted by a hyperinflation allowing sovereign debts to be paid off in worthless flat currency," he said. China is at the mercy of its own credit bubble, Hendry said and he predicts it will explode as it fuels instability within the Chinese economy and political system.

Thrown off balance – Economist - MICHAEL PETTIS wrote an important post the other day, on why the trouble in Europe and the euro's resulting decline against the renminbi doesn't mean that China should delay revaluation. He argues that internal European imbalances hadn't been considered a global problem prior to the crisis, since the continent's deficits and surpluses nearly netted out, such that Europe's total trade gap wasn't that big. But, he argues, this is no longer the case. Southern Europe, is facing a rapid economic adjustment. Domestic demand will drop further, and importantly, southern European nations will have difficulty attracting capital inflows. As a capital account surplus is the flipside of a current account deficit, this implies a rather quick decline in internal European trade deficits. And that means that a bunch of European surpluses are suddenly unbalanced. Surplus European nations will then face adjustment, which will come in two ways.

Europe Throws a Hail Mary Pass - On Thursday of last week Jean-Claude Trichet, president of the European Central Bank, said three times “Non! Non! Non!” when asked in a press conference if the ECB would consider buying Greek bonds. His exclamation was accompanied by a forceful lecture on the need for eurozone countries to get their fiscal houses in order, some of which I quoted in last week’s letter. Trichet was remonstrating about the need for the ECB to remain independent, and was rather definite about it. Then on Sunday he said, in effect, “Mais oui! Bring me your Greek bonds and we will buy them.” What happened in just three days?Basically, the leaders of Europe marched to the edge of the abyss, looked over, decided it was a long way down, and did an about-face. It was no small move, as they shoved almost $1 trillion onto the table in an “all-in” bet.

The European Union rescues Greece and Portugal - It seems crazy: the German state of North Rhine-Westphalia holds an election, and Americans’ 401(k)s go haywire. But that’s not a bad shorthand description of what’s happened to the stock market over the past few weeks. What links the two is the Greek debt crisis and the actions of Germany’s Prime Minister, Angela Merkel, the villain of the story. When the scale of Greece’s problems first became clear, she grudgingly agreed to help with a bailout. But in the spring Germans started to ask why they should pay for Greek fecklessness and, as elections loomed, Merkel began taking a harder line in her public comments. The tougher she talked, the more skittish markets got. On April 26th, Merkel gave a speech in which she said, “Germany will help if the appropriate conditions are met,” making it sound as if that help were far from a sure thing. The yield on Greek debt immediately soared, and within days a rout was on. It may well have been the most expensive “if” in history.

Central Bank Chief: Euro Crisis Is Worst Since The Second World War- The European Central Bank president, Jean-Claude Trichet, warned this weekend that Europe faces its worst crisis since the second world war as he called for a "quantum leap" from eurozone countries in getting a grip on their finances.With political leaders across the eurozone lining up to blame the financial markets for their economic plight, Trichet said it was Europe's governments that were responsible for the euro's slump, rather than currency traders and speculators.In an interview with German news magazine Der Spiegel, Trichet compared the situation just over a week ago – when markets went into freefall – with the start of the credit crunch. "The markets stopped functioning – it was almost like the situation after the collapse of Lehman Brothers in September 2008." He added that Europe is "undoubtedly in the worst situation since the second world war, perhaps even since the first. We have experienced, and are experiencing, really dramatic times."

What Were Greek Bondholders Being Paid For? - I agree with Felix Salmon that we should still fear Greek default--if not now, then eventually.  (I also agree with Henry Farrell that if the eurozone does pull this one out, it will have substantially deepened its ties and economic institutions. Or at least this is what I take him to be saying.)But I don't understand this line in Felix's post: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. And until very recently, Greek bonds were considered to be an interest-rate play, not a credit play. As a result, the institutions owning them can ill afford to see big losses on them. There's no currency risk on Greek bonds. And because they're issued in a major currency, I don't see liquidity being a major independent issue.  Unless I'm missing something, that leaves duration, and default risk.

Fed Up, Greece Lists Tax Dodgers – NYTimes - Trying to crack down on rampant tax evasion, the Greek authorities have made good on promises to name — and shame — some of the worst offenders. The Finance Ministry made public a list of 57 Athens doctors who officials believe are guilty of a variety of tax offenses, including failing to give patients receipts for their fees or even recording the visits. Twelve of the doctors had reported a combined income of slightly more than $15 million from 2001 to 2008, yet they had deposited more than twice that much — about $39 million — in their bank accounts, the ministry said Thursday. Experts estimate that the Greek government may be losing as much as $30 billion a year to tax dodgers, a figure that would have gone a long way to solving the nation’s debt problem

The (Abridged) Story of Greece - From 1996 - 2008, the Greek economy expanded faster than the broader European Union in each and every year (below is all the data I could dig up for a chart). But, growth is a good thing right? In most cases... sure, but all growth is not the same. Growth based on ever-expanding debt (think housing bubble) is surely not as good as one based on increased productivity. While there is no doubt that a lot of Greece's growth was due to increased productivity that came with being a member of the EU (i.e. open markets), a lot of this growth came from cheap financing which not only allowed the Greek economy to double within a 10 year period, but to double their debt levels as well.This arrangement of growth and ever-increasing debt was all good... until it wasn't.

Greek Myths and the Euro Tragedy - Last week the Greek bailout ballooned into a gargantuan 750 billion euro (nearly $1 trillion) debt stabilization fund, including a $39 billion line of credit from the International Monetary Fund. This coincided with the European Central Bank (ECB) announcement that it would immediately begin purchasing junk-rated Greek debt.It won't work. The problem isn't liquidity, psychology or speculators. Germany and France simply cannot borrow or tax enough to cover Europe's debts and looming deficits. So, barring a fiscal and growth miracle, we will either see sovereign defaults (larger and more chaotic for having been postponed) or the ECB will have to print euros to buy worthless debt, leading to widespread inflation. Since inflation lowers the value of promises to state workers and pensioners, and also is easy to blame on others, it will be an especially tempting escape. Notice who is missing: Greek bondholders are not being asked to miss a single interest payment, reschedule a cent of debt, suffer any write-down, take a forced rollover or conversion of short to long-term debt, or any of the other messy ways insolvent sovereigns deal with empty coffers. Those who bought credit default swaps lose once again.  But why? The reasoning behind the Greek bailout is founded on several myths that need exploding

Strauss-Kahn to Greece: Don't Fear the IMF - It seems the old adage that time goes around in circles is correct. I suddenly received a whole bunch of hits to an older post I made, when the world was still young it seems, featuring the signature image of then-IMF Managing-Director Michel Camdessus hunching over former Indonesian President Suharto in arranging yet another bailout package with the IMF in 1998. The famously strict conditionalities imposed on Indoesia are widely believed to have fomented the race riots that helped bring down the Suharto regime--in power for 21 years. Although the riots in Greece are pretty vehement this time around, I have mentioned that they pale in comparison if your yardstick is the human toll extracted as the IMF is called in.

The global crisis and political extremism  -  VoxEU - Will the global crisis lead to a rise in political extremism just as during the Great Depression? This column examines the vote share for extreme parties in a sample of 16 OECD countries over three decades. A one-percentage-point decline in growth leads to a one-percentage-point increase in the vote share for right-wing or nationalist parties.

Eurozone thoughts in no particular order - Perhaps what the Eurozone needs is a tax imposed upon all member nations as a way to solve the various fiscal crises going on there. By taxing businesses and individuals in Euro nations and then using the revenue to retire government debt, the Eurozone can work together to fix their fiscal problems. Of course such a tax would be unpopular but the alternative would be to allow member nations to continue their public indebtedness. One of the agreements that member nations signed way back in 1992 (an agreement that has since been replaced by the Lisbon Treaty) was to limit budget deficits. This was implemented as an essential macroeconomic policy to ensure the smooth running of the Eurozone. Unfortunately this part of the treaty was neither honoured by members nor allowed to punish wrongdoers. The current fiscal crisis in the EU is a result of the inability of member nations to honour the treaty.

El-Erian on the difficult choices still facing Europe - We should also be aware of a secular issue that underpins all this-and one that tends to escape the notice of policymakers and others that are more comfortable dealing with flows and rates of change, rather than stocks and levels. A key dynamic of the past few years-namely, the serial contamination of balance sheets-is hitting the reality of scarcity.Industrial countries are running out of balance sheets that can be levered safely in order to minimize the disruptive impact of past excesses. This lies behind the recent (warranted) concerns about the explosion of debt, and the related surge in sovereign risk measures.The balance sheets that are left-which reside essentially in central banks-are not made (and, I would argue, should not be forced) to assume permanent ownership of dubious assets. After all, the revolving nature of central bank balance sheets is essential to the healthy functioning of a market system, and to the credibility of its institutions. Remember, it is the quality of institutions that distinguishes successful economies over time.

European countries feel the pain as cuts keep coming - That deep anger threatens to mount across Europe as governments slash at social guarantees considered integral to the continent's political life but which have become too expensive to sustain. Some foresee widespread social protest as cuts take place amid high unemployment; others predict a potential shift of sovereign authority to European institutions. But the outcome of efforts to control government debt could rewrite an economic order that has left Hatzi's generation in relative comfort but world markets nervous about financing it. Investors speculate that Europe might not have a dynamic enough future to foot the bill, and it has left politicians from Athens to Madrid, and from London to Berlin, scrambling for a response.

Papandreou Weighs Legal Action Against US Banks - At first blush, Greece’s prime minister George Papandreou statement that he is looking into litigation against banks that worsened the country’s financial woes sounds like pandering to his electorate. From Bloomberg: Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis. Yves here. While this all sounds to those outside the EU like an effort to shift blame, the fact that Greece had a budget crisis does not mean that speculators weren’t trying to play the situation to maximum advantage. But any manipulation took place in the over-the-counter, and virtually unregulated credit default swaps market, so it would be interesting to see what legal theory Greece and other eurozone states could use to file a case. Regardless, the officialdom is looking into abuses: In the days leading up to the May 10 announcement of a loan package worth almost $1 trillion to halt the spread of Greece’s fiscal woes, European Union regulators were examining whether speculators manipulated the prices of bonds and equities and contributed to the crisis.

