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

Saturday, May 8, 2010

week ending May 8

 Can the Fed unload $2.3 trillion without crashing Wall Street? - Having waged a battle against financial mayhem for the last two years, the Federal Reserve is tentatively declaring victory. As it guaranteed debt and swapped cash for all sorts of assets, the Fed's balance sheet grew—from about $850 billion in assets before the crisis to about $2.3 trillion this spring. The binge included the purchase of $1.25 trillion of mortgage-backed securities issued by Fannie Mae and Freddie Mac. But in testimony to Congress in March, Federal Reserve Chairman Ben Bernanke said the purchases were coming to a close and that the Fed was now seeking to lessen its burden. The Fed is now discussing how to sell off these new assets.  The prospect of the Fed dumping hundreds of billions of dollars of bonds and mortgage-backed securities onto the market has unsettled some market watchers. But they shouldn't worry—too much.

Would You Buy a Used Car From the Fed? (Maiden Lane Edition) - Yves Smith - Would you believe the chairman of a financial firm who told you that he was going to be able to pay off his loans to you when: 1. The company was showing a not-negative net worth ONLY because it had marked down its loans on its accounting statements by 7.5%, even when the loan agreement still calls for payment in full 2. Nearly a third of its assets are marked to model (for the technically oriented, valued as Level 3 assets) and therefore may be worth a lot less than the amount the company says they are worth3. All the other assets he has should be benefitting from the Fed’s super low interest rates, meaning their market prices will fall if and when rates rise (which should happen when if the economy ever normalizes) 4. Other creditors will be paid before you are 5. There is every reason to expect more losses  Welcome to the wonder through the looking glass land of Maiden Lane, the bailout vehicle that holds crappy Bear Stearns assets. According to the Fed, the taxpayer will not lose a dime on it

Fed Papers Give Favorable Reviews to Emergency-Lending Programs - The Federal Reserve would like to congratulate itself for the effective construction of its emergency liquidity facilities. Two recent papers from the Boston and New York Federal Reserve banks looked at some of the key programs launched by the Fed during the financial crisis and concluded the programs did a good job at reviving the market for consumer financing and were successful in ensuring the free flow of dollars across international borders.The research comes on the back of other central bank analysis that has also cast a favorable eye on other emergency efforts taken by the Fed, most of which have already ended. Most central bank officials agree that while financial conditions in the U.S. are still problematic, the worst of the troubles faced by markets have passed, which means the financial sector no longer needs much in the way of emergency support. Based on what Fed economists are writing, now is evidently report card time.

Fed’s Rosengren: Current Policy Is ‘Appropriate’ - A slow recovery and no signs of emerging inflation threats meant he Federal Reserve can hold off for some time before tightening monetary policy, a central bank official said Wednesday.“With inflation expectations stable, core [personal consumption expenditures] inflation rates declining, and significant excess capacity in the economy, accommodative monetary policy remains appropriate,” Federal Reserve Bank of Boston President Eric Rosengren told a gathering.Rosengren is currently a voting member of the interest-rate-setting Federal Open Market Committee

Bullard on Fed policy - Most of our interview on Saturday with James Bullard, president of the St Louis Federal Reserve Bank, was focused on his stance on the financial reform bill, which he seems quite exercised about. On eventual mortgage asset sales by the US central bank, Mr Bullard suggested there was still no consensus among the members on how to move forward. “It has been an ongoing topic. It is still a topic. We do want to make a decision, ” he said. Mr Bullard said the impact of the European sovereign debt crisis on the US economy was brought up during the meeting, and Fed officials were “concerned about the situation”. “I am hopeful that the Europeans will come up with a good package,” he said. However, Mr Bullard did not go as far as saying that the Greek debt crisis was the main reason the Fed decided once again to maintain low interest rates for an “extended period”.

Fed’s Bullard Sees Little Risk in Gradually Selling Mortgages - Federal Reserve Bank of St. Louis President James Bullard said the central bank, if it were to start selling mortgage securities later this year, could start the process with “little impact” on markets by using a “reverse taper” approach to slowly unwind its balance sheet. In an interview, Mr. Bullard said he continues to support asset sales in late 2010 — an idea he floated earlier this year — as long as the economy continues recovering. Just as the Fed used the “taper” approach to slow its purchases of mortgage securities, extending them into March, he said the Fed could avoid market disruptions by using a similar strategy for its eventual exit.But Mr. Bullard, a voting member of the Federal Open Market Committee, said policymakers are in “ongoing discussions” about whether to take that approach and haven’t made a decision about asset sales. Fed Chairman Ben Bernanke and other key policymakers support the long-term goal of returning the Fed’s balance sheet to Treasury securities over time, but they remain skeptical that the central bank can sell its mortgage-backed securities in the near term without sending longer-term interest rates up and derailing the recovery.

Fed Watch: Still Unbalanced - The recent flow of data is interesting to say the least. While headline numbers are generally solid, the underlying story looks shaky. Shaky enough that disinflationary trends remain firmly entrenched in the US, whereas inflationary risks appear to be growing in emerging markets. The former suggests the Fed is set to remain on hold, while the latter will push foreign central banks to tighten. In a perfect world, that combination would put downward pressure on the Dollar and support a shift to a more balanced pattern of growth for both the world in general and the US in particular. Yet we persistently fall short of a perfect world. Will this time be any different? The Greek crisis is saying it won't.

A Closer Look at Europe and the Fed’s Central Bank Swap Program - Can the Federal Reserve provide a quick fix to tame Europe’s growing financial crisis? Probably not. But it might be able to help if conditions in Europe worsen.The Fed is considering whether to reopen a lending program put in place during the financial crisis in which it shipped dollars overseas through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England. The central banks, in turn, lent the dollars out to banks in their home countries in need of dollar funding. It was aimed at preventing further financial contagion. The Fed has felt that it is premature to reopen this program — which was shut down in February as the financial crisis appeared to wane — because it wasn’t clear that foreign banks were in need of dollar funds. Still, trading floors on Wall Street are abuzz with anticipation today that the Fed might use the program again as Europe’s problems take on a more global dimension

CBs to the Rescue?  - I made the following predictions back in December. Things have evolved in ways such that I am close to being completely right or completely wrong on both of them. -The Federal Reserve will become active in the foreign exchange markets. At different times of the year they will both buy and sell dollars. Their objective will be stability. These efforts will be referred to as “smoothing operations”. -There will be no breakup of the Euro. Greece will not pull out. The strong members will provide some relief for the weak. But the problems will not go away and the possibility of some form of two-tiered Euro will be a matter of open discussion. It is in this context that the Fed’s FX intervention takes place.  In my opinion the decline of the Euro in 2010 has be orderly, up to the last week. Two "big figures" on any given day is part of the adjustment process that is necessary due to the changing fundamentals. That is not disorderly. But we have lost five big figures in a week. That is a big adjustment, but is still not the Central Banker's definition of a market that would necessitate coordinated intervention. But it is getting close.

Fed Asks Court to Reconsider Discount-Window Ruling - The Federal Reserve’s Board of Governors asked a federal appeals court Monday to reconsider a ruling that ordered it to disclose documents related to individual borrowing from its discount window and other “last resort” lending programs. In separate rulings in March, the New York-based 2nd U.S. Circuit Court of Appeals upheld a lower court’s decision granting a request by Bloomberg LP’s Bloomberg News for documents related to usage of the Fed’s discount window and other programs and vacated a ruling denying a request for documents by Fox News Network LLC’s Fox Business Network...

Federal Reserve Nominees Are Clue to Its Future - NYTimes - In naming two economists and a lawyer to serve as governors of the Federal Reserve, President Obama and his top economic advisers are preparing the central bank for a new emphasis on the supervision of financial institutions.  Only one of the three, Janet L. Yellen, specializes in the setting of interest rates and the supply of credit, the Fed’s traditional bailiwick. The other economist, Peter A. Diamond, is an authority on Social Security and pensions who was a graduate school mentor of Ben S. Bernanke, the Fed’s chairman, at the Massachusetts Institute of Technology.  The lawyer, Sarah Bloom Raskin, Maryland’s commissioner of financial regulation, is an ally of consumer advocacy groups, which believe that the Fed’s neglect abetted the subprime lending crisis that metastasized into the most damaging downturn since the Depression.

The Fed Thumbs Its Nose at the Public --The Fed and its friends and enablers in power, most recently Rahm Emanuel, are fighting tooth and nail to beat back the Audit the Fed amendments to pending financial reform legislation. Even a cursory inspection of the Fed’s disclosures of its extraordinary rescue operations shows them to have been made only under duress, and then to be incomplete and deliberately unhelpful. The reason this matters, is that, contrary to the Fed’s claims of independence, it has been operating as an extra-legal off balance sheet entity of the Treasury, circumventing normal Constitutionally-stipulated budget processes. And rather than make adjustments in its practices to reflect its enlarged and now overtly political role, the Fed has instead been engaging in cynical, blatant misrepresentation, giving lip service to the idea of greater transparency in pubic, while fighting disclosure tooth and nail.

Effort to expand audits of Fed picks up steam in Senate - A contentious effort to expand audits of the Federal Reserve that sailed through the House despite heavy criticism appears to be picking up steam as the Senate considers broad new financial regulations. Sen. Bernard Sanders (I-Vt.) is pushing an amendment to the financial overhaul bill before the Senate that would broaden the Government Accountability Office's power to audit the Fed and compel the central bank to disclose details about the firms that received emergency federal aid during the financial crisis. "The American people have a right to know who has received $2 trillion of their money, and they have a right to have the GAO do an audit about potential conflicts of interest," Sanders said Tuesday.  Sanders's measure reflects legislation introduced by Rep. Ron Paul (R-Tex.) -- who has harshly criticized the Fed for decades -- and approved overwhelmingly by the House last year.

What Would the Sanders Amendment Do to the Fed? - The Obama administration and the Fed are firmly against the measure.  Many lawmakers support it: the House approved a similar measure in the fall, and dozens of senators previously have backed related legislation. But it’s unclear whether the measure will draw enough support to be included in the overall bill. The key elements of the amendment: The Sanders amendment would remove those exclusions on GAO reviews, just as a House-passed measure promoted by Rep. Ron Paul (R., Texas) would do. It also would require the GAO to audit the entire Fed system within a year of the law’s enactment. The only new exclusion would be for unreleased transcripts or minutes of meetings of the Fed’s Board of Governors or the FOMC. Unlike the House bill, the Sanders amendment would require the Fed to publish on its website, within 30 days of enactment, details about “all loans and other financial assistance” since December 2007 under several Fed lending programs authorized under section 13(3) of the Federal Reserve Act,

More On Why The Fed Needs Audited ...and why Chris Dodd, among others, don't want it to happen. Ostensibly, the QE program was designed as the first leg in a two-step process to remove the bad paper from the banks balance sheets and then dump it on Fannie Mae and Freddie Mac as discreetly as possible. So far, Bernanke has been relatively successful in convincing people that he was buying the assets to increase lending, which was clearly never the objective. Quantitative Easing was a fraud from the get-go.No kidding.Not only that, but QE was blatantly unlawful as far as I can determine, as I've laid out more times than I can count. But you can't really expect the Congress, which put in place Fannie and Freddie, left them alone despite documented accounting fraud, had one of their number literally sleep with a former executive, and which still cowers when their arm approaches to take these folks on, can you?

Bernanke Letter to Dodd Opposing Amendments to Audit the Fed- The following is the full text of a letter Federal Reserve Chairman Ben Bernanke sent to Senate Banking Committee Chairman Christopher Dodd over a proposed amendment to the financial overhaul to audit the Fed

Volcker Letter to Lawmakers Opposing Amendments to Audit the Fed - The following is the full text of a letter sent by former Federal Reserve Chairman Paul Volcker to Senate Banking Committee Chairman Christopher Dodd and Ranking Member Richard Shelby about proposed amendments to financial overhaul aimed at auditing the Fed.

Rahm Working With Fed To Beat Back Audit - The White House, Federal Reserve and Wall Street lobbyists are kicking up their opposition to an amendment to audit the Fed as a Senate vote approaches, Sen. Bernie Sanders (I-Vt.), the lead sponsor of the measure, said on Monday. Banking Committee Chairman Chris Dodd (D-Conn.), who is shepherding the bill through the Senate, told Sanders Monday afternoon that "there's a shot we'll be up tomorrow," Sanders told HuffPost. In the spring of 2009, Sanders brought a similar amendment to the Senate floor and won 59 votes. Eight senators who voted against it then are now cosponsors of his current measure. "I think momentum is with us. But I've gotta tell you, that on this amendment, you're taking on all of Wall Street, you're taking on the Fed, obviously, and unfortunately you seem to be taking on the White House, as well. And that's a tough group to beat," said Sanders.  He's been trading calls, he said, with Rahm Emanuel, the White House chief of staff.

An Interview About Auditing the Fed with Dean Baker - I understood that there was an Audit the Fed amendment that passed the House, and that Bernie Sander’s amendment duplicating it in the Senate was getting a lot of attention, with administration officials suggesting that they will try to stop it “at all costs.” I wanted to get a better sense of why such a proposal might be important, and what it would actually do and mean for the Federal Reserve.   So I was lucky to speak with Dean Baker about the matter. Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC.  Dean previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He has also worked as a consultant for the World Bank, the Joint Economic Committee of the U.S. Congress, and the OECD’s Trade Union Advisory Council.

“A Process That Only We Fully Understand” - Bernie Sanders’s “audit the Fed” amendment, which expands the ability of the Government Accountability Office to review Federal Reserve operations, seems to be gaining some momentum. Opponents, including the Obama administration and Fed chair Ben Bernanke, are mounting a defensive effort. There are two main arguments that I have heard. The first is that publicizing which banks take advantage of Fed lending facilities will stigmatize those banks and could increase panic in the midst of a financial crisis. I’m not particularly convinced by this...The second argument is that increased GAO oversight will unduly “politicize” or “interfere with” monetary policy. On its face, this objection doesn’t seem to apply, since the amendment would explicitly not bring to light transcripts or minutes of meetings that the Fed had not itself already released.

The Sanders Amendment to the Dodd Financial Regulation Bill – Delong -I am willing to defer to President Obama's judgment that the Federal Reserve's desire for a modicum of central banker privilege is worth respecting, and that the Sanders amendment is the wrong treatment for the disease. I am willing to do so, in large part, because I think the problems are not those that detailed routine investigations of staff communications would solve: the staff of the Federal Reserve do, it seems to me, overwhelmingly have a reality-based vision of the economy, conduct thorough and appropriate analyses of risks and scenarios, and understand the Federal Reserve's dual mandate. But I ask President Obama: What is your alternative? What is your alternate plan for improving the quality of Federal Reserve decisions--for getting policymakers who properly understand the state of the economy and who believe in the Federal Reserve's dual mandate? It's very hard to beat something--even a bad something--with nothing. And you have had... eighteen months, with only the appointment of Dan Tarullo and the reappointment of Ben Bernanke to show for it

President Obama Is Wrong About the Fed - A remarkable left-right congressional coalition - which includes everyone from true-blue progressives like Florida Congressman Alan Grayson to bleed-red conservatives like Texas Congressman Ron Paul -- has formed to demand an end to Fed secrecy.In particular, members of the coalition want to force the Fed to identify banks that took trillions of dollars in secret subsidies.Unfortunately, the Obama administration has taken the side of elite and irresponsible Wall Street interests, as well as Fed insiders, to oppose open discussion of what is being done behind closed doors and without congressional consent with taxpayer funds."When it comes to openness vs. secrecy, Wall Street vs. Main Street, taxpayers vs. the big bankers, I am sorry to say that the White House has come down on the wrong side," says Vermont Senator Bernie Sanders,

Plan for Congressional Audits of Fed Dies in Senate - Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors. Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.

Sen. Sanders Vows To Fight For Federal Reserve Audit - Sen. Bernie Sanders said Friday he will work with House colleagues to make sure the strongest version of language boosting transparency at the Federal Reserve makes it into the final version of financial-overhaul legislation. The independent senator from Vermont agreed to modify his controversial audit amendment Thursday in a bid to overcome the White House’s objections and get the 60 votes needed to pass. However, Sanders said Friday that the measure still achieves his core goals. Those include forcing the central bank to disclose to which financial institutions it gave more than $2 trillion during the financial crisis.

Rep. Alan Grayson: You Own the Red Roof Inn, Thanks to the Fed; Why the Fed Does Not Want an Audit; America is Wall Street's Sucker - Please play this must-see video by Alan Grayson explaining in great detail exactly why the Federal Reserve does not want to be audited, and thus why it absolutely needs to be audited."Let's find out once and for all who owns the hotels, who owns the houses, and let's try and put this wild beast that creates money out of nothing and jams it in the pockets of special interests like Maiden Lane, like Bear Stearns, like JPMorgan, like all their friends. Let's put them under some degree of restraint before it all comes crashing down, on us."

The Fed Audit Isn’t as Important as Restricting the Financial Sector - There's been a lot of attention recently for Sen. Bernie Sander's amendment to audit the Federal Reserve -- an issue I write about in this piece on the Fed -- with TPMDC going so far as to say it "may be the most important of all" the amendments coming to the floor. To be clear: It's not. Auditing the Fed is a good idea. Citizens deserve more transparency around the institution's actions and a clearer understanding of how the Fed executes its challenging dual mandate of full employment and managed inflation. That said, if Congress is unable to force an audit on the Fed, it's hardly the end of the world. On the other hand, if we fail to get a solid resolution mechanism, new prudential regulatory standards, an effective derivatives regime, a strong Volcker rule or caps on bank size, we will be on the path to a very dangerous crisis. Auditing the Fed will give us a better idea of what happened in the past, but it will by no means protect us from the future.

Regional Fed Presidents Meet With Republicans on Financial Bill - Four regional Federal Reserve bank presidents plan to meet Wednesday with GOP lawmakers to try and retain their oversight over community banks.Under the sweeping financial-overhaul legislation being debated in the Senate, the Fed would lose oversight over state-chartered banks. The Fed and community banks are pushing to retain the ability for community banks to choose Fed oversight. It’s unusual for Fed bank presidents to visit Capitol Hill. Fed officials have argued that removing their oversight of community banks would hurt the central bank’s ability to make monetary policy.

Fed's Lacker Says Subdued Inflation Could Create `False Sense of Security' - (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said the current low level of inflation may lull policy makers into a “false sense of security” that prices will remain stable.  “My worry is that we will let the obvious slack in the economy lull us into a false sense of security regarding inflation,” Lacker said today, according to the text of a speech to a conference of investors in Richmond, Virginia. Believing that high levels of unemployment will restrain inflation, “could allow inflation pressures to build before we raise rates.” The U.S. central bank pledged last week to leave interest rates “exceptionally low” for an “extended period,” citing subdued inflation, stable public expectations for inflation and a high level of unemployment.

Plosser Sees ‘Hazy’ Outlook, Says Fed Must Eye Inflation - “The risks to inflation in the medium to longer run are on the upside” as the economy continues to recover, Federal Reserve Bank of Philadelphia President Charles Plosser said. “The decision about when to begin raising the federal funds rate is conditional on the evolution of the outlook for economic growth and inflation,” he said. “Given the lags in the effects of monetary policy on the economy, we will need to begin withdrawing stimulus well before the unemployment rate gets down to its long-run level,” Plosser warned. Noting the Fed must be forward looking with its policy making, the offical said the outlook confronting policy makers is particularly challenging. “Looking into the crystal ball is sometimes easy, and sometimes in an environment like we’ve been in for the last year, the crystal ball is pretty hazy,” which makes it difficult to provide forward-looking guidance, Plosser said.

Is the Fed's Long-Run Inflation Target 2.5%? - Karl Smith is thinking about inflation forecasts and directs us to the figure below. Here the daily nominal interest rate on 10 year treasury securities is graphed along with the daily real interest rate on 10-year Treasury inflation-protected securities (TIPS).Karl notes the difference between the two series is the bond market's 10-year forecast of inflation and currently it is about 2.5%. Interestingly, outside the financial crisis the forecast value is on average close to this 2.5% value. This can be seen more easily by plotting the difference between the two series as is done in this figure: This caught my attention because if one goes and looks at the quarterly forecast for the average annual CPI inflation rate over the next 10 years in the Philadelphia Fed's Survey of Professional Forecasters the value is also around 2.5%. Here is the forecast data:

US faces inflation or default - Noriel Roubini There are only two solutions to the sovereign debt crisis — raise taxes or cut spending — but the political gridlock may prevent either from happening. Financial crises have occurred very often in history. They are caused by unsustainable bubbles that go bust, and from excessive risk-taking and debt-leveraging by the private sector during the bubble. Then in the wake of, and as part of the response to, the economic downturn, government debts and deficits grow to unsustainable levels that can lead to default or inflation if not corrected. The crisis we are going through now follows this pattern.Today there is a lot of talk about "de-leveraging", yet the data shows that de-leveraging has barely begun. Debt ratios in the corporate sector as well as households in the US have essentially stabilised at high levels. At the same time, we are seeing a massive "re-leveraging" of the public sector with budget deficits on the order of 10 per cent of GDP.

Data Show Low Inflation, but Deflation Redux Odds Low - Data released over recent days underpins the Federal Reserve’s confidence that inflation simply isn’t a problem in this economy. But with price pressures weak and some central bankers warning they could move even lower, it raises the question of whether the nation could be facing the renewed threat of deflation, a widespread and destructive retreat in the direction of prices. Policy makers don’t like prices to rise too much, but they equally dislike falling prices because that makes debt more burdensome and sets in motion a self-reinforcing process that depresses demand. Fighting deflation now would be particularly difficult because the Fed has short-term interest rates down to zero percent, and it has few avenues left to stimulate demand. Researchers at the Cleveland Fed are sanguine the deflationary doomsday scenario is not coming back into play. “A brief look at retail prices shows that the underlying inflation rate has slowed significantly over the past year or so, but a significant deflation has yet to materialize

Currencies: Green back | The Economist - KEYNES once likened investing to judging a beauty contest. For today’s currency investor, however, none of the main contestants looks that fetching. “It’s more like an ugliness contest,” says one hedge-fund manager.  The dollar, for all its blemishes, is the least hideous-looking. So far this year it has risen against the other main currencies (the yen, pound and euro) that are traded internationally and held as reserves by central banks. It has risen most against the euro, which started the year at $1.43 but bought just $1.28 on May 6th (see chart). The euro has slumped in part because the Greek crisis makes it look a poor choice for reserve managers hoping to diversify their big dollar holdings. The variable quality of euro sovereign bonds is now much harder to ignore. Treasury bonds, with their liquid markets and unique issuer, look prettier.

Buffett bearish on currencies holding value --- Warren Buffett said Saturday that he's bearish about the ability of all currencies to hold their value over time because of massive deficits being run up by governments in the wake of the global financial crisis.  The Berkshire Hathaway Inc. chairman also warned shareholders attending the company's annual meeting that the Greek debt crisis will produce "high drama" and said it's unclear how it ultimately will be resolved.  The financial crisis was stemmed by massive monetary and fiscal intervention in developed economies like the U.S. and the U.K. That's shifted a private-sector debt mountain on to governments, increasing concern about sovereign risks.

Buffett worried on inflation, Greek high drama (Reuters) - Warren Buffett said on Saturday he is worried about the prospect for "significant inflation" in the United States and elsewhere, and that the Greek debt crisis has the potential for "high drama." Buffett also said his Berkshire Hathaway Inc has only limited exposure to currency fluctuations, mainly through investments in businesses such as reinsurers and marketable securities. Speaking at Berkshire's annual shareholders meeting, Buffett said the company has a large share of its fortunes tied to the euro, largely from investments in European companies.

Automatic Stabilizers Work, Always and Everywhere – Thoma - One of the lessons of this recession is that fiscal policy is a very imperfect policy tool. In deep recessions when monetary policy has run its course -- when moving interest rates all the way to zero and trying non-traditional policies has not fixed the problem -- fiscal policy can provide the needed boost to aggregate demand. But the politics surrounding fiscal policy means it will be put into place far too late, if it is put into place at all. One option would be to create a Fed-like structure responsible for fiscal policy, an agency that has a reasonable degree of independence from Congress and the administration. This agency would be required to be in balance its budget over, say, a ten year period, but could run surpluses or deficits in the interim as needed to manage the economy

Mauldin: The Future of Public Debt - Everyone and their brother intuitively knows that the current government fiscal deficits in the developed world are unsustainable. They have to be brought under control, but that requires some short-term pain. Today we look at a rather remarkable piece of research from the Bank of International Settlements (BIS) on what the fiscal crisis may morph into in the future, how much pain will be needed, and what will happen if various countries stay on their present courses. Some countries could end up paying north of 20% of GDP just on the interest to serve their debt, within just 30 years. Of course, the markets will not allow that to happen, long before it ever gets to that level. And what makes this important is that this is not some wild-eyed blogger, it's the BIS, a fairly sober crowd of capable economists. We will pay some attention. Then I'll throw in another few paragraphs about Goldman.

Where The Debt Is Coming From - Krugman - One of the small side benefits of the economic crisis has been that the IMF’s World Economic Outlook, all too often a somnolent document, has latterly become must-read and really interesting. The latest edition isn’t quite as pathbreaking as the last two, but still has a lot of interesting stuff. One thing it does it break down the sources of the actual and projected rise in advanced-country debt due to the crisis, measured as a percentage of GDP:What’s striking here is that fiscal stimulus is a small player. It would be even smaller if one took into account the fact that stimulus has made economies stronger than they would otherwise have been, leading to higher revenues and smaller unemployment benefits. What dominates the picture instead is the consequences of the slump, in falling revenues and higher social insurance payments.

China Remains Biggest Holder of U.S. Debt - WSJ - China is still the top holder of U.S. government debt, the Treasury said in a report on Friday. The report showed that as of December, China held $894.8 billion in U.S. securities. The figure is consistent with a preliminary report released in late February. Friday's final version of that report puts to rest a question about whether Japan had surpassed China as the top holder of U.S. debt in December.  Friday's report also shows that China's holdings have declined since the end of last year by $17.3 billion as of February, Japan in February 2010 had $768.5 billion, while the U.K. had $233.5 billion.

The Case for a First-World Debt Relief Conference - You want an outlier scenario? Here's one: I am increasingly of the view that we will see calls for a first-world debt relief conference in 2012-2015. I've been saying this privately for some time, but I might as well put it out there. We watch Greece's rescue continue, while troubles cross the membrane into Spain, Portugal, and elsewhere, and the U.S. remains the largest ticking debt-bomb on the face of the planet. It is going to increasingly seem to more and more debtholders around the world time to have a discussion about what we do. (Everyone inflating their way out is a path to a second-stage collapse, but one-off haircuts solve nothing systemic.) No, my guess is that we will sometime soon see a call for a first-world debt conference -- and leading the calls, of course, will be emerging markets, like China who hold so much of the debt. What a wonderful reversal.

Banks Buying Treasuries Help Keep Borrowing Rates Low (Bloomberg) -- Banks are increasing purchases of U.S. government securities to pump up profits while lending to businesses languishes near the lowest levels since credit markets started to freeze almost three years ago.Holdings of Treasuries and agency debt rose each of the past five weeks, an increase of $63.2 billion to $1.5 trillion, according to Federal Reserve data. At the same time, commercial and industrial loans climbed less than 1 percent to $1.27 trillion and are down 23 percent from the record high level in October 2008. Banks, facing increased regulation after posting $1.78 trillion of writedowns and losses since the start of 2007, are taking advantage of the record gap between their borrowing costs and yields on U.S. debt instead of lending, according to data compiled by Bloomberg. Bank demand for Treasuries is helping cap yields as President Barack Obama sells record amounts of bonds to finance a budget deficits that exceeds $1 trillion.

FT Alphaville » A glimpse into financial hell - Alan Ruskin has peered into the abyss of a US sovereign debt crisis to see what the world might look like. Unsurprisingly, it’s not a nice place. Food commodities would be about the only thing left worth owning, according to the RBS strategist. Now, Ruskin is not forecasting a 70’s style Treasuries sell-off, but he reckons this is a fat tail risk worthy of serious consideration given that politicians will need to have their feet raked over coals before behaving responsibly.Welcome to financial hell:

Batten down the hatches for decade of austerity -The scale of the task facing governments in the United States, Europe and Japan to return debt burdens to pre-crisis levels of 2007 could, by some estimates, usher in a decade of severe austerity through the teen years of the new century. JPMorgan economists said their calculations, while highly sensitive to growth and interest rate assumptions, showed the task ahead for the world's major economies was daunting.Because the scapel is unlikely to be taken to public finances in earnest before 2012, it worked out what primary budget surpluses -- which exclude debt interest payments -- would be needed in the major economies to cut 2013 debt -to-gross-domestic-product ratios back to 2007 levels by 2023. The upshot was the United States needed a sustained primary surplus of nearly 4 percent of GDP for 10 years to reduce a 2013 debt ratio of 101 percent back to 2007 levels of 62 percent.

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

Deficit reduction: A Washington two-step | The Economist - The new commission’s first task will be a lot easier than its second- THE drama over Europe’s sovereign debt might seem good ammunition for American deficit hawks. Not so. As Barack Obama’s bipartisan deficit commission held its first meeting on April 27th, the rising cost of government debt across southern Europe was, if anything, being used to draw a favourable contrast between the American and Greek fiscal positions.  Nevertheless, the American fiscal picture has darkened considerably, thanks to the recession. The projected 2010 deficit, of around 11% of GDP, contrasts with one of 1.2% as recently as 2007, while the net public debt has climbed from 36% to 64% of GDP. These figures look good beside those of Greece, where debt may touch 150% of output by the middle of the decade. There is still enough gloom, however, to trigger concern over the potential for rising interest rates and continued fiscal weakness as America’s baby-boomers start to retire.

The Deficit Commission - Ever since Alice Rivlin spoke here at Wayne about her role on the upcoming Deficit Commission and her belief that we must cut entitlements, I have been worried. This seems like the same center-right coalition to undo the New Deal that has been rampaging in the country for four decades now--reaganomics, and with no heart. Digby, reprinted in the Huffington Post, commiserates, at We (meaning you) Must Tighten Our Belts". It is "interesting" to see that many millionaires feel quite at ease talking about the need to cut back on wages (blaming unions for the fact that owners have taken their businesses overseas where they can pay slave wages), delay social security benefits, tighten medicare requirements. But if you talk about taxing the rich, the response is always that this will "kill competitiveness" and "make the country poorer because there will be less investment."

Obama's Fiscal Commission: What's Going On In There? - Members of President Obama's deficit commission huddled behind closed doors Wednesday despite pleas from the left and right that they hold all their meetings in public.The move only heightens suspicion that rather than forging a national consensus on future spending priorities, the commission's work will consist of backroom dealings in which members of the Washington aristocracy find high-minded excuses for cutting the social safety net.Bruce Reed, the commission's executive director, assured the Huffington Post there is nothing sinister about holding working group meetings like today's in private. But he had no good reason why they shouldn't be held in public, either.

Orszag, Panetta Spoke On Budget Deficits Last Night. - Orszag emphasized the future deficit reduction embodied in the recently enacted health reforms, particularly the new Independent Medicare Advisory Board, and expressed confidence that the President's National Commission on Fiscal Responsibility and Reform will set the course for future deficit reduction when it reports on December 1, 2010. He acknowledged that the strength of the recovery needs to be closely monitored as stimulus spending declines, and he noted that a year ago it was hard to find anyone who expected as much GDP growth and renewed job creation as we have had since. Mr. Panetta said he teaches his students back in California that you can govern through leadership or in reaction to crises. "we've had too much governing by crisis."

Deficit forecasts of primary dealers are lower that CBO's and OMB's. - Yesterday, an unnamed Treasury official told the Bureau of National Affairs that April's average primary dealer forecast for FY10 was $1.38 tr., up slightly from $1.36 tr. in January.  OMB's estimate in President Obama's February budget was $1.556 tr., and CBO's in March was $1.500 tr.  Stronger economic growth than projected by OMB and CBO is the main cause for the improved estimates.

The Political Economy of Consumption: ‘Tis Better To Give, and Give, and Give - Here is why deficit reduction is so hard: Politicians get reelected by encouraging spending, not savings. Supporting policies that reduce current consumption—either by government or households--rarely gets anyone elected to anything. Not to stereotype, but nations do have personalities. Italians eat. Russians drink. Americans spend. And when anything—or anyone—gets between us and our consumption, watch out. Recessions make us grumpy in part because we can’t consume as much as we like. In the depths of the current downturn, the savings rate in the U.S. topped 5 percent. But retail sales have been rising since October, and the savings rate has fallen in half. I suspect Americans won’t really feel better until we drive our savings rate back to zero.  And woe to any politician who stands in the way of this consumption juggernaut by proposing to raise taxes or cut specific government programs.

Rasmussen: 69% Oppose Tax Hike To Lower Deficit - Only 18 percent of Americans are willing to pay higher taxes to lower the federal budget deficit, according to a new Rasmussen Reports national telephone survey.  Sixty-nine percent (69 percent) are not willing to have their taxes raised to deal with deficits that are projected to rise to historic levels over the next decade. Thirteen percent (13 percent) more are not sure.  But most voters think President Barack Obama’s new bipartisan deficit reduction commission is more likely to recommend tax increases than spending cuts to meet the growing deficit, and 78 percent expect Congress to raise taxes if the commission recommends it.  Men are nearly twice as willing as women to pay more in taxes to lower the budget deficit.

Ron Paul There's Anger...There's Going to Be Riots in the Streets - Rep. Ron Paul (R-TX) was on Fox News yesterday, discussing Greece and describing how the financial crisis has become a currency crisis… which is much worse. He sees an attack on the dollar in terms of gold, and has no doubt that the currency crisis is a worldwide problem.Referring to whether or not Greece-like riots could take place in the US he says:“Absolutely, there’s going to be anger. There’s going to be riots in the streets as well. But this is all a consequence of the fact of why and how government could spend like this. It’s because they don’t have sound money.“When we run up deficits, we tax, but never enough. We can’t tax, it would ruin the economy. Then we borrow, and we get away with that for a long time. But, we rely on printing presses from the Federal Reserve to create money and that’s where the problem is [...] we can’t have fake money, this is counterfeit.”

A Value-Added Tax Offers Much to Love — and Hate - NYTimes - THE policy world is abuzz with talk about whether a value-added tax should be part of the solution to our long-term fiscal problems. Most recently, Paul A. Volcker, head of President Obama’s economic advisory board, said a VAT was “not as toxic an idea” as it used to be. But is it actually a good idea? Regardless of whether your politics lean left or right, the VAT gives you some things to love and some to hate. Let’s start with the basics. Economists define a business’s “value added” as the revenue it gets from the sale of goods and services, minus the amount it pays for goods and services. So, for example, if a farmer sells wheat to a miller for $1, the miller sells flour to a baker for $2, and the baker sells bread to a customer for $3, each of the three producers has a value-added of $1.

Tax breaks and loopholes that cost us $1 trillion a year have staunch defenders - The new tax credits, which will eventually cost the government more than $50 billion a year, are part of a growing array of federal benefits offered through the tax code. Known as "tax expenditures" in budget jargon, such tax breaks were worth more than $1 trillion to recipients last year.  That's more than the government spent on Social Security, and nearly enough to balance the federal budget. And their cost is growing. Even if Congress doesn't add any tax credits, analysts predict that the rising cost of existing tax breaks could add about $3 trillion dollars to the federal debt by 2020. With policymakers looking for ways to reduce soaring deficits, lawmakers in both parties are taking a fresh look at paring them back, perhaps as part of a broader tax-reform effort.  "Our tax system is inefficient and riddled with special exceptions," said Alice Rivlin, a  member of President Obama's bipartisan deficit commission, which held its first meeting last month. "If you are looking for additional revenue over time, one approach is to move in the direction of reforming the income tax."

A tax break that is breaking us - The latest Case-Shiller housing data suggest that housing markets have now stabilized. ... This stability makes it possible to move beyond stop-gap measures and to envision fundamental reforms that will make the next housing crisis less damaging. Lowering the $1 million cap on the home mortgage interest deduction is a good place to start. I’m not claiming that government policies, like the mortgage interest deduction, caused the bubble. The deduction is an old policy that has remained a constant in good times and bad. But while government policies cannot be blamed for the bubble, they did exacerbate its damage. For decades, the home mortgage interest deduction and government-subsidized institutions like Fannie Mae and Freddie Mac have made mortgages artificially inexpensive. This subsidy encouraged homebuyers to borrow like mad and tie their fortunes to the housing market

Tax Cuts And 'Starving The Beast' - Bruce Bartlett - Once upon a time Republicans thought that budget deficits were bad, that it was immoral to live for the present and pass the debt onto our children. Until the 1970s they were consistent in opposing both expansions of spending and tax cuts that were not financed with tax increases or spending cuts. Republicans also thought that deficits had a cost over and above the spending that they financed and that it was possible for this cost to be so high that tax increases were justified if spending could not be cut. Dwight Eisenhower kept in place the high Korean War tax rates throughout his presidency, which is partly why the national debt fell from 74.3% of gross domestic product to 56% on his watch. Most Republicans in the House of Representatives voted against the Kennedy tax cut in 1963. Richard Nixon supported extension of the Vietnam War surtax instituted by Lyndon Johnson. And Gerald Ford opposed a permanent tax cut in 1974 because he feared its long-term impact on the deficit.

Starving the Beast - In his column this week, Bruce Bartlett opines on the perniciousness of the “starve the beast” mantra. A former official in the Ronald Reagan and George H.W. Bush administrations, Mr. Bartlett writes: I believe that to a large extent our current budgetary problems stem from the widespread adoption of an idea by Republicans in the 1970s called “starve the beast.” It says that the best, perhaps only, way of reducing government spending is by reducing taxes. While a plausible strategy at the time it was formulated, STB became a substitute for serious budget control efforts, reduced the political cost of deficits, encouraged fiscally irresponsible tax cutting and ultimately made both spending and deficits larger. Given Mr. Bartlett’s personal experience in crafting Republican tax policy, his recollection of the history of “S.T.B.” philosophy — and its shortcomings — is fascinating.

Ed Points The Way On Tax Expenditures - Ed Andrews, along with The Washington Post reporter Lori Montgomery, had a good story in the Post yesterday about the crazy uncle in the attic (you know, the one you don't talk about much) of the federal budget debate: tax expenditures. A tax expenditure is a tax break of some kind that is usually enacted to encourage an individual or business to do something, like buying a home.  In most cases, these provisions are permanent, that is, they stay in place until Congress and the president decide to enact a change in the tax law.  That makes them similar in almost all respects to entitlement spending, which also is usually a permanent change in law.  The biggest difference between tax expenditures and entitlements is that tax expenditures not only generally get far less scrutiny, they are often almost invisible during the annual budget debate in Washington.

Clearing Currencies - The European Commission is pushing for foreign currency derivatives to be cleared.  This is also a bone of contention here in the US. It is interesting that those advocating clearing, and also exchange trading, have not attempted to explain the very pronounced cross sectional variation in trading and clearing practices across markets, and the time trends in particular markets.  Virtually all FX derivatives trading is OTC (with currency futures being the hair at the end of the tail of the dog).  The large bulk of linear interest rate derivative trading is OTC (even though the Eurodollar futures and similar markets are immense, they are dwarfed by the even more immense OTC interest rate swaps).  Equity derivatives and interest rate option trading is more evenly split between OTC and exchange.  Moreover, whereas in recent years a good portion of interest rate swap business has migrated to clearing naturally (accounting for about 50 percent of the interbank business), no OTC FX business is cleared.  A decent amount of OTC equity business is cleared.  A considerable part of OTC energy trading in the US is cleared–and was trending in that direction starting from about 2003 without anybody from the government telling market participants to do it.

The White House Should Stop Pandering to the Street - Robert Reich - The White House opposes three important financial reforms that have drawn bi-partisan support in the Senate. It should reverse course.  1. Require the Fed to disclose the entities it lends to. There’s no reason the public should be kept in the dark about who benefits when the Fed departs from its traditional interest-setting role and chooses to provide credit to particular companies or entities 2. Require big banks to spin off their derivative businesses. Derivatives got us into the mess and Wall Street’s biggest banks are still wielding them like giant poker games. That’s because they’re enormously lucrative for the banks. But they’re also dangerous to the economy. 3. Cap the size of the biggest banks. You don’t have to be a rocket scientist to understand that the best way to reduce financial risks that could (and almost did in the fall of 2008) bring down the entire economy is to spread risk-taking over thousands of small banks rather than centralize it in four or five giant ones.

Financial Reform: Will We Feel Better the Morning After? The financial reform bills being considered by Congress will lead to a better regulated financial system, most importantly by creating a consumer protection agency that will prevent some of the worst abuses of the last decade. However, no serious person can claim that the bills passed by the House or coming out of the Senate Banking Committee will prevent future crises. It's not clear that any piece of legislation can accomplish that task, but we lost our best opportunity to promote crisis prevention when the Senate approved Ben Bernanke for a second term as Fed chairman in January. This act told future regulators that the failure to crack down on recklessness in the financial sector carries no consequence. This means that when a future Fed chair faces the choice of cracking down on a dangerous asset bubble - and encountering the full wrath of the financial industrial - or doing nothing, he or she will know that there are no negative consequence to the "do nothing" option.

The 10 Most Wanted Lobbyist Loopholes | The White House - As debate on the Wall Street Reform bill returns today to the floor of the Senate, lobbyists are working overtime to insert loopholes and special provisions into the bill.  Back in March, Treasury Secretary Geithner made clear to the audience at the American Enterprise Institute the threat we face at this stage of the game: So to kick off this week of amendments and help you follow along, please take a look at the Top Ten Most Wanted Lobbyist Loopholes:

Some Professors Call Financial Bill Premature - NYTimes - As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis. Some point to specific issues left largely untouched, like the instability of capital markets that provide money for lenders, or the government’s role in the housing market, including the future of the housing finance companies Fannie Mae and Freddie Mac. Others simply argue that it is premature to pass sweeping legislation while so much about the crisis remains unclear and so many inquiries are in progress.

Roubini: forget sub-prime mortgages. It's the sub-prime financial system we need to fix - For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation. The crisis dealt a body blow to that belief system, but nothing has replaced it.  That’s all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

How to Avoid a 'Bailout Bill' - John Taylor - It's good news there's now bipartisan agreement that the financial reform bill should not be a "bailout bill," and that amendments to Connecticut Sen. Chris Dodd's draft legislation are being proposed and debated with this agreement in mind. The biggest challenge in this bailout reform debate is to avoid giving the federal government more discretionary power, whether by creating a special bailout fund or by providing more ways to bypass proven bankruptcy rules. Experience shows that such power would increase, not decrease, the likelihood of another crisis. A new bankruptcy process is the right way to deal with failing financial institutions.

Apple Isn't the Problem. Wall Street's Big Banks are the Problem - Robert Reich -Why is the Federal Trade Commission threatening Apple with a possible lawsuit for abusing its economic power, but not even raising an eyebrow about the huge and growing economic (and political) muscle of JP Morgan Chase or any of the other four remaining giant banks on Wall Street? Our future well being depends more on people like Steve Jobs who invent real products that can improve our lives, than it does on people like Jamie Dimon who invent financial products that do little other than threaten our economy.

An Interview on Off-Balance Sheet Reform - Interview Friday. Tim Fernholz has interviews with Senator Ted Kaufman and Senator Mark Warner on financial reform.Last week I told you about 6 things to fight for in the Dodd Bill, including three amendments. One of them was Senator Menendez’s Off-Balance Sheet amendment.In order to learn more about the issue, as well as what the language proposed could accomplish, I spoke with Jennifer Taub.Jennifer Taub is a lecturer and coordinator of the Business Law Program at the Isenberg School of Management at the University of Massachusetts Amherst. (video & transcript)

Crisis Panel to Probe Window-Dressing at Banks - The techniques in question, which are normally relegated to the shadows of finance, are expected to be thrust into a public spotlight on Wednesday by the federal committee that is investigating the causes of the financial crisis. The Financial Crisis Inquiry Commission is expected to focus most sharply on the way banks slim down their balance sheets before reporting their results and on loans they receive from entities like special-purpose vehicles and hedge funds, which are allowed to operate with little public disclosure.  What is perhaps surprising is that many of the practices that enabled investment banks like Lehman Brothers to mask their deteriorating finances during the crisis are still wide open — and still being employed by other banks.

A “Modest Proposal” for Capital Market Reform: Close Down Rule 144A - Years ago, it is unlikely deals like Goldman Sachs’ now infamous Abacus would have been sold. The securities laws written in the 1930s demanded more accountability than we have today, not only for public offerings of stocks and bonds, but for private placements like Abacus. Such private placements had to go through a review process before the Securities and Exchange Commission and issuers were held to high standards of disclosure. No longer. Enter Rule 144A. In one simple step the Securities and Exchange Commission could remove a major cause of the recent credit crisis by shutting this rule down.Issued in 1990, the rule was the SEC’s attempt to make it easier for companies to sell securities in so-called “private placements.” Private placements avoid advance SEC review of disclosure about an offering and, more importantly, exempt issuers, as well as their directors, officers, accountants and underwriters from the most effective liability provision in the federal securities laws, Section 11 of the Securities Act of 1933.

“The Specter Amendment would take the limited, but important, step of amending the Exchange Act to authorize a private right of action under §10(b), the antifraud provision, and other, less commonly invoked, provisions of the Act, against a secondary actor who provides substantial assistance to a person who violates the securities antifraud rule.” Tim Solanic. Yves Smith: This is actually huge, the lack of secondary liability (which goes earlier than Stoneridge, I must admit I forget the case, but I cited it in ECONNED, and Frank Partnoy went on at greater length in his book Infectious Greed) means someone who helps a fraudster (like a lawyer or accountant) can’t be sued by the client of the fraudster. The advisor who actively enabled a fraud can only be sued by his own client.

What Bank Regulators Can Learn From Previous Regulatory Agencies - The biggest question about the financial reform bill that the Senate has just started to debate is whether it can stop what’s called “regulatory capture“—the tendency of supposedly independent overseers to submit to the influence of the industries whose bad behavior they’re supposed to curb. Bank regulators’ cheerleading for the practices that created the current financial mess is only the latest instance of a century-old pattern. How do we turn lap dogs into tough cops?  The history of environmental regulation has lessons to teach. The legacy of pollution that haunts us today was created not by ignorance alone but also through ineffectual oversight. Pollution control agencies came into existence fully a hundred years ago, but their efforts were largely stymied.  Bureaucratic and political battles erupted on occasion, but until the 1970s the polluting industries were almost always the victors.

Regulating Toxics - As members of Congress consider regulation of the toxic assets currently seeping through our financial system, they might want to reflect on the history of efforts to regulate toxic air emissions.This history offers reasons to doubt that “transparency” — provision of information necessary for individuals to effectively choose their own level of exposure — will protect us all from harm. Whether fraudulent assets or dangerous chemicals are concerned, warnings are seldom heeded until a crisis unfolds. In 1984, a Union Carbide plant in Bhopal, India, released a cloud of methyl isocyanate that killed thousands of people and sickened many more.

