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

Saturday, June 26, 2010

week ending June 26

US Fed's balance sheet rises slightly in week -  (Reuters) - The U.S. Federal Reserve's balance sheet rose slightly in the latest week, Fed data released on Thursday showed. The balance sheet rose to $2.328 trillion in the week ended June 23 from $2.327 trillion the previous week. The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) totaled $1.129 trillion on June 23 versus $1.128 trillion on June 16. The U.S. central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was $165.61 billion on June 23 versus $166.21 billion on June 16. Primary credit via the Fed's discount window averaged $151 million per day in the latest week versus $104 million per day in the previous week.

FOMC Statement: Less Positive - The comments on the economy were slightly more negative than last meeting. The Fed noted the financial issues in Europe, and also commented that "underlying inflation has trended lower". Each statements was slightly less positive ...From the Fed: Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. The key language about rates stayed the same: "The Committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Parsing the Fed: How the Statement Changed - The Fed’s statement following the June meeting offered a more subdued assessment of the economy than April’s remarks. The central bank continues to see economic recovery, but makes no signal that rates are going to rise in the near term. (Read the full June statement.)

Redacted Version of the FOMC Statement - Changes in italics.

Federal Reserve Statement In English -- From The Fed: Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. The economy is falling off a cliff.  The Federal Government has blown over $1.5 trillion a year for the last two years to try to get private parties to lever up again, but they have no more credit capacity and still have no jobs.  Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Housholds can't spend what they don't have, and they don't have.  There has been no income growth other than government handouts.  Household "wealth" has been revealed to be an empty suit, devoid of any substance, as it was simply a $100,000 VISA credit line, which has now been slashed to $100.

The Lone Dissenter: Kansas City’s Hoenig Goes Four for Four - Four meetings, four dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig kept his dissent streak going strong at today’s Federal Open Market Committee meeting. Given the rest of the FOMC’s stance — displaying more caution about the strength of the recovery — this probably won’t be Mr. Hoenig’s last dissent of the year.Mr. Hoenig was the lone opposing vote in the FOMC’s 9-1 decision to keep the federal funds rate near zero with the guidance that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

What's Next For The Fed? Nothing, It Has Officially Become Useless - Today’s Fed decision is largely a non-event.  The consensus believes the Fed will leave rates unchanged and is unlikely to alter their language too much as global double dip concerns have increased in recent months: “The FOMC announcement for the June 22-23 FOMC policy meeting is expected to leave the fed funds target rate unchanged. With continued market skittishness over sovereign debt problems in Greece and other European countries, the Fed is likely to be cautious about plans for unwinding its expanded balance sheet. Fed watchers likely will focus on statement wording regarding the status of the economy-notably any signs of labor market improvement.” But as the seemingly endless zero interest rate policy continues some at the FOMC are beginning to get antsy about the Fed potentially being behind the 8 ball as they were in 2002 and heading into the recession.  Of course, I think we are looking more and more Japanese.  The problems in Europe have almost certainly compounded our problems and that likely means the Fed will be even more hesitant to raise rates. A recent SF Fed paper confirms this thinking.  They believe the current environment is similar to Japan:

Fed Is Likely to Remain on Sidelines Longer - The Federal Reserve left rates unchanged at its policy-setting meeting today, but low inflation and continued uncertainty about the recovery has economists pushing their forecasts for the eventual rate increase even further into the future.  In a midmonth addendum to the Wall Street Journal’s economic forecasting survey conducted this week, 15 of 44 responding economists moved their expectations for when the Fed will raise rates further into the future compared to their responses just three weeks ago. Only three respondents pulled their estimates back. On average, the economists don’t see the central bank changing rates until March 2011. Futures markets see a 45% chance that rates will remain in the current 0-0.25% range through March, up from just 23% last month.“There are lots of reasons to stay on the sidelines– no reason to move,”

Fed holds the line; I predict an interesting 2nd half of 2010 -Here's the statement: Mark Thoma thinks that fiscal and monetary policy should be used more aggressively, citing this David Leonhardt column in the NY Times.  Leonhardt's column is worth quoting at length as it pretty succinctly describes the feeling that has been building in my mind and I'm sure in others over the first half of this year. If you fear that the recovery is about to stall, today's news on new home sales probably increased your worries.  And in the midst this, an FOMC member, Hoenig (Kansas City), dissented from the consensus opinion. Hoenig and Bernanke have similar concerns about stability.  Hoenig is of the opinion that keeping rates low will lead to risks to that stability.  Bernanke seems to be hoping that they can maintain the low rates, but seems to be drawing the line at providing any further support like, say, buying long-term bonds and pushing those rates down as well.But what if GDP stalls in the 2nd half of 2010?  Do you pull the trigger and use unconventional monetary policy?  What is worse, another year of 10% unemployment or instability in the financial markets?  If you wait too long to decide, will you get both?

The Caution of the Fed Comes With a Risk: Ben Bernanke believes that he and his Federal Reserve colleagues have the ability to lift economic growth.... Mr. Bernanke also believes that the economy is growing “not fast enough”... that unemployment will remain high for years and that “a lot of people are going to be under financial stress.” Yet he has been unwilling to use his power to lift growth and reduce joblessness.... How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn’t be sped up? There is an answer — whether or not you find it persuasive. Above all, top Fed officials are worried that financial markets are fragile. They are not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets’ confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last

What Does the Federal Reserve Think that It Is Doing Right Now? -The Treasury real yield curve is at 1.2% for ten years. The Treasury nominal yield curve is at 3.2% for ten years. If anybody out there in the private market thought that such a panic was possible, or even likely, its possibility would be priced into the Treasury yield curve right now.At the start of December 2008 credit default swaps on Greece were at 250 basis points, on Ireland 220, on Portugal 170, on Spain 130, on Italy 100--the marginal investor in the market was betting that there was one chance in 100 that Italy would experience a credit default event, and 2.5 chances in 100 that Greece would experience such an event.Now the United States is at 40: way down from the 100 it was at at the start of March 2009:When CDS prices in the U.S. rise to indicate that there are some investors in the U.S. who think it is worthy buying insurance by betting that there might be a panic, then I can undersand Bernanke's caution.But that's not where we are, is it?

Why Isn't the Fed Doing More? - It appears that that total spending in the U.S. economy is slowing, if not outright contracting. Retail sales fell in May while in April personal consumption expenditures stalled. In addition, housing starts and homes sales plummeted in May. Meanwhile, the MZM measure of the money supply has been declining since late 2009. Since these developments indicate that both money (M) and velocity (V) are declining, it is safe to conclude that aggregate demand (PY) is falling too (i.e. MV = PY). Given these developments why isn't the Fed doing more to help the U.S. economy? Surely, it can stabilize MV. Here is what three observers had to say in response to this question: 1. David Leonhardt. Financial markets are fragile and the Fed does not want to upset the market's confidence in the U.S. government by further easing of monetary policy....2. Daniel Gross: The Fed is exhausted from its grand experiments in central banking.... 3. Ryan Avent: There is division within the Fed on whether further monetary stimulus is really necessary... There may be some truth in these responses, but let me add two more potential reasons for the Fed's inaction.

What the Fed Did and Why - NY Fed - In my remarks this morning, I would like to look back over the events of the past several years and offer my perspective on what were the essential drivers of the financial crisis and the Federal Reserve’s interventions.1 I will review the changes that have been taking place in the U.S. financial system and how these changes created the conditions conducive to the crisis. I will then discuss the developments in residential real estate financing that provided the catalyst for the crisis.  With this background, I will outline the interventions that were carried out to mitigate the crisis, focusing on those conducted by the Federal Reserve. I will direct my remarks to the facilities that were created rather than to the actions taken for individual institutions since these have been discussed extensively elsewhere. The lessons learned from the crisis are important for the design of the policy response aimed at reducing the likelihood that the U.S. economy ever again experiences this degree of trauma.

Why Is It Unsustainable for the Fed to Continue to Hold Financial Assets? -David Leonhardt had a thoughtful piece about the Fed's decision to accept higher rates of unemployment rather than engage in more aggressive quantitative easing to boost the economy. At one point he asserts that: "There is a direct analogy between the budget deficit and the Fed’s asset holdings. Neither is sustainable. The Fed has to show it has a strategy for selling the trillions of dollars of assets it bought during the crisis — without damaging the value of private investors’ holdings and without, at some point, igniting inflation." It is not clear that why continued holding of assets is unsustainable. Japan's central banking has been holding vast amounts of the government's debt for more than a decade and yet it is still in the situation of fighting inflation. In the context of sustained economic weakness there is no obvious way that holding government assets will lead to inflation. Furthermore, even if the economy was to rebound, the Fed has other mechanisms for preventing inflation, such as raising reserve requirements, which can allow it to continue to hold assets without causing inflation.

Bruce Krasting: What’s Ben Gonna Do? - Every day the deflation story gets stronger. Almost all of the numbers in the US are pointing in that direction. A slowdown in the EU is a sure thing. Japan is going nowhere. China is a question mark, but even if they do continue growing it will not result in enough Eco. Juice to offset the global deflationary forces. I was anticipating a slowdown in the 4th Q. It is now looking more likely that we will fall of a cliff starting July 1st. Extended benefits will be ending. Most states start a new fiscal year and they are all dead dead dead on revenue. Any benefit we got from the census will be in reverse gear. By August 1st approximately 1mm temporary workers will again be out of a job. Housing is falling off a cliff. The market sees this. The ten-year is at an incredible 3.1%. The last few days of trading in gold has a smell of deflation as well.  Bernanke must be beside himself. He bet the farm to save the economy in 2009. He has done things that no other Fed head as ever contemplated. As betting goes, he is “all in” on this one. He bet the economy, our future solvency and his reputation. In my opinion there is no way he is going to throw in the towel and accept that deflation is inevitable.

Ben Bernanke needs fresh monetary blitz as US recovery falters - Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.  Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.  Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

Why it is right for central banks to keep printing - Confronted with huge fiscal deficits, many have concluded that they should hurry fiscal tightening on as fast as possible, in the hope that it will prove expansionary. What are the chances that they will be right? Small, I believe. Moreover, rather better alternatives are on offer. But their drawback is that they are unorthodox: alas, many “sound” people prefer orthodox recessions to unorthodox recoveries.  The first, one I made a week ago, is that the deleveraging cycle is generating huge private sector financial surpluses across the developed world. Unless we expect a shift into aggregate external surpluses (and corresponding deficits in the emerging world), these surpluses must now to be invested in government liabilities. This helps explain why yields on the bonds of safer governments remain so low.  The second response is that if governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks. Yes, this is “printing money”. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman, back in 1948. His view was that the government could expand the money supply during recessions and contract it in the subsequent booms.

Print away your troubles - REGULAR readers will know that I view a more expansionary monetary policy as a more-or-less can't-lose response to the current economic doldrums. It seems the idea is catching. Here's Martin Wolf, from his column this week: [I]f governments need to run deficits, to support demand at a time of private sector weakness, they can always borrow from central banks. Yes, this is “printing money”. It is also an insanely radical policy recommended by no less insane a radical than Milton Friedman, back in 1948. His view was that the government could expand the money supply during recessions and contract it in the subsequent booms. Money-financed stimulus was part of the prescription discussed by Ben Bernanke in the speech that earned him his "Helicopter Ben" nickname. It was also the subject of this recent post of mine. The same day Mr Wolf's column ran, the New York Times' David Leonhardt puzzled over the Fed's seeming complacence: Slate's Dan Gross, also pondering the Fed's inaction suggests today that the Fed may simply be exhausted, or has run out of imagination.

Martin Wolf Calls for a NGDP Target - Okay, maybe not quite but he comes close in his most recent article where makes the following statement (emphasis added):  The argument for aggressive monetary expansion remains strong, though not equally everywhere, since the growth of broad money and nominal GDP is weak (see chart). So Friedman’s policy of “quantitative easing”, as it is called, still makes good sense. Note that Martin Wolf did not say the argument for aggressive monetary expansion is the looming deflationary pressures. Rather he focused on the anemic aggregate demand growth as indicated by his "nominal GDP is weak" statement. He seems to be making the point that monetary authorities should be targeting the cause, not the symptom in their conduct of monetary policy. If so, then Martin Wolf should have a chat with his fellow FT columnist Samuel Brittan who has explicitly called for monetary policy to stabilize total cash spending. He should also take time to read Scott Sumner's article on targeting expected aggregate...

Alarming Charts and Graphs June 2010 - Kalpa - Below, are important charts and graphs sounding alarm bells concerning the strength of our "recovery". First, Deutsch Bank released its June 23 "Global Economic Perspectives" (pdf) report titled "Financial Conditions Weakest since '08".  What the WSJ has to say: In the second quarter, the U.S. Monetary Policy Forum's Financial Conditions Index fell to minus-1.82, its lowest since the fourth quarter of 2008, says Deutsche Bank. The index tracks 45 variables, including credit and yield spreads, stock-market data, banks' desire to lend and consumer perceptions. Although it remains above the minus-2.5 to minus-3.5 reached in the depths of the crisis, it has slid from minus-1.29 in the first quarter. The index paints a gloomier picture than narrower indexes like the Federal Reserve Bank of Kansas City's. This is because it gives weight to measures of credit availability, including asset-backed-securities issuance. This is weak, driving much of the deterioration. .The other figures which are alarming everyone, are the ECRI figures addressed by John Mauldin's latest newsletter.

ECRI Leading Economic Index Plunges At -6.9% Rate, Back To December 2007 Levels When Recession Officially Started - It's getting close: the fabled -10% annualized change (see David Rosenberg) which guarantees a recession is now just 3.1% away, which at this rate of collapse will be breached in two weeks. The ECRI is now at December 2007 levels, the time when the last recession officially started. The index dropped from an annualized revised -5.8% (previously -5.7%) to -6.9%. As a reminder, from Rosie, "It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are practically there.

Double-dip fears raise worries the Fed is out of bullets - Economists are more nervous about the chances of another recession. And one of biggest fears is that the Federal Reserve may have run out of bullets to fight another downturn. "They do have some ammunition left, but it's not going to pack a lot of punch," said Mark Zandi, chief economist with Moody's Most economists aren't yet predicting that a double dip recession is imminent. Weaker-than-expected readings on job growth and retail sales have added to concerns that the recovery is stalling out. "Whenever the next recession comes, it is very important that policymakers have had the opportunity to reload their gun to fight the downturn," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. "Today it's not clear that there's a lot more policymakers can do."

Fed Chairman Bernanke doesn't seem to care about high unemployment. Why? - The central bank says it has a trio of missions. The Fed "sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates." Long-term interest rates are near record lows, inflation is under control, and prices are stable, but maximum employment remains a far-off dream. In a speech earlier this month, Bernanke noted that "in all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost nationwide over 2008 and 2009." In another recent speech in Michigan, he acknowledged that "high unemployment imposes heavy costs on workers and their families, as well as on our society as a whole." But he doesn't seem inclined to do anything about it. The Federal Open Market Committee this week stood pat on monetary policy and announced no additional efforts or initiatives to combat persistent high unemployment.

Natural Jobless Rate Seen Shifting Higher - Somewhere out there lies a trigger point for Federal Reserve rate hikes. While that policy tightening may not come for many months or even years, economists still believe the key variable is the interplay between employment and inflation. That interplay, most economists believe, has changed in the wake of the worst recession in generations. Structural changes in the economy mean higher rates of unemployment will be the new normal. As a result, inflation could start to well up from levels of joblessness that until recently had been benign for price pressures.At the heart of the issue is what economists call NAIRU, or Non-Accelerating Inflation Rate of Unemployment. It’s essentially the lowest level of unemployment that, if breached, will lead to rising inflationary pressure. NAIRU is tough to pin down, but even so, the concept has currency with many economists and Fed policy makers. Central bankers generally deal with the issue in a roundabout way, by talking about how much excess capacity the economy has.

Fed's Next Move Is to Ease, Not Tighten, Says Michael Pento - Michael Pento, chief market strategist at Delta Global Advisors, is confident the Fed’s next move will be to ease rates. “Ben Bernanke is a student of the Great Depression and he doesn’t want his tenure to be marked by the second Greater Depression,” he says. “So he will do whatever he can to boost money supply and fight deflation.” How will he do that with rates already at 0-0.25%?Obviously, they can’t lower rates. The Fed is also reluctant to start buying more mortgage-backed securities so soon after ending that program. The alternative, Pento says, is for the Fed to stop paying interest on excess reserves, a move that will drive banks to lend instead of sit on their cash.

Bursting bubbles - READING policy speeches by central bankers isn't as much fun as you'd imagine. Nonetheless, the past week had some interesting statements that offered a glimpse into the role of central banks post-crisis.  A common thread that stands out is the talk of expanding the role of authorities to focus on macro-prudential policy in addition to plain old monetary policy. As Jaime Caruana points out, macro-prudential policy has become a buzzword of late. The BIS definition of the term as... ...the use and calibration of prudential tools with the explicit objective of promoting the stability of the  financial system as a whole, not just the individual institutions within sufficiently vague and broad to include a wide variety of instruments and institutions. But the key idea is that central banks should use regulatory policies to moderate asset and credit booms.

Inflation or deflation? - For the last year and a half my assessment has been that the near-term pressures on the U.S. economy were deflationary, while long-term fundamentals involve significant inflation risks. It's time for a look at the data that have come in over the last 6 months, and time to say that I still see things exactly the same way. The short-run deflationary forces come from the substantial underemployment of potentially productive labor and capital. I noted in January that, given the high unemployment rate at the time, a traditional Phillips Curve would predict deflation in the CPI over 2010-2011. Six months into the year, that's about how things have unfolded so far. The Bureau of Labor Statistics reported on Thursday that the seasonally adjusted consumer price index for May was at exactly the same value it had been in December.

Notes from the deflationary quicksand - Deflationary quicksand… We will all end up Japanese… Collapsing houses of cards… Yes, it’s another missive from SocGen’s perma-bear Albert Edwards, who on Thursday developed some recent riffs on deflation a tad further:…although our deflationary arguments are gaining some traction in the bond market, investors have yet to fully acknowledge we are now walking on the deflationary quicksand that will inevitably suck us towards total fiscal and financial ruin – you ain’t seen nothing yet. With core inflation rates now sub-1% in the eurozone and the US, we are only one recession away from Japanese-style deflation. Albert thinks recession will return by the end of the year, but that’s not the main issue. The real problem is that private-sector de-leveraging has barely begun, Edwards says, especially if you strip out the efforts made by financials — see chart (click to enlarge):

John Cochrane: How we get from here to inflation - University of Chicago’s John Cochrane has a new NBER paper out that is sure to generate some debate. He outlines the following scenario of how the U.S. could conceivably go from the current state of affairs to a situation of high inflation: Will we get inflation? The . Lower growth is the single most important negative influence on the Federal budget. Then, the government may have to make good on its many credit guarantees. A wave of sovereign (Greece), semi-sovreign (California) and private (pension funds, mortgages) bailouts may pave the way. A failure to resolve entitlement programs that everyone sees lead to unsustainable deficits will not help. When investors see that path coming, they will quite suddenly try to sell government debt and dollar-denominated debt. We will see a rise in interest rates, reflecting expected inflation and a higher risk premium for U.S. government debt. The higher risk premium will exacerbate the inflationary decline in demand for U.S. debt. A substantial inflation will follow — and likely a “stagflation” not inflation associated with a boom.

The solution to all problems -ADAM OZIMEK sends us to a new paper by John Cochrane, which aims to describe how events could conspire to produce a damaging inflation in America. In his focus on arriving at his inflation destination, I think he ends up burying the lede:Will we get inflation? The scenario leading to inflation starts with poor growth, possibly reinforced by to larger government distortions, higher tax rates, and policy uncertainty. Ok, stop right there. The scenario leading to inflation starts with poor growth. Forget about everything that comes next and focus on that most important factor. Because it happens that the scenario leading to a budget crisis also starts with poor growth, and the scenario leading to a long-term unemployment crisis starts with poor growth, and a scenario leading to a begger-thy-neighbour trade crisis starts with poor growth, and so on. So a very important question is: what can be done to improve the prospects for economic growth? In particular, what is the right countercyclical approach to take to best situate the economy for future growth?

Touch of Deflation Is Way to Price Stability: What’s so bad about a little deflation?  As Federal Reserve policy makers gather today and tomorrow in Washington to take the economy’s pulse and assess their policy course, prices will be on their mind. Specifically falling prices.  Not that deflation is a reality right now. The core consumer price index, which excludes food and energy, rose 0.9 percent year over year in both April and May, the smallest increase in 44 years. The Fed’s preferred inflation measure, the core personal consumption expenditures price index, rose 1.2 percent in the 12 months ended in April.  What the U.S. economy is experiencing is disinflation, a slower rate of price appreciation, not deflation, or falling prices. A little bit of the latter wouldn’t be the worst thing.  For starters, if the Fed wants to make good on its pledge of price stability, one of its dual mandates, it will have to do better than its 1.5 percent to 2 percent unofficial target.

Don't Fear Inflation, If It Comes - Economists agree that the deflation of 2008-9 – when prices fell in the economy – resulted from a “flight to quality,” a rather sudden reduction in demand for goods and increase in demand for dollars. They agree that, in principle, inflation will occur in the future if demand suddenly shifts in the opposite direction.Some economists say investors over the next several years will continue to demand dollars, so future deflation is the more likely danger. Other economists, including John Cochrane of the University of Chicago in this recent paper, say our government budget is on an unsustainable path, with lots of public spending promised and elected officials who lack the political will to raise taxes. So the real question is whether the economic damage from inflation is more or less than the economic damage of raising payroll taxes, implementing a national sales tax or paring some of the government’s spending promises. The answer is that inflation is less costly now than it usually is. Inflation would alleviate some damage done by the housing market to the wider economy.

New Treasury Bond Contract Bets on Deflation, Not Inflation - For the average investor, the Ultra US Treasury Bond futures contract is a relatively new way to get protection against deflation. But for at least one trader, it's another sign that a significant price drop is looming for the bond market.  The Ultra contract gets futures traders true exposure to the 30-year Treasury bond. The original T-Bond contract included bonds with terms of 15 years or more.While volume remains comparatively low, investors have been turning to the Ultra increasingly as deflation, not inflation, has become a bigger worry for the economy. Inflation erodes the value of fixed-income instruments over time as interest rates rise and outpace the gain of appreciation in bonds and similar securities. Conversely, deflation rewards investors with the rates of return on fixed income that outpace interest rates.

FT Alphaville » Renminbi ruminations - As the FT reports, the Chinese central bank said in a statement on Saturday night that it would increase the flexibility of the exchange rate, effectively abandoning its currency peg with the US dollar via a policy of gradual appreciation of the renminbi against the greenback after nearly two years when the rate has remained unchanged.Lex notes that “a teenager ordered to tidy its room will often do the minimum necessary to get the oppressor off its back.” So it is with China’s announcement that its currency will trade more flexibly against the US dollar, “three days after the US president told it to”. The move, a week before the G20 convenes in Toronto, allows five days of modest gains for Beijing to demonstrate it is a “responsible, if reluctant, world citizen”.

China’s Renminbi Announcement: A Big Headfake - Yves Smith - The Chinese central bank made a vague announcement about its currency policy on its website today, which the officialdom, on cue, treated as a major move (to wit: “China vows increased currency flexibility” at the Financial Times, “Chinese say they intend to free up their currency,” Washington Post).) As we describe below, this “announcement” is basically a non-statement to silence Westerners calling for a revaluation in the runup to the Toronto G-20 meeting later this month. This is the full text of its English version:

China Moves. Or Not., by Tim Duy: Futures markets are abuzz with excitement over the Chinese currency proclamation issued this weekend. The announcement was quickly hailed by observers worldwide as a major policy shift, yet I am inclined to side with the analysis provided by Yves Smith - the statement leaves plenty of wiggle room, and never really promises to do much of anything. At the moment, the Chinese announcement feels like more smoke than fire. The Wall Street Journal's initial reporting was just want the Bejing and Washington wanted you to believe:China's decision to abandon its currency peg is a victory of pragmatism over divisive politics, the result of careful diplomacy by leaders in Beijing and in Washington, each side vulnerable to powerful domestic lobbies.In the end, both sides agreed that a more flexible exchange rate was good for China, good for the U.S. and good for the global economy. Yet timing was everything.The implication is that hard-working policymakers on both sides of the Pacific have risked all to foster the greater good. But what exactly has changed? From the Chinese statement:  I see no commitments here, vague or otherwise.

China Turns Tables on AAA Debt Time-Bomb Nations - Your move, folks. That’s the message from China’s surprise move to allow a more flexible yuan. China, in signaling it’s okay with a rising currency, voiced a strong vote of confidence in its economic outlook. It also shifted the onus to the developed world in a crafty and unambiguous way. Timothy Geithner and his team at the U.S. Treasury should keep on ice the champagne they’re tempted to open. Now it’s time to start getting their own imbalances in order. The debt explosion of the past two years isn’t just unsustainable, it’s a growing threat to global stability. Chess games are won by those who can think and plan the farthest ahead. China, at least at the moment, appears to have a better sense of how the board is laid out. The question now is what Geithner and his partners in history’s greatest debt orgy do.

China to Put Renminbi in a Currency Basket – Things heated up in the currencies this weekend… Yes, while everyone was wiping the milk from their mouths from their cereal they ate for breakfast on Saturday morning, the Chinese made a BIG announcement…  Here is the official statement from the People’s Bank of China (PBOC)… “In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People’s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.” (They say RMB for renminbi.)The PBOC also said that the “new currency regime” would be to value the renminbi versus a basket of currencies (that’s how they did it 2005-2008), but this time they mentioned that they would allow the markets some say in the movement of the currency. Now… Please pay attention to what I’m about to say… There are a lot of people that believe that this will mean a HUGE one-way street for renminbi versus the dollar… I’m not one of those! While I think at the moment renminbi should move higher versus the dollar, there’s no “guarantee” that it will always move higher versus the dollar! The renminbi is now “flexible”!

Yuan appreciation not guaranteed – China's announcement that it will allow increased currency flexibility is far from a game-changing move and may actually backfire, some economists said on Monday. While the People's Bank of China's (PBOC) statement over the weekend was labeled "cryptic" by some, a Q&A posted later on the central bank's website showed that it is trying to scale bank expectations of an imminent appreciation in the yuan. Instead, China appeared to suggest that it wants to increase two-way risk given the recent appreciation against the euro. Some analysts say the yuan could actually fall, especially against the euro, which would increase China’s trade advantage on that continent.

Why China's Currency Announcement is Hokum - China isn’t really changing anything. It’s only doing the minimum to prevent Congress from listing China as a currency manipulator, leading to a squeeze on Chinese imports. Over time – and I’m talking about months if not years – China will raise its currency to where it was before the global meltdown in 2008. Big deal. Even then, a stronger yuan won’t generate lots of new jobs in the United States That’s because most of the gains of China’s meteoric growth are still not finding their way into the hands of Chinese consumers, whose spending is growing far more slowly than China’s overall economy. In 2009, total personal consumption in China amounted to only 35 percent of the economy; ten years ago it was almost 50 percent

Two Opposing Opinions On The Yuan Depegging - Yesterday's mega news on the CNY depegging, which went so far as to make headlines out of something as mundane as the PBoC yuan fixing, has now been fully priced in. And before we put the matter to rest, we would like to present two diametrically opposing opinions on this issue: one from Goldman's Sven Jari Stehn, which is full of contained optimism about the future of the world, and one from Gary Shilling, who in a Bberg TV interview, says that the Chinese decision could not have come at a worse time, and that it risks destabilizing the precarious global balance achieved at the cost of so many trillions in stimuli.

More Fire From Washington on China's Economic Policies - Facing continued lackluster economic conditions at home, some American politicians are pointing the finger abroad. Days after China announced that it would allow its currency to float more freely, raising expectations that American-made goods could compete against higher-priced Chinese goods, several House Democrats and a Republican said today that they did not think the measure went far enough. Standing behind a placard emblazoned with the phrase “China Cheats,” Representative Tim Murphy, Republican of Pennsylvania, said that Congress would not tolerate China’s “unfair trade practices, currency manipulation, and deadly products,” and that a bill he introduced last year, the Currency Reform for Fair Trade Act of 2009, would end China’s currency devaluation by requiring penalties on underpriced goods.

The Renminbi Runaround - Krugman - Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting. Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense. n fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith — an attempt to exploit U.S. restraint. To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior. Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints. In short, they’re playing games. To understand what’s going on, we need to get back to the basics of the situation.

More on China’s Renminbi Headfake -Yves Smith - It was hard to miss the Chinese central bank’s announcement last weekend that it was implementing a ore “flexible” policy toward managing its currency. Numerous Western officials and analysts declared the statement to be a major move, signaling China’s willingness to allow the renminbi to appreciate to a meaningful degree. We, by contrast, called it a a non-statement to silence Westerners calling for a revaluation in the runup to the Toronto G-20 meeting later this month: China has committed to do…..absolutely nothing. In fact, this language could just as easily be used to justify shifting its dirty float to be against the dollar to putting greater weight upon the euro in its basket, which would lead to a devaluation against the dollar.China allowed the renminbi to appreciate a grand total of 0.39% against the dollar this week. leading commentators to rethink China’s canny ploy. Today, the Financial Times gives a reassessment. It notes in particular that domestic interests are fiercely opposed to a rise of a mere 2-3% against the dollar, much the less the 20% to 40% that most experts deem necessary to achieve fair value. In addition, it stresses the possibility we mentioned in February: that China could devalue the renminbi.

Yuan-way bet - SO, TWO days on, what have we learned about China's new currency strategy? There is a general tendency toward scepticism among the economics commentariat. Take, for instance, this Tim Duy post, in which the author makes much of this story: China’s yuan declined the most since December 2008 on speculation the central bank will encourage more two-way fluctuations in the exchange rate after it pledged to expand flexibility... but of course the currency has been pegged to the dollar over that period. And meanwhile, renminbi were still dearer today than they were on Friday. But it's also important to understand what the Chinese are doing. Here's economist David Li talking to HSBC: The PBoC announcement unpegging the renminbi from the US dollar seems to be a return to an earlier system (July 2005–July 2008). This time round, the renminbi will likely gradually appreciate against major currencies; however, the process may not be as smooth as it was before.

Number of the Week: Yuan Revalue Is No Panacea for U.S - 13%: Growth in the U.S.-China trade deficit* since 2005, the last time China loosened its exchange-rate peg. As leaders of the Group of 20 developed and developing nations meet in Toronto this weekend, one big question on the agenda is how to deal with the global imbalances reflected in the vast U.S. trade deficit — and in China’s similarly vast trade surplus. The concern: If the U.S. keeps borrowing money to buy goods from China and other exporters, it will eventually build up enough debt to undermine confidence in the dollar.

Global Markets Fear U.S. Treasuries Sell-Off As China Ends Currency Freeze - Global markets are braced for a possible sell-off in US Treasury bonds after China said over the weekend that it will allow the yuan exchange rate to adjust against the dollar, ending a two-year currency freeze that has led to trade clashes with Washington and Brussels. China's Central Bank said the economic recovery had opened the way for a return to "flexibility" but ruled out an immediate one-off rise in the yuan. The currency will be allowed to fluctuate within a widened band of 0.5pc each day against a basket of currencies. The yuan is now expected to rise slowly against the dollar, although it may fall if the euro weakens further. "There is at present no basis for major fluctuation or change in the exchange rate," said the bank

How Dangerous Is U.S. Government Debt? - The dollar’s status as the world’s reserve currency has become a facet of U.S. power, allowing the United States to borrow effortlessly and sustain an assertive foreign policy. But the capital inflows associated with the dollar’s reserve-currency status have created a vulnerability, too, opening the door to a foreign sell-off of U.S. securities that could drive up U.S. interest rates. In this Center for Geoeconomic Studies Capital Flows Quarterly, Francis E. Warnock argues that a sell-off came close to happening in 2009. How the United States uses this reprieve will affect the nation’s ability to borrow for years to come, with broad implications for the sustainability of an active U.S. foreign policy. DOWNLOAD THE FULL TEXT OF THE QUARTERLY REPORT HERE (636K PDF)

Yuan can become alternative reserve currency to US dollar-ADB (Reuters) - China's yuan could rapidly become an internationally used currency and serve as an alternative to the U.S. dollar in central bank reserves, the Asian Development Bank said in a report on Thursday. "The renminbi has yet to become an international currency. It could become one much more quickly than many anticipate," the ADB said in a joint study with Columbia University's the Earth Institute. "The internationalization of the renminbi has the potential to become an alternative to the U.S. dollar -- as did the euro -- and help nudge the global reserve system toward a multi-currency reserve structure," it said. The study, undertaken by 11 economists from around the world, including academics Joseph Stiglitz and Barry Eichengren, did not provide a timeline for when the yuan could become a reserve currency. Most analysts expect it to be fully convertible by 2020, the target date set by Beijing to make Shanghai an international financial centre.

Suiting Up for a Post-Dollar World - The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie's choice between social unrest and bankruptcy. But with the "Club Med" economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.  Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

China Backs Obama With Debt Holdings to $900 Billion (Bloomberg) -- A year after criticizing U.S. fiscal policy as “irresponsible,” China’s leaders are showing increasing confidence in President Barack Obama’s leadership of the American economy. China boosted holdings of Treasury notes and bonds by 2.6 percent to $900.2 billion in March and April, after reducing its stake by 6.5 percent from November through February, the longest consecutive monthly declines in a decade, U.S. data released June 15 showed. The People’s Bank of China said June 19 that it will relax its 23-month lock on the yuan. Congressional leaders say the new foreign-exchange policy doesn’t go far enough to keep them from seeking laws to punish China for what they say are unfair trade practices. Regardless of the currency rate, China will continue to be a net buyer of U.S. debt, “It’s just bad economics to pretend we can fix the lives of middle class American workers by getting the Chinese to revalue its currency vis-a-vis the dollar -- it’s a horrible misconception,” Stephen Roach, chairman of Morgan Stanley Asia Ltd. said

Understanding The Global Risk Carry Trade - Given that the worlds central banks answer to global speculators and their money center bank/investment bank sponsors, the people of each country must stand up for a public policy that benefits them. Central bankers have many complex tools in which to exercise their “stability” agenda. While things like currency swap facilities sound harmless when explained as short term in nature, the ability of a central bank to reinstate them at will is a perpetual back stop to global risk asset speculators. When we are asked to fund the IMF in the name of global economic stability, we are really just allowing the sovereign risk hot potato to be passed up the credit ladder in a hidden backstop of foreign folly. The unwinding of the global risk asset carry trade is the ultimate end game for decades of Keynesian lunacy. A credit bubble cannot be cured by more credit. We must recognize the widely accepted fallacies we have lived by, and devise an exit strategy that is fair to all.

America's Ticking Debt Bomb: Like Greece, "Only Worse," Pento Says - America's debt bomb is ticking and is likely to detonate in five years or less, says Michael Pento, senior market strategist at Delta Global Advisors.  "It could be much sooner when we hit the debt wall," Pento says. "My opinion doesn't matter: Math tells me we're in a serious problem." The math Pento refers to is the Treasury Department's recent estimate that total  U.S. debt will top $13.6 trillion this year and rise to 102% of GDP by 2015. Moreover, the publicly traded debt (debt excluding intra-governmental obligations) will rise to $14 trillion by 2015, up from "just" $7.5 trillion in 2009. At $14 trillion, the interest payments on the public debt will total about $1 trillion in 2015, he continues; even assuming solid growth and low inflation, that would equal about 30% of total government revenue. "What do you think that does to our bond market?," Pento wonders. "It leads to a dollar crisis and a bond market crisis. That's why gold refuses to go down. "

Alan Greenspan v. Paul Krugman - Paul Krugman and Alan Greenspan came out with dueling op-eds Friday about budget deficits gone wild.  Krugman: we're slitting our wrists by trying to slash our deficits now.  Greenspan: cut spending now, right now, and don't worry your pretty little head about a double-dip recession. Neither was convincing, and there's a reason: the fiscal debate has become so polarized that combatants on both sides are glossing over what they don't know.  I would argue that we ought to be doing the opposite: the unknowables right now are huge, and we ought to talk about them.  Put another way: we need insurance.  Against our next mistake.

In the hot tub time machine with Alan Greenspan: The "Maestro" tells Americans we can't afford our future. Ten years ago, he sang a different tune - The federal government of the United States better get its finances in order, warns Alan Greenspan in the Wall Street Journal today, or we're going to be in big, big trouble!If I were seeing a therapist, I'm sure she would warn me that my recent habit of reading opinion pieces in the Journal and then collapsing into a fit of apoplectic befuddlement is not good for either my long-term health or sanity. Calmer minds might  wonder why we should bother paying any attention to the "Maestro" -- a man whose deepest convictions about the infallibility of self-correcting markets have been proven so profoundly wrong. But after Calculated Risk reminded me of a speech Greenspan gave to Congress in 2001, a speech that just gets better and better with each rereading in the years since, I simply could not resist. Please bear with me.

My Father and Alan Greenspan - Robert Reich -When I was a small boy my father gave me my first economics lesson. “Bobby,” he said with obvious concern, “you and your children and your children’s children will be repaying the national debt created by Franklin D. Roosevelt.” I didn’t know what a national debt was, but I remember being scared out of my wits. Dad, now 96 and still in good health, recognizes how wrong he was then. He admits FDR’s deficit spending not only won World War II but it also got America out of the Great Depression. But now another gaggle of deficit hawks is warning us against more federal spending.  “The current federal debt explosion is being driven by an inability to stem new spending initiatives,” warns Alan Greenspan in Friday’s Wall Street Journal, calling for budget cuts and saying “the fears of budget contraction inducing a renewed decline of economic activity are misplaced.” My dad learned from his mistakes. Alan Greenspan obviously didn’t.

The facts have a well-known Keynesian bias (Paul Krugman) There are many things to say about Alan Greenspan’s op-ed yesterday, none of them complimentary. But what struck me is the passage highlighted by Tim Fernholz: Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences. You know, some people might take the fact that what’s actually happening is exactly what people like me were saying would happen — namely, that deficits in the face of a liquidity trap don’t drive up interest rates and don’t cause inflation — lends credence to the Keynesian view. But no: Greenspan KNOWS that deficits do these terrible things, and finds it “regrettable” that they aren’t actually happening.

Contemptible Advocates of Debt Default - Historian Jeffrey Rogers Hummel accuses me of being “awfully contemptuous of those opposed to increasing the federal debt limit.” He is right. I am contemptuous of those who know so little about the federal budget that they actually believe the debt limit is an effective tool for controlling growth of the federal debt. I went into detail on this subject some years ago in testimony before the Senate Finance Committee, where I explained the history of the debt limit and why it is totally ineffective at controlling growth of the debt. The curious can find it among the committee’s printed hearings. The date was February 14, 2002. On that occasion I proposed abolition of the debt limit to deafening silence from the committee, but nodding agreement from the Treasury secretary. One doesn’t really need to read my testimony, however, because it is perfectly obvious from the most casual examination of the record that the debt limit has never exercised any constraint on spending or borrowing.