Forget the wolf pack – the ongoing euro crisis was caused by EMU - Mr Trichet was ash-white at the Brussels summit a week ago. He distributed charts of credit stress to every eurozone leader. By the time he had finished his hair-raising discourse, everybody round the table finally understood what they faced. “The markets had ceased to function,” he told Der Spiegel. “There is still a risk of contagion. It can happen extremely fast, sometimes within hours.” The spreads on Greek, Iberian, and Irish bonds have, of course, dropped since the ECB stepped in with direct purchases. But the euro rally fizzled fast, to be followed by a fresh plunge to a 18-month low of $1.24 against the dollar. European bank stocks have buckled again. Spain’s IBEX index fell 6.6pc in capitulation fever on Friday. Geneva professor Charles Wyplosz said EU leaders made the error of overselling up their “shock and awe” package before establishing any political mechanism to mobilise such sums. “The fund is an empty shell,” he wrote at Vox EU. “Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements.”

Germany’s paranoia about the ECB and hyperinflation - The ECB revealed that it has bought €16.5bn government bonds, the FT reports. The scale of intervention is at the low end of market expectations.  The ECB said that it will sterilise tomorrow the liquidity from bond purchases through a quick tender in which banks will offer a maximum rate of 1% for deposits.  After the ECB´s explanations the euro rebounded from 1.2235, its lowest level in four years. On Tuesday, the euro is under pressure again.  Frankfurter Allgemeine displays the hysteria in Germany about the decision with an editorial in its business pages, according to which the ECB has opened the floodgate to inflation. The pollicy is now determined in the finnancial markets, not in the ECB. The editorial indirectly calls on the ECB to raise interest rates as a bullwork against future inflation. ("Those whom the gods wish to destroy, they first make mad.")

FT Alphaville » Sterilised and scandalised - We mentioned last week that the sterilisation or non-sterilisation of the European Central Bank’s government bond-buying was likely to be an extremely controversial move.We weren’t wrong. The ECB announced on Monday that it will sterilise its €16.5bn of bond purchases via the auction of one-week fixed-term deposits. Banks will be able to bid for the deposits, and they’ll be given to those that bid at the lowest yields. The first auction is scheduled to be held today, Tuesday.But here’s the key bit from the ECB’s statement: Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem’s credit operations. Which means the ECB’s govt bond purchases will be offset for a full week — until the banks can repo the fixed term deposits at things like the Long-Term Refinancing Operation (LTRO). What liquidity the ECB takes away with one hand, via the term deposits, it gives in unlimited amounts with the other.

EURO TURNS INTO A BAD CIRCUS ACT - The euro’s performance continues to disappoint, only now turning from a circus act into that of a clown without his make-up. The single European currency now rests below its weakest point reached ahead of the weekend loan package. That near trillion dollar lending program has also cheapened to around $930 billion and according to some market pessimists will fall to an equivalent $750 billion before the year is out should the euro slumps to parity with the dollar. Before the birth of monetary union in 1999 some pessimistic forecasts predicted it would not last without fiscal union while one renowned economist told us to see how the euro fared through its first crisis. Well here we are and the chorus of pessimism is getting louder. One media story this morning reports a French threat to pull out of the union should Germany fail to fully back Greece last weekend. In a speech earlier, the grand father of economic austerity and former Fed Chairman Paul Volcker raised his concerns that the euro couldn’t last.

'Lack of Trust' Pummels Bank Lending in Europe: Credit Markets (Bloomberg) -- Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro. Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 62 percent higher than a month ago. Investment-grade corporate debt sales in the region plummeted 88 percent last week to $1.2 billion from the previous period, according to data compiled by Bloomberg. The rate banks say they charge each other for three-month loans in dollars rose to a nine-month high, even after a government-led rescue designed to prevent Greece from defaulting, and a new financial crisis. The euro fell to its weakest against the dollar since 2006.

Spain’s Jobless Find It Hard to Go Back to the Farm - Now, with the construction jobs gone, Mr. Rivera is behind on his bank payments and eager to return to the farmwork he left behind. But Spaniards have been largely shut out of those jobs. Those bent over rows of strawberries under plastic greenhouse sheeting or climbing ladders in the midday sun are now almost all foreigners: Romanians, Poles, Moroccans, many of them in Spain legally. “The farmers here don’t want us,” Mr. Rivera said with a defeated shrug. Local officials and union leaders say Mr. Rivera has it right. Farmers have been reluctant to take Spanish workers back — unsure whether they will work as hard as the foreigners who have been picking their crops, sometimes for a decade now. So far, only 5 percent of the pickers this year are Spaniards.

Anglo-Saxon media out to sink us, says Spain - It is the only economy in Western Europe still in recession: property prices are crashing, unemployment has risen to more than 4 million, and some are already muttering that it could end up with a financial crisis worse than Greece's.But at least Spain now has someone to blame: the country's intelligence services are investigating the role of British and American media in fomenting financial turmoil, the respected El País daily reported .The newspaper said the country's National Intelligence Centre (CNI) was investigating a series of "speculative attacks" against the Spanish economy amid bond market jitters about the country's growing national debt."The (CNI's) economic intelligence division … is investigating whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces and challenges facing the Spanish economy – or whether there is something more behind this campaign," El País said.The report follows claims from prime minister José Luis Rodríguez Zapatero's socialist government that speculators and newspaper editorial writers had launched a concerted attack.

Euro Rescue Package 'Just Buys Time': Merkel - A trillion-dollar package to shore up ailing eurozone economies merely buys time until the deficits of certain members of the 16-member zone are cleaned up, German Chancellor Angela Merkel said Sunday. Speaking at a conference of the Confederation of German Trade Unions, Merkel said that recent speculation against the euro "is only possible because of huge differences in the economic strengths and debt levels of member states." With the rescue package, "we have done nothing more than to buy time until we have brought order to these competitive differences and to the budget deficits of individual euro countries," she said

IMF Chief Asks Greece To Cut Private Sector Wages - Greece will have to cut wages in the private sector in order to boost its competitiveness, IMF’s head Dominique Strauss Kahn argued. It is the only way to sell what they are producing vis-à-vis their euro zone neighbours, he said in an interview with Euronews. “Why is it so difficult for Greece to find growth? Because they have a problem of competitivity. What does that mean? That means that what they produce is more expensive than the same goods or services provided by other countries.”  “That’s why they have to cut wages, which is terribly painful but absolutely necessary because it is the only way to sell what they are producing when other countries have lower costs, not those underdeveloped countries in Asia, Africa or Latin America, but their very neighbours in the Euro zone. Costs in Greece are 20 to 25% over the German costs for instance and this difference has to be fixed,” he said

Fiscal austerity measures could hit corporate credit, analysts warn –  As governments across Europe announce austerity measures designed to rein in deficits, sovereign and corporate bond investors are divided over the scale and timing of the cuts. Credit analysts have raised concerns that the cost-cutting measures announced by Spain and Portugal may cause corporate spreads in those countries to widen. Both Spain and Portugal have set ambitious targets since the bailout was announced. Spain aims to cut its fiscal deficit to 3% by 2013 and Portugal to 2.8% by the same date. Both countries have introduced cost-cutting for pensions or retirement reforms. Portugal’s prime minister has cut almost 70,000 civil service jobs and rolled out tax increases. On May 13, Spain announced public sector wage cuts of 5% for 2010 (followed by a pay freeze) as well as the shelving of two planned government investments: a pensions hike and a parents’ subsidy.

Fiscal Austerity Fever Goes Global - Virtually the entire world’s press is now focusing on the travails of the euro zone, but continues to draw the wrong lessons from what now afflicts the region. But Americans might be pleased to know that this collective economic insanity is not restricted to the pages of the right wing press or the rantings of Fox News commentators such as Glenn Beck. No America, you can rejoice! This has become a fully fledged global disease. You are not alone.As I have pointed out before, no euro zone government issues its own currency. Consequently, they have to “finance” every euro they spend. And, as Bill Mitchell notes, if tax revenues do not cover pre-existing spending desires, then all of these countries (including Germany) have to issue debt. The current crisis is manifested by the bond markets’ unwillingness to lend to the PIIGS governments any longer because they are beginning to query the PIIGS’ national solvency. These funding constraints do not apply to the US government, which is sovereign in the US dollar and can never be revenue constrained

I am trying to figure this out! - Danni Rodrik sometimes tries to read more into a economic situation than can be found. He suggests that the Greek crisis was generated through an innate discontinuity between economic policy and Democracy. There is no inconsistency mandatory between economic policy and Democracy, only mal-approach to legislation of the economic policy. There will always be economic disaster when the wrong applications are applied, whether under Democracy or Authoritarianism. Both Democrats and Soviets have intrinsic difficulty with misapplied economic policy. Globalization has much different connotations, though, all concerned with Too Big to Succeed. Economic policies must be sculpted to meet the needs of populations, and One can doubt if there is an economic policy with enough latitude to be applied everywhere.

Is a weak euro deflationary? - In my research on the Great Depression, I kept running across researchers who focused on gold flows between central banks.  This made no sense to me, as gold flows are a zero sum game; one country’s gain is another country’s loss.  But the Great Depression involved worldwide deflation.  How could this be caused by flows from one country to another?  The answer is that it cannot, rather what matters is gold reserve ratios–is country A attracting gold because it is raising its gold reserve ratio, or is country B losing gold because it is lowering its gold reserve ratio?  So why not calculate global gold reserve ratios?  No one had done that before, so I did.The same problem applies to changes in exchange rates, which are also a zero sum game.  If the euro depreciates against the dollar, then the dollar appreciates against the euro.  It’s not clear why this should have any impact on world commodity prices.

To save the eurozone, reform its governance The European rescue package has changed the odds about the future of the eurozone in two ways. It has reduced the probability of a collapse within the next three years – and increased the odds within the next 10 years. The eurozone came extremely close to a breakdown 10 days ago. The Spanish newspaper El Pais reported a claim by José Luis Zapatero, the Spanish prime minister, that Nicolas Sarkozy “beat his fist on the table and threatened to withdraw from the euro” unless Berlin accepted a deal. Whether this story is true or not, the deal is unquestionably the result of a successful French ambush. The more important issue, however, is whether the eurozone has become more sustainable as a result. The answer to that question depends on your diagnosis of the problem. If you believe, as the French do, that financial speculators are to blame, then the new €440bn special purpose vehicle might just do the trick. If you believe, as the Germans do, that the deep-rooted problem was fiscal profligacy, a stricter stability and growth pact would be the logical answer.

Et Tu, Wolfgang? – Krugman - Perhaps the most startling and frustrating thing about the debate over the fate of the euro is the way almost everyone avoids confronting the core issue — the elephant in the euro. With a unified currency, adjustment to differential shocks requires adjustments in relative wages — and because the nations of the European periphery have gone from boom to bust, their adjustment must be downward. At this point, wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall something like 20-30 percent relative to wages in Germany. But nobody is willing to say that outright. Even the ever-pessimistic (and hence realistic) Wolfgang Munchau writesNone of the governance reform proposals that are currently discussed even attempt to answer the questions of how Spain is going to get out of this hole, and how the competitiveness gap between the north and the south of the eurozone is going to be closed … What the eurozone needs is an increase in domestic consumption in the north, particularly in Germany, and labour and product market reforms in the south, most importantly in Spain.  How many readers will get that what he’s really saying is that WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.