Credit Derivatives as Weapons of Economic Mass Destruction. - Poorly-understood and badly-modeled financial derivatives turned out to be weapons of economic mass destruction. Jacob Weisberg draws an analogy between all the people (like him) who believed that Saddam Hussein's weapons of mass destruction existed in Iraq before 2003 and all the people (like him) who believed that credit derivative weapons of economic mass destruction did not exist before 2007. Weisberg writes:Robert Rubin is the wrong guy to blame for the financial crisis: The assumption that the rating agencies knew their business, a key enabler of the subprime meltdown, is analogous to the view before the Iraq war that Saddam Hussein had WMD. There are a lot of people now who scoff about what an obvious fallacy that was and not many who can point to doubts expressed at the time... Well, in addition to Robert Shiller and Dean Baker, three people who can point to doubts expressed at the time come to mind: Raghuram Rajan, Alan Greenspan, and me.  What are we, chopped liver?

Derivatives-spinoff proposal opposed as part of overhaul bill - A dramatic proposal that could force banks to spin off their derivatives businesses, potentially costing them billions of dollars in revenue, has run into opposition on multiple fronts as the Senate prepares to take up legislation to remake financial regulations. Obama administration officials, industry groups, banking regulators and lawmakers from both sides of the aisle have taken aim at the measure proposed by Sen. Blanche Lincoln (D-Ark.), chairman of the Senate agriculture committee.  Their main objection: If a central goal of regulatory overhaul is to make financial markets more transparent and accountable, Lincoln's provision would have the opposite effect. Barring banks from trading in derivatives would force those lucrative business into corners of the market where there's even less oversight, critics warn.

Main Street Is In The Hands Of A Roulette Wheel - The solution is the problem. To quote Bill Carleton’s album, Squeeze the People, "Main Street is in the hands of a Roulette Wheel." He is so correct. The name of the "Roulette Wheel" is Credit Default Swaps. It does not matter what the G-7 or the G-20 does. It does not matter what the IMF, ECB and Fed under a beard do. Mrs. Merkel’s foolish political strategy fits right into the equation. CDS are going to take down every major currency, making trillions for the players. It will in time turn on the USA as it is already operating against the financially weaker Illinois and New York debt.The dollar, as it gains ground due to the mirror image of the euro, becomes weaker and weaker due to overvaluation with no fundamental legs. The dollar’s time will come

Editorial - What About the Wall Street Raters? - NYTimes - Everyone (except Wall Street bankers) seems to be outraged about Wall Street banks, which made billions by trading complex confections of dicey mortgages and then passed us the tab when the investments went belly up. But what about the agencies that bestowed triple-A ratings on many of the noxious financial products?  Moody’s, Standard & Poor’s and Fitch, whose ratings assured investors that the newfangled investments were as safe as United States Treasury bonds, arguably bear as much responsibility for the financial crisis as the banks that put the investments together. But the raters have mostly avoided public scrutiny, and from the look of Democrats’ current proposals to overhaul financial regulation, it looks as if they will remain off the hook.

Alford: Fix the Rating Agencies By Making Them Less Essential - The credit rating agency system has serious shortcomings. Given that the theoretical economic assertions regarding market efficiency are predicated on all economic agents making rational, self-interested decisions based upon all relevant information, it is rather amazing that economists, regulators and market participants thought that a single analysis by an agent with a conflict of interest (instead of narrow self-interest) could be counted on to generate analysis that would promote and maintain market efficiency. Any surprise attached to the recent failings of the credit rating agencies should be that the system lasted so long before failing so obviously.

Bankers’ bonuses: Claw-back clauses are critical - VoxEU - The global crisis has sharpened the media spotlight and political debate on bankers’ bonuses. Focusing on evidence from the UK, this column argues that to avoid excessive risk-taking in the financial sector and exploitation of moral hazard, bankers’ bonuses should be based on risk-adjusted long-run performance or be subject to “clawback” if future performance declines.

Financial regulation overhaul: Same tired arguments - Every time I hear a big industry crab about how some new set of government regulations will mean the end to life as we know it, bring the economy crashing down around our heads, or burden the consumer with more passed-on costs, I think of the smartest words Ronald Reagan ever spoke. They were: "There you go again." It's not just that they're opposed to any new initiatives — that's just industry doing what comes naturally. It's the dismal sameness of the arguments, decade after decade, that gets to me.

Bank-Tax Shenanigans.- There is an extraordinary amount of confusion surrounding the proposed bank tax designed to recoup the losses associated with bailing out Wall Street in 2008, and the fee proposed to create a fund that would cover the costs of liquidating the banks in the event of a future crisis. That's how you get reporting like this:  Despite the push from the Obama administration, the prospects for the "bank tax" remain uncertain. During a congressional hearing Tuesday, [Treasury Secretary Tim Geithner] said the tax provision was "an important complement" to a bill now before the Senate to overhaul financial regulations. But some Democrats said they are reluctant to include the tax because it could complicate prospects for the hotly contested overhaul bill.  But it doesn't matter if this tax is included in the financial-reform bill or not, as long as it is passed

Ezra Klein - Why aren't Fannie and Freddie in FinReg? - One of the right's talking points on financial reform is that it needs to include major reforms of Fannie Mae and Freddie Mac. That seemed fair enough to me, at least until I started working on a Fannie Mae and Freddie Mac explainer and realized it belies the reality of the issue. And Republicans, I think, know that.If you read the Republican FinReg proposal, it does three things on Fannie and Freddie: It appoints a new special inspector general inside the mortgage giants to make regular reports to Congress. It undoes the emergency measures put into place during the financial crisis. And it directs the president "to submit a plan to reform [Fannie and Freddie] to Congress no later than six months after the enactment of the Act." In other words: Ready, set, PUNT!

Why Jamie Dimon is Afraid of Elizabeth Warren - There are a lot of reasons to like the idea of a consumer financial protection agency. My colleagues Barbara Kiviat and Michael Grunwald have made the more substantive ones here, here and here. But I think I have stumbled across possibly the most telling data point yet on why the CFPA is likely a good idea: Jamie Dimon is scared of debating Elizabeth Warren on the topic. It's not because Dimon is not passionate about the topic. Privately, Dimon and other JP Morgan exeuctives have been strongly making their case in Washington against starting a new agency, even one housed at the Fed, to monitor consumer protection in the banking business. Nonetheless, I have put some phone calls in and Dimon is unwilling to take Warren on in person and debate the topic. Dimon is a smart guy. So the fact that he is scared to debate Warren on the topic means that he knows he can't win. There's no good argument against Warren's proposed CFPA, so no one can make it. Mortgages and credit cards are confusing stuff and easy to be gamed by the bankers. Consumers need a watchdog. Our economy needs a watchdog. The financial crisis has shown that. So Dimon's people are right, arguing against the CFPA in person would make Dimon look foolish, or more foolish than he already does. But not being willing to debate Warren only proves Warren's point: the CFPA is something we need badly.

Banks Exploring Balance-Sheet Workaround - Royal Bank of Canada has implemented a tactic designed to keep the assets of its U.S. commercial-paper conduits off its balance sheet. Bank of America, Citigroup, J.P. Morgan and Wells Fargo are also considering the maneuver, which entails the sale of high-yielding "expected-loss" notes that would essentially represent first-loss exposures to the banks' commercial-paper vehicles. At issue are the Financial Accounting Standards Board's FAS 166 and 167 rules, and an accompanying directive issued by the FDIC, Federal Reserve, Office of the Comptroller of the Currency and Office of Thrift Supervision. Under the FASB guidelines, U.S. banks must hold their conduit pools on balance sheet. The FDIC group, meanwhile, has ordered a larger-than-expected buildup of capital reserves against those assets from July 1 to Sept. 30.

Shadow Banking - Despite all the noise about financial reform, the shadow banking system that helped create the financial crisis would remain fundamentally unaltered by the legislation now pending in Congress. Indeed, leveraged entities such as private-equity, venture-capital, and hedge funds get only minor regulatory attention. These barely regulated, nontransparent bastions of speculation propagated systemic risks beyond any that could be created by the banks themselves. Whether housed at banks, created by banks, or freestanding, they exist to enable speculative risk-taking hidden from either regulatory or market scrutiny while camouflaging layers of debt and enabling the complex-securitization deals that caused the financial collapse.  Yet, neither the House bill passed last December nor the most recent Senate bill submitted by Sen. Chris Dodd does more than impose marginal adjustments on the shadow banking system.

JPM wishes the adults were in charge of financial reform - FT Alphaville has only one thing to say about the following note from JP Morgan economist James Glassman: ouch. Below are selected highlights from the note, which Glassman sent out to clients on Monday:The hearings exposed an unnerving ignorance of fundamental principles of market economics by folks who have a hand in remapping rules of finance that will be with us for a while. The low level of economic literacy is plaguing financial reform. Reform is dangerous—it produces unintended consequences—if we don’t understand the connection between incentives and economic behavior. Folks may like to hear that someone else is to blame for the mistakes they made, but everyone knows—including those who bought houses far beyond what they could afford and then walked when the promise of endless capital gains died and including the investors who bought funky financial instruments that enabled the housing bubble out west and in Florida to inflate—that Wall Street isn’t the only culprit in the housing debacle.

Grownups - Krugman - Thank you, James Glassman. The remarkable arrogance of your analysts memo — your employer has apologized, but the damage is done — has helped clarify where things really stand. I’ll probably have more to say about all this, but let me focus for the moment on one particular line — the one where Glassman says, Now that the financial reform debate is in the final innings, it’s time for the grownups to step in.  Atrios writes about this often, the persistent perception that conservative authority figures are the grownups, the people who know what really works, while the critics are pie-in-the-sky nuts. Yet for the past decade at least, the “grownups” have again and again proved utterly clueless.

Ezra Klein - Is J.P. Morgan's James Glassman a double agent… Last week's hearings before the Senate Subcommittee on Investigations "exposed an unnerving ignorance of fundamental principles of market economics by folks who have a hand in remapping rules of finance that will be with us for a while," writes James Glassman, J.P. Morgan Chase's chief economist. Glassman then goes on to bash Michigan's economy for a while (because Carl Levin is from Michigan, and, ah, what's the point?) and declare "now that the financial reform debate is in the final innings, it's time for the grownups to step in."Hoo boy. It's as if Glassman wants Congress to come down like a ton of bricks on his industry. Just look at the graph (pictured above) that Glassman decided to include in his presentation. You think that's going to make Michigan's delegation more receptive to J.P. Morgan Chase's interests? But putting aside the political consequences of Glassman's childish outburst, is it true? Is Congress beset by an "unnerving ignorance of fundamental principles of market economics?"

On Hill, Geithner Makes Case for a Bank Tax - NYTimes - Timothy F. Geithner, the Treasury secretary, urged Congress on Tuesday to impose a 10-year, $90 billion tax on the largest financial institutions to recoup the costs of the 2008 bailouts. But he faced skeptical questions from lawmakers on the structure and purpose of the fee. The Obama administration proposed the tax, which it calls the Financial Crisis Responsibility Fee, in January, amid public anger over the bank bailouts. The tax is not part of the overhaul of financial regulations being debated by the Senate. At a Senate Finance Committee hearing on Tuesday, officials from the American Bankers Association and the Financial Services Roundtable sharply criticized the proposal. While lawmakers did not reject the idea outright, some questioned its impact on consumers and small businesses, as well as the timing.

Wall Street Profits, Subsidies and Lobbyists - Wall Street bankers are strutting around like little banty roosters these days, crowing about the phenomenal profits their banks are raking in. Citigroup has just announced that its profits for just the first three months of this year totaled an incredible $4.4 billion, Goldman Sachs' haul was $3.5 billion, JPMorgan Chase grabbed $3.3 billion and Bank of America took $3.2 billion. Top bankers are cock-a-doodle-doing over these numbers, claiming that such results prove what geniuses they are, how essential they are to America's financial health and, of course, how deserving they are of their multimillion-dollar bonuses. Before they choke on their own hubris, however, let's note that a huge chunk of these profits are taken directly from a massive, little-known subsidy slipped to them by Ben Bernanke and other regulatory sweethearts in our country's Federal Reserve system. The Fed has deliberately held short-term interest rates to historic lows - less than one half of a percent. Meanwhile, the Treasury Department is paying almost 4 percent interest on longer-term loans that banks make to the government.

Can You Tax Wall Street Into Submission?  - Ezra Klein has some, to my mind, contentious ideas about how to fix Wall Street. He’s worried about the size, and power of big banks, both of which feed and are in turn fed by their profitability. Unless you can make them less profitable, he argues, they will be able to influence regulators and legislators; Wall Street is simply too profitable to exist in our corruptible democracy. He writes:…I don’t believe you can effectively regulate the financial industry so long as it’s sucking up about a third of domestic profits. The incentives to take massive risks will just be too great. The power to bribe Washington to dismantle regulations and legislation will be irresistible over time.His solution is that we need to take advantage of the brief moment of public interest in financial regulation to tax Wall Street profits down to a size at which they can’t buy as much regulatory influence.

The Rebirth of Regulation, by Robert Reich: What do oil giant BP, the mining company Massey Energy, and Goldman Sachs have in common? They’re all big firms involved in massive plunder. BP’s oil spill is already one of the biggest and most damaging in American history. Massey’s mine disaster, claiming the lives of 29 miners, is one of the worst in recent history. Goldman’s alleged fraud is but a part of the largest financial meltdown in 75 years. ...Where were the regulators? Why didn’t the Department of Interior’s Minerals Management Service make sure offshore oil rigs have backup systems to prevent blowouts? One clue: You may remember MMS’s wild drinking parties exposed during the Bush era. Where was the Mine Safety and Health Administration before the Upper Big Branch mine exploded? MSHA says it fined the company for a whole string of violations, but the law didn’t allow fines high enough to deter the company. Which raises the next question: Given Massey’s record, why didn’t the MSHA seek to change the law and increase the penalties?

Dodd Formally Agrees to Drop $50 Billion Fund to Ink Bipartisan Deal - Mr. Dodd agreed to drop the fund as part of an agreement with Sen. Richard Shelby (R., Ala.) to create new powers to break up failing firms that might pose a threat to broader financial markets.“These measures will prevent large failing firms from holding our country hostage, extorting giant taxpayer funded bailouts under the threat of economic disaster,” Mr. Dodd said Wednesday. Although Democrats and Republicans don’t have agreements on other parts of the bill, such as consumer protection powers and derivatives regulation, an agreement on resolution powers could help Democrats win more Republican support for the bill when its time for a final vote.

Senate OKs ban on use of taxpayer funds in bank bailouts – On a 96-1 vote, the Senate adopted an amendment by Sen. Barbara Boxer (D-Calif.) declaring that no taxpayer funds would be used to shore up failing financial institutions in the future. The Senate also adopted, 93 to 5, a bipartisan compromise that dropped a proposed $50-billion fund to cover costs of liquidating failing firms — a fund that would have been financed by banks. Critics said the fund's existence would encourage future bailouts rather than prevent them. With the adoption of those amendments — the first since the bill arrived on the Senate floor last week — the way was cleared for what is expected to be at least a week of debate on even more contentious issues

Senate Votes For Wall Street; Megabanks To Remain Behemoths -A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33. The amendment, sponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.), would have required megabanks to be broken down in size and capped so that their individual failure would not bring down the entire system.  Under Brown-Kaufman, no bank could hold more than 10 percent of the total amount of insured deposits, and a limit would have been placed on liabilities of a single bank to two percent of GDP.  In practice, the amendment required the six biggest banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- to significantly scale down their size. It was touted as a way to end Too Big To Fail.

Coverage of TBTF Amendment FAIL Fails - The Senate voted 61-33 yesterday against the so-called SAFE Banking Act, an amendment to the financial-reform bill that would have required the breakup of the megabanks. The New York Times gives this its own story on B1. The Wall Street Journal gives it the very last sentence of a story on A2, sniffing: The Senate on Thursday beat back another amendment with populist tinges, defeating 61-33 a provision that would have put strict caps on the size of the nation’s banks. Needless to say, this is a bigger story than that. Thirty-three senators, including three Republicans, voted to bust up Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley, and that only merits one sentence in The Wall Street Journal? But even the Times doesn’t give us a good explanation of why the amendment failed...

Hank Paulson's Wall Street Reform Proposals Stronger Than Pending Senate Bill - Former Treasury Secretary Henry Paulson outlined a number of "suggestions" Thursday to fix the nation's broken financial system and the outdated regulatory regime overseeing it, including reforming the derivatives trade, the securitization process, the credit rating agencies and lessening the reliance on megabanks.Some of Paulson's suggestions will come as a delight to reformers; some of those same suggestions will come as a disappointment to those who believe the current pending reform legislation will fix the ills that plague the financial system. Calling the financial regulatory system "archaic and outmoded" -- a frequent assertion made by many current and former policymakers -- Paulson, a former chief executive officer of Goldman Sachs, said these four reforms need to be addressed...

Congress Members Bet on Fall in Stocks - Some members of Congress made risky bets with their own money that U.S. stocks or bonds would fall during the financial crisis, a Wall Street Journal analysis of congressional disclosures shows.Senators have criticized Goldman Sachs Group Inc. for profiting from the housing collapse. And Congress is considering legislation to curb Wall Street risk-taking, including the use of financial instruments known as derivatives and of leverage, or methods that amplify returns.According to The Journal's analysis of congressional disclosures, investment accounts of 13 members of Congress or their spouses show bearish bets made in 2008 via exchange-traded funds—portfolios that trade like stocks and mirror an index. These funds were leveraged; they used derivatives and other techniques to magnify the daily moves of the index they track.

Congress Refuses to Outlaw Insider Trading For Lawmakers - Even a cynic can find Washington's hypocrisy shocking at times. The Wall Street Journal reports today a House bill that would force lawmakers to make greater disclosures on financial transactions and disallow them from trading on nonpublic information is going nowhere fast.  That's right. Members of Congress are currently allowed to profit on insider trading!The bill, which has been languishing in the House for four years, would require elected officials "to make their financial transactions public within 90 days of a purchase or sale" and "prohibit lawmakers from trading in financial markets based on nonpublic information they learn on the job," the WSJ reports. This comes a day after the same newspaper reported several lawmakers profited by betting against the housing and stock market in 2008.  And some did it using derivatives they've recently been railing against.

Senators Opposing Breaking up the Banks Get Way More Money from Financial Industry - As the day wound down on Wednesday afternoon and Senate offices began to close, the whip count paused for the day with 11 senators in the supportive column and 11 senators in the opposing column. So I began thinking, how does support for breaking up the banks a la the SAFE Banking Act correspond with campaign contributions from the finance industry Pulling from lifetime campaign contribution data provided by, I discovered that senators opposing the big-bank opposed SAFE Banking Act have received nearly twice as much money from the financial sector.

The Rich Continue To Use Government To Cut Out Their Competition - One of the scams that the rich use the government for in order to stop less wealthy people from getting richer is to promote the lie that, since venture capital is “riskier” than investing in public securities on the NYSE (another lie), individuals with less than a certain minimum net worth should not be allowed to invest in these “riskier” VC investments. Bankster puppet Sen. Chris Dodd (D-CT) has inserted into the upcoming financial “reform” bill a clause that would more than double the minimum net worth of a potential venture capital investor from $1 million to $2.5 million, or require an annual salary of $450,000 for the past two years to the current annual salary requirement of $200,000 [the article mistakenly says it is $250,000] for the past two years.

Keep the Casinos Open - In the storm of politician and pundit pique over financial regulatory reform, brought to a crescendo by conveniently-timed SEC charges against Goldman Sachs1, one refrain is repeated again and again in different forms. Paraphrasing a few: • Wall Street is just a casino. • Over-the-Counter derivatives like the Goldman Sachs’ CDOs are just “side bets” and should be banned, or at the very least we should regulate the bejesus out of them.• These “bets” aren’t “real investments”.• We should not let people “gamble” in this manner. However ubiquitous, and now verging on the conventional wisdom, this is still just silly talk.

Roubini Urges Goldman Sachs Breakup, Possible CDO Ban - (Bloomberg) Nouriel Roubini has a modest proposal for deflating Wall Street’s bubble-prone bankers. Break up Goldman Sachs Group Inc., he says. Consider banning collateralized debt obligations. And why not compensate traders with slices of their own exotic securities instead of with cash or shares? These prescriptions crop up in “Crisis Economics,” a rigorous yet highly readable look at why booms and busts occur and how to keep them from wreaking havoc on the real economy. Roubini is usually remembered as “Dr. Doom.” He’s the New York University professor who predicted in 2006 that the U.S. would soon suffer a once-in-a-lifetime housing bust and deep recession. What’s less appreciated is that he based his forecast on years of studying booms and busts. His conclusion: Financial crises are hardwired into capitalism.

Audio: Taleb on Black Swans, Fragility, and Mistakes - Nassim Taleb, author of The Black Swan and Fooled by Randomness, talks with EconTalk host Russ Roberts about his latest thoughts on robustness, fragility, debt, insurance, uncertainty, exercise, moral hazard, knowledge, and the challenges of fame and fortune. Listen

It’s The Compensation Stupid! - (The Solution to Goldman Sachs) The recent debate on financial regulation is missing the point. The focus has been exclusively on regulating the financial institutions. This is akin to preventing drunk driving by giving a breath test to the car. The key problem in the financial industry is not the institutions, it is the people. The people in the financial industry are mercenaries. They owe no allegiance to their employer, to their shareholders, to their clients or to their peers. They are in it for themselves. The problem they work on, every hour of every day, is how to maximize their personal financial reward. I learned very early in my business career that the most important factor in managing a sales force is defining the comp plan. Salesmen are smart. They will quickly understand what the comp plan tells them to do and they will do it. You had better make sure that the comp plan tells them to do exactly what you want them to do! Bankers are super salesmen. Bankers are smart. Bankers do exactly what their comp plan tells them to do.

SEC Didn’t Act After Spotting Wall Street Risks, Documents Show (Bloomberg) -- The U.S. Securities and Exchange Commission, criticized by lawmakers for failing to stop practices that fueled the financial crisis, raised concerns as early as 2006 about the risks of Wall Street’s appetite for packaging mortgages into bonds. Officials in the SEC’s division of trading and markets wrote that collateralized debt obligations tied to home loans exposed banks to writedowns if the assets weren’t immediately sold, according to documents released yesterday by a federal panel investigating the crisis.  The Financial Crisis Inquiry Commission, which Congress formed to investigate what caused the worst economic slump since the Great Depression, released the SEC document as part of its examination into why Bear Stearns Cos. collapsed in 2008

U.S. Faces High Stakes in Its Goldman Probe - WSJ - The criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud is a potent reminder of the pressure on the Justice Department to land a big fish on Wall Street. But the agency also is under pressure to show it can win big cases without cutting corners. "We're here not to win cases, but to do justice," Attorney General Eric Holder said in an interview before The Wall Street Journal reported that the U.S. attorney's office in Manhattan has launched a criminal probe of Goldman Sachs in connection with the securities firm's mortgage trading. "If we focus on that, we'll win the cases that we need to win." As the Justice Department digs in for what is likely to be a long, complicated and contentious investigation, federal prosecutors are being pushed by their bosses to avoid the overzealousness that has led judges to reprimand some of them and even throw out criminal charges.

Goldman: Still Greedy, No Longer Patient – NYTimes - Once upon a time, Goldman Sachs’ raison d’etre was to serve the ongoing needs of its clients and be paid fees for helping them raise capital, trade blocks of stock or by providing merger and acquisition advice, a business strategy that made the firm for years the envy of Wall Street and immensely profitable. This strategy forced Goldman’s bankers to be “long-term greedy” Nowadays Goldman’s mission, along with its argot, have changed. This shift is not doing the firm or its boss any favors. As was made abundantly clear during Tuesday’s 11-hour Goldman Sachs-athon on Capitol Hill, the bank has eschewed its client-focused ethic in favor of “making markets” for its trading “counterparties.” It is no coincidence that not one of the seven current or former Goldman professionals grilled by senators in the hearing is, or ever was, a banker; most came from the trading floor.

Letters – A Congressional Grilling for Goldman – NYTimes - To the Editor: The Securities and Exchange Commission’s case against Goldman Sachs is essentially defining the fine line between ethically abhorrent and illegal. How the courts ultimately rule is anyone’s guess. But most perturbing to me was how little attention is being paid to a big loser from Wall Street’s actions: the American saver.TARP and other money funneled to Wall Street has been largely paid back. The biggest and most hidden subsidy of all has not. Interest rates are near zero. They are at such a level so banks, like Goldman, can make money by using this almost-free money and investing in AAA-rated Treasuries yielding 2 to 4 percent more than their borrowings. Savers are the ones financing this by forgoing normal interest rates, but they will never get their day in court. If Goldman owes anyone, it’s not the “sophisticated” institutions that bought their risky mortgage products; it’s the citizens who didn’t have a choice in bailing out entities like Goldman.

Did Goldman’s Ex-Mortgage Guru Lie Under Oath? - During Tuesday's 10-hour grilling of past and present Goldman Sachs executives and traders before a Senate subcommittee, the questioning frequently centered on four mortgage-related products the company had sold to investors as the subprime market was about to implode. At one point, an indignant Sen. Jon Tester (D-Mont.) said, "Every one of these [deals] looks like a wreck waiting to happen." And he asked Daniel Sparks, the former head of Goldman's mortgage department, how he "in good faith" could peddle these mortgage-related products to clients when it was clear the mortgage market was close to complete collapse—and when Goldman itself had begun "shorting," or betting against, this very same market. Sparks—whose overall evasiveness drew the ire of Senate investigations subcommittee chair Carl Levin (D-Mich.) and other lawmakers—replied: "At the time we did those deals, we expected those deals to perform." Numerous documents released by the subcommittee, however, indicate that Sparks, who left Goldman in the spring of 2008, and his former employer knew otherwise. And his testimony raises a serious question: whether he lied to Congress under oath.

The Goldman Wells puzzle - I can understand the trading-desk mentality which went into the Abacus deal. What puzzles me more is Goldman’s incredible secrecy when it came to disclosure that it had received a Wells notice: The Financial Industry Regulatory Authority also has opened an investigation into Goldman’s failure to report the Wells Notice that it received in September regarding trader Fabrice Tourre, a person familiar with the matter said on Wednesday.Goldman was required to report the notice – which signals the likelihood of SEC charges – within 30 days of receiving it, but did not disclose it to FINRA until this week, the source said.This seems to me to be a no-brainer of a disclosure, since there’s no way the firm is going to make any more money if it doesn’t disclose the notice. But not only did Goldman fail to make any SEC disclosure of the notice, it didn’t even inform Finra, despite industry requirements.

Goldman Sachs has a big legal problem - Goldman Sachs' legal headaches don't start and end with the Securities and Exchange Commission. Reports surfaced late Thursday that federal prosecutors have opened a criminal investigation into Goldman and its employees, over whether it may have committed securities fraud in its mortgage trading operations. A representative for the firm would not confirm reports of an inquiry, but said they were not surprised given the scrutiny the firm has endured in recent weeks, adding they would cooperate with any requests for information.  The latest legal action builds on the high-profile civil case brought against the company last month by the SEC, in which the agency charged the firm and one of its employees with defrauding investors in the sale of securities tied to subprime mortgages.

Big Money: Debunking the myth of the ’sophisticated investor’- As part of their defense in a messy SEC investigation, Goldman Sachs and investor John Paulson have trotted out a classic Wall Street defense: Their customers were "sophisticated investors."  So buyers, beware -- this is just how the big boys roll. It's a high-stakes game for experienced players; they all know the real rules; the public shouldn't care. Don't fret over the higher workings of the princes of finance, Wall Street loves the "sophisticated investors" argument, and little wonder: It could generate infinite financial fees if only the populace could be convinced that it's okay to fool some of the people all of the time. The problem is that even when only some of the people get fooled, all of us are paying all of the time.

Lloyd Blankfein’s AAA Bridge He Wants to Sell You - Perhaps the most stunning part of the Goldman Sachs hearing the other day came at the end of the hearing, after most of the press had left for dinner. Carl Levin challenged Lloyd Blankfein on something he had said to staffers. Blankfein claimed that he “never thought” of the fact that AAA ratings were important to sales and that some buyers only buy AAA rated products.Somehow I have a feeling this claim is going to come back to haunt Blankfein

Warren Buffett backs Goldman Sachs at Berkshire meeting-- Warren Buffett offered his strongest defense yet of Goldman Sachs, saying he doesn't believe the investment bank acted improperly in a sale of subprime-related securities at the heart of a Securities and Exchange Commission fraud case. "I do not hold against Goldman at all that an allegation has been made," Buffett said Saturday at Berkshire's annual shareholder meeting in Omaha. He adds that he "loves" Berkshire's lucrative investment in Goldman preferred stock and believes the firm remains the best investment bank in the world.

From Buffett, Thought-Out Support for Goldman - Why is Warren Buffett sticking his neck out so far in defense of Goldman Sachs? That was the question so many Berkshire Hathaway shareholders, some in disbelief, kept asking here over the weekend, after Mr. Buffett offered his full-throated support of Goldman and its chief executive, Lloyd C. Blankfein, as they fight a civil fraud suit brought by regulators. Yet by the end of Berkshire’s annual meeting, at least some of the 40,000 shareholders in attendance who had been skeptical of Goldman had come to the same conclusion: Mr. Buffett may actually be right.  “I don’t have a problem with the Abacus transaction at all, and I think I understand it better than most,” Mr. Buffett declared with nonchalance late Sunday afternoon, referring to the mortgage derivatives deal at the center of the lawsuit.

Senate’s Goldman Probe Shows Toxic Magnification - Wall Street Banks Repackaged Same Risky Bonds into Numerous Securities, Spreading the Pain Across Multiple CDOs.  Even at its peak, subprime lending accounted for a relatively small portion of overall mortgage lending. Yet losses from these mortgages caused deep damage to the financial system. Now, documents released by Senate investigators last week provide clues in understanding why the losses were so severe. The documents show how Wall Street banks packaged and repackaged the same risky bonds into securities that ultimately helped magnify the impact of defaulting subprime mortgages on the financial system.

Goldman, Other Banks to Face Munis Case – NYTimes - Goldman Sachs & Co, Citigroup Inc and other high-profile banks must defend against allegations by 15 California cities and counties that they conspired to rig bids for municipal investment contracts and derivatives, a U.S. judge ruled. But the financial arm of troubled insurance giant American International Group and a unit of General Electric Co were among several companies that won dismissal of civil lawsuits brought in 2008 by the California municipalities, including the city of Los Angeles. The decisions, which do not address the merits of the case, were published in two separate rulings this week by U.S. District Judge Victor Marrero in New York. Last month, Marrero declined to dismiss similar cases against 16 firms that were sued by several states and Hinds County, Mississippi.

Pre-avoiding regulation, Goldman style - How does this work?Goldman argues that the highly profitable, tailored segment of the derivative business is unable go on an exchange due to low volumes or pricing difficulty. Alternatively, these high margin OTC products will likely be cleared through a common settlement venue, and based on the current draft of the Senate Bill, would have to be originated outside the bank (Section 1065). This would force banks to move their fixed income derivatives books from the bank subsidiary (that is FDIC protected and has access to the Fed window) to a new separately capitalized (and lower rated) derivatives subsidiary that would likely be guaranteed by the bank holding company. Goldman already operates its OTC fixed income derivatives book out of such a subsidiary and would not have to use new capital to support this subsidiary.That’s from an enthusiastic “buy” note on Goldman Sachs, penned by Brad Hintz at Bernstein. (Yes, yes, it’s in the usual place.)

Charlie Gasparino Says Goldman Settlement To Be Between $1 and $5 Billion | zero hedge - “I’ve been talking to lawyers and rival CEOs just trying to ballpark it at this point…there is no number, but people are ball parking, and these are CEOs and lawyers, between $1 and $5 Billion. And that’s what they are saying. And these aren’t people that are necessarily trying to keep negative stuff on Goldman Sachs. These are both analysts that are positive on the stock, but those are the numbers that they are talking about.”“And it depends on a lot of things. For all I know, the SEC can come in and say give us $100,000,000 if Lloyd Blankfien gets fired. That’s a possibility.”

Goldman’s London bankers paid average of $1m each - GOLDMAN SACHS, the investment bank at the centre of a criminal investigation into its role in the financial crisis, paid its London staff $5.5billion (£3.6billion) in salary and bonuses last year.  The payouts equate to an average of $1m each - almost twice as much as the average pay deal across the rest of the group.  The figures, detailed in accounts filed at Companies House late on Friday, come amid continuing criticism of high pay for bankers.  They also follow the revelation that the US attorney-general has launched an investigation into Goldman's sales of complex mortgage products in the run-up to the global financial collapse.

Singling out Goldman Sachs - I think it entirely possible that Goldman could go the way of Arthur Anderson or Drexel. If so, the firm will have no one to blame but itself. Nevertheless, there is a danger that we will make a ritual sacrifice of Goldman and pretend to have exorcised our demons, while other firms that have engaged in similar conduct continue undisturbed. It would be a sad irony if, in single-minded pursuit of Goldman Sachs, we not only let other perps escape unscathed, but also hand them the windfall of a less competitive industry. Rather than forcing traumatic self-appraisal and reform at surviving banks, Goldman’s fall might lead managers elsewhere to congratulate themselves for savvy positioning, for playing the system. Competitors would swallow the corpse of Goldman Sachs, thinking they had eaten what they’d killed.

Fabrice Tourre: Gaining Cred on Wall Street – Newsweek - While Main Street vilifies Goldman Sachs, and the federal government widens its probe into the bank’s selling of mortgage securities, an unlikely folk hero is emerging on Wall Street: Fabrice Tourre, the 31-year-old Goldman employee named in the Security and Exchange Commission's suit. Already, Fabulous Fab—as he calls himself in e-mails released by the SEC—has two Facebook fan pages devoted to him. New York magazine breathlessly reported on his life, including the $4,000-a-month Manhattan apartment he once rented. The 15 Wall Street employees—20- and 30-something bankers, traders, and former Goldman employees—whom NEWSWEEK interviewed for this piece say they admire the way Tourre foresaw the collapse in the housing market and structured a lucrative deal for his client, hedge-fund impresario John Paulson. Goldman Sachs refused to comment or to pass along Tourre's contact information. "Everyone thinks he has a bit of swagger," says former investment banker and Columbia Business School professor David Beim. "Everyone is cheering for him."

10 Ways the American Economy Is Built on Fraud - Fraud has become so endemic in this country that it's woven its way into America’s DNA.  Here are 10 ways the American economy is built on fraud.

Too Big to Jail? - The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges. That’s in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking's most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr. One explanation for the difference may be that key bank regulators – who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors – have this time left reporting fraud up to the banks themselves.

Lloyd Blankfein is Taking Matters Into His Own Hands - Expect to see a lot of Lloyd Blankfein on your television in the coming months.After last week's interminable Senate hearing, the Goldman Sachs C.E.O. stayed late to face the music from the financial news outlets and even the network morning shows. Apparently, that was only the beginning.On Friday, the man of many wonderful faces told Charlie Rose he plans to be a more public face for his embattled company. "We're very important but the public doesn't see that," said Mr. Blankfein, who said the firm has always dealt with institutional clients and so it's remained a little aloof from the American public. Now that the S.E.C. is accusing it of fraud, that's going to change.

Fixing Wall Street’s Autopilot - NYTimes - ON Thursday afternoon, the Dow plunged 1,000 points within a few minutes, followed by an equally sudden recovery. We don’t know all the details about the drop, but it was almost certainly the result of computer or human error in a high-speed trading program. Among the many arcane corners of the financial world highlighted by the Wall Street crisis, high-frequency trading — in which computers scan billions of bits of market data for trading opportunities that may exist for mere fractions of a second — has generated a surprising amount of discussion. Alongside the risk of expensive errors like what happened Thursday, critics say, these programs facilitate insider trading and overwhelm regulators’ access to critical information.These are fair criticisms. Fortunately, they can also be easily addressed without undermining the positive role that high-frequency trading plays in the market.

The Run on the Shadow Liquidity System - Back in 2008 when banks and the like were busily going to zero the phrase that captured much of what was going on best was that it was a "run" on the shadow banking system. Something similar happened yesterday, albeit in the shadow liquidity system. As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don't want any. So long as there is nothing awry in U.S. markets the depth of liquidity -- the amount of stock, currency, futures, etc. you can trade without materially moving the price --  is impressive, almost certainly the best in the world. But all of this changes market microstructure in insidiously destabilizing ways. For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic whim. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks. You battle bots take it". And, they don't.

SEC Said to Consider New Rules as It Investigates Market Plunge (Bloomberg) -- The U.S. Securities and Exchange Commission is considering regulatory changes aimed at slowing stock trading during periods of cascading prices, even though the agency hasn’t yet concluded what caused this week’s market plunge, two people familiar with the matter said.  SEC officials are weighing whether uniform trading curbs should be imposed across markets for companies that have fallen a certain percentage, said the people, who declined to be identified because the discussions are preliminary. The agency is examining whether any rules should include a time element because a steep decline that occurs in minutes may be more detrimental to markets than a decline over several hours, one of the people said.  U.S. regulators and exchanges are trying to determine what happened after stocks fell May 6, temporarily erasing more than $1 trillion in market value, in a rout fueled by waves of computerized trading. The SEC and Commodity Futures Trading Commission said in a joint statement yesterday that declines for individual stocks were “inconsistent” with well-functioning markets and pledged to make “structural” changes if necessary.

More On Yesterday's Plunge - If you had any doubt about what I have been talking about during this entire ramp job off 666 - that the so-called "bull market" was in fact not much more than a handful of institutions buying shares with free Fed money and passing them between one another hoping to distribute them to you - you should be thoroughly disabused of your skepticism after yesterday."Revenge of the algorithms" writ large, basically.We keep talking about how financial innovation has "helped consumers", "helped businesses" and "made markets more efficient." Let me put this in nice, large letters for you:That claim is one big fat LIE.

PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure - The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.

Retraining and Rehabilitation of Financial Sector Employees May Be a Daunting Task - According to the email below there is some concern among employees in the financial services sector about their future employment prospects if reform legislation should be enacted, and some tentative, but perhaps unrealistic plans, of coping with it if it happens are expressed. I can always use a little help around the kitchen and the yard, cleaning up and minor repairs, and I would gladly pay a fair wage based on effort, moderated by experience and capability. My son and helper is leaving for university soon to begin his studies in engineering, which is the manipulation of real things for practical purposes with benefit to the customer. So it might be unfamiliar to you. And I am not getting any younger. By the way, since most of the suburban teaching jobs are filled, have you considered going back to school to learn to be a Registered Nurse? There will be plenty of openings in nursing homes and hospices, and your selfless dedication to hard and sometimes distasteful work will be most useful and appreciated.

Banker Eats People (video)

Who Knew Bankruptcy Paid So Well? - MORE than $263,000 for photocopies in four months. Over $2,100 in limousine rides by one partner in one month. And $48 just to leave a message. Explanations for these charges? Priceless. The lawyers, accountants and restructuring experts overseeing the remains of Lehman Brothers have already racked up more than $730 million in fees and expenses, with no end in sight. Anyone wondering why total fees doled out in the Lehman bankruptcy alone could easily touch the $1 billion mark merely has to look at the bills buried among the blizzard of court documents filed in the case.

Repaying Taxpayers With Their Own Cash - Senator Charles E. Grassley, Republican of Iowa, uncovered what he called a government-enabled “TARP money shuffle.” It relates to General Motors, which on April 21 paid the balance of its $6.7 billion loan under the Troubled Asset Relief Program. G.M. trumpeted its escape from the program as evidence that it had turned the corner in its operations. “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse,” boasted Edward E. Whitacre Jr., its chief executive.  G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: “We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability,” said Timothy F. Geithner, the Treasury secretary.

Inflation and Bailouts Go Hand in Hand - Pick a financial fire and you can be sure the U.S. government will hose it down with gallons of money.  AIG, General Motors, Chrysler, insolvent states, FDIC, Fannie, Freddie and all the banks are just a few of the blazes Uncle Sam has sprayed money on.Now, the Federal Reserve is printing up another $105 billion to send to Greece to help with its debt problem.  Is the bailout cycle getting ready to take another turn bailing out the Banks?  You know, the ones we were told had little exposure to sour European debt?  Check out this article from Bloomberg last week:  JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy,Ireland, Greece and Spain, according to Wells Fargo & Co.  JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital,

Mortgage Bond Spreads at Widest in Five Months: Credit Markets  (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates climbed to the highest in five months relative to Treasuries as Europe’s worsening government finances led investors to shun all but the safest assets. Even with the U.S. promising to pump unlimited capital into the two agencies through 2012 to ensure they can meet $4.6 trillion of guarantees on housing debt, speculation Greece’s debt crisis will infect Portugal, Spain and the rest of the European Union and make interest rates more volatile is sending investors fleeing to the safety of Treasuries.

Fannie Mae mortgage holdings up after loan buyouts - (Reuters) - Fannie Mae (FNM.N), the largest buyer of residential home loans, said on Friday its March mortgage portfolio was inflated by buyouts of seriously delinquent loans repurchased from securities pools.The company's total book of business, gross mortgage portfolio, commitments to buy loans and net and new business acquisitions included about $40 billion of loans it bought back from the pools.Excluding those repurchases, which will not be reflected as liquidations from the mortgage-backed securities that Fannie Mae holds until April data, the total book of business would have declined 2.3 percent in March. Including them, there was a 2.8 percent increase to a total book of business of $3.263 trillion.

Freddie Mac seeks additional $10.6 billion from federal government - McLean-based Freddie Mac is seeking an additional $10.6 billion from the federal government after reporting an $8 billion loss in the first quarter.The results included $1.3 billion in dividend payments to the U.S. Treasury, which received stock when it took over Freddie Mac and Fannie Mae in September 2008 and put them into conservatorship.The quarter’s results also reflected credit losses of $5.4 billion, a derivative loss of $4.7 billion because of a decline in long-term rates and net interest income of $4.1 billion

Freddie Mac: Q1 Net Loss $6.7 billion, Asks for $10.6 billion - Press Release: Freddie Mac Reports First Quarter 2010 Financial Results First quarter 2010 net loss was $6.7 billion. ...Net worth deficit was $10.5 billion at March 31, 2010, driven primarily by a significant adverse impact due to the change in accounting principles. ...The Federal Housing Finance Agency (FHFA), as Conservator, will submit a request on the company’s behalf to Treasury for a draw of $10.6 billion under the Senior Preferred Stock Purchase Agreement (Purchase Agreement).

Mortgage Insurer Turns to Lenders to Police Brokers - The changes will put more of the onus on lenders to make sure there is no fraud or faulty underwriting in the loans they fund, and less on the FHA. The lenders could be held liable for losses if a loan insured by the FHA goes bad and there are signs of fraud or mistakes in the underwriting.The new approach comes as the FHA is straining to monitor mortgage brokers seeking to arrange FHA-backed loans, a number that has mushroomed in the last few years.The FHA doesn't make loans. Instead, it guarantees lenders against losses on loans made by FHA-approved lenders and brokers. Brokers serve as middlemen between borrowers and lenders. Because it didn't loosen its lending standards, the FHA largely sat out the subprime-mortgage boom. When defaults sent housing and financial markets reeling, lenders and brokers scurried to the FHA for backing on loans that had become hard to fund otherwise. The agency's market share rose to about one-third of the mortgage market last year, up from 2% in 2006.

Whitney Says Banks Face ‘Tough’ Quarter, Housing Dip (Bloomberg) -- U.S. lenders face “tough” comparisons when they report second-quarter results and higher dividends aren’t likely because of increasing capital requirements, according to banking analyst Meredith Whitney.  Banks benefited from write-ups tied to fixed-income assets as consumer banking lagged in the first quarter, Whitney said today at the Bloomberg Markets Global Hedge Fund and Investor Summit in New York. “A vast majority of last year’s profits for the banks were government-induced,” Whitney said. “The government is putting a life guard on duty so that people will play in the pool.” Banks are unfairly “teasing” investors by discussing higher dividends because regulators are demanding lenders hold on to capital, said Whitney, known for her forecast for 2008 that Citigroup Inc. would cut its payout.

Commercial Real Estate Carnage Continues – The troubled commercial real estate market continued to ravage the community banking sector last month as federal banking regulators closed 23 banks, the highest monthly toll in nearly a year.In total, the April bank closings cost the Federal Deposit Insurance Corporation nearly $9 billion as banks loaded with commercial real estate and construction loans continued to falter at a record pace. “Judging by what we’ve seen so far we think the size of the problem is going to increase,” said Matt Anderson, managing director of real estate analysis firm Foresight Analytics. Foresight’s bank watch list, which at the end of 2009 totaled 590 banks, is now at 645, Anderson said.

Q1: Office, Mall and Lodging Investment - Here are graphs of office, mall and lodging investment through Q1 2010 based on the underlying detail data released by the BEA today ...This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new all time low (as a percent of GDP). The second graph is for investment in malls. Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by over 50% (note that investment includes remodels, so this will not fall to zero). Mall investment is also at an all time low (as a percent of GDP) and will probably continue to decline through 2010. The third graph is for lodging (hotels). The recent boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by almost 2/3rds already..  I expect lodging investment to continue to decline through at least 2010.

Homebuyer Tax Credit Cost Rises to $16 Billion - There's updated data on the cost to taxpayers of the Homebuyer Tax Credit, which expired at the end of April. The U.S. Treasury reports that through March 27 some 2.2 million people had filed for the credit and the cost to the Treasury was nearly $16 billion. That's up from 1.8 million filers through late February at a cost to Treasury of nearly $1.8 billion.Given anecdotal evidence that April was an especially active month for home-sale transactions given the program's pending expiration, it's fair to assume that the final cost to the Treasury will exceed $20 billion. So what do you think: Was it worth it?

Strategic Defaults Outpace HAMP Modifications – Last quarter, more homeowners voluntarily defaulted on their mortgages and chose to walk away from their homes than the total number of mortgages permanently modified to date under the Administration's year-old Home Affordable Modification Program (HAMP).According to new data from the team of researchers at the University of Chicago and Northwestern University that first identified the scope of "strategic default" behavior last year, the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, has dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009. RealtyTrac reported foreclosure filings on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009.

U.S. Lets Second Loans Threaten Housing, Goodman Says – (Bloomberg) -- The U.S. government and the nation’s largest banks are still allowing second mortgages to jeopardize the housing market, according to Laurie Goodman, an analyst at Amherst Securities Group LP. While the Treasury Department created an initiative requiring holders of home-equity debt to adjust terms when first mortgages are changed -- a program in which the biggest banks have agreed to participate -- the plan falls short of what’s needed, Goodman said today in a Bloomberg Television interview. The Treasury’s Second Lien Modification Program allows for “long delays” between when first-lien mortgages get changed and when homeowners may get lower payments on their home-equity debt, Goodman said. The four biggest banks, which own more than 40 percent of about $1 trillion in U.S. second mortgages, began signing up in January. The program was announced April 2009.