Response from Brad DeLong on fiscal policy -Read the whole thing; my original post was here.  On my point 1, that the central bank moves last, Brad writes: Yes, the central bank can neutralize any additional fiscal stimulus by raising interest rates. (It is not clear that it can undo any fiscal contraction by some combination of lowering interest rates and quantitative easing: it may be able to.) What is clear is that the U.S. Federal Reserve and the Bank of England are right now definitely not in a place where they would neutralize any additional fiscal stimulus by raising interest rates. And my bet is that the ECB is also not in such a place--although it is much harder to figure out what they think and what they will do.. Maybe the central bank cannot undo a fiscal tightening, but surely it can undo a fiscal expansion, by making money tighter, limiting QE, and/or changing the pace at which it undoes previous QE.  My assumption is that the central bank has a preferred inflation vs. unemployment position for the economy, so why be so sure they won't undo the expansion of the fiscal authority, if only probabilistically?

Why and when to spend - TYLER COWEN has been challenging those looking for bigger short-term deficit spending to defend their arguments, and this has led to an interesting debate between him and Brad DeLong. The back-and-forth has actually come around to re-arguing the value of countercyclical fiscal policy. A couple of specific points of quasi-disagreement appear to emerge from this exchange.First, does the zero bound mean anything? (Mr Cowen calls the zero bound problem "the single largest 'red herring' in the economics profession today".) In fact, the zero bound does not bind, in most cases anyway. Fiscal stimulus supporters might respond that while the zero bound does not bind, the Fed might nonetheless be reluctant to engage in the appropriate amount of monetary expansion, and that a fiscal boost is therefore required. A potential response to this is that if the Fed has chosen the unemployment rate with which it is satisfied, it will simply offset any fiscal measures to push unemployment below that level. And that is a sticky problem. On the other hand, the classic helicopter drop of money approach involves a money-financed tax cut. That's monetary policy as fiscal policy, so in a way, Mr Cowen is accepting that fiscal boosts may be necessary at some point. Is that point the zero bound?

Super-Asinine Propensities - - As Economix notes, Mark Thoma has coined the term "austerians" for those who are calling for budget cutting in the face of continued high unemployment. That's pretty good, but I think Keynes said it even better, as his biographer Robert Skidelsky writes in the FTHe explained to an American correspondent that “every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”  Speaking of Alan Greenspan... Paul Krugman, Andrew Leonard and Calculated Risk respond to his super-asinine WSJ op-ed. See also Andrew Leonard on Skidelsky's piece.

The Unavoidability of Long-Term Austerity - Edmund Andrews surveys the fiscal policy debate and says “If I were king, the plan would allow for another round of stimulus spending but call for real belt-tightening around 2015.” Sure, me too. But one thing that I really think needs to be emphasizes is that the need for medium-term belt-tightening has nothing to do with the argument over short-term stimulus.By which I mean, whether we make the short-term deficit smaller or larger we still need to tackle a serious longer term problem. And we would still need to tackle that problem even if the recession hadn’t happened. It’s a real problem. And a big one. But the shape of the problem is very simple and it looks like this:

  1. The public sector has assumed responsibility for financing the health care of old people.
  2. The cost of health care relative to the rest of the economy is rising.
  3. The proportion of old people relative to the rest of the population is rising

Now and Later, by Paul Krugman - Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?  Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems. But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. ... America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard..., a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.  But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Deficits are our saving - Even the most simple understandings are lost in the public debate about budget deficits and public debt. The Flat Earth Theorists who whip up deficit hysteria each day like to stun people with large numbers. They produce debt clocks that relentlessly tick over and try to get us to believe that impending doom is upon us. But if we just take a deep breath and think the situation through we would see that the ticking debt clock is really just a measure of the portion of non-government wealth embodied in public debt. We would then learn that budget deficits are just the mirror image of non-government savings. Saving is usually considered to be something we should aim for. Increased wealth is also something we usually aspire to. So the increasing deficits and increased debt outstanding is, in fact, beneficial to the private sector (overall). Once we understand that then the deficit hysteria becomes transparently ideological. These characters just hate government and want to get their greedy hands on more of the real pie.

Steny Hoyer and the Deficit: “We’re Lying to Ourselves and Our Children” - Speaking to The Third Way, a middle-of-the-road Democratic think-tank, Hoyer called for a bipartisan effort to balance the need for short-run economic recovery with long-term deficit reduction. Not much new there. Lots of pols have delivered a similar message in recent months. But what made Hoyer’s talk matter is that he named names. It is easy to say, “everything is on the table.’ It is not so easy for an elected official to explicitly describe what that means. Hoyer did. And his remarks won’t make him any friends within the Democratic base. Among his proposals: Trim future Medicare costs. Raise the Social Security retirement age. Adjust both programs to focus benefits on those who need them most, even if it means reducing benefits for wealthy retirees. Cut defense spending. Have a “serious discussion” about whether to permanently extend the Bush tax cuts for those making less than $250,000 as President Obama wants. Enforce budget rules that require Congress to pay for new spending and tax cuts.

The Deficit and the Damage to Come - "Our nation's fiscal position has deteriorated appreciably since the onset of the financial crisis and the recession," Bernanke said in his comments on fiscal sustainability. "Unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth."In contrast with Mr. Bernanke's admonishing of the federal government, signs of easing in the purse strings of private market participants are generally well received in policy circles. When businesses and consumers curtail investment and spending in the early stages of a recovery, it may reflect a decline in confidence that augurs poorly for the economic outlook. More restrained spending by consumers, as conveyed in last week's retail spending report, has been interpreted through this particular lens, casting a further pall over already-shaky markets

Do Deficit and Inflation Hawks Know Best? - This is a good example of what's going on with economic policy right now. Marty Feldstein thinks that people ought to be worried about inflation and budget deficits, and the fact that he can't find evidence of this worry puzzles him: while inflation is very likely to remain low for the next few years, I am puzzled that bond prices show that investors apparently expect inflation to remain low for ten years and beyond, and that they also do not require higher interest rates as compensation for the risk that the fiscal deficit will cause real interest rates to rise in the future. Instead of questioning his own assumptions in light of evidence that they are incorrect, he suggests implicitly that investors collectively -- i.e. the vaunted market with its ability to incorporate all relevant information into prices -- is wrong. When do we abandon what markets are actually telling us and instead react to what we -- the less capable humans -- think markets ought to be telling us?

FT Reveals Orszag Resigns Over Inability To Persuade Summers And Obama Keynesianism Leads To Suffering - As we speculated previously, the sudden and unprecedented departure of Peter Orszag, the day prior to the US Budget's formalization (which incidentally never happened as now the US will likely not have a 2010 budget at all, for fear of disclosing to most Americans just how broke the country is ahead of mid-terms) was due to Orszag's disagreement with the administration's, and particularly Larry Summer's, inability to fathom that reckless spending is a recipe for bankruptcy. As the FT reports: "Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House." And so, as any remaining voices of reason realize they are dealing with a group of deranged Keynesians, soon there will be nobody left in the administration who dares to oppose the destructive course upon which this country has so resolutely embarked, which ends in one of two ways: debt repudiation, or war. .

Against The Super-Asinine, The Gods Themselves Contend in Vain - Brad DeLong wonders how the proponents of tight budgets and tight money are prevailing in the midst of mass unemployment, low interest rates, and incipient deflation. The natural instinct of almost everyone is to think that tough times require tough measures, and that if the economy is suffering, the government should tighten its own belt. It would take a clear consensus from economists to overcome that natural bias. And that consensus has, of course, been lacking — largely because a significant proportion of the economics profession has spent the last three decades systematically destroying the hard-won knowledge of macroeconomics. It’s truly a new Dark Age, in which famous professors are reinventing errors refuted 70 years ago, and calling them insights. On top of that, anti-stimulus appeals to a fundamental meanness of spirit that is always present in the political world. The super-asinine we shall always have with us.

The Case Against Stimulus - Steve Randy Waldmann has a very good post up noting some problems with discretionary fiscal stimulus. I recommend it to one and all because I think that reading the detailed case for skepticism about stimulus as a general matter only drives home how strong the case for stimulus in the current actual situation is.  This all actually reminds me of a story from my youth in the distant land of the USA. Once upon a time an asset bubble burst, but there was little leverage involved and the ensuing downturn was relatively mild. The federal reserve had room to run in terms of cutting interest rates, and the previous ten years’ worth of fiscal policy had seen a series of measures, some bipartisan (1990 & 1997) and some partisan (1993) to improve the country’s budget situation. But the newly inaugurated young president argued that the country needed to enact a large discretionary fiscal stimulus program to combat the downturn, even thought his would shatter the fragile consensus that had guided improvements in the fiscal posture. Oddly, this stimulus program would be phased in and out over a ten-year time horizon. Even odder, the nominally temporary nature of the stimulus was clearly a fraud—everybody understood that the key authors of the stimulus in fact intended the policy change to be permanent in nature.  I refer, of course, to the Economic Growth Tax Relief Reconciliation Act of 2001, a.k.a. “the Bush tax cuts,” which IIRC were roundly applauded by most of the right-of-center economists who can today be found assuming a debt-averse and stimulus-skeptical posture.

Has stimulus become a dirty word? – Disastrous home-sale figures and persistently high unemployment make it clear the U.S. economy is still struggling. What’s not so apparent is what new efforts Barack Obama, the U.S. President, might seek to tackle the problem. While he urges America’s allies not to sacrifice economic growth to pay down ballooning deficits at this weekend’s Group of 20 industrial and developing nations summit in Toronto, Mr. Obama is coming under stiff resistance back home against turning any sort of stimulus taps back on.“He’s very skilled and articulate, but he really lost control of the debate on stimulus,” “Polls show most Americans think the stimulus package didn’t create jobs, [although] most economists think it did. The word stimulus has become a dirty word.”

The Instinct for Austerity is Working Against Us – Thoma - A couple of days ago, Room for Debate at the NY Times asked about the need for further stimulus, and part of my response said the following (It hasn't run yet since they decided to cover McChrystal first):But the most important change that is needed is in the attitude of the public and politicians toward using deficit spending to stabilize the economy. Even though it’s the correct response, deficit spending goes against our instincts. When times are tough, our natural response is to cut back on consumption. We may dip into savings or borrow money to prevent too large a fall in consumption, but our overall consumption falls. To see government not only failing to reduce its spending as its income (tax revenue) falls, but actually increasing spending by a large magnitude, cutting taxes, and financing it by taking on debt, and then saying even more is needed runs counter to those instincts. And starting with a budget that is already in the red doesn't help at all.

A Moment of Truth - For lower-income people, unemployment numbers rival those of the Great Depression. And the average unemployed person has now been searching for work for over eight months—the highest average on record.  Despite such widespread hardship, the Senate has failed to extend unemployment benefits. As a result, as many as 1.2 million workers will be cut off of unemployment benefits by the end of this week, and at least 140,000 workers will lose healthcare benefits. The Senate and House also failed to approve $24 billion in promised federal assistance to state Medicaid programs—even as states face $260 billion in budget shortfalls over the next two years. The Center on Budget and Policy Priorities estimates that without federal help state cuts could result in the loss of 900,000 jobs. If we fail to understand the need to invest in people and our future—now and in the months, perhaps years, ahead—the already weak recovery will unravel. But with deficit hawks in both parties dominating the debate in Congress, abetted by a lazy media drumbeat, the chances that this country will become a stronger and healthier one don’t look very good.

Is Paul Krugman depressed? - I get the feeling that Paul Krugman is getting gloomier and gloomier.  Professor Krugman is a Nobel Prize-winning economist, columnist and blogger.  Since December he has been warning about the possibility of a double-dip recession.  Now, his latest column suggests that he is looking at something worse.  In fact, he used the ‘D’ word–depressed that is–four times: Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand? …Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.Professor Krugman is acknowledging that we will have trillion dollar budget deficits as far as the eye can see.  He can see that the day of reckoning is coming, but he is hoping that it will not come soon.

In The Long Run, We Are Still All Dead - Krugman - So, reading Mohamed El-Erian, I’m somewhat at a loss about what he’s actually saying; what, exactly, is the policy recommendation? But in any case, here’s what struck me: he writes, The world is facing deep structural challenges yet its leaders are stuck in a short-term, cyclical mindset. I disagree. If anything, we’re suffering from the opposite problem. Talk to German officials about high unemployment and the looming threat of deflation, and they ramble on about the demographic challenge and the cost of pensions. I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem. So saying that we need to focus on the long term, and not worry our little heads about trivial short-term issues like the highest long-term unemployment rate since the Great Depression, may sound like wisdom — but it’s actually folly.

Budget Hawk, Stimulus Dove  -  It's not my position. But I would think someone would articulate it. It sounds like what Mark Thoma would advocate, for example. That is, someone could advocate: 1 A larger deficit in the short term.  2. Specific, clear measures to reduce deficits over the next ten years, by trimming entitlements and raising taxes. 3. Linking (1) and (2) in a single piece of legislation.This sort of approach might satisfy doves who complain about austerity as well as Europeans and domestic hawks who worry about the U.S. fiscal outlook, . If (2) included some serious structural changes in entitlements I might endorse it.But my point is not whether this compromise is something I could get excited about. My point is that it represents a missing position in the media. Why are the hawks and doves more interested in trying to score debating points against one another than in achieving their objectives?

Resource Hawk, Stimulus Dove -I suggested as much via last summer’s post Means of deficit reduction: Medicare and Social Security. I am a lot more interested in reducing Medicare costs than in cutting Social Security – and this could be done by reducing health care costs overall rather than on Medicare alone. Clearly, if we could get cost growth in healthcare paid by private insurance, it would impact Medicare costs down. Of course, I prefer lower spending and lower taxes to lower spending and higher taxes. And I don’t have a lot of faith in stimulus these days unless it is related to jobs because special interests have a way of getting their hands into the pot and perpetuating malinvestment. But, remember deficits are an ex-post accounting identity. If you think of economic policy as a largely exogenous short-term variable, but perhaps a more endogenous variable in the long-term, then it makes sense to move away from the deficit talk (see my post Out of control US deficit spending for more detail). The real driver of policy has to be a conversation about the allocation of society’s scarce resources.

What caused the Budget Deficit (Before the Financial Crisis)? - Kash on Angry Bear put together a really good graph in 2006 comparing where we might have been if Clinton policies (bad as they were in many cases) had stayed in place compared to where we were and expected to be with the Bush tax cut and spend policies. Responsibility for the Federal Budget Deficit, Angry Bear 2006.  Deficits under Bush were projected for more than $500 billion annually.  Of course, that was before the greedy, reckless banks threw the financial system into a tizzy with too much credit invested in too many houses by people with too little income to pay for them.  Add the costs of backstopping the Big Banks, and we end up with the trillion dollar hole we are currently in. Answer would seem to be--1) make the banks pay with a tax based on leverage and 2) end the tax cuts or at least a goodly share of them and 3) reinstate an estate tax that has some bite, so that those at the top who can afford to pay do pay. 

You've seen the stimulus. Now meet the anti-stimulus - A multiple choice question for you: Did the stimulus a) work; b) fail; c) end up locked in an unexpected battle with the massive anti-stimulus that's ripped through the states? Most people haven't heard of "c." But ask Bruce Bartlett, a conservative economist who worked for Ronald Reagan, George H.W. Bush and Jack Kemp, and you'll hear all about it. "When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments," he says. "I think economists will view this as a preventable error equivalent to the Fed's passive shrinkage of the money supply in the early 1930s." Take my home state of California, with an unemployment rate of more than 12 percent. We need the government to help create jobs, and quick. But instead, Sacramento is raising taxes and cutting services. That's like bailing water into the boat rather than out.

“Emergency” does not mean “important” - Emergency spending is advantaged in the Congressional budget process: The total amount of discretionary spending, implemented through annual appropriations bills, is capped by the annual budget resolution.  Discretionary spending designated as emergency spending does not count toward these caps. Mandatory spending, most of which is for entitlement programs, is on autopilot.  Congressional budget rules require you to offset any legislative increase you propose in mandatory spending.  An emergency designation waives this requirement.   The same is true for tax cuts designated as emergencies. OK, now that we know how emergency spending is advantaged, what is it?  It turns out there is no formally binding definition in the legislative process, so as a formal matter, it’s whatever you can get away with labeling as an emergency.  A Member of Congress can argue that X is not an “emergency,” and if he or she can get the votes to strike that emergency designation from the bill, then that spending will count toward the caps (discretionary) or its deficit effect must be offset (mandatory).  If, however, a majority of Members (separately in the House and Senate) agree that they’ll label X as an emergency, then there is no procedural challenge available.

House Democrats Announce No Budget Will Be Passed In 2010 -House Democrats will not pass a budget blueprint in 2010, Majority Leader Steny Hoyer (D-Md.) will confirm in a speech on Tuesday. But Hoyer will vow to crack down on government spending, saying Democrats will enforce spending limits that are lower than what President Barack Obama has called for. In the scheduled address to the progressive think tank The Third Way, Hoyer will acknowledge that the lower chamber will do things differently this election year. “It isn’t possible to debate and pass a realistic, long-term budget until we’ve considered the bipartisan commission’s deficit-reduction plan, which is expected in December,” according to Hoyer’s prepared remarks that were provided to The Hill.

Thrill-Ride Thursday – Jobs or Bust! - The legislation, known as the “tax extenders” bill, would have reauthorized extended unemployment benefits for people out of work for six months or longer, would have protected doctors from a 21 percent pay cut for seeing Medicare patients, and would have provided billions in aid to state Medicaid programs.  Thanks to the wisdom of a minority of Congress, none of that will happen and the markets are crashing, as well they should with 1% of our nation’s struggling families losing the last shred of money they had coming in. It’s not just the 1.2M people that lose benefits on Friday though, it’s the 250,000 additional people PER WEEK that will lose their benefits as well.  As today’s numbers are likely to show and as I ranted about yesterday – we are doing NOTHING to create new jobs while we funnel Trillions of dollars of Corporate Welfare (which is charged back to the taxpayers) to Banks, Insurance Companies, Auto Makers, Oil Companies and thousands of other companies who lobbied their pet Congresspeople to stop this bill from making it less profitable to ship their job openings overseas.  Is the American voting public too stupid to live? 

Gaming the Budget Window - Faced with continuing gridlock over a soup-to-nuts extenders bill, congressional leaders have gotten creative in their legislative strategy. Exhibit A is a stripped-down bill that passed the Senate by unanimous consent on Friday. This bill would temporarily reverse the 21% cut in Medicare physician payment rates that took effect earlier this month. The price tag for this six-month “doc fix” is a bit more than $6 billion over the next ten years.To appear fiscally prudent, lawmakers want to pay for that spending by raising new revenues or reducing other spending. About $4 billion would come from changes to Medicare. The other $2 billion would come from allowing businesses to postpone contributions to their underfunded pension plans. Yes, you read that correctly. In the strange world of Washington budgeting, lawmakers can pay for new spending by making it easier for corporations to underfund employee pensions.

Time to get tough on defense spending - With the fixation on shrinking the budget deficit, why is over $700 billion in annual defense spending almost always off-limits for discussion? The ... bipartisan Sustainable Defense Task Force's June 11 report recommending over $1 trillion in Pentagon cuts over the next 10 years is an indication that some sanity might arrive inside the Beltway. ... Some of the report's big-ticket items for savings over a 10-year period include $113 billion by reducing the U.S. nuclear arsenal; $200 billion by reducing U.S. military presence abroad and total uniformed military personnel; $138 billion by replacing unworkable, costly weapons systems with better alternatives; and $100 billion by cutting unnecessary command, support and infrastructure funding. But, the report argues, "significant savings" may depend on rethinking "our national security commitments and goals to ensure they focus clearly on what concerns us the most."

Simpson’s Comments Undermine Commission Efforts - Simpson regards proposals for reducing Social Security costs--such as raising the age at which full benefits are paid--as not affecting seniors because it would not apply to anyone now getting benefits. In the interview, Simpson maintained Social Security is already insolvent because it is paying out more than it is getting in tax revenue. It is not clear whether that will be true for the current fiscal year or the next few years, but it will be happening not too far in the future. Then Lawson asked, "But what about the $180 billion in surplus that [the trust fund] brings in every year [in interest payments on the Treasury securities it holds]?""There is no surplus in there. It’s a bunch of IOUs," Simpson said. "Listen. It’s two-and-a-half trillion bucks in IOUs which have been used to build the interstate highway system and all of the things people have enjoyed since it has been set up."

Social Security: Makeup of U.S. panel a reason for concern…Social Security's curse is that its amazing simplicity from the standpoint of its beneficiaries — those checks keep coming regardless of the state of the economy or the federal budget — masks the complexity of its inner workings. This is what allows the program's antagonists to disguise their efforts to destroy it as merely minor tweaks — requiring from the rest of us never-ending vigilance. That's because some seemingly "minor" fixes can have consequences great enough to wreck the entire edifice, the way a tiny water leak can eat away a foundation and bring down a house.The instrument causing Social Security advocates anxiety today is the National Commission on Fiscal Responsibility and Reform, which President Obama created in February to address the long-term budget deficit.

The Myth of “Wealthier Seniors” and Cutting Social Security and Medicare - One of the important untrue items circulating in policy debates in Washington is that we can have substantial budget savings if we cut Social Security and Medicare benefits for "wealthier seniors." Peter Peterson, the billionaire Wall Street investment banker regularly announces that he doesn't need his Social Security when highlighting his efforts to reduce the budget deficit. In fact, everyone in the policy debate knows that there are very few people like Peter Peterson among Social Security and Medicare beneficiaries and it would not matter one iota if we took away their benefits completely. This is why it is incredibly dishonest when the Washington Post puts forth its case in an editorial for cutting Social Security and Medicare benefits for "wealthier seniors," a change that the paper describes as making the programs "more progressive."

Dean Baker: Pay Retirees to Leave the Country - I thought the plan was to have death panels decide which of our seniors to send away on icebergs, but Dean Baker says to help with the budget, we should pay retirees to leave the country: (vimeo)

Who Are the "Lesser People"? What the Fiscal Commission Needs to Hear About Poverty - Last week, our friends at Social Security Works captured an impromptu and rather frank interview with Alan Simpson, co-chair of the National Commission on Fiscal Responsibility and Reform and former Senator of Wyoming. Of Simpson's statements, here's one of the most striking: "We're trying to take care of the lesser people in society...." It is an appalling sentiment -- that any one person would have less value than another. Yet, I cannot help but wonder who are the "lesser people" Simpson was referring to? Was it his intention to refer to those less well-off? Perhaps Simpson meant those living in poverty? Or those living near poverty? As dreadful as it sounds, Simpson's comment offers an important learning opportunity for decision makers, including those members of the Fiscal Commission.  Put simply, there are far more Americans who are less well-off than we acknowledge.

Zombies Have Already Killed The Deficit Commission – Krugman - Social Security is a government program funded by a dedicated tax. There are two ways to look at this. First, you can simply view the program as part of the general federal budget, with the the dedicated tax bit just a formality. And there’s a lot to be said for that point of view; if you take it, benefits are a federal cost, payroll taxes a source of revenue, and they don’t really have anything to do with each other. Alternatively, you can look at Social Security on its own. And as a practical matter, this has considerable significance too; as long as Social Security still has funds in its trust fund, it doesn’t need new legislation to keep paying promised benefits. OK, so two views, both of some use. But here’s what you can’t do: you can’t have it both ways. You can’t say that for the last 25 years, when Social Security ran surpluses, well, that didn’t mean anything, because it’s just part of the federal government — but when payroll taxes fall short of benefits, even though there’s lots of money in the trust fund, Social Security is broke.

Dawn of the Dead: the Krugman remake - On his blog Dr. Krugman attacks Fiscal Commission co-chair Alan Simpson for his recent Social Security comments.  More interesting than Dr. Krugman’s latest Social Security argument is that he is trying to kill the President’s Fiscal Commission by declaring it to be already dead: But the commission is already dead – and zombies did it.So what does it mean that the co-chair of the commission is resurrecting this zombie lie?  It means that at even the most basic level of discussion, either (a) he isn’t willing to deal in good faith or (b) the zombies have eaten his brain.  And in either case, there’s no point going on with this farce. I will respond to the specific “zombie lie” claim another day.  Today I want to focus on the strategic problem Dr. Krugman’s post raises for the President.

How to impress the bond markets - The deficit hawks have been pushing the line in recent months that we have to make cuts in social security, along with some revenue increases, in order to reassure the bond markets about the creditworthiness of the US government. According to this argument, by taking tough steps (ie cutting social security benefits) we will have shown the bond markets that we are prepared to do what is necessary to keep our budget deficits within manageable levels. If the issue is assuaging the bond markets by convincing them that we are prepared to take tough choices to limit long-term deficits, let's put a few other items on the table. For item number 1: how about a financial speculation tax? Wouldn't the bond markets be impressed by seeing Congress crack down on the Wall Street hot shots whose recklessness helped fuelled the housing bubble? That one would show real courage given the power of Goldman Sachs-Citigroup gang..

Washington Post Alternate Reality: Public More Concerned About Deficit Than Jobs or Economy Overall -A stunning front-page article in Saturday's Washington Post moves the paper firmly into conservatives' dream universe on deficit policy. "Stimulus plans run up against deficit fears" There you have it: the budget deficit is an issue that's resonating more with voters than the issues of high unemployment or the possibility of further economic downturn generally. It's a trendy right-wing meme of the last few months, but here it is in the news pages of the Washington Post.But is this notion supported by what the polling actually says? No. Not even close. A Pew Research / National Journal poll from early June asked "Which of the following national economic issues worries you most?" Number one was "job situation" with 41%. "Federal budget deficit" got 23%.An NBC / Wall Street Journal poll from early May asked "Please tell me which one of these items you think should be the top priority for the federal government." Sure enough, "job creation and economic growth" won with 35%. "The deficit and government spending" got 20%.A Fox News poll also in early May got even more dramatic results. "Economy and jobs" topped the priority list with 47%, while "deficit, spending" garnered only 15%.A CBS / NYT poll in early April found 27% prioritizing "jobs", 27% the "economy" and 5% prioritizing "budget deficit/national debt."

Stimulus, Austerity, and the Spiral of Decline – In an economic decline, mediocre governments typically bounce back and forth between “stimulus” and “austerity.” They are the ketchup and mustard of bad recession policy.“Stimulus” – favored by the left-leaning politicians – rarely amounts to more than a form of welfare spending. This is appreciated in hard times, but it tends to be extremely expensive and does little for the economy as a whole. Deficit worries increase. Then comes the “austerity,” often favored by conservative politicians.“Austerity” usually means spending cuts and tax hikes. But, it does not take long before politicians, bureaucrats, public employees and corporate cronies all agree that they don’t actually want to cut spending. Usually, they take some unpleasant swipes at welfare programs and services – in other words, the only programs that actually do some good, and which are especially important in a recession. These spending cuts rarely amount to much, so the government relies more and more on tax hikes for their “austerity” plans. The results of the tax hikes are typically an even worse economy, and often no appreciable increase in tax revenue.

IRS not cashing checks fast enough » About the same time Uncle Sam was announcing that next spring he was going all electronic when it comes to federal benefits, a watchdog agency was chastising the IRS for not cashing tax payment checks more quickly. IRS slowness in processing paper payments is costing the Treasury hundreds of thousands of dollars in interest earnings, says the Treasury Inspector General for Tax Administration (TIGTA).As you recall, the IRS was exempted from the upcoming total e-payment edict, meaning tax refunds will continue (at least for now) to be issued in the old-fashioned paper form to taxpayers who prefer that method.And the IRS will continue to accept our annual remittances in check form, too.But when that happens, Uncle Sam needs to put his John Hancock on the payment document's back and send it off to the bank to be processed ASAP.

IRS says it plans to tax BP payments to oil spill victims – The Internal Revenue Service says oil spill victims who receive BP payments for lost wages will have to pay up come tax time. Under current law, BP payments for lost wages are taxable — just like the wages would have been, the IRS said in tax guidance issued Friday. Payments for physical injuries or property loss, however, are generally tax free. Payments for emotional distress? Taxable, though medical expenses related to the emotional distress are deductible. The IRS issued the guidance Friday to help spill victims sort through the law's complexities. The agency has posted tax information for oil spill victims on its website and plans to hold forums in seven Gulf Coast cities on July 17 to help victims with tax troubles or questions.

Middle-Class Tax Cuts May Be On Chopping Block, House Majority Leader Says - House Majority Leader Steny Hoyer tiptoed into dangerous political territory Tuesday, suggesting that to cut the government's record budget deficits dramatically, popular middle-class tax reductions set to expire at year's end could be extended only temporarily. Hoyer, a Maryland Democrat, also suggested that future Social Security benefits may have to be trimmed to contain the national debt. Those calls from the House of Representatives' second-ranking Democrat, at a Washington budget conference, were seen as an important political step as well as a legislative trial balloon.

David Cay Johnston has noticed a tax giveaway through FERC - David CAy Johnston, writing in Tax Notes, has focused on a tax giveaway that most of us have missed--a provision that permits partnerships that own pipelines to charge consumers for a tax that they don't actually pay, resulting in considerable profits for the partners of the partnerships with little or no accompanying tax liability.  See Master LImited Partnerships: Paying Other People's Taxes, 129 Tax Notes 1393 (Jun. 21, 2010), available for free at, here.   There's also a brief explanatory video by Johnston, here.  This pipeline policy stems from the Federal Energy Regulatory Commission and a 2007 court decision upholding the shift.  ExxonMobil Oil Corp v. FERC, 487 F.3d 945 (DC Cir. 2007). Johnston explains:

Income tax loophole of the day - Why would the government force consumers to pay someone else’s taxes — even when that person might not pay any taxes at all? The answer, of course, as it usually is in such cases, is regulatory capture, and in this case the regulator in question is the Federal Energy Regulatory Commission.The FERC sets the rates that consumers pay for moving oil through pipelines. Because these pipelines are monopolies, the FERC controls the prices — and it takes into account the taxes that the pipeline owners have to pay when it sets those prices. “As a general proposition,” explained one judge, in a key decision, “a pipeline that pays income taxes is entitled to recover the costs of the taxes paid from its ratepayers”.So far so good. The problem arises with a clever little loophole: the corporations which used to own the pipelines have all now transmogrified themselves into partnerships.

It’s Time We Taxed Financial Gambling - Remember the May 6 stock market “flash crash,” when the Dow plummeted nearly 1,000 points in less than an hour? The experts are still scratching their heads over the exact cause of that historic market bungee jump. What is clear is the plunge never would have happened without automated high-frequency trading, which accounts for 50 percent to 75 percent of daily stock trades. How does it work? Financial firms program computers to trade millions of shares every second based on certain triggers, such as when a stock drops or rises a certain percent. Like so much of what happens on Wall Street, this financial activity has little to do with what’s actually happening in the economy. It’s about following market trends, whether they are rational, irrational, or the result of human error. One way to encourage investors to go back to thinking with their heads would be to place a small tax on each trade of stock, derivatives, currency and other financial assets. A fee of a quarter of 1 percent or less would be virtually unnoticeable to ordinary investors. But for the big-time stock-flippers and derivatives dealers, it would add up.

Senators Propose A Progressive Estate Tax, Complete With A ‘Billionaire’s Surtax’ I’ve been long lamenting the lack of perspective from which the debate over the currently expired estate tax has been suffering. Conservatives pushing a tax cut worth tens of billions of dollars to the very richest 0.2 percent of households in the country have been presenting their proposal as a “reasonable compromise,” even though it is the most conservative idea on the table short of full repeal. Progressives, meanwhile, seemed to be resigned to reinstating the estate tax at the 2009 level, which still costs billions compared to the budget baseline.  Well, Sens. Bernie Sanders (I-VT), Tom Harkin (D-IA) and Sheldon Whitehouse (D-RI) have finally rectified the situation, proposing a progressive estate tax:

Harkin, Whitehouse and Sanders Are Pushing an Estate Tax Proposal That Might Be Called the Die Abroad Act - Vice President Gore campaigned on the idea of raising the exemption amount to $4 million for individuals and $8 million for couples.No slouch when it comes to taxing the rich, President Obama has a proposal similar to that Gore platform. In the FY 2011 U.S. Budget, he calls for making 2009 law permanent. That would set a top tax rate of 45% on the taxable portion of estates, granting an exemption of $3.5 million to individuals and $7 million to couples. But some Democrats are now swinging the other way, demanding much higher estate taxes. As reported by Janet Novack in Forbes, Senators Harkin, Whitehouse and Sanders are urging their colleagues to match Obama's exemption levels -- $3.5 million and $7 million -- but to demand a top rate of 65% on estate value above $500 million (dubbed a "billionaire's tax" because the threshold for couples would be $1 billion). Rates of 55%, 50%, and 45% would apply to estates valued lower.

Bank Tax: France, Germany and UK, but where's the USA? - On June 23, the big three Euro countries--France, Germany, and Britain--agreed to tax banks directly, "to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk."The tax in the UK (which is also increasing its capital gains tax) will be imposed on banks with liabilities in excess of $20 billion pounds and should raise about $3 billion a year. It will be based on the aggregate amount of riskier liabilities (i.e., liabilities other than Tier 1 capital and insured deposits). Berlin's Finance Ministry noted that "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk." Although the US has ostensibly supported such a tax, we have been notoriously reluctant to impose any real constraints on banks. The financial reform legislation wending its way through Congress has been watered down, so that both consumer protection and protection of the national fisc have given way to the desire of banks to continue to grow in size

Reducing the Influence Banks Have over Monetary Policy - Thoma - This post addresses the latest proposal for financial reform, in particular the proposal to change the way the District Bank presidents are chosen in an attempt to reduce the power banks have over monetary policy. One part of the proposal was to have the NY Fed president chosen by the president rather than the NY Fed's Board of Directors because of the NY Fed's special role in the implementation of national monetary policy. One question I ask at the end of this post is whether the NY Fed needs to have a special role in monetary policy and be elevated above all other District Banks. Why can't the execution of monetary policy be housed in a separate agency under the control of the FOMC (or, alternatively, the Board of Governors)? There was a time when proximity to Wall Street was essential, but that has changed in the last 70 years, and, in any case, the agency could be located as close to Wall Street as needed. Communication with Washington, to the extent it's needed, could us digital technology. This would put the NY Fed on a more equal footing with the other Fed's, and solve the problem of how to represent both regional and national interests in the selection of the NY Fed president:

One Thing at a Time - Congressional negotiators are working overtime to reconcile various provisions of the House and Senate bills to overhaul financial regulation, hoping to send a final version to President Obama’s desk before the July 4 weekend. Thursday Senators on the panel voted 10-2 to kill a provision that would have made the Federal Reserve Bank of New York’s president a White House appointment, requiring confirmation by the Senate, instead of a matter for the New York bank and the governors of the Federal Reserve Board,  as it is now.  That led Jon Hilsenrath of The Wall Street Journal to write (subscription required), “[T]he Federal Reserve has emerged as likely to retain most of the power and independence Fed officials had feared they might lose.”  Does that mean that appropriate bank reform will have been achieved?  Hardly. There’s broad agreement among experts that this year’s bill tackles mainly the easy stuff.

Dead On Arrival: Financial Reform Fails - By Simon Johnson - The House-Senate reconciliation process is still underway and some details will still change. But the broad contours of “financial reform” are already completely clear; there are no last minute miracles at this level of politics.  The new consumer protection agency for financial products is a good idea and worth supporting – assuming someone sensible is appointed by the president to run it.  Yet, at the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit cycle. Go, for example, through the summary of “comprehensive financial regulatory reform bills” in President Obama’s letter to the G20 last week.

Sleight of hand is not the best reform -FT - A US House-Senate conference has started work on merging the chambers’ respective financial reform bills. This tortuous process still has some way to go. The good news is that the plans are similar, and not that different from the blueprint suggested by the administration last year. Agreement will most likely be reached, and the final measure will tick the main boxes. It will be better than nothing. The bad news is that it will be no more than a start. At a conference last week in New York, 15 distinguished finance and economics scholars presented their own recommendations for financial reform*. The Squam Lake Group, as the economists call themselves, represents a wide range of opinion but is in agreement about most of what should happen. However, none of this will work without willingness to face down pressure from the industry.

New agency would help consumers save money: Warren - A new consumer financial protection agency aimed at protecting Americans on a wide range of personal-finance transactions seems to be a likely result of Congress's current effort to overhaul the banking industry and prevent future economic crises -- but will the agency succeed?  "Credit-card agreements, bank overdraft notices, and mortgages are all loaded with tricks and traps," said Elizabeth Warren, a Harvard law professor and chairwoman of the Congressional Oversight Panel, who has been an advocate for creating the agency. "The agency can reverse that and give families a chance to take control over their money, but families will have to be smart," Warren said. The Congressional Oversight Panel is tasked with monitoring the government's regulatory reform efforts.

The CFPA Auto-Dealer Exemption - The CFPA/B proposal that the House conferees have presented to the conference committee for the financial reform bill includes an exemption for auto-dealers (see the bottom of p. 13).  It's frankly an exemption that is impossible to justify except as special interest pleading.  They House proposal would exempt used-car salesmen for goodness sakes!  (There's also a less troubling pawn-shop carve-out).  Today the Federal Reserve's Consumer Advisory Council (CAC) has submitted a letter of opposition to the auto-dealer carve-out to Chairmen Frank and Dodd.  This letter is an unprecedented move for the CAC, which is a non-partisan, expert body that does not usually weigh in on legislation.  I think it shows that there is absolutely no policy justification for the auto dealer carve-out. 

Oversight exemption for auto dealers gaining traction - Lawmakers were on the brink Tuesday of exempting the nation's 18,000 auto dealers from oversight by a new consumer financial watchdog aimed at protecting borrowers from abusive lenders.  Depending on the final language, the move could mark a major victory for industry lobbyists and a blow to President Obama, Democratic leaders, consumer advocates and Pentagon officials, who have long opposed such a loophole.  Rep. Barney Frank (D-Mass.), chairman of the House-Senate conference committee finalizing details of new financial regulations, reiterated his opposition to the auto-dealer exemption but proposed including it in the final bill, acknowledging the widespread support for it in the House last fall. "I consider myself bound by the House," he said.

Caving in to Car Dealers – We’re in the final stretch of the House-Senate conference on financial regulation, still waiting to assess the final compromises on the big ticket issues of reining in derivatives and proprietary trading by banks. But while we wait, we already know that the House capitulated to automobile dealers. House Dems got the conference to agree on excluding car dealers from regulation by the new Consumer Financial Products Bureau. Do we care? Only if you think that subprime mortgages had catastrophic consequences for civilization as we knew it. Car loans are the second biggest financial obligation for most families, and the single biggest for most people who don’t have a mortgage. Eighty percent of car loans are originated by dealers, and subprime lending is a lucrative part of that market. Need evidence? Here’s Auto Express Credit, which actively recruits troubled borrowers who are desperate to buy a car and then markets its database to car dealers:

Fed Will Run New Consumer Protection Agency - House and Senate leaders have reached a compromise over differing versions of key sections of financial reform, handing banks a victory on one hand, while dealing them a setback on the other. According to final language agreed to by both chambers, the new Consumer Financial Protection Agency (CFPA), proposed to protect consumers' interests in dealings with banks and credit card companies, will be part of the Federal Reserve, not an independent agency.  The House version of the financial reform bill established CFPA as an independent agency. Consumer advocates pushed for that, saying the Fed, which currently has responsibility for consumer protection in financial matters, failed in that area in events leading up to the financial meltdown

Elizabeth Warren Backs Emerging Consumer Protection Agency - Elizabeth Warren, the Harvard professor who originated the idea of the consumer financial protection agency, supports the current version of the bureau that Wall Street reform conference committee negotiators are settling on, she told the Huffington Post.Though her endorsement isn't a ringing one, Warren, who chairs the congressional panel overseeing the bailout, said that the version emerging from negotiators is strong enough to rein in abuses in the lending industry despite exemptions that Congress has carved out for auto dealers. "I'm disappointed that Congress seems to be taking the side of auto lenders and big banks over the Pentagon, community banks, and all the public interest groups that oppose an auto dealer carve-out, and there are some other problems as well," said Warren. "But right now the bureau has the authority and the independence it needs to fix the broken credit market. I keep waiting for an incoming missile that means the banks have won their fight to destroy this consumer agency, but that hasn't happened so far -- and I don't think it will."