Paul Krugman: No One's Labor Market is Flexible Enough to Make the Euro Work - The problem with the eurozone as currently constituted is that there are wide differences in both the business cycles and the relative productivity of various members.  Normally those differentials are handled by currency fluctuation and monetary policy.  The US finesses the problem of imperfect currency union with mobile labor markets and automatic fiscal transfers.  Absent these, all the work of adjustment has to be done by flexible wages.Unfortunately, wages just aren't that flexible--at least not downward.  Wages are what's known as a "sticky" price, which is to say that they get stuck at various points.  In the case of wages, that means that they're very unlikely to adjust downward.  In part that's psychological adjustment, and in part that represents the long-term nature of peoples' obligations; if you have a mortgage, a couple of car payments, and some student loans, it's hard to suddenly take a 10% pay cut because business is off.  Paul Krugman offers a taste of just how big an adjustment will be required

Europe’s Historic Gamble - Eichengreen -The last few weeks have been the most amazing – and important – period of the euro’s 11-year existence. First came the Greek crisis, followed by the Greek bailout. When the crisis spread to Portugal and Spain, there was the $1 trillion rescue. Finally, there were unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank. All of this was unimaginable a month ago. Europe’s fortnight mirabilis was also marked by amazing – and erroneous – predictions. Greece would be booted out of the monetary union. The eurozone would be divided into a Northern European union and a Southern European union. Or the euro – and even the European Union – would disintegrate as Germany turned its back on the project. But, rather than folding their cards, European leaders doubled down. They understand that their gamble will be immensely costly if it proves wrong. They understand that their political careers now ride on their massive bet. But they also understand that they already have too many chips in the pot to fold

Greek Crisis Is 'Tip of Iceberg' in Euro Region, Roubini Says(Bloomberg) -- The crisis engulfing the euro area is not over yet as Greece remains the “tip of an iceberg,” New York University professor Nouriel Roubini said.“It’s not over,” Roubini said in an interview with BBC radio broadcast today. “What we’re facing right now in the eurozone is a second stage of a typical financial crisis.”The European Union’s 750 billion-euro ($931 billion) rescue package to stop contagion from Greece hasn’t calmed the markets while questions remain about whether governments are strong enough to implement the austerity measures required, Roubini said. The European Union said today it has transferred the first instalment of emergency loans to Greece, one day before 8.5 billion euros of bonds come due. Markets remain concerned about the solvency of some European countries as there is “significant economic and financial trouble in the eurozone,” Roubini told the BBC’s “Today” program. The recent riots in Greece in response to fiscal cuts have fueled doubts about some European governments’ ability to solve these problems, he said.

Greece receives EU funds but faces huge task ahead - Greece received a 14.5 billion euro ($18 billion) loan from the European Union on Tuesday and can now repay its immediate debt, but still faces a mammoth task to claw its way out of recessionConcerns that other EU countries such as Portugal and Spain could follow Greece and need aid from the bloc have hit the euro, while investors are still watching Athens to see whether its austerity plan will stave off the risk of default.The EU and IMF agreed at the beginning of the month to lend Greece 110 billion euros ($137 billion) over three years to help it pay billions in expiring debt after being shut out of financial markets by the high cost of borrowing.

Former Central Bank Head Karl Otto Pöhl: Bailout Plan Is All About ‘Rescuing Banks and Rich Greeks’ – (interview) The 750 billion euro package the European Union passed last week to prop up the common currency has been heavily criticized in Germany. Former Bundesbank head Karl Otto Pöhl told SPIEGEL that Greece may ultimately have to opt out, and that the foundation of the euro has been fundamentally weakened.

Banks dump Greek debt on the ECB as eurozone flashes credit warnings - Foreign holders of Greek and Portuguese debt have seized on emergency intervention by the European Central Bank to exit their positions, leaving eurozone taxpayers exposed to the credit risk.The Bank of New Mellon said its custodial data showed a "sharp acceleration" of net sales of debt from the two countries after the ECB began purchasing €16.5bn of bonds from southern Europe and Ireland in bid to halt market panic. "It rather suggests that investors leapt at the opportunity to clear their balance sheets of intolerable risk," said Neil Mellor, the bank’s currency strategist. "This leaves the ECB itself in an unpleasant situation since it now faces a deterioration in its own balance sheet."

Greek debt crisis faces double blow of brain drain and early retirement - Efforts to overhaul Greece's near-bankrupt social security system, one of the biggest drains on its debt-stricken economy, have been hit by two new blows: young Greeks migrating and older ones demanding to retire before the rules change.As striking unionists brought the country to a halt and tens of thousands took to the streets today in protests over planned pension cuts, the socialist government faced mounting pressure over an unprecedented, and potentially explosive, dilemma.For the European Union and International Monetary Fund, which have agreed to the biggest bailout in history change is essential to consolidate the public finances that have brought Greece to the brink of insolvency. But with public servants braced to work an extra decade and the basic retirement pension slated to be only €360 a month by 2020, Greek authorities have been deluged with requests for early retirement.

Why Spain’s in worse shape than Greece - Note the circular reasoning in Martin Wolf’s latest column: Greece is likely to restructure its debt at some point, as John Dizard has argued in the FT. That would not be the worst outcome. Once a country is in the “junk bond” category, no reputation is left. Or, to put it another way, Greece got downgraded because it is likely to default, and it is likely to default because it got downgraded. This is yet another reason to start ignoring credit ratings.The main point of Wolf’s column is a very good one: European orthodoxy is that the crisis is, at root, fiscal. The fiscal rules failed to pick up the risks. This is no surprise. Asset price bubbles and associated financial excesses drove the Irish and Spanish economies. The collapse of the bubble economies then left fiscal ruins behind it.It was the bubbles, stupid: in retrospect, the creation of the eurozone allowed a once-in-a-generation party.

Spain’s €15bn austerity plan is flawed, warns leading economist – The Spanish government has made plans for austerity measures based on growth forecasts that far outpace those of the IMF and EU.Spain’s €15 billion austerity package, announced on May 12, may fail to alleviate the fiscal deficit because the government has “overestimated” growth rates and tax revenues, a leading Spanish economist has warned.“The Spanish government forecast for growth, which is double the figure estimated by the IMF or EU, is very optimistic,” says Javier Diaz-Gimenez, professor of economics at IESE Business School in Madrid. “When you get that kind of forecast – and if you’re going to use that to design the 2011 budget – then it will end in trouble because you’re going to overestimate government revenues by a large margin.”Diaz-Gimenez sees the picture as further complicated by the lack of public access to up-to-date current account cashflow data in Spain.

The End of Fiscal Sovereignty in Europe - Milton Friedman said that a common currency – that is, a monetary union – cannot be sustained without a deep form of economic and political union. By this, he meant an open economy that ensures the free flow of goods, labor, and capital, together with a disciplined central fiscal authority and a strong central bank. The latter two are pillars of a strong currency. They work in tandem. But the other pieces are no less important. The eurozone, currently wrestling with fiscal imbalance and sovereign debt risk, has a strong and autonomous central bank, but is fiscally fragmented and only partly unified politically.Enter the Maastricht Treaty, which in theory imposes fiscal discipline by placing limits on government deficits and debt levels – clearly a structure designed to prevent free riding on the fiscal discipline of others. Maastricht was thus intended to prevent a situation like the current one in Greece.It didn’t work. Eurozone sovereign debt turned out not to be homogenous with respect to risk.

Two Choices, Restructure Debts or Debase Currencies - John Hussman - In the end, as I've argued repeatedly over the years, monetary policy is only as good as fiscal policy. A central bank does not have wealth of its own. It is a zero-sum entity that can only enrich those from whom it purchases debt by debasing the relative wealth of people who hold the existing stock of currency. If a government insists on running deficits, engaging in wasteful spending, and dissipating public resources to bail out private bondholders, it has to find somebody willing to buy its debt. If it does not, the central bank buys it, and dilutes the currency by doing so. The situation is particularly insidious when the central bank buys low-quality debt, because there is no taxing authority behind it to provide a basis for confidence in the currency. Without a central taxing authority, the goal of a common European currency can only survive if the participating countries obey a rule that strictly controls the deficits of individual countries. Without that, the whole system is compromised.

Irish Miracle — or Mirage? - Ireland was one of the first nations to introduce tough fiscal austerity in this cycle — in spring 2009 the government slashed public-sector spending and raised taxes. Despite the cuts, the European Commission forecasts that Ireland will have one of the highest budget deficits in the world at 11.7 percent of gross domestic product in 2010. The problem is clear: when you cut spending you also lose tax revenues from people who earned incomes from that money. Further, the newly unemployed seek benefits, so Ireland’s spending cuts in one category are partly offset by more spending in another. Without growth, the budget deficit still looms large.Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic Tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills. The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses — from computer services like Google and Yahoo, to drug companies like Forest Labs — that set up corporate bases and washed profits through Ireland to keep them out of the hands of the Internal Revenue Service.

"Austerity" the New Buzzword: Mass Protest in Romania Over Austerity Measures; Greek Unions Protest Austerity Measures;Sarkozy Grapples with Austerity - Mish - Social unrest continues to brew in Europe. This time in Romania and Greece. France is on deck as French President Nicolas Sarkozy battles unions who refuse any cuts in pension benefits. French unions have called for a general strike starting May 27.Let's kick of the discussion with a look at Romania.

Austerity - The Consequences - I am going to start this post with a comment from Suzy, given on my last post: Cynicus what do you think about the theory that nothing now can save us. As is being made clear the austerity measures - that you seem to support are causing deflationary problems on a massive scale in the countries they are being used in. This means the markets are jittery about possible double dips and jittery about Greece entering a horrible recessionary scenario. So it seems we are damned if we cut and damned if we don't. And what is worse - default or ten years of depression - which is what some commentators think Greece now faces. The problem identified by Suzy is indeed a real problem - damned if we do, and damned if we do not. It will not have escaped the notice of readers that the word 'austerity' appears to be the word of the moment. This is a report from Forbes which is headlined as 'Austerity - the New Worrisome Buzzword': Dictionaries define austerity as economic restriction, scarcity, sternness, hardship.

Portugal's unemployment rate rises to 10.6% from 10.1% - Portugal's unemployment rate rose to 10.6% in the first quarter, official data showed on Tuesday, highlighting the economic challenges the nation confronts at a time when it's under pressure to lower its excessive deficit. The unemployment rate increased by 0.5 percentage points from the fourth quarter of 2009, Statistics Portugal reported on Tuesday. Compared to the same period last year, unemployment rose 1.7 percentage points. In the first quarter, the number of unemployed Portuguese surged by 96,400 to stand at 592,200 people from the same quarter a year ago. The jobless population rose by 28,900 compared to the last three months of 2009.