CMBS Delinquencies Hit New All-Time High - Overdue loans in pools of commercial mortgage-backed securities (CMBS) continue to mount. With each passing month, CMBS delinquency rates jump to another record high – and April held true to form.The delinquency rate for commercial real estate loans in CMBS climbed higher still last month, although the rate of increase slowed from March’s breakneck pace, the research firm Trepp LLC reported Monday.According to Trepp’s monthly study, the percentage of CMBS loans 30 or more days delinquent, in foreclosure, or classified as REO jumped 41 basis points during April, putting the overall delinquency rate at 8.02 percent, the highest in CMBS history

Case Shiller: Housing Recovery Hoorah! (Or Is It a Decline?) Once again, the news from the latest Case Shiller Home Price Index is all over the map. Home prices are up for the year! Home prices are down for February! Seasonally-adjusted home prices are up! Here's what's really going on: Standard & Poor's Case Shiller Index has been flat since last fall.  Over the last three years, the index has moved boldly almost every month, rising or falling by several points or well over 1 percent.  But after the brief recovery in home prices last summer, the index has barely moved since September.

The Housing Seesaw - The big news last week on the housing price front was the jump in the S&P/Case-Shiller Home Price Indices. Even though the bounce was rather slight – the widely cited index registered a year-over-year increase of just 0.6 percent – the media glommed on to it as evidence that the housing market might be stabilizing.  While great attention gets paid to the slightest gyrations in the oft-cited index, there is another, less-cited component of the Case-Shiller series that’s even more interesting. It’s the index value itself – graphed above. And it essentially tracks housing prices in light of their January 2000 baseline. As this chart shows, the 20-city composite index hit a high of 206 before falling to 145, a decline of roughly one-quarter from its peak.  The 10-city index peaked at 226 before falling to 156, a decline of approximately a third. Still, that’s roughly 50 points above 2000 levels. Nationally, housing prices today are in line with their 2003 levels.

The NYT Gives Space to Bubble Deniers - Casey Mulligan is on the lose again. The notorious University of Chicago economist is arguing that there was no housing bubble in the NYT Economix section. The centerpiece of his argument is that inflation-adjusted house prices have not returned to their pre-bubble level. This means that the price rise must be driven by the fundamentals of the housing market rather than an irrational bubble. It's hard to know where to begin on this one. I guess the first point would be that he is using the wrong series to find anything about the bubble. He is using the new house price series from the Census Bureau. This series controls for neither quality nor location. If the price of all homes doubled, but the price of new homes built further from city centers remained the same, this index would show no increase in prices. This is why almost everyone in this debate uses one of the repeat sales indices, such as the FHFA House Price Index or the Case Shiller national housing index.

Pending Home Sales increase in March - From the NAR: Pending Home Sales on an Upswing The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, rose 5.3 percent to 102.9 from 97.7 in February, and is 21.1 percent above March 2009 when it was 85.0; this follows an 8.3 percent increase in February. The data reflects contracts and not closings, which usually occur with a lag time of one or two months."In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” This is no surprise - the tax credit has pulled demand forward, and existing home sales will decline after June (existing home sales are counted when the contract closes).

Update to Fed Rent-to-House Price Graph - Last night I posted some excerpts from the just released 2004 FOMC transcripts showing there was some concern about a housing bubble in June 2004. A key graph, presented by Fed associate research director Stephen Oliner, showed the rent-to-price ratio through Q1 2004. Oliner used the OFHEO (now FHFA) house price index. Usually the invert is presented (price-to-rent). Here is an update to that graph through Q4 2009. The arrow shows the rent-to-price ratio when Oliner warned that "even after you account for the fundamentals, there’s a part of the increase [in house prices] that is hard to explain".  Clearly the ratio was even more out of line with fundamentals in 2005.

Studies Find "Strategic Defaults" on the Rise The number of homeowners deciding to throw in the towel even though they can afford to pay their mortgage is growing, according to two new industry studies. Still-falling property values are pushing more homeowners underwater, and the social stigma attached to foreclosure is steadily eroding as delinquencies become almost commonplace – such factors are giving rise to so-called strategic defaults.Researchers at the University of Chicago and Northwestern University found that the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, has dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.

MBA: Mortgage Purchase Applications Highest Since October - The MBA reports: Purchase Applications Continue to Increase, Refinance Activity Declines in Latest MBA Weekly Survey The Market Composite Index, a measure of mortgage loan application volume, increased 4.0 percent on a seasonally adjusted basis from one week earlier. ... The Refinance Index decreased 2.1 percent from the previous week and the seasonally adjusted Purchase Index increased 13.0 percent from one week earlier. This is the third consecutive weekly increase in purchase applications and the highest Purchase Index recorded in the survey since the week ending October 2, 2009. This graph shows the MBA Purchase Index and four week moving average since 1990. This is the highest level for the purchase index since last October. The index will probably turn down in the next week or two since the tax credit expired last Friday (buyers need to close by June 30th).

Private Construction Spending Declines in March - Overall construction spending increased in March, with a boost from public spending, however private construction spending - both residential and non-residential - declined in March. From the Census Bureau: March 2010 Construction at $847.3 Billion Annual Rate The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2010 was estimated at a seasonally adjusted annual rate of $847.3billion, 0.2 percent (±1.3%)* above the revised February estimate of $845.5 billion. ... Spending on private construction was at a seasonally adjusted annual rate of $550.8 billion, 0.9 percent (±1.4%)* below the revised February estimate of $555.7 billion. The first graph shows private residential and nonresidential construction spending since 1993.  The second graph shows the year-over-year change for private residential and nonresidential construction spending. Nonresidential spending is off 25.5% on a year-over-year (YoY) basis.

Residential Investment Components Q1 2010 - More from the Q1 2010 GDP underlying detail tables ...Note: Residential investment (RI), according to the Bureau of Economic Analysis (BEA), includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories. Back in Q4 2008 - for the first time ever - investment in home improvements exceeded investment in new single family structures. This has continued through Q1 2010. This graph shows the various components of RI as a percent of GDP for the last 50 years. The most important components are investment in single family structures followed by home improvement. Investment in home improvement was at a $152.9 billion Seasonally Adjusted Annual Rate (SAAR) in Q1, significantly above the level of investment in single family structures of $115.2 billion (SAAR).

Could Basic Math Skills Have Prevented Foreclosures? - One popular narrative of the subprime/foreclosure crisis is that many borrowers did not understand the loans they were getting into, and that subprime lenders took advantage of this by offering loans that were doomed to fail and difficult to understand.  A new study from the Atlanta Fed provides evidence in support of the borrower ignorance part of the narrative: We find a large and statistically significant negative correlation between financial literacy and measures of mortgage delinquency and default, and the finding is robust to the inclusion of controls for income, education, risk aversion, and time preferences, thus ruling out a broad set of potential biases from omitted variables. The point estimates are remarkably robust, and quantitatively important: 20 percent of the borrowers in the bottom quartile of our financial literacy index have experienced foreclosure, compared to only 5 percent of those in the top quartile.

NMHC Quarterly Survey: Apartment Market Conditions Tighten - From the National Multi Housing Council (NMHC): Apartment Industry Shows Widespread Improvement According to NMHC Quarterly Survey of Market Conditions  The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose sharply from 38 to 81. This was the highest figure in nearly four years. Fully 64 percent of respondents said markets were tighter (meaning lower vacancies and/or higher rents). Only two percent reported looser markets. This is the sixth straight increase for this measure. This graph shows the quarterly Apartment Tightness Index. A reading above 50 suggests the vacancy rate is falling. Based on limited historical data, I think this index will lead reported apartment rents by about 6 months to 1 year. Right now I expect BLS reported rents to continue to decline through most of 2010.

Shiller: "The Real Worry Is That We'll Grow Slowly Until We Run Into The Next Recession." - He expressed concern of slow growth until the next recession, his definition of a double-dip. His 20-city Case-Shiller real home price index declined 35% from its 2006 peak until early 2009, when Fed mortgage backed securities purchases and the homebuyer tax credit pushed it back up just over half as much, but he expects further housing price declines with the expiration of those government interventions on March 31 and April 30 respectively. Shiller spent most of his talk describing how Animal Spirits, the title of his recent book co-authored with Nobel Prize winner George Akerlof, can lead to bubbles, the existence of which are denied by the Efficient Market Theory. "We economists like data sets where n=30 or more, but we have n=2 when it comes to the financial market bubbles of 1929 and 2000. These events were unique."

General Motors: Sales up 6.4% compared to April 2009 - From MarketWatch: GM April U.S. sales up 6.4% to 183,997 vehicles and from GM: Chevrolet-Buick-GMC-Cadillac Sales Increase 20 Percent in April  Note: GM discontinued several brands, so total vehicle sales were up 6.4%.
Update:  Ford U.S. April sales jump 24.7% to 167,542 units
Update2: Chrysler U.S. April sales increase 25%
Update3: Toyota U.S. April sales up 24.4% to 157,439 units
This is based on a very easy comparison: in April 2009 U.S. light vehicle sales fell 36% to 9.2 million (SAAR) from 14.4 million (SAAR) in April 2008. The sharp decline last year was due to the financial crisis, the recession, and reports of the then impending bankruptcy of GM and Chrysler

U.S. Light Vehicle Sales 11.2 Million SAAR in April - Based on an estimate from Autodata Corp, light vehicle sales were at a 11.21 million SAAR in April. This is up 21.8% from April 2009 (when sales were at the lowest level in 30 years), and down 4.6% from the March sales rate that was driven by incentives. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for April (red, light vehicle sales of 11.21 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967. Auto sales have recovered from the low levels of early 2009, but are still below the lowest point of the '90/'91 recession (even with a larger number of registered drivers).

Trucks drive 20% increase in April vehicle sales - Sales of new cars and trucks last month zoomed nearly 20% from year-ago levels, but the pace lagged behind discount-fueled March, delivering an uncertain verdict on the auto recovery's strength.Perhaps most striking was that trucks — a category that includes pickups, minivans, SUVs and cargo vans — powered April's boom. Truck sales rose 23.2% vs. only 16.8% for cars, Autodata reports.Almost every brand saw higher sales growth in trucks than cars, says Jesse Toprak, vice president at, a research site. "It speaks to the strength of the recovery overall. Truck sales are a harbinger of the overall ... demand, particularly from small business."

Big Spenders: The Consumer Economy - Consumers are the biggest players in the nation’s economy, and are now bigger than (almost) ever.On Friday, the Bureau of Economic Analysis reported that the nation’s output grew last quarter at an annualized rate of 3.2 percent, and that the most recent expansion was largely driven by consumer spending. What do we mean when we say that consumer spending helped “drive” the expansion?Well, consumer expenditures increased at an annualized rate of 3.6 percent. That’s a smaller increase than some other categories of economic activity; for example, gross private domestic investment grew at an annualized rate of 14.8 percent last quarter. Consumer spending was a bigger contributor to the over all growth rate, though, because in total consumer spending is almost six times as big as gross private domestic investment. That means a small increase in consumer spending has a much bigger effect on changes in G.D.P. than a medium-size or even large increase in private investment.

Household saving: Still spendthrifty | The Economist - In March, as in previous months, consumption and spending both grew, but spending growth outstripped income growth. And as a result, the personal saving rate declined again. Now as Paul Krugman notes, this isn't the worst thing in the world. Looking at the first quarter GDP report, we see that much of the economy's growth was attributable to increased consumption, and nearly all of the growth net of inventory changes stemmed from consumption growth. If Americans were keeping their spending in line with incomes, the broader economy would be substantially weaker. And presumably, many workers are spending more than they earn based on the belief that as the economy recovers incomes will grow. But obviously these imbalances need to resolve themselves eventually.

March Personal Income up 0.3%, Spending Increases 0.6% - The BEA released Q1 data on Friday, and here is the March data from the BEA: Personal Income and Outlays, March 2010 Personal income increased $36.0 billion ... Personal consumption expenditures (PCE) increased $58.6 billion, or 0.6 percent. ..Real PCE -- PCE adjusted to remove price changes -- increased 0.5 percent in March, the same increase as in February....Personal saving -- DPI less personal outlays -- was $304.0 billion in March, compared with $332.2 billion in February. Personal saving as a percentage of disposable personal income was 2.7 percent in March, compared with 3.0 percent in February. Once again spending increased much faster than income ... meaning the saving rate declined again.

Consumption growth continues to outstrip income growth - The BEA released US personal income and consumption figures for March today.  The data show that the growth in consumption continues to outstrip the growth in personal income. Take out government transfer payments and you have zero income growth. As I noted in my review of the GDP numbers on Friday, this is an unsustainable trend. Something has to give eventually: either incomes will have to rise more quickly to sustain the rate of growth in consumer spending or spending growth will have to come down to the lower level of income growth.  With huge slack in the US labour market, all indications are that income is the weaker link.

Annaly Blogs – Let’s Get This Party Started…No, Wait - Consumer spending data for March were released yesterday, and the 0.6% increase was the highest in five months, with strength in durable goods helping to drive the number. To state the obvious, for a consumption-based economy, this bodes well. Anecdotal evidence is accumulating of rosier cheeks and a jauntier step for segments of the economy, and objective market participants have to consider the possibility that the consumer is finally bellying up to the punchbowl. Nevertheless, we have to ask the following question: Whence came this consumption? Personal income gained in the month, up 0.3% (versus +0.1% in February, +0.4% in January), but it was flat without transfer payments. Currently, consumer debt is not a likely source….it’s been falling since July 2008….nor is home equity withdrawal. (Aaahhh, the good old days.) So this indicates that the source of marginal spending money is likely a combination of government checks, strategic defaults on home mortgages, the acceleration of cashing out of money market and other mutual funds, or something else entirely.

Still Trying to Locate those Personal Consumption Expenditures - I’m guessing they’re buried in Health Care and Education because it doesn’t look like they’re in retail sales. See what I mean:  Up until right before the crash the two tracked each other well. However, at the peak of the housing bubble, when Americans were supposed to be blowing all their money on Plasma TVs and nights out at the Olive Garden, retail sales growth was actually slowing down while Personal Consumption Expenditure continued growing, unabated. To date Retail Sales have not yet recovered. However PCE is on a tear, breaking through the old peak and setting new highs. What gives?

Consumer credit and consumer spending - Contrary to what you may have read, it is impossible to determine, on public data, whether or not the decline in consumer credit is negative for current consumer spending. For loans from commercial banks, net new lending was actually positive in 2009. However this is only a third of consumer lending, and we simply don't know about the rest. You might look at declines in consumer credit over the last year or so and think, as most do, that this is clearly a drag on spending. As Bloomberg Businessweek wrote: Or you might think the data show the opposite, that the fall in credit is actually due to charge-offs of past loans, not a fall in current lending, and in fact current data suggest higher spending, as Felix Salmon wrote, In fact both views are wrong. The problem with the first view is that it is too simple. As implied by Salmon, and as very clearly explained by Paul Kasriel and Asha Bangalore at Northern Trust

The Customer Is Always Right - Maxine Udall (girl economist) - I was drawn to economics because of my family's business background. Thinking like an economist came naturally to me. When my brethren were talking about "rational self-interest," I knew they meant the kind of rational self-interest all the business men and women in my family employed: self-interest that included the welfare of their community and their customers; self-interest that included their reputation and their long-term status in the community; self-interest that traded off short-term gains in profits against long-term losses of return business and social standing. No one would have wanted to sell a customer something they could not afford to pay for. Our job, the reason we earned a profit, was to match customer preferences and means with our products in ways that made every party to the deal better off. We often sent customers to competitors because we knew the competitor's merchandise was a better fit with the customer's price and quality preferences. We didn't get rich, but we made a decent living. 

Not Sustainable - The WSJ details: U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable. Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday. Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth. With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.  Below is a chart of the cumulative change in the largest sub-component of personal income, compensation, in real terms over the past three years.

The Saving Rate Does Not Have to Rise to 7% in the Near Term, Macroavisors: The argument that the personal saving rate is headed to 7% is based on a long-term relationship between the wealth-to-income ratio and the personal saving rate (pictured above) that is assumed to be stable over time. In fact, this long-term relationship shifts for reasons that are well understood. ... Over the next 2 years, the relationship between the wealth-to-income ratio and the personal saving rate is expected to shift in such a way as to suggest only modest upward pressure on the personal saving rate — enough pressure to suggest an increase to about 3½% — but not nearly enough pressure to raise it to 7%.

Blogger questions from the KEO Q2 - Five bloggers submitted their own questions to this quarter's Kauffman Economic Outlook, which I think turned out very well and will want to continue.  Here are the results, and I'll withhold comment for now.  Others are welcome to copy and repost individual charts.

Personal Bankruptcies Dip, Still Outpace Last Year -The number of consumer bankruptcies slipped in April compared to the prior month but remains far higher than a year ago. There were 144,490 personal bankruptcy filings last month, down 3% from March, the American Bankruptcy Institute said based on data from the National Bankruptcy Research Center. Still, the number of filings was 15% higher than the same month last year. Filing for the first four months of 2010 are already 17% higher than the same month period last year.  Personal bankruptcy filings are often higher in March and April because people in financial distress can rely on their tax refund checks to pay for the fees associated with filing.

Personal Bankruptcy Filings Up 15% Compared to April 2009 - From Bloomberg: Filings totaled almost 146,000 in April, according to data compiled by Automated Access to Court Electronic Records, a service of Oklahoma City-based Jupiter ESources LLC. March filings were about 158,000. The April filing total represented a 15 percent increase from April 2009 total. This is the 2nd highest month since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted. This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from

Western States Lead in Personal Bankruptcies - Western states battered by the housing bust are disproportionately responsible for the rising tide of consumer bankruptcies this year.Consumer bankruptcies in April were slightly lower than the prior month but remained 15% higher than the same time last year. But that doesn’t give a complete picture of the bankruptcy story, said Ronald Mann, a law professor at Columbia University.In fact, some states have seen consumer bankruptcies fall from last year. Others, particularly ones that were hard-hit in the financial collapse, are still experiencing spades of personal bankruptcy filings.

Food-stamp tally nears 40 million, sets record (Reuters) – Nearly 40 million Americans received food stamps -- the latest in an ever-higher string of record enrollment that dates from December 2008 and the U.S. recession, according to a government update. Food stamps are the primary federal anti-hunger program, helping poor people buy food. Enrollment is highest during times of economic distress. The jobless rate was 9.9 percent, the government said on Friday.The Agriculture Department said 39.68 million people, or 1 in 8 Americans, were enrolled for food stamps during February, an increase of 260,000 from January. USDA updated its figures on Wednesday."This is the highest share of the U.S. population on SNAP/food stamps," said the anti-hunger group Food Research and Action Center, using the new name for food stamps, Supplemental Nutrition Assistance Program (SNAP). "Research suggests that one in three eligible people are not receiving ... benefits."

GDP Report: An Anti-Middle Class Recovery - The Commerce Department reported gross domestic product rose a modest 3.2% in the first quarter, further confirming the end of the recession and that the recovery is only moderate and disappointing. Half of the growth came from inventory adjustments, and the prospects for future growth and wage gains are only modest.  Separately, the March employment cost index was up 1.7% year over year. This broad measure of worker pay and benefits indicates that the typical American is not keeping up with rising prices, health care costs and taxes.  This recovery is decidedly anti-middle class. Wages will not keep up with rising prices, health care premiums and taxes. A good deal of the gains, so far, are going to Wall Street and the medical and intellectual property industries.

Severe financial vulnerability among Black and Latino seniors - Millions of African-American and Latino seniors are living on the edge of financial collapse, according to a new report, Severe Financial Insecurity among African American and Latino Seniors. Released today by the Institute on Assets and Social Policy (IASP) at Brandeis University and the public policy organization, Demos, the report finds that African American and Latino seniors face widespread financial insecurity during retirement, a trend accelerated by the current economic crisis. According to the study, 9 in 10 senior households of color lack sufficient resources for long-term economic security.Painting a daunting picture, these findings are a result of analysis utilizing the Senior Financial Stability Index (SFSI), a tool developed by IASP and Demos to assess the long-term economic security of seniors. A combination of inadequate pensions and savings, high housing costs, accelerating health expenses, and other trends that affect seniors, will likely get worse, unless policies are enacted to address them.

The American Family’s Financial Turmoil (graphic)

Inflation Worries Permeate U.S. -  Although the Federal Open Market Committee said "inflation is likely to be subdued for some time" after its meeting last Wednesday, 55% of Americans in an April 8-11 Gallup poll are "very concerned" inflation will climb, and another 29% are "somewhat concerned." This level of concern about inflation also seems to reflect consumer inflation expectations contradictory to the FOMC's assertion that "longer-term inflation expectations [are] stable."A higher percentage of lower-income than of upper-income Americans are "very concerned" about inflation, likely resulting from lower-income families' tendency to spend a much larger proportion of their income on the basic necessities experiencing the most pronounced price increases -- food and energy. More Westerners than Easterners are very concerned, possibly reflecting the higher gas prices in that part of the nation. Concern is greater among conservatives than among liberals or moderates, perhaps because, compared with the other groups, conservatives are less likely to say they enjoy spending (vs. saving) and, therefore, they may be more price sensitive; and more Republicans and independents than Democrats are very concerned, given current political predispositions.

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

Small Business: Bad But Less Bad - April results show a surge in the number of small business owners who say economic conditions for their own businesses are getting better: 30 percent of them say the climate will get better in the next six months, compared to only 20 percent who answered that way in March. Of the remaining respondents; 48 percent say the climate is getting worse, but that number is down from 53 percent in March.When asked about their intentions to invest in their businesses, 23 percent say they would increase spending, up from 18 percent in March, while 43 percent still plan to decrease spending, which is down from 52 percent in March; 31 percent say they will make no changes. Small business owners who say the current economy is good or excellent was 13 percent in April, up from 7 percent in March and the highest it has been in 20 months; 29 percent rate the economy as fair, and 57 percent think it's poor.

David Rosenberg: The Economy Is Getting Killed By Too Much Productivity - Gluskin-Sheff's David Rosenberg calls out the big paradox of the economy :Well, there is such a thing as too much of a good thing.  U.S. productivity growth moderated but not nearly as much as expected in Q1 (remember, the pace of economic activity moderated too) — to a 3.6% annual rate (the consensus was expecting 2.6%) versus 6.3% in Q4 and 7.8% in Q3.  The message here is that the recovery is being totally dominated by productivity with very little in the way of labour input.   Of that 4.4% rise in nonfarm business output in Q1, 80% was accounted for by productivity growth, not far off what we saw in Q4 (in the current cycle productivity is accounting for nearly 100% of output growth, compared to 50% in prior cycles going back to the early 1950s).  Real compensation per hour stagnated in Q1, and this followed outright declines the prior two quarters — a whole series of other cash flow boosts from extended jobless benefits, to strategic defaults and tax credits, are helping underpin consumption. 

The 2nd Half Slowdown - There are several analysts forecasting GDP growth to pick up in the 2nd half of this year, with annual GDP growth of over 4% for 2010 (the advance Q1 GDP estimate was 3.2%, so over 4% for 2010 would require a nice pick up in the 2nd half). This is not a "v-shaped" recovery - that didn't happen - but these forecasts are still above trend growth.Unfortunately I think we will see a slowdown in the 2nd half of the year, but still positive growth. Last year I argued for a 2nd half recovery ... and that was more fun! Here are a few reasons I think the U.S. economy will slow

Full Speed Ahead - The recent recession, and the massive job loss that accompanied it, shows that a status quo approach will not suffice if America is to leave the 21st century stronger than when it entered. A truly balanced transportation network that achieves higher efficiencies among passenger and freight modes will help create an infrastructure platform that makes America more competitive in the global economy. Freight rail occupies an important role in this multi-modal network, and merely maintaining share within a growing freight market would forego the significant opportunities presented by rail’s demonstrated ability to reduce oil consumption, achieve system and vehicle efficiencies to reduce pollution, as well as create and sustain quality employment throughout the economy. Read the full paper in PDF format

ISM Non-Manufacturing Index Shows Expansion - April ISM Non-Manufacturing index 55.4%, unchanged from March. This shows further growth in the service sector, although employment contracted for the 28th consecutive month.From the Institute for Supply Management: April 2010 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in April for the fourth consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

ADP: Private Employment increased in April - ADP reportsNonfarm private employment increased 32,000 from March to April 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from February to March 2010 was revised up, from a decline of 23,000 to an increase of 19,000. In addition, the revised estimate of the monthly change in employment from January to February 2010 shows a modest increase of 3,000. Thus, employment has increased for three straight months, albeit only modestly. The slow pace of improvement from February through April is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months.

ADP Report: Small Business Isn’t Hiring - ADP just released its monthly private-sector employment report. The report says that “employment has increased for three straight months, albeit only modestly.” The Bureau of Labor Statistics’ monthly report, which comes out on Friday, will probably cite a sharp increase in jobs, thanks to Census workers.  The ADP report is compiled by Economic Advisors, LLC, a group whose founder, Lawrence Meyer, sits on the Board of Governors of the Federal Reserve System. In other words, ADP’s data is compiled thoroughly, but they’re not completely independent of the government. This is why I take any prognostications associated with their data with a grain of salt:

ADP'S REPORTS JOB GROWTH FOR APRIL: JUST BARELY… Let’s hope today’s ADP National Employment Report is wrong. Nonfarm private employment increased by a meager 32,000 last month, according to this report. The general trend is fine, but that’s far below the consensus forecast by economists for this Friday’s government update on April payrolls. More importantly, a net rise of 32,000 is hopelessly insignificant given the extent of the 8-million-plus job losses in the Great Recession. But what the economy needs, and what it ultimately gets, may be two different things.The crowd, however, is expecting that the Labor Department will report net job creation in the private sector of nearly 190,000 for April, according to That a world above ADP’s 32,000 estimate for last month’s change in the labor market. Why the disparity? ADP’s accompanying press release offers a clue:

Meet The Unemployable Man - The betting is that the Labor Department's Friday snapshot of the job market will show that employers added workers in April, perhaps even that the unemployment rate fell. That would be good news, but not good enough. It's hard to exaggerate how bad the job market is. Here's one arresting fact: One of every five men 25 to 54 isn't working. Even more alarming, the jobs that many of these men, or those like them, once had in construction, factories and offices aren't coming back. "A good guess…is that when the economy recovers five years from now, one in six men who are 25 to 54 will not be working," Lawrence Summers, the president's economic adviser, said the other day.

April Employment Report: 290K Jobs Added, 9.9% Unemployment Rate -From the BLS: Nonfarm payroll employment rose by 290,000 in April, the unemployment rate edged up to 9.9 percent, and the labor force increased sharply, the U.S. Bureau of Labor Statistics reported today. This graph shows the unemployment rate and the year over year change in employment vs. recessions. Nonfarm payrolls increased by 290,000 in April. The economy has lost 1.4 million jobs over the last year, and 7.8 million jobs since the recession started in December 2007. The unemployment rate increased to 9.9 percent as people returned to the workforce. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). Census 2010 hiring was 66,000 (NSA) in April.

Finally, jobs - THERE is no doubt about it, today's employment report is an extremely good one. The headline April increase in payroll employment, of 290,000, is the best the economy has done in over four years. It's a good showing even accounting for the 70,000 or so jobs associated with temporary Census hiring. February's employment number was revised from a decline to an increase of 39,000 jobs, and the March figure was revised upward from 162,000 jobs to 230,000. All told, the economy has added nearly 600,000 jobs in 2010. That's less than the economy lost in each month between November of 2008 and March of 2009, but it's still much better than the economy managed during the first two quarters of the recovery.

A Misleading Jobless Rate - Pay no attention to the unemployment rate — that is, if you’re trying to make sense of today’s jobs report. It is an excellent report. The economy added more jobs last month than it had in four years. Over the last two months, employers have been adding jobs at a rate faster than the population is growing. If that continues, the unemployment rate will soon start falling. It rose last month because of a something of a statistical quirk. The Labor Department counts people as officially unemployed only if they are not working and looking for work. Between March and April, there was a surge in the number of out-of-work people who started looked for work. That — not job losses — is what swelled the ranks of the officially jobless and caused the unemployment rate to rise to 9.9 percent, from 9.7 percent.

Jobs come back, along with unemployment - The payrolls report this morning was good: it feels churlish to throw cold water on the news that 290,000 more people are working now than a month ago.But. Keep an eye on those unemployment rates. The headline figure is back up at 9.9%, the highest it’s been this year. The U-6 underemployment rate is a gruesome 17.1%. And U-4, which is total unemployed plus discouraged workers, has hit a new high of 10.6%.If we’re going to have sustained GDP growth, it’s going to have to come from those figures falling back to acceptable levels: without that happening, we can have a little bit of a rebound, but none of the long-term consumer demand that’s necessary. And yet they’re all going the wrong way: up, rather than down. That’s devastating for the economy, and not only because rising unemployment is a sure-fire way to increase mortgage delinquencies, with all the ugly financial and fiscal consequences that entails.

Jobs, Jobs, Jobs - Krugman - An actually good employment report. A reminder: there are two separate surveys, one of employers — which is where the 290,000 jobs number comes from — and one of households, which is where the 9.9 percent unemployment rate comes from. Sampling error, seasonal adjustments, and other technical factors can make these reports give contradictory indications.Actually, though, in this case they’re both positive. My favorite indicator from the household survey isn’t the unemployment rate, it’s the employment-population ratio — and that’s up, from 58.6 to 58.8. In fact, it has been rising since December. At this point it’s clear that the economy is adding jobs, and doing so faster than population growth.

Broader U-6 Unemployment Rate Increases to 17.1% in April - The U.S. jobless rate rose to 9.9% in April, the first increase in three months, but the government’s broader measure of unemployment ticked up for the third month in a row, rising 0.2 percentage point to 17.1%.The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.3 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.The 9.9% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.  (Read a more in-depth explanation for the rise in the unemployment rate.)

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report ..The Employment-Population ratio increased to 58.8% in April (from 58.6% in March), after plunging since the start of the recession. This is about the same level as in December 1983.This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. From the BLS reportThe number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was about unchanged at 9.2 million in April. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce. According to the BLS, there are a record 6.72 million workers who have been unemployed for more than 26 weeks (and still want a job). This is a record 4.34% of the civilian workforce.

Temporary Help and Diffusion Index - Here are a couple more graphs based on data in the employment report ...From the BLS report:  Temporary help services continued to add jobs (26,000); employment in this industry has increased by 330,000 since September 2009. This graph is a little complicated. The red line is the three month average change in temporary help services (left axis). This is shifted four months into the future. The blue line (right axis) is the three month average change in total employment (excluding temporary help services).The thinking is that before companies hire permanent employees following a recession, employers will first increase the hours worked of current employees (hours worked increased slightly in April) and also hire temporary employees. Since the number of temporary workers increased sharply over the last seven months, some people think this might be signaling the beginning of a strong employment recovery. However, there has been some evidence of a shift by employers to more temporary workers, and the saying may become "We are all temporary now!", so use this increase with caution. The BLS diffusion index for total private employment increased to 64.3 from 57.8 in March. This is the highest level since 2006. For manufacturing, the diffusion index is at 65.9; the highest since 1998.

Fewer workers needed - AMERICAN labour productivity grew at a 3.6% annual rate in the first quarter of 2010. That's good news and bad news. The good news is that productivity is good. The bad news is that very rapid productivity growth has contributed to the joblessness of the recovery so far. Then the other good news is that the 3.6% productivity performance in the first quarter is down from the previous three quarters, when output per hour rose between 6% and 8%. There's obviously a cyclical element to this growth. In recoveries, demand often rebounds for a while before firms feel comfortable adding workers, so for a time those firms meet increased orders by working their existing labour force harder. But take a look at the bigger picture:

Number of the Week: 29.4 Million in ‘Industrial Reserve Army’ - WSJ - Number of the Week:

29.4 million unemployed and underemployed. Karl Marx was disastrously wrong about a lot of things. But if the job market keeps growing as slowly as it has the past few months — even with April’s 290,000-job boost — the U.S. economy could soon find itself in a place he’d recognize.In Das Kapital, Marx described a problem he saw in the way capitalist societies function. As companies became more productive, learning to get more from their workers, they would need fewer and fewer of those workers. This would create an “industrial reserve army” of unemployed people, whose desperation to work would keep the fire at the heels of those who had jobs and keep wages in check. As a result, all the added value created by workers would accrue to the owners of the companies.As Marx put it: “The condemnation of one part of the working class to enforced idleness by the over-work of the other part, and vice versa, becomes a means of enriching the individual capitalists.”

Hispanics' unemployment rate soars - latimes. - Unemployment among Hispanics in the U.S. has soared since the recession hit because those workers are disproportionately employed in industries and regions hardest hit by the downturn, according to a congressional report released Wednesday.Hispanic workers were more likely to be employed in the construction sector, which was pounded during the housing collapse, particularly in states including California, Florida and Nevada, which experienced the largest declines in housing prices and biggest increases in foreclosures."Not only were Hispanics a significant part of the industries hardest hit by the recession, but they have also been underrepresented in education and health activities — sectors that have experienced growth during the Great Recession,"

The Anti-Mommy Bias - Employers often define ideal managers as individuals who are not only smart, reliable and committed, but also willing to drop everything else in their life to get the job done. Like the protagonists of Ayn Rand novels, managers should be unencumbered by responsibilities for the care of dependents (who cannot always be dropped).  During the 1920s and 1930s, many employers refused to hire married women, or fired them once they married. As my fellow Economix blogger Casey Mulligan points out, such “marriage bars” are not allowed today. But family responsibilities still weigh more heavily on women than on men, accounting for much of the pay gap between the sexes. Some policy analysts argue that mothers make a lifestyle choice, opting for easier, more flexible work over greater responsibility and higher pay. Others, like myself, argue that our economic system imposes unfair penalties on those who care for others.

Canada adds surprising 108,700 jobs in April – Canada produced a "shockingly good" jobs gain in April of 108,700, Statistics Canada reported, with all the hires happening in the private sector, and led by the services industry and construction. The jobless rate in April fell to 8.1%, from 8.2% in the previous month. There was a double dose of good news when U.S. jobs data showed a 290,000 gain for April, above expectations for a 190,000 increase. Of note is that the U.S. private sector added 231,000 to its payroll, beating the previous month's private gain of 174,000. Plus, there were revisions to the February and March U.S. data that, as a result, indicated 121,000 more Americans found jobs than previously believed. However, marring the U.S. picture was that the unemployment rate crept up to 9.9%, from 9.7% last month.

End Of Unemployment Checks Will Mean No Income For Many - While the economy created 290,000 new jobs in April, unemployment jumped to 9.9 percent as 805,000 people rejoined the labor force to renew their job search. Sadly though, 6.7 million Americans, nearly 46 percent of the nation's unemployed, have been jobless for 27 weeks or more. Another 1.2 million are still discouraged and no longer looking. Most states provide up to 26 weeks of jobless benefits for qualified workers. Then the worst recession since the Great Depression forced Congress to step in and pay for extended coverage. Twenty-seven states and the District of Columbia now provide a maximum of 99 weeks, while other states offer from 60 to 93 weeks.The beefed-up benefits are unprecedented in the history of the unemployment insurance program and have helped millions such as Nieves survive the recession and keep roofs over their heads. With a projected $1.5 trillion federal deficit looming this year, though, lawmakers from both parties are resisting costly and politically unpopular appeals to extend benefits.

Checking In on Last Year’s Unemployed - The John J. Heldrich Center for Workforce Development at Rutgers has released its latest work trends report on the long-term unemployed, and the results are somewhat discouraging. (The title of the report — “No End in Sight: The Agony of Prolonged Unemployment” — was sort of a giveaway, though.)The report concentrated on people who were unemployed as of August 2009, and checked up on their status as of March 2010. What happened to these folks? Despite persistent growth in economic output since August, two-thirds of those workers — 67 percent — were still looking for work in March. Another 12 percent had given up and dropped out of the labor force entirely. Just one in five — 21 percent — had found work, with about half of the newly employed able to find only part-time work.

Productivity vs. Employment - Reuters details: U.S. non-farm productivity growth slowed sharply in the first quarter, government data showed on Thursday, suggesting businesses will have to raise employment to boost output.The Labor Department said non-farm productivity rose at a 3.6 percent annual rate, the smallest advance in a year, after expanding at a brisk 6.3 percent pace in the fourth quarter.Productivity expanded rapidly in the previous three quarters as businesses wrung more output from a small pool of labor. Despite the resumption of economic growth, firms have been reluctant to hire new workers, opting instead to increase working hours. Looking at the chart, one can see that we have been squeezing out more, from less for 10+ years now. Productivity is a good thing, but it can be painful as the economy transitions to new technologies and requires new skill sets.

CBO says green jobs - brown jobs < 0 - In a brief released this afternoon, CBO has analyzed the research on the effects that policies to reduce green house gases would have on employment and concluded that total employment during the next few decades would be slightly lower than would be the case in the absence of such policies. In particular, job losses in the industries that shrink would lower employment more than job gains in other industries would increase employment, thereby raising the overall unemployment rate. Eventually, however, most workers who lost jobs would find new ones. In the absence of policies to reduce emissions of greenhouse gases, changes to the climate also might affect employment; however, this brief does not address such changes because that effect would probably arise after the next few decades, and it has not been studied as carefully by researchers.

Trade policy and the American worker (interview)“Globalization is dramatically disconnecting the relationship between American corporate employers and their employees,” says Jeff Faux, EPI founding president and distinguished fellow. Faux has written extensively about the ways so-called free trade agreements have benefitted the world’s largest corporations at the expense of the average worker, and shown how the winners and losers of trade agreements line up not along national borders, but according to their economic status. In 2006 Faux published the book The Global Class War, and co-authored EPI’s paper, Revisiting NAFTA, where he argued that 1993’s North American Free Trade Agreement (NAFTA) had served to “protect the interests of large corporate investors, while undercutting workers’ rights.” With growing concern over China’s trade policy again putting world trade and globalization in the spotlight, Faux spoke about U.S. trade around the world and outlined how many U.S. trade policies had undermined the American economy.

Volcker Says U.S. Unemployment Will Be ‘Too High for Too Long…   (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the U.S. economy faces a “long slog” as the nation struggles to reduce the jobless rate from close to a 26- year high. “I am afraid the level of unemployment will be too high for too long,” Volcker said in the prepared text of a speech yesterday in St. Louis. “My characterization of the outlook is a long slog.”Volcker, chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. economy should shift from reliance on consumer and government spending to a greater emphasis on investments and exports as it recovers.“What we need is more saving, more industrial investment, and a stronger trade position,” Volcker said “Our expansive and expensive program of entitlements simply must be brought under control. Our mortgage market must be rebuilt from the ground up.”

Goodbye, stimulus. Hello, state budget cuts  -- Think states have made deep spending cuts? You ain't seen nothing yet. States have been struggling with huge budget gaps since 2008, but this year could be worse as federal stimulus funds wind down. Until now, stimulus money spared governors and state lawmakers from making some of the most brutal budget cuts. But with this lifeline running out, officials are looking at making significant cutbacks to public services, particularly schools and health programs.As of mid-April, states and localities have received nearly $109 billion since the American Recovery & Reinvestment Act was passed in February 2009, according to the U.S. Government Accountability Office. The vast majority of that money went to help states maintain their Medicaid services and education funding in the face of steep drops in tax revenues due to the recession.

News Release - Federal Income Tax Collections Foretell More Bad News for States— A decline in personal income tax revenues collected by the federal government through the end of April 2010 suggests that state governments may suffer significant declines in such tax collections compared to 2009, a period which itself was down dramatically from the year before, according to Rockefeller Institute fiscal experts. The weeks just after the April 15 filing deadline for income-tax returns is the most important tax-collection period of the year for most states, and particularly those that rely heavily on income taxes. The Institute’s fiscal policy analysts have been watching daily federal data on nonwithheld taxes processed in April, as an indicator of what state governments around the country are likely to expect in terms of revenues compared to last year. Through April 30, the federal government’s nonwithheld income taxes are down 17.6 percent from a year earlier. That is likely a close estimate to the final decline the Internal Revenue Service will see in nonwithheld income tax collections in this period; in 2009, 96 percent of April and May's nonwithheld taxes were known by April 30.

Midwest economy: A state-by-state glance for April - The Institute for Supply Management, formerly the Purchasing Management Association, began formally surveying its membership in 1931 to gauge business conditions. The Creighton Economic Forecasting Group uses the same methodology as the national survey to consult supply managers and business leaders. Creighton University economics professor Ernie Goss oversees the report. The overall index ranges between 0 and 100. Growth neutral is 50, and a figure greater than 50 indicates an expanding economy over the next three to six months. Here are the state-by-state results of the April survey in the Mid-America region:Unemployment among Hispanics in the U.S. has soared since the recession hit because those workers are disproportionately employed in industries and regions hardest hit by the downturn, according to a congressional report released Wednesday.

Declines in State and Local Government Spending Continue to Drag Economy Down - Here’s some important details buried inside the new GDP figures:Real federal government consumption expenditures and gross investment increased 1.4 percent in the first quarter, compared with no change in the fourth. National defense increased 1.2 percent, incontrast to a decrease of 3.6 percent. Nondefense increased 1.7 percent, compared with an increase of 8.3 percent. Real state and local government consumption expenditures and gross investment decreased 3.8 percent, compared with a decrease of 2.2 percent In an ideal world, Congress would have appropriated even more funds for aid to states.  Instead, the Senators from Maine teamed up with some moderate Democrats to scale it back. It’s been a huge mistake and we’re likely to continue paying the price for it.

Public Sector Pay Outpaces Private Pay - We all know that state and local government finances are a mess. This chart helps explain why.  The top line tracks the real compensation of all state and local government workers–wages and benefits, adjusted for inflation.  The lower line tracks the real compensation of all private sector workers.  The data comes from the Employment Cost Index data published by the BLS. The chart shows that public and private sector pay rose in parallel from 2001 to 2004. Then the lines diverged. Since early 2005, public sector pay has risen by 5% in real terms. Meanwhile, private sector pay has been flat. This one fact explains much of the fiscal stress at the state and local level—why states such as New York, New Jersey, and California are in such a mess. State and local governments pay more than $1 trillion in compensation annually (actually, that’s an astounding number–I had no idea it was that high). If compensation is 5% higher than it should be, that’s $50 billion in excess pay costs for the state.

Buffett: US can bail out states, insurers pained (Reuters) - Warren Buffett said on Saturday he would expect the U.S. government to bail out an ailing state, and mounted a defense of credit rating agencies as an investment, including stakes by his Berkshire Hathaway Inc. Speaking at Berkshire's annual meeting, Buffett said that while he might have in the past overestimated the potential for municipal defaults, this week's default by a municipal entity whose debt is guaranteed by Harrisburg, Pennsylvania shows they can happen. Referencing recent federal bailouts of publicly traded U.S. companies, Buffett said it would be hard for the federal government to turn its back on states in distress

Buffett Says GM Rescue May Mean US Can't Say No to States (Bloomberg) -- Warren Buffett, chairman of Berkshire Hathaway Inc., said the U.S. would probably feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers.“It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett, 79, told shareholders in Omaha, Nebraska, at the company’s May 1 annual meeting. “I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.” States’ personal income-tax revenue fell 7.1 percent in January and February from the same period in 2009, and there is a risk the slide will extend into this quarter, the Nelson A. Rockefeller Institute of Government said in a report last month. A 9.7 unemployment rate and a slump in property prices have cut into local governments’ ability to raise funds.

Square Feet – Cash-Hungry States Put Buildings on the Block – NYTimes = Lately some individuals and businesses have decided that maybe owning is not always better, especially when you have other pressing needs for cash, like paying off your creditors.  Now the idea has spread to some states with serious debt problems. In January the state of Arizona concluded a deal to sell to investors ownership stakes worth a total of $735 million in several state-owned office buildings, arenas and other properties — including the buildings housing both chambers of the State Legislature. Arizona will lease back the property from its new landlords, among them the mutual fund giants Fidelity and Vanguard, for 20 years, after which ownership will revert to the state. Last month California received sale-leaseback bids on a portfolio of 7.3 million square feet of office space in 11 state-owned buildings. The Golden State Portfolio includes buildings in Los Angeles and Sacramento, as well as the San Francisco Civic Center, where the state Supreme Court sits. The deal had been expected to yield about $660 million in revenue for the state, after $1.1 billion in expected proceeds were used to pay off construction bonds. California’s deficit for 2010-11 is about $20 billion.

Connecticut faces 2-yr $4.5 bln deficit: comptroller (Reuters) - Connecticut should end the current fiscal year with a $105 million surplus, thanks partly to a deficit-cutting plan, but the state will have to close total of $4.5 billion of budget gaps over the next two years, the state comptroller said on Monday."The surplus is mainly produced by federal stimulus dollars, deferral of payments to the pension fund and one-time transfers of money from accounts, including the Rainy Day Fund," Comptroller Nancy Wyman said in a statement.

Plunge in state revenue dashes hopes of an easy budget fix - State tax collections plummeted unexpectedly in April, wiping out months of steady gains that legislators hoped would ease their budget troubles and restore California's economy faster than experts predicted. Such hope is now fading fast. Revenue for April, the biggest revenue month because it is when most Californians pay their taxes, lagged projections by nearly 30% — roughly $3 billion, according to state officials. The drop was steep enough to erase improvements recorded in each of the four previous months. Economists and finance officials are scurrying to analyze the data to determine what caused the April swoon. Some suspect it sprang from new laws that changed the rhythm of tax payments. It could also reflect the growth in unemployed residents eligible for refunds.

Haunted by gulf oil spill, Schwarzenegger drops plan to fund parks with new drilling— The catastrophic oil slick spreading through the Gulf of Mexico has claimed another victim: Cash for California's strapped parks system.Painting a grim picture of the spill's devastation, Gov. Arnold Schwarzenegger on Monday backed away from a contentious drilling proposal off the coast of Southern California that officials hoped would raise $1.8 billion for state parks over the next 14 years. The decision means the governor must find $100 million for parks in this year's budget and $119 million more in the 2010-11 budget, adding additional pain to California $18.6 billion budget deficit

Bay Area transit needs $1 billion a year to survive Bay Area public transit is caught in a downward spiral, and fundamental changes must be made to rescue it, according to the region's major transportation planning agency's annual report. The area's more than two dozen transit systems, including BART and AC Transit, are likely to need about $1 billion a year for the next 25 years to survive, according to the Metropolitan Transportation Commission's 2009 annual report. Bay Area ferries, buses and trains are barreling toward deficits totaling about $25 billion deficit in 2033. "By all measures, the long-term prognosis points to decline, not stability," Steve Heminger, the commission's executive director, said in the report. "The current transit system is unsustainable."