Upheaval Sweeps Consumer Finance - Even before Congress unveils a consumer-protection agency, new state and federal laws are ushering in the most sweeping changes in consumer finance since the 1960s. On July 1, Arizona will force changes on the state's 595 payday-loan stores—outfits that make high-interest loans against future paychecks—that could effectively put them out of business. Wisconsin banned small loans backed by car titles that led many people to lose their vehicles. Arkansas, Maine and New York joined other states in putting curbs on tax preparers who offer costly loans against expected tax refunds.The federal government, meanwhile, is for the first time requiring that lenders verify a borrower's income and assets before issuing a home loan. It has also slapped broad new rules on credit-card issuers, limiting their ability to boost interest rates and charge certain fees.

Looking for economic rationales in finreg - Anyone care to offer an economic rationale for this? …the bill gives the Federal Reserve the ability to set a limit on the fees that stores must pay to accept debit cards. The catch here, though, is that only banks with more than $10 billion in assets would be subject to the cap. As a result, merchants may have to pay more to accept debit cards from smaller banks and credit unions than big banks like Bank of America and Chase.

Even the Fed can’t get credit-card language right - has an interesting survey of the literature surrounding penalty interest rates on credit cards. Many of the biggest card issuers rank as “poor,” on the quality and transparency of their disclosures, although Wells Fargo stands out as being particularly good. Most distressingly, the Federal Reserve itself, in its sample statement language, fails on some key points. For instance, the Fed’s model flyer says this:How Long Will the Penalty APR Apply?: If your APRs are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due. Sounds clear, right? Well, it is clear — but it’s also highly misleading. Because the fact is that once your APR is increased, the bank doesn’t need to bring it back down from the penalty level ever, at least for new purchases. CardHub explains that “for new transactions, the credit card companies are not restricted and the Penalty APR could apply indefinitely” — something you’d never guess from reading the Fed’s language.

To regulate or not to regulate - IN RECENT weeks a vigorous debate has raged over the appropriate way to handle interchange fees on card transactions. The fee is essentially a charge for the use of the card, which is meant to cover things like payment risk and basic costs. But the dynamics of the market end up being somewhat complicated. You have multiple parties involved: the merchant, the merchant's bank, the consumer's bank, the consumer, and potentially a card association (here's a fun graphic showing how this all works, sort of). Some people argue that the fact that interchange fees in America are high by international standards and rising is evidence that something is amiss in the market—most likely, some sort of predatory behaviour on the part of banks. Others counter that regulators couldn't hope to get the prices right in such a complicated, multi-party transaction, and that in any case there is plenty of payment system competition (cash, cheques, online payment methods and so on).

The Disingenuous Mr. Russell Simmons - Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment.  Simmons claims that his card takes "the poor, the voiceless and the under-served" out "from the claws of payday lenders and check cashers, from humiliating lines waiting to cash their paychecks and then more lines to pay their bills."   Gosh, you'd think that Russell Simmons was operating a charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users.  (See here for more details on the RushCard.)  The RushCard is an alternative to check-cashing outlets, but that's all that it is--another high-cost financial service for the poor.  It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees.  The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.  

Won’t somebody think of the competition? - The interchange debate involves a lot of details that I haven’t had the time to fully digest, so I won’t claim to have a high level of confidence about whether regulations being proposed are  good idea or not. But I would like to offer a note of concern and skepticism about an issue I haven’t seen seriously addressed by the otherwise very informative bloggers, like Felix Salmon and Mike Konczal, who have been covering this topic: what impact will the proposed regulation have on potential market entry? I think we can all agree that more competition is, when feasible, the best way to deal with undesirable market power.  This point has been echoed several times by Matt Yglesias, but the most I have seen it discussed so far is by Konczal, who is not optimistic that this represents a feasible solution:

The interchange win -It looks like interchange-fee regulation has made it through! That’s great news, and I’m not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees — that’s OK, although it’ll probably just push further down the road the day when the U.S. will finally embrace the low-fraud EMV standard. Kevin Drum “wouldn’t mind seeing some regulation of credit card interchange fees as well”, but that’s bound to happen, de facto, now that merchants are free to offer discounts to people paying with cash or debit: if credit-card interchange fees stay high while debit-card fees fall, then merchants will simply start offering broad discounts to anybody using cash or debit, essentially forcing customers to pay extra for all those frequent-flier miles and cash rebates.

Competition in payments - Adam Ozimek reckons that we need more competition in the payments space, and that interchange regulation is going to impede progress toward that goal: I think we can all agree that more competition is, when feasible, the best way to deal with undesirable market power…I don’t see it this way at all, partly because we don’t all agree that more competition and innovation is necessarily the optimal way to go with respect to payments. Being able to easily pay for things without worrying about the mechanism is a great public good.

Merchants Win Debit-Card Fee Battle - Retailers stand to reap billions from the financial-overhaul legislation being finalized by Congress this week, possibly giving them a long-sought victory by slashing the "swipe fees" that credit-card companies charge merchants for every debit-card transaction. Members of the House and Senate announced an agreement Monday to include the debit-card fee cuts in the final version of the overhaul bill—a loss for the financial industry, which had mounted a furious campaign to eliminate or water down the proposed regulations. Though it is unclear how much the estimated $20 billion a year in debit-card fees paid by U.S. merchants would be reduced under Congress's proposal to have them regulated by the Federal Reserve—or what impact consumers might feel—some experts believe they could be cut by half or more, saving Wal-Mart Stores Inc. alone, the world's largest retailer, hundreds of millions annually.

Swipe Fee Deal: Merchants Beat Wall Street - Wall Street reform negotiators struck a deal Monday to regulate the swipe fees that major banks and credit card companies can charge to merchants -- costs that are passed on to consumers in the form of higher prices. The cost to merchants of using credit cards has more than doubled since 2003 even as merchants' profits have declined, a contradiction only explained by the monopolistic system that lets banks continuously raise swipe fees. The deal, struck between Sen. Dick Durbin (D-Ill.) and key House negotiators, leaves out some elements that consumer advocates had been fighting for. It allows fees charged to reloadable, prepaid debit cards -- generally used by the poor -- to remain unregulated. And it allows an exemption for states that use debit cards to dole out benefits. But, for the first time, banks and credit card companies will face restrictions on the fees they can charge merchants for the privilege of accepting credit and debit cards. (Read a summary of the deal here.)

Banking Lobbyists Make Final Run at Reform Bill - NYTimes - Industry lobbyists — and sympathetic members of Congress — are pushing for provisions to undercut a central pillar of the legislation, known as the Volcker Rule, which would forbid banks from using their own money to make risky wagers on the market and would force them to sell off hedge funds and private equity units.  To secure the support needed for their bill, Senate negotiators are leaning toward creating a series of exemptions to the Volcker Rule that would allow banks to continue to operate these businesses as investment funds that hold only client money, The three main changes under consideration would be a carve-out to exclude asset management and insurance companies outright, an exemption that would allow banks to continue to invest in hedge funds and private equity firms, and a long delay that would give banks up to seven years to enact the changes.  In particular, the provisions, sought by Senator Scott Brown, Republican of Massachusetts, and several other lawmakers, would benefit Boston-based money management giants like Fidelity Investments and State Street Corporation.

Disappointing Finance Bill Still Has Issues Worth Fighting For - The financial reform bill in its final stages of legislative action did not break up the big banks, reinstate Glass-Steagall, reign in bonuses and executive salaries, or stop the usury rates for payday loans and credit cards, nor did it require mortgage reform in light of the housing collapse. But there are still some key issues worth fighting for - issues the big banks and, too often, the Obama administration, are trying to remove from the bill. As the House-Senate banking conference committee continues its closed-door negotiations, bank lobbyists - through big-bank-friendly lawmakers - are trying to strip key reforms from the bill. There are three key issues we should be urging legislators to support:

Bailout Banksters to take on Blanche - Next up are the Bailout Banksters and the members of Congress they keep in their hip pockets. They hope to dump both Lincoln and her tough derivatives amendment in a financial reform bill now being pieced together by a House-Senate conference committee. They have billions of reasons to try.The in-the-dark derivative market, created and run by giant Wall Street banks, was the grenade that nearly blew up the world's economy in October 2008. That unregulated, massive mess required hundreds of billions of dollars of your money to bail out the banks' casinolike trading.Today, Congress has done nothing. Almost 97 percent of all swaps – paper bets similar to commodity futures –continue to be traded by five banks – Morgan Stanley, Bank of America, Goldman Sachs, Citigroup and JP Morgan Chase.

Lawmakers at Impasse on Trading - Derivatives trading, a business long prized by Wall Street but little noticed by anyone else, is rapidly gaining prominence as the rare part of the nation’s vast financial infrastructure that Democrats cannot agree how to regulate, Binyamin Appelbaum reports in The New York Times.House and Senate Democratic leaders failed at a meeting Wednesday morning to persuade Senator Blanche Lincoln, Democrat of Arkansas, to soften a provision she wrote that would force banks to abandon the lucrative business.A group of centrist House Democrats, and a bloc of legislators from New York, where trading activity is concentrated, have warned that the inclusion of Senator Lincoln’s language jeopardizes their support for the broader legislation to overhaul financial regulation.

Editorial - The Derivatives Endgame - NYTimes - Financial reform enters a crucial phase on Thursday as House and Senate negotiators begin public debate on the regulation of derivatives, the complex instruments at the heart of the financial crisis.  This is arguably the most important issue for big banks because real reform will crimp their huge profits from derivatives deal-making. It also is arguably the most important one for the public. The largely unregulated, multitrillion-dollar market in derivatives fed the bubble, intensified the bust and led to the bailouts. Unreformed, it will do so again. The final bill must ensure that derivatives are traded on transparent exchanges and processed through third-party clearinghouses to guarantee payment in case of default. That would end the opacity that masks the size and risk of derivatives deals, like those that caused the bailout of the American International Group. But to be effective, the new rules must be broadly applied.

Don’t Gut Proxy Access - The Senate’s representatives on the conference committee finalizing financial regulatory overhaul have proposed weakening the proxy-access provisions included in both the House and Senate bills. The senators’ amendment would prevent shareholders owning less than 5 percent of a company’s shares from ever placing director candidates on a corporate ballot.Hard-wiring such an ownership threshold in the financial regulatory bill would be a significant setback for shareholders and corporate governance reform. Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field.

Peanut Butter Regulations - Having dealt with a wide range of government regulatory agencies over 35 years, dealing with both health care and small business, I am familiar with “peanut butter regulation.” Peanut butter regulation spreads regulatory effort evenly over all regulated entities, even when it is well known that 20% of the targets represent 80% of the problems. Nursing home regulation comes immediately to mind. Also food safety. And the SEC. Regulation and regulatory capture are a hot topic these days. Do we need more targeted regulatory efforts? Peanut butter regulation reminds me of drunk driving checkpoints, stop everybody and eventually the cops find a drunk. Is there a better way?

Updates on the Financial Reform Effort - Here’s some stuff to keep an eye on: - After an interchange swipe fee compromise was reached yesterday, Chris Bowers finds, in House conferees pass swipe fee compromise; Schumer goes to GOP to seek further exemptions, - Banking and payment analyst Bryan Derman gets real about the Durbin Amendment. Great article, . The Audit also has an excellent piece on interchange. - David Dayen reports that auto dealers are exempted from the CFPB. Reup: I talked about the exemption to Planet Money here, and Planet Money turned around and asked Rep. John Campbell (R-Calif.) why he introduced this into the debate when he owns property where car dealers are located. That link also talks about Raj Date’s work on the matter. The vote that got an auto dealer exemption into the House Bill features, with video, at the beginning of Ryan Grim and Arthur Delaney’s The Cash Committee, what I think is one of the best pieces on the financial reform bill in the House (and a great peek into how Congress works around election funding).It appears that this CFPA compromise might be at risk. Here is the House offer on consumer protection. It would be a shame if it didn’t make the final bill, will find out shortly.Ryan Grim reports Insurance Industry Poised To Tear Loophole In Wall Street Reform, which might as well be called the AIG amendment.- Luis Guiterrez at Huffington Post, talking about prefunding a resolution fund. - I’m really worried about a complete disaster on derivatives in the next few days.

Mirabile Dictu: $19 Billion Fee Added to Financial Reform Bill - Yves Smith - In a weak nod to “too big to fail” concerns, House Financial Services Committee chairman Barney Frank announced that larger banks and hedge funds would pay a fee as a way of pre-funding resolution costs. From the Financial Times: The proposed levy emerged as an unwelcome surprise for the industry deep into a late-evening congressional session to finalise landmark Wall Street reform legislation. Banks with more than $50bn in assets and hedge funds with more than $10bn will be required to pay into the fund as a proportion of their assets…. One of the long technical arguments during the reform debate has been over whether to impose an upfront fee on large financial institutions to cover the costs associated by the government seizing and winding down a failing firm using new powers.

Wall Street Reform Could Cost Goldman Sachs Billions –The proposed financial reforms pending before Congress could cost Goldman Sachs nearly a quarter of its annual profits, Citigroup analysts estimate in a new report. Goldman, the most profitable securities firm on Wall Street, could lose up to $5.06 in earnings on a per-share basis if Congress passes a bill that forbids banks from trading for their own profit, owning or sponsoring hedge funds and private equity funds, and compelling them to move most of their derivatives dealing into regulated markets, according to the research note. Combined with a potential fee to recoup taxpayer losses on TARP and higher deposit insurance assessments on its bank, Goldman could lose up to 23 percent of its profits, giving it the distinction of being the firm most impacted by the financial reform legislation. Morgan Stanley is a close second

Volcker Rule Under Attack as Lawmakers Seek Hedge Fund Loophole - Senate negotiators will probably offer changes today that would soften the Volcker rule by allowing banks to sponsor hedge funds and invest their own money, within limits, alongside that of clients. The compromise, designed to win the support of at least three Republican senators, comes as lawmakers struggle to reach agreement on financial reform this week. To appease Democrats in favor of stronger regulation, negotiators also plan to make it harder for regulators to undermine the rule, according to lobbyists and congressional aides involved in the discussions. “There’s pressure from both sides to toughen and to soften the Volcker rule, and politics is the art of compromise,” “Running a hedge fund wasn’t the problem, and this way they’re saying all of it wasn’t bad, you just can’t use too much of your capital on it. Politics is the art of saying ‘we made it tougher’ without making it really tough.”

A key Republican vote keeps banking curbs in play - State Street isn't one of the iconic firms of Wall Street. It doesn't even make the top 10 largest bank holding companies in the country. But on Capitol Hill this week, as lawmakers finalize new rules regulating Wall Street, Boston-based State Street wields enormous influence. The bank has a powerful advocate: Sen. Scott Brown (R-Mass.), whose vote the Democrats need to pass the financial overhaul bill. Brown is worried that a key provision in the regulations known as the "Volcker rule" would hurt State Street, BNY Mellon and other banks with major operations in his state. Even though Democrats have fought to include a strong version of the rule, which could restrict the kinds of trading banks engage in, Obama administration officials and Democratic aides on Capitol Hill say Brown is likely to get his way because his vote is critical for approval of the House-Senate draft.  If he does, many other banks across the country could benefit.

Chuck Prince” Is Going To Run This Bank (Into The Ground) - Simon Johnson - “Breaking up big banks would actually increase system risk” is a refrain heard from top administration officials, ever more vocal after they helped kill the Brown-Kaufman amendment (that would have limited the size and leverage of our largest banks) on the floor of the Senate.But while Mr. Geithner and his colleagues are still taking their victory laps and congratulating themselves on retaining “business as usual” after the biggest crash-and-bailout in world financial history, educated opinion starts to feel increasingly uncomfortable.People who worry seriously about system risk break the problem down into several distinct buckets, including the nature of shocks and the way these are propagated across the system.  In this typology, the “Chuck Prince problem” is in a class of its own

Heh Heh Heh... Fannie/Freddie In FINREG? - Now I'm getting impressed. The FINREG folks are screaming about the possibility that Fannie and Freddie are being included in "resolution authority." This would effectively tax the entire financial system to cover the Fannie and Freddie mess. In my opinion, this is a GREAT thing, and the lobbyists who are screaming this morning can go do this: Why? Because the banks are the ones who wrote this paper and then sold it off to Fannie and Freddie at a profit to be securitized! For them to argue that "they bear no responsibility for the costs" that this imposed on the taxpayer (well over $100 billion realized thus far, and likely as high as $1 trillion before all is said and done) is ridiculous - and an outrage.

House and Senate in Deal on Financial Overhaul - A 20-hour marathon by members of a House-Senate conference committee to complete work on toughened financial rules culminated at 5:39 a.m. Friday in agreements on the two most contentious parts of the financial regulatory overhaul and a host of other provisions. Along party lines, the House conferees voted 20 to 11 to approve the bill; the Senate conferees voted 7 to 5 to approve.  With the agreement in place, President Obama said Friday morning that Congress was “poised to pass the toughest financial reforms” since the Great Depression, homing in on the consumer-protection measures that he said would make lending agreements easier to understand and protect small borrowers from hidden penalties and fees.  He said that the bill contained “90 percent of what I proposed when I started this fight.”

The Dodd-Frank bill - The House-Senate conference committee on financial reform finished its work at 5:49 a.m. today, concluding a session that began Thursday morning and continued through the night. The result is the Dodd-Frank bill. The final text is not yet available, but going off a number of reports, here are some key items:

Financial Reform Bill Passes: Banks Keep Derivatives Units, Volcker Rules Softened; House-Senate Conference Passes Financial Reform Bill After Marathon SessionHouse and Senate negotiators struck a grand compromise to merge the two chambers' competing bills to reform the nation's financial system in a party-line vote. But the long hours of closed-door meetings also appear to have fulfilled Wall Street's greatest wish: Many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant. The two most high-profile provisions were the last items to be considered. Neither emerged intact. One would have forced banks to stop trading financial instruments with their own capital and give up their stakes in hedge funds and private equity funds, named after its original proponent, former Federal Reserve Chairman Paul Volcker. The other would have compelled banks to raise tens of billions of dollars because they'd have to spin off their derivatives-dealing operations into separately-capitalized affiliates within the bank holding company.

Your Money: From Card Fees to Mortgages, a New Day for Consumers -After months of haggling, the terms of financial reform are set, so long as both houses of Congress vote to accept them in the coming days.  While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with their own money, they also set a number of new rules that will directly affect consumers.  Investors and those who advocate on their behalf did not get everything they wanted. Stockbrokers and annuity peddlers are still not required to act in their customers’ best interest, for instance. But mortgage shoppers stand to gain under the new rules and millions of people will now have access to a free credit score.  Here is a roundup of some of the biggest consumer issues that members of Congress addressed and where they ended up:

Your Money - A Wave of New Rules Is to Protect Consumers…Until now, the power to watch over consumers’ interests has been scattered across an array of agencies, which is why a centerpiece of the bill is the creation of a central Consumer Financial Protection Bureau. The bureau’s sole responsibility would be to look out for consumers. The bureau was conceived and championed by Elizabeth Warren, the vocal consumer advocate and head of Congressional oversight for the Troubled Asset Relief Program. She said in a statement on Friday that the new bureau would represent a victory for consumers. “They created a strong, independent consumer agency that will have the tools to rein in industry tricks and traps and to cut out the fine print,” Ms. Warren said. “For the first time, there will be a financial regulator in Washington watching out for families instead of banks.”

Financial reform: Almost there | The Economist - Newsbook has some details: The White House had intended the Volcker rule as a blanket ban, but it was forced to accept a watered-down version: banks will be allowed to invest a modest amount (up to 3% of their tier-1 capital) in hedge funds and private equity, though regulators will have less leeway than previously envisaged to waive the ban on prop trading. Included in the final version was the “Hotel California” provision, which would block bank holding companies from converting to investment-bank status to escape Volcker.The compromise over derivatives was even messier. A proposal that would have forced banks to spin off their lucrative swaps-dealing units was taken up, but only for certain products. Banks can continue to trade foreign-exchange and interest-rate swaps as well as credit-default swaps that are run through clearing houses. But contracts deemed riskier (by some lawmakers at least), such as agricultural, energy, equity and uncleared credit-default contracts, will have to be handled by separately capitalised affiliates. Much more here. The bill is far from perfect, but it has some surprisingly tough provisions, and it should make the financial sector safer. Not safe, mind you. Just safer.

Grading Financial Regulatory Reform - This morning, we learned of a huge compromise in regulatory reform. The expectation was that no one was happy with the bill, but the politicians, who all get to go home to the voters and say “Well, at least we passed something.” Overall, I give this a C minus: There are simply too many Fs to give them a much higher grade. Let’s look at what was passed and grade each section of reform: TOO BIG TO FAIL:  Grade: F - The new regulation does not directly address either the repeal of Glass Steagall or TBTF. The crisis legacy is a financial services sector that is highly concentrated with dramatically reduced competition. The six largest financial firms — combined assets: $9.4 trillion — will still dominate the industry.  Too-Big-to-Fail remains the law of the land.

“Disappointing and Inspiring”: Warren, Johnson, Black and More React to FinReg - Roosevelt Institute fellows and colleagues explain the good, the bad, and the ugly on the FinReg bill.

FinReg finale - Pat Garofalo's chart comparing the House, Senate and final versions of the bill is a good resource. I'm very glad to see that derivatives regulations remained strong, and surprised that Blanche Lincoln's spin-off idea made the cut. I'm also glad, and surprised, to see that a semi-robust Volcker rule survived.The big disappointment is that capital requirements, which I think to be the most important part of the bill, didn't end up in the final legislation. Instead, that's left to regulators, although it's hard to imagine that anything in the bill will stop regulators from getting caught up in bubble-mania. Still, this is an ambitious, thoughtful piece of legislation that addresses some of the system's worst failings (like the unregulated derivatives market) and adds a raft of protections. The work of financial regulation is trying to draw out the time between the last crisis and the next one, and this bill does seem likely to do that.

A Deal on Financial Reform: Now What? - Many people are already commenting on how good or bad a deal financial reform is for Wall Street. Some are saying it will crush profits in the banking sector. Others are saying Wall Street dodged a bullet and it will be business as usual. The answer is we really don't know. That's because a key problem with the bill, though why it worked politically, is that it leaves many of details up in the air. Regulators can wind down "Too Big To Fail" banks. But what is the definition of "Too Big To Fail" and when do they have to resolve. It will be up to others to decide. Here's the run down of the bill from Swampland.

Financial Reform Legislation Moves Forward - The House and Senate have come to an agreement of financial reform, and it is stronger than I anticipated when the process first began. Here’s a quick summary of the legislation: The bill would give the government new power to oversee systemic risk and to shut down giant failing institutions (another AIG) in an orderly way. It includes a surprisingly strong “Volcker Rule,’’ which almost prohibits banks, with their federally-insured deposits and special access to Fed borrowing,  from engaging in proprietary trading. It sharply restricts the ability of banks to trade derivatives.  It cleans up the whole business of derivatives by moving the trading into clearinghouses and onto exchanges where it will be transparent and properly capitalized. And it creates a new consumer protection agency, albeit within the Federal Reserve, with the power to crack down on shady mortgages, credit card practices, payday lenders and other financial services. However, although the legislation is stronger than I thought it would be, it’s important to note that many of the new rules are written in a way that will depend upon the judgment of regulators and their inclination to crack down, or not, on particular behaviors.

The regulatory fight moves from Washington to Basel - It’s a great day: financial regulatory reform is done, and not a day too soon. The Consumer Financial Protection Bureau is coming — Ron Lieber has a great overview of how that will change the regulatory landscape — and while banks won’t have to sell their swaps desks entirely, they will need to spin them off into separately-capitalized, small-enough-to-fail subsidiaries which deal mainly on public exchanges. That’s a big and a welcome change. No one really knows how the bill is going to shake out in reality: the Volcker rule, in particular, remains very vague indeed, and a lot of regulatory heavy lifting is being put onto the untested shoulders of the SEC and of other institutions which have failed many times in the past. But in general the bill makes as robust an attempt as could reasonably be expected to both monitor and ring-fence the kind of things which can cause systemic meltdowns.

The good and the bad of Basel III - It’s looking as though the FT was, thankfully, a little over-hasty when it led today with a big story saying that the banks have won the Basel battle over liquidity requirements. A BIS spokesman (the BIS is the organization hosting the Basel III negotiations) says that weakening liquidity requirements hasn’t even been discussed, let alone agreed to. Yes, it’s likely that the banks will win some concessions at some point, but there’s a long way to go before then.Joel Clark is hearing similar messages: Senior committee members have told Risk they were shocked to see reports suggesting the proposal for a net stable funding ratio (NSFR) would be shelved, as they don’t intend to make any firm plans until the next Basel Committee meeting on July 15 at the earliest…

Misnamed Financial Services “Reform” Bill Passes, Systemic Risk is Alive and Well - 06/26/2010 - Yves Smith - I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Adminsitration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did. Witness some of the headlines today that no doubt give Team Obama cheer: “Big banks face ‘jarring shake-up’ from new regulations” (MarketWatch); “U.S. Lawmakers Set Historic Finance Deal” (Wall Street Journal); “In Week of Tests, Obama Reasserts His Authority” and “In Deal, New Authority Over Wall Street” (New York Times). But the market action said it all. On a flat trading day, financial firms shares rose 2.7% after the deal was announced. And the Financial Times (the only financial news purveyor whose reporters and columnists were savvy enough to recognize the credit bubble and indicate it was likely to end badly) gave a wonderfully understated diss:

Finally The Farce That Is Fin Reg Reform Passes And Wall Street Can Resume Its Rapid March To Financial Armageddon - As if anyone thought otherwise, the final shape of finreg has now been formalized and as Shahien Nasiripour at the Huffington Post notes, "many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant." Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll. And, sorry, you can't even vote some of the idiots that passed this garbage out: after all there is a retiring lame duck in charge of it all. We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.

Barney Frank Brings Additional Unclarity On The FinReg Scam, Punts Again On All Fannie/Freddie Questions - In case you just can't get enough of of Barney Frank simply oozing truth, integrity and unbribable honesty (in other words, everything that defines the American Congressional way) in every interview he does, this Bloomberg TV clip is for you. It is also for everyone else who would rather not read the 2,000 pages of FinReg reform yet wants to get some sense if they will be sued next Monday for lifting a 5MM offer of UK CDS. Overall, Barney mumbles about this and that, discusses whether the bill will make banks less profitable (it won't), clarifies the 3% loophole for JPMorgan's investment in Highbridge,  notes the surprising $19 billion bank levy, yet runs like a scolded schoolgirl the second Fannie and Freddie (also known as the one biggest disaster of his career, and the only thing he will be remembered for) are mentioned.

Sheila Bair on ‘Too Big to Fail’ (15 min video)

Wall Street 'bewilderment machine' still cranking out products - Australia's biggest hog farm and a three-hour drive from Melbourne, couldn't be farther from Wall Street. That didn't stop the local council, which represents about 11,000 people, from investing A$1 million ($878,900) in one of the most esoteric inventions cooked up by the financial industry, a constant proportion debt obligation, or CPDO, with the catchy name “Rembrandt.” The top-rated note, linked to credit-default swaps on investment-grade companies, lost 93 percent of its value in two years. “How do you have an AAA rated instrument go belly up as quickly as that one did?”

Another View: Now It’s Up to the Regulators - You can almost hear the collective sigh of relief in Washington: at last, financial regulatory reform is done.  Not so fast. The simple truth is that we have nothing but a sketch of the regulatory new normal.  The bill creates the outlines for America’s financial system of the 21st century, but it leaves the regulatory agencies with the job of filling in the blanks. If the New Deal is credited with creating the regulatory agencies, this bill will be remembered for supercharging their authority. It is in the trenches of these agencies where the real skirmishes will begin as more than 150 rules are proposed and subject to public comment and sparring. Here is where it will be determined just how far-reaching or not the legislation will be, and here will be determined the winners and losers.

The limits of systemic risk regulators - What kind of information will a systemic risk regulator need from banks? Sifma has just commissioned an 86-page study on this question from Deloitte, and the conclusion, though predictable, is sobering: There is much work to be done, both domestically and globally, in order to address the issue of systemic risks in the financial system… Information gaps are inevitable, however, as noted by the FSB, “These gaps are highlighted, and significant costs incurred, when a lack of timely, accurate information hinders the ability of policy makers and market participants to develop effective policy responses.” One of the reasons why Basel II was never fully implemented in the US is that many of the banks here simply don’t have the requisite sophistication to implement it. (In hindsight, this was a good thing.) And worldwide, it’s inevitable that many banks will lack the IT infrastructure needed to be able to give systemic-risk regulators the information they need, especially in a crisis.

Banks ‘Dodged a Bullet’ as U.S. Congress Dilutes Trading Rules - Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.  A deal reached by members of a House and Senate conference early this morning diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds.  Banks “dodged a bullet,” said Raj Date, executive director for Cambridge Winter Inc.’s center for financial institutions policy and a former Deutsche Bank AG executive. “This has to be a net positive.”

Ignore the Wall Streeters moaning about how unfair the new regulatory bill is. - The long-awaited Wall Street reform bill seems to have been finalized. The banking industry, which strongly opposed much of the legislation, will likely see this as a partial defeat. But as we plow through the legislation to figure out the winners and the losers, it's worth considering what Wall Street got out of the entire crisis. And the answer is: a lot. The new bill has a few sticks in it, but banks have been enjoying a feast of carrots. First, Wall Street has received—and continues to receive—free money from the Fed as a result of the crisis. To kick-start the financial system, the Fed in December 2008 lowered the Federal Funds rate target to between 0.00 percent and 0.25 percent and has left it there ever since. Translation: Banks can borrow money from the Fed for next to nothing. Second, the Federal Reserve, the Treasury Department, and the FDIC (and we taxpayers who stand behind all three institutions) offered the banking system extraordinary guarantees.

Financial Sector Profits: Taxation Without Represenation? - Maxine Udall - FDIC Chair Sheila Bair's remarks to the Wharton School, University of Pennsylvania International Housing Finance Program. In contrast to the long-term payoffs that are expected by investors, many other parties – from the mortgage brokers, to the lenders, to the securities underwriters, to the ratings agencies – got paid upfront. This divergence of financial interests, and the lack of market discipline that it created, explains why loan originators failed to apply appropriate underwriting standards in the first place.Bair goes on to spell out several sound policies for aligning short and long-term, private and public interests and then turns to discussing financial reform.  Bair's closing remarks and rereading Simon Johnson's 2009 Atlantic Monthly article got me thinking. Every time I contemplate the waste, the misallocations of capital and labor, the contraction of output and credit, the job losses, it causes me to wonder if it would be helpful for the general public to start viewing financial sector profits as a "tax" we all pay in support of the benefits we expect to derive from a well-functioning financial sector.

Geithner Yet Again Misrepresents TARP “Performance” - Yves Smith - The problem with propaganda is that it is generally effective. Utter the Big Lie often enough and most people will come to believe it. The Obama Administration has engaged in persistent misrepresentation of the outcome of the TARP equity injections, which is a manifestation of its early decision to reconstitute as much as possible, the banking industry that had just driven itself and the global economy off the cliff. Albert Einstein defined insanity as “doing the same thing over and over again and expecting different results.” The decision of the new Administration to cast its lot with an unreformed banking industry locked it into a course of action. As we noted earlier,Thus Obama’s incentives are to come up with “solutions” that paper over problems, avoid meaningful conflict with the industry, minimize complaints, and restore the old practice of using leverage and investment gains to cover up stagnation in worker incomes. Potemkin reforms dovetail with the financial service industry’s goal of forestalling any measures that would interfere with its looting.

Bailout World, 2nd Stage of Kleptocracy (New Feudal War 2 of 4) The fictive “growth” which was really nothing but the result of asset bubbles peaked and started to be rolled back in 2007. The rout temporarily climaxed in 2008, as trillions in phony wealth disappeared when the hologram machine went dead. This laid bare the true extremism of the “Great Moderation”, really a crazed raging of booms and busts, bubbles and crashes, all this throbbing over the backbeat of an inexorable debt curve trending terrifyingly, impossibly upward since the 1980s. It was impossible to sustain, and nobody meant for it to be sustained. It was just supposed to carry the middle class along while this doomed cohort’s political and economic strongholds were destroyed. The steady degradation of wages and job security, the assault on the unions, the co-opting of pension systems into stock market thralldom, Walmartization and offshoring, and the ”ownership society” propaganda offensive including the systematic demonization of all values other than Social Darwinism; all this combined to reduce the people to a mass of totally dependent and antisocial atoms. It was a comprehensive top-down strategy.

To Help Prevent Crises, Delay Some Executive Pay - Robert Shiller - Well, now that we’re past the initial phases of crisis management, Congress has a chance to address the underlying issues in a fundamental way. Unfortunately, though, the reform bills approved separately by the House and the Senate — and now in conference committee — deal with the crisis by offering a host of little cleanups and shopping lists. The cumulative effect would certainly be positive, but the current versions wouldn’t really prevent a repeat of the mess.  There may be a better way. I have been working as part of a nationwide group of 15 professors of financial economics on recommendations to improve our chances. Last Wednesday, we presented our findings, “The Squam Lake Report: Fixing the Financial System” (Princeton University Press). Ben S. Bernanke, the chairman of the Federal Reserve, helped introduce the book at a conference at Columbia University. He said he agreed with the principle that “the stakeholders in financial firms — including shareholders, managers, creditors, and counterparties — must bear the costs of excessive risk-taking or poor business decisions, not the public.”  But the current legislation does not yet fully satisfy our criteria.

Why is No One Willing to Say Wall Street is Overpaid? - Yves Smith - The New York Times yesterday featured an article by Yale economist Robert Shiller in which he discussed how financial reform had fallen short of addressing the conditions that caused the crisis. He focused on the failure to implement effective pay reform at the large financial firms that too big or otherwise too crucial to fail: Efforts to reduce executive salaries have perversely created the wrong incentives. A 1993 law discouraging companies from paying their chief executives more than $1 million a year appears to have led to a de-emphasis of salaries and an increase in stock options. Those stock options didn’t lower total compensation. And they probably encouraged C.E.O.’s to expose their companies to more risk, because options’ value grows as risk does. In fact, legislators’ misunderstanding of the law’s true incentives may have contributed to the severity of the crisis.  Yves here. Um, so how exactly does this little discussion disprove Shiller’s aside, that the level of pay did not contribute to the crisis? Answer: it doesn’t. He instead shows that not-fully-thought out reform created results the reverse of what was intended:

Federal Reserve presses banks to curb risky pay practices -Bank regulators have told the nation's largest financial firms to move faster in changing pay practices that could encourage dangerous risk-taking, officials said Monday. The Federal Reserve has completed an initial review of compensation policies at 28 large banks it oversees and has been giving them confidential feedback on areas where they must change. On Monday, the Fed and other federal regulators issued final guidelines, stressing the need for policies that do not give executives, traders, and other bank employees incentives to make overly risky investments that might earn them huge bonuses in the short run while leaving the bank exposed to losses in the long term.  Leading bank regulators and many outside analysts have concluded that poorly designed pay practices contributed to irresponsible decisions that caused the financial crisis. Nearly three years after the crisis began, regulators from the Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. found many large banks to be "deficient" in several areas, according to a news release Monday

Mirabile Dictu! The Fed Criticizes Wall Street Pay Practices  Yves Smith - The normally bank-friendly Fed fired an unexpected shot across the industry’s bow today, taking issue with its failure to take sufficiently tough measures to curb undue risk-taking. Per the Washington Post: The Federal Reserve has completed an initial review of compensation policies at 28 large banks it oversees and has been giving them confidential feedback on areas where they must change.The press release detailed the areas in which, ahem, improvement was necessary: Yves here. This emphasis on better calibration of risk, and more differentiation among incentive comp payout structures, would indeed help discourage the industry’s fondness for complex, opaque deals that produce profits now but have hidden risks that can blow up clients and even the firm, later. It might serve to restore the recently-fallen standing of investment banking businesses.But one of the problems is I am not certain how you improve the industry’s ability to judge risk ex ante. Pretty much no one at the big firms judged AAA CDO tranches to be risky until it was too late.

Summers cites recovery, risks in view of economy -The US economy has probably begun a lasting recovery, but the outlook has become more uncertain in recent weeks in the face of the European debt crisis, gyrating stock markets, and weaker-than-expected job growth, said Lawrence Summers, President Obama’s top economic adviser. Summers, in an interview with Globe editors and reporters this week, acknowledged that the recovery still faces risks, from the premature withdrawal of federal spending aimed at stimulating the US economy to a financial meltdown in Europe to increased tensions in Korea. Summers, the former Harvard University president and Treasury secretary under President Clinton, presented a cautious, measured view of economic conditions. For example, after expressing confidence that European policy makers would contain the government debt crisis and avoid another global financial crisis, he added that the assessment was “my best guess, and I could be wrong.’’ Or, when asked if the nation had achieved a self-sustaining recovery, Summers responded, “I think that’s the right presumption and my expectation. I wouldn’t be foolish enough to be certain.’’

Flash Crash Analysis - May 6'th 2010 - Intro - On the afternoon of May 6, 2010 the Dow Jones Industrial Average (DJIA) dropped approximately 600 points (5.7%), and then quickly recovered. Other Major Market Indexes dropped by similar amounts. We have read numerous articles attempting to explain this event including the SEC report "Preliminary Findings Regarding the Market Events of May 6, 2010" dated May 18, 2010. Our report assumes the reader is familiar with the SEC report. Our business is supplying a real-time data feed comprising trade and quote data for all US equity, option, and futures exchanges. We have archived this data since 2004 and have created and used numerous tools to help us sift through the enormous dataset: approximately 2.5 trillion quotes and trades as of June 2010. May 6th, had approximately 7.6 billion trade, quote, level 2, and depth records.  We generated over 4,500 datasets and over 1,200 charts before uncovering what we believe precipitated the swift 600 point drop beginning at 14:42:46 and ending at 14:47:02. The following are the results of our findings.