Fitch Keeps Outlook Negative on Greece Rating on Debt Concern (Bloomberg) -- Fitch Ratings is maintaining its outlook negative on Greece’s credit rating on concern debt will climb to almost 150 percent of gross domestic product. Fitch has yet to act after reducing Greece by two steps to BBB- on April 9, one level above junk. Standard & Poor’s classes Greece at BB+ while Moody’s has given Europe’s most indebted nation an A3 rating.“Whilst the support package maps out a viable route to medium-term debt sustainability, general government debt is set to rise to almost 150 percent of GDP before stabilizing in 2013, making this route a highly challenging one,” Paul Rawkins, a senior director on Fitch’s sovereign ratings team, said today in a statement from London.

How to Be a Good Regulator, IMF-Style - The International Monetary Fund is in the middle of trying to coordinate financial regulation globally. But it’s warning that new rules aren’t the only thing needed — good enforcement of existing rules is also critical.What’s especially important is what the IMF calls, in a new paper, is the “will to act.” “Developing this ‘will to act’ is a more difficult task and requires that supervisors have a clear and unambiguous mandate, operational independence coupled with accountability, skilled staff, and a relationship with industry that a avoids ‘regulatory capture.’”The paper, “The Making of Good Supervision: Learning to Say ‘No,’” is written by Jose Vinals, the IMF’s financial counselor and a former deputy governor at the Bank of Spain, and Jonathan Fiechter, an IMF official who is a veteran of the U.S. clean-up of the savings and loan mess in the 1990s.

Roubini at the LSE - governments run out of policy bullets - The LSE was packed tonight for a talk and discussion with Nouriel Roubini. It was an occasion to help launch his latest book “Crisis Economics” and Roubini started by arguing that financial crises are now more common than is supposed. Economics textbooks pay lip-service to crises and the conventional wisdom is that systemic crises in the markets are irregular and few and far between. Dr Doom takes a completely different stance believing that the sorts of crises that have dominated the headlines in recent years are best described as White Swans rather than the Black Swans beloved of Nicholas Taleb. Crises come in many different guises:

* Currency systems coming under strain and eventually breaking down
* Systemic crises of confidence and liquidity in the banking systems
* Sovereign debt crises often involving partial or complete defaults on loans
* Corporate and property borrowing bubbles

Euro Crisis, the Hidden Agenda - While everyone is focusing on the so called obvious factors, they have missed the most important factor; the real reason behind the crisis. The crisis started in Greece and the top EU members knew they were going to bail out Greece and potentially any other member that needed help, but they pretended that they would not. One of the obvious reasons for the bailout was not to protect Greece, but to save the bond holders; most of the bond holders are foreigners. That’s the same reason the banks were bailed out in the US, to protect the large shareholders; it’s all a game of smoke and mirrors. Our hypothesis is that the main reason that the Euro crisis was allowed to evolve was to deflate the Euro. Note that we have stated many times in the past that we have now entered into the competitive currency devaluation era, where the theme is or will soon be “devalue or die”. We recently spoke of this phenomenon in two separate articles Currency-devaluation-a-race-to-the-bottom and the devalue or die era is picking up steam

ECB To Withdraw €16.5 Billion In Liquidity Injected Last Week Even As Pritchard Says Only QE Can Save Euro In yet another attempt to blur the fine line between sterilization and quantitative easing, the ECB has announced it will carry out a one week variable rate liquidity operation on Tuesday to absorb the €16.5 billion in cash that was spent on bond purchases (don't you dare suggest this is QE) until last Friday. This will be followed with another liquidity extraction procedure the following week. From the press release: "As decided by the Governing Council on 10 May, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Market Programme." The amount of the extraction takes "into account transactions with settlement at or before Friday 14 May." The logic of immediately extracting rescue liquidity for a continent that is still on the verge of a liquidity crisis eludes us. Market News solidifies the point:

An intermediation problem, not a liquidity problem -  Talk about demand for the proverbial liquidity mop. As FT Alphaville noted earlier, the ECB set out to sterilise up to €16.5bn of its bond purchases via the auction of one-week fixed-term deposits on Tuesday. Demand for the deposits, however, has turned out to be almost ten times that sum. According to the ECB, 223 banks bid to deposit a total of €162.74bn at the central bank over the next week.Which brings Divyang Shah to make the salient point that the issue here is less liquid, more intermediated: The 7-day term deposit was allocated in full which is not a surprise given the bidders were lining up at the door to give the ECB their excess cash. The weighted average allotted rate of 0.28% is only 3bps above the overnight deposit rate of 0.25% highlighting that the market did not need much of an incentive to term out their deposits. The total bid amount at 162bn and the number of bidders at 223 highlights that the problem with the money markets is not so much liquidity but intermediation

The ECB’s QE doesn’t inhale - According to Morgan Stanley, the ECB’s recent foray into government bond purchases means the US Federal Reserve is now closer to an exit from quantitative easing (QE) than the European bank.Which leaves the MOST analysts with a number of questions regarding its current actions. Namely:Do the bond purchases represent QE or a move towards QE?What does the sterilisation via term deposits mean for the success of the programme? Since the Fed conducted large-scale purchases of assets, can we look to the Fed’s balance sheet for more insight into the ECB’s balance sheet? Their attempts to answer those questions look like this (our emphasis):

Trichet Says ECB Policy Stance Appropriate After Bond Buys - The European Central Bank’s present monetary policy stance remains “appropriate” after the ECB’s decision to purchase debt issued by governments in the euro zone, ECB President Jean-Claude Trichet said Thursday. “Our decisions on May 9 have confirmed it: We are not engaging in any form of quantitative easing,” Trichet said The ECB last week, for the first time, started to intervene in the euro zone’s sovereign-debt market to restore investor confidence in debt issued by euro-zone governments with weak public finances.To silence critics, who argue the ECB’s debt purchases could potentially fan inflation in the 16 nation euro bloc, Trichet said: “The liquidity provided through [bond purchases] is withdrawn in its entirety through tenders of term deposits”The ECB and the euro zone’s 16 national central banks settled EUR16.3 billion in purchases of bonds in the week ended May 14, the ECB said Tuesday.

Blanchflower Says Another EU Aid Package 'Inevitable' - Former Bank of England policy maker David G. Blanchflower said another euro-region rescue package “inevitably is going to come” and the euro’s “unstoppable” decline may lead to parity with the U.S. dollar. In an interview with Bloomberg Television, Blanchflower also slammed the European Central Bank’s “too-tight” focus on controlling inflation, saying it was based on outdated “German dogma” that must change or “the markets will do it for them.” “What we really have to think about are rescuing the banks, dealing with this credit crisis, giving confidence back to the euro area, which they’ve not done,” he said today from Hanover, New Hampshire, where he is a professor of economics at Dartmouth College. “And let’s think about how we can organize the next rescue package, which inevitably is going to come.”

European Inflation Accelerates, Exports Increase (Bloomberg) -- European inflation accelerated to a 16-month high and exports jumped the most in more than a year as the economy gathered strength. Consumer prices in the economy of the 16 nations using the euro rose 1.5 percent in April from a year earlier, compared with a 1.4 percent gain in March, the European Union statistics office in Luxembourg said today. Exports from the euro area rose a seasonally adjusted 7.5 percent in March from February, the biggest increase since January 2008.  The euro’s 17 percent drop against the dollar in the last six months has helped bolster European exports while at the same time pushing up inflation by making imports more expensive. As the euro-area economic growth gains momentum, finance ministers said austerity measures needed to tame budget deficits won’t choke the nascent recovery.

Fears Intensify That Euro Crisis Could Snowball- After a brief respite following the announcement last week of a nearly $1 trillion bailout plan for Europe, fear in the financial markets is building again, this time over worries that the Continent’s biggest banks face strains that will hobble European economies. In a sign of the depth of the anxiety, the euro fell Friday to its lowest level since the depth of the financial crisis, as investors abandoned the currency as well as stocks in favor of gold and other assets seen as offering more safety. In trading early Monday morning, the euro declined again, managing at one time to reach a four-year low relative to the dollar. The president of the European Central Bank, Jean-Claude Trichet, in an interview published Saturday, warned that Europe was facing “severe tensions” and that the markets were fragile. For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

Slightly scary stories about the leverage of European banks - Felix Salmon and I were on the radio a few days ago and we agreed (I think) on the need for as-simple-as-possible stronger limits on bank leverage.  I browsed the web to see how this struggle was going and ran across the following, A planned cap on bank leverage would not make the sector safer, said a German banking lobby on Friday, adding heavyweight support to a growing campaign.This is scary for at least two reasons.  First, it may be difficult to implement a leverage restriction in the United States, as supposedly this would be happening through an international agreement, namely Basel III.  This is a major (the major?) problem with the current banking bill.  There is then this: France does not want a fixed numerical cap.. Deutsche Bank (DBKGn.DE), a member of the BDB, says a ratio is simplistic, while Sweden wants a carve-out for its banks. Might I go out on a limb and suggest that some of these European banks are...excessively leveraged?  In theory the Basel III reforms will adjust the leverage restrictions for the risk of bank assets.  It's been the case for a long time that many German banks have higher measured degrees of leverage.  But are they more leveraged, all things considered?  If they're worried about Basel III, maybe the answer is yes. 

Germany now wants to shove its constitutional balanced budget law onto the eurozone - We are not surprised that Germany is framing the post-bailout debate purely in terms of fiscal discipline. The FT has a story that Germany wants to force its balanced budget constitutional amendment onto the rest of the euro area. Germany's law, which comes into effect in 2016 restricts the deficit-to-GDP ratio to 0.35%, which should stabilise the debt to GDP ratio at a ridiculously low level of between 10 and 20%. The report says Sarkozy is also favouring some constitutional deficit ceiling, details of which are expected to be revealed by former IMF MD Michel Camdessu this week. Der Spiegel has an interview with Trichet, in which he says this was the most severe economic situation Europe was facing since WW II, possibly even WW I (Worse than 1929-1933?). He also called for a quantum leap in terms of efforts to improve the eurozone dysfunctional governance regime. Merkel also accepts the view that the eurozone has only bought time, and that it still needs to fix the problems of imbalances and debt.