Paterson Offers Choice: Furloughs or Shutdown - Gov. David A. Paterson escalated his battle with the Legislature over the state’s financial crisis on Tuesday, saying that lawmakers could give him the authority to furlough more than 100,000 state employees or face the prospect of shutting down New York’s government. Though Mr. Paterson is calling for workers to be furloughed for a single day, he warned that he would continue pressing for furloughs until the Legislature agrees to a deal on the state budget, which is more than a month late with no resolution in sight. Mr. Paterson asked the Senate and the Assembly to approve furloughs in a bill he submitted last week. But because the Legislature has refused to put the measure to a vote, he said, he would include furloughs in the next emergency spending bill. Since the budget deadline expired on March 31, there have been five such bills passed to keep the government running.

Black Thursday: Ax to fall on 12000 city jobs - But the executive budget the mayor will release today is expected to make up for a multibillion-dollar shortfall by cutting nearly 12,000 other city workers, including 6,700 teachers, and shutting down 20 fire companies and 75 senior centers, according to sources familiar with the plan. Bloomberg hinted he would restore cuts to the Police Department if city revenues came in higher than previously projected, during his radio show several weeks ago. But the need to protect the public became more pressing after a failed car bombing in Times Square this past weekend. The city has also seen a 20 percent spike in murders in the first four months of 2010 as compared to last year, according to NYPD statistics

Pennsylvania Governor Warns Lawmakers To Act On Transportation - Gov. Ed Rendell warned state lawmakers Tuesday of disaster if they fail to dedicate additional dollars for Pennsylvania's highways, bridges and mass transit agencies by the end of the year.Rendell outlined alternatives he said would help plug a hole in state transportation funding that was partly caused by federal regulators' decision last month to reject a plan to toll Interstate 80.He said lawmakers could adopt a short-term fix or find the billions it will take to fully repair and maintain the state's transportation infrastructure for decades to come. He called inaction "unacceptable to me and a disaster for our state."The Pennsylvania Department of Transportation says about a fifth of the state's highway miles -- and a similar portion of its bridges -- are in poor condition. It calculates the total backlog of maintenance needs at about $14 billion, or roughly half the state's annual general fund budget.

Pa. budget deficit tops $1 billion Pennsylvania's budget deficit has expanded to more than a billion dollars. Governor Rendell says that means another round of state employee layoffs.April tax collections came in nearly $400 million below projections, increasing the state's revenue shortfall to $1.1 billion. Senate Appropriations Committee Chairman Jake Corman, a Centre County Republican, says he expects the figure to reach $1.3 billion by the end of June. "We really need to start over," says Corman, "start from scratch, and figure out a way to put this budget together on time before June 30th, that reflects the revenues we have, as opposed to what was reflected back in February

Pennsylvania budget deficit $1 billion and growing -- After state revenue officials disclosed Monday that the state budget deficit has ballooned to more than $1 billion, Gov. Ed Rendell urged the Legislature to approve a combination of spending cuts, new taxes and revenue transfers that he said would erase the huge pool of red ink. The deficit for the fiscal year that ends June 30 grew considerably worse in April, due to the ongoing damage to state tax revenues being done by the recession. At the end of March the deficit stood at $720 million, but it swelled by an additional $290 million in the past month and now tops $1 billion.The biggest problems were with corporate tax revenues, which were $147 million below what had been expected, and personal income tax revenue, $129 million below estimates. Sen. Jake Corman, R-Centre, chairman of the Senate Appropriations Committee, estimated the deficit could hit $1.5 billion by the end of fiscal 2009-10 on June 30.

Ohio income-tax take $229M shy of forecast - The crucial tax month of April brought more bad news for Ohio's coffers, but the state's number-crunchers said the lower-than-expected figures are no reason to panic. Income tax collections, in particular, came in $229.4 million, or 16.3 percent, below projections last month, according to preliminary numbers released yesterday. That was offset somewhat by stronger-than-expected sales, cigarette, liquor, and other taxes, but the state still finished the month short of projections by a net $158 million, or 7.5 percent. With the fiscal year set to end June 30, tax receipts for the first 10 months are off $217.7 million, or 1.6 percent.

Illinois Budget Woes Come to a Boil - Illinois lawmakers were in disarray Thursday as they groped for stopgap measures to address a $13 billion deficit equaling nearly half of the state's general-fund revenue. The state faces one of the nation's worst budget crises, spilled over in part from the broader national economic crunch, and its current bond ratings lag only California's. But the confusion in the legislature indicates that serious steps to fix state finances won't be taken until after the November elections—if then." "Any hopes that the national economic recovery would help the budget discussions were dashed this week when Illinois disclosed that revenue for April —when most citizens pay taxes—fell more than 15% from the same month a year ago, or $501 million, in part because of a $345 million drop in federal aid. Gross personal income-tax receipts, a major revenue source, dropped $103 million, or 8.1%

Beware the Muni-Bond Bubble Investors are kidding themselves if they think that states and cities can’t fail.The financial crisis has exploded plenty of long-held beliefs, including the idea that mortgage debt is a risk-free investment. But nothing has shaken the articles of faith that underpin another massive debt market: municipal bonds. Investors in municipal bonds don’t have to worry about a thing, the thinking goes, because the states and cities that issue them will do anything to avoid reneging on their obligations—and even if they fail, surely Washington will step in and save investors from big losses. These are dangerous assumptions.

Los Angeles on the Brink of Bankruptcy Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.  According to the city's own forecasts, in the next four years annual pension and post-retirement health-care costs will increase by about $2.5 billion if no action is taken by the city government. Even if Mr. Villaraigosa were to enact drastic pension reform today—which he shows no signs of doing—the city would only save a few hundred million per year. As a result of his delays in responding to the city's fiscal emergency, Mr. Villaraigosa has squandered not just his career, but his relevancy. He continues to insist that bankruptcy is not an option for Los Angeles even as anyone who can count understands there is no other option.

California leaders woo Washington for billions in federal aid— California state legislative leaders made the rounds in Washington this week to lobby for billions in federal funding to help implement health care reform in the state and plug its projected $20 billion deficit. California Senate leader Darrell Steinberg, D-Sacramento, and Assembly Speaker John Perez, D-Los Angeles, said Wednesday that they feel optimistic California will get federal help based on meetings with Health and Human Services Secretary Kathleen Sebelius, House Speaker Nancy Pelosi, D-Calif., and White House staff. Although the lawmakers said they didn't get any concrete commitments, they credited a similar visit to Washington in January by Gov. Arnold Schwarzenegger and legislative leaders with bringing in $675 million in financial relief through enhanced reimbursements for Medicare prescription drug benefits.

California' budget crisis expected to linger (Xinhua) -- Revenue collections in California plunged in April, dashing hopes of an easy budget fix, it was reported on Tuesday.Revenue for April lagged projections by nearly 30 percent, or roughly three billion dollars, according to the Los Angeles Times.April is the biggest revenue month because it is when most Californians pay their taxes.The drop wiped out months of steady gains that legislators hoped would ease their budget troubles and restore California's economy faster than experts predicted, the report noted.

Budget Cuts Threaten 250000 Teachers (audio) With budget cuts hitting harder than ever our school system hangs in the balance. Over the next year class sizes are expected to rise to around 40 or 50 students as an estimated 250,000 teachers are laid off. In attempts to combat this huge loss, Senator Tom Harkin is proposing a bill which calls for $23 billion that will help save our educators jobs, $3 billion of which would go to California

Mike to dump 6400 teachers unless Albany pays - In what's shaping up as a brutal showdown with Albany, Mayor Bloomberg will announce plans today to get rid of 6,400 teachers and 300 other school workers unless the state restores $493 million in education aid that's on the chopping block, sources said last night. The deadline is June 30, when the city's budget must be approved by the City Council. One administration source said the cuts would be accomplished by layoffs. But another said the cutbacks -- amounting to about 8 percent of the 80,000-teacher workforce -- would be accomplished by a combination of layoffs and attrition

“Hey Dad, Why do we save Billionaires, but not Teachers?” « SpeakEasy - This week thousands of New Jersey public school students walked out of class to protest draconian school budget cuts. “Save my teacher,” their signs read. In a state that is home to a bevy of high finance billionaires, with the highest per capita income in the nation, teachers are being sacked left and right. In our town half the student body protested outside the high school. Perhaps the protesters should turn their eyes towards the twenty-five top hedge fund honchos who took in $25 billion in 2009. Their “earnings” alone could fund 658,000 entry level teachers. It’s ironic that the battlefield in this war over resources is public education. Because the public remains entirely uneducated about the connection between those billionaires and school budget cuts. We are clueless about what the Wall Street billionaires do to earn their riches and whether it’s of any value. We might be able to understand “weapons of mass destruction,” but financial weapons of mass destruction are way beyond us.

Deficit hawkery's harsh impact on education - One of the precious few points of consensus in our polarized land is that we need to do a better job educating our kids. But consensus, apparently, gets you only so far. In red states and blue, in urban, suburban and rural districts with unionized and non-unionized teachers, the story is the same: The worst recession since the 1930s is clobbering the nation's schools.  In Indiana and Arizona, the legislatures have eliminated free all-day kindergarten. In Kansas, some school districts have gone to four-day weeks. In New Jersey, 60 percent of school districts are reducing their course offerings. In Albuquerque, the number of school district employees is down 10 percent. In the D.C. suburbs, Maryland's Prince George's and Virginia's Prince William counties have increased their class sizes. One-third of the districts are looking at eliminating summer school this year. Fourteen percent are considering going to four-day weeks (last year, just 2 percent did). Fully 62 percent anticipate increasing class size next year, up from 26 percent in the current school year. The teacher-to-pupil ratio, the AASA says, will rise from 15 to 1 to 17 to 1.  Nationwide, estimates of teacher layoffs range from 100,000 to 300,000, with some experts pegging the most likely number nearer the high end.

If We Want to Help Future Generations, Let's Educate Their Parents and Grandparents - Maxine Udall (girl economist) - There are several ways of ensuring that our children and grandchildren have the same opportunities (or better opportunities) than we had. We can leave them a lot of money. We can leave them better educated than we are. We can leave them healthier than we are. We can leave them a level playing field. Investing in our children's health and education is the best way to level the playing field AND leave their children (our grandchildren) in better health and better educated. There is no way that cutting public education helps anyone, especially our children and grandchildren. If we have to borrow to invest in the health and education of future generations, I can't think of a better use for the money. The present value of those returns will build on each generation's improved productivity and their improved skills at managing a democracy and a complex, growing market-based economy. It may be the only way to grow us out of the hole the financial sector has put us in. Inter-generational win-win.

Illinois Legislature gives state universities an IOU to take to bank - The Senate just passed the bill 33-11, sending it to Gov. Pat Quinn. — For anyone who needed another indication of how bad Illinois’ fiscal situation is: The Illinois House this morning passed a bill that will allow state universities to borrow money for operational expenses, using as their collateral the money that the state owes them but hasn’t paid them.It’s a little like your boss telling you he doesn’t have your pay check this week — but it’s okay, because he’ll give you a note proving that you have the money coming to you, so you can take that note to the bank and borrow the money you need.

College students are working less hard, it seems - Philip Babcock and Mindy Marks report: Using multiple datasets from different time periods, we document declines in academic time investment by full-time college students in the United States between 1961 and 2003. Full-time students allocated 40 hours per week toward class and studying in 1961, whereas by 2003 they were investing about 27 hours per week. Declines were extremely broad-based, and are not easily accounted for by framing effects, work or major choices, or compositional changes in students or schools. We conclude that there have been substantial changes over time in the quantity or manner of human capital production on college campuses.  An earlier, different and ungated version is here.  A closely related paper, by the same authors, is here.

FRONTLINE: college, inc.: watch the full program online - Even in lean times, the $400 billion business of higher education is booming. Nowhere is this more true than in one of the fastest-growing -- and most controversial -- sectors of the industry: for-profit colleges and universities that cater to non-traditional students, often confer degrees over the Internet, and, along the way, successfully capture billions of federal financial aid dollars. In College, Inc., correspondent Martin Smith investigates the promise and explosive growth of the for-profit higher education industry. Through interviews with school executives, government officials, admissions counselors, former students and industry observers, this film explores the tension between the industry --which says it's helping an underserved student population obtain a quality education and marketable job skills -- and critics who charge the for-profits with churning out worthless degrees that leave students with a mountain of debt.

The Homeless at College - BusinessWeek - The boom in for-profit education, driven by a political consensus that all Americans need more than a high school diploma, has intensified efforts to recruit the homeless. Such disadvantaged students are desirable because they qualify for federal grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-profit colleges jumped from $4.6 billion in 2000 to $26.5 billion in 2009. Publicly traded higher education companies derive three-fourths of their revenue from federal funds, with Phoenix at 86%, up from just 48% in 2001 and approaching the 90% limit set by federal law.  The privately held Drake College of Business, which trains people to be medical and dental assistants, relied on taxpayers for 87% of its revenue in 2007. Almost 5 % of the student body at its Newark (N.J.) branch is homeless, says Jean Aoun, director of admissions and student services there. Late in 2008, it began offering a $350 biweekly stipend to students who show up for 80% of classes and maintain a "C" average. "It's basically known in the community: If you're homeless, and you need some money, go to Drake,"

Chicago Pensions Lack Assets to Ensure Payment, Commission Says (Bloomberg) -- Chicago’s pension funds lack assets to guarantee payments to the third most-populous U.S. city’s workers and will run out of money within a decade without changes, a commission said today.Mayor Richard Daley’s panel, appointed two years ago to examine pension funds for groups including firefighters, police officers, city laborers and school employees, found the funds had a combined actuarial liability of about $25.4 billion and assets of $10.9 billion at the end of 2009, according to a press release from the city today. "The financial health of each of the city’s four pension funds has deteriorated,” according to the statement. “The city and its taxpayers will have to increase the amount they contribute.”The $793 million of contributions due in 2012 would have to increase by $660 million then and $710 million every year after for at least 50 years, according to the release.

Calpers Suit Against Ratings Services Can Proceed (Bloomberg) -- Standard & Poor’s, Moody’s Investors Service and Fitch Ratings must face the California Public Employees Retirement System’s lawsuit claiming their faulty risk assessments on structured investment vehicles caused $1 billion in losses. A state court judge in San Francisco rejected the companies’ requests to dismiss Calpers’ claims of negligent misrepresentation, Brad Pacheco, a spokesman for Calpers, the largest U.S. pension fund, said today in a phone interview.  Judge Richard Kramer, in an April 30 ruling, tossed out a claim of negligent interference and said Calpers could renew that claim later, Pacheco said.

PBGC Protects Pensions, Faces $12.9 Billion Deficit - The Pension Benefit Guaranty Corporation is one of those weird birds: a "federal corporation" that receives no general tax revenue. Instead, according to its Web site, "operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusted by PBGC, and recoveries from the companies formerly responsible for the plans." While you may not know much about it, PBGC is extremely important to the 44 million Americans whose pensions it protects.Now comes word that the PBGC has lots of its own troubles. A new investigation by the Center for Public Integrity exposes startling weaknesses in PBGC's operations.

PBGC deficit could reach combined $34 billion by 2019 -The PBGC’s single-employer pension plan program could have a deficit of $30 billion by 2019, while its multiemployer plan program could see a $4 billion shortfall by then, according to the agency’s 2009 annual report issued Tuesday.The deficits represent the average possibilities for the two pension programs calculated using the PBGC’s pension insurance modeling, or PIMS, system.

Declining social security benefits keep older men in workforce - The decline in the generosity of Social Security benefits for workers who recently reached their 60s has been the leading cause of the trend toward delayed retirement of older men, a new national study suggests. Between the periods of 1988-1992 and 2001-2005, there was a 4.7 percentage point increase in the number of men aged 55 to 69 in the workforce. The new study found that between 25 and 50 percent of that increase can be explained by declining Social Security benefits, said David Blau, co-author of the study and professor of economics at Ohio State University. "Older individuals don't get the same level of Social Security benefits when they retire as they once did, and that has been one reason why a significant number of men continue to work longer than they otherwise might have," Blau said.

Most Americans Not Ready for Retirement — Only 18% of employees at US corporations will have a retirement income sufficient to maintain their standard of living. This is the result of a study by Hewitt Associates . Those who have a defined contribution retirement plan will meet only 74% of their retirement income needs and that includes Social Security income. It is this analyst's opinion that Social Security income will most likely be reduced below current levels in the future making the situation even worse. A report on the gloomy outlook for future retirees is found at The author, Paul Menchaca, summarizes the results of the study: Of the 15.7 times final pay, Hewitt estimates that Social Security will provide 4.7 of it, leaving employees responsible for making up the remaining 11 times final pay. This will likely have to come from company-provided plans and personal savings, but of the more than 2 million employees at 84 large U.S. companies it examined, Hewitt’s study found that only 18% of these people who are expected to work a full career will meet this goal.

Retirement: The New Math -There's one key fact of life that most retirement planning advice gets wrong: the way people actually live and spend when they retire. Put simply, most retirement calculators and planners aim for decades of level spending, but most people reduce their spending as they move through retirement. That's a disconnect that can significantly skew the results of the typical planning exercise, says a recent study from the Society of Actuaries and the Actuarial Foundation. It could lead workers to take greater investment risks, or be overly frugal during their final years of work or their first active years of retirement. When workers retire, their budget often goes through four phases: (1) early retirement, when travel, home improvement, hobbies, and new wardrobes can raise expenses beyond workday levels; (2) midretirement, when people (and their spending) typically slow down;  (3) late retirement, when spending and activity slows even more; and (4) end of life, when spending for health care and personal assistance can use up what's left of a retirement kitty.

Time running short for Medicaid help - Late last year, when Congress’ willingness to pass an enormous health care bill still was very much in doubt, states had a more modest goal that should have been easier to achieve. They wanted Congress to pass a 6-month extension of the part of the economic stimulus program that is helping to pay for their Medicaid programs. The Medicaid assistance, set to expire at the end of December, has become a critical component in many state budgets during a time of devastating deficits. So critical, in fact, that two-thirds of the states crafted 2011 budgets assuming that more of it would come through. For a while, this looked like a safe bet. The House had included the states’ extension in its original version of health care reform. But by the time Congress produced a final bill for President Obama to sign in March, the aid to states had disappeared into the legislative ether.

Actuarial Opinions: Health care, apples to apples - The other day I was highly offended that I could find no one in government had assembled an apples-to-apples comparison of the two key cost estimates for Obamacare, those of the Congressional Budget Office and of the Office of the Actuary. So I’ve dug around for a couple of days and drew up my own comparison. The comparison is of some importance as a number of people have said the actuary’s estimates show increased federal spending on health care. A few have claimed that the Obama administration suppressed the actuary’s report till after the legislation passed. (The chief actuary emphatically denies this.) The discussion continues here, here and here

Flying Blind in Policy Reforms - The long and divisive fight over U.S. health care reform exposed basic weaknesses in the processes of governance. As is so often true in American politics these days, politicians and lobbyists kept complex subjects to themselves, pushing expert discussion and systematic public debate to the sidelines. During 14 months of debate over health care, the administration did not put forward a clear, analytical policy white paper on the aims, methods and expected results of the proposed reforms. One might think that the real action had all happened earlier, in congressional hearings, in brainstorming sessions and in the bargaining sessions with key stakeholders. Yet the earlier process was relentlessly driven by political and lobbying calculations and without the informed participation of the American people.  The mammoth legislation is impenetrable... Experts were never invited systematically to comment or debate about it so as to help the public and politicians understand the issues. The lack of clear policy documents from the administration meant that the public had little basis for reaction other than gut instincts and fearful sentiments fanned by talk-show hosts.

The Hidden Costs of Publicly Financed Private Health Insurance -The Patient Protection and Affordable Care Act continues the American tradition of privately provided, publicly subsidized health insurance. It’s how most Americans’ health insurance is financed today. But despite its advantages, there is a hidden cost to this arrangement: insurers have more information about health care coverage, spending and utilization than the taxpayers that help fund them. The system’s opacity gives insurers the upper hand in debates over government payment rates. Public funding of private health insurance is ubiquitous. Recent events in Massachusetts and years of experience in Medicare reveal that the opacity associated with public financing of private coverage is a set-up for conflict. A few weeks ago, Massachusetts insurance companies filed suit after the state’s Division of Insurance rejected proposed rate increases of hundreds of insurers.

Ugly divorce reform bill threatens victims of domestic violence -Kansas City Star headlines recently announced what those in the field have long known: a tough economy increases the incidence of domestic violence and depletes the resources available to combat it.What has received less attention is a new Missouri bill that would make matters worse. House Bill 1234 claims to promote “heterosexual marriage” by making divorce more difficult; what it really does is to strip away hard-won protections for the victims of domestic violence. Indeed, the bill’s proposals are so one-sided, it should be renamed “The Full Protection of Batterers Act.”

Pentagon Turns to Brain Implants to Repair Damaged Minds - An estimated 10 to 20 percent of troops coming home from Iraq and Afghanistan are suffering from traumatic brain injuries, or TBIs, which afflict 1.7 million Americans each year. Now the Pentagon’s rolling out a revolutionary initiative to treat the condition: brain implants that one researcher likens to “replacement parts” for damaged gray matter.“When something happens to the brain right now, there’s so little that the medical community can do,” Krishna Shenoy, associate professor of electrical engineering and bioengineering at Stanford University, told Danger Room. “Our goal is to understand — and then be able to change — how a brain responds to trauma.”No surprise that military extreme science agency Darpa is behind the project, which is called REPAIR, or Reorganization and Plasticity to Accelerate Injury Recovery. Yesterday, they announced an initial two-year round of $14.9 million in funding for four institutions, led by Stanford and Brown universities, that will collaborate on the brain-chip project. All in, it’ll involve 10 professors and their research teams, working in neuroscience, psychiatry, brain modeling and even semiconductors

Changing Views on Organ Prohibition - I spoke recently at the Kidney and Urology Foundation of America on using incentives to increase organ donation.  Also speaking was Nancy Scheper-Hughes, the courageous UC Berkeley detective/anthropologist responsible for busting international rings of organ traffickers.Scheper-Hughes is well known as an opponent of kidney vending, especially because it has often involved the exploitation of poor people in the developing world (fyi, there is no question that exploitation has occurred even if you take the view, as I do, that payment per se is not exploitation.)  In her impassioned talk, Scheper-Hughes presented many pictures of poor people with large scars.   Thus, I was very surprised that Scheper-Hughes favors a trial of compensation for deceased donation and is even supportive of a trial for compensated live donation saying: "There are penalties for buying, selling and brokering the sale of organs in this country, but still it goes on, often with an attitude of 'don't ask, don't tell.' I believe that if the laws are not going to be followed, then the laws should change

Lack of sleep ‘linked to early death’ - Getting less than six hours sleep a night can lead to an early grave, UK and Italian researchers have warned. They said people regularly having such little sleep were 12% more likely to die over a 25-year period than those who got an "ideal" six to eight hours. They also found an association between sleeping for more than nine hours and early death, although that much sleep may merely be a marker of ill health. Sleep journal reports the findings, based on 1.5m people in 16 studies. The study looked at the relationship between sleep and mortality by reviewing earlier studies from the UK, US and European and East Asian countries.

Can you believe……that in this day and age, our President’s stated policy can be “that American farmers should have protection from market disruptions and weather disasters.” That is from the administrations “guiding principles” on the Rural Issues page of  I’m not surprised that the administration supports this, and every modern president has in one form or another, but that it can still be a stated goal rather than just a regrettable yet politically intractable handout is really unfortunate. We are not a village on the banks of the Amazon river susceptible to supply side famines. What is the justification for this? If that doesn’t rankle you, here’s another little gem from a Council of Economic Advisors report:Payments to farmers of specific crops or animal products constituted about 70 percent of all direct farm support in 2008. Of this amount, corn producers received about 29 percent... 15 percent for tobacco...Tobacco farmers. Money is taken from you, and given to tobacco farmers. No news here, but these are the kinds of policies we shouldn’t allow ourselves to forget about or be comfortable with.

Fears for crops as shock figures from America show scale of bee catastrophe - The world may be on the brink of biological disaster after news that a third of US bee colonies did not survive the winter. Disturbing evidence that honeybees are in terminal decline has emerged from the United States where, for the fourth year in a row, more than a third of colonies have failed to survive the winter.The decline of the country's estimated 2.4 million beehives began in 2006, when a phenomenon dubbed colony collapse disorder (CCD) led to the disappearance of hundreds of thousands of colonies. Since then more than three million colonies in the US and billions of honeybees worldwide have died and scientists are no nearer to knowing what is causing the catastrophic fall in numbers.

What’s wrong with price gouging? - THERE WASN’T much Martha Coakley could do about the massive pipe break that left dozens of Greater Boston towns without clean drinking water over the weekend. So she kept herself busy instead lecturing vendors not to increase the price of the bottled water that tens of thousands of consumers were suddenly in a frenzy to buy.It never fails. No sooner does some calamity trigger an urgent need for basic resources than self-righteous voices are raised to denounce the amazingly efficient system that stimulates suppliers to speed those resources to the people who need them. That system is the free market’s price mechanism — the fluctuation of prices because of changes in supply and demand.

Water Infrastructure: The Unseen Crisis -The importance of investment in air traffic management modernization remains a priority, but one month since World Water Day, let's focus on the unseen crisis of global water infrastructure.  Simply put, the world is running out of water - and people are feeling the impact, and the consequences. Although clean, drinkable water is among the most fundamental human needs, less than 1 percent of the world's water is safe to drink. Freshwater withdrawals are predicted to increase by 50 percent in developing countries and 18 percent in developed countries by the year 2025. In a world where every drop counts, we must invest in the infrastructure needed to conserve clean water and prevent what is already a global shortage from becoming a crisis.

Water Infrastructure Bill Introduced in US Senate - A bipartisan bill proposed in the US Senate would remove caps on bond levels for water infrastructure projects. The Sustainable Water Infrastructure Investment Act of 2010 (S. 3262) would remove state volume caps on private activity bonds (PABs) for water and wastewater projects. The bills sponsors say it will free up billions of private capital dollars for investment in the nation’s water infrastructure. A similar bill introduced in the U.S. House of Representatives last year by Congressman Bill Pascrell (D-NJ) was passed by the House as part of the Small Business and Infrastructure Tax Act last month. According to the U.S. Environmental Protection Agency (EPA) and the Government Accountability Office, there is an investment gap of more than $500 billion for necessary infrastructure upgrades over the next 20 years to ensure safe drinking water and wastewater treatment.

Water woes: Supply issues abound - Dodge, a quiet hamlet in Dunn County away from the throb of oil drilling further west, could become a daily destination for 240 semi-trucks when a new tap gets opened there in June.The tankers will fill up at a depot a half-mile south of town and head back out to the oil field, where the millions of gallons of water, along with sand and chemicals, is injected into oil wells in pressurized treatments that fracture the oil formation.The water should help quench the thirst of an industry that consumes the equivalent of a small river every day. It’s projected the industry will use as much as 5.5 billion gallons of water a year for up to two decades to fully develop the Bakken formation at the rate of about 2,000 additional oil wells every year. In Dunn County, the annual demand for water will ramp up to about 1 billion gallons.

Could Become Too Hot for Humans - Researchers calculated the highest tolerable "wet-bulb" temperature - equivalent to what is felt when wet skin is exposed to moving air - and found that this temperature could be exceeded for the first time in human history if greenhouse gas emissions continue at their current rate and future climate models are correct. Temperatures this unbearable for humans haven't been seen during the existence of hominids - the primate family that includes ancient humans - but they did occur about 50 million years ago. Exposure to wet-bulb temperatures above 95 degrees for six hours or more will create lethal stress levels in humans and other mammals, "The wet-bulb limit is basically the point at which one would overheat even if they were naked in the shade, soaking wet and standing in front of a large fan,"

Odds of cooking the grandkids - There is a horrible paper in this week's Proceedings of the National Academy of Sciences which looks at how the limits of human physiology interact with upper-range global warming scenarios.  The bottom line conclusion is that there is a small - of order 5% - risk of global warming creating a situation in which a large fraction of the planet was uninhabitable (in the sense that if you were outside for an extended period during the hottest days of the year, even in the shade with wet clothing, you would die).  To give you a feeling for the likely uninhabitable regions, it's the portions of the map above that are in the white or pink/purple color (above 35oC wet bulb temperature on the scale).  As you can see, it includes most of the eastern US, much of inland Brazil and Latin America, tropical Africa, pretty much all of India, portions of northern China, and most of Australia.  Plenty to qualify as a "Risk to Global Civilization", I think.

Trading cap-and-trade - THERE have been a number of bloggers (especially Brad Plumer) arguing that the BP oil spill may actually have made the outlook for energy legislation worse. The case for this makes sense to me; drilling concessions were supposed to be the carrot used to attract Republican votes, and now the carrot has gone bad, so to speak (How to work in Barack Obama's preemptive decision on offshore drilling is another matter, and one we'll ignore for now.) But is the argument right? Well, here is the price path on the Intrade contract paying off in the event a cap-and-trade bill is passed before the end of 2010. The oil rig in question exploded on April 20, and it became clear soon after that oil was leaking into the Gulf. It looks to me like the spill has clearly erased the momentum that had been building on energy legislation. Strangely enough.

How China and India Sabotaged the UN Climate Summit - Der Spiegel (video) Part 3: Obama Stabs the Europeans in the Back - Like the Europeans, the US president was also intent on securing a commitment to protect the climate from the new economic superpowers, China and India. "I think it is important to note that there are important equities that have to be considered," he said, with a distinctive note in his voice that suggested the foresight of a statesman. But then Obama stabbed the Europeans in the back, saying that it would be best to shelve the concrete reduction targets for the time being. "We will try to give some opportunities for its resolution outside of this multilateral setting ... And I am saying that, confident that, I think China still is as desirous of an agreement, as we are."

Unilateral climate policy: Combat leakage or beggar-thy-neighbour? - Will unilateral emissions cap-and-trade schemes result in carbon leakage and provide a cover for protectionist policies? This column argues that these risks are overstated. Moreover, large open economies such as the EU or the US cannot substantially reduce pollution costs through competing on emission-prices and a simple rule of uniform pricing is close to optimal.

How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment - Human activities around the world are producing increasingly larger quantities of greenhouse gases, particularly carbon dioxide resulting from the use of fossil fuels and from deforestation. Adopting policies aimed at reducing emissions of green house gases would shift the demand for goods and services away from fossil fuels and products that require substantial amounts of those fuels to make or to use and toward alternative forms of energy and products that require lesser amounts of fossil fuels. Employment patterns would shift to mirror those changes in demand. Changes in employment in specific industries would reflect the amounts of greenhouse gases they emit (through production and use of their output) and the difficulty of reducing their emissions of those gases.

Climate Change and the Integrity of Science - Signed by 255 members of the National Academy of Sciences, including 11 Nobel Prize winners - We are deeply disturbed by the recent escalation of political assaults on scientists in general and on climate scientists in particular. All citizens should understand some basic scientific facts. There is always some uncertainty associated with scientific conclusions; science never absolutely proves anything. When someone says that society should wait until scientists are absolutely certain before taking any action, it is the same as saying society should never take action. For a problem as potentially catastrophic as climate change, taking no action poses a dangerous risk for our planet.

What connections are there between debt, oil prices, and personal income? - I was looking at the ratio of US debt to US disposable personal income together with some other graphs of oil supply and oil prices, and realized that maybe there is a connection between debt, oil prices and personal income. In this post, I show a few graphs, and offer my conjectures as to what may be behind the relationships. You may agree with me, or perhaps you can offer some different ideas as to what happened in the past, and what may be ahead. Let's start with the 1981-1987 period. I have always wondered how the US was able to add all kinds of nuclear facilities, ramp up coal production, and improve auto mileage, back at the time oil consumption dropped in the early 1980s. Maybe the answer was more debt! At that time, there were some low-hanging fruit--switching out of petroleum based electrical power plants, to nuclear and coal, and downsizing vehicles. It takes capital to do all of these things.

Voter perceptions, energy -  Any bill with the slightest austerity or self-sacrifice has an uphill climb, particularly in this economy. Voters will accept the “new” environmentalism (focused on climate change) only as long as it is free. The temptation has been to pay for the new environmentalism by gutting the old environmentalism (focused on visible pollution).  Here the energy industry in recent decades offers certain parallels to the finance industry. Structured finance on the one hand, a green economy on the other – both innovations involve trade-offs. But the modern voter, like the modern consumer and the modern investor, is unsatisfied with trade-offs. He wants windfalls. So innovations are presented as pure gains. This is done by rounding risk down, by assuming that hitherto rare events – a housing crash on the one hand, a drilling leak on the other – are impossible. You pay for the new efficiencies by zeroing out protections from old-fashioned risks. The risk of a spill is taken off balance sheet. Until the inevitable screw-up, it looks like a bonanza attained through the brilliance of our leaders

Rebutting CBO’s climate policy and jobs paper - The Congressional Budget Office issued a briefing paper yesterday concluding that climate pricing will slightly reduce employment overall in the United States, because green jobs gains won’t quite offset other job losses. Unfortunately, this paper will likely be misquoted and misunderstood repeatedly. It’s not what it seems.Properly understood, it should give us confidence that the clean-energy path is our best option by far for a high-employment future. Too bad CBO didn’t just say that. You could read the summary and never guess. I delved into the study itself and here’s what I learned...

Progress ups Levy nuclear plant costs, delays start (Reuters) - Progress Energy Inc (PGN.N) boosted the estimated cost of its proposed Levy nuclear power plant in Florida and delayed its start-up to 2021 due to a delay in licensing the reactors, a spokeswoman for the company said on Thursday.The company estimates the project to build two 1,100 megawatts reactors at Levy about 130 miles (209 km) northwest of Orlando, would cost $17.2 billion to $22.5 billion -- up from its previous estimate of $17.2 billion.The first reactor is now expected to enter service in 2021 with the second 18 months later. Progress originally estimated the first unit could enter service in 2016 but delayed that estimate by about 20 months a year ago

JPMorgan’s War on Nature - Mountaintop removal (MTR) mining, focused in Appalachian states like West Virginia, Tennessee, and Kentucky, involves deforesting huge swaths of land and blasting the summits off of mountains to expose the black veins of coal underneath. The waste and rubble from the demolition is then dumped into nearby rivers and streams, burying local water sources in toxic byproducts, choking off tributaries that feed into larger rivers, and wiping out plants and wildlife, according to numerous scientific studies. Despite the mining industry's claims, there are no successful ways to mitigate the effects of MTR, according to Margaret Palmer of the University of Maryland Center for Environmental Science. The effects on the nearby environment, she says, are long lasting and often irreversible.  "Chase is the single largest remaining player in this game," . "They just absolutely refuse to take responsibility for their role in this absolutely devastating industry."

British fish stocks drop 94% - The news is astounding: Britain's fish stocks have declined by 94% since 1937. Species with the greatest declines include cod and haddock. The report, 'The effects of 118 years of industrial fishing on UK bottom fish trawl fisheries,' published in Nature Journal on May 4th. The researchers, Ruth Thurstan, Simon Brockington and Callum Roberts, set out to validate a claim made by the European Commission (EC) that "... 88% of monitored marine stocks were overfished." Drawing upon over 100 years worth of data collected on actual catches from the UK, the researchers found fish stocks had actually declined by 94%. The authors wrote "... This implies an extraordinary decline in the availability of bottom-living fish and a profound reorganization of seabed ecosystems since the nineteenth century industrialization of fishing."

Fall in fish stocks far worse than feared, study shows - The dramatic decline of fish stocks around the British Isles is highlighted by a study showing that fishing fleets today have to work 17 times as hard to catch a given amount of fish than the largely sail-powered vessels of the late-19th century.In 1889, Britain's fishing fleets were landing twice as much fish as today's advanced vessels; this catch rose to a peak in 1937 when fishing vessels in England and Wales landed more than 14 times as much by weight as the average annual catch of today.Scientists said that data gathered since the 1880s, when records began, showed a dramatic collapse in stocks of cod, haddock, ling, halibut and other commercial species of fish."For all its technological sophistication and raw power, today's trawl fishing fleet has far less success than its sail-powered equivalent of the late-19th century because of the sharp declines in fish abundance,"

Dead Zones - NASA -This is not the title of a sequel to a Stephen King novel. "Dead zones" in this context are areas where the bottom water (the water at the sea floor) is anoxic — meaning that it has very low (or completely zero) concentrations of dissolved oxygen. These dead zones are occurring in many areas along the coasts of major continents, and they are spreading over larger areas of the sea floor. Because very few organisms can tolerate the lack of oxygen in these areas, they can destroy the habitat in which numerous organisms make their home.The cause of anoxic bottom waters is fairly simple: the organic matter produced by phytoplankton at the surface of the ocean (in the euphotic zone) sinks to the bottom (the benthic zone), where it is subject to breakdown by the action of bacteria, a process known as bacterial respiration. The problem is, while phytoplankton use carbon dioxide and produce oxygen during photosynthesis, bacteria use oxygen and give off carbon dioxide during respiration.

BP Fought Safety Measures at Deepwater Oil Rigs BP, the company that owned the Louisiana oil rig that exploded last week, spent years battling federal regulators over how many layers of safeguards would be needed to prevent a deepwater well from this type of accident. One area of immediate concern, industry experts said, was the lack of a remote system that would have allowed workers to clamp shut Deepwater Horizon's wellhead so it would not continue to gush oil. The rig is now spilling 210,000 gallons of oil a day into the Gulf of Mexico. In a letter sent last year to the Department of the Interior, BP objected to what it called "extensive, prescriptive regulations" proposed in new rules to toughen safety standards. "We believe industry's current safety and environmental statistics demonstrate that the voluntary programs…continue to be very successful." CLICK HERE TO READ THE LETTER

BP defends record, Obama in La. as spill grows - BP's chairman defended his company's safety record and said Sunday that "a failed piece of equipment" was to blame for a massive oil spill along the Gulf Coast, where President Barack Obama got a firsthand update on the slick creeping toward American shores. BP PLC chairman Lamar McKay told ABC's "This Week" that he can't say when the well a mile beneath the sea might be plugged. But he said he believes a 74-ton metal and concrete box — which a company spokesman said was 40 feet tall, 24 feet wide and 14 feet deep — could be placed over the well on the ocean floor in six to eight days.

WSJ: Deepwater Horizon well lacked $500,000 shut off valve safeguard required in almost every country except U.S. - The oil well spewing crude into the Gulf of Mexico didn't have a remote-control shut-off switch used in two other major oil-producing nations as last-resort protection against underwater spills.  The lack of the device, called an acoustic switch, could amplify concerns over the environmental impact of offshore drilling after the explosion and sinking of the Deepwater Horizon rig last week.U.S. regulators don't mandate use of the remote-control device on offshore rigs, and the Deepwater Horizon, hired by oil giant BP PLC, didn't have one. With the remote control, a crew can attempt to trigger an underwater valve that shuts down the well even if the oil rig itself is damaged or evacuated.

BP spends millions lobbying as it drills ever deeper- While the explosion of BP/Transocean's Deepwater Horizon drilling rig was a horrific event, it was neither surprising nor unexpected. BP is one of the most powerful corporations operating in the United States. Its 2009 revenues of $327bn are enough to rank BP as the third-largest corporation in the country. It spends aggressively to influence US policy and regulatory oversight. In 2009, the company spent nearly $16m on lobbying the federal government, ranking it among the 20 highest spenders that year, and shattering its own previous record of $10.4m set in 2008. In 2008, it also spent more than $530,000 on federal elections, placing it among the oil industry's top 10 political spenders

Agency Postpones Awards Ceremony Celebrating Offshore Oil Drilling Safety - Since the offshore oil rig spill in the Gulf of Mexico, federal regulators at the Minerals Management Service (MMS) have been coming under increasing scrutiny for whether they were negligent in overseeing the rigs owned by BP and others. Ironically, MMS was all set to hold its annual “2010 Annual Industry SAFE Awards Luncheon” on May 3. Perhaps recognizing that now is not the time to applaud the oil industry for safety on the job, MMS postponed the event. The LA Times notes that last year, BP “was among the luncheon’s winners, cited for ‘outstanding dedication and leadership in promoting improved medical care and evacuation capabilities for offshore facilities.’

In ironic twist, BP finalist for pollution prevention award -Call it a tragic irony. BP, now under federal scrutiny because of its role in the deadly Gulf of Mexico explosion and oil spill, is one of three finalists for a federal award honoring offshore oil companies for "outstanding safety and pollution prevention."The winner of the award - chosen before the April 20 oil rig incident - was to be announced this coming Monday at a luncheon in Houston. But the U.S. Department of Interior this week postponed the awards ceremony...

Whistleblower: BP Risks more and greater catastrophic blowouts in the Gulf - A former contractor who worked for British Petroleum (BP) claims the oil conglomerate broke federal laws and violated its own internal procedures by failing to maintain crucial safety and engineering documents related to one of the firms other deepwater production projects in the Gulf of Mexico, according to internal emails and other documents obtained by Truthout. The whistleblower first raised concerns about safety issues related to BP Atlantis, the world's largest and deepest semi-submersible oil and natural gas platform, located about 200 miles south of New Orleans, in November 2008. Atlantis, which began production in October 2007, has the capacity to produce about 8.4 million gallons of oil and 180 million cubic feet of natural gas per day. It was then that the whistleblower, who was hired to oversee the company's databases that housed documents related to its Atlantis project, discovered that the drilling platform had been operating without a majority of the engineer-approved documents it needed to run safely, leaving the platform vulnerable to a catastrophic disaster that would far surpass the massive oil spill that began last week following a deadly explosion on a BP-operated drilling rig

BP now slicker than ever - BP is now an inviolable sovereign state. Not even the mighty US can transgress its borders. The latter must rest on assurances the former is doing everything in its power to arrest its massive oil spill in the Gulf Of Mexico, in the same way it relies heavily on the pretence of the word of states formerly occupying the status of shareholders in the axis of evil, like Iran and North Korea. But how long can a war of words suffice, while BP’s invasion continues? Surely diplomacy must yield to military action, sooner or later. Why would the US permit a stinking oil company poison its waters, in effect perpetrating a corporate 9/11, when any such attempt by a foreign political power would be met with abrupt force?

The Spill vs. a Need to Drill - NYTimes -. The Santa Barbara disaster of 1969 resulted from a blowout at an offshore platform that spilled 100,000 barrels of crude oil — 4.2 million gallons in all. It marked a turning point in the oil industry’s expansion, shelving any chance for drilling along most of the nation’s coastlines and leading to the creation of dozens of state and federal environmental laws.  But whatever the magnitude of the spill at the Deepwater Horizon drilling rig, 50 miles off the coast of Louisiana, it is unlikely to seriously impede offshore drilling in the Gulf. The country needs the oil — and the jobs. The politics have also changed. Republicans want to boost domestic oil production to reduce the nation’s dependence on foreign oil. High on the Democratic agenda is reducing carbon emissions that cause global warming. To bridge the gap, the White House has backed a compromise that would expand domestic offshore exploration in exchange for Republican support for its climate policy.

Where would we be without offshore oil? - As oil continues to pour into the Gulf of Mexico, I thought it might be helpful to review how we got where we are today. The graph below shows total U.S. consumption of petroleum products (in red) and oil production from U.S. fields (in green). Consumption has been growing pretty steadily since 1981 while production has been declining. About 3-1/2 million barrels per day of the gap between these two lines is made up by refinery process gain, natural gas plant liquids, and other liquids. But most of the gap must be met by U.S. imports. Each year that our consumption grows and production declines, imports have to go up. Those rising U.S. oil imports could be the single most important factor determining the price of oil, global trade imbalances, and geopolitics today. The next graph shows that although total U.S. production has been falling, U.S. offshore field production (in blue) has been rising, so that offshore oil now represents a third of our total field production.

Oil-Spill Fight Bogs Down - WSJ - Engineers prepared to try containing the gushing Gulf of Mexico oil well with giant underwater boxes and siphons, as seaside towns braced for landfall of a giant slick.BP PLC, the oil giant that leased the rig whose sinking last week caused the disaster, has failed in efforts using unmanned submarines to activate a shutoff device on the undersea well.  A stopgap solution BP is planning—covering the well with containers and pumping the oil out—will take weeks to roll out and is untested at the one-mile depth of this well, however. BP said it would begin working this weekend on a permanent solution to the crisis, drilling a new hole to cut off the damaged well, but industry scientists said that could take months. With a quick solution to shut off the spill looking out of reach Friday, the government and the oil industry struggled to contain the resulting slick and keep it from shore.

Gulf Coast oil spill threatens to shut down Louisiana's commercial fishing industry = As the massive oil spill in the Gulf of Mexico continued to spread Friday, Louisiana's $2.5-billion commercial fishing industry, which provides much of the country's domestic shrimp and oysters, is bracing for a virtual shutdown that could trigger shortages and price hikes for consumers nationwide. As an armada of fishing vessels was dodging the oil-covered waters, seafood distributors, restaurants and grocery stores across the nation were on edge as well. In Southern California, supermarket chains such as Albertsons and Ralphs said they were closely monitoring the situation and were concerned about how serious the problem might become. A spokeswoman for Whole Foods Market said it was prepared to find alternatives — just in case.

Louisiana Fishermen Losing Patience Over Spill (Reuters) – Louisiana fishermen, who say they face ruin because of the huge Gulf of Mexico oil spill, were fast losing patience on Friday with what they say is the slow pace of efforts to contain the slick.Federal, state and local authorities and London-based BP, which owns the offshore well that is the source of the spill, are engaged in a campaign to speed up efforts to protect the coast.But for many fishermen the effort smacks of too little too late for the Gulf waters they plow, which teem with shrimp, oysters, crabs and fish and support a $1.8 billion U.S. fishing industry second only to that of Alaska.

US Gulf coast faces disaster as oil slick threatens to destroy fisheries and wildlife - There is anger in Young's voice. He says he has had his phone turned off since noon because it was constantly ringing with customers wanting to find out whether their fishing outing was still going ahead. He couldn't tell them anything, so why answer? Overnight, an answer of sorts does finally arrive. Louisiana state officials announced they were closing all commercial and recreational fishing to the east of the Mississippi where the oil from the Deepwater Horizon, spewing out at least 5,000 barrels a day from the seabed, is most likely to be blown onshore by prevailing winds. That's just the start. "It's bleak, very bleak," said Captain Shawn Lanier. "We are fixing to lose our livelihoods if they cancel everything."