SEC Investigates Magnetar, Sponsor of CDO Program That Pumped Up the Subprime Bubble - Readers of this blog may know that we broke story in our book ECONNED of the role that the hedge fund Magnetar played in increasing the severity of the subprime bubble through its program of hybrid CDOs (meaning composed of actual tranches of subprime bonds plus credit default swaps). To recap: Magnetar embarked on an unheard-of program of CDO creation to enable it to take a no-lose bet. It sponsored CDOs by funding the equity tranche, the riskiest layer that received high interest payments, typically 18-20%. It used the cash flow from the equity to sponsor an even larger short position, using the instruments in the CDO. It balanced its exposures so it would show a thin profit as long as the CDO performed, and a much larger return when it failed. Sponsorship of the equity trance most importantly gave Magnetar influence over the parameters of the deals

The Inflatable Loan Pool - AMID the legal battles between investors who lost money in mortgage securities and the investment banks that sold the stuff, one thing seems clear: the investment banks appear to be winning a good many of the early skirmishes.  But some cases are faring better for individual plaintiffs, with judges allowing them to proceed even as banks ask that they be dismissed. Still, these matters are hard to litigate because investors must persuade the judges overseeing them that their losses were not simply a result of a market crash. Investors must argue, convincingly, that the banks misrepresented the quality of the loans in the pools and made material misstatements about them in prospectuses provided to buyers.

The Banks Keep Stealing -- Why Do We Keep Paying? - The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the "people." Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence.  When Senator Durbin said "The banks... frankly own this place," you realize it was not in jest. Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs. And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.

Dear Bankers: It’s Not a Communication Problem -Here’s a hint for bankers who continue to whine about being disliked: Stop with the condescension. We got another dose of it today from Goldman Sachs, in comments from the company’s head European flack. It’s the same refrain we’ve heard countless times now since the onset of the financial crisis, and it goes something like this: We understand the public is upset, so we need to do a better job of explaining what we do and how we do it. Baloney. That’s just a back-handed way of saying people outside the industry aren’t really bright enough to understand how we make money, and if they did, they’d really appreciate us for our benevolence and unflinching ethical behavior.

Challenges in Economic Capital Modeling - FRBSF Economic Letter - Financial institutions are increasingly using economic capital models to help determine the amount of capital they need to absorb unexpected losses. These models typically aggregate capital based on business-level analysis. However, important challenges surround this aggregation as well as other aspects of these models. Supervisors could use these capital calculations when they assess capital adequacy, but they need to be aware of these modeling issues.

For small companies, the credit crunch won't go away. Here's why… The government has launched a boatload of programs to get small businesses financing. President Barack Obama has urged banks to give the companies a "third and fourth look" before rejecting them for loans. Yet entrepreneurs are still struggling to land credit. Only half of small businesses that tried to borrow last year got all or most of what they needed, according to a survey by the National Federation of Independent Business. In the mid-2000s, 90% of businesses said they got the loans they needed.What's going on here? Why is the credit crunch alive and well when it comes to small businesses? Part of the problem is that most of the government programs created to address the problem have focused on Small Business Administration loans, which total less than 10% of overall lending to small companies. But there's a wider issue at work. Banks and the government are trying to avoid repeating the mistakes that led to the subprime meltdown. It's a perfectly understandable goal—but it's freezing up financing.

Geithner and Warren Duel Over Banks’ Health - When it comes to the health of the banking system, Timothy F. Geithner and Elizabeth Warren don’t see eye to eye.Mr. Geithner, the Treasury secretary, told the Congressional Oversight Panel on Tuesday that the Troubled Asset Relief Program had been “remarkably effective” in stabilizing the banking system, noting that the program was on track to end in October with only minimal losses to the taxpayers.But Ms. Warren, the panel’s chairwoman, questioned whether the banks were really stable enough to stand on their own without the program’s government safety net, and she called for another round of stress tests to make sure the banks are sound. Ms. Warren was particularly concerned about the billions of dollars worth of bad securities and questionable commercial real estate loans still on the banks’ balance sheets. These relics from the boom years could haunt the banks in the future, possibly forcing them back into the arms of the government.

God's Work? Luck? Or Lawbreaking? - One has to wonder about the BP thing....It seems incomprehensible that the president and other members of the administration still have jobs when it is now being reported that the federal government was apprised by BP on February 13 that the Deepwater Horizon oil rig was leaking oil and natural gas into the ocean floor.In fact, according to documents in the administration's possession, BP was fighting large cracks at the base of the well for roughly ten days in early February. Further it seems the administration was also informed about this development, six weeks before to the rig's fatal explosion when an engineer from the University of California, Berkeley, announced to the world a near miss of an explosion on the rig by stating, "They damn near blew up the rig." Hmmm....Now let's see.... there was no public dissemination of this information, was there?  Well, no. And yet we know that:  According to regulatory filings, has found that Goldman Sachs sold 4,680,822 shares of BP in the first quarter of 2010. Goldman’s sales were the largest of any firm during that time. Goldman would have pocketed slightly more than $266 million if their holdings were sold at the average price of BP’s stock during the quarter.

ETFs Gone Wild - Exchange-traded funds--many stuffed with exotic derivatives--are shaking up the mutual fundindustry. Regulators want to make sure they don’t become the next financial time bomb. The skunk works at IShares’ headquarters in San Francisco is buzzing. Researchers in the development lab pore over data flashing across computer screens while colleagues refill their mugs at the coffee bar and huddle in conference rooms illuminated by translucent blue partitions. These brainiacs, who create the exchange-traded funds that have made the BlackRock Inc. unit the kingpin of the global ETF market, took a radical departure in November from the index trackers IShares has churned out for a decade. They released a hedge fund in a box.

Think the Gulf Spill Is Bad? Wait Until the Next Disaster - Brits are angry with Obama for pressuring BP to suspend dividend payments and set aside $20 billion for the clean up. Obama’s strong-arm position has affected British pensioners, who own 40% of BP, as well as American pension funds that own 39%. In other words, the economic damage of BP goes far beyond the Gulf. The damage is spreading to pensions, pensioners, and portfolios all around the world. While people watch the BP disaster in the Gulf, few people are aware of the other BP -- the financial bomb production -- that is still going on. If this derivative market begins to collapse, we will see another disaster.Most of us know there is not enough money in the world to fully clean up the Gulf. The same is true with the $700 trillion derivatives market. If just 1% of the $700 trillion derivatives market goes bust, that is a $7 trillion disaster. The entire U.S. economy is only $14 trillion annually. A 10% failure, equating to $70 trillion, would probably bring down the world economy. As with the BP Gulf disaster, there is not enough money in the world to clean up the next disaster.

A Bankrupt BP - Worse For The Financial World Than Lehman Brothers - People are seriously underestimating how much liquidity in the global financial world is dependent on a solvent BP. BP extends credit – through trading and finance. They extend the amounts, quality and duration of credit a bank could only dream of. The Gold community should think about the financial muscle behind a company with 100+ years of proven oil and gas reserves. Think about that in comparison with what a bank, with few tangible assets, (truly, not allegedly) possesses (no wonder they all started trading for a living!). Then think about what happens if BP goes under. This is no bank. With proven reserves and wells in the ground, equity in fields all over the planet, in terms of credit quality and credit provision – nothing can match an oil major. God only knows how many assets around the planet are dependent on credit and finance extended from BP. It is likely to dwarf any banking entity in multiples.  And at the heart of it all are those dreadful OTC derivatives again!

Halfway Back to Lehman: New Report Shows Financial Conditions Tightening Sharply - The Federal Reserve said today that financial conditions had weakened recently because of market turmoil abroad, meaning Europe. A new report suggests they’ve been worsening for some time and are now about as bad as they’ve been since late 2008, when the financial crisis was raging. “Financial conditions appear to have worsened substantially in recent quarters based on our update of the broad index of US financial variables presented earlier this year at the US Monetary Policy Forum,” economists at Deutsche Bank said in a note to clients. Deutsche’s Peter Hooper teamed up with Goldman Sachs economist Jan Hatzius, in addition to researchers at New York University, Columbia University and Princeton to produce a broad index that measures whether money is easily available and difficult to access. It last updated its numbers through Dec. 2009 and now provides a view into the second quarter. The upshot is that the financial system is providing serious headwinds to recovery:

Warren Sees 'A Lot of Problems' in U.S. Banking System - video -Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, talks about the U.S. banking industry and the outlook for Treasury Secretary Timothy Geithner's testimony before the panel today. Warren talks with Betty Liu on Bloomberg Television's "In the Loop."

Unofficial Problem Bank List increases to 797 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for June 25, 2010. Changes and comments from surferdude808: CR provided a tease earlier on some of changes to the Unofficial Problem Bank List that would be happening as the FDIC released its enforcement actions for May yesterday. As CR predicted, it was a busy week as 24 institutions were added while 8 were removed. Also, the agencies issued numerous Prompt Corrective Action Orders. Overall, the Unofficial Problem Bank List stands at 797 institutions with aggregate assets of $409.6 billion, up from 781 institutions with assets of $404.5 billion last week

Bank Failures Through 2014 Will Cost $60 Billion, FDIC Says - U.S. bank failures through 2014 will drain $60 billion from the Federal Deposit Insurance Corp. fund that protects customer accounts in the event of a collapse, the agency said today. “We expect bank failures to peak this year and start tapering off next year as the banking industry continues to heal and recover, but there are some uncertainties that lie ahead,” FDIC Chairman Sheila Bair said today at a meeting in Washington.  Regulators are closing banks at the fastest pace since the savings-and-loan crisis ended in the 1990s, seizing 83 lenders through June 18 of this year after shutting 140 in 2009 amid loan losses stemming from the collapse of the mortgage market.

FDIC to Delay Bank Plan. - The Federal Deposit Insurance Corp. said it would put off a planned premium increase on banks as it held steady its projected losses for the government fund that covers bank deposits. The FDIC staff on Tuesday advised the agency's five-member board to delay a premium increase of three one hundredths of a percentage point scheduled for Jan. 1 because it expects bank failures to begin trailing off next year. The higher assessments will be put off until some unspecified date.
The FDIC expects bank failures to begin to peak this year. It has set aside $40 billion to cover failures from March 2010 through March 2011. Beyond five years, the FDIC expects the pace of bank failures to return to the very low levels that preceded the financial crisis.

Bank Failure Interactive Graphic

The political economy of the subprime mortgage credit expansion - We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers. During the expansion years, mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behavior on housing related legislation. The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward housing finance during the subprime mortgage credit expansion.

Mike Konczal: Underwater and the Strategic Default PR Campaign: What we got when we didn’t get cramdown - The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary. And part of our dilemma here is “who is going to make the decision on how to restructure around a credible borrower and is anybody paying that person to make that decision?” And what we need here is financial innovation in the first instance because you can’t do this loan by loan, you are going to have to scale this up to a bigger level and we are going to … have to cut the gordian knot of the securitization of these loans because otherwise if we keep letting these things go into foreclosure it’s a feedback loop where it will ultimately crush the consumer economy.

Moody's: Commercial Real Estate Prices increase 1.7% in April - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 1.7% in April, after declining for the previous two months. This is a repeat sales measure of commercial real estate prices. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.  Notes:  - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices. CRE prices in red only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes). It is possible that commercial real prices have bottomed - in general - but it is hard to tell because the number of transactions are very low. Commercial real estate values are now down 16% over the last year, and down 41% from the peak in late 2007.

Apartment owner on rental market: "Worst ever", Charge-offs triple -Veteran Orange County apartment owner and manager Ray Maggi says this the current rental market “is the worst I’ve ever seen” for landlords.Maggi, a past president of the Apartment Association of Orange County, says in his three decades in the rental game hasn’t seen as harsh a mix of falling rents, empty apartments and rising costs.Last year, landlords usually offered free months of rent as lures for new tenants. This year, Maggi says, more landlords have simply slashed rents to meet tight-fisted renters who have plenty of choice. Making matters worse for property owners is that a growing number of tenants aren’t keeping up with payments. Charge-offs have roughly tripled to nearly 3 percent of rents due.

Just pay the cover - YESTERDAY, commenter hedgefundguy posted an interesting link to this story, about a Cleveland real estate project that has received a lot of investment from foreign nationals: Forty investors from China, Brazil, Argentina, India and Britain have committed $500,000 each to the east bank. That qualifies them and their families for conditional green cards. They can become permanent residents two years after receiving the conditional visas -- if the $500,000 investments create at least 10 jobs each. The U.S. Citizenship and Immigration Services offers the visa program to drive foreign investment into distressed American communities, although it has attracted some criticism for giving wealthy foreigners an easier path into the United States.

Vote no to the American dream - A new paper from Atif Mian of the University of California, Berkeley, and Amir Sufi and Francesco Trebbi of University of Chicago’s Booth School of Business looks at the politics of America’s subprime boom. The authors found that at the start of the past decade, the mortgage industry increased campaign contributions to congressmen in districts with lots of subprime borrowers. The pork apparently worked: the rising amounts of cash had a discernible effect on how representatives voted on housing-related legislation. So far, so depressing. But the power of special interests was not the only influence on politicians. The authors find that the presence of lots of subprime borrowers in a specific district also influenced congressmen to vote in favour of measures supporting this type of lending. As they put it: “Pressure on the US government to expand subprime credit came from both mortgage lenders and subprime borrowers.” 

Homeownership fetish still alive and well - The big story in this article in the Times is that the CBO has estimated that Freddie and Fannie could end up costing taxpayers as much as $389 billion. But the interesting side story is that the obsession with homeownership has not subsided despite history recently providing us with an important lesson in the costs of homeownership and homeownership encouraging policies. Community groups are pushing Fannie and Freddie to work at getting homeowners rather than investors to buy their foreclosed properties, and apparently they are succeeding:Executives at both Fannie and Freddie say they have an overriding obligation to limit losses, but that they are taking steps to sell more homes to families.Fannie Mae last summer announced that it would give people seeking homes a “first look” by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. This seems incredibly misguided to me.

Cost of Seizing Fannie and Freddie Surges for TaxpayersFannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.  For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.

On Fannie and Freddie REO Inventory - New York Times: Cost of Seizing Fannie and Freddie Surges for Taxpayers Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The REO inventory of Fannie and Freddie (and the FHA) are increasing rapidly, but this is only a portion of the total REO inventory. The worst loans were made outside of Fannie and Freddie. This graph shows the increase in Fannie, Freddie and FHA REOs through Q1 2010. Even with all the delays in foreclosure, the REO inventory has increased sharply over the last three quarters, from 135,868 at the end of Q2 2009, to 153,007 in Q3 2009, 172,357 at the end of Q4 2009 and now 209,500 at the end of Q4 2010. These are new records for all three agencies.

Fannie Mae cracks down on "Walk Aways" - From Fannie Mae: Fannie Mae Increases Penalties for Borrowers Who Walk Away Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. I'm not sure how they can tell if someone "walks away" (a borrower who could afford to make their mortgage payments, but instead strategically defaults), or if the borrower had no real choice. But this suggests that the number of strategic defaults is increasing.

Fannie Mae demonizes the victims of the housing bust - When Fannie Mae got taken over by the US government, it became even more of an instrument of state policy than it was before. So when it comes to the problems of default and foreclosure, it’s crucial that Fannie Mae be part of the solution rather than part of the problem. Instead, it’s decided to get onto a self-defeating moralistic high horse. The headline of Fannie’s latest press release says it all. “Fannie Mae Increases Penalties for Borrowers Who Walk Away”: Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.. This is going to do significant harm, and it’s going to do no substantial good at all. Mike Konczal has an excellent response, as you’d expect: the key thing to note is that Fannie is not proposing the kind of modifications that minimize the probability of redefault — ie modifications which reduce the principal amount outstanding. By encouraging homeowners to modify their loans without reducing the amount they owe or having any chance of having any equity in their homes in the foreseeable future, Fannie is kicking the can not very far down the road, and ensuring that default and foreclosure will be a nationwide problem for years to come.

Fannie Screws The Citizens Twice - First, Fannie Mae ran crooked books for years, got caught, ran insane risk models for years more (80:1 leverage anyone?), got caught again, the second time by the market and essentially forced the government to step in lest they default on over $3 trillion in paper sold to, in large part, the Chinese.Now, having screwed you, the taxpayer, through outright fraud and ridiculous risk-taking and being a prime architect of the housing bubble, they now propose to bend you over again: (Strike-outs original, italics mine.)WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure designed to assrape anyone who does what banks and other commercial entities do every day - intentionally default when it suits them. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe may be able to make a campaign contribution to Congress to have their penalty status lifted.

Underwater and the Strategic Default PR Campaign, 1: Fannie and a 7-year penalty.- Wow. Fannie is jumping ahead of Congress in going after Strategic Defaulters without (a) identifying who they are even quasi-rigorously and (b) identifying how big of a problem this is, and how this isn’t just piling on people experiencing deep income shocks in a major recession. Fannie Mae Increases Penalties for Borrowers Who Walk Away: Seven-Year Lockout Policy for Strategic Defaulters: Why don’t they cramdown these mortgages? Why don’t they do a Right-To-Rent process? “Loan modification” has turned out historically to increase the balance of the loan by capitalizing fees and then just spinning out the length of the loan.We know from HAMP analysis, specifically carried out by Analysis of Mortgage Servicing Performance, that 70% of modified mortgages have a principal increase (data discussed here):

Underwater and the Strategic Default PR Campaign, 2: FHA and the problem of a definition. - In a move that I’m assuming is market testing a potential new “welfare queen” meme, House Republicans attached an amendment to penalize strategic defaulters by barring them from getting Federal Housing Administration-backed loans in the future. Ryan Grim:The GOP offered its provision as “motion to recommit,” which is one of the minority party’s few ways to amend a bill on the floor. Known as an MTR, the motion is generally stripped out in the Senate if it is adopted in the House. Democrats chose not to fight, and accepted the motion with a simple voice vote. Annie Lowrey has more. The obvious questions, now that Republicans may push this hard and Democrats won’t fight it, are, “What is a strategic defaulter? And when should be penalize them?” I’ve still seen nothing that makes me think most strategic defaulters are not simply moving to follow jobs in this economy.

Fannie Mae to Charge Strategic Defaulters for Everything - Fannie Mae is sifting through borrower data to determine who is strategically defaulting and who is not after announcing more efforts this week to crack down on those who walk away from their homes. And if the GSE determines someone strategically defaulted, then they say they will hold the borrower accountable for all associated costs of getting the house back on the market, in areas that lawfully allow deficiency judgments. Often when a home forecloses, Fannie Mae brokers and contractors discover vandalism and missing appliances and fixtures when they ready the home for resale, the GSE said. The cost of making those repairs and replacements will be included in the determination of the deficiency amount, a Fannie Mae spokesperson said, in addition to the difference in the mortgage balance and the proceeds from the foreclosure sale.Fannie will base its assessment of who is and who isn’t walking away from their home on income verification, information on the borrower’s credit report, and borrower documentation related to the disposition of prior mortgage loans.

Fannie, Freddie, and Fixed Rate Mortgages - Richard Green says "If we do away with Fannie and Freddie, we may also do away with the 30-year fixed rate mortgage," and that may not be good for home buyers:  Bob Hagerty blogs about Patrick Lawyer on Fixed Rate Mortgages, by Richard Green: He writes, in part: Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible. The context is important.  One of the reasons the 30 year fixed rate mortgage is ubiquitous is the United States may be the existence of Fannie and Freddie.  If we do away with FF, we may also do away with the 30-year fixed rate mortgage.  So let me defend the 30-year fixed a bit with something I wrote about 3 years ago:

US fixed rate mortgages aren't fixed rate mortgages; they are weird, stupid, and dangerous - First off, American 30-year fixed rate mortgages aren't 30-year and aren't fixed rate. The term is variable, and the rate is variable. That's because they are "open" mortgages, rather than "closed" mortgages. A 30-year 6% closed mortgage really does have a fixed term and a fixed rate. You know exactly how much you will be paying per month for the next 30 years. An open mortgage means you have the option to pay off or refinance that mortgage at any time over the next 30 years.  And you will of course exercise that option at any time when the market interest rate for the remaining term falls below the rate you are currently paying.  The option to renew sounds good. It's like a one-way bet. If the option were free, of course you would want an open mortgage. You can't lose. But, of course, there must be someone taking the other side of the bet. The lender won't sell you that option for free. You have to pay for it, and you pay for it in higher interest rates.

30-Year Fixed-Rate Mortgage Debate - Richard Green likes them. Nick Rowe does not. I can understand Green's antipathy toward the most common forms of adjustable-rate mortgages in the United States. However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment every five years, and no teaser rate would be better than any of the common mortgages here. The five-year fixed term would suit many people, since many people move in less than ten years.  In any case, regardless of what Green or Rowe or I believe is the right mortgage, I think that the market ought to decide

One more point about fixed-rate mortgages -They seem to be safer. From the Mortgage Bankers Association of America: On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types. The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.  Some of this may just be that people who take less risk select themselves into fixed-rate loans, but even so....

Why can't Canadians get 30 year mortgages? -The typical Canadian mortgage matures in 5 years or less. Why can't Canadians get (say) 30 year mortgages? I used to think that the answer was "inflation", or "inflation uncertainty". Now I don't. A 5-year "closed" mortgage means the interest rate is fixed for 5 years. That's the typical Canadian mortgage. If you want to pay it off earlier, you have to compensate the lender by paying the difference between the old and new interest rates over the remaining term of the mortgage. That means you never have any incentive to renew a mortgage if interest rates fall. A 30 year "open" mortgage means you can pay it off any time you like. So if interest rates fall, you have an incentive to renegotiate the mortgage and take advantage of the new interest rates. That means the interest rate you pay cannot rise, but can and probably will fall. That's the typical American mortgage.

A Mortgage in the State of Nature? - Nick Rowe writes US fixed rate mortgages aren’t fixed rate mortgages; they are weird, stupid, and dangerous. It’s a good discussion, especially in the comments. For the bond nerds in the audience, Nick thinks they are stupid because they are callable (can be prepayed) which creates negative convexity, which is dangerous with a fixed rate.It’s interesting, one of the reasons investors desired subprime was that it was believed to be more stable on the prepayment front; everyone was looking at interest rate risk instead of credit risk, and while the former was fine the second exploded (a situation relevant to Fannie as well, as John Hempton points out). I’ll have more to say on this when we start to dig into housing reform, but I just want to point this out for now.

The depth of negative equity and mortgage default decisions - A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home's value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity.

HAMP data shows over 150 Thousand Trials Cancelled in May - From Treasury: HAMP Servicer Performance Report Through May 2010 About 347 thousand modifications are now "permanent" - up from 299 thousand last month - and 430 thousand trial modifications have been cancelled - up sharply from 277 thousand last month. According to HAMP, there are 467,672 "active trials", down from 637,353 last month. However if we add the trials started since December (5 months!), there should only be 300,000 thousand borrowers in trial programs. That means there is still a huge number of borrowers in limbo, but with all the cancellations, the number is declining. The second graph shows the cumulative HAMP trial programs started. Notice that the pace of new trial modifications has slowed sharply from over 150,000 in September to just over 30,000 in May (down from 47,160 in April 2010). This is the slowest pace since the program started, probably because of two factors: 1) servicers are now pre-qualifying borrowers, and 2) servicers are running out of eligible borrowers. The program continues to slow down ...

Borrowers exit troubled Obama mortgage program.- The Obama administration's flagship effort to help people in danger of losing their homes is falling flat.
More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That's more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes. Last month alone, 150,000 borrowers left the program -- bringing the total to 436,000 who have exited since it began in March 2009. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

Obama housing metrics - The Obama administration has introduced a "monthly housing scorecard". Here is the website: ...Some excerpts and a couple of graphs: This graph from the Obama Administration "scorecard" shows the actual house prices, and future house prices. The light blue line was the projected house prices based on futures in January 2009 - before the Obama administration started supporting house prices with various programs to limit supply and boost demand.I believe the overall goal of supporting house prices was a mistake. It wasn't horrible - because prices were much closer to the bottom than the top - but by keeping prices too high, the market hasn't cleared and there is still a huge overhang of existing home inventory.The second graph from the housing scorecard shows the Obama administration's estimate of the housing overhang.

Less Than One Percent Of Modified Mortgages In Obama Foreclosure Plan Involve Principal Cuts - As few as 0.1 percent of mortgage modifications initiated under the Obama administration's signature foreclosure prevention program involve reductions of principal, according to a federal report released Wednesday. Research by state regulators, academics, and by the Federal Reserve shows that principal reductions lead to more sustainable loan modifications. In other words, they're the best way to ensure that troubled borrowers don't lose their homes. But of the nearly 121,000 troubled loans that have been modified by large banks and thrifts under the administration's Home Affordable Modification Program through March, just 120 of them involved a cut in principal, according to the report by the Office of the Comptroller of the Currency and Office of Thrift Supervision. The Treasury Department has consistently said that the share of modified mortgages that incorporate a permanent reduction in principal is "under 10 percent."

What Do Mortgage Lenders Want? - Mike Konczal writes, I think further deregulation would see something similar to what we see in the credit card market, where everyone's mortgage looks like whatever the laws of North Dakota say, and that the poorest homeowners (or "inept", if you prefer) cross-subsidize the richest. Like subprime, the whole thing would be characterized by interest rate jumps and penalties and a whole bad-faith expectation that someone can actually pay it off. What this implies is that in the absence of regulation, lenders would prefer to issue mortgages that cannot be paid off. I disagree that the main goal of mortgage lenders is to create foreclosures. Lenders lose money on foreclosures, and the more foreclosures a lender has, the less likely it is that the lender will remain in business.

Year of the Short Sale, and Deed in lieu - There are two programs in Home Affordable Foreclosure Alternatives (HAFA), short sales and deed in lieu of foreclosure. The deal can be quick, and the first lender will agree not to pursue a deficiency judgment. However 2nds are a problem, and "deed in lieu" transactions still hit the borrower's credit history. Borrowers with 2nds considering a "deed in lieu" transaction should contact the 2nd lien holders. HAFA offers a payout to 2nd lien holders in deed in lieu transactions who agree to release borrowers from debt (see point 4 here for payouts under deed in lieu).  Under the HAFA deed in lieu program, the borrower needs to be proactive with 2nd lien holders.The deed in lieu program is gaining in popularity

Second Liens and Personal Bankruptcy -  From the Chicago Tribune: Moral bankruptcy? [Filing bankruptcy] may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second "piggyback" mortgages used to buy homes. "It's a big trend," said Dan Lindsey, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. "Banks are having a hard enough time dealing with the first mortgages. The second (mortgages), there's no equity there to collect so they're being charged off and sold to debt buyers and rearing their ugly heads later. It's a drastic last resort to file Chapter 7, but in some cases it's appropriate."

Foreclosure alternative gaining favor - Short sales have been the hot solution for financially stressed homeowners and their lenders for the past year, but here's another potent foreclosure alternative that's about to take center stage: deeds in lieu.  Some of the largest mortgage servicers and lenders in the country are gearing up campaigns to reach out to carefully targeted borrowers with cash incentives that sometimes range into five figures, plus a simple message: Let's bypass the time-consuming hassles of short sales and foreclosures. Just deed us the title to your underwater home, and we'll call it a deal. We won't come after you to collect any deficiency between what you owe us on the mortgage and what we obtain from the home sale. We might even be able to wrap up the whole transaction in as little as 30 to 45 days. How about it?  Mortgage companies say troubled borrowers are increasingly signing up. One of the largest servicers, Bank of America, has mailed 100,000 deed-in-lieu solicitations to customers in the past 60 days, and its volume of completed transactions is breaking company records, according to officials.

First-Time Homebuyers Disappeared After Tax Credit Ended - Homebuyer traffic nationwide tumbled in May, according to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Most of the decline was attributable to first-time homebuyers who sharply reduced their home shopping last month. The survey’s first-time homebuyer traffic index, which measures home shopping activity on a scale of 1 to 100, registered an anemic 35.1 in May. This was down from an index of 63.5 in April. Since September 2009, the index had never been below 50, which represents a flat, or neutral, condition in home purchase activity. “The decline of first-time homebuyer traffic is undoubtedly related to the expiration of the federal homebuyer tax credit,” stated Thomas Popik, research director for Campbell Surveys. “Homebuyers had until April 30 to sign a purchase and sale agreement and receive the credit. Once we entered the month of May, the government stimulus disappeared.”

The Homebuyers Credit: Is It Better to Laugh or Cry? - For two years, the homebuyer credit has been in the running for Washington’s worst tax policy idea. Now, new evidence about this bit of legislative bilge suggests it may be time to retire the trophy. The Commerce Department reports the new homes market collapsed in May after booming in March and April (chart). Why? Well, in early spring, in response to an intense marketing campaign by the real estate and mortgage industries, tens of thousands of buyers accelerated home purchases to take advantage of this sweet tax give-away (as much as $8,000 for some buyers) before the credit expired on April 30. Then, just as most sentient economists predicted, the market dried up. Actually, it didn’t just dry up. It became the Death Valley of housing.

Prison inmates among those abusing home buyer tax credit –Despite efforts by the IRS to combat scams, thousands of individuals — including nearly 1,300 prison inmates — have defrauded the government of millions of dollars in home buyer credits, Treasury's inspector general reported Wednesday.The home buyer credit provided a federal tax credit of up to $8,000 for first-time home buyers for tax year 2008, the subject of the report. The credit, created to revive the housing market, was later extended to repeat home buyers. The latest credit expired with sale contracts signed as of April 30. NEW-HOME SALES: Plunge 33% to lowest level on record. Among the report's findings: 1,295 prisoners, including 241 serving life sentences, received $9.1 million in credits, even though they were incarcerated at the time they reported that they purchased their home. These prisoners didn't file joint returns, so their claims could not have been the result of purchases made with or by their spouses, the report said...10,282 taxpayers received credits for homes that were also used by other taxpayers to claim the credit. In one case, 67 taxpayers used the same home to claim the credit.

30 Year Freddie Fixed Rate Mortgage Drops To All Time Low Of 4.69% - Full blown deflation is here: the 30 Year Freddie fixed rate mortgage just dropped to a fresh new all time low. The problem - not even record low mortgage rates are incentivizing consumers to buy homes. This is a complete disaster for the Fed which is now facing outright deflation in the face and will be forced, without debate, to monetize and launch another round of QE very shortly, as this trend suicidal to the banks' bloated balance sheets. If home prices continue dropping, look for the next Flow of Funds report to be a massacre for household net wealth. The nuclear option: giving away houses for free. Yet with yesterday's announcementby the GSEs that they will lock out any strategic defaulters, this has all the makings of a disaster

Lawler: Home Sales in May: A Look at the Data -While most (though by no means all) of the country appears to have experienced a sharp gain in existing home sales (closed) this May vs. a year ago, the nationwide increase does not appear to have been as high as the surge in pending sales (related to the expiring tax credit) in March and April would have suggested. Last year’s “comp,” of course, was pretty low: the NAR estimates that existing home sales last May ran at a seasonally adjusted annual rate of 4.75 million, and unadjusted sales were estimated at 447,000. While this May’s “seasonal factor” should be lower than last May’s (meaning flat unadjusted sales would produce a seasonally adjusted increase), I estimate that unadjusted sales this May vs. last May would have to be up about 19.2% for seasonally adjusted sales to be flat to April. Obviously sales in many areas of the country were up a lot more than that, but in some large states sales showed much smaller gains, and a few saw declines.

Existing Home Sales decline in May - The NAR reports: May Shows a Continued Strong Pace for Existing-Home Sales - Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.   Sales in May 2010 (5.66 million SAAR) were 2.2% lower than last month, and were 19.2% higher than May 2009 (4.75 million SAAR). The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.89 million in May from 4.04 million in April. The all time record high was 4.58 million homes for sale in July 2008.  Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory increasing in the spring and into the summer. The increase in April 2010 was partially related to sellers hoping to take advantage of the housing tax credit, and a decline in May was expected

Existing-home sales dip 2.2% in May - Resales of U.S. homes and condos fell 2.2% to a seasonally adjusted annual rate of 5.66 million in May despite the boost from a federal tax credit for home buyers, according to data released Tuesday by the National Association of Realtors. Economists were expecting sales to rise about 6% to a 6.11 annual rate, theorizing that the expiration of the tax credit at the end of June would force some buyers to rush ahead."While the headline figure is below expectations, it is still a decent figure and above the six-month average of 5.39 million," wrote Omair Sharif, economist with RBS Securities. Sales could remain at elevated levels for another month before the stimulus from the home-buyer tax credit stops, said Lawrence Yun, chief economist for the real estate agents' lobbying organization. Read the full press release on the NAR Web site.

Existing Home Sales Slide 2.2% - We see more evidence that next leg down in Housing has begun, as sales of existing houses fell 2.2% to an annual run rate of 5.66 million sales. These transactions include tax subsidized contracts signed by April 30 and closing by May 31st. This was the first monthly decrease in sales after 2 consecutive increases — and right into the teeth of seasonal strength. That’s not very good. Hallucinogenic economists had actually forecast a rise to a 6.12 million rate, according to a Bloomberg survey of 74 stoners. We haven’t looked at the usual idiotic blatherings from the National Association of Realtors in quite some time. For shits and giggles, let’s have a gander at their latest, to see if they are still maintaining their traditional high standards of alcohol consumption. Ahhh, the Realtor crowd rarely disappoints. The Headline — “May Shows a Continued Strong Pace for Existing-Home Sales” — reveals their inability to separate facts from wishful thinking. Such is what happens when “Spin” is your religion. Let’s ignore their usual foolishness, and go straight for the data:

More trouble ahead - THE National Association of Realtors has posted the latest data on existing home sales: Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May 2009; April sales were revised to show an 8.0 percent monthly gain.Here's what that looks like:The main thing to note here is that the existing sales data count completed sales, so these are contracts that were signed several months ago. Because the housing tax credit covered contracts signed through the end up April and closed through the end of June, this release indicates that sales were falling even before the tax credit expired. That's troubling, as is the fact that the credit-fuelled spike in sales never reached the level attained prior to the previous expiration of the credit last fall.

New-home sales plummet nearly 33% in May from April - Sales of newly built U.S. homes collapsed in May, falling to a record low and stirring concerns among some economists that the housing market would stumble again now that a popular federal tax credit for buyers has expired. The Commerce Department said Wednesday that new homes sold at a seasonally adjusted annual rate of 300,000 units in May, a record 32.7% drop from the revised April estimate and 18.3% below the May 2009 figure. It was the lowest sales pace since the government began collecting such data in 1963. Despite the lowest mortgage interest rates in 60 years, sales fell across all regions and were down by more than half in the West.

New Home Sales collapse to Record Low in May - The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 300 thousand. This is a sharp decrease from the revised rate of 446 thousand in April (revised from 504 thousand). The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2010. In May 2010, 28 thousand new homes were sold (NSA). This is a new record low. The previous record low for the month of May was 34 thousand in 2009; the record high was 120 thousand in May 2005. The second graph shows New Home Sales vs. recessions for the last 45 years. And another long term graph - this one for New Home Months of Supply. Months of supply increased to 8.5 in May from 5.8 April. The all time record was 12.4 months of supply in January 2009. Since the sales rate declined sharply, the months of supply increased - this is still very high (less than 6 months supply is normal).

Sales of U.S. New Homes Plunged to Record Low in May  (Bloomberg) -- Purchases of new homes in the U.S. fell in May to a record low as a tax credit expired, showing the market remains dependent on government support. Sales collapsed a record 33 percent to an annual pace of 300,000 last month from April, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down. The end of a tax incentive worth as much as $8,000 means the market will now be dependent on gains in employment, which are needed to lift incomes, brace confidence and contain foreclosures. A lack of inflation and concern over jobs and housing are among reasons Federal Reserve policy makers may reiterate a pledge to keep interest rates near zero

Housing markets: Falling again | The Economist - WHEN Congress first opted to subsidise new home purchases with a tax credit worth around $8,000, the thinking seemed to be that a burst of selling could stablise housing markets while the economy bottomed and job growth returned, at which point markets would be fine on their own. In September of last year, as the deadline for the credit approached while employment was still declining, Congress opted to give potential buyers a little more time to take advantage of the credit and extended the deadline to April of this year. But by the end of 2009, the effect of the credit became clear. Sales and prices zoomed up to a peak in the fall as buyers rushed to beat the deadline, then tumbled in the months after, despite the extension of the credit. The credit was primarily shifting what sales were to be had around. Meanwhile, overall volume remained low, inventory levels remained high, and prices remained flat to falling. Sales figures finally perked up a little as the April deadline approached, but we now have May data on sales of new homes, and the impact of the credit is clear:

Housing Market Threatens US Recovery as Sales Slide Resumes (Bloomberg) -- The U.S. real estate market threatens to undercut the Obama administration’s stimulus-driven economic recovery as home sales resume their record slide following the end of the federal homebuyer tax credit. New-home sales tumbled 33 percent last month to a record low annual pace of 300,000, the Commerce Department said in a report today. Sales of previously owned homes unexpectedly fell 2.2 percent in May, the National Association of Realtors said yesterday, even as mortgage rates remained near an all-time low.The end of the tax credit in April is putting a strain on a market still hurting from the worst collapse since the Great Depression. Foreclosures may reach 1.9 million this year after a record 2 million in 2009, according to Mark Zandi, chief economist at Moody’s  It would take 8.3 months to sell all available 3.89 million existing homes, the Realtors’ association said.

The housing slide we've been waiting for - We've known for a long time that the expiration of the federal home-buying tax credit would trip up the housing market. Many people who had been planning on buying a house down the road accelerated that decision in order to grab the credit. The byproduct of that acceleration was always going to be that post-credit there would be fewer people still in the market to buy. Economists surveyed by Dow Jones Newswires have been figuring on a month-over-month drop of nearly 21% in new-home sales in May because of the tax credit's April 30 expiration. Well, today we got the May numbers, and the drop is there—and bigger than expected. According to the Census Bureau, new-home sales in May dropped by nearly 33% from April, to a seasonally adjusted annual rate of 300,000. That's the biggest drop since 1963, when the government started keeping track. That drop feels particularly jarring since it came on the heels of rising sales in April (up 15% to a revised yearly pace of 446,000) and March (up 12% to 389,000).

Home Sales: Distressing Gap -The first graph shows existing home sales (left axis) and new home sales (right axis) through May. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble, and the "distressing gap" (due partially to distressed sales).Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties. The two spikes in existing home sales were due primarily to the first time homebuyer tax credit (the initial credit last year, followed by the extension to April 30th / close by June 30th). There were also two smaller bumps for new home sales related to the tax credit. Since new home sales are reported when contracts are signed, the 2nd spike for new home sales was in April and then sales collapsed in May.The second graph shows the same information as a ratio - new home sales divided by existing home sales - through May 2010. The ratio decreased because the expiration of the tax credit impacts new home sales first. This is the all time low for the ratio (due to timing issues), and the ratio will increase somewhat as existing home sales collapse in July.

Analysts: Record low new-home sales could lead to another tax credit – A historic drop in new-home sales following the expiration of the federal homebuyer tax credit just might lead to yet another tax credit, a pair of analysts told SNL on June 23. ew-home sales tumbled 32.7% month-over-month in May, hitting a seasonally adjusted annual rate of sales at 300,000, a record low for the series that dates back to January 1963. The previous low was 338,000, set in September 1981. The drop was also the largest month-over-month decline on record. Previously, the largest month-to-month decline was a 23.8% decline in January 1994.  Michael Widner, an analyst with Stifel Nicolaus & Co., told SNL that the tax credit did nothing to help housing fundamentals and only pulled demand forward. In a June 22 report, Widner predicted the new-home sales rate would hit 295,000 in May, just 5,000 units off the actual pace.Even though he is not in favor of another tax credit, Widner said May's exceptionally low number means plenty of industry insiders will push for one.