Demographics and the End of the Savior State - Germany is well down the path to national insolvency--a path shared by all developed nations attempting to fund unsustainable Savior States. That the Savior State appeared sustainable was an accidental coincidence of cheap oil and favorable demographics. The notion that a central government could provide cradle-to-grave care for all its citizenry was only possible when the worker-to-retiree/recipient was on the order of 10-to-1 or 5-to-1. Now that it is effectively 2-to-1 in most of the developed world, the demographics have turned decidedly unfavorable

Germany to Ban Naked Short-Selling at Midnight -Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis. The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said. “You cannot imagine what broke lose here after BaFin’s announcement,” Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so -- if they find any possibilities left at all now.”

The German Government Has Had Enough - If you thought the German government was going to be a lapdog for Sarcozy, or worse, was going to fellate Brussels and the ECB, you got a rude shock today.It appears that the German Government has just plain had enough of the crap that the banksters have tried to pull, and has decided to do what Barack Obama should have done in early 2009. It's about damn time.That is:No more naked credit crap, especially against sovereigns but not only against sovereigns.  No insurable interest, no CDS - period.Naked shorting will now be actually stopped in 10 leading financial institutions.Germany has had it with naked shorting of Gold, and specifically noted bank manipulation of gold prices via naked shorts beyond intent or ability to deliver.Germany has also said that they're not going to permit Euro derivatives that are not a "bonafide" FX hedge.  That is, no more naked bets on Euro movements either.Hedge funds are going to be regulated, position size limits mandated and enforced, reporting enhanced and a transaction tax is coming.Oh, and it appears that instead of telling all the banksters what they were going to do and "getting permission" first, or even discussing it with other governments, the German Government did what all governments should do - make up your mind and then do it without giving a good damn whether the banksters or other governments like it - and without giving them input into the decision or notice that it's coming.

Merkel urges action against market 'extortion' (Reuters) - German Chancellor Angela Markel, spooking investors on Wednesday by saying the euro was in danger, urged speedy action to stop market "extortion" and said the EU needed a process for "orderly" insolvency of members. Recommending tough moves against "notorious deficit sinners" in the euro zone, such as withdrawing voting rights, the German leader told parliament in Berlin: "Above all, what's necessary is to develop a process for an orderly state insolvency."With that we would create an important incentive for euro zone member states to keep their budgets in order.""

Merkel to The Banks and Hedge Funds: Sprechen Sie Deutsche? Then Droppen Sie Dead - After tonight, when hedge funds and The Banks call upon German financial firms and European governments to make payments on Credit Default Swaps or other financial instruments that are subject to the ban, the Germans will have a rather large hammer in hand to help them to negotiate the terms, and respond to any threats and coercion. Since the CDS will be deemed to be no longer legal, at least in the quantity and leverage desired by those gaming the system, the opportunity to default on them with the backing of the government may be an option. This seems quite similar to the stance that the Chinese government took on behalf of some Chinese firms that were caught on the wrong side of energy derivatives.

Merkel, Only Adult in Room, Lays Down the Law - Angela Merkel has laid down the law, something her fellow European and American heads of state have been too timid, or too beholden, to do, and too-big-too-fail banks around the world are scrambling for cover. She warned them last week she would do this. From Ambrose Evans-Pritchard at The Telegraph (via Jesse’s Café Américain):  "German Chancellor Angela Merkel accused the financial industry of playing dirty. 'First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous,' she said. 'Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight.'" See how that works? No kiss on the forehead this time for the Systemically Important Too Big Too Fail (SITBTF) institutions which, having been bailed out again, this time by EU and IMF promises of another US$1 trillion on top of the US$150 billion for Greece alone, will not be allowed to continue to play with some of the matches which could - again - burn down the house...

Don't sell Germany short - "Germany's lost the plot: it's rushing ahead on banning speculation, and now it wants other countries to go along." This has been the widespread reading of what the German regulator did yesterday. I write this from Berlin, and I can tell you that this summary is completely wrong. For starters, the German government has not lost the plot - it merely wants to rewrite it to reflect German political realities.German officials are under no illusions. They know that a unilateral ban on these trades - just in Germany - will not make much difference to anything. They also know that other countries are unlikely to follow them anytime soon. They are not really asking them to. I'm sitting in the Finance Ministry, at their G20 conference on reforming financial regulation. The finance minister hosted a dinner last night for the delegates, and I'm told that the German officials present were a bit sheepish about yesterday's ban.

Eurozone Lacks Policy Coordination - We remain dumbfounded that Germany instituted its short-selling ban unilaterally. When Germany first announced the decision, we assumed that other eurozone members would announce similar measures, but that did not happen. French Finance Minister Christine Lagarde said, "We haven't envisioned doing it." It is becoming clearer that the eurozone is not coordinating policy. While we have suggested that this crisis will eventually bring Europe closer together, early signs are not promising. We also stress again that German Chancellor Angela Merkel's blaming of speculators is a page right out of past emerging-market crises. Markets are never impressed with such finger-pointing, and this certainly does nothing to boost Europe's credibility. One bit of news that got lost in the shuffle Tuesday is worth repeating. The Bank of Italy effectively suspended mark-to-market requirements for Italian banks. It said new rules are aimed at "neutralizing" the effect of capital losses (and theoretically, capital gains) on regulatory capital from holding European government bonds.

Germany’s Short Selling Bans: Prudence, Populism or Bank Protection? - Yves Smith - Some commentators on the surprising and not terribly well received unilateral move by Germany to ban naked credit default swaps on sovereign debt and shorting of bank stocks assumed it was intended to placate domestic voters. Merkel’s move to join the Eurozone rescue effort was wildly unpopular at home; taking a tough line with speculators looks like a desperate gesture to restore a semblance of cred.And indeed, Wolfgang Schäuble, Germany’s finance minister, offered a credible-sounding defense in an interview in the Financial Times….if you were living on Mars and hadn’t witnesses the market’s raspberry: He wants urgently to rewrite the rulebook of the eurozone to prevent any such crisis happening again, and at the same time to revive the momentum of international negotiations on tougher regulation of financial markets. He has returned to the idea of an international financial transaction tax, to make financial institutions share in the costs of the crisis, even if it can be agreed only inside the European Union….

Merkel Does Mahathir and Martin Luther: Tilting the Market Table  - 1998, Malaysian Prime Minister, Mahathir Mohammed imposed capital controls ostensibly to protect Malaysia from speculators like George Soros. Then as now (with respect to German controls, also ostensibly to ward off speculative attacks) the financial press was full of quotes proclaiming the foolishness of such actions. The Church of Free Capital is, apparently, a dogmatic church- nation-states, according to the creed, have no right to impede the flow of holy money, or alter the terms of trade.The Church of Free Capital's creed states that prices set by market speculators (i.e. big finance) are, in a sense, divinely inspired, leading to the best outcome. That big finance has been taking home an increasing share of decreasing profits has not shaken faith in the creed among speculators, but it has angered capital providers in Germany sufficiently to provoke a protest and policy schism. Roughly five hundred years ago, a monk named Martin Luther sent a list of complaints- the 95 theses- to his Catholic superiors. His main complaint was about indulgences, whereby a Catholic could buy redemption from sin...

How can a [CDS] market be made?’ - We’ve had bans on the naked short-selling of equities many times before.But we don’t think we’ve ever seen a ban on naked shorting of credit default swaps (CDS). That means BaFin’s latest move is a bit of an experiment.It throws up myriad questions, controversies and points of regulatory debate for an industry that has been under regulatory scrutiny for some time now. The International Swaps and Derivatives Association (Isda), the derivatives industry’s representative body, has given a rather wishy-washy response to the BaFin ban. But Tim Backshall at Credit Derivatives Research has a much more interesting one.

Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets…(Bloomberg) -- Credit-default swaps soared as German Chancellor Angela Merkel’s curb on using the contracts to speculate on European sovereign debt sparked concern among investors about increasing government regulation.  Merkel’s coalition stopped traders buying default protection on government bonds they don’t own, so-called naked swaps, as German lawmakers debate a bill authorizing their contribution to a $1 trillion bailout to support the euro. The unexpected ban, done independently of the European Union, came after the rescue package failed to stop the 16-nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another.  “The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,”

The arrival of regulatory revenge - The German efforts to maintain political control over the rising public anger against the financial industry took an almost comic twist yesterday, when Germany imposed a unilateral ban on the short selling of eurozone government securities, and the shares of ten financial institutions. This ban is temporary, and extends to naked CDS. The euro plummeted on the news. The political idea is to show one’s determination against the greedy speculators who apparently destabilising the euro. The problem is only that there is hardly any CDS trading in Germany. Most of it is in the UK. It is inconceivable that the new Tory/Liberal government there will support (though the idea has the support of Lord Turner, the financial regulator). The ban took effect midnight. Another highly symbolic – and ultimately not very important – decision was taken yesterday by the Ecofin, which approved its version of the Alternative Investment Fund Mangers Directive, to regulate hedge funds. The vote was how Ecofin welcomed George Osborne, the new British finance minister, on his first visit to Brussels. And there is more to come. Merkel is pressured by her party into accepting a new tax on the banking system.

Market Chaos Warning After German Ban On Shorting - Traders are predicting chaos on the world's second-largest government bond market after the German authorities on Tuesday announced a ban on all naked short-selling in European public debt, as well as shares in the country's 10 largest financial institutions. The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region's sovereign bond market

FT Alphaville » Italy suspends mark-to-market accounting on eurozone bonds - Forget the BaFin naked short-selling ban (for a second). Tuesday’s other desperate European regulatory act took place in Italy: MILAN (Dow Jones)–The Bank of Italy Tuesday said Italian lenders holding European government bonds in their available-for-sale portfolio don’t have to take into account possible capital gains or losses on them, in a move to safeguard capital ratios.The decision came after volatility on European government bonds skyrocketed in recent weeks following several rating agencies downgrades, temporarily affecting the capital ratios of Italian, as well as other European, banks.That’s right — in another echo of US regulatory actions during the financial crisis, the Italian central bank has decided to partially suspend some mark-to-market accounting.