The Gulf oil spill: a salient example of a small probability catastrophic event - Many big issues in environmental policy and economics surround potentially catastrophic events that have small probability of occurring.  The Gulf oil spill provides a salient example.  What did we perceive the odds of such an event to be before it occurred?  How large a risk was acceptable? Now that it's happened, presumably more safeguards will be put in place (like remotely controlled shutoff valves) and the odds of reoccurance will go down.  But by how much?  It is, of course, possible to make the risk too low, if the costs are high enough. The difficulty with rationalizing optimal safety in situations like this one is that quantifying the sizes of small probabilities and huge potential damages is simply impossible to do in an objective way. This the dirty secret underlying any rational economic analysis: uncertainty about the risk-damage tradeoff can far exceed actual tradeoffs, and often (usually?) no amount of analysis can reconcile the problem objectively

Variety of Cleanup Methods Considered - Desperate officials trying to corral a massive oil spill in the Gulf of Mexico are considering an increasing variety of high-tech, even far-fetched, techniques to deal with the gusher of oil flowing up from the sea floor a mile below the surface. Thad Allen, the commandant of the Coast Guard who was named Saturday to oversee the federal oil-spill response, said officials were looking into the possibility of adjusting dams to increase the flow from rivers draining into the Alabama's Mobile Bay and then into the Gulf. The hope would be, he said, that the currents would keep the oil slick at bay. "I think they're willing to listen to anything," Adm. Allen said in a conference call with reporters, responding to a suggestion about a particular spill-recovery technology from a Scandinavian company.

20-year veteran of the Coast Guard: “With a spill of this magnitude and complexity, there is no such thing as an effective response.”  -As I watch the slow unfolding of the disastrous oil spill in the Gulf of Mexico, I am reminded of the children’s poem: Humpty Dumpty Sat on the wall; Humpty Dumpty had a great fall...This time, it is our technology that has had a great fall, and while the efforts to put it right may be valiant and well intentioned, we won’t be able to put it back together again.I haven’t felt this level of despair since Katrina descended over New Orleans.  But this time, it is a slower process that will unfold over weeks, or worse, months.  This is not the first time this has happened, but hopefully, it will be the last.  We first learned about massive oil spills when an oil well blowout occurred in Santa Barbara in 1969.  The second-largest oil spill of all time occurred between June 1979 and March 1980, when the Ixtoc I well blew out in the Gulf of Mexico.  This spill ran for eight months and released around 140 million gallons of oil.  By comparison, the Exxon Valdez (only!) released 10.8 million gallons.

Disaster Invokes the Specter of Valdez -Massive amounts of oil continued to gush unchecked into the Gulf of Mexico on Sunday, raising concerns the spill could surpass the Exxon Valdez disaster that poured 260,000 barrels of crude into waters off Alaska in 1989.  "We're dealing with a massive and potentially unprecedented environmental disaster," President Barack Obama said during a short visit Sunday to Venice, La., the small town closest to the sunken rig Deepwater Horizon. While recent estimates have been that 5,000 barrels a day were leaking, administration officials said Sunday that they feared as much as 100,000 barrels a day could pour into the Gulf if the well infrastructure deteriorates further.  BP has said the well may contain tens of millions of barrels of oil, but Bob Fryar, a BP executive working on the response to the spill, said Sunday that the company doesn't know how much oil is pouring into the Gulf. "We don't have any physical way to measure this," he said. , adding that any characterization of the amount of oil spilling from the well "is just an estimate."

Oil Spill: Here's the Inside Scoop  The Gulf oil spill is much worse than originally believed.As the Christian Science Monitor writes: It's now likely that the actual amount of the oil spill dwarfs the Coast Guard's figure of 5,000 barrels, or 210,000 gallons, a day. Independent scientists estimate that the renegade wellhead at the bottom of the Gulf could be spewing up to 25,000 barrels a day. If chokeholds on the riser pipe break down further, up to 50,000 barrels a day could be released, according to a National Oceanic and Atmospheric Administration memo obtained by the Mobile, Ala., Press-Register.CNN quotes the lead government official responding to the spill - the commandant of the Coast Guard, Admiral Thad Allen - as stating: If we lost a total well head, it could be 100,000 barrels or more a day. Indeed, an environmental document filed by the company running the oil drilling rig - BP - estimates the maximum as 162,000 barrels a day:

A Brief History of the Deepwater Horizon Blowout (timeline & graphic)

EPA ramps up air quality monitoring for oil spill The Environmental Protection Agency says it's stepping up air quality monitoring on the Gulf Coast.There are concerns that vapors from the oil and controlled fires might cause health problems for people living in the region. An oil smell could cause headaches or nausea, but EPA spokesman Dave Bary said Saturday there have been no confirmed reports of such problems.State health agencies are advising people having such symptoms to stay indoors and ventilate their homes with air conditioning. Crude oil gives off gaseous vapors. But Jonathan Ward, an environmental toxicology professor at the University of Texas Medical Branch at Galveston, says the vapors likely will be mostly dispersed by brisk sea breezes by the time they reach shore.

Booms to stop oil spill are breaking down, says Gov. Bob Riley - Alabama Gov. Bob Riley says most of the inflatable booms deployed to catch the oil spill are breaking down, forcing crews to rework their contingency plan. Riley said Sunday that 80 percent of the thousands of feet of booms the Coast Guard and other crews have laid down off the Alabama coast over the past three days have broken down in the bad weather. He says the other Gulf Coast states are experiencing similar problems. Riley says luckily the winds are keeping the oil slick off the coastline for now.

As oil spill approaches, dead animals wash up in Mississippi- On Saturday the sea turtles started washing up on shore. On Sunday, the turtles were joined by dead catfish, horseshoe crabs, and birds -- a duck, a pelican and a seagull. Before the April 20 rig explosion and oil started pouring into the Gulf, the city might see a small turtle wash up every six months -- one that got caught in a net, or died from some natural cause, said Holliman, a City of Pass Christian patrol officer, who works the harbor. "But we've never seen this many," he says, shaking his head. "Something's going on; we just don't know what."

Technical discussion of Deepwater Horizon catastrophic failure at U.S. Coast Guard Eighth District External Affairs Flickr account - Photos and discussion are at the uscgd8 / U.S. Coast Guard Eighth District External Affairs Flickr account. Deepwater Horizon Incident Unified Command has: To submit alternative response technology, services or products please email or call (281) 366-5511 In case you missed that – the USCG is asking for help.  To bring you up to date and to make a very lengthy story how we got here short – there was a $3M bond to drill this and no plan from BP to handle a failure. None. Photo entitled ROV attempting to activate Deepwater Horizon Blowout Preventer at

Officials say shutting off gusher fueling oil spill at least a week away -Federal officials shut down fishing from the Mississippi River to the Florida Panhandle on Sunday because of the uncontrolled gusher spewing massive amounts of oil into the Gulf of Mexico, and the environmental disaster is still expected to take at least a week to cut off. Even that toxic scenario may be too rosy because it depends on a low-tech strategy that has never been attempted before in deep water.The plan: to lower 74-ton, concrete-and-metal boxes into the gulf to capture the oil and siphon it to a barge waiting at the surface. Whether that will work for a leak 5,000 feet below the surface is anyone's guess; the method has previously worked only in shallower waters.  See an animation of the growth of the oil slick.

Iran Offers Help in Cleaning Gulf of Oil Spill  (Reuters) - An Iranian state company offered on Monday to help in preventing a vast oil slick that is moving towards the coast of the United States, the Islamic Republic's old foe, from causing an "ecological disaster". Haidar Bahmani, managing director of the National Iranian Drilling Company, said his firm was ready to provide assistance in fighting the spill in the Gulf of Mexico, the Oil Ministry's website SHANA reported."Our oil industry experts can curb the rig leakage in the Gulf of Mexico and prevent an ecological disaster in that part of the world," Bahmani said, without giving further details.

Relief Well Was Used to Halt Australian Spill - While BP tries various short-term efforts to plug a leaking oil well in the Gulf of Mexico, the company is preparing to drill a relief well as a backup plan. BP hopes to drill that well diagonally to intersect the original one below the seabed and then flood it with mud and concrete to stop the uncontrolled flow. Although the idea sounds simple, the experience with a similar spill last year near Australia shows just how difficult it can be to execute the maneuver. “It’s like finding a needle in a haystack,”  The Australian accident, known as the Montara spill, began Aug. 21 with a blowout of high-pressure oil similar to the one in the gulf. With the well spewing 17,000 to 85,000 gallons per day, precious weeks passed before the relief wells were started. When efforts got under way, the first four relief wells — drilled on Oct. 6, 13, 17 and 24 — missed the original well. A fifth well finally intersected the original on Nov. 1, and about 3,400 barrels of heavy mud were pumped into the base of the original well. The spewing oil finally stopped Nov. 3 — more than 10 weeks after the original explosion.

Could you please define 'appropriate'? - On Monday, BP said it would pay “all necessary and appropriate clean-up costs" from the disaster. "BP takes responsibility for responding to the Deepwater Horizon oil spill. We will clean it up," the company said in a statement.  via

Back to Petroleum - A decade ago, the company then known as British Petroleum launched a multimillion dollar advertising campaign to rebrand itself as the greenest of oil giants. Since then, it has gone only by the initials "BP" and has popularized a new slogan: "Beyond Petroleum." The campaign launched with a $200 million public relations and advertising budget and a new logo featuring the now-ubiquitous green-and-yellow sunburst. Ten years later, the company still spends big on advertising, dropping $76 million on radio and TV ads touting its image in the United States just last year. The campaign has paid off for the company. A customer survey in 2007 found that BP had by far the most environmentally friendly image of any major oil company

Experts paint grim picture for local tourism economy - Rick Harper, director of the Haas Center for Business Research and Economic Development at the University of West Florida, said the potential impact of the oil spill is massive. Tourism represents about 10 to 12 percent of the local economy in Santa Rosa County. That number increases to about 20 to 25 percent in Okaloosa County and more than 50 percent in Walton County.“If we do have dead fish, oily beaches, we can reasonably expect visitors to stay away. And this hits right at the start of our peak visitation season,” Harper said. “The big question marks obviously are, how severe is the damage going to be? How long is it going to last? Will it disrupt the entire tourist season, and how far will it extend geographically?

BP's Deepwater Horizon Rig Disaster Threatens Future of Offshore Drilling - Obama on March 31 proposed opening areas off the East Coast and in the eastern Gulf and Alaskan waters beginning in 2012, part of a bargain that administration officials hoped would propel energy and climate legislation designed to lead the country beyond petroleum, as BP’s slogan declared. For the oil industry, the Gulf of Mexico had been one of the few bright spots in a picture of flattening global production. After several years of decline, the amount of oil pumped in the Gulf has been rising as rigs move into deeper waters. The Deepwater Horizon crisis has shifted the political conversation from seeking opportunity to avoiding risk. The Obama Administration announced a 30-day safety review. Florida Governor Charles Crist, who recently left the Republican Party to run for the U.S. Senate as an independent, backed away from his support for offshore drilling, as did California Governor Arnold Schwarzenegger.

Drill, Baby,, oops - Plans by U.S. President Barack Obama to expand oil drilling off the eastern coast of the United States are "dead on arrival" in Congress after the massive oil spill in the Gulf of Mexico, Democratic Senator Bill Nelson said on Tuesday. Nelson, of Florida, made the prediction to reporters at a new conference where he and two other anti-drilling Democratic senators also called for a huge increase in the cap on oil-company liability related to environmental disasters.

The Gulf Coast Oil Spill: How Does It Compare to Exxon Valdez? - PBS - So how bad will the Deepwater Horizon oil spill turn out to be? The president of the National Wildlife Federation, Larry Schweiger, told us it has the potential to be the "worst ecological disaster in U.S. history," dwarfing the Exxon Valdez disaster in Alaska in 1989. Schweiger pointed out that the tanker held a finite amount of oil, while the "petrogeyser" a mile down on the floor of the Gulf of Mexico is still pouring thousands of barrels of crude oil into the water. There are other differences, too. The Exxon Valdez was loaded with a much heavier crude oil than the so-called "sweet, light crude" gushing into the Gulf. It was also a lot colder in Alaska, making the heavy oil even more viscous and that much more difficult to remove. BP's lighter oil is easier to handle, but it also contains more volatile compounds that can hurt plants and animals. Schweiger said the Deepwater Horizon spill couldn't have come at a worse time, because spring is when most species nest and reproduce. He fears an entire generation of hundreds of species will be lost.

Ken Salazar Calls Gulf Coast Disaster A 'Grave Scenario' And 'Very Catastrophic' (VIDEO) -- Interior Secretary Ken Salazar says the potential environmental outlook for the Gulf Coast oil spill is "a very grave scenario."He tells NBC's "Meet the Press" that it could take three months before workers attain what he calls the "ultimate solution" to stopping the leak -- drilling a relief well more than 3 miles below the ocean floor.Salazar also appeared on CNN's "State of the Union," telling host Candy Crowley that the Gulf Coast disaster was "indeed, a massive oil spill.""It potentially is very catastrophic. And I think we have to prepare for the worst, as we have from day one," he said. "If this thing continues to spew out, the ultimate relief here is going to be a relief well that may be 90 days out. And so we have to be prepared to make sure that we're protecting the American public, the American environment, our treasured coastlines on the Gulf Coast. So we are ready to do everything humanly possible to get that done."

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

Gulf of Mexico worst Case Scenarios-- Listing the Players and Possible Terrorist or Nuke Tie-in - This is a horror story which will become so much worse, it will become the dominant news story for the forseeable future. It includes Haliburton, the release of unprecedented geologic forces and a potential world wide catastrophe, not only ecologically, but much more, especially if the river of oil spewing from the deepwater, hyperpressurized sea-floor opening reaches the gulf stream, which will quickly spread it all the way up the east coast and beyond, possibly even to Europe.Underestimation seems to be the pattern here. Reportssuggest that if the pipe the oil is gushing from, already believed to be kinked, breaks, and if the wellhead fails, the amount of oil gushing out could rise from the lower current estimates of 200,000 to one million gallons a day to up to six million gallons a day. Exon-Valdez's damage was caused by a total of 11 million gallons released. For all we know, the amount released could already be far more than the 200,000 gallon a day estimate. suggests that rather than considering this a "spill" it be considered a"river of oil."

Total Wellhead Failure Raises Fear of Worst Case Scenario - Total wellhead failure is raising the fear of a worst case scenario becoming reality.The oil that has been pouring into the Gulf of Mexico from the explosion last week on the Deepwater Horizon oil rig, is about to get much worse.New fears over the total failure of the wellhead are making the worst case scenario even more frightening. The result would be the unprecedented, catastrophic destruction of the ecosystem, on a scale that the world has never seen before. US Coast Guard Admiral, Commander Thad Allen said, “The volume of spewing oil could climb to 100,000 barrels a day in the event of a total wellhead failure, a much greater breach than is believed to exist now.

Oil spills by the numbers - The devastating consequences of Exxon Valdez and BP gulf - The BP Gulf Coast rig explosion is a horrible human, economic, and environmental disaster. The death of 11 employees is tragic. The spill could devastate the Gulf Coast commercial and sport fishing industries for years to come. Louisiana’s seafood industry alone is worth $2 billion annually.This is the biggest U.S. economic and environmental disaster since the Exxon Valdez oil spill in Alaska’s Prince William Sound on March 24, 1989. The key lesson from the Exxon Valdez is that the oil spill continues to have an impact today—more than two decades after the event.The length and breadth of BP’s gulf oil spill are still unknown, but reviewing the harm and costs from the Exxon Valdez spill can give us a sense of the likely scale of the disaster. Whether the gulf spill surpasses this devastation will depend on whether and when BP can stop the flow of oil from deep on the ocean floor.

Oil spill could cost BP over $4.6 billion: report (Reuters) -The huge oil spillage in the Gulf of Mexico could cost British energy giant BP over 3 billion pounds ($4.6 billion) in containment and clean-up expenses, according to the Mail on Sunday.The report said BP's own insurance company Jupiter had laid off some catastrophe risk to larger reinsurers such as Lloyd's of London, Swiss Re or Munich Re. A ruptured deepwater well last month spilled millions of liters of oil into the Gulf of Mexico, spreading to the coast of Louisiana, threatening fish and shrimp breeding grounds and vulnerable wetlands teeming with wildlife.

Gulf oil spill at Deepwater Horizon threatens $8bn clean-up and an ecological oil slick disaster for the US -Twelve months ago BP dismissed the possibility that a catastrophic accident could happen at its offshore rig Deepwater Horizon, it emerged yesterday. An exploration plan and environmental impact analysis for the well, produced by the company in 2009, concluded that it was virtually impossible for there to be a giant crude oil spill from it.Now City experts say that the accident could cost the company up to $8bn (£5.23bn) to clear up the slick. The US Coast Guard has estimated that 6m litres of oil has already spilled into the waters of the Gulf of Mexico since an explosion destroyed the rig on 20 April, killing 11 workers.A further 800,000 litres is thought to be pouring from the stricken well every day, threatening to turn the accident into the worst US oil disaster since the Exxon Valdez in Alaska in 1989. Yesterday, a slick 130 miles long and 70 miles wide was being swept towards the ecologically vulnerable coastlines of Louisiana and Mississippi.

David Kotok: $12.5 Billion Is Just The Start Of The Oil Cleanup Costs, And A Double-Dip Is Now Way More Likely - David Kotok of Cumberland Advisors is out with some very gloomy comments about the economic ramifications of the Deepwater Horizon oil spill, and what it will cost. First he notes the ugliest case scenario: This spew stoppage takes longer to reach a full closure; the subsequent cleanup may take a decade.  The Gulf becomes a damaged sea for a generation.  The oil slick leaks beyond the western Florida coast, enters the Gulfstream and reaches the eastern coast of the United States and beyond.  Use your imagination for the rest of the damage.  Monetary cost is now measured in the many hundreds of billions of dollars.As for numbers: Usually, the first estimates in any crises are too low.  That is true here.  1000 barrels a day is now 5000, and some estimates of spillage are trending higher.  No one knows exactly.  The containment and boom mechanism is subject to weather cooperation as we can see this weekend.  Soon we are entering the hurricane season.  The thoughts of a storm stirring up the Gulf, hampering any cleanup or remediation drilling effort and creating a huge 10,000 square mile black stew is frightening to every professional in the business. This will be a financial calamity for many firms, not just BP and its partners and service providers.  Their liabilities are immense and must not be underestimated.  The first estimate of $12.5 billion is only a starter.

Cost of oil spill could exceed $14 billion (Reuters) - The total bill related to the oil spill drifting toward Louisiana from a well operated by BP Plc in the Gulf of Mexico, could exceed $14 billion, analysts said.Since an explosion almost two weeks ago on the Deepwater Horizon rig, a disaster scenario has emerged with hundreds of thousands of gallons of crude oil spewing unchecked into the Gulf and moving inexorably northward to the coast. The responsibility for the cleanup operation lies with the owners of the well, led by 65 percent shareholder, London-based oil company BP Plc. BP said last week that it was spending $6 million a day on the clean up but admitted this figure would rise sharply when the slick hits land.

Oil Slickonomics - Three scenarios lie ahead.  They rank as bad, worse, and ugliest (the latter being catastrophic and unprecedented).  There is no “good” here. The Bad. Containment chambers are put in place and they catch the outflow from the three ruptures that are currently pouring 200,000 gallons of oil into the Gulf every day.  If this works, it will take until June to complete.  The chambers are 30-foot-high steel configurations that must be placed on the ocean floor at a depth of one mile.  This has never been done before.  If early containment is successful, the damages from this accident will be in the tens of billions.  The cleanup will take years.  The economic impact will be in the five states that have frontal coastline on the Gulf of Mexico: Texas, Louisiana, Mississippi, Alabama, and Florida.

RIGZONE - BP Spuds Relief Well for Oil Spill - BP announced Tuesday that work has begun to drill a relief well to intercept and isolate the oil well that is spilling oil in the US Gulf of Mexico. The GSF Development Driller II drillship is drilling this second relief well. Another drillship, GSF Development Driller III, spudded the first relief well at 3 p.m. Central Daylight Time on Sunday. The British supermajor plans for the new well in 5,000 feet of water -- to intercept the existing, leaking well at approximately 13,000 feet below the seabed and permanently seal it. The new drill site is located approximately one-half mile on the seabed from the leaking well in Mississippi Canyon block 252. According to BP, drilling should take approximately three months.

USF prof: Oil plume likely to miss Pinellas beaches, Keys…The massive oil spill in the northern Gulf of Mexico poses no immediate threat to Pinellas County beaches or the west coast of the state and will likely miss the Florida Keys once it gets pulled into what's known as the Loop Current, a University of South Florida scientist said today.Although it appears imminent the slick will get pulled into the current, computer models show the oil plume is likely to stay in deep water, away from the Tampa Bay coast, then flow west of the Dry Tortugas islands before dipping south into the Florida Strait, said USF oceanographer Robert Weisberg.The Dry Tortugas are about 50 miles west of Key West.The Loop Current will act like a conveyor belt, dragging the oil north toward Miami then along the East Coast of the U.S., Weisberg said

Execs: 60,000 barrels is worst-case Gulf scenario -  – Executives from BP PLC tell members of a congressional committee that in the worst-case scenario a leaking well could spew up to 60,000 barrels of oil into the Gulf of Mexico. The well has been leaking about 5,000 barrels a day — or 210,000 gallons — into the Gulf since an explosion April 20 on an offshore drilling rig. Rep. Ed Markey, D-Mass., says industry officials told the House Energy and Commerce Committee that the worst-case scenario is 60,000 barrels a day, or 2.5 million gallons.He says committee members were told a more likely scenario if the leak gets worse is 40,000 barrels, or 1.7 million gallons. In an exploration plan filed with the government in February 2009, BP said it had the capability to handle a "worst-case scenario" it described as a leak of 162,000 barrels per day from an uncontrolled blowout.

Shocking allegations against BP - At least one worker who was on the oil rig at the time of the explosion on April 20, and who handled company records for BP, said the rig had been drilling deeper than 22,000 feet, even though the company’s federal permit allowed it to go only 18,000 to 20,000 feet deep, the lawyers said. That’s from a front-page story in the NY Times Tuesday with the mild headline, “On Defensive, BP Readies Dome to Contain Spill.”The paper of record chose to publish this serious allegation of permit violation, but oddly didn’t lead with them.  And  the paper then drops this bombshell: Another worker familiar with the rig told the lawyers that the company had chosen not to install a deep-water valve that would have been placed about 200 feet under the sea floor. Much like blowout preventers, devices that are meant to seal leaks, this valve could have served as a cutoff of last resort in explosions, the lawyers said.

BP: “This was not our accident” at Oil Change - In the middle of potentially America’s worst environmental disaster, BP is attempting to squarely shift the blame for the Deepwater Horizon disaster from itself to Transocean. As BP’s CEO Tony Hayward prepares to meet key Congressmen in Washington today, you can see part of BP‘s PR strategy in play with the simple message: We are not to blame, although we will clean up the mess.Speaking on the BBC yesterday, Hayward said: “This was not our accident … This was not our drilling rig. This was not our equipment. It was not our people, our systems or our processes. This was Transocean’s rig. Their systems. Their people. Their equipment.”But evidence suggests otherwise:

Slick Operator: The BP I’ve Known Too Well -  I've seen this movie before. In 1989, I was a fraud investigator hired to dig into the cause of the Exxon Valdez disaster. Despite Exxon's name on that boat, I found the party most to blame for the destruction was ... British Petroleum (BP).That's important to know, because the way BP caused devastation in Alaska is exactly the way BP is now sliming the entire Gulf Coast. Tankers run aground, wells blow out, pipes burst. It shouldn't happen, but it does. And when it does, the name of the game is containment. Both in Alaska, when the Exxon Valdez grounded, and in the Gulf last week, when the Deepwater Horizon platform blew, it was British Petroleum that was charged with carrying out the Oil Spill Response Plans (OSRP), which the company itself drafted and filed with the government. What's so insane, when I look over that sickening slick moving toward the Delta, is that containing spilled oil is really quite simple and easy. And from my investigation, BP has figured out a very low-cost way to prepare for this task: BP lies. BP prevaricates, BP fabricates and BP obfuscates.

The Market Ate My (Bear Stearns) Homework - Is today "Corporations' Day"? At his eponymous website, Lew Rockwell wonders why we can't feel sorry for BP and ex-Bear Stearns CEO Cayne testifies that he did no wrong, "the market ate his homework". Of the two arguments, I have some sympathy for Mr. Rockwell's view (although to assert, as he does, It should be obvious that BP is by far the leading victim seems so silly he can't be serious). Deep sea drilling seems like tricky business and BP will, no doubt, become the "whipping boy" of the environmental zealots (which is to distinguish the radical fringe from those with justified, but more balanced concerns). Yet, I can't see why one should wax anthropomorphic. BP is a corporation. I feel for the workers who died on the rig, those affected by the spill, and those, in and out of BP, who will lose jobs as a result, but for BP itself? No.

BP Spill Threatens Gulf of Mexico Oil, Gas Operations (Bloomberg) -- The growing oil slick fed by an underwater leak in a BP Plc well in the Gulf of Mexico may threaten production, shipping and refining of oil and natural gas in Mississippi, Alabama, and Louisiana. Those three states account for 19 percent of U.S. refining capacity as of 2009, according to data from the U.S. Energy Department’s Energy Information Administration. “Traders are nervous about how fast the slick could grow,” and whether it could have a significant effect on oil and natural-gas production, said Andy Lipow, president of Lipow Oil Associates LLC in Houston. The oil spill followed an April 20 explosion on a drilling rig leased by BP Plc that killed 11 workers. The rig, owned by Transocean Ltd., sank two days later.

Gulf oil slick threatens $100 billion tourism industry - As the Gulf Coast braces for a sprawling slick from a damaged oil well to hit its shores, the financial impact is already seeping into the region's $100 billion-plus tourism industry, from New Orleans seafood restaurants to Florida vacation rentals."This has the potential to be as big an economic disaster as an environmental one," particularly since summer is high season for most of the region's beach towns, says Orlando-based tourism marketer Peter Yesawich. In New Orleans, restaurant owners are reassuring customers that Sunday's precautionary federal ban on fishing from the Mississippi River to northwest Florida for at least 10 days doesn't affect more than three-quarters of Louisiana's seafood production

Is the $75m cap on BP liabilities binding? - I'm still trying to figure out the extent to which the O1990 Oil Pollution Act $75 million cap on liabilities above and beyond clean-up costs is binding. This helps a little:  BP's liabilities may be capped by a federal rule that limits the payouts for economic damages stemming from an oil spill to $75 million. Once that threshold is reached, a federal fund kicks in, covering an additional $1 billion. The federal fund is paid for by a 8-cents-a-barrel tax on oil produced or imported into the Untied States. Then again, BP may not be able to use the liability shield. Carl Nelson, a Tampa-based maritime lawyer, said the $75 million cap only applies when a company has no violations related to an accident. That rarely happens. BP will almost certainly be found to be at fault in some way for the spill.

Risk and return - Another worker familiar with the rig told the lawyers that the company had chosen not to install a deep-water valve that would have been placed about 200 feet under the sea floor. Much like blowout preventers, devices that are meant to seal leaks, this valve could have served as a cutoff of last resort in explosions, the lawyers said. “The company took their chances in not having the valve so they could save money,” said Mike Papantonio, one of the lawyers representing the shrimpers and fishermen.

Schwarzenegger withdraws support for offshore drilling - Gov. Arnold Schwarzenegger on Monday withdrew his support for a plan he championed to allow new offshore oil drilling off Santa Barbara County, citing the disastrous oil spill in the Gulf of Mexico. Schwarzenegger, whose administration as recently as Friday defended the proposed Tranquillon Ridge offshore drilling project, said images of the spill in the gulf changed his mind. "All of you have seen, when you turn on the television, the devastation in the gulf, and I'm sure that they also were assured that it was safe to drill," he said at a news conference Monday. "I see on TV the birds drenched in oil, the fishermen out of work, the massive oil spill and oil slick destroying our precious ecosystem. That will not happen here in California, and this is why I am withdrawing my support for the T-Ridge project."

Gulf oil spill roils energy bill prospects The explosion of an offshore oil rig in the Gulf of Mexico has raised enough concern among congressional Democrats to jeopardize the prospects for passage of an energy and climate change overhaul."Personally, I will have a very hard time ever voting for offshore drilling again," Sen. Jay Rockefeller, D-W.Va., said Tuesday. "It's too much unknown."With that, Rockefeller joined the ranks of Democrats lining up against the already troubled energy bill heading to the Senate. Its very progress has depended on the addition of sweeteners to attract support from traditional opponents. For environmentalists, the bill would curb pollution-causing gases blamed for global warming and crack down on oil companies. For the "Drill, Baby, Drill" crowd, there's permission to drill in new ocean areas along the coast of Alaska and the coast stretching from Delaware to central Florida.

Black Storm Rising - The Economist - The United States Coast Guard has estimated that 5,000 barrels of oil are being added to the slick every day. Ian MacDonald, a marine biologist at Florida State University who studies oil that comes out of natural seeps on the sea floor, estimates on the basis of pictures and maps from the coastguard that the rate may be as much as five times that. The largest accidental oil spill in history, which was also in the Gulf, was due to a 1979 blowout on a Mexican rig called Ixtoc-1 (see chart). Between June 1979 and March 1980 it released around 3.3m barrels. For comparison, the Exxon Valdez fiasco in Alaska in 1989, America’s most infamous oil spill, released just 260,000 barrels. At the coastguard rate the Deepwater Horizon leak would take years to match Ixtoc-1; at Mr MacDonald’s rate, months.

Web Resources for tracking the Oil Spill - A couple of resources ...From NOAA: Deepwater Horizon Incident, Gulf of Mexico; From the Office of the Governor, Louisiana: Gulf Oil Spill 2010 Trajectory Click on map for larger image in new window. Update: from Google: Gulf of Mexico Oil Spill

Mapping the Gulf oil spill in Google Earth -Many government agencies and other organizations have made data publicly available, which we’ve compiled on our crisis response site dedicated to the spill.Last week we made imagery from NASA’s MODIS available as an overlay for Google Earth, which currently shows the extent of the oil spill through April 29, and we’ll continue to add more imagery as it becomes available. We’ve also made radar images from ESA’s ENVISAT available through this KML file. Below, you can see the progression of the spill over time.To view this imagery and other datasets in Google Earth, turn on the “Places of Interest” layer in the Layers panel on the left-hand side of Google Earth, then navigate to the Gulf of Mexico and click on the red icon.

The Deepwater Horizon oil spill trajectory hindcast/forecast based on West Florida Shelf ROMS - Ocean Circulation Group - Animation Control - This site is updated 8X a day with real time data.

TRANSOCEAN DEEPWATER HORIZON EXPLOSION-A DISCUSSION OF WHAT ACTUALLY HAPPENED? Drilling Ahead: A Social Network of Oil and Gas Professionals - Witnesses state that the lights flickered on the Deepwater Horizon. Then a massive thud shook the vessel, followed by another strong vibration. Transocean employee Jim Ingram, a seasoned offshore worker, told the U.K. Times that he was preparing for bed after working a 12-hour shift. "On the second [thud]," said Mr. Ingram, "we knew something was wrong." Indeed, something was very wrong. Within a moment, a gigantic blast of gas, oil and drilling mud roared up through three miles of down-hole pipe and subsea risers. The fluids burst through the rig floor and ripped up into the gigantic draw-works. Something sparked. The hydrocarbons ignited. In a fraction of a second, the drilling deck of the Deepwater Horizon exploded into a fireball. The scene was an utter conflagration.

Bubble of methane gas triggered deadly rig blast - Photos - The deadly blowout of an oil rig in the Gulf of Mexico was triggered by a bubble of methane gas that escaped from the well and shot up the drill column, expanding quickly as it burst through several seals and barriers before exploding, according to interviews with rig workers conducted during BP's internal investigation. Portions of the interviews, two written and one taped, were described in detail to an Associated Press reporter by Robert Bea, a University of California Berkeley engineering professor who serves on a National Academy of Engineering panel on oil pipeline safety and worked for BP PLC as a risk assessment consultant during the 1990s. He received them from industry friends seeking his expert opinion.Based on the interviews, Bea believes that the workers set and then tested a cement seal at the bottom of the well. Then they reduced the pressure in the drill column and attempted to set a second seal below the sea floor. A chemical reaction caused by the setting cement created heat and a gas bubble which destroyed the seal. Deep beneath the seafloor, methane is in a slushy, crystalline form. Deep sea oil drillers often encounter pockets of methane crystals as they dig into the earth.

Federal Regulators Deferred to Oil Industry on Rig Safety - Yet the Minerals Management Service, the Interior Department agency charged both with regulating the oil industry and collecting royalties from it, never took steps to address the issue comprehensively, relying instead on industry assurances that it was on top of the problem, a review of documents shows. In the intervening years, numerous blowout preventers and their control systems have failed, though none as catastrophically as those on the well the Deepwater Horizon drilling rig was preparing when it blew up on April 20, leaving tens of thousands of gallons of oil a day spewing into the Gulf of Mexico. Agency records show that from 2001 to 2007, there were 1,443 serious drilling accidents in offshore operations, leading to 41 deaths, 302 injuries and 356 oil spills. Yet the federal agency continues to allow the industry largely to police itself, saying that the best technical experts work for industry, not for the government.

More of Gulf closed to fishing because of spill - The National Oceanic and Atmospheric Administration said Friday an area from the Southwest Pass of the Mississippi River to south of Pensacola, Fla., is now closed. NOAA spokeswoman Christine Patrick said the initial closure was 6,814 square miles and the new area is 10,807 square miles.Late Thursday, Louisiana officials closed shrimping in state waters from South Pass of the Mississippi to the eastern shore of Four Bayous Pass just east of Grand Isle. Earlier, state waters east of the Mississippi were closed to seafood harvesting.

BBC News – Oil slick hits Chandeleur Islands off Louisiana - Oil from a massive slick in the Gulf of Mexico has started washing ashore on an island chain off the coast of Louisiana, US officials have confirmed. Pelicans and other birds covered in oil have been found on the uninhabited Chandeleur islands, which are part of the Breton National Wildlife Refuge. A federal maritime agency said there was "oiling all over" the islands.  Earlier, workers began lowering a giant funnel over the leaking oil well at the bottom of the sea to harvest the spill. Remote-controlled submarines are being used to lower the 90-tonne containment device in an operation expected to take two days.

Expert Recommends Killing Oil-Soaked Birds - A German biologist says that efforts to clean oil-drenched birds in the Gulf of Mexico are in vain. For the birds' sake, it would be faster and less painful if animal-rescue workers put them under, she says. Studies and other experts back her up."Kill, don't clean," is the recommendation of a German animal biologist, who this week said that massive efforts to clean oil-soaked birds in Gulf of Mexico won't do much to stop a near certain and painful death for the creatures. Despite the short-term success in cleaning the birds and releasing them back into the wild, few, if any, have a chance of surviving, says Silvia Gaus, a biologist at the Wattenmeer National Park along the North Sea in the German state of Schleswig-Holstein.

Dome to be Temporary Solution for Oil Spill - A short-term solution for bottling up the Gulf Coast oil spill is on the way.On Wednesday afternoon, a barge will haul a 100-ton containment dome to the spill site 50 miles off shore. It is designed to siphon gushing oil into waiting barges on the surface. But such domes have never been tried at such depth -- about 5,000 feet down -- so it is unclear how well or if it will work. Experts believe the well is spewing at least 200,000 gallons of oil a day in what could become the country's worst environmental crisis.The spill has forced President Barack Obama to freeze his plan to expand offshore drilling.

BP Stopped One Leak From Gulf of Mexico Oil Well (Bloomberg) -- BP Plc stopped one of three oil leaks from its well in the Gulf of Mexico, advancing efforts to end a spill after a drilling rig sank last month, the U.S. Coast Guard said. Crews successfully closed a valve installed yesterday, stopping leakage from a section of drill pipe severed from the well when the rig sank, John Curry, spokesman for London-based BP, said today. There is no change in the official estimate that the well is leaking 5,000 barrels of oil a day, he said. BP is planning to have an underwater containment structure on the well working by May 10 that would capture oil from the largest leak and pipe it to a ship on the surface, Doug Suttles, chief operating officer of exploration and production for the company, said at a press conference today in Robert, Louisiana.

Effort to Cap Gulf Oil Leak Fails Again - From Reuters: BP has given up on efforts by underwater robots to close valves on a failed blowout preventer at the site of a massive oil leak in the U.S. Gulf of Mexico, an executive said on Friday.“We’ve essentially used up all those options,” Doug Suttles, chief operating officer for BP (BP.L) (BP.N) said regarding the robots’ unsuccessful efforts to close the valves, called rams, and plug the leak at the well. While other measures to stop the leak are still underway, the focus on BP’s so-far unsuccessful efforts to stop the leak at its source has served to divert focus from a much bigger act of negligence: refusing to contain the oil slick, which would have been a low-tech operation. BP failed to implement emergency plans as it has promised to the US government.

Oil Spill Desperate Measure-- It sounds like a Hollywood movie. An impending disaster -- think the disabled spacecraft in "Apollo 13" or the asteroid hurtling toward Earth in "Armageddon" -- prompts a daring intervention by engineers to save the day.This time, the threat is oil gushing from a broken well on the bottom of the Gulf of Mexico that could destroy livelihoods and irreplaceable coastal wetlands.Equally real is the attempted engineering marvel -- a four-story metal container that will be lowered onto the leaking pipe to try to suck in the flowing oil. Officials of BP, the oil giant that owns the leaking well, said Monday they plan to try the unprecedented effort this week. If successful, they say, the "pollution containment chamber" could reduce the underwater gusher by more than 80 percent and provide the first success in industry and government efforts to control the spill that began April 20 with an explosion and fire on an offshore rig.

Q. and A. - Clarifying Questions of Liability, Cleanup and Consequences - NYTimes…As the crisis has unfolded, confusion has soared about the oil spill’s gravity, the potential effects on coastal residents, the risks to wildlife and who will foot the costs of the cleanup.  Following is an oil spill primer.

Why BP's rivals should be doing much more to stop the Gulf oil spill. - By now, you would think that every oil executive worth his weight in petrodollars would recognize the ability of a single spill to set back the entire industry by decades. The 1969 Santa Barbara oil spill, after all, has queered the prospects of prospecting off the California coast for 41 years—and counting. Given this, you would have expected the global oil industry to rush in with equipment and expertise to clean up the Gulf spill. Sure, British Petroleum first downplayed the size of the spill, which started on April 20, and then said Transocean, which owned the rig, was responsible for cleaning up the mess. Yes, Shell did offer up its training facility in Roberts, La., to BP as a command center, and Exxon did help transport booms. But the broader industry generally remained mum, more concerned about liability and competitive issues than about stopping the biggest PR disaster for the oil industry in 20 years.

Gulf of Mexico Oil Spill By the Numbers - As officials continue to carry out cleanup efforts from the deadly April 20 BP oil spill, one thing is clear: Last week's Gulf Coast spill is one of the worst in history. It's tough to say just how much oil might leak out before the three major underwater leaks are stopped. Right now around 210,000 gallons of oil are pouring into the Gulf each day. That's nowhere near the 11 million gallons of oil leaked into Alaska's Prince William Sound by the Exxon Valdez tanker. Yet. But if the leaks aren't repaired soon, the BP spill may overtake the iconic Valdez tragedy in volume. If oil continues to leak at its current rate, the BP spill will be larger than the Exxon spill by the third week in June.

Deepwater Horizon First Hand Account - On Friday, April 30th 2010, an anonymous caller contacted the Mark Levin Show to clarify the events that preceded the Deepwater Horizon tragedy. Rigzone has transcribed this broadcast for your convenience. To hear the actual radio broadcast please visit (transcript follows)

The Cover-Up - Obama and his senior White House staff, as well as Interior Secretary Ken Salazar, are working with BP's chief executive officer Tony Hayward on legislation that would raise the cap on liability for damage claims from those affected by the oil disaster from $75 million to $10 billion. However, WMR's federal and Gulf state sources are reporting the disaster has the real potential cost of at least $1 trillion. Critics of the deal being worked out between Obama and Hayward point out that $10 billion is a mere drop in the bucket for a trillion dollar disaster but also note that BP, if its assets were nationalized, could fetch almost a trillion dollars for compensation purposes. There is talk in some government circles, including FEMA, of the need to nationalize BP in order to compensate those who will ultimately be affected by the worst oil disaster in the history of the world.

Video Shows Federal Officials Knew Quickly of Potential for Massive Oil Flow in Gulf Spill - A National Oceanic and Atmospheric Administration video, shot as officials coordinated response to the Deepwater Horizon disaster, shows that federal officials almost immediately worried that the oil well could leak up to 110,000 barrels per day, or 4.6 million gallons.  The video appears on a federal Web site.  It was filmed in Seattle, at NOAA's Western Regional Center, as scientists and federal officials in Seattle, Houston and New Orleans engaged in telephone conferences, according to a companion document on the Web site. The video appears to have been edited, and it was shot by a person carrying a camera from room to room.  In it, officials are discussing the search for survivors of the Deepwater Horizon explosion. There is a hand-drawn map of the spill dated April 22. At one point, the video freezes on a sign next to a door that reads, "War Room."

Greenpeace: 'Never been a successful response to oil spill' On Thursday, a Greenpeace official called BP's reaction to the Gulf oil spill "response theater." Also, a Unified Command spokesperson said they sympathize with the concerns of fishermen a BP rep said, "We continue to fight on every front." Floegel now refers to the Gulf of Mexico as the Gulf of Oil He has been following disasters like this for 30 years and examines this present oil spill through the prism of his work surrounding the Valdez spill. He says, "It's been 21 years and the litigation between the federal government and Exxon is still not over." What he details next, however is telling

Spill backlash could lift drilling cost, oil price (Reuters) - A bill of more than $10 billion to clean up oil gushing from BP's U.S. Gulf well could be small compared to costs the disaster adds to producing oil offshore in coming years, enough to push world oil prices higher.As regulators, oil companies and insurers plot their response to the U.S. Gulf disaster, few experts expect offshore drilling to be halted or sharply cut, given its importance to global oil supply. Deepwater output accounts for around 9 percent of the world's oil, or double its contribution a decade ago, according to industry estimates.As drilling procedures go on trial and rules are tweaked to hold the oil industry accountable for disasters, the economics of future deepwater drilling will be at stake.The offshore oil industry may be in store for a new economic reality, with oil companies seeking to pass along higher costs to customers at the pump

Toxic Oil Dispersant Used in Gulf, Despite Better Alternative - British Petroleum and government disaster-relief agencies are using a toxic chemical to disperse oil in the Gulf of Mexico, even though a better alternative appears to be available.As the Deepwater Horizon oil spill spreads, BP and the U.S. Coast Guard have conducted tests with Corexit 9500, a chemical designed to break oil slicks into globules that are more quickly consumed by bacteria or sink into the water column before hitting shore. The decision has been a controversial one. A few scientists think dispersants are mostly useful as public relations strategy, as they make the oil slick invisible, even though oil particles continue to do damage. Others consider Corexit the lesser of two evils: It’s known to be highly toxic, adding to the harm caused by oil, but at least it will concentrate damage at sea, sparing sensitive and highly productive coastal areas. Better to sacrifice the deep sea than the shorelines.

Always tradeoffs...and complexities and externalities - One of the most difficult decisions that oil spill responders and natural resources managers face during a spill is evaluating the environmental trade-offs associated with dispersant use. The objective of dispersant use is to transfer oil from the water surface into the water column. When applied before spills reach the coastline, dispersants will potentially decrease exposure for surface dwelling organisms (e.g., seabirds) and intertidal species (e.g., mangroves, salt marshes), while increasing it for water-column (e.g., fish) and benthic species (e.g., corals, oysters). Decisions should be made regarding the impact to the ecosystem as a whole, and this often represents a trade-off among different habitats and species that will be dictated by a full range of ecological, social, and economic values associated with the potentially affected resources.

Gulf Coast May Be Permanently Changed by Oil Spill -  If a desperate, last-ditch attempt to cap the Deepwater Horizon wellhead succeeds in coming days, environmental damage to the Gulf of Mexico will still be severe but probably not long-lasting. But if the cap fails, and months pass before a diversionary well can be drilled, the Gulf may be profoundly and permanently altered.Thousands of miles of marshlands, sea-grass meadows and coral reefs — and the human industries they support — could be damaged beyond recovery. This is a worst-case scenario, and far from certain. But as long as the oil keeps flowing, the odds of it happening get better.“ High concentrations of oil are acutely toxic, but low concentrations have more subtle, widespread effects. As oil percolates through food webs, it retards plant and animal growth, leaving them vulnerable to predation and disease, and less fit to reproduce. With the Deepwater Horizon spill already too large and unpredictable to contain, the question is no longer whether it will cause damage, but what form damage will take

After Gulf Coast oil spill, scientists envision devastation for region - How bad will this get? No one knows, but with each day that the leaking oil well a mile below the surface remains uncapped, scientists and energy industry observers are imagining outcomes that range from bad to worse to worst, with some forecasting a calamity of historic proportions. Executives from oil giant BP and other energy companies, meanwhile, shared their own worst-case scenario: the spill could increase from an estimated 5,000 barrels a day to 40,000 barrels or possibly even 60,000 barrels.  Three scientists in separate interviews Tuesday said the gulf's "loop current," a powerful conveyor belt that extends about 3,000 feet deep, will almost surely take the oil down through the eastern gulf to the Straits of Florida, a week-long trip, roughly. The oil would then hang a sharp left, riding the Florida Current past the Keys and north again, directly into the Gulf Stream, which could carry it within spitting distance of Palm Beach and up the East Coast to Cape Hatteras, N.C.

Despite disaster, U.S. has little choice but to drill offshore… If the oil spill off the Louisiana coast leads to a federal ban on ultra-deepwater drilling and production it could cripple an increasingly important source of America's domestic oil supply.  So far, the Obama administration hasn't imposed any ban, temporary or longer term, on existing ultra-deepwater operations, but it's delayed new exploration in deep water of the Mid-Atlantic coastline and the eastern Gulf Coast off Florida.Industry speculation is that cementing around the exploratory well gave way, but that's just the most frequently mentioned of several potential causes. What caused the disaster will determine how much new regulation and costs are imposed on a little-known but increasingly vital segment of U.S. oil production. Costs are an important part of the equation, since ultra-deepwater drilling, defined as water depths of 5,000 feet or greater, isn't cheap.

Environmental Disasters as Regulation Catalysts: The Case of the April 2010 Oil Spill - Unexpected events such as environmental catastrophes capture wide public attention. Soon after five major shocks—Three Mile Island, Love Canal, Bhopal, Chernobyl, and the Exxon Valdez oil spill—Congress voted on new risk regulation. This paper conducts an event study to test whether individual congressional representatives were “shocked” by these environmental disasters into increasing their probability of voting in favor of risk legislation. On average, representatives were less likely to vote in favor of bills tied to these five events. Significant heterogeneity in representatives’ responses to these shocks is documented. Liberal Northeast representatives were most likely to increase their pro-environment voting in the aftermath of these shocks." So what? Given our new environmental disaster now unfolding near Louisiana's coast, what will Congress be tempted to vote on?