Homebuyer Tax Credit Extension Hits the Wall - Legislation containing a three month extension of the popular homebuyer tax credits to allow buyers to close by September 30th died in the Senate last night and the opportunity to extend the credits past the current deadline of June 30th may have passed. The National Association of Realtors estimates some 75,000 first-time and repeat buyers need the three month extension on closing in order to qualify for the credits. Short sales, which require the lender to agree to take a loss on the seller’s mortgage, generally take much longer to close than standard sales, and as many as 15 percent of distressed property sales currently are short sales

MBA: Mortgage Purchase Applications Decrease in Weekly Survey - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 7.3 percent from the previous week and the seasonally adjusted Purchase Index decreased 1.2 percent from one week earlier. This graph shows the MBA Purchase Index and four week moving average since 1990. The purchase index has collapsed following the expiration of the tax credit suggesting home sales will fall sharply too. This is the lowest level for 4-week average of the purchase index since February 1997.

30 Year Mortgage Rates fall to Record Low - From Reuters: Mortgage Rates Drop to Lowest Level on Record Interest rates on U.S. 30-year fixed-rate mortgages, the most widely used loan, averaged 4.69 percent for the week ended June 24, the lowest since Freddie Mac started the survey in April 1971.This graph shows the 30 year fixed rate mortgage interest rate, and the Ten year Treasury yield since 2002. The 30 year mortgage rate is now at a series low (started in 1971), although the spread between the mortgage rate and the treasury yield has widened about 30 bps recently.  The decline in mortgage rates is related to the weak economy and falling treasury yields.

Builders slash prices to sell houses – Could new houses be getting smaller, or are prices really dropping at a time when most home prices are going up? The latest figures from Hanley Wood Market Intelligence show that new Orange County house prices indeed are down this year so far, the latest in an unbroken four-year slide. (Click on charts to enlarge)But sales of new houses are up. Out of 24 California metro areas tracked by Hanley Wood, Orange County had the state’s second-highest percentage gain. Here’s the lowdown, based on Hanley Wood’s April report:

Why It's Different This Time for Housing - IF YOU WANT TO KNOW WHY this economic is cycle is different in a single word, it would be housing.Where housing was the spark that lit every post-World War II recovery, this time it's the wet blanket that is damping a rebound. In every other cycle, Federal Reserve monetary tightening would raise mortgage rates and curtail credit to curb inflation, which would help precipitate a sharp slowdown in housing activity.But as soon as the Fed relented, the resulting drop in interest rates invariably would let loose the pent-up demand from prospective homebuyers who had been held back by tight credit. Not this time, even after the biggest financial and economic crisis since the 1930s.

Race and the Foreclosure Crisis - In a new study, the Center for Responsible Lending analyzes the demographics of the foreclosure crisis, and finds that foreclosure has disproportionately impacted black and Latino homeowners. All in all, a home owned by a black family is 76 percent more likely to go through foreclosure than a home owned by a white family. And the CRL study shows worrying evidence that the foreclosure crisis will wipe out a generation of wealth in communities of color and exacerbate the existing income and equity gap between white and non-white families.

Existing Home Sales: Inventory increases Year-over-Year - Earlier the NAR released the existing home sales data for May; here are a couple more graphs ...The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. Inventory increased 1.1% YoY in May. This is the second consecutive month of a year-over-year increases in inventory. Although the YoY increase is small, I expect it will be higher later this year. This increase in inventory is especially concerning because the reported inventory is already historically very high, and the 8.3 months of supply in May is well above normal. The months of supply will probably stay near this level in June, because of more tax credit related sales (reported at closing), but the months-of-supply could be close to double digits later this year. And a double digit months-of-supply would be a really bad sign for house prices ...The second graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010). Sales (NSA) in May 2010 were 17.7% higher than in May 2009, and also higher than in May 2008.

How high will Existing Home Months-of-Supply increase this summer? - Earlier I posted a graph showing the relationship of existing home months-of-supply to house prices. When months-of-supply is below 6 months, house prices are typically rising - and above 6 months-of-supply, house prices are usually falling (this isn't perfect, but it is a general guide). So how high will months-of-supply rise this summer? Here are some estimates of sales via the WSJ: Outlook for Home Prices Grows Darker Since April 30, new purchase contracts have plunged ... Lawrence Yun, chief economist for the Realtors, estimated that contracts signed in May were 10% to 15% below the weak level of a year earlier.  Ronald Peltier, CEO of HomeServices of America Inc., which owns real estate brokers in 21 states, said new home-purchase contracts in May and June so far are down about 20% from a year earlier. Contracts signed in May and June lead to sales later in the summer (counted when escrow closes).  Sales in July 2009 were at a 5.14 million rate (SAAR). Usually inventory increases in July, but if we assume inventory is steady at 3.892 million, the following table shows the month-of-supply estimates based on three year-over-year declines sales in July 2009:

Outlook for Home Prices Grows Darker - WSJ - Housing analysts have grown gloomier about the outlook for U.S. home prices as sales slump, a new survey shows. The monthly report by MacroMarkets LLC, due for release Wednesday, found that 56% of the 106 economists and other analysts surveyed expect home prices to decline this year. That is up from 40% a month ago. Federal tax credits of as much as $8,000 for home buyers spurred sales in recent months. To qualify for those credits, buyers had to sign purchase contracts by April 30. The Realtors' data for May reflect completions of sales, most of which were based on contracts signed in March or April.Since April 30, new purchase contracts have plunged as buyers no longer have the incentive of a federal tax break, builders and real estate agents say. Lawrence Yun, chief economist for the Realtors, estimated that contracts signed in May were 10% to 15% below the weak level of a year earlier.

Treasury Dept. approves plans to provide $1.5B in housing aid to Calif., Fla., 3 other states-- The Obama administration has approved five state-designed plans to help homeowners as part of a $1.5 billion effort to assist areas slammed by the housing bust. Treasury Department officials, who spoke on condition of anonymity because the decisions had not yet been made public, said plans for Arizona, California, Florida, Michigan and Nevada had received approval. The states estimate that the plans are projected to help up to 93,000 homeowners. That's a small part of the administration's main existing $75 billion mortgage assistance program, which is widely viewed as a disappointment.

Meredith Whitney Comments on Housing Double Dip - Meredith Whitney was a guest host on CNBC at 8AM ET talking about an anticipated housing double dip. The videos are below. A few comments first.  Whitney was late to the recovery party in 2009 in my view. But I found the recent Rip Van Whitney piece by banking insider Thomas Brown a bit patronizing., I don’t find his (bullish) economic arguments convincing. He says "economic growth over the past year has been wildly better than anyone had dared expect." That is not true. Analysts have been saying growth would be fairly robust for some time. Even I have been bullish on economic growth since at least April or May of 2009. The question is not the growth but the sustainability of that growth. This forward-looking perspective is what was missing in Brown’s commentary.

Meredith Whitney: "No Doubt We Have Entered A Double-Dip For Housing" -Highlights from an interview by Meredith Whitney currently on CNBC (full interview to be posted later):

  • A double dip in housing is a certainty
  • State economies are plunging, and are $200 billion underwater, will lead to 2 million in state-level layoffs leading to a low-end impact; raising taxes at state level will impact the top-end
  • Retail sales have been stronger only due to consumers not paying mortgages, retail sales have already topped as is
  • Q2 bank results will finally catch up with accelerated mortgage foreclosures; charge-offs and delinquencies in credit cards are better due to mortgage non-payment cash flow going to other obligations, and this will soon top as well
  • Structural employment issues in the US won't get better any time soon

The high price of homelessness - Carmen, 60, who is disabled, had been evicted from her apartment the day before after losing her section eight subsidised housing voucher. She had checked into a homeless shelter the previous night but had to wait until 3am before she was awarded a bed. As she walked into the Path office, she asked me to pray that they would give her a bed for that night.I didn't want to tell her that I had already spoken to two women who had emerged from the same office having been denied a similar request. If you hang around any similar facility anywhere in the country you will encounter numerous people in similar and worse situations. The main reason being that there are simply not enough affordable housing units for low income or unemployed people, which is putting extraordinary pressure on the emergency shelter system. In New York and across the US, services for the homeless are being cut. But in the long term this makes no financial sense.

Suburb Population Growth Slows - Suburban growth lagged from July 2008 to July 2009, another indication of how the recession and housing bust have kept people trapped in place, according to an analysis of Census data by Brookings Institution demographer William Frey. “There has been a widespread slowdown in suburban growth especially since mid decade,” says Mr. Frey.According to Frey’s analysis, between July 2008 and July 2009, 27 of the the 52 biggest metro areas saw their suburbs grow slower than in the year-earlier period, and 33 slowed down from the torrid growth in 2004-2005, when the housing boom was in full swing. The slowdown was especially stark in cities hit hardest by the housing bust, including Phoenix, Las Vegas and Orlando. (See a sortable chart of city growth) In 2008-2009, 13 metro areas — including Chicago, Seattle, Washington DC, Denver and Charlotte — saw their core city area grow faster than the suburbs, up from 6 in 2004-2005.

The effect of gasoline prices on household location -Abstract: Gasoline prices influence where households decide to locate by changing the cost of commuting. Consequently, the substantial increase in gas prices since 2003 may have reduced the demand for housing in areas far from employment centers, leading to a decrease in the price and/or quantity of housing in those locations relative to locations closer to jobs. Using annual panel data on ZIP codes and municipalities in a large number of metropolitan areas of the United States from 1981 to 2008, we find that a 10 percent increase in gas prices leads to a 10 percent decrease in construction after 4 years in locations with a long average commute relative to locations closer to jobs, but to no significant change in house prices. Thus, the supply response may prevent the change in housing demand from capitalizing in house prices. Because housing is durable, the resulting change in construction has a long-lived impact on the spatial distribution of housing units. Full paper (477 KB PDF)

Why Housing Starts And Unemployment Remain Mired In A Circular Trap This graph shows single family housing starts and the unemployment rate through May (inverted). You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little in early '09, housing starts (blue) have mostly moved sideways.Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This lead to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recovery. However this time, with the huge overhang of existing housing units, this key sector isn't participating. So in this recovery there is less job creation, less household formation, and less demand for housing units than a normal recovery. This is sort of a circular trap for both GDP growth and employment.

Aid to the Unemployed Facing Foreclosure: Too Little, Too Late? This week, the Home Affordable Modification Program — the administration’s flagship effort to help homeowners by letting them refinance for lower monthly mortgage payments and thereby avoid foreclosure — reported dismal numbers. In recent months, the program has kicked out far more homeowners than it has helped. It has completed only 346,000 modifications — though it initially set its sights on three million. As Mike Konczal of the Roosevelt Institute argues, loan modification generally increases the loan balance by capitalizing the fees to alter the mortgage, leaving homeowners even deeper underwater. An analysis by state regulators shows that 70 percent of mortgage modifications bump up the size of the loan. But this week, the Obama administration is moving on two little-noticed provisions that finally address the crisis of unemployed homeowners facing foreclosure and possibly enact more effective measures than mortgage modification.

Get a Grip on Reality. -Double-dip risks in the U.S. have risen substantially in the past two months. While the “back end” of the economy is still performing well, as we saw in the May industrial production report, this lags the cycle. The “front end” leads the cycle and by that we mean the key guts of final sales — the consumer and housing.
We have already endured two soft retail sales reports in a row and now the weekly chain-store data for June are pointing to sub-par activity. The housing sector is going back into the tank – there is no question about it. Bank credit is back in freefall. The recovery in consumer sentiment leaves it at levels that in the past were consistent with outright recessions. Last year’s improvement in initial jobless claims not only stalled out completely, but at over 470k is consistent with stagnant to negative jobs growth. And exports, which had been a lynchpin in the past year, will feel the double-whammy from the strength in the U.S. dollar and the spreading problems overseas.

Inconspicuous consumption: Insiders vs. outsiders -"We argue that some consumers prefer products with subtle signals because they provide differentiation," the authors write. "Consider two groups of individuals: regular consumers and insiders in a particular domain. If being thought of as an insider carries value among the masses, then some regular consumers may attempt to poach or borrow insider symbols.""Accountants might start riding Harleys, for example, to seem tough, and the geeks might start wearing Abercrombie and Fitch in the hopes that other students will think they are similar to popular jocks," the authors write. "Consequently, insiders might start adopting more subtle signals that are only recognizable to people in the know."

Income Gaps Between Very Rich and Everyone Else More Than Tripled In Last Three Decades, New Data Show - The gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007 (the period for which these data are available), according to data the Congressional Budget Office (CBO) issued last week. Taken together with prior research, the new data suggest greater income concentration at the top of the income scale than at any time since 1928. While the recession that began in December 2007 likely reduced the income of the wealthiest Americans substantially and may thereby shrink the income gap between rich and poor households, a similar development that occurred around the bursting of the bubble and the 2001 recession turned out to be just a speed bump. Incomes at the top more than made up the lost ground from 2003 to 2005.

CEOs Express Caution Over Capital Expenditures - The chief executives of some of the largest U.S. companies expect sales and employment to pick up in the second half of the year, though they don’t anticipate boosting spending on plants and equipment, according to the Business Roundtable’s latest survey of its members. “Our member CEOs plan to continue hiring and expect improved sales,” Verizon Communications Chief Executive Ivan G. Seidenberg, the group’s current chairman, said in a press release. “That said, our CEOs are demonstrating some caution in the area of capital expenditures, with fewer planning to increase spending and more keeping it level.”

Capacity Utilization versus Unemployment - In the past, there was a fairly close contemporaneous relationship between capacity utilization and unemployment. However, much like the relationship between output and unemployment, a lag in the relationship has developed in the last two recessions (see graph). That is, in past recessions an upturn in capacity utilization was matched by an upturn in employment, there was no delay in the relationship, but in recent recessions there has been about a half year delay before unemployment reacts to changes in capacity utilization (or perhaps even a bit longer).[Note: To highlight the relationship, the graph shows 100-(UN rate) on the right-hand scale. Thus, an upward movement in the red line represents a decline in unemployment.]  I've been relatively pessimistic about the recovery of employment, but I don't want to just present evidence that supports my views, and there are two things about this graph that are encouraging.

Increasing hours worked versus increasing hiring  - macroblog - The current recovery has been characterized by increasing production and sales without an associated expansion in employment. Part of the explanation for the lack of hiring has to do with increased productivity of workers (output per hour worked)—either by improved production methods or simply requiring more effort from staff per hour worked. Another reason why firms have been relatively slow to hire is that, in addition to slashing payrolls during the recession, many firms also cut the work hours of the remaining staff to levels well below prerecessionary norms. As a result, these firms have some scope to increase the hours worked by their current staff before hiring additional workers. This fact is evident in the often-cited increase during the recession in the number of people working part time for economic reasons (see here and here, for example). .Another perspective on the part-time issue can be gleaned from data on average work week obtained from the U.S. Bureau of Labor Statistics (BLS) Current Population Survey. Chart 1 shows the pattern of average weekly hours (not seasonally adjusted) for all nonfarm wage and salary workers during the period of January 2008 through May 2010.

What Events Triggered Shifts in U.S. Layoff Activity? -The U.S. government measures the number of layoffs in the U.S. economy by counting the number of Initial Unemployment Insurance Claims made each week. We thought it would make for a neat project to go back through the last four years of that data to see if we could successfully apply our statistical dating analysis technique, which would make it possible to isolate what events may have triggered major shifts in layoff activity in the United States throughout that time. The chart to the right reveals what we found when we looked at all the reported data in the time from 20 May 2006 through 22 May 2010. Here, we determined that there were five major trends during this period, where we determined the mean trend line and the range of natural variation we would expect to see for each subperiod. That range of natural variation for each trend is defined as being within three standard deviations of the mean trend line that applies for each observed trend. .

A Closer Look at the Recent Trend in Layoffs - Having established that a new trend in employee layoffs began between 14 November 2009 and 21 November 2009, we've modified the statistical chart we originally presented yesterday to show its full extent. In doing that, we also recalculated the typical range of natural variation we would expect to see for the previous trend, and in doing so, found an anomaly. The data for 11 July 2009 falls outside that range, which is defined as being within three standard deviations of the mean linear trend line for the data defining the trend. As it happens, the only economic factor that could have impacted the decision of businesses for retaining employees that occurred at this time is the government's Car Allowance Rebate System (CARS, aka "Cash for Clunkers") stimulus program.

Can Obama Create More Jobs Soon? - Most projections for unemployment do not foresee a full recovery until 2013 or even 2014. What should government do to create jobs? The optimal policy is a combination of both tax incentives and government spending initiatives. Tax incentives can be put into place faster than new spending, and the sooner we address the employment problem the better.  However, tax cuts can only do so much, and additional government spending is also needed. To the extent that we can find additional high value infrastructure projects that can be undertaken quickly we should pursue them, but most of those projects are already underway and other types of jobs will also need to be provided. The most important change needed is in the attitude of the public and politicians toward using deficit spending to stabilize the economy.

Job creation has left the building - Where are the jobs? That question pervaded last week’s edition of the MetroMonitor index of recession and recovery and is becoming acute in the Intermountain West, where the companion Mountain Monitor reported that that employment actually fell slightly in the first quarter of 2010 in most of the region’s metros.Nor is the prognosis looking much better going forward. The last dose of federal stimulus is beginning to wear off.  The Senate is dawdling on a new lifeline intended to forestall additional state and local government layoffs. And for that matter the housing market is flagging again. Which is especially troubling news for the Mountain West with its disproportionately large real estate and construction sectors.

Impact of Decennial Census on June Payroll Report - In a post last month I reviewed the impact of the decennial Census hiring on the payroll report. Here is an update ...We can estimate the Census hiring using weekly payroll data from the Census bureau (ht Bob_in_MA). If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring.The Census Bureau releases the actual number with the employment report. This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. So far the decennial Census payroll has decreased by 156 thousand this month, and will probably subtract 200 to 250 thousand from the payroll report

Estimate of June Decennial Census impact on payroll employment: minus 243,000 -The Census Bureau released the weekly payroll data for the week ending June 12th this morning (ht Bob_in_MA). If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment. The Census Bureau releases the actual number with the employment report. This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. The Census payroll decreased from 573,779 for the week ending May 15th to 330,737 for the week ending June 12th. So my estimate for the impact of the Census on June payroll employment is minus 243 thousand (this will be close). The employment report will be released on July 2nd, and the headline number for June - including Census numbers - will almost certainly be negative. But a key number will be the hiring ex-Census

Most Americans Support Paid Sick Leave, Poll Finds - A bill in Congress that would require employers to offer workers seven paid sick days a year has fostered a classic debate between liberals who want government to protect workers, and conservatives who say the last thing business needs is another government-imposed mandate. Now a new poll by the National Opinion Research Center at the University of Chicago shows strong public support for such legislation. The survey of 1,461 randomly selected people found that 86 percent of respondents favored legislation that would guarantee up to seven paid sick days a year, while 14 percent opposed such legislation. According to the survey, which was released on Monday, 69 percent of respondents said paid sick days were “very important” for workers, with 78 percent of women compared with 61 percent of men saying paid sick days were “very important.”

Chances Fade for Jobless-Benefits Extension - Senate Democrats are still pursuing compromises to break loose legislation to renew jobless benefits and revive several lapsed business tax cuts. But chances of success appear to be fading.After a series of closed-door negotiations Wednesday, the latest version of the legislation – the third circulated this month – now totals about $85.5 billion, according to a preliminary estimate by the nonpartisan Congressional Budget Office. That’s down significantly from CBO’s $105 billion estimate for last week’s version of the bill. According to CBO, the latest bill would add some $35 billion to the deficit, roughly the cost of the six-month extension of long-term jobless benefits, which expired the first week of June. The bill also includes a scaled-back package of aid to cash-strapped states and a summer jobs program, among other things. Beyond some $50 billion in new taxes, the measure also now includes some $8 billion spending savings, about half of that coming from a reduction in future spending on food assistance to low-income families.

Editorial - Cutting Off the Unemployed - NYTimes - It was bad enough when the Senate left town for a long Memorial Day break without passing a bill to extend expiring unemployment benefits. It’s worse now. Back in session for nearly three weeks, the Senate still has not acted. That means that 900,000 jobless workers have already lost their benefits, a number that will swell to an estimated 1.6 million people if an extension is not passed by the July Fourth holiday. Lost benefits — the average check is $309 a week — deprives struggling Americans of cash they need for buying food, paying the rent or mortgage and other essentials.  All indications are that when the Senate finally does pass a bill, it will be stingy and cynical — hacking away at jobless benefits and fiscal aid to cash-strapped states, while preserving tax breaks for the wealthy and other well-connected political donors.

Centrist and clueless -Efforts by the leaders in both houses to pass bills that would save the jobs of teachers and police officers, maintain states' ability to make Medicaid payments and extend unemployment insurance have hit not only the expected bumps in the road (unified Republican opposition) but also fresh potholes: Blue Dog resistance to countercyclical spending. The House passed a second stimulus in December, and in theory this is what the Senate is belaboring. Although its version is far punier than the House's, the Senate stimulus bill, which had already been pared by such Scroogish expedients as cutting weekly unemployment benefits by $25 -- thank centrist Montana Democrat Jon Tester -- last week came a few votes short of the 60 to needed cut off a potential filibuster. And recent efforts by House Appropriations Committee Chairman David Obey to come up with funds to keep the states from devastating the ranks of teachers have had rough going at the hands of the Blue Dogs

The Senate unemployment bill founders - The biggest and most important item is the extension of unemployment insurance. ...Then there's the extension of the federal government's program to help states pay for Medicaid costs. During recessions, more people need Medicaid, which increases the program's cost, but state revenues drop, which reduces their ability to pay for the program. ... The bill also has a raft of tax cuts and investments, including billions for the Small Business Administration to offer more loans to small businesses, bonds to fund infrastructure development, money to encourage private-sector R&D. and more. A full list of the bill's provisions, and its subsequent modifications, can be found here.Those modification documents are important, because Democrats have made a lot of changes to the bill in response to Republican opposition. And still, it looks like Democrats might lose the vote today.

Stabenow: “Republicans Want This Economy To Fail”- In a depressing briefing with reporters, Sen. Debbie Stabenow (D-MI) charged that Republicans basically are holding back measures to extend unemployment insurance and create jobs in a cynical ploy to help their chances in November by crashing the economy and blaming the Democrats for it.At issue is the large tax extenders/jobs bill, which has been whittled down consistently over the past few weeks, with Republicans continuing to offer a united front against the bill. Today there will be a cloture vote on the bill, and absolutely nobody believes it will pass. All Republicans and Ben Nelson (one Senate leadership aide said to me “What’s the difference?”) oppose the bill, wanting it to be fully offset with spending cuts or other revenue-raising items

Senate ready to hang states, the unemployed, the economy out to dry - A Democratic Senate aide tells me that "the outlook is grim" for achieving cloture, even on this drastically curtailed proposal.Governors and state legislatures in some 30 states have already budgeted for this funding, a huge portion of most states' budgets. A KFF report [pdf] last year found that "Medicaid is the second largest line item in state budgets following elementary and secondary education. Presently, 17 percent of state funds are allocated to Medicaid on average and it is the largest source of revenue in the form of federal grant support to each state." It also found that decreases in funding "reduce the flow of dollars to hospitals, nursing homes, home health agencies and pharmacies, and reduce the amount of money circulating through the economy, affecting employment, income, state tax revenue and economic output." When you hear that as many as 200,000 jobs (the CBPP says it's up to 900,000) could be lost if this funding is not passed, these are the jobs in question. For the graphically inclined, this is what it looks like.

Congress Fails to Pass an Extension of Jobless Aid -Legislation to extend unemployment subsidies for hundreds of thousands of Americans who have exhausted their jobless benefits teetered on the edge of collapse on Thursday, as Senate Democrats and Republicans traded bitter accusations about who was to blame for an eight-week impasse. Senate Republicans and a lone Democrat, Ben Nelson of Nebraska, joined forces to filibuster the bill in a procedural vote on Thursday. Visibly frustrated, the majority leader, Harry Reid, Democrat of Nevada, said he would move on to other business next week because he saw little chance of winning over any Republican votes.

The magic yellow brick wall - It makes no difference whether the stock markets go up or down or sideways anymore, except for those actively playing them. The demise of the American economy continues unabated regardless. Here's the real economy for you: Unemployment: Outlook Grim For Jobs Bill Ahead Of Vote Democratic leaders in the Senate have apparently failed to win enough support to overcome a Republican filibuster of a bill to help the poor, the old and the jobless, despite making a series of cuts to the measure over the past several weeks to appease deficit hawks. That is the most accurate portrait of the real America you will find. The country is deliberately creating un underclass below its underclass. And that will have severe consequences.

Stymied by GOP, Democrats at loss on jobs agenda -The demise of their jobs-agenda legislation Thursday means that unemployment benefits will phase out for more than 200,000 people a week. Governors who had counted on fresh federal aid will now have to consider a more budget cuts, tax increases and layoffs of state workers. Senate Democrats cut billions from the bill in an attempt to attract enough Republican votes to overcome a filibuster. But the 57-41 vote fell three votes short of the 60 required to crack a GOP filibuster, leaving the way forward unclear.

Another blow to the US labor force - The Senate voted down the American Workers, State, and Business Relief Act of 2010, 57 to 41 (see an earlier version of the CBO's estimate here for a breakdown of the Bill). The emergency extensions to weekly unemployment benefits will now expire, leaving many without government support as the labor market improves at snail speed. Those who support the Bill claim that benefits prop up consumer spending. Those who oppose the Bill claim that extending the benefits only increases the duration of unemployment - in May 2010 median duration was 23.2 weeks, its highest level since 1967. One way or another the government will plug the hole that is private spending. And the government will find this out the easy way (expansionary fiscal policy) or the hard way (perpetual deficits that result from weak private-sector tax revenue). Apparently it's going to be the hard way.

Unemployment benefits extension nixed for nearly 1 million - -- Nearly a million people have lost their unemployment benefits because the Senate failed for the third time Thursday to extend the deadline to file for this safety net. Hoping to overcome deficit concerns, the Senate trimmed down the bill yet again on Wednesday night so that it would only increase the deficit by $33.3 billion over 10 years, instead of $55.1 billion. The main changes were to scale back additional Medicaid funding for the states and to reallocate some stimulus and Defense Department spending.  The bill will now be pulled, according to two Democratic leadership aides. This leaves many groups in flux, including the jobless who have lost their safety net, companies who are waiting to learn what tax breaks are extended, and governors who were counting on the additional funds to balance their budgets.

Senate Jobs Bill Fails; Republicans and Ben Nelson Succeed in Destroying Lives of Millions - 57-41 was the final vote. Every Republican who voted opposed, along with Ben Nelson. There are no plans to take up the jobs bill again. It’s increasingly hard to argue with Debbie Stabenow’s contention that the GOP wants to wreck the economy for political gain. In the short term, Republicans are making what will probably end up being the right bet that taking down the nation’s job market will only hurt the party in power. In the exchange, families will lose their homes, go hungry, and some will die. All in a day’s work.

The Undeserving Unemployed - Maybe they don’t deserve assistance. Or maybe they don’t deserve unemployment. Attitudes toward the approximately 10 percent of our labor force that is actively seeking work and not finding it have become a defining feature of our political landscape. Fierce and intensely partisan disagreements over the extension of unemployment benefits are blowing up on Capitol Hill. Long-term unemployment, a jobless period of six months or longer, has reached a historic high. In March 2010 more than 44 percent of the unemployed fell into this category. Whose fault is this? Some argue that wages in the United States are too high. If everybody would just agree to work for less – or if employers were gutsy enough to cut wages – we could solve the problem. Just let the forces of supply and demand do their job! Unfortunately, as John Maynard Keynes pointed out, both unemployment and falling wages lower consumer demand and can lead to even greater unemployment.

FAQ: Unemployment-Benefits Extension - WSJ - The Senate looked likely to abandon efforts to extend unemployment benefits after Republicans appeared set to filibuster a bill that also includes aid to states and tax changes. Below are some questions about how this will affect the unemployed and the economy. (what happens and how many people are going to be affected)

Aid to States May Be Lost as Jobs Bill Stalls - Financially struggling states, already facing record budget shortfalls, are now confronting the possibility of losing out on billions of dollars in federal aid that they had been counting on, if Congress does not revive a jobs bill that stalled in the Senate this week.  The result, governors and state budget officers are warning, could be hundreds of thousands of layoffs at the state and local levels, as well as draconian spending cuts.  “It’s a bloodletting,” said Gov. Edward G. Rendell of Pennsylvania, a Democrat.  But Mr. Rendell and other state leaders are running up against Senate Republicans and at least one Democrat concerned about the spiraling federal deficit.  “What we’re not willing to do, is use worthwhile programs as an excuse to burden our children and our grandchildren with an even bigger national debt,” the Senate minority leader, Mitch McConnell, Republican of Kentucky, said in a statement Thursday.

Focusing On Crumbling State And Local Budgets - By now, everyone is well-aware the US, as the Federal level, is insolvent, and continues to exist merely thanks to 1) the ability to print money and 2) having the world's reserve currency for the time being. Yet more and more are focusing not only on the calamitous, and even more bankrupt, state fiscal picture, but increasingly so on the smallest bankrupt quantizable element: local governments. The following surprisingly objective note from Goldman's Alex Phillips separates fact from propaganda in this increasingly more critical discussion, now that the question of how soon the administration will need to provide state bail out funding reaches critical mass.

Monday Map: Property Taxes on Housing by State

Build America Bonds Dealt Setback in Senate Fight Over Job Bill (Bloomberg) -- The U.S. Senate’s failure to pass legislation extending unemployment benefits also set back efforts to prolong the Build America Bond program, the fastest- growing part of the $2.8 trillion municipal securities market. The effort to keep the expiring Build America program alive through 2012 was included in the unemployment bill rejected by Senate Republicans yesterday. The measure passed the House of Representatives last month.Build America securities were created last year as part of President Barack Obama’s economic-stimulus package to help ease borrowing by state and local governments. The program is set to expire Dec. 31. Failure to extend it may dampen investor interest in the debt by limiting the size of the market, said John Hallacy, a municipal strategist in New York for Bank of America Merrill Lynch.

States Face New Pinch as Stimulus Ebbs -Tax Receipts Aren't Rebounding Quickly Enough to Offset Declining Federal Aid; Push for Additional Medicaid Help Stalls -  States have long known stimulus funds sent their way early in the recession would taper off in the first half of 2011. But many hoped a rebound in tax receipts would close the gap.While state revenues have rebounded somewhat, legislatures still must grapple with deficits totalling $127 billion over the next two fiscal years, according to the National Association of State Budget Officers. Meanwhile, many lawmakers in Washington, concerned about a U.S. budget deficit that could rise by as much as $11 trillion over the next decade, are opposing more spending.

Greek-Style Deficits in America? - Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP . . . State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters That is an ugly statistic. And I agree with Gluskin Sheff’s David Rosenberg — massive budget cuts and tax hikes will only make the situation worse, not better. The time to raise taxes and cut spending is during an expansion, not immediately post-contraction.

NY government on verge of shutting down- Once again, an emergency spending bill is all that stands between New York and a complete government shutdown.With no state budget in place, lawmakers in Albany head back into session Monday. Governor David Paterson has laid out another emergency spending bill to avoid a government shutdown. It would be the 12th emergency extender keeping New York running since the budget deadline passed April 1st. Assemblyman Sam Hoyt said, "It's not the right way to do a state budget and we've never done it this way before."

State budget agreement appears unlikely headed into Mondays showdown - Gov. David Paterson unveiled the remainder of his 2010-11 budget Friday -- including $1.2 billion in new taxes -- and set up a showdown Monday with lawmakers to either take or leave the proposal. Paterson's proposal contains a cap on property taxes at 4 percent that includes both schools and local governments; restores $300 million of $1.4 billion in cuts to education; and includes a plan to sell wine in grocery stores that is expected to raise $150 million.Budget Director Robert Megna said the proposal fills a $9.2 billion budget gap.Megna said the restoration of school aid -- less than the $400 million to $500 million lawmakers had sought -- should be used to reduce the tax rate in districts, whose budgets mainly passed in May with the original cuts.

State budget panel with $8 billion problem to solve will start meeting June 29 - Ohio lawmakers are finally getting off square one in seeking solutions to one of the toughest riddles in recent memory: How to fill an $8 billion hole expected in the 2012-13 state budget. After 11 months of inaction, lawmakers finally reached an agreement last week on a pair of meetings to kickstart the work of the Ohio Budget Planning and Management Commission. The six-member panel was named last July -- largely born out of Republican frustration with the huge amount of one-time money used during the last budget merry-go-round -- but it has yet to meet. The panel is charged with making recommendations about how best to address the looming budget gap.

California on 'verge of system failure’ - Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.  Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines. “People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.” It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal. California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

California government workers have built up $2.75 billion in paid time off - Working under one of the most generous state leave policies in the nation – and the country's harshest furlough program – California government employees have built up the equivalent of $2.75 billion of paid time off. Data analyzed by The Bee show that state workers had 75.5 million hours on the books as of May 28. The time was spread across 17 types of leave employees can cash out when they quit or retire. That's equal to nearly 11 weeks of paid time off owed each of the 176,000 state workers whose leave data are tracked by the state Controller's Office. Average cash value: $15,655 per person. "We expect much of this time will be used for its intended purpose," said Lynelle Jolley, spokeswoman for the state's Department of Personnel Administration. "We don't want employees hoarding their leave time like it's some sort of retirement benefit."

Schwarzenegger: Workers are facing minimum wage — Gov. Arnold Schwarzenegger’s administration on Wednesday warned state workers that they will have their pay cut to the federal minimum wage if California lawmakers don’t pass a budget soon.Department of Personnel Administration director Debbie Endsley wrote in a memo to agency managers that the administration will instruct the state controller to reduce wages to $7.25 per hour for the July pay period if there is no budget agreement. She also warned that furloughs, which were scheduled to end last week, could be extended. “The governor retains the right and authority to order furloughs if necessary to address a fiscal and cash crisis,” Endsley wrote. “As for the prospect of state workers receiving minimum wage in lieu of full wages, it will depend on when the Legislature and the governor reach a budget agreement.”

State jobless fund in the red - The California Unemployment Insurance Trust Fund, the source of payment for jobless benefits, has run a deficit for 18 months, but state officials think it will end next year $6.4 billion less in the red than they first thought.The trust fund has been in the hole since January 2009 and officials expected the deficit to hit $7.4 billion last year. The shortfall ended up being $6.2 billion.This year, the best guess is the deficit will be $15.3 billion, rising to $20.9 billion at the end of 2011. But that's still less than the $27.3 billion originally expected.Still, the fund remains way underfunded, mostly because employer contributions and other receipts can't keep up with the payouts.  For instance, last year, the fund took in $4.8 billion in employer contributions, interest, reimbursements and other receipts but paid out $11.3 billion.

Defeat of jobs bill in Senate costly to California — The demise of a sweeping jobs and tax bill in the U.S. Senate this week dealt a stiff blow to California as it struggles to recover from the recession. Hundreds of thousands of jobless residents will see their unemployment checks cut off. The deficit-plagued state budget stands to lose billions of desperately needed dollars. And a tax credit for research and development, long prized by the tech industry, appears to be on life support. The $110 billion catchall measure stalled in the Senate on Thursday night in the face of Republican resistance to another round of deficit spending amid a ballooning national debt.  Some 200,000 jobless Californians have already lost their unemployment benefits, and that figure is expected to rise to 1.5 million by the end of the year without an extension from Congress. California's unemployment rate stands at 12.4 percent, among the highest in the nation.

Bond Defaults Stalk Michigan's Wealthiest as Home Prices Crash (Bloomberg) -- Michigan’s auto-industry collapse, which led to the worst home-price drop among U.S. states, has forced some of its wealthiest and fastest-growing communities to seek state aid to prevent municipal bond defaults. Detroit, slammed by the state’s 74 percent housing-price decline, warned of bankruptcy when it borrowed in March to cover part of a $280 million deficit. Now, nearby communities in Livingston County such as Hartland Township and Howell Township may need legislation to help make bond payments

Razing the City to Save the City - For generations, residents of this hollowed-out city hoped that somehow Detroit could be reborn — its population would return and its crumbling core would be rebuilt. No idea was more heretical than widespread demolition of thousands of derelict buildings.  But a new momentum has taken hold here that embraces just that: shrinking the city in order to save it.  “There’s nothing you can do with a lot of the buildings now but do away with them,” said Mae Reeder, a homeowner of 35 years on the southeast side, where her bungalow is surrounded by blocks that are being reclaimed by nature, complete with pheasants nesting in vacant spaces where people once lived. The residential vacancy rate in Detroit is 27.8 percent. This is up from the 10.3 percent rate found in 2000 by the United States census.

Report: Cuts inevitable for all types of cities - A report by the League of Minnesota Cities released Thursday said that no cities will escape the inevitable trend toward ever-steeper budget cuts. “These findings are staggering — that cities of all kinds will fall into a deficit within the next five years and be unable to provide the level of services residents and businesses have come to accept,” the report states. “In other words, it won’t matter where a city is, how big or small its population, what its tax base composition is, what its local economy looks like ... all types of cities will be in the red if nothing changes.” The report, done in conjunction with the University of Minnesota’s Humphrey Institute of Public Affairs, projects city spending will rise 5.5 percent each year simply by maintaining existing services. The increases will be driven by inflation, rising health care costs and demographic changes in the population.

Cost-Cutting Detroit Will Close 77 Parks - The city of Detroit plans to close 77 public parks as part of a bid by Mayor Dave Bing to cuts costs due to a budget deficit pegged at hundreds of millions of dollars. Roughly 1,400 acres of parkland will be affected by the closures, which are scheduled to take place July 1. Detroit has closed dozens of schools in recent years and cut back on other city services, such as busing, as the city as a whole has begun to respond to a decline in population that has left whole blocks and neighborhoods sparsely populated

US counties, towns seen slicing school budgets  Reuters) - U.S. counties, cities, and towns may be forced to trim spending on public schools as their revenue tend to recover more slowly from downturns than that of states, according to a new report. All states except Vermont are obliged by law to balance their budgets and often plug deficits by reducing aid to localities, said the report by Goldman Sachs released late Thursday.Cash-poor states could shift more of the costs for social programs, such as children's health and welfare plans, to localities -- just when they can least afford it.Counties, villages, cities and the like typically get 60 percent of their revenue from their own property taxes and the states, Goldman Sachs said.But the housing market's fragile state and political concerns may prevent localities from raising property taxes, it said.State tax revenue rose 2.4 percent in the first quarter of this year to mark the first year-over-year rise since the third quarter of 2008, according to the Rockefeller Institute. But state revenue actually fell 2.1 percent if the effect of tax hikes is taken into account, the report said

LA Unified budget includes nearly 3000 layoffs - The Los Angeles Unified’s board of education yesterday approved a final budget for the next fiscal year. To close a large state funding gap the school district is projecting it’ll have to lay off nearly 3,000 employees before the fall to help close a large funding deficit. Many of the employees who face layoff are campus clerical workers represented by the California School Employees Association. Schools couldn’t function without them according to chapter president Susan Gossman.  "Who’s going to input grades? Who’s going to provide rosters for teachers? Who’s going to put together teacher roll books? Who’s going to supervise student workers? Who’s going to assist kids with college apps? Because we all know counselors are too impacted for that," Gossman told board members.