Criminally incompetent - They have been meeting almost daily since the crisis, at technical level, at the Ecofin, and several times even at the top level. And yet Merkel/Schauble forget to mention to their European friends that they are planning an important headline grabbing regulatory move. The French are outraged. Christine Lagarde not only criticised the German decision, saying that a short-sale ban kills market liquidity, and added that France will not follow suit. Financial market commissioner Michel Barnier also criticised the decision, emphasising the need for a common response. All effort to display European unity have once again by defeated in full public limelight. (Merkel is either criminally incompetent, or driving Europe off the cliff on purpose. We suspect it is the former.) The reaction to Germany’s unilateral decision was one of shock and disbelief. Global stock markets plunged. European markets were down by 3%. The euro plunged, but later recovered. Criticism focused both on the decision itself (somewhat strange since most CDS activity is in London, not Frankfurt), but more important on the the unilateral way it was decided. Bloomberg this morning is full of stories citing currency analysts that the euro will have much further to fall. The FT writes that the German decision was a quid-pro-quo to appease the Bundestag

Germany: Right and wrong on naked shorts - Those who criticise the German government for trying to restrict the use of naked shorts and credit default swaps (CDS) are - on the whole - concerned about the when and the how, rather than the whether.Or to put it another way, there are strong arguments for restricting the use of credit default swaps, or insurance policies for loans, in that their use exploded well beyond what could seen as sensible protection against loans going bad.At their peak a couple of years ago, there were $60 trillion of extant credit default swaps, insuring loans with a value of around $6tn. This was the equivalent of taking out 10 buildings insurance policies on a single house, or 10 life policies on one individual.The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad. And just as you might feel a bit anxious if your neighbours took out nine insurance policies that would enrich them in the event that your house burns down or you pop your clogs, it is reasonable to fear that the other $54tn of CDS contracts were not all taken out with the purest of motives.

Merkel Isolated After Short-Selling Ban Fails to Win Backers – (Bloomberg) -- German Chancellor Angela Merkel’s curbs on government-bond trading proved a step too far for European allies, leaving her isolated as she pushes for a crackdown on euro-area states that flout budget-deficit rules. Merkel’s unilateral effort to control what she called “destructive” markets came 10 days after voters angry at aid for Greece dealt her a regional election setback that cost her control of the federal upper house of parliament. She’s now trying to win support for another loan package that’s due to go to a parliamentary vote tomorrow, this time on Germany’s share of a $1 trillion bailout to backstop the euro. The political trials of the leader of Europe’s biggest economy and her flip-flop last month on extending help to Greece have fanned investor concerns as the 16-nation currency bloc struggles to counter the region’s debt crisis. They contributed to the euro’s decline to its lowest since 2006

Imagine There's No Credit Market: Another Look At German Controls - If I told some friends the financial capital of the nation was allocated in Narnia, Middle Earth or Hades, they might think I needed some time in a rubber room. Yet I could tell the same people the financial capital of the nation is allocated in credit markets, and seem wise despite the fact that Narnia and credit markets are both simply mental constructs. They don't exist.We, humans, exist (sidestepping valid, but for our purposes, irrelevant philosophical issues). We live, breathe, eat, sleep and act, and in so doing, we change the world, which also exists, and are changed by it. This idea we call "an economy" is a construct we imagine to be composed of the actions of millions of people, making, working, buying, selling, and saving. Confusion over this key point is rife. Politicians talk about saving the economy and speculators talk about freeing the markets, but neither exists to be saved or freed.  People all over the world think their investments are worth what a bunch of intermediaries say it is worth, instead of what it eventually returns.

Germany’s ‘desperate’ short ban triggers capital flight to Switzerland – A year ago, Germany's financial regulator BaFin warned that the toxic debts of the country's banks would blow up "like a grenade" once hidden losses from the credit crisis caught up with them. An internal memo at the time showed that BaFin feared write-offs might top €800bn (£688bn), twice the reserves of Germany's financial institutions. Nobody paid much attention. But the regulator's shock move on Tuesday night to stop short trading on banks, insurers, eurozone bonds – as well as a ban credit default swaps (CDS) on sovereign debt – has left markets wondering whether the slow fuse on Germany's banking system has finally detonated. BaFin spoke of "extraordinary volatility" and said CDS moves were jeopardising "the stability of the financial system as a whole". It is unsettling that the BaFin should opt for such drastic measures a week after EU leaders thought they had overawed markets with a €750bn rescue package and direct purchases of Greek, Portuguese and Spanish debt by the European Central Bank. BaFin's heavy-handed move seems to proclaim that the rescue has failed.

Germany: Europe's fed-up sugar daddy - I am in Berlin right now with a clutch of EU correspondents invited by the German government, and the message from ministers and politicians is that Germany still wants the European Union to work, and would like to see deeper integration of the EU. But, and it is a big but, Germany has changed. The days of France having all the ideas and Germany meekly paying the bills are over, we have heard. Germany is fed up of paying more than any other country into the EU budget, and being taken for granted. Germany feels unfairly attacked in this euro crisis. Mrs Merkel's government thinks it is outrageous that it is taxed with euroscepticism for insisting on tough conditions before bailing out members of the euro who caused their own problems. Germany is just trying to defend the law, monetary stability and taxpayers across the union, we keep hearing

Is Germany Going to Trigger a Lisbon Treaty Renegotiation? - It’s hard to tell whether the story at the Guardian, based on a memo apparently leaked by Germany’s finance ministry, is overstating the situation in contending that changes Germany will demand for the euro regime could require a Lisbon treaty negotiation. From the article: Following Greece’s debt emergency and with the euro in the throes of its worst crisis of confidence, Berlin also tabled a nine-point plan rewriting the euro regime to include legally enshrined budget deficit ceilings in all 16 member countries.The German demands, in a finance ministry paper obtained by the Guardian, could require the EU’s Lisbon Treaty to be renegotiated, presenting David Cameron with a dilemma over whether this would trigger an EU referendum in Britain…in what looked like a concession to her centre-left opposition before a crucial vote in Berlin today on the €750bn (£642bn) security blanket for the fragile currency, she [Merkel] said she would fight for a global financial transactions tax at the G20 meeting in Canada next month.

Rescue packages and iron boots - Today, I thought I would provide some background to the Euro crisis to advance some understanding of why the conservatives in Europe are advocating highly destructive solutions to their crisis. So I went back to some notes that I have accumulated over the years to try to put the sort of nonsensical fiscal rules that are now being proposed by very influential German economists into some sort of context. What you will see is that the context doesn’t in any way help to justify the rules. They are crazy by any reasonable assessment. But at least you will see them in a wider context. I hope

Merkel’s comments trigger a mass sell-off of global stocks - World market plunged yesterday, as investors reacted scared by Germany’s politically motivated regulatory proposals. At a conference in Berlin, Angela Merkel presented Germany’s big ideas for reform – a global financial transactions tax, short selling ban, and a European ratings agency. The Canadian finance state secretary told Merkel into her face that his country would not participate, as Canadian banks behaved responsibly during the crisis, and the Americans also think that the idea of a transaction tax is downright potty. FT Deutschland quoted Adam Posen from the Bank of England who said that a transaction is unworkable, and that he favoured the idea of a financial activity tax.  We also suspect that the Brits will not participate, so this idea is likely to end up as a Germany-only initiative. The paper also quoted the Finnish finance minister who said Germany’s short sale ban had surprised everybody, and it was not a nice surprise.

'Perfect storm' as market tremors hit China, EU, US  - Capitulation fever has swept global markets on triple fears of faltering recovery in the US, Chinese credit curbs and Europe's intractable escalating debt crisis. "It is the perfect storm," said Andrew Roberts, credit strategist at RBS. "People have been too complacent about risky assets. This is a global deflation scare and people need to get ready for falls in US and European bond yields to 2pc." Investors shrugged off German approval of a $1 trillion (£700m) eurozone rescue package, doubtful that it can resolve the debt crisis. World equities are now heading for the biggest monthly fall since October 2008.

CDS Traders Refuse To Shift Focus Away From UK And France -For the 4th week in a row, the UK is a top derisking name not just in sovereigns but in all DTCC tracked names. With $385 million in net notional derisking, in 227 contracts, the UK was the top 2 derisking name, with the surprising appearance of Brazil in the top spot at $460 million. Far less surprising was the 3rd name on the list: France continues to be in the top 5 derisking names week after week. Other notable names that complete the top 10 deriskers: Argentina, Germany, Australia, Korea and Japan. And the proof that corporates are now secondary to gambling in sovereigns, the top corporate derisking name, Enel SPA came in at a mere 191 million in notional, a ways away from the top three, all consisting of sovereigns. The same is true on the rerisking side, where of all 1000 names, the top 5 reriskers were all sovereigns (Italy, Spain, Portugal, Greece and Austria).

It’s the general equilibrium, stupid - VoxEU - Are policymakers on track to prevent a repeat global crisis? This column says the answer is probably “no”. It argues that the current financial reform efforts are mostly aimed at the symptoms rather than the underlying illness. The fundamental problem in the current global macroeconomic and financial equilibrium is one of a shortage of safe assets.

Inflation Expectations Falling in Europe - Today in the bond market:German and French government bonds rose, pushing yields to record low levels, and securities of so- called peripheral nations such as Spain fell on concern Europe lacks a united response to its debt crisis. It’s true that there’s a growing perception of unsafety in Europe, but you already knew that. The interesting thing here is that German and French bond yields are falling to record lows. That prima facie looks like falling inflation expectations in Europe. Which in turn drives home the point that though Greece definitely has fiscal problems, the main issue in Europe isn’t in government budgets but in the lack of growth or prospects for growth. If your economy doesn’t grow, your budget will necessarily not add up. The ECB desperately needs to step up with more forceful intervention, and if European governments feel like taking politically difficult measures it would be better to focus on pro-growth structural reforms than on possibly counterproductive austerity budgets

Whatever Germany does, the euro as we know it is dead - Angela Merkel's ban on short-selling is just a distraction from the horror to come - For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst. In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.

A future without the euro is a distinct possibility - Will the euro survive? It is a question that, two years ago, would have seemed outrageous. Anyone who suggested that the eurozone was fatally flawed was branded as a Europhobe, someone who hated the European Union, not just its single currency. For the euro appeared a success. After a few wobbles, it had established itself as a major currency, while across the Continent, euros were making it easy for people to travel and trade. More important, adopting the euro seemed to have given a greater stability to countries that had previously had weaker currencies, such as Italy and Spain, cutting their interest rates and encouraging growth.

The Euro Turns Radioactive - Some of the world's largest money managers and central banks have become increasingly skeptical of the euro, presenting a threat to the common currency's prospects.So far during the euro's months-long descent, attention has been focused on hedge-fund selling of European assets but central banks and large managers have a much-larger influence on foreign-exchange markets. Even if they don't dump euro assets, a mere pause in their buying could weigh heavily on the currency. Mutual-fund data show that in recent weeks, European and U.S. investors have shifted out of euro-zone equity funds. Asia's largest bond fund, Kokusai Asset Management's Global Sovereign Fund with $40 billion under management, lowered its euro allocation from 34.4% in March to 29.6% on May 10, according to a company manager. And portfolio managers with huge money pools, such as Allianz SE's Pacific Investment Management Co., or Pimco, and Baring Asset Management, expressed caution on the euro in interviews with The Wall Street Journal.Video: John Lipsky, first deputy managing director of the International Monetary Fund, speaks about reactions to the global recession, comparisons between Greece and Japan, and plans for fiscal adjustment in Japan.