Tax on Oil May Help Pay for Gulf Spill Cleanup - NYTimes - The federal government has a large rainy day fund on hand to help mitigate the expanding damage on the Gulf Coast, generated by a tax on oil for use in cases like the Deepwater Horizon spill. Up to $1 billion of the $1.6 billion reserve could be used to compensate for losses from the accident, as much as half of it for what is sometimes a major category of costs: damage to natural resources like fisheries and other wildlife habitats.  Under the law that established the reserve, called the Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government, although they are responsible for the cost of containing and cleaning up the spill.

Who Should Pay the Costs of the Oil Spill? All of Us, Really - The BP oil spill provides us a new and very in-your-face lesson: that the excess of social costs over private costs (the “external costs”) associated with fossil fuels go beyond the “biggie” of global warming via the consumption (burning) of fossil fuels–a very long-term phenomenon that is very difficult to predict the economic and social costs of (and hence is easy for us to ignore).  The BP oil spill reveals that there are more immediate and clear (and very visual and quantifiable) social costs associated with fossil fuels in terms of the risks to the environment on the production/extraction side of the market.  So now there are at least two major reasons why for economic and social efficiency, fossil fuels should be taxed:  (i) because of the external costs associated with global warming resulting from the consumption of fossil fuels; and (ii) because of the external costs associated with the risky extraction strategies used in the production of fossil fuels.  And both these reasons suggest that there is no way that the right policy response to the BP oil spill–from an economic efficiency, maximize social welfare standpoint–is just to “fine the hell out of BP” (alone) and run BP (alone) out of business. 

Would a “Drain America First” strategy significantly lower gas prices?  - In the New York Times today, Jad Mouawad argues that the United States “needs” more offshore drilling in the Gulf of Mexico.  I don’t think the numbers support his claim. Instead, any additional oil would mainly a) lead to increased consumption in other nations, and b) lead to decreased production in other nations, with little net effect on American consumers. This is because oil is a fungible global commodity.  According to his article, Mouawad reports that Gulf of Mexico oil production amounts to 1.7 Million bbl/day. This is just 2% of the 85 million bbl/day produced globally. James Hamilton has estimated that the long run demand elasticity of oil is about -0.2 to -0.3 (although there’s evidence of less elasticity recently). If crude oil accounts for half of the cost of gasoline, then even a 50% increase in Gulf production would lead to only about a 1.5% to 2.5% decrease in U.S. gas prices.

Gasoline costs versus per capita miles driven in the United States, through the decades. - NYTimes graphic

Could we finally get a Pigou Tax on gasoline now? - Lisa Margonelli in this morning's New York Times. The Deepwater Horizon spill illustrates that every gallon of gas is a gallon of risks — risks of spills in production and transport, of worker deaths, of asthma-inducing air pollution and of climate change, to name a few. We should print these risks on every gasoline receipt, just as we label smoking’s risks on cigarette packs. And we should throw our newfound political will behind a sweeping commitment to use less gas — build cars that use less oil (or none at all) and figure out better ways to transport Americans. I think it is safe to say that economists across the political spectrum approve of gasoline taxes. To the extent they are regressive, the revenue they raise could be used to provide better mass transport subsidies for low income people. Maybe now there will be political cover to do something.

Sensing a Disturbance in the Oil Production Force - Nice graphic from the Calgary Herald showing the delicate balance between U.S. onshore and offshore oil production, one easily upset if BP/Deepwater turns into energy’s Bhopal/Three Mile.

Spill is major energy policy setback, Yergin says (Bloomberg) -- The BP Plc oil well that’s spilling thousands of barrels of crude a day into the Gulf of Mexico may delay plans for domestic offshore drilling, according to Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates. Oil has been gushing from the damaged well at a rate of 5,000 barrels a day and it may rival the 1989 Exxon Valdez incident as the worst oil spill in U.S. history. The leak already has complicated President Barack Obama’s proposal to allow more oil and gas exploration in the Gulf of Mexico and off portions of the U.S. East Coast as some Democratic lawmakers call for the administration to reverse course. “This is a really major setback both for climate and of course also on energy policy,” Yergin said in a Bloomberg Radio interview today with Tom Keene. “Everything now is obviously on hold.” Yergin is the author of a Pulitzer-Prize winning history of the oil industry.

Steven Chu’s New Energy Vision | WBUR and NPR -- The giant oil spill in the Gulf of Mexico seems to be screaming at the United States to get off fossil fuels. And fast. If that’s going to happen, the vision of U.S. Energy Secretary Steven Chu will be at the heart of that effort. Chu was not a political appointment to the Obama cabinet. He’s a Nobel Prize-winning scientist. And he has a scientist’s view of the energy crisis and its tough sister, the climate crisis. We need a price on carbon, he says, and we need it now. Or China will win, economically. And the Earth will lose, period. This Hour, On Point: as the oil spills, we talk with Energy Secretary Steven Chu.

What the leak says about the search for oil | FT Energy - The question of what the Deepwater Horizon accident will mean for the future of oil extraction can probably be answered depending on one’s views. Jeff Rubin believes it could be a turning point for world oil supply; others are not so sure. Either way, the disaster highlights the increasing intensity with which oil is being sought.  It says even less for the wider industry, among which both BP and Transocean are considered to have good technical expertise. As Gapper writes, it’s the inherent nature of the task — ultra-deepwater drilling — that is so challenging. And that is increasingly the story of 21st century oil production. Though some countries - mostly those with nationalised oil industries — still have easily accessible reserves, the oil majors are persuing ever more difficult sources, from tar sands to shale oil.

Saudi crude exports to US below 1 million b/d for five straight months Twenty years ago, Saudi Arabia was the United States' biggest supplier of crude, its 1.195 million b/d accounting for nearly 20% of the 5.984 million imported in 1990.Through most of the past decade, annual volumes from the kingdom averaged around 1.5 million b/d -- and occasionally more. But in 2009 crude imports from Saudi Arabia fell to just 989,000 b/d -- the first time volumes had fallen below 1 million b/d since 1988. The downtrend became particularly noticeable in August last year, when volumes plunged to a mere 745,000 b/d to the US, a 22-year low.The latest official data, released monthly by the US Energy Information Administration, shows that imports of Saudi crude have now been below the million b/d mark for five consecutive months, between October and February.The Saudis themselves say the diminishing volumes have nothing to do with politics and everything to do with business and the fact that the bulk of future oil demand growth will come from Asia.

Saudi Arabia global oil exports to wane post-2010 - Saudi Arabia’s long-standing status as a swing producer of crude oil could be drawing to a close according to the head of national oil company Saudi Aramco. Global oil exports from Saudi Arabia, the world's largest oil producer alongside Russia, will start to wane in the coming years as domestic demand surges and spare capacity drops, warned Khalid al-Falih, chief executive officer of Saudi Aramco in a speech published on the company's website.Domestic energy demand is expected to increase by almost 250%, from about 3.4 million barrels per day (b/d) in 2009 to about 8.3 million b/d by 2028, which will eventually affect the country's ability to export oil, he said."Along with China and India, we do expect Saudi Arabia to be one of the largest sources of global oil demand,"

Petroleum expert: Egypt oil and gas may dry up by 2020 - Egypt's demand for petroleum and gas will reach 103 billion tons annually by the beginning of 2020, the equivalent of 750 million barrels of oil, said Hussein Abdallah, former first undersecretary of the Ministry of Petroleum.Egypt's oil and gas reserves are officially estimated at 16 billion barrels of oil and 12 billion tons of gas, the equivalent of 2200 tons of petroleum, said Abdallah, therefore, Egypt's share of these reserves, after its foreign partners take their share, may be fully depleted by the beginning of 2020. This would force Egypt to purchase its petroleum and gas at world market prices, which is not expected to be less than US$120 a barrel. At this price, Egypt would have to pay US$90 billion annually to satisfy its demand for petroleum and gas."

Canada's oilsands are a blessing - For the past 10 years, green-leaning politicians and policy gurus have talked about the "ecological carnage of the tar sands" and targeted them as the "worst project in the world." Al Gore likened the sands to the last vein the junkie finds in his big toe. Waterloo academic Thomas Homer-Dixon recently bemoaned that "The rapacious exploitation of Canada's tar sands has distorted our economy, corrupted our politics, ruined our environment, and turned us, collectively, into a rogue nation of carbon polluters." Even Toronto peak oil pop star Jeff Rubin has sneered, "You know you are at the bottom of the ninth when you have to schlep a tonne of sand to get a barrel of oil."All this criticism is becoming increasingly moot now the oilsands and heavy oil of Alberta and Saskatchewan are proving themselves to be one of the world's most stable and productive petroleum sources. It's a resource that has turned Canada overnight into the world's major new petro power.

Greenland Oil Rush Looms as Exxon Eyes Cairn's $400 Million Arctic Wager (Bloomberg) -- Cairn Energy Plc is betting $400 million this year on striking oil off Greenland, a campaign that will be closely watched by producers such as Exxon Mobil Corp. and Chevron Corp. that hold rights off the island.  The potential rewards may justify the cost of Arctic drilling: Greenland’s waters could hold 50 billion barrels of crude and gas, the U.S. Geological Survey estimates, enough to meet Europe’s energy demand for almost two years. More companies are on the way. Royal Dutch Shell Plc and Statoil ASA were among bidders in this week’s auction of offshore drilling rights.

Tipping Point - 56 pp PDF - Near-Term Systemic Implications of a Peak in Global Oil Production - An Outline Review

Exponential Growth and Depletion: Chart of the Century? -In the ongoing effort to help people understand what exponential or compound growth (and depletion) mean, I have prepared the following chart. The chart displays two lines: the blue line traces out exponential growth (for example, in demand for oil, deficit spending, etc.) while the lower lines traces out exponential depletion (for example, of oil reserves). The chart depicts 3-percent growth and depletion. It does not matter what is measured, whether it is energy, debt, land, or population, the effects are the same and they are important to understand.The arrows indicate how long it took to obtain an incremental level (100).What does this mean? Considering debt growth, the current monetary system requires positive debt growth or the dreaded deflation will occur. As you can see to achieve the first increment of 100 took nearly 80 periods. The second period to achieve the next increment took about 11 periods and the third just over five.

Why “Peak Oil” Will Never Lead To $500/bbl Crude Oil - Although there’s more than 100 years’ supply of crude oil left in the ground, the resources that are “cheap and easy” to extract have for the most part already been discovered. By 2012 the decline of production output from conventional sources coupled with much higher extraction cost of unconventional sources will lead to peak cheap oil, a phenomenon that will put extreme upward pressure on oil prices.Those who anticipate extraordinarily high prices (upwards of $300/bbl) have failed to consider what George Soros calls reflexivity. The global economy simply cannot afford such prices, and the rules will be changed before they are reached. The future is likely to bring price controls, government intervention in the petroleum supply chain, and nationalization of oil resources.

Possible Responses to Peak Oil: Some Lessons from the Past - In a recent article (found here (PDF) and at Science Direct), I have investigated how different societies have responded to sharp and rapid cutbacks in their energy supplies. These responses may give us some insight into what might happen as our energy supplies shrink in the future. In the examples I looked at, I found the following results: North Korea, 1990s: Response was totalitarian retrenchment Cuba, 1990s: Response was mobilization of local resilience Japan, 1940s: Response was predatory militarism My case studies lead me to formulate the following three hypotheses, which I state upfront here to facilitate discussion. However, please note that they are actually developed from the cases.

Optimism Versus Reality In Peak Oil Media Battle Right now, much of this focuses on everyone’s favourite cause for optimism, the oil sands. Never mind that the Gulf of Mexico oil spill is such an ecological disaster that President Obama had to visit - with the promise that no new offshore leases will be signed in the area until the Deepwater Horizon explosion has been investigated - because, as we constantly hear, Canada is now the main oil supplier to the US, and has reserves greater than Saudi Arabia. In a stroke, the optimists get to deny both peak oil – or at least put it back a significant number of decades – and the US reliance on overseas imports. No Islamic revolutions in the Great White North, eh?  But do the facts support this rampant enthusiasm? I’d suggest not.

Crude oil no longer needed for production of plastics - Each year the world produces about 130 million kilo of ethene, the most important raw material for plastics. This gigantic industry is currently dependent on crude oil. And that is running out. Dutch researcher Tymen Tiemersma might have found a solution for this problem. With his new reactor we can produce ethene from natural gas and, therefore, in the future from biogas as well.Tiemersma found an apparently very simple solution for one of the biggest problems in producing ethene from natural gas. If you want to produce plastics from natural gas then you first of all need to convert the natural gas into ethene. That can currently be done but one vital problem occurs: the process generates an incredible amount of heat, too much to remove easily. Consequently the conversion of natural gas is far too expensive and consumes a lot of energy. Yet natural gas is not only used for the production of ethene. It is also the raw material for syngas, a mixture of carbon monoxide and hydrogen. And the production of syngas happens to require a lot of heat. "What would be more logical than combining the two processes?"

Windmill Boom Curbs Electric Power Prices (Bloomberg) -- On windy nights in northern Germany, consumers are paid to keep the lights on. Twice this year, the nation’s 21,000 wind turbines pumped out so much power that utilities reduced customer bills for using the surplus electricity. Since the first rebate came with little fanfare at 5 a.m. one October day in 2008, payments have risen as high as 500.02 euros ($665) a megawatt-hour, about as much as a small factory or 1,000 homes use in 60 minutes. The wind-energy boom in Europe and parts of Texas has begun to reduce bills for consumers. Electricity-network managers have even ordered windmills offline at times to trim supplies. That hurts profit for wind-farm operators

Generating Electricity by Going With the Flow (NYTimes interactive animation) Several start-up companies in the United States are developing technology to produce electricity from strong tidal currents. Ocean Renewable Power’s system uses a cross-flow turbine that spins as the water flows through it, turning a generator.

'Green' Isn't The Point; It's Peak Oil - On Earth Day 2010, evening newscasts trumpeted a perky, upbeat story about a Pentagon project to power warplanes with a mixture of biofuel (derived from a type of mustard plant) and conventional jet fuel. It's all about breaking dependence on foreign oil and being "green." Leaving aside the question about how "green" war can be, the context is peak oil, an open secret for decades that has yet to be acknowledged at top levels of government. It is, however, on the minds of Pentagon planners. The U.S. military deals in reality, mostly, without consulting the political winds in advance, which is as it should be. It consumes a great deal of petroleum product -- 320,000 barrels of oil per day In 2006. Only three countries on Earth consume more oil per capita than the Department of Defense.

The next oil price shock -A few years ago I made a graph showing the timing of future oil price shocks in an era when supply can no longer keep up with strong demand growth, as happened in 2006-2008. I've updated that graph to reflect the current price, but I haven't changed my mind about the timing of the next blow-up. Here it is. Informally, we can say there's been an oil price shock when the real (inflation-adjusted) price goes over $100 per barrel and stays there for at least 2 months. I have the next spike occurring in 2012 ± 1 year. This is not a "price" graph—nobody can predict future oil prices. It's simply a schematic showing that—

  • demand surges cause oil price shocks (the peaks)
  • oil price shocks cause recessions and force reductions in demand (the troughs)
  • the average price of oil goes up over time (the ascending blue line)

Technology Review: Follow the Flow - If you tried to get an all-embracing view of energy use in the United States, it wouldn't take long for your eyes to go blurry. The Energy Information Administration and other sources release reams of data almost constantly. That's good if you want to look at minute detail, but not so good if you want the big picture. Based on a version originally created by researcher David Bassett for the Woodrow Wilson Center, this energy flow map reveals the energy sources we draw from, the ways we use that energy, and the ways we waste it. Two elements are perhaps most striking: at bottom left, the relatively paltry contribution of renewables; and at far right, the staggering amount of energy lost as heat. On its own, this lost energy could satisfy the total demands of an industrialized nation like Japan or Germany.

Energy's New 'Great Game' - Energy security has leaped to the top of many investors' minds because of ongoing geopolitical and economic trends. It's a bit like a modern-day version of the 19th century Great Game, when Czarist Russia and the British Empire fought for control and influence in Persia and Central Asia. In the New Great Game, the European Union, Russia, Central Asia, and the Middle East are locked in a high-stakes dance over energy supplies, with the U.S. and China—the two biggest actors of all—jumping in when it suits their needs. The first and most obvious result of this titanic struggle is a growing wave of energy mergers and acquisitions, both in the U.S. and around the world. The industry has already seen significant consolidation via domestic mergers and cross-border strategic investments. Now, nations are widening their reach.

Pentagon in Race for Raw Materials - WSJ The U.S. military is gearing up to become a more active player in the global scramble for raw materials, as competition from China and other countries raises concerns about the cost and availability of resources deemed vital to national security.The Defense Department holds in government warehouses a limited number of critical materials—such as cobalt, tin and zinc—worth about $1.6 billion as of late 2008. In the coming weeks, the Pentagon is likely to present a plan for Congress to overhaul its stockpiling program,

U.S. DOE Takes Next Step on Rare Earths Strategy - As it builds the first federal strategy on rare earth minerals, the U.S. Department of Energy (DOE) on May 6 put out a call for information on the family of materials, which are used in many high-tech military systems. The department released a request for information (RfI) on rare earths almost two months after David Sandalow, assistant secretary of energy for policy and international affairs, announced the strategy was being built. "The responses to the RfI will help inform DOE's understanding of supply and demand for these materials, opportunities for developing substitutes and the potential for using these materials more efficiently," according to a statement released by the department May 6.

Australian miners out-earning bankers - The China Post Wages at mining companies in Australia eclipsed those of the nation's financial firms by a record amount as demand for iron ore, coal and copper surges while the island continent struggles with a skilled-labor shortage, data compiled by Bloomberg show.  Bloomberg's Chart of the Day compares average wages in Australia's mining industry with those in financial services. Resource-related workers earned 37 percent more than staff at banks, brokerages and insurers in November, according to the most- recent figures from the Australian Bureau of Statistics. “There are a lot of projects coming online and we see at least 10 years of strong demand ahead,” according to Konrad Forrest, director of Mining Employment Services in Perth. The highest-paid jobs involved skilled professions, such as electricians, engineers and scientists, many of whom earn more than AU$200,000 (US$186,000) a year.

House Prices Surge As Rate Rises Fail To Dent Demand - Property prices surged by more than 16 percent in the past year, pushing the average national house price to $542,000, according to new research. A recovering economy and booming demand fuelled by population growth have offset the impact of five Reserve Bank of Australia interest rate rises pushing annual house price growth to a six-year high , Australian Property Monitors (APM) said.  Sydney has the highest average house price at $609,353 but Melbourne prices surged by 27 percent in the past 12 months. Darwin houses rose by 15.7 percent, while Canberra prices were up 13.9 percent.

Untapping the EU-US trade potential: Taking the Transatlantic Economic Council forward - VoxEU - The EU and US are huge, quite open markets, but many barriers to doing business across the Atlantic remain. This column argues for creating a transatlantic marketplace by reducing regulatory barriers. The EU and US are already regulatory standard setters. Creating a transatlantic market with harmonised regulation would strongly reinforce this global regulatory leadership role.

The U.S. Trade Gap Won't Go Away - BusinessWeek - The U.S. trade deficit shrank like a puddle in the hot sun in 2008 and 2009 as appetite for imports melted in the recession and Asian export markets grew. With the U.S. economy now improving, the gap is widening again, dashing hopes that the U.S. is anywhere close to rebalancing trade with the rest of the world.  On Apr. 30 the Commerce Dept. announced that the economy grew at an estimated annual rate of 3.2 percent in the first three months of the year, propelled by stronger consumer spending and business investment. The bad news is that a lot of that consumption and investment went for imports. While exports grew at a 5.8 percent rate, imports grew at an annual rate of 8.9 percent. Overall, the trade deficit nicked 0.6 percentage points from the growth rate.

Petroleum subsidies on the rise, say IMF - Petroleum subsidies are costly, inequitable, and rising, and reducing them could have benefits for budgets and the environment, the IMF said in a report. Eliminating these subsidies can help reduce the large budget deficits many countries accumulated during the global economic crisis, as well as combat global warming. Some budgetary savings can be redirected to programs to mitigate any adverse impact on the poor. The paper, “Petroleum Product Subsidies: Costly, Inequitable and Rising,” says to eliminate subsidies, countries will need a new approach to pricing and supporting reforms.

China’s Soaring Energy Use Weakens Pledge on Efficiency— Even as China has set ambitious goals for itself in clean-energy production and reduction of global warming gases, the country’s surging demand for power from oil and coal has led to the largest six-month increase in the tonnage of human generated greenhouse gases ever by a single country. China’s leaders are so concerned about rising energy use and declining energy efficiency that the cabinet held a special meeting this week to discuss the problem, according to a statement Thursday from the ministry of industry and information technology. Coal-fired electricity and oil sales each climbed 24 percent in the first quarter from a year earlier, on the heels of similar increases in the fourth quarter

Power shortage may hit central and South East China According to China Electricity Council Central and southeastern parts of China may be short of power during peak hours in this summer, due to tight supply, price hikes of thermal coal and drought in hydropower generating region. The CEC said in its quarterly analysis report China electricity consumption jumped 24.19%YoY to 969.5 billion kWh during the January to March period of 2010 boosted by macro economic recovery.What we are facing this summer is a situation far from satisfactory. She said the electricity volume generated by hydropower plants might be affected by the current drought that strike southwestern China while a 15% price hikes of thermal coal would add to the tension between coal producer and thermal power plants. Limited railway transport capacity will also impair the supply of thermal coal to central and southwestern China.”

Wen Conflicted as Yuan Rise Moving Teddy-Bear Jobs  (Bloomberg) -- Lovely Creations Corp., the supplier of talking teddy bears to Wal-Mart Stores Inc., may move some of its 800 Chinese assembly jobs to Vietnam because the currency is eroding profits. “The yuan’s appreciation would mean we lose our profit margin,” said Poh-Heng Toh, general manager at Lovely Creations, a Taipei-based manufacturer with factories in the coastal provinces of Guangdong and Zhejiang. “We also have higher labor costs in China because, as the economy develops, workers demand better lives while our end customers like Wal-Mart won’t raise what they pay us.”  As the U.S., India and Brazil raise pressure on Premier Wen Jiabao to end the yuan’s almost two-year peg to the dollar, business leaders say they’re ready to relocate where costs are lower. Haier Group, the biggest Chinese appliance maker, built plants in India and Thailand. U.S. shoemaker New Balance shifted orders to Indonesia. Li & Fung Ltd., a leading supplier to Bentonville, Arkansas-based Wal-Mart, bought 5 percent fewer consumer-goods in China in 2009 and 20 percent more in Bangladesh.

Is China’s Recovery a Fraud The China growth miracle has resumed its vertical trajectory. We know this because the Chinese government says it’s so. And, of course, governments never massage economic numbers for public consumption, right?If you believe the data, China’s GDP has tripled since 2000, with annual growth rates ranging from 8% to 13% over that time frame. While we can’t be entirely sure about the numbers, we are sure that China produced while America consumed, and that while China saved, America borrowed. This is the formula that made the world go round until September 2008, when the wheels came off the worldwide financial system.

China vs America: fight of the century – The list of irritants in US-Chinese relations is growing. Google threatens to quit China over censorship and cyber-attacks. Washington and Beijing are at cross purposes over Iran’s nuclear programme. US lawmakers have again criticised China’s unwillingness to allow the value of its currency to rise and its failure to protect the intellectual property of foreign companies. There are trade disputes over tyres and steel pipes. Yet these problems are merely symptoms of an illness that has progressed further than some observers realise.Put bluntly, the Chinese leadership no longer believes that American power is as indispensable as it once was for either China’s economic expansion or the Communist party’s political survival. Nor does it accept that access to US capital or commercial know-how is quite so important for the next stage of China’s development—or that its growth depends on the spending habits of American consumers.

“Reminbising China’s Assets” - From Yin-Wong Cheung (UCSC), Guonan Ma (BIS), and Robert McCauley (BIS):...Recent policies adopted by the Chinese authorities can be interpreted as allowing the rest of the world to denominate debt in renminbi. But if trading partners consider that the renminbi is subject to big jump risk, then prospects for its internationalisation are weak. ... ......"From the paper, a figure depicting the ratio of forex turnover to trade: The authors observe: Use of the renminbi to denominate bonds, official credits and trade could result in the renminbi gaining as a currency in the foreign exchange market. There is ample room for the renminbi to advance in this regard. Between 2004 and 2007, daily trading in the renminbi expanded enough to surpass the sum of daily imports and exports from China (Graph 2). By contrast, even the un-internationalised Indian rupee or the partially internationalised Korean won traded 10 times as much as the sum of Indian or Korean international trade. And thoroughly internationalised currencies trade 100 times as much. The renminbi has a long way to go.\

Andy Xie: China Asset Bubble Triggered By Long-term Low Interest Rate - Andy Xie, formerly chief Asia economist at Morgan Stanley, said the Chinese real estate market is 100 percent overvalued and that the intrinsic value of the Shanghai Composite Index is 2,000 points, reports Xie compared the current Chinese housing market to the Japanese housing market of the 1980s and 1990s and predicts China's stock and real estate markets will decline slightly in the fourth quarter of this year, with a large decline coming in 2012. Xie said the asset bubble was triggered by long-term low interest rates and an over-supply of money.

China may bail out banks if property collapses: Fitch - China may be forced to bail out some of its banks if the nation's property market collapses, Fitch Ratings said.“If we do see a pretty serious correction in the property market, banks' balance sheets will likely be severely impacted and this could at some point necessitate bailouts for the banks,” Charlene Chu, a senior director in Fitch's financial institutions ratings team in Beijing, said on a conference call Wednesday. China's government is cracking down on property speculation after record price increases in March. Measures to cool the market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases. Bank stocks have fallen in Shanghai and Hong Kong this year on concern the clampdown may add to bad debts.

China raises required reserves as inflation stirs (Reuters) - China on Sunday raised the proportion of deposits that lenders must keep in reserve at the central bank, another step in its months-old campaign to mop up excess cash in the economy at a time when inflation is on the rise.The People's Bank of China said it was lifting lenders' reserve requirement ratio by 50 basis points, effective May 10, its third increase of that magnitude this year.The move, which will drain about 300 billion yuan ($44 billion) of cash from the banking system, is bound to fuel speculation that officials are preparing for an influx of capital in anticipation of a long-awaited decision to let the yuan resume its climb, stalled since July 2008

Beijing Unveils Tough Measures To Curb Housing Price Rises - Beijing banned all families from buying more than one home Friday, in a tough set of restrictions designed to curb speculation and soaring home prices.As of Friday, "one family can only buy one new apartment in the city for the time being," the municipal government said in a statement.The government also ordered the implementation of central government policies that ban mortgages for purchases of a third or third-plus home. It also instigated a central government ban on mortgages to non-local residents who cannot provide more than one year of tax returns or proof of social security payments in Beijing.

Chinese Manufacturing Growth Slows, Survey Shows – (Bloomberg) -- Chinese manufacturing grew at a slower pace in April according to a survey of more than 400 companies, indicating that government efforts to prevent overheating in the economy may be starting to bite.  A purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics fell to a six-month low of 55.4. That contrasted with a government survey showing manufacturing accelerated. HSBC says its study has a different methodology and gives a bigger weighting to smaller, privately owned businesses.     China’s policy makers two days ago ordered banks to hold more of their assets as reserves for the third time this year, and have also sought to rein in the nation’s property market. Any sustained slowdown in the nation’s factories would alleviate inflation pressures, and could affect the government’s decision whether to end the yuan’s peg to the dollar.

Why EU Won't Play 'Bash RMB at WTO' With US - Nowadays, there is much commentary emanating from the Peterson Institute for International Economics--formerly just the Institute for International Economics--on how the United States should engage the World Trade Organization in bashing China over the value of the renminbi. Arvind Subramanian thundered that, well, a weak RMB is not just a problem for the United States but the rest of the world in a March op-ed in the Financial Times. Meanwhile, Peterson Institute Director Fred Bergsten has been, if anything else, even more strident than Subramanian in calling for congressional action. Here are some excerpts from what Fred said before the House Ways and Means Committee on "Correcting China's Exchange Rate: An Action Plan" on 24 March 2010--right before the Treasury decision on the currency practices of US trade partners scheduled for 15 April was delayed -

Asia Ministers Warn of Sovereign Debt Risk, Destabilizing Flows (Bloomberg) -- Asian governments said sovereign debt risks and "destabilizing" capital flows are among risks that may undermine a global economic recovery, according to a statement from finance ministers of 13 of the region's nations."We recognize that downside risks to the overall global recovery remain," finance officials from Japan, South Korea, China and the 10-member Association of Southeast Asian Nations said in Tashkent, Uzbekistan, during the annual meeting of the Asian Development Bank. "We are determined to remain vigilant.""

The rise of emerging markets: Be worried | The Economist - YOU might expect a book on the rise of emerging markets by the chief economist of HSBC to be a rose-tinted puff piece. After all, HSBC is one of the global banks that has the biggest presence in the emerging world. You would be mistaken.. The rich world’s policymakers, he argues, have been far too complacent about how emerging markets might affect the West’s future prosperity and the workings of the world economy. As the book’s title suggests, Mr King reckons the rise of the emerging giants means Western countries will increasingly forfeit control over their economic destiny. They will face far greater competition for scarce resources, such as commodities, even as the globalisation of labour markets decreases their workers’ bargaining power

Why BRIC MNCs are More Averse to 'Political Risk' - Here's an interesting summary from a new report, World Investment and Political Risk 2009, by the Vale Columbia Center on Sustainable International Investment. One of the oft-remarked reasons why Brazil, Russia, India, and China (the BRICs) are a force to be reckoned with in the world economy is their increasing share of foreign investment abroad. However, an interesting finding this new research makes is that multinationals from emerging markets are, if anything else, more sensitive to political risk--threats of expropriation, terrorism, declines in the law & order situation, etc.--than their peers from industrialized countries. What's surprising to me is that they would be this way considering that they have to live with more political risk at home. Brazil has tensions resulting from world-leading inequality while Russia, India and China all have their respective troubles involving restive minorities and regions. Probably, a reason is that Western MNCs have greater accumulated experience dealing with business environments in foreign lands--where it's acceptable to stay and where not--while the BRIC ones are still getting their feet wet

Pattern seen in governments’ currency policies - Indeed, as Singer has discovered in new research, migrants send so much cash sloshing around the globe that it has a major impact on one of the highest-level decisions governments in the developing world make: The more remittances that flow into a country, the more likely that country is to fix its exchange rate, a critical policy matter that often dictates how much control a country has over the state of its own economy.“This is a tremendously important, highly political decision,” says Singer. “It affects everybody in society, whether they know it or not.” And yet, as Singer points out in a new paper,

Philippines to post record budget deficit in 2010 - The Philippines, Asia’s largest sovereign issuer of foreign debt, is expected to post a record budget deficit in 2010 after a larger-than-expected shortfall in the first quarter, a Reuters poll of 10 economists showed. The median forecast was for the deficit to widen to P307.5 billion ($6.9 billion) from P298.5 billion in 2009, the current record deficit in peso terms.Four economists said Manila could hit its target of P293.2 billion, but none predicted a smaller-than-expected deficit

Migrant Remittances and Exchange Rate Regimes in the Developing World,” to be published in the American Political Science Review, in order to predict what a country’s exchange-rate policy will be, it makes sense to look beyond the corridors of power and follow the money moving through those Western Union offices, one wire transfer at a time.

India and Bangladesh's thriving cow trade - latimes - A dirty little secret that most Indian politicians don't discuss is the thriving cow smuggling trade from their Hindu-majority nation, home of the sacred cow, to Muslim-majority Bangladesh, where many people enjoy a good steak. The trade is particularly robust around the Muslim festival of Eid. India has outlawed cattle exports, but that hasn't prevented well-organized traffickers from herding millions of the unlucky beasts each year onto trains and trucks, injecting them with drugs on arrival so they walk faster, then forcing them to ford rivers and lumber into slaughterhouses immediately across the border.

What A Difference A Day Made! - According to a once famous statement by the British Prime Minister Harold Wilson, a week can often be a long time in politics. But when it comes to financial market crises the situation often feels more like a line from the Dinah Washington version of the old María Méndez Grever song: “What a difference a day made”. The day in this case was last Wednesday, at least for those of us here in Spain, since it was on Wednesday that the ratings agency Standard & Poor’s downgraded Spanish Sovereign debt to AA from AA+. As a result the cost of insuring such debt using credit default swaps (CDS) surged at one point to a record 211 basis points according to CMA DataVision prices. Contracts on Greece and Portugal also rose sharply, Greece climbed 42 basis points to 865.5, while Portugal jumped 20 to 406

Greece is going down, but is Portugal next? - -- As Greece barreled closer to the edge of a debt default this week, fears that the crisis would infect other countries rattled the world's financial markets. "It's not a question of the danger of contagion," Angel Gurria, the head of the Organization for Economic Cooperation, said. "Contagion has already happened. This is like Ebola.""The signals now being sent to Portugal are the same ones that were sent to Greece," Portugal, in many ways, mirrors Greece's problems. Like its suffering Euro-partner, Portugal has weak public finances -- its budget deficit rose to over 9% last year, six percentage points higher than the standards stipulated by the European Union. And its debt equals about 80%; Greece's hovers around 115

Greeks Turn Out for May Day Protests - Hundreds of youths rioted in Athens, throwing Molotov cocktails and stones at police who responded with tear gas at a May Day rally against austerity measures being enacted by the cash-strapped government.This May Day protest has been much larger than usual because of the backdrop of looming and unpopular austerity measures expected to be announced Sunday. This will be a second and even harsher round of wage and pension cuts imposed by the ruling socialist party now in power for seven months. "We will be pursuing an organized, massive and long-term struggle against austerity measures because they can only lead to a very severe depression and skyrocketing unemployment," said Ioannis Panagopoulos, the president of the private sector umbrella union GSEE.

Greek unions protest expected austerity measures - Hundreds of youths rioted in Athens on Saturday, throwing Molotov cocktails and stones at police who responded with tear gas at a May Day rally against austerity measures being enacted by the cash-strapped government to secure foreign loans to stave off bankruptcy. The uniforms of several riot police officers were set ablaze by firebombs. One of the policemen hopped over a metal railing as other officers stood over him extinguishing the flames. A state television van was set on fire and badly damaged.Responding to calls from the country's two main labor unions, several thousand people marched in major Greek cities Saturday against the anticipated spending cuts and consumer tax hikes. In Athens, groups of black-clad anarchists in hoods and motorcycle helmets smashed three shop and hotel windows and set up barricades of burning trash bins. Around 17,000 people took part in the march, according to police estimates.

Greece erupts in violent protest -Athens erupted into violence as traditional May Day festivities turned into a bitter protest against draconian austerity measures aimed at tackling Europe's worst debt crisis in decades.For the tens of thousands of demonstrators who took to the streets in rallies that quickly descended into clashes with riot police, the show of force was just the beginning – a prelude of the storm that will rock Greece if its Socialist government "caves in" to the dictates of the IMF and enforces policies that have been likened to "the coming of Armageddon".To make the point, scores of stone-throwing youths chanted "people don't bow down, it's time again for revolution" as a petrol bomb set fire to a police officer in the heart of Athens.

Thousands of angry Greeks march against austerity (Reuters) - Angry protesters set fire to garbage cans and two TV outside broadcast vans in Athens as thousands of Greeks marched through the capital on May Day to protest against austerity measures they say only hurt the poor.At one rally, police fired two or three rounds of tear gas against 20 protesters trying to reach parliament. The protesters retreated and the march, which was otherwise largely peaceful, continued, a Reuters witness said.Shops were closed, ships stayed docked and the streets of the capital were unusually empty except for protesters marching toward parliament, meters away from the Finance Ministry where EU and IMF officials have been meeting for days to agree a new set of austerity measures.A common call among many of those interviewed in the unusually empty streets of Athens was for punishment of those responsible for Greece's biggest crisis in decades, in a country where corruption scandals and tax evasion are widespread.

Thousands join May Day protests in Europe (Reuters) - Hundreds of thousands of people joined May Day rallies across Europe Saturday, many protesting against government austerity policies in the wake of the global financial crisis. In Greece, where the debt-stricken government has pledged budget cuts to secure a European Union and IMF rescue, protesters burned garbage cans and set a TV van on fire.  In Germany, a key contributor to the Greek rescue package, violence erupted in Berlin when about 600 militants threw bottles, stones and burning materials at riot police in the Kreuzberg district, police said. Several fires were set and police cars demolished. German TV said many people were injured on both sides, including one police officer who was seriously hurt.

Popular rage erupting in Europe - With the motto ‘Stop the misery,’ the European Union (EU) has declared 2010 ‘The year for combating poverty and social exclusion.’ In the 27 countries of the EU, there are some 85 million poor (a) One in six Europeans lives in poverty. (b) And the situation is getting worse as the effects of the global economic crisis spread. Popular rage has erupted over the austerity plans in Greece, Portugal, Spain, Ireland, etc. Strikes and violent protests are multiplying. Many citizens are also rejecting the political system (abstaining from voting or casting white ballots) or joining extreme factions (the far right and xenophobes). Poverty and social desperation are creating a crisis in the democratic system itself. In Spain, 20 per cent of the population live below the poverty line. There are particularly extreme cases, like that of the children of non-EU immigrants (more than half of whom live in poverty) and the homeless, who number 30,000 (about half a million in total EU). Hundreds die of cold each winter.

Eurozone unemployment rate still 10% - The latest Eurostat figures show that the unemployment rate across the eurozone remains stagnant at a record 10 percent, with Spain's jobless rate topping 20 percent in the first quarter. Seasonally adjusted unemployment in the 16-nation eurozone stood at 10 percent, the highest level since August 1998 and much higher than the 9.1 percent a year ago. In the 27-nation EU, the unemployment rate was unchanged compared to February, at 9.6 percent, the highest level since records started in January 2000. In March 2009, the rate was 8.5 percent. The latest figures show that in Spain, more than 20 percent of the country's workforce is unemployed.

Bailout War, New Theater: The Assault on Greece (And I mean that word “theater” in every sense, since any Greek bailout is just more kabuki, just another scam to prop up the zombie a little longer.)We’ve reached a new level of stridence in this latest this-time-we’re-serious iteration of the Greek bailout talk. Maybe they really are serious this time as Papandreou’s “socialist” government has caved in completely to the demands of the IMF-German junta that the price of a bailout, meaning German and US taxpayers lend the Greek government money to pay off existing debts to German banks, has to be the complete economic liquidation of the Greek people. Who is this bailout really for? It’s for the profits of German banks, French banks, bankster speculators the world over, to appease the terroristic stock and bond markets, and to preserve Greek feudalists, land barons and banksters, in their positions, and enable them to profit from the fire sale of their people into serfdom.

Europe’s sovereign-debt crisis: Acropolis now | The Economist - THERE comes a moment in many debt crises when events spiral out of control. As panic sets in, bond yields lurch sickeningly upwards and fear spreads to shares and currencies. In September 2008 the failure of once-stellar Lehman Brothers almost brought down the world’s banking system. A decade earlier, Russia’s chaotic default on its sovereign debt rocked the credit markets, felling Long Term Capital Management, a hugely profitable American hedge fund. When the unthinkable suddenly becomes the inevitable, without pausing in the realm of the improbable, then you have contagion. The Greek crisis—or more properly Europe’s sovereign-debt crisis—looks dangerously close to that (see article).

The Lessons of Greece - I have now written several posts on the subject of the Greek crisis, but I thought it might be an appropriate moment to explain why we should all be alarmed at the implications of the Greek crisis. It is not a post about contagion, but about the fundamental problems for all of the countries that are financing huge and growing debts through overseas borrowing. For regular readers, they will be familiar with the discussion that follows, but I hope they will forgive the repetition for any new readers. The problem that I would like to outline is the problem with the measure so dear to economists, analysts and policymakers; the measure of GDP. The fundamental problem of GDP is that it measures activity within an economy, rather than the underlying size of an economy.

Only radical action can save us from meltdown – Angel Gurria, the secretary general of the Organisation for Economic Co-Operation and Development, could not have been clearer last week. The Greek crisis threatened the stability of the world's financial system. Contagion -- the spreading of Greek's problems to neighbouring countries -- had already happened. "This is like (the) Ebola (virus). When you realise you have it you have to cut your leg off in order to survive," he said.Gurria could not have been more right, or more wrong. Greece's crippling debt burden, and its inability to repay what it owes, threatens a financial catastrophe that could far exceed the collapse of Lehman Brothers in 2008.

Giving reform a chance - If one is to believe the popular media, economists have finally found one issue to agree on: That Greece can only get out of its atrocious fiscal quagmire through debt restructuring. Here, I’d like to argue for the opposite, even if that meant that, for once, I’d have to side with the politicians.Let’s talk contagion first. In case you’ve missed it, repo markets for Spanish, Portuguese and Irish bonds are drying up, which raises flags of alarm for their respective banks and, indeed, any bank that is using them as collateral for funding. Debt restructuring by Greece would create a precedent that would be very hard for the markets to ignore when thinking about the rest of the PIGS. Instead, avoiding a Greek restructuring (for now) gives a chance to the governments of these countries to take tougher measures to escape Greece’s fate.

Greek FinMin Behind Goldman Swaps, Unplugged - Following George W. Bush in Iraq and Wen Jiabao at Cambridge, I've come to the conclusion, boys and girls, that you're nobody in this world until people start throwing shoes at you. Recently, we almost had one such occasion here at the LSE as Yiannos Papantoniou, Greece's finance minister as it entered the Eurozone, came to speak. He is of course responsible for the use of currency swaps to (temporarily) disguise Greece's debts from national accounts to meet EMU entry criteria. It seems Goldman Sachs is in hot water on both sides of the Atlantic as Eurocrats are looking into its nefarious activities in implementing the Greek swaps. When queried about this, he's already said something along the lines of "everybody else did it, so why couldn't we?" Still, this sort of Enron-inspired accounting--since banned by the EU--has not endeared him to watchers of the current crisis unfolding in Hella

Greek Wealth Is Everywhere but Tax Forms - That wholesale lying about assets, and other eye-popping cases that are surfacing in the news media here, points to the staggering breadth of tax dodging that has long been a way of life here.  Such evasion has played a significant role in Greece’s debt crisis, and as the country struggles to get its financial house in order, it is going after tax cheats as never before.  Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion — a figure that would have gone a long way to solving its debt problems.

Key Links for the Greek Financing Package - IMFdirect Greece announced May 2 it had reached agreement with the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) on a targeted program to stabilize its economy, become more competitive, and restore market confidence with the support of a €110 billion (about $145 billion) financing package.Here’s links to key documents and material about Greece:

The EU rescue for Greece: Europe agrees a "shock and awe" bailout for Greece - IT is a cherished Brussels maxim that the European Union takes its greatest leaps forwards in a crisis—and then only after several false starts. Thus for Euro-optimists, the fact that it has taken EU leaders nearly three months to deliver a promised rescue package for Greece is less important than the fact that on May 2nd the block finally leapt, setting in motion the biggest sovereign bail out plan in EU history. Meeting in Brussels, finance ministers from the 16 countries that use the single currency accepted the need to stump up more than €110 billion ($146 billion) over the next three years. In effect, the rescue funds (€80 billion from the eurozone buttressed by €30 billion from the International Monetary Fund) will replace commercial borrowing from the financial markets between now and 2012. The hope is that will buy Greece time to bring its deficit under control through savage cuts in public spending: Greece has agreed to austerity measures worth 13% of national income over the next four years.

IMF/EU/Greece agree outlines of a package – but can it stave off insolvency? - They needed to come up with something. While there are still negotiating details of the package, the main components of the package were leaked last night to the Financial Times. Here are the details:  The total nominal size of the budgetary adjustments over three years is €24bn –  8.5% of  2009 GDP.  The measures include, according to the FT

  • ·         Two to three percentage points increase in value-added tax
  • ·         Three-year public sector pay freeze; recruitment frozen
  • ·         Abolition of ‘13th and 14th monthly salary’ for public sector workers; 5 per cent cut in allowances
  • ·         No renewals for short-term public sector contracts
  • ·         Closure of more than 800 out-dated state entities
  • ·         Opening up of more than 60 ‘closed-shop’ professions
  • ·         Overhaul of pension system: raising average retirement age to 67 for men and women; cutting state corporation pensions.
  • ·         Privatisation: sales of state corporations; flotations on Athens stock exchange; sales and leasing of state-owned properties

Greece Gets $146 Billion Rescue on EU, IMF Austerity Package (Bloomberg) -- Euro-region ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc.  The first payment will be made before Greece’s next bond redemption on May 19, said Jean-Claude Juncker after chairing a meeting of euro-region finance ministers in Brussels yesterday. The 16-nation bloc will pay 80 billion euros at a rate of around 5 percent and the International Monetary Fund contributes the rest. Greece agreed to budget measures worth 13 percent of gross domestic product. “It’s an ambitious program, it’s austere but it’s absolutely necessary,” Juncker told reporters. European Central Bank President Jean-Claude Trichet, speaking at the same press conference, said Greece’s plan will “help to restore confidence and safeguard financial stability in the euro area.”

Greece Reaches Bailout Deal With EU, IMF - WSJ - Euro-zone countries and the International Monetary Fund, seeking to halt a widening European debt crisis that has threatened the stability of the euro, agreed to extend Greece an unprecedented €110 billion ($147 billion) rescue in return for Draconian budget cuts. Under the three-year agreement announced here late Sunday, Greece would receive €80 billion in loans from other euro-zone members and €30 billion from the IMF. The planned rescue is the largest ever attempted by the IMF and a first for the 16-member euro zone. It still requires final approval from national governments. The bailout removes the worry that Greece won't meet its immediate funding needs—€8.5 billion in borrowings due May 19. But it introduces fresh questions, among them whether the country can bear the harsh budget-cutting measures that are the price of the aid.

Greece Takes Its Bailout, but Doubts for the Region Persist - Greece announced on Sunday that it had reached agreement on a long-delayed financial rescue package that would require years of painful belt-tightening, but the deal might not be enough to stop the spread of economic contagion to other European countries with mounting debts and troubled economies.  The bailout, which was worked out over weeks of negotiations with the International Monetary Fund and Greece’s European partners, calls for 110 billion euros, or $146 billion, in loans over the next three years intended to avoid a debt default.  But analysts warned that Greece had not yet solved its fundamental problems and that other sovereign debt crises could arise as lenders and market speculators turned their attention to a handful of similarly vulnerable nations across southern Europe.