SF School Board Expected To Pass Budget Full Of Painful Cuts Tonight - The San Francisco Unified School District board tonight is expected to approve its proposed budget, which represents months' worth of wrangling to patch a $113 million deficit projected over the next two years. The proposed budget includes roughly $40 million in concessions from educators, according to the teachers' union, which entered into negotiations with the district in February. A contract agreement was ratified last month. Although the agreement reduced the cuts to teachers and classroom staff, roughly 250 positions would still be eliminated, down from the 348 positions for which layoff notices were sent out in May.

Teachers in LA and SF will see more cutbacks and pink slips in 2010-2011 - Amid protest signs and tearful pleas, school boards in San Francisco and Los Angeles approved budgets this week that will result in more furlough days and pink slips. With operating costs going up, $1,171 less funding per student than in 2008 and an overall shortfall of $113 million, San Francisco Unified's board approved a budget that will reduce summer school, art programs and employees, while forcing all district administrators to take five unpaid days off during the 2010-11 school year, according to the San Francisco Chronicle. Upwards of 900 teachers could be laid off next year to boot. Meanwhile, down south, a deficit of some $640 million made the LA Board of Education resolute in approving spending cuts, despite the passionate pleas of teachers and others who decided to protest at the meeting.

Syracuse City School Board votes to cut 224 positions - The Syracuse City School Board has voted to cut 224 positions, a staff reduction of five percent. It is a decision board members argue is necessary to compensate for a growing budget deficit. It is not immediately clear how many of the cut positions will be vacated through attrition, or how many teaching positions will be affected. The School Board considered early retirement incentives Thursday as a way to keep actual layoffs to a minimum. Either way, teachers' union president Anne Marie Voutsinas, said that the cuts will have a negative impact on the quality of education in the district

"Perfect storm" hits school districts - Across the state, many school districts have set their budgets for the next year not knowing exactly how much money the state will have. In 2009, the state's looming budget shortfall was postponed by billions of dollars in federal aid, in 2011 that money will be gone. Add to the disappearing federal funds a property tax cap passed in2007 and an anticipated state shortfall of $18 billion and districts have their work cut out for them. North East ISD is addressing the problem of falling revenue by freezing salaries, changing class schedules and streamlining employment.  This week the district passed a $495 million budget for 2010-2011. NISD expects the reality of the state's budget crisis to hit home and until the Texas Legislature acts, the district does not know exactly what the fallout will be for 2012.

State budget woes impact school  — Even after massive cuts this spring, the Rochelle Elementary School District has concerns about the future of its education fund because of the state’s financial crisis. Currently, District 231 is owed $1.097 million by the state. That figure is expected to rise each month as Illinois falls deeper and deeper into debt.“Nobody has ever seen anything like this. It’s really unprecedented,” District 231 Superintendent Todd Prusator said. “The state is going to start on a $13 billion deficit and they don’t have revenue to match. It doesn’t look like there’s anything on the horizon to rectify it.”

GED Offers ‘Minimal Value’ - Is the GED worthless? That’s a question at the heart of research from Nobel laureate Prof. James J. Heckman, and his University of Chicago co-authors in their working paper “The GED” The GED “is America’s largest high school,” says Mr. Mader, one of the co-authors. “But there’s substantial danger there.” The GED, shorthand for the General Equivalency Diploma, or General Education Diploma, is an eight-hour exam administered to high school dropouts to establish equivalence between dropouts who pass the exam and traditional high school graduates. In 2008, 12% of all high school credentials issued were GEDs, about 500,000 students a year. The problem is, however, the GED is of “minimal value” in terms of labor market outcomes, the authors say, and only a handful of GED recipients use it to advance in school or the workplace. The authors cite a study that found that only 31% of GED recipients enrolled in a postsecondary institution and that 77% of those who did only stayed for a single semester.

Gulf between college spending on academics, athletics grows - As colleges across the country spend increasingly more on athletic programs — a median $84,446 per athlete in 2008, up almost 38% from 2005 — academic spending hasn’t changed proportionally — a median $13,349 per student, up about 20% over the same period, according to a report released today by the Knight Commission on Intercollegiate Athletics. Over 18 months, the athletic reform commission compiled data on college sports finances and found that at institutions belonging to major athletics conferences, median spending per athlete ranged from four to almost 11 times more than median spending on students for educational purposes. In 2008, median per capita athletics spending for Football Bowl Subdivision conference institutions was $84,446, compared to a median $13,349 per capita for academic spending.

A Trend I don’t Appreciate - The Journal reported this week that shopping centers are filling up their vacant spaces with for profit colleges:The schools, eager to keep up with demand from out-of-work adults seeking new skills in the health-care, automotive and technical trades, are renting empty mall anchor stores, grocery stores and space in office buildings to house their classrooms and training facilities. Though there are some obstacles to moving in, the schools are often welcomed as tenants, picking up hundreds of thousands of empty square feet and bringing new customers to nearby shops.While it’s great that shopping center owners are getting some revenue for the vacancies, I certainly hope this trend is temporary. Investors tend to stay away from centers that have a gym, an ice rink, or a vocational school. In this case, it’s not just the parking issue that bothers me, what troubles me more is the “for profit schools” business model.

America's Youth Are Too Big to Fail - Overlooked in the debate over which institutions are 'too big to fail' for the sake of stabilizing America's economy is the future strength of our country: America's youth. Young Americans nationwide will suffer lasting damage from the financial crisis. My generation, so-called "Millennials," or people born after 1981, is on track to be the first generation in decades to be worse off than our parents. It's no coincidence that this 30-year period has also been the Era of Deregulation culminating in a perfect storm of unemployment, education divestment, and debt that is disproportionately hindering the prosperity of America's youth. That's why Congress must pass a vigorous financial reform bill that includes a strong Consumer Financial Protection Bureau (CFPB). While the nationwide unemployment rate is hovering just under 10 percent, a staggering 37 percent of 18- to 29-year olds are unemployed or involuntarily out of the workforce. This is the highest share among this age group in more than three decades and the effects of this crisis will be lasting.

Law Schools Visit Lake Wobegon - To paraphrase the late, great Henny Youngman: Take our graduates — please!That is the message blasting from the nation’s law schools, those cash cows of higher education that could once promise lucrative employment to the nation’s risk-averse young adults. Now the legal job market has turned chilly, though, and schools are trying everything from literally paying employers to hire their students to retroactively inflating their alumni’s grades. I recounted some of these efforts in an article in today’s paper, focusing on the grading changes. By my count at least 12 schools have changed their grading systems in the last two years to make them more lenient. (I learned of two other schools today after the article ran: the University of Alabama and Florida International University.) And in the previous decade  10 or 11 more schools had made similar changes. The schools making the changes range from all over the spectrum, from the tippy-top-ranked schools like Harvard and Stanford (which no longer use traditional grades) to other top-20 schools like New York University, Duke, Georgetown and Washington University in St. Louis down to middle- and low-range schools

School districts face tax hikes, program cuts to pay for teacher pensions - A state House bill designed to ease the burden of school district contributions to the underfunded Pennsylvania Public School Employees Retirement System may help keep district costs down this year, but the price to taxpayers would be an additional $21.5 billion in the long run.That's the conclusion of an analysis by the Public Employee Retirement Commission of the effects of House Bill 2497.The bill was approved, along with its amendment, last week and is now headed to the Senate for consideration. While the bill would help to lower costs in the future by reducing benefits for new employees, it would do little to address the large unfunded debt currently in the plan that was created by a decade's worth of decisions that included increasing benefits, decreasing employer contributions and relying heavily on investment earnings that tanked.

In Budget Crisis, States Take Aim at Pension Costs - Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits.  Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week. “We can’t afford to deny reality or delay action any longer,” said Gov. Pat Quinn of Illinois, adding that his state’s pension cuts, enacted in March, will save some $300 million in the first year alone.

BP Oil Disaster Costs U.S. State Pensions $1.4 Billion in Value - The California Public Employees’ Retirement System lost $284.6 million in value as the largest oil spill in U.S. history erased more than $1.4 billion from BP Plc shares held by 42 state retirement accounts, data compiled by Bloomberg show. The declines come as public pension funds are struggling to recover from investment losses that averaged 21 percent last year, according to Wilshire Associates of Los Angeles. U.S. public pension systems held more than 300 million shares of London-based BP, according to Bloomberg data through May 1.  Calpers, the largest U.S. public pension at $210 billion, held 58.2 million shares of BP on April 20, more than any other state pension, and saw the value fall to $301 million from $585.7 million, according to Bloomberg data.

The Next Crisis: Public Pension Funds - Ever since the Wall Street crash, there has been a bull market in Google hits for “public pensions” and “crisis.” Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold in a decade) would be enough to finance entire new police and fire departments.  David Crane, the special adviser to Gov. Arnold Schwarzenegger, says it is time for liberals to rally to the cause. “I have a special word for my fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.” The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs that progressives naturally applaud.

Multi-Employer Pension Liability and the PBGC - Multi-employer defined benefit plans are common in the trucking and construction industries.  Unrelated employers contribute based on the number employees with contribution rates set by collective bargaining.  Multi-employer plans have the unique problem of "withdrawal liability", i.e. unfunded liability caused by employers exiting the plan, usually through bankruptcy or dissolution. This "orphan liability" burdens remaining employers who are often unable and understandably unwilling to bear it. Congressional concern over the unfunded liabilities of the PBGC was the principal motivation for the Pension Protection Act . The PBGC is significantly under funded. According to its 2009 Annual Report, it currently has $68.7 billion in assets and $89.8 billion in liabilities. Furthermore it estimates its exposure to “reasonably possible terminations” is another $168 billion.

NJ pension funds face $174 bln liability - report (Reuters) - New Jersey's pension funds have about $67 billion of assets but their unfunded liability is almost three times higher, at close to $174 billion, a report said on Wednesday. New Jersey's official estimate for its unfunded liability is $44.7 billion. But that figure is low because it is based on an overly generous annual return of 8.25 percent, according to the report by the Mercatus Center at George Mason University in Arlington, Virginia. A lower annual return assumption of 3.5 percent -- as common in the private sector -- pushes the liability to nearly $174 billion, said the report

NY pension fund to sue BP for investment loss (Reuters) - New York state's pension fund plans to sue BP Plc to recover losses from the drop in the company's stock price following the worst oil spill in U.S. history, Comptroller Thomas DiNapoli said on Wednesday. New York's Common Retirement Fund has a long history of serving as the lead plaintiff in shareholder lawsuits. DiNapoli said the fund owned more than 19 million shares when the Deepwater Horizon rig exploded in the Gulf of Mexico in April.

The Point of No Return -  When I first started looking at the Social Security system, the three dates in question were in the 2010s, the 2020s, and in the 2040s.  I thought that those dates were optimistic, but what I did not expect was that the current economic crisis would accelerate the first two dates dramatically.  As it is, date one has passed in 2008 (+/- a year), and I think the second date is happening in 2010.  Bruce Krasting’s post highlights the details, but I would concur, this recession will not end rapidly in the place where is counts for Social Security — employment.  We are not likely to see Social Security deliver surpluses to the US Government anymore.  Thus I expect deconsolidation of Social Security’s finances with that of the Federal Government, which has cynically integrated its budget with Social Security to make its deficits look smaller.  This is like a drug to the government; the real pain will come to it when the subsidy begins to fall.  By the time it goes negative, the US Government will account for it separately, so as to minimize the deficit again.

Doctors limit new Medicare patients — The number of doctors refusing new Medicare patients because of low government payment rates is setting a new high, just six months before millions of Baby Boomers begin enrolling in the government health care program.Recent surveys by national and state medical societies have found more doctors limiting Medicare patients, partly because Congress has failed to stop an automatic 21% cut in payments that doctors already regard as too low. The cut went into effect Friday, even as the Senate approved a six-month reprieve. The House has approved a different bill

Medicare Fee Ordeal- Continued - As of Friday the Senate has passed a six (6) month patch to counter the Sustained Growth Rate formula cuts directed at most physicians.The average for all physicians was a 21% cut, with changes ranging from primary care (+6%) to cardiology (-42%).The House will consider the patch next week, and is likely to pass the necessary legislation. CMS contractors will process claims from June 1 forward - someday. This will really help cash flow in medical practices.

200,000 Jobs And Vital Programs At Stake In Senate Debate Over Medicaid Funding - The Senate is still — yes, still — trying to wrangle together the perfect formula for its version of a tax extenders bill that extends unemployment insurance and several tax credits. The House, when it passed its version of the legislation, jettisoned $24 billion in aid to state’s for Medicaid, but the Senate has been trying to place the funding back, to no avail.  The Medicaid funding has been a sticking point for some of the self-styled “moderates” in the Senate, who seem to think that cutting a bill’s economy-boosting potential is the height of moderation. Sen. Susan Collins (R-ME), for instance, “has twice voted against procedural motions on the tax extenders bill because of their cost.” “That’s been my No. 1 concern,” she said. “I’d like to help [the states], but we can’t afford it,” added Sen. George Voinovich (R-OH)

House Passes Plan to Stop Medicare Cuts to Doctors  — The House on Thursday approved a six-month plan to prevent a steep cut in doctors’ fees paid by Medicare, agreeing to a short-term solution that Speaker Nancy Pelosi called “totally inadequate” but said the House had decided to adopt after concluding that the Senate was hopelessly gridlocked and could do no better. " "The $6.4 billion measure reverses a 21 percent cut in physician payments that had raised the possibility that some doctors might begin to turn away those covered by Medicare. The measure is retroactive to June 1

Ezra Klein - What to do about the doc fix? - There were many moments during the health-care reform process where the participants did not exactly cover themselves in glory, but the one that is going to cause the most ongoing annoyance was the punt on the rates that Medicare pays doctors. You're all probably as tired of reading this as I am of explaining it, but here, again, is the quick background. The Sustainable Growth Rate formula was supposed to be a little tweak that saved a couple billion dollars. But the formula was wrong, and it quickly proved a wrenching readjustment that would've driven physicians out of the program by sharply slashing their payments. But rather than undo it, Republicans in Congress, and then Democrats when they took over Congress, passed temporary fixes, because no one wanted to come up with the money to fix the thing permanently.

Survey: Individual Health Insurance Premiums Jump - People who buy their own health insurance have been hit lately with premium hikes that far exceed increases in premiums for employer-sponsored coverage, according to a new survey from the Kaiser Family Foundation. The nonprofit foundation, which is separate from health insurer Kaiser Permanente, said recent premium hikes requested by insurers for individual coverage averaged 20 percent. Some customers were able to switch plans and pay less, so people paying on their own actually wound up paying 13 percent more on average

As Law Takes Effect, Obama Gives Insurers a WarningPresident Obama, whose vilification of insurers helped push a landmark health care overhaul through Congress, plans to sternly warn industry executives at a White House meeting on Tuesday against imposing hefty rate increases in anticipation of tightening regulation under the new law, administration officials said Monday.  The White House is concerned that health insurers will blame the new law for increases in premiums that are intended to maximize profits rather than covering claims. The administration is also closely watching investigations by a number of states into the actuarial soundness of double-digit rate increases.  “Our message to them is to work with this law, not against it; don’t try and take advantage of it or we will work with state authorities and gather the authority we have to stop rate gouging,”

What Many Liberals Don’t Understand About Health-Care Reform - Both liberals and conservative critics have charged that the health reform legislation that President Obama signed this spring focuses mainly on insurance coverage, and does little to rein in the spiraling cost of health care. This isn’t true. But the legislation is dense-- and, as usual, the truth is more complicated than a lie. There is no single “fix” that will “break the curve” of health care inflation. The Affordable Care Act (ACA) contains multiple provisions that open the door to cost containment in myriad ways. In today’s issue of The New England Journal of Medicine (NEJM), Peter Orszag, director of the White House Office of Management and Budget (OMB) and OMB special health advisor Zeke Emmanuel explain how the bill will make Medicare more affordable:   “Perhaps most fundamentally,” they write, “the ACA recognizes that reform, particularly changing the delivery system, is not a one-time event. It is an ongoing, evolutionary process requiring continuous adjustment. The ACA therefore establishes a number of institutions that can respond in a flexible and dynamic way to changes in the health care system.”

Nudging People to Buy Health Insurance - The current, vehement opposition from Republicans to the mandate stuns me. After all, there was a time, in the 1990s, when prominent health-policy analysts allied with Republicans in Congress fully endorsed the idea of the mandate, as did the officeholders whom they advised. For example, in “A Plan for ‘Responsible National Health Insurance,” a seminal paper published in 1991 by a group of politically conservative economists led by Mark Pauly of the University of Pennsylvania, made the mandate a cornerstone of its proposal. “In our scheme, every person would be required to obtain basic coverage, through either an individual or a family insurance plan,” they wrote. “All basic plans would be required to cover specified health services; plans could, however, offer more generous benefits or supplemental policies. The maximum out-of-pocket expense (stop-loss) permitted would be geared to income, with more complete coverage required for lower-income people, to ensure that no one faced the risk of out-of-pocket expenses that were catastrophic, given their income.”

US ranks last among 7 countries on health system performance, EurekAlert —Despite having the most expensive health care system, the United States ranks last overall compared to six other industrialized countries—Australia, Canada, Germany, the Netherlands, New Zealand, and the United Kingdom—on measures of health system performance in five areas: quality, efficiency, access to care, equity and the ability to lead long, healthy, productive lives, according to a new Commonwealth Fund report. While there is room for improvement in every country, the U.S. stands out for not getting good value for its health care dollars, ranking last despite spending $7,290 per capita on health care in 2007 compared to the $3,837 spent per capita in the Netherlands, which ranked first overall.

Blinded eyes restored to sight by stem cells – STEM cells have restored sight to 82 people with eyes blinded by chemical or heat burns.The results provide a timely boost for bona fide stem-cell researchers following a recent patient death due to an untested stem-cell treatment and mounting concerns over private clinics offering bogus treatments. Of the 107 eye patients treated, some as long as a decade ago, the successful cases had sight restored to a level up to 0.9 on a visual acuity scale, in which 1 represents perfect vision, reports Graziella Pellegrini at the University of Modena in Italy (The New England Journal of Medicine (DOI: 10.1056/nejmoa0905955). Most of the patients had burns in only one eye, so Pellegrini's team was able to treat them with corneal stem cells extracted from their good eye.

Optimizing Kidney Allocation: LYFT for LIFE - Under the current system, kidneys are allocated to patients primarily based on the time that the patient has been on the waiting list and the quality of the match. Suppose that we want the transplant system to maximize total life expectancy or, as it is known in the literature, to maximize the life-years from transplant (LYFT). The current system does not maximize life expectancy.  In the current system, a 60 year old patient can be given a 20 year old kidney--that's a waste because the life expectancy of the kidney is longer than that of the patient; it's like putting a new clutch in a car that is rusting away.  If we had 20 year-old kidneys to spare, this wouldn't be a big problem.  But we don't have 20-year old kidneys to spare, so we also give 20-year old patients 60-year old kidneys which means the kidney is likely to die early taking the patient along with it.  If we want to maximize total life expectancy, younger people should get younger kidneys.

The long-term impact of life before birth - The long-term effects of early childhood development are of increasing interest. This column outlines a recent literature review suggesting that interventions should target pregnant women as well as young children. But while events before birth can have a lasting impact, this does not mean that later efforts are doomed to fail.

Personality shows up in brain structure - Some people are more outgoing than shy, or worrisome than carefree. Such personality differences are now being explored biologically in the brain. A new study in the journal Psychological Science finds that several personality traits are associated with definite brain regions. Scientists from the University of Minnesota, University of Toronto, Yale University, and The Mind Research Network in Albuquerque, New Mexico, collaborated on the study. Participants were 116 people, half of whom were male, and all between 18 and 40 years old. They were given a personality test and then underwent magnetic resonance imaging. The researchers found evidence in the brain for four of the "Big Five personality traits": extroversion, neuroticism, agreeableness, and conscientiousness. They looked at the volumes of various brain regions to see how greater or smaller volumes might be connected to personality traits. But they did not find clear associations for the fifth trait: openness/intellect.

Oil-spill health risks under scrutiny -  A plethora of health problems from exposure to chemicals threatens workers and volunteers involved in clean-up efforts for the Deepwater Horizon oil spill. People living in communities around the Gulf of Mexico are also at risk. But more monitoring is needed to determine exactly how the vulnerable are being affected, said researchers and health officials at a workshop in New Orleans, Louisiana on 22–23 June.The meeting was organized by the Institute of Medicine, a non-profit organization within the US National Academies in Washington DC, at the request of the US Department of Health and Human Services. Participants rallied local agencies and communities to pull together to address human health concerns and to avoid the mistakes made in the aftermath of previous spills.

40,000 deaths a year due to junk food, says health watchdog Nice - More than 40,000 Britons are dying unnecessarily every year because of high levels of salt and fat in their diets, the Government’s public health watchdog Nice has warned. The National Institute for Health and Clinical Excellence (Nice) says that unhealthy foods have wreaked a “terrible toll of ill health” on the nation and placed a “substantial” strain on the economy.  For the first time, the organisation publishes landmark guidance on how to prevent the “huge number of unnecessary deaths” from conditions such as heart disease that are linked to the consumption of ready meals and processed food.

Organic Food Has a ‘Health Halo,’ Too -A few recent studies have focused on one of our favorite topics: the “health halo” hovering around certain foods that leads people to underestimate how much they’re eating. The latest research, a study by University of Michigan researchers to be published in the journal Judgment and Decision Making, is on organic foods. The study found that participants who looked at the nutrition facts label (which includes the calorie count) for Oreos “made with organic flour and sugar” were more likely to rate the cookies as lower-than-average in calories than were people looking at the label of conventional Oreos. “Presumably, participants inferred that, if organic cookies contain 160 calories, then the calorie content of conventional cookies — whatever the precise amount — is likely to be higher,” the authors write.

Not from the Onion: EPA Classifies Milk as Oil - New Environmental Protection Agency regulations treat spilled milk like oil, requiring farmers to build extra storage tanks and form emergency spill plans. Local farming advocates says it’s ridiculous to regulate a liquid with a small percentage of butter fat the same way as the now-infamous BP oil spill.  “It’s just another, unnecessary over-regulation by the government just lacking any common sense,” said Bill Robb, dairy educator for Michigan State University Extension...  The EPA regulations state that “milk typically contains a percentage of animal fat, which is a non-petroleum oil. Thus, containers storing milk are subject to the Oil Spill Prevention, Control and Countermeasure Program rule when they meet the applicability criteria..."Seriously, this is not from The Onion. Do note that the issue is not even regulation of milk spills it's regulation of milk under the oil spill prevention law.

Energy Use in the US & Global Agri-Food Systems: Implications for Sustainable Agriculture - During the 20th century, access to cheap and abundant sources of energy helped transform the world in countless ways. Extraction of fossil fuels led to a massive expansion in economic growth and agricultural production, and was one of the bases of a six-fold increase in human population. Petroleum, the most sought after fossil fuel, had the largest role in this transformation. The benefits we derive from oil are so numerous and of such great convenience that we have built our entire way of life around its use. Now we are entering a period of declining oil supplies and rising prices that threaten not only food security for increasing numbers of people globally, but also many aspects of political and economic stability as well -- a new phenomenon for a world that became accustomed to growing supplies of oil and relatively stable prices. Unless we begin quickly to a move away from fossil fuel dependence to a different energy regime and a radical lifestyle and societal change, the transition to a post-petroleum world could be devastating for Americans and people throughout the world. Food, the basis of all life, will be at the forefront of this upheaval.

Global Grain Surplus Sows Trouble for Farmers - WSJ - Two years after the global food crisis peaked, grain shortages are turning into surpluses that could create their own problems. Some traders and economists are speculating that if the U.S. and world economies don't heat up soon, surpluses could turn into price-depressing gluts. While cheap grain is good news for consumers and livestock producers, excessive supplies increase a government's cost for farm subsidies and tend to ignite trade fights between the big farming powers. This tension is growing partly because many of the farmers in the U.S. Midwest who were plagued by rainy growing seasons in recent years are having few problems so far this year.

US food aid policies create 561 jobs in Kansas, risk millions of lives around the world -I read recently the First Law of Policy Economics: Every inefficiency is someone’s income. US food aid policy is definitely no exception, and it is riddled with inefficiencies. Exhibit A: This invitation from a coalition of big US shipping interests to an event in Washington today. At this event, USA Maritime will have tried to convince lawmakers and their staff that ancient and outdated US food aid legislation, which requires virtually all US food aid to be bought in-kind from the US, processed and bagged in the US, and shipped on US-flag ships to even the most far-flung destinations, should not be altered. Let us leave aside for a moment that the report recommending favorable policies for the US shipping industry was bought and paid for by the US shipping industry and may not be the most objective or trustworthy source on the subject.

Loss of bees could be ‘a blow to UK economy’ - If bees and other pollinators were to disappear completely, the cost to the UK economy could be up to £440m per year, scientists have warned. This amounts to about 13% of the country's income from farming. In a bid to save the declining insects, up to £10m has been invested in nine projects that will explore threats to pollinators.  Some projects will look at factors affecting the health and survival of pollinators in general. Others will focus on specific species and diseases.

US decision on ethanol blend put off until fall - - The Environmental Protection Agency says it will wait until this fall to decide whether U.S. car engines can handle higher concentrations of ethanol in gasoline. The agency had been expected to decide by this month whether to increase the maximum blend from 10 to 15 percent. The EPA said Thursday that initial tests "look good" and should be completed by the end of September. A decision will come after the Energy Department completes the testing of the higher blend on vehicles built after 2007.The ethanol industry has maintained that there is sufficient evidence to show that a 15 percent ethanol blend in motor fuel will not harm the performance of car engines. But the refining industry, small engine manufacturers and some environmental groups have argued against an increase.

Monsanto GM seed ban is overturned by US Supreme Court - The bio-tech company Monsanto can sell genetically modified seeds before safety tests on them are completed, the US Supreme Court has ruled. A lower court had barred the sale of the modified alfalfa seeds until an environmental impact study could be carried out. But seven of the nine Supreme Court Justices decided that ruling was unconstitutional. The seed is modified to be resistant to Monsanto's brand of weedkiller. The US is the world's largest producer of alfalfa, a grass-like plant used as animal feed. It is the fourth most valuable crop grown in the country.  Environmentalists had argued that there might be a risk of cross-pollination between genetically modified plants and neighbouring crops.

Potatoes May Power The Batteries Of The Future - Oh, batteries. Can't live with 'em, can't live without 'em. It sounds like a power ballad, but it's the story of our lives around here. We've been dealing with lofty promises and batteries that kick the bucket far too early, for years now.  And the fact that we're still dealing with lead-acid batteries is sort of a baffling thing to wrap one's mind around. But all of that just might be changing. We won't get our hopes too high until fuel cells become the viable alternative that we have been told that they are, but we strangely have more faith in a vegetable than a science lab to revolutionize the battery.

Single Asian carp found 6 miles from Lake Michigan - Commercial fishermen landed the 3-foot-long, 20-pound bighead carp in Lake Calumet on Chicago's South Side, about six miles from Lake Michigan, according to the Asian Carp Regional Coordinating Committee.There are no natural connections between the lakes and the Mississippi basin. More than a century ago, engineers linked them with a network of canals and existing rivers to reverse the flow of the Chicago River and keep waste from flowing into Lake Michigan, which Chicago uses for drinking water.But environmental groups said the discovery leaves no doubt that other Asian carp have breached barriers designed to prevent them from migrating from the Mississippi River system to the Great Lakes and proves the government needs to act faster.Scientists and fishermen fear that if the carp become established in the lakes, they could starve out popular sport species and ruin the region's $7 billion fishing industry. Asian Carp can grow to 4 feet and 100 pounds and eat up to 40 percent of their body weight daily.

Report: Toxins Found in Whales Bode Ill for Humans-- Sperm whales feeding even in the most remote reaches of Earth's oceans have built up stunningly high levels of toxic and heavy metals, according to American scientists who say the findings spell danger not only for marine life but for the millions of humans who depend on seafood. A report released Thursday noted high levels of cadmium, aluminum, chromium, lead, silver, mercury and titanium in tissue samples taken by dart gun from nearly 1,000 whales over five years. From polar areas to equatorial waters, the whales ingested pollutants that may have been produced by humans thousands of miles away, the researchers said.  ''These contaminants, I think, are threatening the human food supply. They certainly are threatening the whales and the other animals that live in the ocean,'' said biologist Roger Payne, founder and president of Ocean Alliance, the research and conservation group that produced the report.

Biologist: Ocean pollution ‘threatening the human food supply’ -Sperm whales feeding even in the most remote reaches of Earth's oceans have built up stunningly high levels of toxic and heavy metals, according to American scientists who say the findings spell danger not only for marine life but for the millions of humans who depend on seafood. A report released Thursday noted high levels of cadmium, aluminum, chromium, lead, silver, mercury and titanium in tissue samples taken by dart gun from nearly 1,000 whales over five years. From polar areas to equatorial waters, the whales ingested pollutants that may have been produced by humans thousands of miles away, the researchers said. "These contaminants, I think, are threatening the human food supply. They certainly are threatening the whales and the other animals that live in the ocean," said biologist Roger Payne, founder and president of Ocean Alliance, the research and conservation group that produced the report.The researchers found mercury as high as 16 parts per million in the whales. Fish high in mercury such as shark and swordfish — the types health experts warn children and pregnant women to avoid — typically have levels of about 1 part per million.

Bid to suspend California's global warming law qualifies for November ballot - California headed for a high-stakes battle over global warming Tuesday, as an oil industry-backed measure to suspend the state's aggressive climate-change law qualified for the November ballot.The measure, launched six months ago by Texas oil giants Valero Energy Inc. and Tesoro Corp., comes as the industry has fallen under intense scrutiny in the wake of the Gulf of Mexico oil spill disaster. Under California's law, known as AB 32, the state is setting limits on greenhouse gas emissions from automobiles, oil refineries and other industries, and will probably require that a third of the state's electricity come from renewable sources by 2020, up from about 15% today. New rules under the law would encourage sales of more fuel-efficient cars.

Fannie and Freddie delinquent on climate change - Mortgage insurers Fannie Mae and Freddie Mac have thrown a wrench into one of the most promising programs to finance climate change solutions and promote clean energy. The program, Property Assessed Clean Energy (PACE), helps homeowners pay for the upfront costs of environmentally friendly upgrades, from energy efficiency retrofits to solar panels. Fannie and Freddie have paralyzed PACE. The government-chartered mortgage finance giants, which underwrite three-quarters of all single-family-home mortgages, recently wrote a letter to lenders threatening to prohibit mortgages on properties with a PACE assessment. Why? Because in the event of a foreclosure, a property tax lien like PACE takes priority over the mortgage. So the local government gets repaid first on a PACE debt, and the bank gets the remainder. As mortgage insurers, Fannie and Freddie don’t want to be on the hook for the loss.

EU sees solar power imported from Sahara in 5 years - The European Union is backing projects to turn the plentiful sunlight in the Sahara desert into electricity for power-hungry Europe, a scheme it hopes will help meet its target of deriving 20 percent of its energy from renewable sources in 2020. "I think some models starting in the next 5 years will bring some hundreds of megawatts to the European market," Oettinger told Reuters after a meeting with energy ministers from Algeria, Morocco and Tunisia. He said those initial volumes would come from small pilot projects, but the amount of electricity would go up into the thousands of megawatts as projects including the 400 billion euro ($495 billion) Desertec solar scheme come on stream. The EU is backing the construction of new electricity cables, known as inter-connectors, under the Mediterranean Sea to carry this renewable energy from North Africa to Europe.

Comparing US and European Wind Penetration - Using the same methodology as in Thursday's post on European wind energy, I took some data from the American Wind Energy Association annual market report and computed the Wind/Fossil ratio for the US.  The above graph compares the two.  As you can see, Europe is very far ahead in deploying wind infrastructure, relative to the size of its fossil fuel usage. Partly this is because Europe began large scale deployment of wind earlier:  However, it's also the case that the US uses almost twice as much fossil fuel as the EU-15: This is despite the fact that the EU-15 population is larger than the US (about 385m versus about 307m), and that Europe also has a slightly larger economic output ($14.8 trillion on a PPP basis in 2009, versus $14.25 trillion for the US, according to the IMF).

Comparing US and European Fossil Fuel Use - Commenter Mister Moose reacted to yesterday's piece by noting that Europe is famously densely settled and with good public transport, accounting for its lower oil usage.  However, what is striking is that European natural gas and coal usage are even more dramatically lower than the US. These next paired pictures show the composite fossil fuel usage (click for larger versions in a separate window). When I first made this, I couldn't quite believe it. I had to go back and double check my formulas to make sure this effect is real: it is. Another way of looking at the data is to compute the ratio of US usage to European usage for each fuel. Those ratios are as follows: As you can see, the disparity in NG and coal is even larger than that of oil. Furthermore, Europe is shifting away from coal and towards NG relative to the US. I imagine these effects primarily reflect politico-cultural differences. Europe has been more energy conscious for a long time, and in particular has long been committed to trying to do at least something about climate change, which the US has not been. The differences show up in the numbers.

A Partial Price on Carbon - The odds remain slight that Congress will put a price on carbon across the whole economy. But there’s still a chance that it may put a price on carbon for only power plants (but not for factories or transportation.)Several senators have suggested they’re open to such a policy, and Rahm Emanuel, the White House Chief of Staff, indicated the White House was, too, in a recent interview with Jonathan Weisman. “The idea of a ‘utilities only’ [approach] will also be welcomed,” Mr. Emanuel said, referring to President Obama’s upcoming meeting with senators. David Roberts of Grist breaks down the pros and cons of the power-plant approach: In sum: Cap-and-trade was always mostly about the utility sector, so if it becomes explicitly about the utility sector, it’s not a total loss, if a few conditions are met. The full post explains those conditions — including more money for energy research and the flexibility to expand the utility-only cap later on — and has some good charts, too.

The Real Options for U.S. Climate Policy, by Robert Stavins: The time has not yet come to throw in the towel regarding the possible enactment in 2010 of meaningful economy-wide climate change policy...  Meaningful action of some kind is still possible, or at least conceivable.  But with debates regarding national climate change policy becoming more acrimonious in Washington as midterm elections approach, it is important to ask, what are the real options for climate policy in the United States – not only in 2010, but in 2011 and beyond.  Let’s begin my considering Federal policy options under two distinct categories:  pricing instruments and other approaches.  Carbon-pricing instruments could take the form of caps on the quantity of emissions (cap-and-trade, cap-and-dividend, or baseline-and-credit), or approaches that directly put carbon prices in place (carbon taxes or subsidies).  Beyond pricing instruments, the other approaches include regulation under the Clean Air Act, energy policies not targeted exclusively at climate change, public nuisance litigation, and NIMBY and other public interventions to block permits for new fossil-fuel related investments.  I will discuss each of these in turn.

Poll Finds Deep Concern About Energy and Economy - NYTimes -Overwhelmingly, Americans think the nation needs a fundamental overhaul of its energy policies, and most expect alternative forms to replace oil as a major source within 25 years. Yet a majority are unwilling to pay higher gasoline prices to help develop new fuel sources. Those are among the findings of the latest nationwide New York Times/CBS News poll. The poll, which examines the public’s reaction to the oil leak in the Gulf of Mexico, highlights some of the complex political challenges the Obama administration faces. For instance, despite intense news coverage and widespread public concern about the economic and ecological damage from the gulf disaster, most Americans remain far more concerned about jobs and the nation’s overall economy.

Speaking of “Small People”: Will the Energy Bill Hurt or Help All Americans? A BP executive got himself in hot water this week for suggesting that his company is not “greedy” and cares about the “small people.” Pundits were outraged less by his lies than by his condescension.Admittedly, he should have chosen a different phrase to describe the low-income and vulnerable Americans who are suffering in the gulf region. But he was right to put concern for their plight at the center of the debate.The question is: Will clean energy champions do the same thing? After all, we know that the dirty energy spill hurt vulnerable Americans. But will the clean energy bill help them?The time has come to call the question. Momentum is again gathering for comprehensive clean energy and climate legislation. The EPA analysis of the Kerry-Lieberman American Power Act looks promising, lowering consumer costs and creating badly needed jobs. President Barack Obama’s Oval Office speech made the case. July looks to be the month for historic action.

Obama, EPA to push for restoration of Superfund tax on oil, chemical companies - For 15 years, the government imposed taxes on oil and chemical companies and certain other corporations. The money went into a cleanup trust fund, which reached its peak of $3.8 billion in 1996. But the taxes expired in 1995, and because Congress refused to renew them, the fund ran out of money.  Now the Obama administration will push to reinstate the "Superfund" tax. The Environmental Protection Agency, which rarely urges passage of specific bills, will send a letter to Congress as early as Monday calling for legislation to reimpose the tax.

Europe, US to see snowy, cold winters: expert - "Cold and snowy winters will be the rule rather than the exception," said James Overland of the US National Oceanic and Atmospheric Administration. Continued rapid loss of ice will be an important driver of major change in the world's climate system in the coming years.The exceptionally chilly winter of 2009-2010 in temperate zones of the northern hemisphere were connected to unique physical processes in the Arctic, he said. "The emerging impact of greenhouse gases in an important factor in the changing Arctic," he explained in a statement. "What was not fully recognized until now is that a combination of an unusual warm period due to natural variability, loss of sea ice reflectivity, ocean heat storage, and changing wind patterns all working together to disrupt the memory and stability of the Arctic climate system," he said. The region is warming more than twice as fast as the rest of the planet, a phenomenon known as Arctic amplification. Resulting ice loss is significantly greater than earlier climate models predicted.

OMG Moment - Sea surface temps near India, Southeast Asia, Western Pacific (temperature gradient map; ocean temps appproach 90F)

Arctic Sea Ice Meltdown Accelerates  - Thin Arctic sea ice, is cracking up and melting down at record rates so far this year. A central core of ice north of Greenland is intact while most of ice is failing across the Arctic. The melting of Arctic sea ice has more profound ecological and climatological implications than the BP oil disaster in the Gulf of Mexico. High pressure and beautiful sunny weather at the north pole research station yesterday was reminiscent of the warm weather that led to the record low sea ice levels in September 2007.This year's sea ice meltdown is well ahead of 2007 in loss of both area and thickness. The ice is failing at a record pace, in part, because it is at a record low thickness for the date. This ice is thinning at a record rate because of warm air temperatures above and because of melting from below.