"Stormy Seas on the Atlantic" - The European Union's debt crisis, the threatened collapse of its fledgling 'euro' currency, and the uncertainties created by the UK elections may seem very far removed from the American ship of state, but, in reality, this turbulence threatens to capsize our fragile economy. Greece is in the most immediate danger of default, followed closely thereafter by Portugal, Spain, and perhaps Italy. As the European Union overrides its own treaty agreements to offer bailouts to these 'PIGS,' global financial markets have panicked. Essentially what has happened is that the covenants and assumptions underlying one of the bedrock reserve currencies of international finance - and the presumed successor to the US dollar as primary reserve - have been broken.

Europe’s Rescue for Greece Brings Euro to New Normal (Bloomberg) -- Europe’s debt crisis will depress the euro still further after it declined to the lowest level since 2006, according to UBS AG and BNP Paribas SA. For years to come. For the 16 countries using the currency, that isn’t all bad. A drop over three to four years would benefit European exporters in countries such as Germany, where foreign sales help offset reductions in government spending and restraint by consumers concerned about inflation. U.S. exports, which President Barack Obama says he wants to double within five years, may become less competitive.  “The euro depreciation is very good news for the region” because the rest of the world economy is expanding, said Charles Wyplosz, head of the International Center for Monetary and Banking Studies in Geneva. “This is going to bring a welcome boost that may save the euro zone from outright recession.”

A big step towards fiscal federalism in Europe - When the euro was born everyone knew that sooner or later a crisis would occur. It was inevitable that, for a such a bold and unprecedented project, in some countries (even the most virtuous ones), mistakes would be made and unforeseeable events occur. It was also clear that the stability and growth pact was – as I have said before – “stupid”, not because it was mistaken in its objectives, but because it was founded on purely mathematical parameters without any discretionary powers or political instruments to enforce it. Germany and France were the first countries to violate it, although not in a destabilising way: their finance ministers decided to ignore the objections of the European Commission (possibly because they were “too big to fail”).Due to political difficulties it was not possible to protect the euro. I was warning years ago that, through no one’s fault in particular, extraordinary events could occur that would force joint co-ordination of fiscal policies.

Europe about to experience American-style credit crunch - The rapid slide in value of the common European currency known as the euro continues to rattle global investors amid signs that problems on the other side of the Atlantic could spread and infect other economies, even slowing growth in the United States. The problems in Europe stem from having a single currency in 16 nations with widely varying levels of economic health and debt. Not even last week's trillion-dollar bailout stemmed concerns, which range from slower growth to fears of an outright crumble of the European Union.Like the United States just a few years ago, Europe now faces a financial crisis of the proportions not seen since the aftermath of World War II. Here are some answers to questions about why problems in Europe offer Americans both risks and opportunities.

Eurozone crisis to be worse than Lehman crash: Tyche Group Berlin's decision late on Tuesday to ban several financial transactions — a move designed to quell volatility — not only took the markets by surprise but most of its euro zone partners too, and has led to more uncertainty, not less.Analysts suspect that the ramifications for the Eurozone could be profound. Not only does the move undermine efforts to improve coordination and political unity across the European Union, but it has sent the euro to a new four-year low. In an interview with CNBC-TV18, Martin Hennecke, Senior Manager, Tyche Group, said the Eurozone crisis is actually a lot worse than the Lehman crisis. He feels eventually the crisis would spread to bigger markets like the US, UK, Germany and France. "In the second phase of the crisis you have seen the governments going bankrupt that started with Southern Europe," Hennecke said

After the fall - The ECB’s dented reputation is in part a result of hubris about the euro - May IT IS meant to be an example of European unity, but in response to the euro zone’s fiscal crisis the European Central Bank (ECB) is having a fight on several national fronts. Even as the bank’s dealers were pushing cash into the bond markets of selected euro-zone countries, its president, Jean-Claude Trichet, was trying to reassure Germans that the ECB had not lost its inflation-fighting zeal or its independence. He told Der Spiegel that it was “ridiculous” to believe that the decision to buy bonds, in the early hours of May 10th, was in response to political pressures. In a separate interview, he insisted that the bank’s monetary policy was unchanged and that its actions would not spur inflation.To back up that claim, the central bank conducted a special auction of one-week deposits on May 18th to “sterilise”, or soak up, the €16.5 billion ($20.4 billion) of cash it had created by buying bonds. Banks offered almost ten times what was required, which meant the ECB had to pay an interest rate of just 0.28%. The exercise was largely cosmetic given how much liquidity the ECB supplies to banks. But appearances count. “It’s as if the ECB has sinned and has to do penance,”

A Time for Calm/Panic [delete as applicable] - Should international investors worry less about the euro? The voice for calm would say yes. True, financial markets have been spooked this week by aggressive German rhetoric - and action - against speculators. But it's hardly news that European governments want to rein in the financial system in key respects over the next few years. And, as yesterday's key US Senate vote confirmed, the Europeans aren't the only ones. Look through the German rhetoric - the voice for calm would say - and you see the key player in the eurozone drama demonstrating that it is willing to put the future of the single currency before pretty much anything else.  The 440bn-euro special stabilisation mechanism for the euro has won support today in the German parliament.  (OK, so the Eurogroup meeting to sign off on the details was cancelled today - because they, er, didn't have enough details to sign off. But assume they get their act together fairly soon.)

Emerging Markets are ‘Safer’ Bet in Europe Crisis, Mobius Says - Developing markets offer lower debt to gross domestic product ratios, higher foreign currency reserves and better- managed banks relative to their developed peers, said Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset. Any decline in European exports and foreign investment won’t be “disastrous” for nations from China to India, he said. The cost of insuring European sovereign debt against default has almost doubled this year. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments has risen by 59.2 basis points this year to 129 and reached a high of 167.1 basis points on May 6, according to CMA DataVision prices. Contracts on Greece, Portugal and Spain are now higher than developing nations such as Russia, Philippines and Thailand, CMA prices show. “The numbers show that these countries are safer to put your money in terms of debt,” Mobius said in an interview with Bloomberg Television. “People are now beginning to differentiate. Many of these countries have been denigrated undeservedly because they’ve been doing actually a good job.”

Boom, bust and sovereign ratings: Lessons for the Eurozone from emerging-market ratings -VoxEU - Credit rating agencies have recently downgraded Greek, Portuguese, and Spanish sovereign debt, causing unrest among Europe’s leaders. This column argues that unless sovereign ratings can be turned into proper early warning systems, they will continue to increase instability and volatility and to undermine the benefits of capital markets. One option is to drop the use of sovereign ratings in prudential regulation altogether.

An Interview With Joseph Stiglitz -- Regulation and the Euro Zone - Nobel Prize winner and Professor for Economy at Columbia University, Joseph Stiglitz, just returned from a book tour in Europe where he introduced his widely acclaimed analysis of the Financial Crisis, called Free Fall. In an interview he explains the future of the Euro Zone, how it was possible to create a moral vacuum on Wall Street, why US citizens do not take their anger to the streets and how the US should follow Greece and start regulating now.

For a solution to the euro crisis, look to the states, - The Greek budget crisis has made it clear that something must be done to limit fiscal deficits in eurozone countries. The attempt to do so with the group's Stability and Growth Pact has failed. ...There is now political consensus in Europe that new rules are needed to prevent large deficits, but there is no agreement on what should be done. The European Commission ... proposed last week that the national budgets of each country be examined by the others before they are approved. ... Here there may be something to learn from United States. Although the 50 states share a currency and each sets its own spending and tax policies, state deficits remain very low. Even California has a deficit of only about 1 percent of the state's GDP and total general obligation debt of less than 4 percent of state GDP. The basic reason for these small deficits is that each state's constitution prohibits borrowing for operating purposes.

US Senate Votes No on IMF Aid to Troubled Nations - The United States would oppose International Monetary Fund bailout packages to countries that are not likely to repay them under a measure passed by the U.S. Senate on Monday. The 94-0 vote came amid widespread concern that the United States is indirectly supporting a $40 billion IMF bailout approved for Greece earlier this month as that country struggles to rein in its debt. A series of unprecedented U.S. bailouts to stem the 2008-09 economic crisis has angered many Americans and lawmakers have said they are unwilling to bailout foreign countries, as well. European leaders have asked the IMF to stand ready to provide up to $310 billion as part of a $1 trillion package of loans and guarantees to prevent Greece's financial woes from spreading to other euro zone countries with big budget deficits, such as Portugal and Spain.

Europe May Be Insolvent But It Sure Is Guzzling Electricity - An interesting chart depicting European monthly yoy change in electricity consumption comes to you via Goldman. Now that Europe's true fiscal problems are being exposed, look for such datapoints, which Goldman is of course using as a pitch to just how great Europe's condition is (for a real indication how "good" things are, check the EUR Libor, or the TED spread posted earlier, but let's not forget Jim O'Neill fluff piece about How Good The World Is, issued about 50 S&P handles higher - tells you all you need to know about bias), another, and more objective way to read the data, is to expect European electric output to decline materially. What that may mean for nattie and spent uranium rods, one can decide on their own.

Debt crisis: The next phase - THE European debt crisis remains the biggest economic story of the moment, but events seem to have matured into a new phase. In the first chapter, when began several years ago, private banks faced collapse and economies stood on the brink of a depression-like decline, but governments stepped in to support banks and economies with bail-out packages and large deficits. In the second chapter, the burden of sovereign debt grew high enough in some nations to scare markets, raising the prospect of a sovereign-driven financial crisis. The European Union, the European Central Bank, and the IMF seem to have doused that fire via a massive emergency loan package and the ECB's decision to purchase government debt. So far, so good on that front; yields on government bonds across southern Europe remain well below their crisis peaks and well behaved. Markets aren't nervous about default in the short- to medium-term. But it appears that they're increasingly worried about growth prospects

Morgan Stanley: Full-Blown Quantitatve Easing May Be Needed To Save Europe, And We Could Still See 1987 Redux - A possible way to read last week's sharp post-bailout rally, and then the subsequent selloff, is that markets were initially enthused by the ECB's intervention on bond markets, but then dispirited once they realized that this was not quantitative easing. All bond purchases will be sterilized, said Jean-Claude Trichet, meaning that on net the bond buying won't add liquidity to the system.The lack of QE means that Europe didn't really engage the nuclear option, and decided to leave one crucial weapon in the tank.Now everyone assumes that it's only a matter of time before Trichet fires that last bullet off. Indeed Morgan Stanley's (MS) Euoprean strategy team lead by Teun Draaisma remains bullish, but acknowledges: "It is possible that the crisis worsens and that this correction is only over when the ECB  announces full-blown QE, unsterilised buying of government bonds in size."