Monetary union has delivered a ‘German Europe’ after all - We now know the answer to Henry Kissinger's question: "Who do I call if I want to call Europe?" Only one person matters. The Chancellor of Germany. Berlin was Europe's capital last week, basking in summer heat of 26 degrees. The heads of the European Central Bank and the International Monetary Fund (IMF) – both French, oddly – arrived as supplicants, pleading with Chancellor Angela Merkel and a stern finance committee of the Bundestag to save monetary union. Nowhere else mattered. The markets have stopped listening to Paris or Brussels. If the aim of Helmut Kohl and Francois Mitterrand at Maastricht was to tie down a "European Germany" with the silken chords of EMU, they failed. Monetary union has delivered a "German Europe" after all.

Guest Post: “Beyond Repair” - My friend Erwin has published a book out of ten years of columns for the German paper “Die Welt”. He put an Intro in front of it where he lays out why Germany will go down the tubes as everybody else. It is a lively written polemic with much insider understanding of political Germany….  I enjoyed the piece (even thought it is a tad apocalyptic), but it was too long for a post, so I’ve extracted key sections. I focused on his discussion of Landesbanken, since they played a more important role in the crisis than is generally recognized (Germany investors, Landesbanken in particular, were major stuffees of late-cycle subprime dreck).

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

Lessons from the Eurozone Crisis - It is increasingly likely that the Eurozone could become the Humpty Dumpty of currency unions. If so, this is a tragedy foretold by many observers. Martin Feldstein, for example, argued back in the late 1990s that there were too many cultural, institutional, and economic differences in the EU nations for a single currency to work. He even claimed that the currency union could lead to more conflict instead of reducing it as many Euro supporters claimed it would do. His skepticism of the Eurozone was shared by many others, particularly American economists, who saw a one-size-fits all monetary policy as destabilizing to the regional economies in the EU. For all these naysayers, though, there were supporters who argued that political gains will trump any economic costs in the monetary union and that over time many, if not most, of these costs would disappear as the regional EU economies converged. Well so much for the Euro optimists. Many folks are now saying that at a minimum there needs to be a "shock and awe" bailout package as high as $1 trillion to keep Eurozone intact. Yikes.

Greek Deal - Krugman - More serious than I expected. The Greek fiscal problem has been turning into a death spiral, in which fear of default is driving up borrowing costs, making default even more likely. The EU has now, in effect, given up on trying to restore market confidence; instead, it’s going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding. The plan still requires savage austerity on Greece’s part, and ensures a terrible few years for the Greek economy. But it does rise to the scale of the problem, and it might work.

And now? A dark scenario - VoxEU - Eurozone members, the IMF, and the ECB have announced significant commitments to assist debt-laden Greece. This column outlines a dark scenario in which the plan fails and contagion spreads, necessitating further assistance to other indebted Eurozone governments. That could risk high inflation or debt problems for the entire Eurozone.

ECB Scraps Greek Debt Collateral Rules Indefinitely – The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market. The decision came less than a day after Greece agreed to a 110 billion-euro ($145 billion) package of emergency loans from the International Monetary Fund and its euro-region allies. Under the plan backed by the ECB, Greece pledged 30 billion euros in budget cuts to bring a deficit of 13.6 percent of gross domestic product within the EU limit of 3 percent in 2014. “The ECB is a key player in the rescue package designed to help Greece and it is clearly buying insurance against the likelihood of further multiple downgrades of the Greek debt, something that might lead to a halt of ECB financing to the Greek banks,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

Definitely, Maybe, Perhaps Not: The ECB’s communication strategy on collateral policy in full - The ECB has suspended the minimum credit rating requirements for Greek bonds – and only for Greek bonds - as collateral for its liquidity operations.  El Pais called it a decision without precedent.  It effectively makes rating agencies irrelevant for the eligibility to central bank money, at least for Greece.   It was a huge U-turn for Jean Claude Trichet, who had earlier stated that no exceptions would be allowed. The move fuelled speculation that the central bank may have to extend that to other countries, renew a programme of lending unlimited cash to banks for a year, and even start buying government debt if the €110bn bailout plan for Greece fails to stem the euro’s slide, writes Bloomberg. While the ECB is prohibited from buying assets directly from authorities, it can buy them on the secondary market.  In a thundering editorial, FT Deutschland called the decision by the ECB a communication disaster in the making. First, the ECB announced a return to the previous regime by next year, then comes the decision to reduce the minimum collateral requirement to BBB, and now the exemption for Greece only. What will the ECB do if (or rather when ) Portugal’s debt go down?

ECB’s Weber Sees Threat of ‘Grave Contagion Effects’ -(Bloomberg) -- European Central Bank council member Axel Weber said Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area as stocks fell around the world and riots in Athens left three people dead. “There is a threat of grave contagion effects for other member states in the monetary union and increasing negative feedback loop effects on capital markets,” Weber said in a statement today as German lawmakers in Berlin debate the proposed rescue of Greece. “All in all, Germany’s contribution to the aid package for Greece is justifiable.” The euro is tumbling as the Greek fiscal crisis spreads to other indebted nations such as Spain and Portugal. Moody’s Investors Service today placed its Aa2 rating on Portugal’s debt on review for a possible downgrade. In Germany, Chancellor Angela Merkel appealed to parliament to approve the country’s 22.4 billion-euro portion of the joint European Union- International Monetary Fund bailout amid public opposition.

Default, Devaluation, Or What? - Krugman - Consider what Greece would get if it simply stopped paying any interest or principal on its debt. All it would have to do then is run a zero primary deficit — taking in as much in taxes as it spends on things other than interest on its debt. But here’s the thing: Greece is currently running a huge primary deficit — 8.5 percent of GDP in 2009. So even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity. It follows, then, that a debt restructuring wouldn’t help all that much — not unless you believe that getting forgiveness on much of Greece’s existing debt would make it possible to take on substantial new debt, which doesn’t seem very likely. The point is that the only way to seriously reduce Greek pain would be to find a way to limit the costs of fiscal austerity to the Greek economy. And debt restructuring wouldn’t do that

Why the Greek bailout won’t work - Paul Krugman has an intriguing pair of back-to-back blog entries. On Sunday afternoon, he wrote this:The plan still requires savage austerity on Greece’s part, and ensures a terrible few years for the Greek economy. But it does rise to the scale of the problem, and it might work. Then, on Monday morning, he followed up with this:Anyone demanding that countries not run such big deficits is, in effect, calling for higher taxes and slashed spending in the face of a deep recession — Hoovernomics. Is that really what they want? Is that their final answer? Steven Erlanger has a good analysis in today’s NYT: There are serious questions about whether the deep cuts in salaries and benefits the agreement calls for are politically sustainable over time, even as deflation will make it impossible for Greece to grow its way out of debt… “How can Greece grow out of its debt if there is deflation?” “Deflation increases the debt burden, so we are following this virtuous circle that is bringing us toward hell. Economics has nothing to do with virtue, which can kill an economy.”…

News Analysis - Deflation Could Stall Efforts to Revive Greece… Greece, effectively bankrupt and with a European gun to its head, committed itself to years of austerity on Sunday when it signed a financial bailout deal with the European Union and the International Monetary Fund.  But there are serious questions about whether the deep cuts in salaries and benefits the agreement calls for are politically sustainable over time, even as deflation will make it impossible for Greece to grow its way out of debt.  There is a consensus that the Greek economy is broken and needs major structural reform, and the deal done on Sunday is intended to give Athens a couple of years of breathing room to change the fundamental pattern of Greek behavior.

Asian Crisis Countries: Greece Getting Off Lightly - The following article had me pause a bit. Given that the budget tightening (and accompanying deflation since it cannot devalue its currency) demanded of Greece is so severe that the country is not expected by some to approach 2009-level GDP until 2017, how can anyone say Greece is getting off lightly? The answer: crisis-hit states of the Asian financial contagion. Aside from the question of whether the IMF should be bailing out Greece in the first place since its woes can be construed as primarily fiscal and not balance of payments ones as per the IMF's mandate (though our friends at IPE@UNC demur), we have this. Basically, the arguments are twofold. First, the voting weights assigned to the IMF which still reflect a post-WWII economic order give unduly large priority to Europe. Hence, Europeans can give softer terms to Greece if they wish to. And second, the IMF seems to be no longer in the Washington Consensus-style business of remaking borrowing economies in America's image.

Greece braces for "violent modernization" (Reuters) - Greece reacted with a mix of resignation and outrage on Monday to a painful new austerity package from the government that newspaper editorials said would force a long-delayed "violent modernization" on the country. "The time to pay the bill has come, the time of responsibility for all of us tackling this crisis must become the big opportunity to modernize our public life, even if we have to bleed," said financial daily Kerdos.Prime Minister George Papandreou's government unveiled the plan to overhaul Greece's debt-ridden economy on Sunday after talks with officials from the International Monetary Fund (IMF) and European Union (EU).

A bail-out for Greece is just the beginning - Desperate times; desperate measures. After months of costly delay, the eurozone has come up with an enormous package of support for Greece. By bringing in the International Monetary Fund, at Germany’s behest, it has obtained some additional resources and a better programme. But is it going to work? Alas, I have huge doubts. In important respects, the programme is far less unrealistic than its intra-European predecessor. Gone is the fantasy that there would be a mild economic contraction this year, followed by a return to steady growth. The new programme apparently envisages a cumulative decline in GDP of about 8 per cent, though such forecasts are, of course, highly uncertain. Similarly, the old plan was founded on the assumption that Greece could slash its budget deficit to less than 3 per cent of GDP by the end of 2012. The new plan sets 2014 as the target year.

Greek Rescue Doubts Spur Sovereign Debt Risk on Contagion Bets (Bloomberg) -- The cost of insuring against default on sovereign bonds rose on concern that the $144 billion aid package for Greece may not solve the nation's deficit crisis or prevent contagion to Europe's debt-ridden economies.Credit-default swaps on Greece surged 34.5 basis points to 681, according to CMA DataVision prices, implying a more than 42 percent probability of default over five years. Contracts on Portugal, Spain, Italy and Ireland also rose." "At 14.3 percent of gross domestic product, Ireland had the euro region's largest deficit last year. Greece's was 13.6 percent, Spain's was 11.2 percent and Portugal's 9.4 percent. The shortfalls as a share of gross domestic product were more than three times the European Union limit of 3 percent.

Germany warns Greece to stick to plan: report - German Finance Minister Wolfgang Schaeuble on Tuesday warned Greece to stick to its deficit-reduction plan or again face the threat of insolvency, news reports said. "If there are any violations, payments will be stopped. Then Athens will once again be threatened with bankruptcy," Schaeuble said, according to news reports quoting the Rheinische Post newspaper.

Greece, Germany, and the Dangers of Beggar Thy Neighbor - Yves Smith -  Investors continued their flight from risky assets as the wobbling Greek rescue looked ready to morph into a broader sovereign debt crisis, compounded by fears that a China’s expansion, once seen as inevitable and enduring, is now looking at risk of fading as the officialdom tries to dampen inflation.  But the focus on the Greece trigger is masking a bigger and more complicated set of issues. The supposedly successful rescue of the global financial system was achieved by making sure bank investors took no pain. That was a dangerous decision: it promoted moral hazard (risk capital, like shareholders and bondholder, are supposed to take losses when businesses come a cropper) and kept the incumbents in place, assuring that there would be no change in any of the firms that had driven themselves off the cliff. The rationales were many: there wasn’t enough time to wind down a dealer, the banks were too interconnected to permit any major one to fail.

Merkel's Coalition Steps Up Calls for `Orderly Insolvencies' of EU States (Bloomberg) -- German Chancellor Angela Merkel’s coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with debt to avoid a repeat of the Greek fiscal crisis. Floor leaders of the three coalition parties agreed in Berlin today to put a resolution to parliament alongside the bill on Greek aid calling for the European Union to revise rules for the euro to put pressure on countries that run deficits. Merkel, who faces elections in Germany’s most populous state on May 9, is seeking to shift focus from the Greek bailout to drawing lessons from the euro’s biggest crisis. An “orderly insolvency” process would ensure that creditors participate in any future rescue, she said on ARD television yesterday.

Greece’s Fund to Provide as Much as 10 Billion Euros (Bloomberg) -- Greece will create a support fund worth as much as 10 billion euros ($13 billion) to protect its banks, tapping money from the bailout loans provided by the euro region and the International Monetary Fund, a European Union document shows. The purpose of the fund “is to maintain the stability of the Greek banking system by providing equity capital in case of a significant decline of capital buffers,” according to a memorandum of understanding between Greece and the euro area published today by the Greek Finance Ministry.  “Participation in the fund will be based on a trigger linked to the minimum required level of capital adequacy requirements” established by the central bank, according to the memorandum.

Some really bad news from Greece – Opposition decides to vote against the deal - The EU/IMF deal will find a majority in the Greek parliament, but last night’s decision by Antonis Samaras, leader of the opposition New Democracy, to vote against the IMF/EU package destroys any hopes of a lasting consensus for reform. It signals a return to the politics as usual at a rather early stage in the adjustment process, and destroys any hope of a national consensus, which is so critical when it comes to the implementation of long-term adjustment programmes. (Remember the IMF said the whole adjustment would take 10 years!) The decision makes it very likely that Greece will not be able to maintain the commitments it made in its negotiations, except in the very short term. See this report in Kathimerini for more details.

Handelsblatt Illustrates German Opposition - At right is the front page of Today’s Handelsblatt (April 29), a business newspaper in Germany of about 150,000.  It competes with the German editions of the Wall Street Journal and Financial Times. On a normal day, the Handelsblatt cover looks like the example at bottom — full of words and stories.  Today, however, their cover is all black to powerfully illustrate the extreme distaste and opposition to a Greek bailout. They called yesterday “black Wednesday” in reference to German Prime Minister Angel Merkel’s change of heart regarding the need for a bailout of Greece.

Cliches won't fix the financial crisis - I heard a member of Germany's parliament scornfully dismiss the suggestion that the European Central Bank should target a somewhat higher rate of inflation. This suggestion had been put forward by Olivier Blanchard, one of the world's leading macroeconomists. Furthermore, he had proposed a higher inflation target in his role as the chief economist for the International Monetary Fund.  But what was striking was the nature of the dismissal. The parliamentarian just asserted that: "Inflation never solved anything." That's a strong statement. Did he get that information from his parents? Or, as we used say growing up in Chicago: "Did your momma tell you that?"  Blanchard and others arguing for a higher inflation target actually have very good reasons as to why higher inflation might be very helpful in solving the world economic crisis. First, a higher inflation rate will erode the real value of debt. This will benefit all debtors, households, businesses and countries.

The numbers still do not add up - The aim of the rescue package agreed for Greece cannot conceivably have been to prevent a default. For all the daunting austerity and structural reform it requires, the numbers do not add up. The main purpose I can detect is to reverse the rise in Greek bond yields and stop contagion. We should not knock this deal from Athens. The eurozone might not have survived otherwise. This column would have been an obituary. I am also glad to note that those in charge gave a positive answer to a question I posed last week, which was whether the authorities would ever get ahead of the situation. They did, and they deserve credit. But in spite of the readiness to accept extreme austerity, Greece will not get by without some form of debt forgiveness. I can understand why the International Monetary Fund and the European Union did not want to open that can of worms at this point. It would have prolonged the negotiations. In the middle of an acute bond market crisis one has to manage expectations very carefully. A debt restructuring will eventually be necessary, however, because Greece’s debt to gross domestic product ratio is going to rise from its current 125 per cent to about 140-150 per cent during the adjustment period. Without restructuring, Greece will end up austere, compliant, and crippled.

Instead of solving the problem, European leaders play the blame game - It was  another hugely depressing day for the euro area. The crisis continued to spread yesterday, as Spanish interest rates rose to 3.58% for two year notes, and 2.84% for five year bonds, about six times as Germany, according to El Pais. There was no indication that the ECB would go beyond the concrete measures of support it announced as part of its contribution for the Greek debt crisis. There will be no quantitative easing in support of European bond markets. Trichet said yesterday that the issue was not even discussed at the ECB’s special council meeting in Lisbon. Jornal de Negocios quotes  Trichet saying in an interview:  "Portugal, like all others, has no time for complacency. It's very important that all countries, and Portugal in particular, provide credibility to their program of reconstruction of public finances and to do so with total clarity."

Why Europe is still in meltdown - The hope after the European Union and the International Monetary Fund finalized a $146 billion bailout for heavily indebted Greece was that such a grand display of resolve would stop the contagion beginning to seize financial markets from rampaging through Europe, and from there, the rest of the world. Well, that hope now looks more like wishful thinking. Stock markets around the world are swooning, the euro hit a one-year low against the dollar, and yields of some European sovereign bonds are rising again. The big bailout is proving a big bust in the contagion containment department. Nerves in financial markets are so frayed that the prime minister of Spain had to personally dismiss rumors that his country was seeking a bailout of its own. He called the chatter "complete madness." Madness just about sums it up. Why hasn't the Mt. Olympus-sized Greek bailout calmed investors? And if that isn't working, what will?. In a post a few days ago, I warned that IMF bailouts are no instant remedy to debt crises. They didn't work to appease investors during the 1997 Asian economic crisis, so I'm not surprised the Greek bailout hasn't done the trick today.

OPUD - Ooooohhhh boy. That wasn't part of the rescue plan, was it?The standard approach to crisis management is "UPOD": under-promise, over-deliver. This is the "shock and awe" approach to bailouts that we saw last spring (via huge QE programs and a Dr. Evil-esque allocation promise to the IMF, which hasn't done much good for Greece, it must be said!)  Sadly for holders of risk assets, the Europeans have taken the more treacherous "OPUD" strategy: after talking about sums as high as €130 billion last week, the Greek program underwhelmed that figure by €20 bio or so. And so Greece came under the kibosh yesterday, dragging the rest of the world's risky assets with it. While there's no real trading in Greek 2yrs anymore, the best guess yield is now about 15%. That's not good

Pimco CEO El-Erian: Greek Crisis Far From Over - The $146 billion in loan announcements by the European Union and the International Monetary Fund, along with Greece’s fiscal austerity plan, represent “bold and unprecedented steps”, El-Erian wrote in a research report. But there are four “design challenges” that still need to be overcome, he said. First, the external financing, while above current market rates on Greek bonds, is not enough to match expectations that Greece’s debt will rise to 150% of GDP, even with its drastic fiscal austerity plan. Second, the plan assumes the best scenario, which is that Greek GDP will “only” contract by 7%. Third, the plan deals with Greece’s liquidity problems but not its debt overhang, which will be a deterrent for foreign investors. Fourth, while the plan doesn’t assume financing from the private sector until 2013, there is no system to prevent existing creditors from exiting in mass.

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

Is the euro a failure? - VoxEU - As world markets continue to raise concerns about Eurozone countries, this column argues that the euro has been a failure. Why should money be poured into Greece to "save the euro"? Besides the moral hazard effects of the intervention, it makes little sense to prolong a monetary regime which is actually one of the reasons why these Eurozone countries are in trouble.

The Threat of Euro Contagion - Nelson D. Schwartz had a great piece in the New York Times a few days ago that showed how susceptible the entire Eurozone would be to a Greek default. Here are the key paragraphs: The first domino is Greece. It owes nearly $10 billion to Portuguese banks, and with Portugal already falling two notches in S. & P.’s ratings and facing higher borrowing costs, a default by Greece would be a staggering blow. Portugal, in turn, owes $86 billion to banks in Spain; Spain’s debt was downgraded one notch last week.  The numbers quickly mount. Ireland is heavily indebted to Germany and Britain. The exposure of German banks to Spanish debt totals $238 billion, according to the Bank for International Settlements, while French banks hold another $220 billion. And Italy, whose finances are perennially shaky, is owed $31 billion by Spain and owes France $511 billion, or nearly 20 percent of the French gross domestic product.

The crisis is catching - But for the moment, it appears that European leaders and the IMF have not sufficiently ring-fenced the Greece crisis. Contagion looms.  It may be that European leaders have insufficiently demonstrated their awareness of the difference in the two kinds of crises. Aid to Greece has been generous, but it's not clear that it will address the underlying insolvency of the Greek government. Forbearance worked in the case of the American financial system because banks could borrow cheaply from the government and then lend at a higher rate, thereby slowly recapitalising themselves. The 5% interest rate Greece is getting from Europe and the IMF is much lower than market rates, but it's higher than Greece's expected growth rate. The aid strategy has bought time, but it won't save Greece unless growth surprises strongly to the upside.

Wadhwani Sees Sovereign Crises ‘Recurring’ After Greek Bailout (Bloomberg) -- The euro region faces the danger of further debt crises because of its delay in bailing out Greece and the failure to prepare a system to rescue other nations, former Bank of England policy maker Sushil Wadhwani said. “We don’t really have a credible mechanism in place to deal with potentially Portugal and Spain,” Wadhwani said in a televised interview at an event hosted by Fathom Financial Consulting in London yesterday. “My strong suspicion is that we have recurring sovereign debt crises. Although I’m not sure how long it’ll take for the next one.” The cost of insuring against default on sovereign bonds rose yesterday on concern that the 110 billion-euro ($144 billion) aid package for Greece may not solve the nation’s debt crisis or prevent contagion elsewhere in Europe. Demonstrators occupied the Acropolis in Athens in an escalation of protests against budget cuts imposed as part of the bailout.

EU: Screw Credit Rating Agencies; We'll Do Rating - Credit rating agencies have long been bogeymen for those facing down financial crises. During the Asian financial crisis, Ferri, Liu, and Stiglitz (1999) found these agencies complicit in procyclical ratings that worsened matters.  Well it's 2010 and it seems these same credit rating agencies haven't learned their lesson at all. In this game of perception, have a gander at the view of market participants at what EU actions mean. To them, the ECB allowing Greek bonds to be used as collateral regardless of their credit rating is the latest in a long line of concessions to erring EMU countries:Ah, well. Markets will markets, eh? Far more interesting has been the response from EU bigwigs, In particular, Michel Barnier, Commissioner for the Internal Market and Services, has been keen on policing the dreaded Anglo-Saxon abuses of the credit rating agencies:

Greek End Game - Krugman - Many commentators now believe that Greece will end up restructuring its debt — a euphemism for partial repudiation. I agree. But the reasoning seems to stop there, which is wrong. In effect, the consensus that Greece will end up defaulting is probably too optimistic. I’m growing increasingly convinced that Greece will end up leaving the euro, too. I’ve basically laid out the logic already: even with a debt restructuring, Greece will be in deep trouble, forced to engage in severe austerity — and provoke a deep slump — just to close the primary, non-interest deficit. The only thing that could reduce that need for austerity would be something that helped the economy expand, or at least not contract as much. This would reduce the economic pain; it would also increase revenues, reducing the needed amount of fiscal austerity.

Deadly Greek Riots Stoke Worries Crisis Will Spread, Deepen… Deadly riots and nationwide strikes in Greece on Wednesday stoked investor fears that Europe's debt crisis will drag on and spread, with the region's political unity and shared currency at stake. A pregnant woman and two others choked to death when protesters set an Athens bank ablaze. Police used tear gas to disperse demonstrators near parliament. Inside, the government tried to advance $24 billion in spending cuts and tax hikes — the price for a 110 billion euro ($146 billion) bailout. Meanwhile in Berlin, German Chancellor Angela Merkel urged her parliament to approve Germany's $29 billion share of that aid, saying Europe's fate was at stake.

Goodhart Says Greek Deal May Collapse as Crisis Tests Euro – (Bloomberg) -- Greece’s bailout “might collapse” and the nation’s debt crisis makes it “hard to see” how the euro will survive in its current form, former Bank of England policy maker Charles Goodhart said. “If this financing deal should collapse, and it might for one reason or another, then there would be a question of what the Greeks could possibly do,” Goodhart said in an interview with Bloomberg Television in London today. “Default would be totally disastrous for them and leaving the euro would equally be disastrous.”

BBC News - Greek strikers hit Athens streets over austerity plan - Greek public sector workers have stormed the Acropolis and scuffled with riot police after launching a 48-hour strike against austerity measures. Their action comes ahead of a nationwide general strike on Wednesday. The austerity measures were outlined in a draft bill submitted to the Greek parliament and will be voted on by the end of the week. They have been introduced in return for a 110bn euro (£95bn) international rescue package agreed for the country. The measures include wage freezes, pension cuts and tax rises.

It's Not About Greece Anymore (Boone & Johnson) The Greek “rescue” package announced last weekend is dramatic, unprecedented and far from enough to stabilize the euro zone. The Greek government and the European Union leadership, prodded by the International Monetary Fund, are finally becoming realistic about the dire economic situation in Greece. They have abandoned previous rounds of optimistic forecasts and have now admitted to a profoundly worse situation. This new program calls for “fiscal adjustments” — cuts to the fiscal deficit, mostly through spending cuts — totaling 11 percent of gross domestic product in 2010, 4.3 percent in 2011, and 2 percent in 2012 and 2013. The total debt-to-G.D.P. ratio peaks at 149 percent in 2012-13 before starting a gentle glide path back down to sanity. This new program is honest enough to show why it is unlikely to succeed.

Europe’s Web of Debt - NYTimes graphic - Banks and governments in these five shaky economies owe each other many billions of euros — converted here to dollars — and have even larger debts to Britain, France and Germany. Arrow widths are proportional to debt amounts. Related Article »

Europe finds the old rules still apply - The eurozone experiment was, in effect, an attempt to speed up the graduation process through the carrot of the single currency and the stick of harsher bail-out rules. Instead of having to demonstrate fortitude and commitment through decades of surpluses and declining public debt levels (as for example, Chile has done), euro members were allowed to have their cake and eat it, too. ... Greece could run up its public debt to more than 115 per cent of GDP. Even more stunning a figure is Greece’s total external debt to GDP, which is more than 170 per cent, counting both public and private debt. Prof Reinhart and I find that most emerging markets run into trouble at external debt levels of merely 60 per cent of GDP. ...

The fire this time  REMEMBER, the Greeks have only just begun to feel the pain of the massive fiscal adjustment they face: Three people died on Wednesday in a blaze triggered by a fire-bomb tossed into an Athens bank during a march by tens of thousands of striking Greek workers, police said. Earlier, police fired teargas and stun grenades at demonstrators who tried to force their way into parliament on Wednesday ahead of an emergency debate on a harsh three-year austerity package agreed with the European Union and International Monetary Fund.Angry protesters outside the parliament building raised clenched fists and shouted “thieves, thieves” – a traditional Greek expression for corrupt politicians. It's very hard to see how the budget cuts can stick. The probability of a Greek default continues to rise, but the bigger question is whether contagion can be contained.

Stiglitz voices Greece concerns - NOBEL laureate economist Joseph Stiglitz on Tuesday voiced concern about the terms of the Greek bailout with Athens facing severe fiscal austerity measures in a bid to slice its debt. 'It is good that Europe finally got its act together and was able to come up with a package' to save Greece, Stiglitz, who won the Nobel Prize for economics in 2001, said in an interview with BBC radio. But the one-time economic adviser to former US president Bill Clinton voiced concern about the 'degree of fiscal austerity' being placed on Greece. 'If you cut budgets too excessively the economy gets weaker, tax revenues go down and the improvement in the fiscal position of the country is much less that one would have hoped. This is specially true because other countries in Europe will be going through similar exercises and the result of that is that the recovery of Europe, which is based on concerted government expansionary policy, will already be weaker,' Mr Stiglitz said.

Mikis Theodorakis: Omen Of Great Disasters - With such common sense as I possess I cannot explain, much less justify, the speed with which our country has slumped from the 2009 level to the point where we lose part of our national sovereignty to the IMF and are placed under trusteeship. And it is strange that until now, no one has done the simplest thing, that is, traced the course of our economy from then until now with facts and figures, so that we, the uninitiated, can understand the real reasons for this unprecedented and dizzying turn of events, which has resulted in the loss of our national independence and, along with it, international humiliation. What also troubles me is the element of exaggeration in the blows dealt our country internationally; this, together with such a highly concerted action against a financially insignificant country, raises suspicions.

Three dead as Greek strike grows violent - CNN - video & slide show- Police sirens and tear gas filled the streets around Greece's parliament building Wednesday after protests against government spending cuts turned violent, then deadly, with three people dying in a fire inside a bank. The demonstrators are furious at what they see as plans to take money out of their pockets."I've been working 38 years in the private sector. I live a simple life. I never took money from anyone," one man in the crowd said. "And now I owe a lot of money to the borrowers -- I don't know who else."  Three people died after a fire bomb hit a bank in central Athens, the Greek fire brigade told CNN. The victims, two women and a man, were bank employees, they said.Protesters were throwing bottles at police guarding the burned-out bank, shouting "torturers" and "liars" because they said they don't believe people were killed inside. Riot police were moving in to push the crowd away, CNN's Diana Magnay reported from the scene. One woman in the bank died trying to reach an upstairs balcony, and the other was found trapped in an attic, medical examiner Filippos Koutsaftis said When asked about the casualties, a protester outside the bank expressed disbelief. "I'll believe it when I see it," he said.

Greeks Protests Over Bailout Leaves 3 Dead, Buildings Burning –(Bloomberg) -- Greek demonstrations against government austerity measures turned deadly when three people were killed after protesters set fire to a bank in central Athens in what Prime Minister George Papandreou called a “murderous act.”  “Greeks have a right to demonstrate, not a right to violence, especially violence which leads to murder,” Papandreou told parliament today. He said all Greek political parties were united in opposing violence. The violence came during a general strike called after Papandreou announced a second set of wage cuts for public workers, a freeze on pensions and a second sales-tax increase to secure a bailout from the European Union and the International Monetary Fund. The measures, which aim to tame a budget deficit of almost 14 percent of economic output, were denounced as “savage” by union leaders.

Greek Violence Threatens to Scare Away Tourists Key to Economy – (Bloomberg) -- The protests and riots in Athens threaten to undermine tourism, one of Greece’s few growth industries and the country’s best hope of easing the pain of its unprecedented austerity program. “People will think twice about going to Greece,” said Ian Gamse, a director at London-based Otus & Co., which advises Marriott International Inc. and Hilton Worldwide. “People who have booked are going to start calling their tour operators. If Greece can’t get the situation under control, it is going to be a big problem.” The demonstrations, which left three people dead and four buildings burned yesterday, come as the spring tourist season is getting under way. Tourism accounts for about 16 percent of Greece’s gross domestic product and about one in five jobs, according to estimates by the London-based World Travel and Tourism Council.

President of Greece says his nation on the brink of an 'abyss'- The angry protests in Greece are gaining momentum. Three people, two women and one man, were killed today when a gas bomb was thrown into a bank.  Greek President Karolos Papoulias warned his people today, that the protests over the planned austerity measures must stop because the nation is hanging  "...on the brink of the abyss. We are all responsible so that it does not take the step into the void."  The BBC reports that three bank employees were killed during today's riots. The bodies of two women - one pregnant - and a man were found inside the Marfin bank branch on Stadiou Avenue in central Athens. They were among 20 people working there when a gas bomb was thrown inside. Most of the bank's employees managed to get out, but the three who died weren't so lucky

“On the brink of the abyss”“On the brink of the abyss” - these are not our words, but those of the Greek President Karolos Papoulias after the news that three people had been killed in violent protests in Athens. The Greek political classes have reacted with defiance. Prime minister George Papandreou vowed to continue with the austerity programme. The shock may even persuade the opposition New Democracy party to reverse their pledge of a No vote to the IMF/EU programme. But it also raises the question, in Athens and elsewhere, whether the austerity programme is feasible in its current form – economically, socially, and politically. Austerity has not even started.  The financial markets got spooked by these events. The euro is at $1.28. The Greek stock market decline by 3.9%, the Spanish markets were down by 1%, and the Portuguese by 1.5%. Greek ten year bonds yield well over 10% again, and Spanish and Portuguese yields also increased, as investors are now pricing in contagion risks. The bond markets were earlier spooked by a statement from Axel Weber, who warned about the threat of “grave contagion” in a deposition to the German parliament.

Europe leaders warn of contagion, 3 die in Greece - German Chancellor Angela Merkel said Europe's fate was at stake and France declared the euro was under speculative attack but said it would fail, while the Greek government vowed not to retreat a single step despite violence on the streets of Athens. Three people, including a pregnant woman, choked to death when rioters set an Athens bank ablaze during a protest against wage and pension cuts that were the price of the 110 billion euro ($146.5 billion) EU/IMF bailout agreed on Sunday.A general strike shut down Greek airports, tourist sites and public services and about 50,000 demonstrators marched against the planned public spending cuts and tax rises, demanding that tax cheats and corrupt politicians be put on trial.Hundreds of protesters threw stones and bottles at police who responded with tear gas in easily the biggest demonstration since Prime Minister George Papandreou took office last October.

Look, It's an ECB Member Dissembling! - So let me see if I get this right. Greece lied to get into the Euro in the first place.  They engaged in hinky deals with various large banks, including but not limited to Goldman, with the explicit intent (and effect) of falsifying their financials. The ECB and Euro nations admitted Greece to the union on the basis, in part, of this intentionally false and misleading information.  That is, they relied upon materially and intentionally false information, and in doing so harmed themselves as a whole (this is pretty much the definition of fraud, by the way.) Having done so, and now having the deception exposed, Germany is now being told that even though it did not create the fraud and in fact was harmed by it the German people must pay as a consequence of the fraud, instead of those institutions, nations and individuals who committed it, including those very same large international banks that were involved.

Expect Nothing - Simon Johnson - After months of denial, the European policy elite finally begins to understand that something is seriously wrong in the eurozone. But the prevailing definition of the problem is still too narrow – the consensus in France and, even more, in Germany is that “this is a Greek problem”.  Even the most negative still think that Portugal and Spain can easily escape serious damage. This is a major misconception, as we pointed out last week – and as we have been emphasizing, to anyone who would listen, for more than a year. If you want to call for a “rescheduling” of Greece’s debts – a position that is becoming increasingly popular among leading north European intellectuals – that is fine.  But you also need to recognize that the policy elite (central banks and ministries of finance) are completely unprepared to handle the consequences, which would be immediate and devastating for other weaker eurozone countries.

What will happen if Greece defaults? Insights from theory and reality - For the last 50 years sovereign defaults only concerned developing countries. The recent predicaments of Greece have raised the spectre of a default in a high-income country. This column argues exchange-rate depreciation has helped shrink the costs of default and spur economic recovery in past episodes. As part of the Eurozone, Greece may pay a steep cost if it were to default.

Greece: Default is no soft option -The head of the European Central Bank once again said today that a Greek default "would not happen". Every G20 official - in or outside the eurozone - will tell you the same thing: with markets as fragile as they are, it is unthinkable that a sovereign government would be allowed to default. Investors and experts are thinking about it all the same. In fact, looking at the economic programme the Greek government has signed up to, many veterans of past debt crises would say a debt restructuring was only a matter of time. But it's worth asking how - and when - it is done. And how it would help.  As you'd expect, there's no rule book for countries seeking to default on their debt. It's not something the international system likes to encourage. But it's not as if it has never happened

Greek Default Already Decided - That’s the view of Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee and frequent consultant to the European Central Bank, who recently joined Citigroup as its chief economist. He’s not making a prediction. He’s saying the decision has already been made. In a note distributed Wednesday he said:“A Greek sovereign restructuring with a net present discounted value haircut became unavoidable when the euro area decided not to lend to Greece at something close to the risk-free rate, but at 300 or 400 basis points over the swap rate.”The  final  €110 billion rescue package is full of feints. One is that the tough conditionality clauses require Greece to make swingeing fiscal cuts, so that it is running a primary budget surplus in 2013, by which time its gross sovereign debt will have risen to around 150% of GDP

Timing a Greek default - Willem Buiter has joined the group of people convinced that Greece will default. I think he’s too optimistic:  A mix of huge debt and no primary deficit – i.e. needs for external funds to pay for ongoing government spending – constitute “ the exact circumstances that makes a default individually rational for the debtor,” he notes… The later it happens, the larger the haircut will be, says Buiter. He reckons a 30% cut today would have sufficed, but would have wrought havoc on the capital positions of Greek, French and German commercial banks, which would probably need to be recapitalized immediately, provoking major political embarrassment in Berlin and Paris. The problem here is that a 30% cut today would not have sufficed, precisely because Greece is not running anything close to a zero primary deficit. Paul Krugman makes the point: Here’s the thing: Greece is currently running a huge primary deficit — 8.5 percent of GDP in 2009. So even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity. In fact, it’s worse still: even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro.

Containment Fails: European CDS Explode As Market Looks To Future Bail Outs, Bank Runs - Now that Greece is thoroughly irrelevant, the market just told the ECB, the IMF, and the EMU to prepare another $1 trillion in bailout packages. The reason: the Greek bailout just made it abundantly clear the bond vigilantes have free reign to call the bureaucrats' bluff whenever they see fit. The result: CDS of all non Greek PIIGS are now blowing out, and represent the top 4 names of all biggest CDS wideners for the day, each pushing a 10%+ change from yesterday. This movement wider will not stop until the IMF resolves to backstop all the PIIS ex. G. At this point nothing that happens in Greece is important, although the thing that will most likely happen is that the Greek government will fall imminently, killing the austerity package and destroying whatever credibility the EMU and the EU have left, but not before the IMF and the EU soak up another 110 billion euro in their slush funds.

‘Very real’ threat that Greek contagion could spread to Britain - The UK was warned yesterday that it is among the European Union states that faces the risk of contagion from the Greek crisis, with "very real, common threats" to its financial systems.As a stunned Greece, still struggling to come to terms with the deaths of three people in protests on Wednesday, approved cuts to address its financial crisis, one of the leading credit ratings agencies said British banks were "vulnerable" to shocks of the kind now reverberating around the eurozone. The Greek finance minister, George Papaconstantinou, urged parliament not to flinch from passing a widely-detested €30bn package of tax rises and spending cuts, imposed as a condition for €110bn of loans from the EU and International Monetary Fund.

Greek Debt Crisis On Verge Of 'Going Global': ": Pimco's El-Erian (with video) - Problems with Greek debt are about to spread to other countries and could infect the US unless the nation tackles its own mounting problems, Pimco's Mohamed El-Erian told CNBC. About an hour or so after El-Erian spoke, global stocks sold off sharply with major US averages shedding more than 3 percent. Speaking as Greek austerity measures won enough votes to be approved by parliament, El-Erian offered a stern warning about the potential of the crisis to escalate into something resembling, though not duplicating, the 2008-09 financial crisis. "We've seen a crisis start in a country—Greece—become regional, impact the whole of the Euro zone and is on the verge of truly going global," said El-Erian, CEO of the world's biggest bond fund.

The Post Misinforms Readers About the Greek Crisis - A front page Washington Post article told readers that: "The basic problem in Greece, and in the other struggling European countries, is that the government debts have grown as large, or nearly as large, as the gross domestic product, making the government's repayment difficult, if not impossible. The countries' imperiled finances, meanwhile, push up the rates at which they can borrow. (emphasis added)"This is the sort of assertion that belongs on the editorial pages, not in a news story. There have been and are many countries with considerably higher ratios of debt to GDP than Greece than manage to borrow in financial markets without major problems. The more obvious problem with Greece is that it is in the euro. This means that when it make budget cutbacks to reduce its deficit, it leads to large falls in domestic output.

Trichet Resists Calls to Consider Purchasing Bonds, Urges Cuts in Deficits - (Bloomberg) -- European Central Bank President Jean- Claude Trichet resisted pressure from economists to consider buying government bonds to help relieve the euro area’s spreading fiscal crisis. We didn’t discuss the matter,” Trichet told reporters today in Lisbon after the ECB’s Governing Council left its benchmark interest rate at a record low of 1 percent. “I have nothing else to say on that. We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances.” Policy makers met in Lisbon, the latest capital to be hit by the fiscal crisis, as investors looked to them to calm financial markets after a Greek bailout failed to assuage concerns about budget deficits from Portugal to Ireland.

Huge National Debts Could Push Euro Zone into Bankruptcy - Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it. By SPIEGEL staff. The euro zone is pinning its hopes on Thomsen and his team. His goal is to achieve what Europe's politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.If the emergency surgery isn't successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback -- perhaps even permanently.

John Taylor: "Dead Man Walking...The Euro Is Finished" One of the incidents that I remember from my youth was the first time I saw a chicken slaughtered and running around headless for quite a few minutes before it keeled over and died. The euro is at that stage. Its life is finished, but it will be around for some time before it becomes a subject of historical analysis. Actually the euro was always a short term solution, even on the day it was born. There were only two possible outcomes: the euro would blow up, or it would lead to an EU with taxing and borrowing authority. Theoretically those two choices are still possible, but the euro’s disintegration is moving so quickly and the political barriers are rising so fast that the chances of a much closer and ever tightening political bond between the internal surplus countries and the internal deficit countries is basically non-existent

European Union, Currency Are Headed for Collapse: Gartman - The current European debt crisis likely will not end until the euro collapses as a currency and takes the entire European Union with it, said Dennis Gartman, hedge fund manager and author of "The Gartman Letter.""I think the whole thing will go down to defeat, the whole thing will eventually unravel," Gartman said in an interview with CNBC.  Gartman said he doesn't have a specific timetable for how long it will take for the collapse of the 17-year-old EU, but said, "it doesn't look good

Many possible triggers for wider euro debt crisis (Reuters) - Europe may be months, conceivably weeks away from an expanded debt crisis that cuts more countries off from access to the markets and forces fresh emergency action by rich governments or the European Central Bank. The many potential triggers for an expanded crisis include a failed bond auction, any signs that Athens or donor nations were backing away from a 110 billion euro ($141 billion) bailout of Greece, and a freezing up of Europe's interbank money market. For now, Portugal, Ireland and Spain, widely seen as the next possible "dominos" after Greece, remain in significantly better shape. The interbank market is far from grinding to a halt as it did after Lehman Brothers collapsed in late 2008.

FT Alphaville – Who’s most at risk of falling into a European debt trap - Who’s driving who in the complex interplay between European bond markets and sovereign ratings?Deutsche Bank’s Bernd Volk aptly summed up the situation late last week:In its downgrade of Spain to AA from AA+, S&P said: “We have taken into account the possibility that Spanish public and private sector borrowing costs could remain elevated in 2010-2011.” This suggests that S&P was driven by the market development. Funding conditions may have to improve further or support may be needed to avoid further rating actions in the Eurozone and to prevent a vicious circle further freezing public market access . . .Every time one of these sovereign downgrades happens it becomes more difficult for sovereigns to sell their bonds, and harder for governments to service their existing debt. That increases governments’ borrowing and debt servicing costs and leads to . . . more ratings cuts. A vicious circle indeed

Debt levels may continue swelling 'for some time' says European Commission (Bloomberg) — European governments' debt burden may continue to swell for "some time", the European Commission said, as the Greek fiscal crisis threatens to spread and more nations risk having their credit ratings cut. The average deficit in the 16-nation euro region may rise to 6.6 percent of gross domestic product this year from 6.3 percent in 2009, the commission, the European Union's executive arm in Brussels, said in semi-annual economic forecasts published yesterday.Overall government debt may surge to 88.5 percent of GDP in 2011 from 84.7 percent this year. Those debt and deficit figures would be the highest since the introduction of the euro in 1999

Europe Crisis Deepens As Chaos Grips Greece - WSJ - Greece's fiscal crisis took a new turn to violence Wednesday when three people died in a firebomb attack amid a paralyzing national strike, while governments from Spain to the U.S. took steps to prevent the widening financial damage from hitting their own economies.U.S. Treasury officials have been quietly urging their European and International Monetary Fund counterparts to put together a Greek rescue plan more quickly to contain the damage, it emerged Wednesday, as U.S. policy makers worry the continent's problems could undermine a U.S. recovery much as U.S. housing woes hammered Europe in 2008.  In Spain, rival political leaders came together Wednesday with an agreement that aims to shore up shaky savings banks by the end of next month. Banks in France and Germany, which are among Greece's top creditors, pledged to support a Greek bailout by continuing to lend to the country. Investors, meanwhile, are pouring money into bonds of countries seen as less exposed to the crisis, from Russia to Egypt

Greek PM must bow to calls for catharsis (Reuters) - Tens of thousands screamed "Thieves, Thieves!" outside Greece's parliament in violent protests this week that killed three people -- and for the first time, the prime minister was listening.After seven months in office, George Papandreou finally appears to be heeding calls for retribution as he tries to push through his pain-for-aid measures on a society enraged over chronic corruption."My rage is huge when I see the tragedy of the looting of Greek people's wealth," he told a parliament debate on his austerity bill on Thursday, accusing the previous government of waste and corruption."One minister paid 28,000 euros (24,103 pounds) for office curtains...They will be prosecuted."Opinion polls show Greeks are more willing to suffer belt-tightening measures to exit a debt crisis shaking the euro zone if those they hold responsible for their woes -- corrupt politicians and businessmen -- pay.

Banks in Portugal, Spain, Italy, U.K. Face Contagion Threat, Moody's Says (Bloomberg) -- Europe’s fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, Moody’s Investors Service said in a report published today.  “Overall, Moody’s notes that each of these countries’ banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them,” Moody’s said in the report.

Selling Greek Aid: Chancellor Merkel Launches PR Offensive Ahead of Key Vote – SPIEGEL - For months, polls have suggested that Germans are firmly against providing aid to Greece. Now, with less than a week to go before a crucial regional election, Merkel's government has backed a 110 billion-euro package anyway. The chancellor is now doing her best to control the political damage.The proposals are coming fast and furious. It seems as though every time German Chancellor Angela Merkel approaches a microphone this week -- and on Monday evening she managed to complete six television interviews -- she demands yet another measure to ensure that a crisis like that in Greece doesn't repeat itself. In an interview with the public television station ZDF, she demanded that a mechanism for "orderly insolvency proceedings for countries" be established. On ARD, she said that banks cannot be allowed to shirk their responsibility and insisted that financial market regulation be strengthened. On RTL, she demanded that financial speculation be reined in.

German Minister Warns Against Greek Debt Restructuring - A restructuring of Greek debt would have dangerous consequences, with the country's sovereign debt crisis possibly spilling over to other nations, German Finance Minister Wolfgang Schaeuble warned Thursday. "If we opted for a restructuring [of debt], this would cause exactly the kind of conflagration that we won't be able to control," Schaeuble said at the Europe Forum organized by WDR television

Germany reveals 40-billion-euro tax hole - The German government forecast a massive fiscal hole on Thursday, giving Chancellor Angela Merkel precious little room to deliver on tax cuts promised in her 2009 re-election campaign.Figures from the finance ministry showed that tax receipts over the period 2011 to 2013 would be almost 39 billion euros (50 billion dollars) less than predicted last year. Germany, quick to lecture Greece over its debt crisis, has considerable fiscal problems of its own that were exacerbated by its biggest recession since World War II last year when output shrank five percent.  Europe’s biggest economy, now pressing for tougher European Union rules on deficits in light of the Greek turmoil, expects to borrow around 80 billion euros this year and to spend far more than it earns.  Its budget deficit is forecast by Brussels to reach some five percent of gross domestic output (GDP) this year, well above the three percent limit set out in the 27-nation bloc’s fiscal rule book

Germany backs Greek rescue package – Germany has approved its share of the rescue package for debt-laden Greece. The lower house of parliament voted 390-72, with 139 abstentions, to authorise Germany's participation.It was the first of two votes on Friday. The upper house, which represents Germany's 16 states, is due to vote on the package later in the day and is expected to pass it easily.Chancellor Angela Merkel's centre-right government controls a majority in both chambers."We have to make this decision and we have no better alternative," Finance Minister Wolfgang Schaeuble said ahead of the vote. "Any other alternative would be much more expensive for the Germans, would be much more dangerous, would carry much bigger risks."He said central bankers and the IMF agree "it would be disastrous to risk ... a member of the European currency union, Greece, now becoming insolvent."