And the planet got warmer, too - The National Oceanic and Atmospheric Administration, already busy with the oil spill in the Gulf of Mexico, took time out Tuesday to announce that the combined average land and ocean surface temperature on Earth was the hottest on record for May, the hottest on record for a March-May period, and for that matter, the hottest for a January-May period.Factoring out the oceans doesn't help much: the worldwide average land surface temperature was the hottest on record for May, and March-May. The worldwide average ocean surface temperatures for those periods placed second to 1998's data. The average combined land and ocean temperature for May was 1.24 degrees above the average for the 20th century, NOAA reported.

Scientific expertise lacking among ‘doubters’ of climate change, says Stanford-led analysis -The small number of scientists who are unconvinced that human beings have contributed significantly to climate change have far less expertise and prominence in climate research compared with scientists who are convinced, according to a study led by Stanford researchers.  In a quantitative assessment - the first of its kind to address this issue - the team analyzed the number of research papers published by more than 900 climate researchers and the number of times their work was cited by other scientists."These are standard academic metrics used when universities are making hiring or tenure decisions," said William Anderegg, lead author of a paper published in the online Early Edition of Proceedings of the National Academy of Sciences this week.

Cutting greenhouse gases will be no quick fix for our weather, scientists say. UK study predicts increased floods and droughts will continue for decades after global temperatures are stabilised - Global warming will continue to bring havoc to the world's weather systems for decades after reductions are made in greenhouse gas emissions, a new study shows.Scientists at the Met Office Hadley Centre in Exeter say climate change could bring greater disruption to the planet's water cycle than previously thought.The research suggests that increased floods and droughts could continue long after future efforts to stabilise temperature may succeed.Vicky Pope, head of climate change advice at the Hadley Centre, said: "We can't say that if we manage to bring down our carbon dioxide emissions then we don't need to worry any more. There will still be changes beyond that point."

Shale Game -- Natural gas trapped in bands of rock may deliver abundant energy and billions in profits. Companies and environmentalists are clashing as the world rushes to drill. Shale gas proponents, led by 91-year-old oil patch billionaire George Mitchell, who invented the process to extract it, say the U.S. should plumb all forms of natural gas. That would help unhook the nation from coal and foreign petroleum. Gas is about two-thirds cheaper than oil and greener too. It produces 117 pounds (53 kilograms) of carbon dioxide per million British thermal units (MMBtu) of energy equivalent compared with 156 for gasoline and 205 for coal. Shale gas has plenty of detractors. Environmentalists say fracking, a process in which drillers blast water into a well to shatter rock and unleash the gas, threatens pristine watersheds. Last year, the Texas Commission on Environmental Quality found benzene, which it classifies as a carcinogen, at 10,700 times the safe long-term exposure limit next to a well 6 miles (10 kilometers) west of town on which a valve had been left open. 

Life in the Gas Lane: Living with Drilling, Part II-c - Read the previous posts: Part I, Part II-a, and Part II-b.  Photos below from Peacegirl's blog, Gas Wells Are Not Our Friends, where she's been covering the drilling issues for the past two years. Each site requires 1-5 acres of cleared land during the drilling stage, plus access roads. After that, each well has to be connected to pipelines being laid across the county. For the most part, the pipeline is below ground, but in order to place it, trenches must be dug. All this, in a forested area (and we're pretty wooded) means clear-cutting. In hilly areas, land must be leveled to create the well pad, which can mean shaving the tops off hills. Even in open areas, land must be bulldozed and graded. Imagine this, but at 1,000+ wells. Just what will Bradford County look like in two years, in five, in twenty??

A Colossal Fracking Mess - The Delaware is now the most endangered river in the country, according to the conservation group American Rivers. That’s because large swaths of land—private and public—in the watershed have been leased to energy companies eager to drill for natural gas here using a controversial, poorly understood technique called hydraulic fracturing. “Fracking,” as it’s colloquially known, involves injecting millions of gallons of water, sand, and chemicals, many of them toxic, into the earth at high pressures to break up rock formations and release natural gas trapped inside. Sixty miles west of Damascus, the town of Dimock, population 1,400, makes all too clear the dangers posed by hydraulic fracturing. You don’t need to drive around Dimock long to notice how the rolling hills and farmland of this Appalachian town are scarred by barren, square-shaped clearings, jagged, newly constructed roads with 18-wheelers driving up and down them, and colorful freight containers labeled “residual waste.” Although there is a moratorium on drilling new wells for the time being, you can still see the occasional active drill site, manned by figures in hazmat suits and surrounded by klieg lights, trailers, and pits of toxic wastewater, the derricks towering over barns, horses, and cows in their shadows.

Cook a Hamburger and Blow Up Your Polluted Fracking Town… When tap water burns, it’s probably time to admit there’s a problem. Yet not everyone agrees, which is one of the more disturbing messages of “Gasland,” an HBO documentary about pollution caused by the expanding search for “clean” natural gas in the U.S. It was made by Josh Fox, who may go down in history as the Paul Revere of fracking -- short for hydraulic fracturing, the process by which natural gas is extracted. The story he tells is alarming, educational and sometimes funny.  Fox became suspicious when energy companies offered him and his neighbors near the New York-Pennsylvania border boatloads of money to drill for natural gas on their properties in the Delaware River Basin. Fox turned down $100,000 after investigating the situation and finding it fraught with danger.

Too Small to Matter - As I watched the documentary GASLAND last night on HBO my blood began to boil. I’m sure my blood pressure went up dramatically during the 1 hour and 40 minute film. After watching our corrupt government decide that the biggest baddest banks on the planet were too big to fail over the last two years and giving my children’s and their children’s money to these behemoth criminal enterprises, I was not surprised to see poor working class Americans treated like dirt by these same corrupt politicians. Big corporations can buy off politicians to ensure profits. The “small people”, as the Chairman of BP likes to call them, are expendable and can be ignored. They are too small to matter.

The Other U.S. Energy Crisis: Lack of R&D - BP (BP) says it's throwing its best people at stopping the Gulf of Mexico oil spill. Nevertheless, it took an outsider—Energy Secretary Steven Chu, who has a Nobel Prize in physics—to come up with the idea of peering inside the malfunctioning blowout preventer with high-energy gamma rays. BP tried Chu's idea—after a few snickers and Incredible Hulk jokes, according to the Washington Post—and lo and behold, it worked. The probe was "crucial in helping us understand what is happening inside the BOP [blowout preventer] and informing the approach moving ahead," said Jane Lubchenco, head of the National Oceanic & Atmospheric Administration.  The gamma ray incident is symptomatic of a problem that's bigger than London-based BP: Energy companies worldwide are far less science-oriented than one might expect from an industry that is heavily dependent on technology for safety and profit. In the U.S., energy companies' spending on research, development, and deployment amounts to just 0.3 percent of sales. That's barely more than a tenth what the auto industry spends as a share of sales and is dwarfed by the pharmaceutical industry

The gulf tragedy doesn't negate the fact that oil is a green fuel - A rolling "dead zone" off the Gulf of Mexico is killing sea life and destroying livelihoods. Recent estimates put the blob at nearly the size of New Jersey. Alas, I'm not talking about the Deepwater Horizon oil spill. I'm talking about the dead zone largely caused by fertilizer runoff from American farms along the Mississippi and Atchafalaya river basins. Such pollutants cause huge algae plumes that result in oxygen starvation in the gulf's richest waters, near the delta. Because the dead zone is an annual occurrence, there's no media feeding frenzy over it, even though the average annual size of these hypoxic zones has been about 6,600 square miles over the last five years, and they are driven by bipartisan federal agriculture, trade and energy policies. Indeed, if policymakers continue to pursue biofuels in response to the current anti-fossil-fuel craze, these dead zones will get a lot bigger every year. A 2008 study by the National Academy of Sciences found that adhering to corn-based ethanol targets will increase the size of the dead zone by as much as 34%.

BP was told of oil safety fault ‘weeks before blast‘ - A Deepwater Horizon rig worker has told the BBC that he identified a leak in the oil rig's safety equipment weeks before the explosion.  Tyrone Benton said the leak was not fixed at the time, but that instead the faulty device was shut down and a second one relied on. The blowout preventer (BOP) has giant shears which are designed to cut and seal off the well's main pipe. The control pods are effectively the brains of the blowout preventer and contain both electronics and hydraulics. This is where Mr Benton said the problem was found. The most critical piece of safety equipment on the rig, they are designed to avert disasters just like the oil spill in the Gulf of Mexico.  BP said rig owners Transocean were responsible for the operation and maintenance of that piece of equipment. Transocean said it tested the device successfully before the accident.

Guest Post: Obama Administration Knew About Deepwater Horizon 35,000 Feet Well Bore, Green-Lighted And Fast-Tracked Project - President Obama and Secretary of Interior Ken Salazar, Secretary of Energy Steven Chu, and Defense Secretary Robert Gates were informed that BP would drill an unprecedented 35,000 feet well bore at the Macondo site off the coast of Louisiana. In September 2009, the Deepwater Horizon successfully sunk a well bore at a depth of 35,055 below sea level at the Tiber Prospect in the Keathley Canyon block 102 in the Gulf of Mexico, southeast of Houston... According to the Wayne Madsen Report (WMR) sources within the U.S. Army Corps of Engineers and the Federal Emergency Management Agency (FEMA), the Pentagon and Interior and Energy Departments told the Obama Administration that the newly-discovered estimated 3-4 billion barrels of oil in the Gulf of Mexico would cover America's oil needs for up to eight months if there was a military attack on Iran that resulted in the bottling up of the Strait of Hormuz to oil tanker traffic, resulting in a cut-off of oil to the United States from the Persian Gulf

Oil spill: BP to sue partner in Gulf oil well – BP is preparing to sue its main partner in the leaking Gulf of Mexico oil field for its share of clean-up costs after the company, Anadarko, said BP's behaviour revealed "gross negligence" and that the ­accident was preventable.  In a fundamental split between the two companies with lead responsibility for the well, a senor BP source told The Sunday Telegraph that Anadarko was "shirking its responsibilities", not accepting its liabilities and that legal action in the US was now likely to follow.  Anadarko, which has a 25pc stake in the well, signalled this weekend that it will refuse to pay up.  BP has already sent the company one demand for payment but, the BP source said, had yet to receive any costs for the multi-billion ­dollar clean-up operation.

Tony Hayward Gets His Life Back, Goes Yachting - Just call it the latest in a two month series of public relations disasters by the CEO of BP: (AP)  In what one environmentalist described as “yet another public relations disaster” for embattled energy giant BP, CEO Tony Hayward took time off Saturday to attend a glitzy yacht race around England’s Isle of Wight. Spokeswoman Sheila Williams said Hayward took a break from overseeing BP efforts to stem the undersea gusher in Gulf of Mexico so he could watch his boat “Bob” participate in the J.P. Morgan Asset Management Round the Island Race. The 52-foot yacht is made by the Annapolis, Maryland-based boatbuilder Farr Yacht Design.

BP's 'reporters' should put down their pens - Just what exactly is a “BP reporter”? Recently, eagle-eyed oil spill watchers may have noticed a bunch of testimonials from Louisiana residents pop up on the energy giant’s website.They have been gathered by Tom and Paula, BP’s very own purveyors of journalistic truth and objectivity. The gist seems to be: look at these poor people whose lives have been hit by this terrible spill, who wouldn’t dream of blaming the owner of the field that leaked those millions of gallons of crude into the ocean.

Deepwater oil spill victims, from waitresses to cabbies and strippers, plead for BP payouts - BP says that most of the 1,500 claims it is handling across the Gulf each day are from those involved in the fishing industry, unable to work because of the fishing ban. But at BP's New Orleans claims centre, officials say that fishermen no longer make up the bulk of the claimants they see. As well as strip-joint owners, in recent days restaurant waitresses, dock workers, plumbers and electricians have all been through the door. Like the gloops of brown oil that are spreading across the Gulf of Mexico, the economic ripple effects of the disaster are widening. Tourism and the fishing industry are big earners in the region and have been severely hit, but so too have all the other workers who make a living from their custom.

Oil Threatens Key Gulf Algae And Its Ecosystem - It looks dirty and muddy, a brown mass of weeds with gas-filled berries that allow it to float on the Gulf of Mexico's waters. Sometimes it washes ashore, getting caught in the toes of barefoot beachgoers or stuck to the bottom of flip-flops. It appears to be just another sea plant. But this Sargassum algae -- sometimes called sea holly or Gulf weed -- is key to hundreds of species of marine life in the Gulf. Now, the oil is threatening to suffocate it, dealing a blow to fisheries and the ecosystem that scientists say may take years to recover. And as the algae dies in the Gulf, less of the vital plant will reach the Sargasso Sea -- some 3,000 miles away through the loop current -- potentially harming that ecosystem as well.

Gulf Coast Beaches Update - Gulf Shores and Orange Beach, Alabama, have experienced significant oiling, according to the Alabama Gulf Coast Convention and Visitors Bureau. "The beaches are open and visitors are still welcome to sunbathe and walk the beach, but we strongly suggest they swim in a pool or enjoy our many off-beach activities," the site said. The Alabama Department of Public Health has issued an advisory against swimming in waters off Gulf Shores, Orange Beach and Fort Morgan or in bay waters close to Fort Morgan, Bayou St. John, Terry Cove, Cotton Bayou and Old River.

Tar Balls Wash Up Between Destin And PCB - Bay County, FL (WALB) –  More and more reports of tar balls and oil washing up on the beaches between Destin and Panama City Beach Tuesday.  There is the bucket and soap left by the clean up crew for people to wash tar balls off themselves when they come out of the water at St. Andrews State Park.Lots of tar balls were on the beach here yesterday, and they are still in the water now. Just across the state park, the Florida Nation al Guard is training on all terrain vehicles. So far 80 soldiers have been called to duty to do reconnaissance for oil.

Destin's Beaches - What's The Truth? - I want people to see what Destin's beaches actually look like - right here, right now. I'm unwilling to run the hype shots that either the pumpers of the area wish you to see, nor will I run BS claiming that there's "oil everywhere" when there's not. I've lived here since 2000.  This is my home.  I know what the water usually looks like, feels like, smells like.  I know what the beaches are like.  I've seen the people claiming "oil everywhere!" and I've also seen folks saying "it's just like it's always been, come spend your money!" The truth is neither of those things. All these pictures were taken today.  Click any of them for a larger copy at the original resolution. First, this is what our beaches usually look like all the way to the waterline: But this is what the water line looks like NOW:

Miles of oil washing up in Florida Panhandle -- The worst blow yet to the Florida coastline from the growing oil spill struck Wednesday in an eight-mile line of thick, sticky goo that stained the pristine sands of this Panhandle community. Workers spent the day raking up the chocolate-brown oil mats and tar patches that washed ashore, and the state ordered road graders to lift the gunk from the once-white beaches. Some local leaders complained it was too little, too late. ``It took us four hours to clean up 50 to 60 feet of beach and I don't see this stopping for a while.''He urged Gov. Charlie Crist, who toured the area by helicopter Wednesday, to demand that the Coast Guard's unified command center in Mobile, Ala., dispatch front-end loaders and heavy-duty equipment to scoop up the tar mats before the brown goo sinks into the sand. Florida Department of Environmental Protection Secretary Mike Sole then ordered the machines to the scene. ``It's worse than I expected,'' he said.

Panhandle to BP: We Need Money Now - CNN video

Destroyed Pensacola Beach Boiling Like Acid (Video)

Oil Washes up in Orange Beach Alabama, Protection Not Working (News Video)

Tarballs Lurk Just Beneath the Surface (Video)

Oil Spill Puts The Gulf Oyster Industry On Ice - Whether they're deep-fried, baked or served on the half-shell, most of the oysters eaten by Americans start their journey to the gullet in the Gulf of Mexico. But with the Gulf now awash in oil, the supply is down, prices are up, restaurants are going oyster-less, and there appears to be no quick fix to the crisis. After all, suppliers on the Atlantic Coast and in the Pacific Northwest can't simply make more oysters. "In general, it takes us two to four years to grow oyster crops, so it's hard to respond when there's a surge in demand from something like this," said Bill Dewey of the Seattle area's Taylor Shellfish Co. "The Gulf, and Louisiana in particular, is the leading oyster-producing area in the country, and so when they go down it creates a huge void."

Oil Coating Seafloor and Killing Fish, Crabs … and the American Dream - Irish-Canadian journalist Alex Kearns, who now lives in St. Mary’s Georgia posted this image on her website today, along with the following description: A researcher captured this image. A discarded flag (or one that has fallen from one of the many vessels in the area) rests on the ocean floor amid the oil and the bodies of dead crabs. A two-inch layer of submerged oil is coating portions of the Gulf seafloor off the Bon Secour National Wildlife Refuge: a week after a smothering layer of floating crude washed ashore there. This scenario is being played out all along the Gulf shoreline. Collecting in pockets and troughs in waist-deep water, the underwater oil is looser and stickier than the tarballs that cover the beach. The consistency is more like a thick liquid, albeit one made up of thousands of small globs. Unlike tarballs, which can often be picked up out of the water without staining the fingers, the submerged oil stains everything that it touches. If you passed your hand through the material it would emerge covered in oily smears.

Now BP Is Burning Sea Turtles Alive - More heartwarming news from the Gulf, courtesy of FOX Tampa Bay:  VENICE, La. - A boat captain working to rescue sea turtles in the Gulf of Mexico says he has seen BP ships burning sea turtles and other wildlife alive. Captain Mike Ellis said in an interview posted on You Tube that the boats are conducting controlled burns to get rid of the oil. "They drag a boom between two shrimp boats and whatever gets caught between the two boats, they circle it up and catch it on fire. Once the turtles are in there, they can’t get out," Ellis said.Ellis said he had to cut short his three-week trip rescuing the turtles because BP quit allowing him access to rescue turtles before the burns. "They're pretty much keeping us from doing what we need to do out there," Ellis said.

In Photos: Two months later, the oil still flows - A breached well has been pouring oil into the Gulf of Mexico for two months now. Nonstop. According to the Associated Press, as much as 125 million gallons may have flowed so far. (Yahoo! News has a roundup of weekend developments. And continuous updates on the story, often many a day, are available from AP and from Reuters.) [Photos: See hundreds more images from the oil spill]

Oil may pose a hazard for humans, too - The oil is inescapable to the people of the Gulf Coast. Cleanup workers burn it at sea, skim it in boats. Residents smell its sheen, pick up its puddles and tar balls with shovels. Tourists sometimes let their kids swim in it. What is the oil doing to human health? What about the chemicals used to disperse it? Health officials don't know yet.  Even Jimmy Guidry, director of the Louisiana Department of Health, who says 108 workers and 35 residents have reported ailments they believe are related to oil or dispersants, admits he can't prove the connection. ``Some scientists say there's little or no toxicity from the oil,'' U.S. Surgeon General Regina Benjamin told the group. ``Others express serious concerns.''Since then, 11 oil spill workers have been hospitalized briefly with nausea, dizziness and chest pains amid debate over whether they were caused by a dock cleaning chemical, the oil dispersant Corexit, heat and fatigue or a combination.

BP: Gulf Resident Gives Behind the Scenes Account, Slams Cleanup and Safety -Yves Smith - Gulf resident and fisherman’s wife Kindra Arnesen took advantage of the offer extended to her to visit cleanup sites and staff meetings: Arensen appears to have been invited in because she got media coverage earlier in June when CNN covered her efforts to organize wives of Gulf fisherman over concerns about the safety of working on oil cleanup:  Arnesen believes it was vapors from the oil and the dispersants from the BP Gulf oil disaster that made her husband and the other shrimpers sick. She says they were downwind of it, and the smell was “so strong they could almost taste it.”For several weeks, she hesitated to talk publicly about it. Like many fishermen who can no longer fish in the Gulf, her husband has signed a contract to work with BP to clean up the oil, and she doesn’t want to bite the hand that puts food on her family’s table. But now Arnesen, a 32-year-old “uneducated housewife” — her words — is breaking her silence and is encouraging others in her community do the same

Methane In Gulf 'Astonishingly High': U.S. Scientist  (Reuters) - As much as 1 million times the normal level of methane gas has been found in some regions near the Gulf of Mexico oil spill, enough to potentially deplete oxygen and create a dead zone, U.S. scientists said on Tuesday.Texas A&M University oceanography professor John Kessler, just back from a 10-day research expedition near the BP Plc oil spill in the gulf, says methane gas levels in some areas are "astonishingly high."Kessler's crew took measurements of both surface and deep water within a 5-mile (8 kilometer) radius of BP's broken wellhead."There is an incredible amount of methane in there," Kessler told reporters in a telephone briefing. In some areas, the crew of 12 scientists found concentrations that were 100,000 times higher than normal. "We saw them approach a million times above background concentrations"

By the numbers: Oil leak wouldn't fill Superdome -A little mathematical context to the spill size can put the environmental catastrophe in perspective. Viewing it through some lenses, it isn't that huge. The Mississippi River pours as much water into the Gulf of Mexico in 38 seconds as the BP oil leak has done in two months. On a more human scale, the spill seems more daunting. Take the average-sized living room. The amount of oil spilled would fill 9,200 of them. Since the BP oil rig exploded on April 20, about 126.3 million gallons of oil has gushed into the Gulf. That calculation is based on the higher end of the government's range of barrels leaked per day and the oil company BP's calculations for the amount of oil siphoned off as of Monday morning. For every gallon of oil that BP's well has gushed into the Gulf of Mexico, there is more than 5 billion gallons of water already in it. And the mighty Mississippi adds another billion gallons every five minutes or so, according to the U.S. Environmental Protection Agency.

Are We to Believe Gulf Doomsday Talk? - Will the oil gusher in the Gulf eventually destroy all marine life, as oilman Matthew Simmons asserts, or will the disaster instead be contained once BP’s relief well comes online sometime in July or August? Simmons, a peak-oil proponent and no stranger to controversy, has been warning that a second well cannot alleviate the problem because most of the oil, now estimated to flow at around 60,000 barrels per day, is coming not from the well bore but from innumerable ruptures in the sea bed around the Deepwater Horizon site. Because of this, he says, there are only two possible options: allowing the well to run dry — a process that would take 30 years and destroy the Gulf of Mexico and the ocean; or nuking the site, melting the fissured seabed into a glassy cap.

Gulf spill plays havoc with real estate -The phone call was short and to the point: A buyer who had agreed to spend $500,000 (U.S.) on a beachfront home with a stunning view of the Gulf of Mexico was backing out.The cancelled sale was a blow to real estate agent Linda Henderson, but it wasn’t a surprise. Globs of thick, pungent oil are washing up on the shores of Alabama’s Dauphin Island, and the smell on some days is enough to drive the island’s predominantly senior population back into their homes. It’s also enough to drive real estate agents to despair. “I can tell you that things have pretty much dropped to dead,” she says. “We were on track for our best year since Katrina. This is devastating – you can say that the spill killed the real estate recovery.”

Tropical weather could exacerbate Gulf Coast woes - CNN - Downtrodden Gulf Coast residents may soon have something besides the oil spill to worry about. But it's not really a "new" threat -- it's what they fret about every summer: tropical weather. There is a 70 percent chance that a weather system in the western Caribbean will better organize and form at least a tropical depression in the next 48 hours, the National Hurricane Center said Friday morning. Some forecasting models show that by early next week the system could head into the Gulf of Mexico, where it could disrupt the oil cleanup operations. Adm. Thad Allen, who's heading the federal cleanup operation, said on CNN's "American Morning" he'll have to redeploy people and equipment to safer areas 120 hours (five days) in advance of gale-force winds (at least 32 mph).

Tropical storm Alex forms in Caribbean (Reuters) - Tropical Storm Alex, the first named storm of the 2010 Atlantic hurricane season, formed on Saturday near Mexico's Yucatan Peninsula and could be headed for the Gulf of Mexico, the U.S. National Hurricane Center said. Alex had sustained winds of 40 miles per hour (65 km per hour) and was located about 200 miles east of Belize City, Belize. It was moving west-northwest at 10 mph on a path that was expected to take it toward Belize and over the Yucatan Peninsula during the weekend and then into the Gulf of Mexico, where BP officials are battling to contain a massive oil spill. It was too early to know whether Alex could threaten oil and natural gas production in the Gulf of Mexico, or whether it could affect clean-up operations from the oil spill and possibly force a temporary shutdown. Alex was expected to strengthen over water before the center hits the Yucatan Saturday night or Sunday morning. Its tropical storm force winds extend up to 105 miles east of the center. The islands of Honduras are expected to see tropical storm force winds by Saturday afternoon.

Tropical Storm May Stop Spill Response For Two Weeks -Winds in excess of 45 miles per hour days away from the Deepwater Horizon gusher in the Gulf of Mexico spill could force at-sea workers to abandon their oil collection efforts for as long as two weeks, the head of the national response effort said Friday.  That timetable would conservatively unleash another half-million barrels of oil back in the sea -- twice the Exxon Valdez spill. Using upper-end federal estimates of the leak, 840,000 barrels would gush out. That's 35 million gallons.  Coast Guard Adm. Thad Allen described the cut-and-run plan in a conference call to reporters Friday morning in which he said, "Realistically, out of an abundance of caution,'' the Deepwater Horizon well would remain "unattended" for "14 days.'' In Washington, Allen told reporters that planning for a hurricane would require an evacuation of the wrecked oil rig's site once gale force winds are predicted to arrive within five days. Gale force winds are 40 knots and above, or 46 miles per hour.  That means unplugging the makeshift system called a "top hat'' that has been collecting a portion of the gushing crude.

An Interesting Legal Angle? (BP) One has to wonder, given this prognostication....(Click the image for a larger copy) If you don't understand what you're looking at, this is a prognostication of a 104kt hurricane (Cat 3) just off the southern coast of Louisiana on the 28th. Coming from this direction is about the worst-possible case for them, in that the eastern winds would pick up basically the entirety of the floating and near-surface oil and cram it into the coast of Louisiana's marshes and east-facing coastlines.Now here's the question: Does this constitute an "act of God", and therefore in some form or fashion mitigate the liability that BP would ultimately be faced with should people (or states) decide to sue as opposed to taking the "Escrewed" money via Feinberg?

Black Gold From The Heavens: Oil Rain In Louisiana? - "It is literally raining oil" proclaims the narrator in this RT video, who observes what appear to be puddle of oil following a heavy rainfall in the Louisiana area. We have not received independent confirmation of this phenomenon elsewhere but this is very troubling, and certainly possible considering the amount of oil burned and washed ashore as part of the spill recovery effort.

BP estimates spill up to 100,000 bpd in document (Reuters) - An internal BP document released by a U.S. lawmaker estimated that a worst-case scenario rate for the Gulf of Mexico oil spill could be about 100,000 barrels per day, far higher than the current U.S. figure. The estimate in the undated BP document released by U.S. Representative Ed Markey, chairman of the energy and environment subcommittee of the House of Representatives Energy and Commerce Committee, compares with the current U.S. government estimate of up to 60,000 barrels (2.5 million gallons/9.5 million liters) gushing daily from the ruptured well.

Markey: Internal BP Document Shows Worst Case Scenario for Spill Could Be 100,000 Barrels Per Day -In the document, BP stated: If BOP and wellhead are removed and if we have incorrectly modeled the restrictions – the rate could be as high as ~ 100,000 barrels per day up the casing or 55,000 barrels per day up the annulus (low probability worst cases) To read the document, CLICK HERE. This number is in sharp contrast to BP’s initial claim that the leak was just 1,000 barrels a day. At the time this document was made available to Congress, BP claimed the leak was 5,000 barrels a day, and told Members of the House Energy and Commerce Committee that the worst case scenario was be 60,000 barrels a day. This document tells a different story. “Considering what is now known about BP’s problems with this well prior to the Deepwater Horizon explosion, including cementing issues, leaks in the blowout preventer and gas kicks, BP should have been more honest about the dangerous condition of the well bore,”

The BP Oil Spill May Be Bad, But This Cover Up is Far More Deadly - "They [BP] hid the body," said Ian McDonald, FSU oceanographer. BP's initial statement on April 21st that "there is no leak," and later, their impossibly low 5,000 barrel-a-day estimate is like the serial killer with the neighbor's head in the refrigerator, who says he shouldn't be charged for murder because you can't prove it was attached to the rest of the missing body." The above is a quote posted by Sayer Ji, founder of—and hits the nail squarely on the head. Ji's mission is to bring attention to the inherently futile approach of using chemical dispersants on the Gulf oil leak, which actually magnify the damage even further.  In particular, Ji has brought together a good deal of toxicological information, all research-based, about the environmental impact of using oil dispersant chemicals, particularly the agents BP has chosen, which are the WORST possible dispersants for the environment. Our very planet is in peril, as a result.

Here's What Oil Industry Insiders Are Gossiping About The Oil Spill…So to get the skinny on the BP mess, I spent the weekend catching up with old friends who live with a permanent oil stain under their fingernails. Some of the chatter that came back was amazing. BP has discovered the largest and most powerful well in history, and control of it may be outside existing technology. The previous record gusher was Union Oil Co.'s Lakeview well in Maricopa, California, which spewed out a staggering 100,000 barrels a day at its peak in 1910, and created an enormous oil lake in the central part of the state. Estimates for the BP well now range up to 50% more than that. The pressures at 18,000 feet are so enormous, that drilling two more relief wells might only result in creating two more oil spills.

Louisiana Governor Asks Judge to Lift Drilling Ban; Ruling May Be Tomorrow - Louisiana Governor Bobby Jindal and state Attorney General Buddy Caldwell asked a U.S. judge to lift a six-month moratorium on deepwater drilling in the Gulf of Mexico within 30 days to avoid “turning an environmental disaster into an economic catastrophe.”  The drilling ban may cost Louisiana’s economy, “which was already weakened by Katrina and is now crippled by the Deepwater Horizon disaster,” almost 11,000 direct and indirect jobs in five months, Caldwell said in papers filed yesterday in federal court in New Orleans.

Mississippi governor says drilling moratorium worse than oil spill…Mississippi's Republican governor -- a former chairman of the Republican National Committee -- said in an interview Sunday that President Barack Obama's moratorium on deepwater drilling is worse than BP's massive oil spill for his state. "Governor, what's worse, the moratorium or the effects of this spill on the region?" "Meet the Press" host David Gregory asked the governor on Sunday."Well, the moratorium," Barbour replied. "The spill's a terrible thing, but the moratorium is a terrible thing that's not only bad for the region, it's bad for America."

Judge Blocks Moratorium On Gulf Offshore Drilling : NPR -A federal judge struck down the Obama administration's six-month ban on deepwater oil drilling in the Gulf of Mexico as rash and heavy-handed Tuesday, saying the government simply assumed that because one rig exploded, the others pose an imminent danger, too.The White House promised an immediate appeal. The Interior Department had imposed the moratorium last month in the wake of the BP disaster, halting approval of any new permits for deepwater projects and suspending drilling on 33 exploratory wells. White House spokesman Robert Gibbs said President Barack Obama believes that until investigations can determine why the spill happened, continued deepwater drilling exposes workers and the environment to "a danger that the president does not believe we can afford."

The greased wheels of offshore drilling justice - Could there be less of a surprise than the fact that a Louisiana district court judge with financial ties to the offshore oil industry, appointed to the federal bench by Ronald Reagan, granted a preliminary injunction against President Obama's six-month moratorium on offshore "deepwater" drilling? The real shocker would have been finding a local judge who didn't have any entanglement with the oil business. Judge Martin Feldman "owned stock in Transocean, as well as five other companies that are either directly or indirectly involved in the offshore drilling business." Irrespective of the merits of the argument made by the judge in his opinion, the fact that he did not recuse himself is inexcusable. But as the case flies up the appellate ladder, it's not going to get any easier to find an impartial hearing. Judges appointed by presidents who stressed the primacy of deregulated free markets will likely have different views than judges appointed by presidents who took protection of the environment seriously.

How Bad Can it Get? - A federal judge today overturned President Obama's six-month moratorium on deepwater oil drilling in the Gulf of Mexico, claiming that the administration had not provided adequate time for the oil companies to comment on the proposal. The Sierra Club is already appealing to the 5th Circuit Court of Appeals, since we anticipated that federal judge Martin Feldman might well rule with oil. The administration has also indicated that it will appeal. Getting the appeal heard by the 5th Circuit Court of Appeals court might be tough given that so many of them have investments in oil companies that they have recused themselves from hearing cases that might harm the industry. As I wrote earlier this month: "... these are the same judges who are likely to preside over the multitude of cases that will flow from the Deepwater Horizon disaster. In effect, it appears that half the membership of an entire Federal Circuit Court have compromised themselves by investing heavily in their region's dominant industry -- one that generates a huge amount of litigation and is at this point an excellent candidate for public enemy number one."

Nothing Works Anymore - Obama’s offshore drilling exploration moratorium was typical of him – too late, too limited, anodyne, more talk than action, taken only under extreme political duress though he obviously didn’t believe in it, so he couldn’t achieve any goodwill from it anyway. Yet even in that meager way it’s still something worthwhile. Or it was for a few days before a federal judge, at the request of a minor special interest, the ferries serving drill workers, overturned the moratorium, declaring it “arbitrary and capricious”. People are having trouble following the judge’s reasoning, since it’s self-evident that deepwater drilling cannot be done safely and with all the risk accounted for by voluntary market participants. The only thing which looks arbitrary and capricious is the judicial activism here. (Unless you look at the judge’s oil investments. Then perhaps the decision might not seem so arbitrary.)Corporatist judicial activism has been on a roll since the Citizens United decision. The SCOTUS seems especially keen to smash all attempts to impose any sort of rational limits on election buying, no matter how modest.

Future Looks Bleak For Gulf: Alaska Still Hasn't Recovered From Exxon Valdez Disaster 21 Years Later - The old fisherman wrapped his freckled knuckles around a shovel and started digging on the low-tide beach. Six inches down, Robert (RJ) Kopchak saw the telltale, iridescent sheen smearing the groundwater. "There it is. That's oil coming out. I can smell the hydrocarbons," he said as gumball-sized tar balls bubbled up. "It's just poison soup is what that really amounts to." Kopchak, a fisherman for 36 years, wasn't standing on a contaminated beach in Louisiana or Florida.His rubber boots were planted on Prince William Sound in Alaska, where the Exxon Valdez hit a reef and dumped 11 million gallons of crude in March 1989 - far less than the estimated 73.5 million to 126 million gallons that have gushed into the Gulf.

"The Gulf Oil Disaster: What We Know, By the Numbers" - The reservoir that BP drilled into in the Macondo basin of the Gulf of Mexico contains an estimated 15,000,000,000 barrels of oil and trillions of cubic feet of methane gas/frozen methyl hydrates. The pressure within the reservoir is an estimated 120,000 PSI. There is a layer of methane gas at the top of the reservoir that's nearly 20 miles in circumference and over 20 feet deep. The size of the reservoir itself has been described as the "volume of Mt. Everest." For the 66 days following the explosion of methane gas on the Deepwater Horizon rig, oil, methane, rocks and dirt have been propelled up the bore hole by the 120,000 PSI pressure within the reservoir. The bore pipe was severely damaged during the initial incident, and has been under constant "scouring" by the escaping materials, and has now been completely destroyed. This means there is nothing for the relief wells to connect to- it is impossible for them to stop the flow.

Relief oil well drilling in Gulf of Mexico enters a new phase - BP engineers are expected to begin using "ranging" devices today to home in on the damaged oil well in the Gulf of Mexico, as they near the end of the more routine aspects of relief well drilling, Coast Guard Adm. Thad Allen said Monday. The introduction of the ranging equipment is a sign that BP is edging closer to its attempt at permanently sealing the blown-out Macondo well. The relief wells were started at about a half-mile from the accident and are trying to meet the original well at a diagonal. The first well had been drilled to 15,936 feet as of Monday evening. The second was at 10,000 feet.But as BP prepares to try to meet well with well at thousands of feet below the sea floor, the operation changes a bit. Engineers will try to locate their target by sending out an electric current from the relief well that will make contact with the well casing in the damaged well, creating an electromagnetic field between the wells that signals information about direction and distance. The closer the wells get to each other, the stronger the signal will become. The process is slightly ahead of schedule, Allen said Monday, but he doesn't expect the relief well to be completed until mid-August.

Are we banking too much on BP’s relief wells?  -Here's an illustration showing how the relief wells are coming along so far (or see a bigger version):Two spills are often cited to make the point that relief wells are tricky: the Ixtoc 1 spill near Mexico in 1979, which took almost a year to stop, and a leak off the coast of Australia last fall, which required five tries before the relief well worked.The good news is that BP has much better of odds of succeeding.  Technology has greatly improved since the former leak, and engineers have more critical data than they did for the latter.  Yesterday, Coast Guard Admiral Thad Allen mentioned for the first time that other backup plans are being hashed out in case the relief wells fail, as Jaquetta White reports in the New Orleans Times-Picayune: Allen ... shared one such plan that officials are in the early stages of studying. That involves the possibility of sucking oil from the well through a pipeline that would feed to an inactive platform nearby. From that platform, the oil could either be produced or pumped back down into the ground.

Something Broke: Containment Cap Removed From BP Oil Leak After Problems Encountered; Massive Increase In Spill Rate - This is bad to very bad. Coast guard reports two deaths have occurred in the containment effort. Not all is lost - in what probably shouldn't pass for an attempt at humor yet achieves precisely that, the US coast guard said the oil flow is not completely unrestrcited, and some oil was being burned off on the surface. Nothing like a little oil rain for the already happy happy gulf region.

BP removes oil cap after submarine crash - Oil gushed unchecked Wednesday from the leaking well in the Gulf of Mexico after BP's containment system was removed for repairs following a submarine crash, US officials said. "We had an incident earlier today, they noticed that there was some kind of a gas rising," said Admiral Thad Allen, the US official coordinating the response to the disaster."They indicated the problem was a remotely-operated vehicle had bumped into one of the vents," Allen said, adding that the "top hat" container was being checked and could be reinstalled later Wednesday.

BP Removes Cap After Accident - WSJBP PLC's efforts to capture oil spewing from Macondo well into the U.S. Gulf of Mexico hit a major snag early Wednesday when an underwater robot collided with the containment cap, U.S. Coast Guard Adm. Thad Allen said.The snafu halted the oil collection efforts of the larger of two storage vessels, the Discoverer Enterprise, which has a capacity to capture 18,000 barrels of crude a day. The pause could last for a few hours or much longer depending on whether ice-like crystals called natural-gas hydrates are found within the cap.  "They are checking the containment cap right now," Adm. Allen said during a news conference. "They will attempt to reinstall the containment and begin producing later on today." But if there are hydrates, responders will have to reinsert the pipeline connecting the vessel to the containment cap, "and that will take a considerable amount longer," Adm. Allen said.

Progress on containing gulf oil spill reversed as mishap lets well gush anew - The Deepwater Horizon well became an uncapped geyser once again Wednesday, the hydrocarbons surging freely into the deep sea after engineers were forced to remove the dome that had been capturing significant quantities of oil. Engineers scrambled late in the day to recap the well, and the video feed showed a protracted battle to seat the dangling dome on the spewing pipe atop the blowout preventer. Late Wednesday, the company said the cap was successfully reinstalled. But it was unclear when it would return to its previous level of performance.