Forget Greece: Europe's real problem is Germany - Ground zero of Europe's debt-currency-banking crisis isn't in Greece, or Portugal, or Ireland or even Spain. It's in Germany. So says Martin Wolf, the estimable economics columnist of the Financial Times, who this week offered this wonderfully concise, if somewhat mischievous, description of how the vaunted German economic machine really works: At one end is a powerful and highly efficient industrial export engine that generates a large trade surplus with the rest of the world, including most other countries in the eurozone. Instead of spending this new export wealth on a higher standard of living, however, parsimonious Germans prefer to save it, handing it over to thinly capitalized German banks that have proved equally efficient in destroying said wealth by investing it in risky securities issued, not coincidentally, by trading partners that need the capital to finance their trade deficits with Germany. Normally, what should happen to such a country is that, as a result of its trade surplus, wages rise, along with the value of its currency, to reflect its new wealth and productivity. That has the effect of making those exports less competitive while encouraging workers to spend their increased income on cheaper imports. And in that way, the system brings imports and exports more into balance. That rebalancing, however, hasn't happened in Germany.

Albert Edwards: Europe Is On The Edge Of A Deflationary Precipice That Will, Paradoxically, Usher In 20-30% Inflation - A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation."

Number of the Week: 75% Chance of Greek Default - 75%: The probability of a Greek default by 2015, according to the credit markets. The 750-billion-euro rescue package put together by euro-zone governments and the IMF is more than adequate to cover the immediate needs of Greece, Portugal, Spain and other fiscally challenged European governments. All together, those governments need no more than about 288 billion euros through the end of this year even if investors refused to lend them another cent. Beyond that, though, the situation gets dicier — a reality reflected in the market for sovereign credit-default swaps, where players bet on the likelihood of defaults by buying and selling insurance contracts that pay off if a government reneges or restructures its debt.

O’Neill Says Idea of Euro Breakup Within a Year Is ‘Ridiculous'…(Bloomberg) -- Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said it is “ridiculous” to suggest that the euro area will break up within the next year and predicted the currency’s decline may be almost over.  “The simple misconception is people trying to equate pure economic logic with social political reality,” O’Neill said in an interview from his office in London today. “The Germans and French are passionately committed to it whether the rest of us think it’s crazy or not.”  Christopher Wood, chief equity strategist at CLSA Asia Pacific Markets, today predicted the currency will drop to parity with the U.S. dollar “sooner or later.” “This is 60 years of history in the making, so the idea that the euro simply falls apart at first test of its credibility, I think it highly unlikely,” O’Neill said

ALEA IACTA EST - Yes this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money. The consequences are clear; we will have hyperinflation, economic and human misery as well as social unrest. When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar).  Sadly, we are probably not very far from that point. It is already starting to happen in many countries.

The Euro Party's Over. What Now? - WSJ - No need retelling the well-reported slide of Greece into what will likely be an eventual default. Or the trials and tribulations of the euro zone's other periphery countries. What is worth noting is that it is one thing for healthy nations to be the unfortunate victims of "contagion," quite another for them to pick up the infection by embracing the diseased country. Which is what euro-zone countries have done. They have in effect welcomed the disease-weakened balance sheets of Greece and other countries onto their until-now healthy, stronger balance sheets, wiping out decades of good, prudent living in the case of Germany, and calling attention to thirty years of deficits, in the case of France. Worse still, the spread of the fiscal disease is not confined to the euro zone, which it can be said by the querulous should have seen it coming. Britain, with a fiscal deficit of Grecian proportions—12% of GDP—and the U.S., in similar circumstances, find themselves not immune to the disease.

Connecting the eurozone crisis to the Canadian economy - This looks tricky. We should perhaps start with Tim Duy's suggestion that the eurozone crisis could be a net positive for the US: It makes sense to think of lower prices for oil and other commodities as a plus for the US, but it's a mixed bag for us. A stronger US recovery is a plus for Canada, but lower commodity prices are a negative: the net effect may be close to a wash. There really aren't much in the way of direct links in the goods markets: exports to Europe take up something like 3% of Canadian GDP. As was the case in 2008, the linkages to fear are in the financial markets. For their own inscrutable reasons, forex traders have seen fit to respond to a crisis by depreciating the Canadian dollar against the USD. Everything else being equal, this increases inflationary pressures in Canada, and so increases the probability that the Bank of Canada will increase interest rates on June 1. Then again, the Bank may not wish to disturb financial markets now that they're going through yet another crisis.

Greek-style crisis could hit Japan, US: Roubini - Greece's woes may be the start of a widening sovereign debt crisis that could tear through developed economies, including Japan and the United States, leading economist Nouriel Roubini has warned."What's happening in Greece is just the tip of an iceberg of a broader range of sovereign debt issues, of deficit, in many advanced economies," said Roubini, one of the few experts who predicted the financial crisis.The new crisis could occur "not just in the eurozone but UK, US, or Japan," he said.

IMF Says 'Critical' Japan Pursues Credible Debt Plan (Bloomberg) -- The International Monetary Fund said Japan’s government must pursue a credible fiscal program starting next year, including increasing the 5 percent sales tax. “With global scrutiny of public finances increasing, the need for early and credible fiscal adjustment has become critical,” the IMF said today in a report released in Tokyo. “Fiscal adjustment should start in fiscal 2011, beginning with a gradual increase in the consumption tax, to take advantage of the cyclical recovery.” Finance Minister Naoto Kan has said the government needs to draw on Greece’s fiscal crisis to contain a gross debt burden that the IMF says exceeded twice the size of gross domestic product last year. Europe’s deepening fiscal woes prompted the region’s policy makers and the IMF to unveil an unprecedented rescue package last week amid growing scrutiny of sovereign debt.

FT Alphaville - The great Aussie-yen unwind - Get ready for the great unwind in yen-Aussie dollar trades.That, at any rate, is the view from JP Morgan’s Japan currency strategist Tohru Sasaki.As he noted on Friday, Japanese retail forex margin traders have not reduced their yen shorts much on an aggregate basis, despite the brutal yen appreciation seen last Thursday (nearly 14 per cent against the Aussie in less than 24 hours and nearly 6 per cent against the euro, to Y113.67). According to Sasaki’s estimates, the total amount of aggregate yen shorts held by FX margin accounts was Y5,500bn ($59bn) as of May 13 compared to the recent peak at Y6,3oobn on May 5.

‘There’s No Money Left,’ U.K. Minister Learns (Bloomberg) -- Arriving for work at the U.K. Treasury last week, the incoming chief secretary, David Laws, found a note from his predecessor, Liam Byrne, offering advice on the job. “Dear Chief Secretary, I’m afraid to tell you there’s no money left,” Laws cited it as saying. “Which was honest,” Laws, whose position is the No. 2 in the Treasury after the chancellor of the exchequer, told a press conference in London today. “But slightly less than I was expecting.” The note underscores the task facing Britain’s Conservative-Liberal Democrat coalition as it seeks to reconcile demand for improved health and education services with promises to reduce the largest budget deficit since World War II.

How the euro might collapse - I had a little three-minute fantasia this morning on Radio 4 in the UK; if you prefer text to audio, here you go. The idea was to give an idea of one way in which the euro might fall apart, but I had no idea, when I recorded it, that markets would plunge again today

Viewing the euro crisis from Britain - The Economist’s Charlemagne was unimpressed by my euro fantasia this morning: apparently I was the BBC’s second choice for the spot, and was approached only after they had been turned down by more sober journalists.There is enough noise out there about Anglo-Saxon newspapers talking down the euro without dragging The Economist into a spoof about the death of the single currency… the whole idea felt unworthy of the BBC. …The British media is handling this crisis with unusual complacency, tinged with a certain glee.Charlemagne even manages to call the Times (of London) “criminally irresponsible” for writing about a break-up of the euro. All of which represents a level of hypocrisy in the Economist that I’d previously suspected, but not noticed due to highly evasive skills. Exhibit A:

City fears of ‘Great Depression Mark II’ - Leading City experts have started raising the prospect of "Great Depression II" amid worries that the European economic crisis could trigger a deeper bout of chaos. Bill Gross of bond fund Pimco said that hedge funds were starting to liquidate their positions in a bid to preserve their capital – a worrying "mini relapse" towards 2008 territory.Andrew Roberts, head of European rates strategy at RBS, said "Great Depression II" could now be approaching, adding: "It now has potential to speed toward its conclusion; a European $1trn package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation." 

Return of the Nervous Weekend - El-Erian   It's hard to forget those "Sunday night specials"—long hours spent anxiously waiting to hear from Washington on topics like Bear Stearns, Fannie and Freddie and Lehman Brothers. Now, it's Europe's turn. The focus these weekends is on Berlin, Brussels and Frankfurt, with observers wondering how policy makers will react to the generalized disruptions in global markets, and particularly to the mounting pressures facing the European banking system.It is absolutely critical to understand how we end up in the midst of these unsettling weekends. It's a failure of both crisis prevention and crisis management. It happens because structural problems like excessive budget deficits are allowed to fester. Policy makers quickly fall behind in terms of their understanding and ability to respond. And the crisis morphs into a highly disruptive, multidimensional affair. This is the case in Europe today. What started as a Greek debt problem, mistakenly viewed by too many as containable, has gone regional and now global

The second debt storm hits nations – The debt mountain that brought down some of the world's biggest banks and dragged the international financial system to the brink of disaster has simply shifted to governments. Now it's threatening countries around the globe -- and, if left unchecked, could rip the very fabric of Europe's economic system and wreck economic recoveries in the U.S., China and Latin America. The impact on markets has been severe. The euro has slumped more than 12% against the dollar since the sovereign-debt crisis flared in southern Europe. Gold has marched to new highs as investors seek a safe haven and, perhaps most alarming, it is now more expensive to buy insurance against national default than it is to insure against corporate failure

Fiscal Adjustments Ahead Around the World, A Graphical Look - The size of the sovereign fiscal adjustments ahead around the world, based on the latest IMF figures, assuming countries want to stabilize debt as a percentage of GDP. The numbers represent required contraction in domestic spending (in the cyclically adjusted primary balance) between 2010 and 2030 as a percentage of GDP. Click for a larger version.

Something Happened -  Something snapped in the world last week and a lot of people around the world sensed it -- especially in the organs of news and opinion -- but this ominous twang was not very clearly identified.  It was, in fact, the sound of the financial becoming political. The macro-swindle of a worldwide Ponzi orgy now stands revealed and the vacuum left in its place is about to suck everything familiar into it -- standards-of-living, hopes, dreams, not to mention lives. The political action will be a desperate scramble to determine who and what is able to escape getting sucked into this black hole of annihilation. It's very suddenly shaping up to become an epic in human history.