In Europe, a divergence -THE news out of Europe is reasonably good this morning. The Greek parliament has passed a significant austerity package, despite the unrest that has shaken the country and left a number of Greek citizens debt. The adopted measure is forecast to trim the Greek deficit by €30b over the next three years, which would move the government's budget close to balance. And in Germany, the parliament authorised the money for Germany's share of the Greek bail-out package, a loan of €22.4b, or about 20% of the total rescue. The euro's recent decline halted today amid the developments.But it's interesting to note that yields on Greek debt continued to rise today. As did yields on Portuguese debt. Yields on Irish, Spanish, and Italian debt, on the other hand, came down. To some extent and for now, Europe seems to have managed to ring-fence the crisis. It is unfortunate that Portugal is inside the fence, but very good news that Spain and Italy are outside of it.

Are you ready for the United States of Germany? - I am convinced that over the next few years, fairly or unfairly there will be a crescendo of blame directed at Germany and German policies, and this ire will be magnified by the fact that many Germans seem oblivious to their role in the crisis.  The German press in fact seems to delight in wagging a disapproving finger at the shameless profligacy of the south, and this can’t make southerners very happy.Critics of Germany will argue that this moralistic posturing is thoroughly misplaced.  European monetary policy, which was driven largely by Germany, was incompatible with German trade and labor policies that effectively suppressed German consumption, forced a large trade surplus onto its neighbors, and together made a southern European debt crisis almost inevitable.The strong euro and burgeoning liquidity it brought on meant that much of Germany’s trade surplus had to be absorbed within the eurozone, forcing especially southern Europe into high trade deficits. 

French indignant over government plan to raise retirement age - True to form in this protest-rife land, Sarkozy's announcement that he intends to raise the national retirement age sometime this summer sent thousands of demonstrators spilling into the streets last month in opposition. But this time the French are part of a larger tide of anger and anxiety surging across Europe. With budget deficits ballooning across the continent, and a huge bailout of debt-ridden Greece on the verge of taking place, officials across Europe say they have no choice but to boost retirement ages if they are to tackle a monumental economic problem compounded by declining populations and longer life spans. But few issues are as sensitive in a region where the right to retire at a decent age, and retire well, is considered almost an inalienable social right. For many here, it's one of the defining elements of their identity as Europeans, part of what they feel makes them different - more reasonable, more humane - from overworked, overstressed Americans.

Spain fact of the day - The regional governments already account for 57 percent of Spain’s public spending, double the level of two decades ago, according to Carlos Sebastián, economics professor at Complutense University in Madrid.  There is more discussion here.  As in Greece (or for that matter the EU!), the fiscal difficulties are revealing political difficulties which have been papered over by excess and unsustainable levels of subsidy.  That's why this is more than just a straightforward financial crisis.

Report Spain wants 280 bln euros aid is madness-PM (Reuters) - Spanish Prime Minister Jose Luis Rodriguez Zapatero on Tuesday dismissed as "complete madness" a market rumour that his country would soon ask for 280 billion euros in aid from the euro zone. He also told a news conference in Brussels that such rumours could damage Spain's interests and that this would be "intolerable" and Spain would fight them. He said he had confidence in Spain's public accounts and it was strongly solvent, but his country had to restructure its financial sector as soon as possible.

Spain Feels Pain As Recession Bites - It is hoped the deal to rescue Greece's embattled economy will prevent other eurozone countries, with large deficits, from facing similar crises. But there are fears that countries like Spain and Portugal could be dragged into the financial turmoil.  On May Day in Madrid, several thousand people marched through the centre of the city to mark Labour Day. Figures from the first quarter of 2010 showed that Spain has 20.05% unemployment - the highest in the eurozone. With the country still in recession, jobs are a key worry for these marchers.

The Pain in Spain Falls Mainly on the Plain (folks) How backwards does a modern nation have to be for a 20% unemployment number to be even remotely tolerable? I'm always fascinated with democracies that choose to embrace a form of quasi-communism after watching every single one of these experiments toppled - from Russia to Latin America to Asia.When will they learn?  22% unemployment?  25%?  30%?  Must the people be boiling and eating shoe leather before the marxist regime is finally dismantled? In Spain's case, apparently.

Spain Faces 'Explosive Cocktail' of Risk on Jobs, Rotten Loans  (Bloomberg) -- Spain faces an “explosive cocktail of risk factors” as it wrestles with a fiscal deficit at 11 percent of gross domestic product caused by bad loans to builders and swelling unemployment, UniCredit SpA said.The nation’s budget gap is the third largest in the European Union and with an unemployment rate of more than 20 percent, the government in Madrid has limited room to maneuver, according to Stefan Kolek, a credit strategist at UniCredit. Bad loans at Spanish lenders climbed to 5.3 percent of total credit in January as the worst recession in 60 years forced borrowers to miss payments on their debt. "The high dependence of the economy on a highly leveraged construction sector in conjunction with still falling housing prices makes an explosive cocktail of risk factors,”

Even the bears aren't bearish enough on Spain's coming sovereign debt problem (Fortune) -- We often say that investors can be bullish, bearish, or not enough of either. "Our debt is clean, we will not have to ask for help," said Elena Salgado, Spain's finance minister, on April 30th, appealing to the bulls. That is, if there are any bulls left in sovereign debt. Currently, there is no shortage of bearish sentiment regarding global sovereign debt issues. In recent weeks, Greece, Portugal, and Spain have all had their credit ratings downgraded, with Greece taking on junk status. Yet despite this flurry of negative news, I would submit that investors are still not bearish enough, particularly on Spain.

Moody's May Cut Portugal Rating as Contagion Spreads (Bloomberg) -- Portugal may have its credit rating cut by Moody’s Investors Service as the country struggles to reduce its budget deficit and revive economic growth a sign that contagion from the Greek crisis is spreading. Moody’s today placed its Aa2 rating on review for a possible downgrade, a process that will conclude within three months, the company said in a statement. The rating is currently the third-highest investment grade. Investors are shifting their attention to Portugal after surging bond yields forced Greece to seek a 110 billion-euro ($142 billion) bailout from the euro region and the International Monetary Fund. The extra yield that they demand to hold Portuguese bonds over German bunds last week rose to the highest since 1997 and Bundesbank President Axel Weber today warned that the euro region faces “grave contagion effects.”

Moody's says very likely to downgrade Portugal  (Reuters) - Moody's Investors Service put its credit rating for Portugal on a three-month review on Wednesday, and a senior Moody's analyst said that as a result a downgrade of the credit rating is now likely. Moody's said it could downgrade Portugal's Aa2 ratings by one, or at most two, notches, citing "the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges," especially due to low competitiveness. "We have sent a signal that it is possible, and I have to say, statistically, there is a very strong likelihood that if we put it on a review for downgrade then we follow through with a downgrade," Anthony Thomas, vice president at Moody's Sovereign Risk Group, told Reuters.

Portugal Banks Stockpiling Collateral for ECB Loans(Bloomberg) -- Portuguese banks are building up reserves of asset-backed securities eligible as collateral for loans from the European Central Bank as borrowing in bond markets becomes more expensive, according to Fitch Ratings.Fitch was asked to provide feedback on “several” new proposals by Portuguese lenders creating bonds secured by loans to small and medium-sized companies, the ratings company said in a report without providing details. The issues indicate Portuguese financial firms are seeking capital, Fitch said.“Access to the debt capital markets has become more challenging and expensive for Portuguese banks in the recent months,” Philip Smith, a senior director at Fitch Ratings, said in the report published yesterday. “In response, Portuguese banks have been accumulating liquid assets eligible for discount at the ECB in case other sources of funding become scarce.”

Romanian unions threaten strikes over IMF cuts - Romanian unions on Friday threatened a wave of strikes which could cripple hospitals, schools and public transport in protest against draconian wage and pension cuts. President Traian Basescu announced the cuts on Thursday, saying they were needed to ensure continuation of a 20 billion euro aid package led by the International Monetary Fund and would prevent higher taxes and a run on the currency. Romania's powerful unions will meet Basescu on Sunday, before an IMF review mission leaves Romania and leaders said protests similar to those seen in Greece could be launched if they do reach an accord."The likelihood that we will strike is big as long as these draconian measures are not abandoned,"

The PIGS’ external debt problem - VoxEU - Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling

O Nao! - Krugman - Portugal is not looking good: interest rates where Greece was only a few weeks ago.  I really really hope the ECB staff are huddling right now, nerving themselves up to do some serious quantitative easing. Otherwise Anno Domini 2010 is shaping up to be Anno Domino instead.

The Greek crisis: It is not too late for Europe – VoxEU - EU and IMF efforts to rescue Greece have failed to stabilise Europe's financial markets. Now there are significant concerns about Spain and Portugal's financial circumstances. This column says Europe needs to wake up, face the facts, and take action. It outlines what the IMF, ECB, and Eurozone members need to do to prevent the crisis from spreading. It may be too late for Greece, but it is not too late for Europe.

Norway holds billions in bonds from at-risk countries - Norway's state pension fund, the biggest investor on European stock markets, said Friday it was monitoring vulnerable eurozone economies in which it holds billions of euros worth of bonds. At the end of 2009, the fund said it held 55 billion kroner (6.9 billion euros, 8.8 billion dollars) worth of bonds from Portugal, Italy, Greece and Spain, all of which have been hit on financial markets in recent days.It also held 12.6 percent of its European stock investments in these countries at the start of the quarter, it said Friday. The figure amounts to 104 billion kroner worth of shares, notably in banks such as Spain's Santander

In Eastern Europe, Risky Loans in Foreign Currencies Persist – NYTimes - No other region suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies. When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners found themselves stuck with some of the most extreme variable-interest-rate loans on the planet. Monthly payments soared, raising the threat of defaults and bank failures that was averted only with a joint rescue last year by the European Union and the International Monetary Fund — at a cost of 52 billion euros, or about $66 billion. So it may come as a surprise that Austrian, Italian and other Western European banks that dominate the regional market are again offering Eastern Europeans the same credit that nearly derailed their economies a few months ago.

Trichet Resists Call to Step Up Greek Crisis Fight (Bloomberg) -- European Central Bank President Jean- Claude Trichet resisted pressure from investors to take new steps to fight the euro area’s spreading fiscal crisis. Trichet said the ECB’s 22-member Governing Council didn’t discuss buying government debt today and that Spain and Portugal don’t face the same challenges as Greece, which was granted an international bailout last week. Euro-area governments should instead intensify efforts to cut budget deficits, he said. “We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances,” Trichet said at a press conference in Lisbon after the ECB kept its benchmark interest rate at 1 percent, a record low. Spain and Portugal are “not Greece,” he said.

Bank Swaps Surge as Moody’s Raises Sovereign Contagion Alert… (Bloomberg) -- The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis. Banking systems in Greece, Portugal, Italy, Spain, Ireland and the U.K. may come under pressure as the crisis worsens, Moody’s said in a report today. The ratings firm said yesterday it may downgrade the Portuguese government and its banks after Standard & Poor’s last week cut the sovereign debt of Greece, Portugal and Spain. “The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,”

Are France and Germany In Trouble? - You know that Greece, Portugal and Spain are in trouble. You probably know that the UK is threatened by the sovereign debt contagion. But as the following Reuters chart shows (based on information provided by BIS), France and Germany are the largest holder of Greek debt:As The Street notes, France and Germany are also greatly exposed to Portugal and Spain:France's banking sector has the second-largest exposure to Portugal and Spain debt loads, after Germany, according to the BIS.European banks have more at-risk assets in Portugal and Spain than in Greece. European lenders are holding Portugal debt issues of $240.5 billion -- including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009 quoted in a Bloomberg report.And as Tyler Durden points out, France Germany and the UK are getting hit with wider credit default swap spreads

The Greek Contagion Spreads - Forbes -(Roubini) Even as the International Monetary Fund and eurozone have virtually finalized an unprecedented three-year financing package of 110 billion euros for Greece, financial markets remain unimpressed. The common currency continued to plunge this week, and long-term government bond yields in Greece and the periphery countries, including Italy, spiked again after a short relief rally before the agreement.The market's lukewarm reaction to the financing package confirms our view that a traditional financing package (Plan A), extended at unsustainable interest rates, will not allay solvency fears but rather lead to disorder and contagion.

Widening gyre - Its been a while since we've had a good opportunity to quote William Butler Yeats, who featured prominently in headlines in the fall of 2008. Europe, unfortunately, is obliging us. Yields on government debt for Greece, Portugal, Ireland, Spain, and Italy rose today and hit new crisis highs. The euro continued to fall, sinking below $1.27 at one point. And meanwhile, the European Central Bank held interest rates steady, but president Jean-Claude Trichet also announced that the ECB governing council didn't even discuss the possibility of buying government bonds—a measure that may ultimately be necessary to prevent a wave of European defaults.While markets wait on the next policy move to come out of Europe, pundits seem to be all but writing the euro's obituary.

The euro's existential worries | The Economist… WILL the euro still exist in 10 years’ time? That is a trickier question to answer than it was three months ago, when European Union leaders first lined up in Brussels to wag their fingers at the markets and offer vague declarations of “solidarity” with Greece in its hour of fiscal need. The political will to preserve the euro should not be underestimated, any more than was the political will to create it. Indeed, EU resolve has strengthened since February. But the crisis has worsened even faster. There is anger in Brussels that it took until May 2nd for the euro-zone countries to put real money on the table: €80 billion ($105 billion) to meet Greece’s borrowing needs, topped up by €30 billion from the IMF. Senior officials blame Germany for the delay. They concede that Angela Merkel, Germany’s chancellor, has a defence: Greece would never have agreed to such an ambitious austerity plan if the bail-out had come sooner. Fine, the officials retort; but rescuing Greece only at the last possible moment before default has raised the cost by billions

Can Greece Cut Its Deficit by 10% of GDP, Part II - As  I noted a few days ago, some nations have managed even larger budget adjustments than the one that Greece faces today.  Several commenters rightly noted, however, that this slim reed of hope becomes even slimmer when you consider other factors such as the pace of adjustment (Greece would have to cut very quickly) and its inability to devalue its currency (unless it leaves the eurozone). Michael Cembalest of JP Morgan put together a sobering chart that highlights how severe Greece’s challenges are compared to other nations that have accomplished major budget adjustments in the past.  Today Greece finds itself high on the vertical (i.e., needing a very rapid fiscal adjustment) with minimal growth prospects and no ability to devalue.

Debt crisis: The EU is waterboarding Greece - On the day of the eurozone leaders' meeting in Brussels, it is essential that we look at what is really going on in the European Union. The Conservative majority in the EU has again lost sight of the big picture. Its punishment of Greece is like the nation-state equivalent of waterboarding. It seems that it is unable to grasp the gravity of the situation. It is targeting Greece but refusing to see the dangers of its lack of EU coordination and inaction.For four months, EU centre-right governments have applied a torturous drip-drip approach with no less than four separate austerity programmes being demanded. These agonising tactics are due solely to Angela Merkel's "policy of prevarication". Despite experienced progressive voices in Germany recommending a quicker response, the chancellor refused to budge until the last minute. The pain for Greek people has been as much about their justified anger that each line in the sand seems destined to be crossed, due to external demands. This is not how you inspire a population to embark on a tough journey.

Citigroup’s Buiter Says European ‘Wimps’ Slow Greek Debt Revamp (Bloomberg) -- Citigroup Inc. Chief Economist Willem Buiter said European governments have delayed an inevitable Greek debt restructuring because they’re “wimps” and don’t want to bail out their own banks. “If the European area governments weren’t such wimps, they would have done it right away,” Buiter, a former adviser to the International Monetary Fund and World Bank, said today in remarks at the Council on Foreign Relations in New York. “It’s been a disgraceful episode for European heads of state, especially in Germany, for the narrow-minded parochialism that has been displayed.” European leaders including German Chancellor Angela Merkel are meeting in Brussels to endorse a 110 billion euro ($140 billion) Greek bailout. Stocks and commodity prices fell on concern Greece may default even with the rescue plan and drag down Spain and Portugal as well. The selloff worsened after European Central Bank President Jean-Claude Trichet yesterday signaled no immediate steps to stem the worst crisis since the euro’s debut in 1999.

EU debt woes will result in debt defaults, says Prof Ken Rogoff - SOME peripheral eurozone economies will find it difficult to avoid large-scale defaults on their private or public external debts, or on both, said Kenneth Rogoff, a professor of economics at Harvard.Writing in the 'Financial Times', he said not only Greece but also Spain, Portugal and Ireland have debt that's "sky high", judged by emerging market standards. Greece is unlikely to be the last euro nation to need an IMF bailout, with Ireland, Spain and Portugal "conspicuously vulnerable", Mr Rogoff said

IMF cannot afford to bail out the rest of Southern Europe…Here’s the logic. The IMF is currently lending Greece €30bn (about $39bn) towards the combined EU-IMF bail-out package for the troubled nation. This is just under 32 times its quota. It is, for what it’s worth (a lot), the biggest IMF bailout in the Fund’s 65 year history. The previous record was held by Korea which borrowed 20 times its quota in 1998. Anyway, for the sake of illustration, let’s imagine you might need a similiar-sized bail-out of Portugal. That would cost $41bn (to be completely precise, that’s 27.4bn SDRs – the Special Drawing Right being the internal currency term used at the IMF). A similarly-proportioned bail-out of Spain would cost $144bn. And for Italy, the figure would (gulp) be $333.1bn. Can the IMF afford anything like this combined half trillion dollar bail-out? Simple answer: no. The Fund currently has an emergency pot of only $355.2bn. And though there are more funds on the way from the US, there questions over whether the available funds would ever reach this total. And bigger questions over whether the Fund’s members would approve the deal.

Euro crisis goes global as leaders fail to stop the rot - The growing crisis in the eurozone threatened to undermine the global economic recovery as markets plunged across the world on fears that European leaders may not be able to contain the debt contagion spreading from Greece.An emergency summit of the 16 leaders of the countries using the single currency was held in Brussels , with Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France demanding tougher and quicker regulation of the financial markets in what looked like a doomed attempt to contain contagion from the Greek drama

Greek crisis goes viral - (Reuters) - The Greek crisis, to borrow an expression from social media, has now gone viral.It is no longer just about the euro zone. It is global, hitting financial markets across the board and threatening the general improvement in the global macroeconomic climate.Heading into a new week, there is no comfort for investors either from the indecisive British general election, with its accompanying macroeconomic uncertainty.But it is Greece that is the domino that has started to topple.Rioting protestors and burning banks on the streets of Athens have clearly grabbed the limelight the over the past week. But from an investor standpoint, they have simply underlined the growing skepticism about whether the European Union can save the euro zone from a Greek default and spreading debt meltdown.

Governments try to ease global fears over Greece (Reuters) - Governments around the world tried on Friday to calm financial markets shaken by fears that Greece's debt crisis could cause difficulties for other European economies.Group of Seven finance ministers discussed the problems in a conference call after U.S. Federal Reserve officials expressed concern and President Barack Obama told German Chancellor Angela Merkel by telephone that he backed efforts to rescue Greece.World stocks held near a three-month low, despite strong U.S. jobs data, because of fears that emergency loans from the European Union and International Monetary Fund might not be sufficient to prevent a Greek default."We agreed on the importance of a strong policy response by the affected countries and a strong financial response from the international community," Obama said.

Ezra Klein - Too much tail risk - The consensus, as I understand it, is that the Greece bailout might work -- but probably won't. That shouldn't matter that much, as Greece isn't that big: 3 percent of the Eurozone's GDP, and a much smaller percentage of global GDP. But look at the consequences of the instability: The euro might collapse. The American stock market just tanked. Spain and Portugal are teetering. The global financial system is really vulnerable to shocks right now, and the various governments that could respond are pretty deep in debt. The IMF and the eurozone just committed $147 billion to Greece. The oil spill in the Gulf of Mexico is going to add tens of billions, and maybe even more, onto the U.S. government's tab. That doesn't sop up all the excess capacity the system has to mount rescues, but there is, somewhere, a limit, and we are closer than we were before. And think what could go wrong

Greece debt crisis wipes millions off British banks - Two of Britain’s biggest banks admitted they’ve already taken multi-million pounds hit on their exposure to Greek debt, amid mounting fears that the crisis-hit nation will default on its loans.Taxpayer-controlled Royal Bank of Scotland said it has taken a £400m provision against its £1.5bn holding in Greek bonds. HSBC said it has marked down the value of its £1.3bn exposure, but described it as a ‘dent rather than a crash’.RBS chief executive Stephen Hester believes the sovereign debt crisis gripping markets is an ‘uncomfortable reminder’ of the fragility of the global economic recovery

French banks catch cold amid fears of exposure in Greece - The Greek financial crisis is filtering into the banking market, where worries about the exposure of Europe’s leading lenders to weak eurozone governments are raising the cost of insuring bank debt. Shares in the big French lenders, including Crédit Agricole, Société Générale and BNP, fell and credit default swaps on Crédit Agricole widened as markets continued to speculate on a Greek default.Signs that confidence is eroding in the banking sector emerged as a summit of eurozone leaders convened to approve the €110 billion Greek bailout. Olli Rehn, the European Monetary Affairs Commissioner, warned that a Greek bankruptcy could have the same effect on the markets as that of Lehman Brothers in 2008

Capital Markets Face Worst Crisis in 100 Years, Evolution Says (Bloomberg) -- Capital markets may be facing the biggest crisis in a century with governments all but powerless to ward off a sovereign debt disaster, according to Evolution Securities Ltd. Investors greeted plans for a 110 billion-euro ($143 billion) bailout of Greece by shunning the bonds of Europe’s debt-ridden nations on concern the aid package won’t solve the country’s deficit crisis or prevent contagion. Credit-default swaps on Greece, Spain, Portugal and Italy surged and the euro tumbled. “The capital markets could soon be in the midst of the largest financial crisis of the last 100 years,” said London- based Jenkins, Evolution’s head of credit strategy. “With government debt itself perceived to be the problem the potential for political and economic change is much greater.” While the bailout package reduces the “very real risk” of a Greek default, it doesn’t change investors’ view that the country’s debt will be restructured in the medium term, Jenkins said. The European Central Bank may be asked to buy government bonds should markets continue to tumble, he said.

Negative and Positive sovereign debt feedback loops -There are two sorts of countries: countries that can print money to pay their sovereign debts; and countries that can't. Canada is a printer; Greece is a non-printer.Both sorts of countries can get into trouble if they issue too much sovereign debt; but they get into very different types of trouble. Printers get into negative feedback trouble; non-printers get into positive feedback trouble. Positive feedback is always worse than negative feedback, when a bad thing happens. (And positive feedback is always better than negative feedback, when a good thing happens). Positive feedback is a circular feedback loop that tends to amplify the effects of an initial shock.Negative feedback is a circular feedback loop that tends to diminish the effects of the initial shock.

A Money Too Far, Krugman,  NY Times: So, is Greece the next Lehman? No. It isn’t either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008. Whatever caused that brief 1,000-point swoon in the Dow, it wasn’t justified by actual events in Europe. Nor should you take seriously analysts claiming that we’re seeing the start of a run on all government debt. U.S. borrowing costs actually plunged on Thursday to their lowest level in months. ...  That’s the good news. The bad news is that Greece’s problems are deeper than Europe’s leaders are willing to acknowledge,... and they’re shared, to a lesser degree, by other European countries. Many observers now expect the Greek tragedy to end in default; I’m increasingly convinced that they’re too optimistic, that default will be accompanied or followed by departure from the euro.

Does a common currency area need a centralized fiscal authority? - Mankiw -Paul Krugman has a thoughtful and thought-provoking column on Greece today. A large part of his argument is that Europe is not an optimal currency area because it lacks a large central government enacting transfer payments among the various regions.  That argument will be familiar to students of macroeconomics.  (See, e.g., the case study on monetary union in chapter 12 of my intermediate macro textbook.) Is that right? I am not so sure. The United States in the 19th century had a common currency, but it did not have a large, centralized fiscal authority. The federal government was much smaller than it is today. In some ways, the U.S. then looks like Europe today. Yet the common currency among the states worked out fine.

Krugman, Mankiw, and the U.S. as an OCA - Paul Krugman has an interesting column today where explains the Greece and Eurozone crisis from the optimal currency area (OCA) framework. Greg Mankiw also likes the OCA framework, but takes issue with Krugman's emphasis on the lack of a centralized fiscal authority as the key reason why the Eurozone is a mess:  Mankiw attributes the success of the U.S. currency union in the 19th century to wage flexibility and labor mobility. He notes, though, that Greece and much of the Eurozone lack these and thus the Euro experiment may be doomed. I agree with Mankiw that the Eurozone problems are more than just the lack of a centralized fiscal authority. As I have shown before, members of a currency union should (1) share similar business cycles or (2) have in place some combination of economic shock absorbers including flexible wages and prices, factor mobility, fiscal transfers, and diversified economies. Having similar business cycles among the members of a currency union means a common monetary policy, which targets the aggregate business cycle, will be stabilizing for all regions. If, however, there are dissimilar business cycles among the regions then a common monetary policy will be destabilizing—it will be either too stimulative or too tight—for regions unless they have in place some of the economic shock absorbers. Here is how I represented this understanding graphically

A Cross Of Gold - Krugman - Reacting to today’s column, Greg Mankiw points out another reason American makes a better currency union than Europe: high labor mobility, thanks to our cultural homogeneity. Indeed; that’s Mundell’s original optimum currency area argument. (It was actually in my first draft of today’s column, but length was a problem — I needed to cut another 200 characters — and it also doesn’t bear too directly on the current European issues.) But Greg raises another interesting point: why did 19th-century America, with a small central government, also work as a currency area? One answer, which David Beckworth points out, is that it didn’t necessarily work all that well. When William Jennings Bryan declared that “you shall not crucify this country on a cross of gold,” he was in effect saying that the monetary policy dictated by the Bundesbank gold standard wasn’t appropriate for the farm states.  I’d add another point: the 19th-century economy had much more flexible prices and wages than later came to be the case

The Eurozone lender of last resort? - OK. Let's simplify this whole Eurozone mess. Central banks do two things: 1. They do normal, boring, monetary policy. They keep an eye on things like inflation and unemployment or whatever, and move the money supply or interest rates up and down to try to make Aggregate Demand and the economy go where they want it to go. The European Central Bank can normally do normal monetary policy like any other central bank. Sure, there's the whole question of whether the Eurozone is an Optimal Currency Area ("one size fits all"), but that's just a difference of degree between the Eurozone and, say, Canada. 2. They act as lender of last resort. This is the exciting part of monetary policy. But because people know that central banks will usually act as lender of last resort if they ever need to, monetary policy rarely gets exciting. Which is a Good Thing.

Must large capital inflows always end in crisis? - The question I wish to pose for the next two weeks is whether it is possible for countries to accept large net inflows of capital from abroad, without ending up in crisis. If not, how do we manage a world of capital mobility? This may seem a rather abstract problem. But I find it among the most important of all challenges confronting the world economy. It is the principal topic of my recent book, Fixing Global Finance (of which an updated edition has recently appeared). The view I have derived from the last three decades of experience is that it is almost an iron rule that, whenever countries run really large and sustained current account deficits (more than 5 per cent of GDP, or so), they end up in financial crisis. Carmen Reinhart and Kenneth Rogoff provide strong support for this view in their recent masterpiece, This Time is Different

Trading away financial stability - Now pretend you are a finance minister in an emerging market economy. In normal times you would more than welcome all the capital you could get. However, you have a fledgling financial system just showing signs of recovery from the global financial crisis. You are also just back from the annual International Monetary Fund meetings where you were warned that this "capital bonanza" may be causing currency, stock, real estate, and other asset bubbles in your economy. To stem those bubbles you raised interest rates – which only accentuated the incentive for foreign investors to pour speculative capital into your country.Well, there may be another way out. In a February 2010 staff position note and (more cautiously) in the IMF's Global Financial Stability Report (GSFR) also released at those meetings you went to, the IMF said that capital controls are a legitimate part of the toolkit for the situation you are in.

Trichet May Rewrite ECB Rule Book to Tame Greek Risk (Bloomberg) -- European Central Bank President Jean- Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro. Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans. The central bank may have to extend that to other nations, renew a program of lending unlimited cash to banks for a year, and even start buying government debt if the 110 billion-euro ($146 billion) bailout plan for Greece fails to stem the euro’s slide, economists said.  “Rather you break the rule book than the euro area,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “We’re far from being out of the woods. There is now a real opportunity for the ECB to take the lead.”

The message from Berlin that Europe failed to grasp - Does the German government understand what is at stake in the crisis of the eurozone? In recent weeks it has been hard to escape the question. It now seems that Berlin has finally woken up and we may yet avert a disaster. But even assuming that we survive the current crisis, it would be dangerous to minimise what has happened. Behind the difficulties of the past few months lurk deeper changes in German government which, though they have gone largely unnoticed by the outside world, are rooted in recent German history and threaten to have profound implications for Europe. With characteristic acuity, the FT’s Wolfgang Münchau was one of the few to pick up on its significance, predicting that in short order it would create a conflict between France and Germany that might be fatal to the eurozone. Subsequent events would appear to have borne him out. With the hawkish constitutional court looking on, aid for Greece is pitted cent for cent against benefits for Germany’s unemployed. If the long-term survival of the euro requires greater fiscal co-ordination, Berlin has tied itself to a standard of the most dour and simple-minded conservatism

Euro Zone Economy Largely Shrugs Off Greece Crisis - So far, the euro zone has been able to largely shake off the effects of Greece’s fiscal crisis. For all the trouble in Greece and, to lesser extent Portugal, those two countries account for less than 5% of the region’s GDP. Even when Ireland and Spain are added in, the troubled periphery accounts for less than one-fifth of euro zone GDP. And as investors pull money out of Greece, they’re putting it into Europe’s safe havens, particularly Germany, where the 10-year bund yield is now less than 3%, down about half a percentage point since the beginning of the year and near an all-time low. French interest rates are also down. The two countries account for half of euro zone GDP.

European sovereign debt fears - limited impact on European corporate bond markets - Strong earnings results, low inflation expectations and a view that the ECB will have to keep interest rates lower for longer to support the economic recovery has seen demand for European corporate bonds remain fairly robust.  That is not to say that European corporate bond markets have been unaffected. Those credits that have been most impacted by the sovereign debt worries have unsurprisingly been domestic Greek and Portuguese corporations that have limited foreign earnings. It is clear to me that these corporations will continue to come under pressure from the market due to worries about lower earnings, higher taxes and continued speculation that some nations may leave the Euro. This is likely to be reflected in a higher spread for Greek and Portuguese corporate bonds over the equivalent risk-free government bond (which is currently German bunds). Some investors have sought the protection that is offered by credit default swaps (CDS) resulting in more pressure on cash bonds. CDS are seen as an early warning signal for bond markets, alerting investors to structural weaknesses before a crisis hits.

European Liquidity Issues - There is a rumor circulating that the ECB is prepared to announce a €600 billion loan facility for European banks over the next few days. One key analyst has suggested that the FOMC might re-open the dollar swap lines for Europe. I don't usually post rumors during the day, but this is being widely circulated as a possibility. Note that the Bank of Japan moved last night, from the Financial Times: Bank of Japan pumps funds into market  The Bank of Japan offered Y2,000bn ($21.6bn) in overnight liquidity on Friday to “increase markets’ sense of security” because of turmoil resulting from the debt crisis in Greece. ... the bank’s action reflects global demand for dollar liquidity as investors move out of the euro. And from the WSJ: European Banks Head Toward New Funding Crunch  Europe's sovereign debt crisis is making it harder for European banks to get their hands on dollars and may require their central banks to step in with short-term liquidity ...

EU to Set Up Fund to Prevent Spread of Greek Crisis  (Bloomberg) -- European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro.  Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before Asian markets open late tomorrow European time.  “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels

EU to Defend the Euro - Yves Smith - The only moderate reduction in market havoc on Friday has all eyes on the European officialdom. Will they mount a credible enough plan over the weekend to buy them a bit of breathing room so they can come up a better salvage operation for the euro experiment? The odds are against both steps in the process (calling off the hounds of the market and then patching up eurozone arrangements), but as the wags remind us, it isn’t over till the fat lady sings. The EU is at least moving decisively to defend the euro. That may not be as nutty as it sounds, particularly if other countries (the US, Japan, and China, none of whom would benefit from a weak euro) join in the intervention. While single country efforts to prop up currencies usually end in tears (by the time the country under attack resorts to intervention, it is typically low on FX reserves and hence lacks firepower and credibiltiy), multi country intervention like the Plaza Accord and the Louvre accord have been effective

French President Nicolas Sarkozy Vows to "Confront Speculators Mercilessly" via Secret Plan he cannot Reveal - Mish -Every time officials in Europe starts yapping about containing the European debt crisis, the market makes complete fools of them. The latest comments from French President Nicolas Sarkozy may take the cake. Speaking at a news conference, Mr. Sarkozy vowed to “confront speculators mercilessly” and warned them that they would soon “know once and for all what lies in store for them.”The leaders said they would create a so-called European stabilization mechanism, but Mr. Sarkozy declined to give details of the plan on the basis that doing so could undermine its effectiveness.

Buiter’s warning: Who is the recapitaliser of last resort for the ECB? - VoxEU - This column, first posted 17 May 2008, reviews Willem Buiter's analysis of why the ECB is so hesitant to buy debt. Central banks can go broke – and some in developing countries have done so recently. The ECB is now lending against dubious collateral. An ECB recapitalisation seems unthinkable at the moment, but that’s why it is a good time to think the unthinkable. Willem Buiter considers the question at length in CEPR Policy Insight No. 24 and argues that Eurozone fiscal authorities should, ASAP, agree on a formula for fiscal burden-sharing should an ECB recapitalisation ever be necessary.

The European fiscal vacuum makes the ECB timid on quantitative and credit easing - VoxEUFirst published on 24 March 2009, this column is more relevant than ever. In it Willem Buiter argues that the ECB’s lack of fiscal backing is both unusual among major central banks and a severe handicap – it is a factor in why the ECB is “fiddling while the Eurozone burns” by hesitating to undertake quantitative easing started by the Fed, Bank of England, and others.  Editors’ note: This is the first of a four-part series of Vox columns culled from Willem Buiter’s recent post on his FT-sponsored blog, Maverecon.

The Greek crisis: It is not too late for EuropeVoxEU - EU and IMF efforts to rescue Greece have failed to stabilise Europe's financial markets. Now there are significant concerns about Spain and Portugal's financial circumstances. This column says Europe needs to wake up, face the facts, and take action. It outlines what the IMF, ECB, and Eurozone members need to do to prevent the crisis from spreading. It may be too late for Greece, but it is not too late for Europe.

The Mother of All Bubbles: Huge National Debts Could Push Euro Zone into Bankruptcy - Greece is only the beginning. The world's leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it. By SPIEGEL staff. A similar scenario to Lehman could unfold once again, except that this time it would be happening at a higher level, on the meta-level of exorbitant government debt. This fear has had Europe's politicians worried for weeks, but their crisis management efforts have failed. For months, they have been unable to contain the Greek crisis.

Must The Euro Currency Be Destroyed To Save The Eurozone Economy? - Some ways back in these pages, we questioned whether the Federal Reserve, in trying to plug a massive credit contraction hole, might be tossing a mattress into a volcano. It turned out to be the right analogy, but the wrong tosser. The eurozone is the region with serious volcano issues (and not just by way of Iceland).  Last weekend, European heads of state finally got their acts together in offering up a Greek rescue package. The proposed rescue - which the U.S. taxpayer had a hand in too, by way of IMF commitment - was supposed to restore calm and show a fiscally united front. The actual effect was the opposite. Instead of calm, there was fresh panic. The sovereign debt volcano, rather than being sated by last-minute terms for a Greek bailout, grew angrier.

Euro Will Collapse Like Tower of Babel: Economist -CNBC - The attempt to maintain artificial monetary stability within Europe proved to be an expensive failure in the 1930s, but can it survive in 2010? “The IMF could not insist on a Greek devaluation because that would have been tantamount to Greece’s leaving the euro zone,” Lewis said. “If the euro zone started shedding members, it would at least bring the euro arrangements into question. A Greek debt restructuring was also ruled out.”“If Greece’s creditors had been obliged to take a hit, where would that have left the creditors of other euro zone countries with relatively large government deficits?” he asked. “The risk would have been that a debt restructuring would have increased the virulence of the contagion from Greece and, ultimately, would have generated extreme uncertainty over the future of the euro currency.”

Beautiful Chart On The End Of The Age Of Europe - Europe is embroiled in a sovereign debt crisis, but it is just the start of a downward trend for the continent, if this GDP chart is to be believed. This beautiful chart from Spanish economics blog Venturatis, makes it clear that European nations are falling behind in the GDP competition, and sure to fall behind more over the next 40 years if they can't stick together and make the European Union a growth titan. Notably, the United States remains a massive growth market throughout the next 40 years.

Whoever forms the next British government may face a huge Euro-row - WHAT with the euro crisis and a British election, I seem to have spent today scrambling from one television and radio studio to the next. In interviews about the British election (RTL+ television and Bel RTL radio so far), I have faced questions about British-EU relations, and whether a Conservative government will pick a huge fight with Brussels. I have dutifully answered what I have heard from senior Tories, namely that with a nasty economic crisis to manage, the last thing a new Conservative government will look for is a time-consuming fight with the EU. Then I have headed to interviews about the euro crisis (BBC News Channel, Radio Netherlands and, hurry, hurry BBC World Service TV at 1800 GMT tonight). There people have broadly wanted to know if this crisis is about to get worse. Could be, I have answered. The Greek bail out is not the end of it. Halfway between interviews, a horrible thought dawned on me, that the two themes could end up linked.

UK budget deficit 'to surpass Greece's as worst in EU'- European commission's spring forecasts put UK budget deficit this year at 12% of GDP – the highest in the European Union and worse than Treasury estimates. The commission's spring economic forecasts put the UK deficit for this calendar year at 12% of GDP, the highest of all 27 EU nations and worse than the Treasury's own forecasts.The country's budget shortfall was the third largest in the EU last year but will overtake both Greece and Ireland this year, according to the forecasts. Greece's measures to tackle its public finances problems are projected to cut its deficit to 9.3% of GDP.Worries about Britain's public finances – in their worst state since the end of the second world war – continue to unnerve financial markets and analysts are divided over whether a hung parliament will have the clout to rapidly reduce the deficit.

Radical Tax On Debt Put To Parties - Martin Weale, director of the National Institute for Economic and Social Research, said the winner of the election should consider the plan in an effort to wean Britain off its reliance on debt. He said that a small annual levy of 1pc on all household debt, including mortgages and credit cards, could help raise £15bn a year – more than would be raised from a 3p increase in the basic rate of income tax.  Although the suggestion will raise eyebrows, Mr Weale runs one of the country's most respected independent institutions, so may spark speculation that it could be examined by the next government. The Conservatives and Liberal Democrats have both pledged to overhaul the tax system to remove the favourable treatment of debt, although neither has suggested a direct levy on household borrowing.

Japan Faces 'Growing' Urgency to Reduce Budget Gap, S&P Says (Bloomberg) -- Standard & Poor's indicated that a fiscal plan scheduled for next month by Prime Minister Yukio Hatoyama's government may be key to whether it will cut the nation's sovereign credit rating. The proposal will be "an important statement of the government's commitment" to rein in the deficit, William Hess, director of sovereign ratings for Asia, said in an interview yesterday in Tashkent, Uzbekistan. "Something has to appear to change our assessment for where things could end up." At stake for Japan is keeping the AA grade after S&P lowered its outlook for the rating in January, and shoring up confidence that it will avoid contagion from a Greek crisis threatening to engulf other sovereign borrowers. Finance Minister Naoto Kan said this week that Greece has shown the need for Japan to take a "very firm" stance toward reducing debt, which is approaching twice the size of Japan's economy.

Fitch warns of debt 'shock' for Japan - The agency said Japan's gross public debt has reached 201pc of GDP and is likely to continue pushing higher into the danger zone unless premier Yukio Hatoyama starts to get a grip on public accounts.  "Japan is increasingly vulnerable to an adverse interest rate shock, given the scale of government debt and hence the volume of refinancing," said Andrew Colquhoun, Fitch's Asia specialist. "The lack of a coherent and credible plan" for fiscal discipline is likely to put "downwards pressure on creditworthiness in the medium term." The Fitch Report comes two days after the IMF warned that the global banking crisis has mutated into a sovereign debt crisis that risks setting off a second phase of economic turmoil.

Risk of Japan going bankrupt is real, say analysts - Greece's debt problems may currently be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialised nation. Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its ageing population. Based on fiscal 2010's nominal GDP of 475 trillion yen, Japan's debt is estimated to reach around 950 trillion yen -- or roughly 7.5 million yen per person. Japan "can't finance" its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

ECB President Favors Global Governance « The President of the European Central Bank, Jean-Claude Trichet, told Forbes that global governance is extremely necessary if we want to prevent another financial crisis. In his prepared printed and spoken remarks to the Council on Foreign Relations, Trichet emphasized that politicians, economists, and financiers must work across the Atlantic and collaborate on methods to create an international set of standards. It is his belief that through global governance, the resiliency of the global financial system can be assured, noting that ultimately it was governments’ use of taxpayer’s money, equivalent to around 25% of GDP on both sides of the Atlantic, that prevented another catastrophic great depression from occurring. With the backdrop of a U.S. financial regulation bill being stuck in the Senate, he argued three main points in support of creating internationally agreed rules.

What the Greek crisis means for you - The debt crisis in Greece is sadly becoming a human tragedy. Not only have people perished in protests against government austerity measures, but the entire population is likely looking ahead to a protracted period of reduced economic opportunity and welfare. That should be enough to make all of us care about what's going on in Greece. But on top of that, there are more selfish reasons to be concerned. Greece might seem a small country, far away, with little international influence. But the crisis in Greece is sending out ripple effects through the entire global economy that will impact everyone. And for the most part, not in positive ways. First, the Greek debt crisis very likely means a slower recovery from the Great Recession.  The fallout from Greece will just be another drag on the recovery, one that could further dampen job creation.

Americans shouldn’t get smug about Europe’s woes - The United States is a great distance from Greece and its economy is moving in a better direction. But the subprime crisis showed how fast and how far local financial problems can spread. If the euro zone gets into real trouble, the United States may be a safe-ish haven, but can’t hope to escape unscathed.American investors got a sampling this week of what further deterioration in the euro zone could taste like. .Looking forward, an encumbered euro zone economy isn’t good news for global growth, an essential ingredient in the still developing U.S. economic recovery. A new European recession would slow demand for American exports, which would be less competitive in any case, thanks to the crisis-strengthened dollar.Then there is the interconnected global financial system. Few envisioned that lax lending standards for subprime loans would start a chain reaction that ended with a global crisis and recession.

Yes, Virginia. There is a Difference Between Greece and the US - Many market analysts, commentators and economists claim to be having a hard time finding a metric in which the US is in better financial shape than Greece. Ken Rogoff, for example, recently warned that a Greek default would usher in a series of sovereign defaults, and suggested recently on NPR that the crisis also had implications for the US. The historian Niall Ferguson made a similar claim a few months ago in the Financial Times. The cries of the deficit hawks grow louder: Repent all ye fiscal profligates, before the “day of reckoning” comes. Let’s dial down the Biblical hysteria a wee bit while there’s still time for rational debate. The market’s recent response to the intensifying pressures in the euro zone suggests that investors are beginning to differentiate between countries that are sovereign issuers of currency, such as the US or Japan, and non-sovereign issuers, such as Greece or any other nations in the euro zone. The US dollar is rising in value, notwithstanding the federal deficit, while debt distress in the so-called “PIIGS” countries, especially Greece, are intensifying, thereby driving down the euro to fresh 12 month lows against the dollar.

Guess Who's Paying For The Greece Bailout? That's Right -- YOU - Of the 110-billion Euro Greece bailout, 30-billion (approx $40 billion) will be paid for by the IMF.  The US supplies almost 20% of the IMF's funding (per quotas).  So that means US taxpayers are providing ~$8 billion of the $145 billion going to kick the Greek can down the road. That's the first outrage.  (Why is this our problem?) The second outrage is that, as in some of the US bailouts, our bailout money is JUNIOR to Greece's existing debt. That means that, over the next couple of years, the idiot banks that loaned bankrupt Greece money will get their money back. And then, when Greece runs out of cash again, we'll be left holding the bag (along with Germany and the rest of the folks who bailed Greece out).

IMF's Greek Bailout: Who Pays? - WSJ. - Some lawmakers and other commentators are arguing that the U.S. will be handed a big bill to rescue Greece from default because the U.S. is the International Monetary Fund's largest shareholder. But as with much concerning the IMF, an international financial institution based in Washington D.C., it isn't that clear-cut.But the U.S. participation in the €110 billion ($145 billion) loan to Greece is relatively modest compared with the huge commitment by Greece's fellow euro-zone governments, and their taxpayers. Those 15 nations are in various stages of approving a total of $106 billion, divided according to their stake in the European Central Bank. Germany would loan $29 billion, followed by France with $22 billion.The U.S. role comes from its obligations to the IMF, which is lending an additional $39 billion as part of the Greek package. The U.S. pays roughly in proportion to its stake in the IMF, as do other countries, if the IMF's board votes to approve the package on Sunday, as expected.

Bail-Outs for Screw Ups: Oil and Greece - In the not-to-distant future I wouldn't be surprised to read the following from the IMF: Negotiators over the weekend wrapped up details of the package, involving budget cuts, a freeze in wages and pensions for three years, and oil price increases to address British Petroleum's fiscal and debt problems as a result of the Gulf Oil Spill, along with deep reforms designed to strengthen BP's competitiveness and revive stalled corporate growth. The above is paraphrased from the IMF's press release announcing the Greek Rescue Package. This, and other press releases, describe the crisis as "economic" when "financial' seems to me more apt (should we describe the oil spill as a "geologic" rather than "drilling" problem?), and proclaim the creation of a, fully funded, mind you, Financial Stability Fund. Greek Banks which failed to see the crisis coming are going to be shielded from the effects thereof.

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