Each day, another way to define worst-case for oil spill - The base-line measures of the crisis have steadily worsened. The estimated flow rate keeps rising. The well is like something deranged, stronger than anyone anticipated. BP executives last month said they had a 60 to 70 percent chance of killing it with mud, but the well spit the mud out and kept blowing.  The net effect is that nothing about this well seems crazy anymore. Week by week, the truth of this disaster has drifted toward the stamping ground of the alarmists.  The most disturbing of the worst-case scenarios, one that is unsubstantiated but is driving much of the blog discussion, is that the Deepwater Horizon well has been so badly damaged that it has spawned multiple leaks from the seafloor, making containment impossible and a long-term solution much more complicated.

The Economist Off the Deep End on BP and "Vladimir Obama" :The Economist has a pathetic leader this week criticizing Obama for hammering BP and raising the ridiculous idea that his corporate-friendly administration is anti-business. It actually (really!) calls the president “Vladimir Obama” and writes: The collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding. The normally sober Economist has gone off the wagon here. First, it knows better than to “suggest” what “the markets” think. Second, that blew up in its face rather quickly. Most importantly, you have a giant oil company that cut corners while drilling a mile-deep well, killed eleven people, and sprung a hole in the ocean floor that’s gushing an Exxon Valdez-size spill every four days.

Kunstler: Mismanaging Contraction - Lesson of the Macondo:  Blowout preventers don't prevent blowouts. This comes as a shock to people attuned to the on-schedule arrival of techno-miracles. Now, all the acronym-studded invocations of techno-mastery by men wearing interesting hats will not avail to put the schnitz on an epic horror show in the Gulf of Mexico.   President Obama's speech to the nation a week ago was designed as a kind of blowout preventer for the legitimacy of the federal government. It did little to stop the hemorrhaging of confidence in political leadership.  A nation foundering in a crippled vessel in the horse latitudes of collective purpose on a sea of red ink looks to its captain - who puffs a few platitudes into the tattered sails and retreats belowdecks to pace and stew. This is a society truly lost at sea, where even the friendly dolphins are turning belly-up and the dying seabirds stare accusingly under their cloaks of crude oil. The feeling grows that we can't do anything right. Will someone please turn off the TV?

Obama's energy pipe dreams - Just once, it would be nice if a president would level with Americans on energy. Barack Obama isn't that president. His speech the other night was about political damage control -- his own. It was full of misinformation and mythology. Obama held out a gleaming vision of an America that would convert to the "clean" energy of, presumably, wind, solar and biomass. It isn't going to happen for many, many decades, if ever.  For starters, we won't soon end our "addiction to fossil fuels." Oil, coal and natural gas supply about 85 percent of America's energy needs. The U.S. Energy Information Administration (EIA) expects energy consumption to grow only an average of 0.5 percent annually from 2008 to 2035, but that's still a 14 percent cumulative increase. Fossil fuel usage would increase slightly in 2035 and its share would still account for 78 percent of the total.  Unless we shut down the economy, we need fossil fuels. More efficient light bulbs, energy-saving appliances, cars with higher gas mileage may all dampen energy use. But offsetting these savings will be more people (391 million vs. 305 million), more households (147 million vs. 113 million), more vehicles (297 million vs. 231 million) and a bigger economy (almost double in size). Although wind, solar and biomass are assumed to grow as much as 10 times faster than overall energy use, they provide only 11 percent of supply in 2035, up from 5 percent in 2008.

With all eyes on BP, others are busy drilling deep elsewhere...While BP is facing billion-dollar lawsuits in the US, another British company, Cairn Energy, is beginning drilling off the coast of Greenland Few outside the oil industry have heard of Cairn Energy, but those who have keep a close eye on the Edinburgh-based explorer. Cairn has made some smart bets in the past, striking oil where other, bigger, outfits swore there was none. Next month it will start drilling off Greenland, in a stretch of sea known as Iceberg Alley.  Unusually, it will use two drilling rigs, so if there is a blowout from the first the second can immediately start on a relief well to stem the flow of oil.

The Coming Era of Energy Disasters - The Deep Horizon explosion was the inevitable result of a relentless effort to extract oil from ever deeper and more hazardous locations.  In fact, as long as the industry continues its relentless, reckless pursuit of “extreme energy” -- oil, natural gas, coal, and uranium obtained from geologically, environmentally, and politically unsafe areas -- more such calamities are destined to occur. At the onset of the modern industrial era, basic fuels were easy to obtain from large, near-at-hand energy deposits in relatively safe and friendly locations.  “One thing is clear,” he said, “the era of easy oil is over.  Demand is soaring like never before… At the same time, many of the world’s oil and gas fields are maturing.  And new energy discoveries are mainly occurring in places where resources are difficult to extract, physically, economically, and even politically.”

Alberta’s tar sands a slow-motion equivalent of the Gulf disaster - If you were President Obama, what would you do about the tar sands fields in Alberta?  He is being asked to approve or reject a pipeline extension that would carry 900,000 barrels per day of Canadian crude deep into the United States.  It has to be exceedingly tempting to just say “yes”.  After all, Canada is our biggest and friendliest source of oil, and at least the oil wouldn’t be coming from offshore.  And no one expects the U.S. to cut off its demand for oil overnight.  Nonetheless, the tar sands pits in Alberta are just about the last place we should turn for crude oil. From all reports, harvesting Alberta tar sands is an environmental disaster.  A new report from Ceres equates the environmental threats from tar sands with the hazards related to oil from the Gulf.  There is also no doubt that it is a mistake from a greenhouse gas perspective.

View from the Outside - Can We actually do anything about Oil? Everyone wants it, no one wants the aftereffects of it. What ended the Roman Empire–almost All would say Conquest by barbarians. The actual fact was not War, but banditry; the real physical loss of cargo Transport safety. One could not travel anywhere, or send Goods anywhere. Today, We ship Fuel thousands of miles to provide the energy to ship Goods thousands of miles. It is particularly serious as We insist that the Goods must be produced far from home; a double whammy of cheap Wages, and the heavy environmental Costs of close Production. We are several degrees away from au naturale living, and very few alternatives mainly owing to the press of population increase. The question becomes How do We return to a safe livelihood.

Beyond BP: Looking Past the Oil Spill -Today, we're looking further down the road. It's a little more complicated than simply saying that onshore plays will be more attractive than the deepwater fields. Even my four-year-old niece knows that much... What most people don't realize, however, is just how bad things are going to get. One thing we can always count on to exacerbate a situation is a politician who needs a second term. Having said that, I have no doubt in my mind that President Obama will extend the current drilling moratorium in the Gulf of Mexico.In the Gulf of Mexico, up to 300,000 barrels of oil per day could be lost if new projects are delayed. At the very least, we can count on that lost oil from the Gulf of Mexico. Unfortunately, it's not just the deepwater oil that we're losing each year. We know that U.S. oil production isn't teetering on the brink of collapse — it is collapsing. This shouldn't come as a surprise to us. If it does, then you might be new around here.

Oil supply crunch would leave us all in deep water -THE LUTINE Bell, salvaged from the wreck of a British frigate that sank off the Netherlands in 1799, is preserved in an elaborate Corinthian rostrum standing rather incongruously in the high-tech atrium of Lloyd’s of London. By tradition, it was rung once when a ship was lost at sea, so that all the company’s insurance brokers and underwriters heard this bad news at the same time. The bell is tolling again now, this time for the imminent end of cheap and plentiful oil. Last week, Lloyd’s – in collaboration with think tank Chatham House – issued a White Paper, Sustainable Energy Security: Strategic Risks and Opportunities for Business, which explicitly warned that we are heading towards a global oil supply crunch and price spike – in other words, “peak oil”.

Waiting for the Millennium - Part Two: The Limits of Magic - The first half of this essay sketched out the unfamiliar terrain that’s beginning to open out in front of the peak oil community as the concept of hard energy limits seeps back out into public awareness, after thirty years of exile in the Siberia of the imagination where our society imprisons its unwelcome truths. One probable feature of that landscape is the rise of revitalization movements among people in the industrial world. Last week I talked about those movements in general terms, but it’s possible to explain them a good deal more clearly by saying that revitalization movements try to cope with drastic and unwelcome social change through ritual action.

Human race ‘will be extinct within 100 years’, claims leading scientist - As the scientist who helped eradicate smallpox he certainly know a thing or two about extinction. And now Professor Frank Fenner, emeritus professor of microbiology at the Australian National University, has predicted that the human race will be extinct within the next 100 years.He has claimed that the human race will be unable to survive a population explosion and 'unbridled consumption.’Fenner told The Australian newspaper that 'homo sapiens will become extinct, perhaps within 100 years.' 'A lot of other animals will, too,' he added. 'It's an irreversible situation. I think it's too late. I try not to express that because people are trying to do something, but they keep putting it off.'

BP Is Pursuing Alaska Drilling That Some Call Risky - BP is moving ahead with a controversial and potentially record-setting project to drill two miles under the sea and then six to eight miles horizontally to reach what is believed to be a 100-million-barrel reservoir of oil under federal waters. All other new projects in the Arctic have been halted by the Obama administration’s moratorium on offshore drilling, including more traditional projects like Shell Oil’s plans to drill three wells in the Chukchi Sea and two in the Beaufort.  But BP’s project, called Liberty, has been exempted as regulators have granted it status as an “onshore” project even though it is about three miles off the coast in the Beaufort Sea. The reason: it sits on an artificial island — a 31-acre pile of gravel in about 22 feet of water — built by BP.

Oil spill: BP reassures over Russian, North Sea assets -BP was on Tuesday also forced to pay attention to operations outside the US, after saying it wants to divest $10bn (£6.8bn) of assets a year to pay for the spill. It has so far only confirmed the disposal of its French retail business to Israel’s Delek Group for €180m (£150m). Bernard Looney, the boss of BP’s offshore UK oil and gas production, told staff in an internal email that operations in the North Sea are under review after the Gulf of Mexico oil spill, suggesting some could be sold off. But he ruled out a total exit from the UK. “I can confirm that, while BP is reviewing its portfolio following the Deepwater Horizon incident, BP has no intention of exiting the North Sea,” he said, ahead of a tour of UK oil rigs. “We have been here more than 40 years, have a very significant investment programme over the next five years and plan to be here for decades to come.”  Tony Hayward, its chief executive, is now expected to fly to Russia for talks, after the country demanded clarity on how the leak will affect the TNK-BP joint venture.

Russia Cuts Gas Deliveries to Belarus - Russian President Dmitri A. Medvedev on Monday ordered Gazprom to cut deliveries of natural gas deliveries to Belarus over unpaid debts, a step which could jeopardize supplies to Poland and other European countries.  At a morning meeting with Mr. Medvedev, Aleksei Miller, the chief executive of Gazprom, said Belarus was willing to pay its debts through barter, and Mr. Medvedev tartly refused such an arrangement, saying, “Gazprom cannot accept payment for debt in pies, butter, cheese or other means of payment.”  He then ordered Gazprom to gradually reduce supplies sent through Belarus, whose pipelines carry roughly 20 percent of Russia’s experts to Europe.

Russia cuts further gas supplies to Belarus: reports -- Russia decreased natural-gas supplies to Belarus by 30% on Tuesday, deepening cuts put in place the previous day and escalating the two countries' dispute over unpaid debt, according to media reports.State-controlled gas firm Gazprom reduced deliveries to Minsk by 15% on Monday and said the reduction may eventually reach up to 85%. The two sides have been unable to resolve a dispute over unpaid debts. Gazprom says that Belarus owes it $192 million for gas it has already consumed, while Belarus says that Gazprom owes it $260 million in gas transit fees, according to reports.

Russia to drop capital gains tax to attract investment - Russia will scrap capital gains tax on long-term direct investment from 2011, President Dmitry Medvedev has said. Mr Medvedev said that in terms of improving Russia's investment climate "we, I hope, are moving forward". He also said the number of "strategic" firms, in which foreign investment is restricted and which cannot be privatised, would fall from 280 to 41. Mr Medvedev has been promoting the idea of "modernisation", including diversifying the Russian economy. Also, many investors have been wary of coming to Russia because of corruption and the dominant role the state plays in Russia's business life. Mr Medvedev told the St Petersburg International Economic Forum that long-term direct investment was "necessary for modernisation".

China Rare Earth Limits Said to Be Targeted by U.S - China’s restrictions on the export of rare earths used in the manufacture of cell phones and radar are being targeted by the U.S. Trade Representative for a potential trade case, according to industry representatives. The U.S. has asked business groups and unions to provide evidence that China is hoarding these elements for a case that may be filed at the World Trade Organization, according to the people, who asked not to be identified because the talks were confidential.  China controls 97 percent of production of the materials, known as rare earth elements, giving it “market power” over the U.S., the Government Accountability Office said in a report in April. China restricts exports of the elements through quotas and export taxes of as much as 25 percent, the GAO said.

An unlikely resource race: China v India in Afghanistan - Unlikely as it may seem, war-torn Aghanistan is emerging as a battlefield in a quite different sort of conflict - the fight over natural resources between China and India.The poverty-stricken country is said to be sitting on a largely untapped treasure trove of minerals, including copper, iron, ore, gold, lithium and previous gems stones, worth an estimated $1,000bn. While the war makes it difficult to imagine how any investor would commit the billions of dollars that would be needed to exploit even a fraction of these resources, that is not stopping China and India from staking out the ground. India, already a major donor to the Afghan reconstruction effort, is pulling itself up to the table hoping for a chunky slice of the mineral resource cake after China’s successful grab of the African resource market, implemented before New Delhi even began thinking about such a strategy.

India Targets Double Digit Growth In 2012 India has set an ambitious target of making 2012 the year of double digit growth even as it grapples with the twin problems of mounting deficit and rising inflation.  India is back on a high growth trajectory," finance minister Pranab Mukherjee said in a presentation here Monday to the Institute of International Finance, a global association created by 38 banks of leading industrialized countries in 1983 in response to the international debt crisis of the early 1980s.

Beating China, India turns world's top spam source -A series of recent reports by Internet security companies found India has become the top spam-producing nation. After tracking over 3 million spam messages for the week ending June 13, ICSA Labs found the maximum number, 424,224 — or 14 per cent — originated from India. The second biggest source was Russia with 11.5 per cent. While analysts have questioned the fact that China does not figure in that Top 10 list, there is consensus that India is, at the very least, among the top three nations spewing spam. Similarly, according to the statistics featured by Project Honey Pot, the top country where spam servers are located is India, accounting for 16.9 per cent, with Brazil a distant second at 8.7 per cent. The share of countries where spam has traditionally been known to originate from, like China, has dropped, though that country still remains at Number One in Project Honey Pot’s all time list.

China Sends Mixed Signals on Currency - China, under pressure from government around the globe, announced over the weekend that it would proceed with a long-awaited overhaul of its currency regime, igniting hopes that the renminbi is on course to rise against the dollar after Beijing prohibited any gains against the U.S. currency for nearly the past two years. Many economists believe the renminbi is undervalued and gives Chinese goods an unfair advantage in foreign markets.  Early Tuesday, China’s central bank set a key daily reference rate for the renminbi at its highest level in five years, up 0.4 percent from Monday and in line with that day’s gain in over-the-counter trading. It was a closely watched move that suggested Beijing was open to a further rise in the exchange rate.  But by midday, financial news agencies were quoting unidentified currency traders saying that large state-owned banks were buying dollars for renminbi..

Monetary Mark-Up – China Floats the World! - Despite the rhetoric, there was no change in the official Yuan peg (but the currency traded higher) and, of course, the timing of making the announcement right before the G20 meeting (next weekend) is to take the issue off the table as things were really coming to a head with the US on the currency issue. On the whole, it’s a good thing because China needs to slow their growth anyway and this will stall demand for their goods and thus their consumption of commodities while a rising currency will make it cheaper to buy those goods so we can imply better margins at factories – the only question is:  How much will it impact sales?  Clothing sales are the most vulnerable as Chinese sweat shops must compete with sweat shops in Chinatown as well as Vietnamese, Taiwanese, Korean and even African sweat shops in a business where pennies matter a lot.

How to read Beijing's currency move - The Commerce Ministry, which has close connections with the country’s exporters, has been leading the campaign to stop the renminbi from rising, sometimes in an unusually public and blunt manner by the standards of the Chinese system. Yet the few public statements from the ministry so far this week have been nothing but polite. What to make of the low-key response? It would be bad form to openly criticize a new policy announcement like this, although the cynic might say the Commerce Ministry is quite comfortable with the very modest level of appreciation so far. But looking forward, the public statements of the ministry could contain important clues. If officials start complaining openly about the impact of a rising currency, it could mean that pressure is building within the system for more decisive renminbi appreciation.

China's Hu Buys Time at G-20 With Yuan Announcement  - Chinese President Hu Jintao may have succeeded in removing the yuan’s valuation from debate at this week’s Group of 20 leaders’ summit, economists and political analysts say. How much time he’s bought depends on how flexible the currency will become. Days before China’s central bank announced on June 19 that the yuan’s “flexibility” would increase, officials said the currency’s value was not a suitable item for discussion at the G-20 meeting in Toronto. Hu will meet with President Barack Obama and other world leaders at the June 26-27 summit to discuss items ranging from the global response to the European sovereign-debt crisis to increasing the influence of developing countries in the International Monetary Fund.

It's yuan or the other - APART from inspiring the writers of The Economist to a slew of truly awful puns ("Yuan for the money", "yuan-way bet", and of course the title of this post), the ups and downs of China's currency have prompted the question: what is it actually called? We say "yuan", while the Financial Times, part-owner of The Economist, is a stickler for "renminbi". The Wall Street Journal's markets blog asks what the difference is, and comes up with a slightly watery answer: It seems like there’s not a really good equivalent to renminbi in American English, maybe something like “legal U.S. tender.” Yuan is renminbi, just like the dollar is legal U.S. tender—but so are dimes, nickels and quarters. However, there are better comparisons in Europe. Renminbi, literally "people's currency", is the more formal name, like "pound sterling" or "Deutschmark", which are more often used in official contexts or when discussing market movements:

It is not yet Saturday ergo it will never be Saturday - It is clearly in China's interest to allow its currency to appreciate against the dollar. Doing so is necessary to reduce inflation pressures and reserve accumulation, and to move it's economy toward a more balanced—and less vulnerable to trade shocks—economy. Chinese leaders recognise this, and they're on the record acknowledging the fact. China also understands that an angry America is not in its interest, and since America wants China to appreciate China must take that into consideration. Based on all of this, China will allow the currency to rise against the dollar.But there are complicating issues. One is that the government doesn't want to be seen as doing America's bidding. Another is that there are powerful interests in China who do not want the yuan to rise. And a third is that a careless appreciation could generate serious economic costs, either by forcing exporters to adjust too rapidly or by attracting hot money inflows from traders betting on continued appreciation, leading to rapid inflation and asset bubbles. So China has to tread carefully.

How will the new exchange rate regime affect the chinese economy? - VoxEU - China’s announcement that it will allow the renminbi to move upwards against the dollar was welcomed by US and European leaders. This column discusses new empirical research on what happens to economies when they exit exchange rate pegs that are resisting appreciation. Using data on 27 such instances, the authors find that growth slows, but only modestly, and there is no evidence of economic and financial damage as a result – certainly nothing like the fears that China's next decade could look like Japan’s lost decade.

A big step in China’s global economic maturation - China’s decision to gradually abandon their hard peg to the US$ takes us back to pre July ‘08 when it more freely floated. Yes, this comes right before the G20 meeting and with growing international pressure, particularly from the US Congress, but China understands that the move is in their best long term interests in terms of growing the purchasing power of their citizenry, tempering inflation pressures and slowing the incredible trade imbalances that has seen their FX reserves grow to $2.4 Trillion, about 70% of which is in US$s. For China’s growing stature in the world this is great news, although short term difficult for low margin Chinese manufacturers. To those critics in the US of China’s fixed peg, be careful now of what you wished for. The Renminbi has taken a big step to being a global reserve currency and smaller trade imbalances will mean less Chinese purchases of US Treasuries.

Farmer’s apartments in China - Chongqing, which is the biggest city in western China, is very hilly.  Thus 30,000 “stick men” make a living there carrying goods on the end of long poles: Like most rural workers in big cities, Gui Laiyun sleeps in a basic 80-square-meter apartment, which he shares with about 50 other men. The beds here are made from wooden boards and rusty scaffolding. Rent is just 1.5 yuan a day. For you Americans, that’s 22 cents a day for 1.6 square meters, or 17 square feet, of living space.  That means about 6 men in a 10 by 10 foot room, as you can see from the picture in this link.  There are more Chinese people living in tiny places then there are people in America.  It’s a good example of what Franklin Roosevelt referred to as “one third of a nation ill-housed,” although of course it is more than 1/3rd.

WUXI | New Farmer's Apartments | 328m | 1076ft | 74 fl (photo gallery)

Sweet Spot for China’s Blue-Collar Revolution - Andy Xie - China has a lot more factories than the West has buyers for its products, so exporters have generally assumed that their powerful clients would never accept higher prices. But business costs have been rising in China, manufacturers are well-connected to markets and infrastructure, and buyers are realizing that their supply options are not unlimited. A recent spate of worker strikes at factories in China partly reflects a search for a new balance at the labor end of the manufacturing landscape, especially among young, blue-collar workers. On top of that, export manufacturers have been talking about labor shortages for the past year or two. But "labor shortage" is an oxymoron: Any product in shortage is simply not priced right. These conditions point to a need for adjusting the price of labor in China. Western buyers should take note. Although individual factories may lack pricing power, China has national pricing power. Every factory in a given sector has a uniform wage level. And China is the factory of the world.

As China Aids Labor, Unrest Is Still Rising - Chinese workers are much more willing these days to defend their rights and demand higher wages, encouraged by recent policies from the central government aimed at protecting laborers and closing the income gap. Chinese leaders dread even the hint of Solidarity-style labor activism. But they have moved to empower workers by pushing through labor laws that signaled that central authorities would no longer tolerate poor workplace conditions, legal scholars and Chinese labor experts say. The laws, enacted in 2008, were intended to channel worker frustrations through a system of arbitration and courts so no broader protest movements would threaten political stability.  But if recent strikes and a surge in arbitration and court cases reflect a rising worker consciousness partly rooted in awareness of greater legal rights, they also underscore new challenges in China.

Chinese Auditor Issues Warning on Local Debt – China’s central government has begun a series of investigations this week into how much debt was incurred by local governments last year as part of economic stimulus programs undertaken in response to the global financial downturn. Few experts expect anything like the European debt crisis to afflict China. The central government has very little debt by international measures, and ample capacity to bail out local governments and banks that lent to them. But a surge in defaults by local governments that require assistance from Beijing could add to the central government’s liabilities, leaving less room for the government to spend money in the future as China’s population ages. China has barely begun to set up a national pension system, and faces growing demands to provide more medical care.The announcement came a few days after the nation’s top auditor warned that mounting local government debt could undermine the recovery in some parts of the country.

China auditor warns authorities face default risk — Local governments in China are at risk of defaulting on loan repayments, state media said Thursday, following a state-sanctioned lending binge in 2009 aimed at boosting economic growth. The warning from the director of the National Audit Office highlights growing concerns among senior leaders over excessive borrowing by local governments to fund infrastructure and other projects. Some authorities have taken on more debt than they will be able to cover with their earnings, chief auditor Liu Jiayi was quoted by the China Daily as saying. The ratio of debt to annual fiscal revenues exceeded 100 percent in seven provinces, 10 cities and 14 counties, with the highest level reaching 365 percent, the Global Times said without naming the areas

White elephants in China? - WHEN China announced its stimulus package in 2008, it followed a simple rule—spend and spend big. Since then the country's banks have lent heavily for big infrastructure projects. But over the past few months there have been concerns that not all of these investments were wise and Chinese banks could be saddled with bad loans. The complicated holding structure of many local investment companies also makes it difficult to precisely estimate the level of debt that local governments have, since many of the loans are directly or indirectly backed by them. But Nicholas Lardy thinks that these worries are exaggerated. In a column in The Wall Street Journal he argues that China's massive investment in infrastructure is prudent and justified, given the country's needs. And if some of the loans do start to go bad, Mr Lardy says the government can recoup the loss by raising fees on projects that are currently underpriced.

China’s "overstimulus" spending - In late 2008, with the financial crisis rippling through the global economy, China's leaders embarked on a two-year, $586 billion spending program to try to stave off a recession and keep the Chinese economy growing.Chinese leaders followed a simple mandate: Spend and build. China is building tens of thousands of miles of expressways at a pace unseen since the U.S. interstate boom in the 1950s, and it is on track to pass the United States in total highways in the next decade. Among other infrastructure projects  which now amount to 15 percent of China's gross domestic product  are nearly 100 new airports, some serving isolated cities few outsiders have heard of, and dozens of subways. "They basically got started about three months earlier than we did, and it was bigger," Now a year and a half into the spending spree, and with the stimulus set to end in just six months, many economists and others here are asking pointed questions: Does China really need all this infrastructure? And what's going to happen when the bills come due?

China's housing boom spells trouble for boyfriends. - Many women won't marry a man who doesn't own a home. This recent shift, along with soaring real estate prices, has created a woefully frustrated class of bachelors. "A man is not a man if he doesn't own a house," said Chen Xiaomin, director of the Women's Studies Center at the Shanghai University of Political Science and Law. "Marriage is becoming more and more materialistic. This is a huge change in Chinese society. No matter how confident a woman is, she will lose face if her boyfriend or husband doesn't have a house." Dating websites are now awash with women stipulating that hopefuls must come with a residence (and often a set of wheels) in tow. "I'm 25 years old, looking for a boyfriend.... I want you to have an apartment and a car.... The apartment has to be built after 2000 and the car has to be better than a minivan," read one post.

China Bank Debt Repackaging Raises Risk of Crisis, Fitch Says - China’s record loan growth and the repackaging and selling of debt by its banks has raised credit risks “considerably,” and might lead to another financial crisis, Fitch Ratings Ltd. said.  “Credit is disappearing from bank balance sheets, resulting in a pervasive understatement of credit growth and credit exposure,” Charlene Chu, Fitch’s senior director of financial institutions for China, said at a conference in Singapore today. “But credit risk has not disappeared, merely been transferred to investors.”  China’s government unleashed a record 9.59 trillion yuan ($1.4 trillion) lending boom last year to stimulate the economy amid the global credit crunch. The nation’s banking regulator has told lenders to report on their risk exposure by the end of this month to help prevent a pileup of bad loans.

And Now, The Fun Really Begins…Things seem to be moving rather quickly in China.  First, there was the move to increase flexibility.  Now, there’s this: China plans to introduce credit derivatives soon to control risks in the nation’s growing domestic bond market, according to the National Association of Financial Market Institutional Investors.“We will make this a true risk-hedging instrument for the growth of the financial market,” unlike how the derivatives were used during the financial crisis, Shi Wenchao, secretary- general of the government-backed body, said at a briefing in Beijing today. via China Plans Credit Derivatives Soon to Limit Bond Risk, Investor Body Says – Bloomberg. It seems all at once that China has been moving from a regime that is rather tight-fisted to one that isn’t.  From zero-to-gun-slinging capitalist in no time flat.

World Trade Volumes Dropped in April - World trade volumes fell in April for the first time since January, an indication that the economic recovery may be losing momentum. Figures released by the Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Thursday showed trade volumes fell 1.7% in April from the month earlier, having risen 4.0% in March. “Import volumes decreased worldwide in April, with the notable exception of Japanese imports–quite the opposite of last month’s pattern,” the CPB said. “On the export side, growth was remarkably high in…Japan, while Central and Eastern Europe and Latin America continue to perform well also.” The CPB’s figures are closely watched by policy makers, including a number of central banks because they provide the earliest available measure of global trade.

Some Ruminations on Trade Flows, Trade Costs and Trends - One of the persistently challenges I consistently face in trying to model US import and export flows is the sensitivity of the results to the inclusion of time trends. Time trends are bothersome because they are, in one sense, a measure of our ignorance. That's a worry as we consider the feasibility of global rebalancing [0] [1] [2] [3]. One can whittle away at the role of time trends by including in the standard formulation a supply factor, so that for instance US imports depend on US income, the US dollar real exchange rate, and foreign export supply capacity. (How to proxy that latter variable is a vexed question). But in addition, we know that trade costs have varied over time (see the posts on de-globalization: [4] [5]).  Here are two graphs that highlight the potential importance of trade costs. The first graphs US log US durables and nondurables ex.-oil minus log GDP against the average tariff rate for US, Japan and European Union. Notice that as tariff costs decline, the trade intensity of GDP increases

Ironing trade out - MATT YGLESIAS spots an interesting story of protectionism at work: Today’s Washington Post has a fascinating piece by Peter Whoriskey about the last factory in America that makes ironing boards. It stays in business in the face of Chinese competition only thanks to the fact that it’s persuaded congress to impose an extremely heavy tax “of 70 to more than 150 percent on its Chinese rivals.” If I proposed a 70-150 percent tax on sugary sodas, there’d be a big political debate about it, but this kind of thing goes unnoticed because it’s filed in people’s “obscure trade dispute” mental box rather than their “taxes” mental box. But make no mistake, it’s a tax and it results in more expensive ironing boards. And I think he draws a useful conclusion: The problem for me is that with unemployment at nearly 10 percent and projected by the Powers That Be to stay above 8 percent for years it’s really hard for anyone to say with a straight face that if the factory closes down the employees will be able to find new jobs.

Protectionism and trade: The dog that didn't bark - Most people think of tariffs as the main instrument of protectionism, but we've learnt during the crisis that there are many more. For instance, bail-outs can be protectionist; directions to banks to lend more likewise. Some of what we've learned has been thanks to the work of a network of economists who've contributed to something called the Global Trade Alert—a site that tracks every sort of potentially protectionist action taken by governments. The GTA site can tell us, for example, about how many tariffs India has raised, which of its trading partners they affect, etc. It lets you see which countries have been the most persistent offenders, which are the most sinned-against, and so on.The GTA is just out with its latest report, and its director, Simon Evenett, reckons that the biggest protectionist steps taken so far—he and his colleagues identify 16 "jumbo" measures—cover 10% of world trade. This is a lot more than a WTO estimate of 0.4%. Partly, this is because the GTA's definition of what constitutes protectionism is wider than the WTO's. Yet, 10% sounds like a lot. To compare, trade volumes fell by around 12% last year—their biggest fall since the Depression.

OECD Factbook - The OECD Factbook is now online, and hooked up to all sorts of online datasets and interactive maps/graphs.

International Economic Update - FRB Dallas - The Recovery, Growth and New Signs of Financial Market Strain - The current international situation can best be described as strong economic growth in emerging markets, a continued economic recovery in advanced economies and financial market strains in Europe. European sovereign debt problems persist, and the potential for contagion beyond the euro area remains. Inflationary pressures are still subdued and are expected to stay at modest levels. In addition, the number of countries beginning to tighten monetary policy has increased, with the Bank of Canada the first G-7 central bank to raise rates.

Poorer Countries Taking Over Global Economy - Ten years ago, the world’s richest countries accounted for a significant majority of the globe’s economic activity. But the pendulum is swinging in the other direction, according to the Organization for Economic Cooperation and Development. A new O.E.C.D. report finds that rich countries and poor countries now each contribute about an equal share of the global economy. And by 2030, developing countries will account for 57 percent of world G.D.P.: “[T]he economic and financial crisis is accelerating this longer-term structural transformation in the global economy,” according to a release from the agency. The projections are based  on research on economic growth by the late Angus Maddison, who tried to model world G.D.P. numbers going all the way back to Year 1.

World’s rich got richer amid ‘09 recession: report (Reuters) – The rich grew richer last year, even as the world endured the worst recession in decades.A stock market rebound helped the world's ranks of millionaires climb 17 percent to 10 million, while their collective wealth surged 19 percent to $39 trillion, nearly recouping losses from the financial crisis, according to the latest Merrill Lynch-Capgemini world wealth report. Stock values rose by half, while hedge funds recovered most of their 2008 losses, in a year marked by government stimulus spending and central bank easing."We are already seeing distinct signs of recovery and, in some areas, a complete return to 2007 levels of wealth and growth," Bank of America Corp wealth management chief Sallie Krawcheck said.

Asian Millionaires Overtake Europeans - The net wealth of Asian millionaires has eclipsed that of rich Europeans for the first time, largely because of the relative health of stock markets in Hong Kong, India and China last year, according to a new survey. The annual Merrill Lynch Wealth Management /Capgemini analysis of investors with $1m or more in assets found that as of late last year, there were 3m millionaires in both the Asia-Pacific and Europe. The survey quantified the wealth held in Asia at $9,700bn, compared with $9,500bn in Europe.The survey defines millionaires as people with net financial wealth of more than $1m, excluding their primary residence. North Americans are still the best-off. At the end of last year, the continent was home to 3.1m millionaires worth $10,700bn.

Japan Plan Fails to Show Ability to Cut Debt, S&P, Fitch Say (Bloomberg) -- Japan’s fiscal strategy released today has yet to demonstrate to debt-rating companies that the country is on a path toward curtailing the world’s largest public debt.Today’s statement “does not have enough details for us to reach a firm conclusion or for us to say that we have confidence that Japan has a detailed fiscal consolidation plan,” Andrew Colquhoun, director at Fitch Ratings’ Asia- Pacific sovereign group, said in an interview in Tokyo today. Takahira Ogawa, director of sovereign ratings at Standard & Poor’s in Singapore, said that while the strategy is “better than nothing,” the country’s credit quality is “still eroding slowly” and it would be difficult to earn investors’ confidence with the plan. He said Standard & Poor’s maintains its “negative” outlook on Japan’s AA credit rating.

Japan's economy: Nowhere to hide - The problems of Japan run so deep that whatever solution Tokyo's policymakers offer up, the potential downside could be more frightening than the intended benefits. But we can't blame newly installed Prime Minister Naoto Kan for not trying. Since replacing the discombobulated Yukio Hatoyama this month, Kan has proposed a host of initiatives, which have actually sparked some rare optimism in Japan. It seems to me that his contradictory programs won't provide Japan with what it really needs – growth. Growth, though, is what Kan is promising, or at least a Japanese version of it. In a long-term economic strategy report approved by Kan's cabinet a few days ago, his government vowed to achieve 2% real growth annually over the next decade. That may not sound like much, but to Japan that would be scorching. The economy has reached GDP growth of 2% or more only five times since 1992, according to IMF data.

Collateral damage - THE old adage that timing is everything was proven yet again this week, in the second round of Argentina’s debt restructuring. When details of the country’s planned swap became public in March, analysts valued it at around 53 cents on the dollar—a hefty profit for investors who had scooped up Argentina’s defaulted bonds in the teens. Most forecasters expected around three-quarters of creditors who rejected the country’s original exchange offer in 2005 to take it this time, which would bring the total acceptance rate to 94%. However, the opening of the deal was delayed for weeks by regulators in Italy, where three-quarters of retail investors who held out of the first exchange are located. That pushed back the start date to May 3rd—by which point Greece’s debt crisis, which many observers have compared to Argentina’s a decade before, had exploded. The resulting flight to quality drove down the prices of all risky assets, particularly other dodgy sovereigns like Argentina

The worst is not over in central and eastern Europe - Reliance on capital inflows combined with forthcoming changes in European banking regulations leave central and eastern Europe countries extremely vulnerable. Capital inflows were larger in emerging Europe and fell more severely during the crisis than in other emerging economies. A substantial share of these flows were cross-border loans from western European parent banks to their emerging European affiliates. These inflows created macroeconomic and financial sector vulnerabilities — larger current account deficits, rapid credit growth, worse fiscal positions, and heavier indebtedness (often in foreign currencies) of households in a large part of the region.The latest data (2009 Q4) show that cross-border loans into banks and companies continue to fall in many countries across the region even as foreign direct investment equity inflows continue to hold up. Currently, the potential spillover risks from foreign parent banks are very high in the CEE countries. With such interdependence, any difficulties confronted by the big foreign parent banks will rebound on the CEE area. One such cloud is the draft Basel capital accord and liquidity proposals.

SDR Strawman & Gold-Backed Euro - As preface, consider the best parts of the patchwork SDR vehicle, and what benefits it offers. The Special Drawing Rights, denominated in US dollars, has their nominal value derived from a basket of currencies, tied to fixed amounts of Japanese Yen, USDollars, British Pounds, and Euros. The proportion each of these four currencies contributes to the nominal value of a SDR, reset every five years. A greater role for the SDR either to store foreign acquired reserves or to conduct transaction settlement does offer greater stability. It does so by essentially fixing the currency exchange rates within the participating group of currencies. While ignoring the reality of changing environment, it enforces stability from instilled constancy. Maybe the SDR could reset the component percentages every six or twelve months, instead of five years. The world is changing fast. The other benefit would be the greater confidence that comes when foreign reserves can be placed in a stable warehouse shed, even if the place is rotten, has rancid acid spread about, and smells horrid.

What Euro Crisis? - The rescue packages were put together on the weekend of May 8-9 in Brussels. In addition to the €80 billion program already agreed for Greece, the European Union countries agreed on a €500 billion credit line for other distressed countries. The International Monetary Fund added a further €280 billion.The driving force behind all this was French President Nicolas Sarkozy, who colluded with the heads of Europe’s southern countries. French banks, which were overly exposed to southern European government bonds, were key beneficiaries of the rescue packages.   Proclaiming a systemic crisis of the euro, Sarkozy seized the opportunity and took Germany by surprise. He asked for huge sums of money and, as Spanish Prime Minister José Luis Zapatero reported, threatened to pull France out of the euro and break up the Franco-German axis unless Germany opened its purse. After just two days of negotiations, the Maastricht Treaty’s no-bailout clause, which Germany once had made a condition for giving up the Deutsche Mark, was defunct. The “Club Med,” as Germans call the southern countries, had taken over Europe.

Greek Banks Borrow $110 Billion Through ECB Repos, Moody's Says (Bloomberg) -- Greece’s banks have borrowed about 89.4 billion euros ($110 billion) in so-called repurchase agreements with the European Central Bank, according to Moody’s Investors Service. Greek banks turned to the ECB for cash after the global financial crisis that peaked in 2008 and this year’s sovereign fiscal debacle curbed their access to wholesale funding and bond markets. The nation’s banks have also been hurt by losing about 7 percent of their deposits, totalling an estimated 21 billion euros, Moody’s said in a report yesterday. “Changes to the funding profile of Greek banks have widened maturity mismatches and depleted” their “market- funding franchise,”

Fatal bombing may be ominous for debt-hit Greece (Reuters) - A bomb explosion at the Greek ministry in charge of police could be an ominous show of strength by militants in a nation suffering austerity cuts that have sparked street protests and scared off tourism. Thursday night's blast, which killed one official, suggested that a tiny violent fringe with a bent for bombings remains active despite the arrests in April of six suspected members of its most militant group, the leftist Revolutionary Struggle. "This is the last thing that Greece needed," said George Kassimeris, a Greek expert on terrorism at Wolverhampton University in England. "All the implications are extremely negative for Greece."

Cost of Insuring Greek Debt Hits Fresh Record—The cost of insuring Greek sovereign debt against default rose further in early trading Friday to hit a new record, amid growing market anxiety that Greece may suffer from a fall in tourist arrivals. Greece's five-year sovereign credit default swaps were quoted at 11.31 percentage points compared with Thursday's closing level of 11.27 percentage points, according to data provider CMA DataVision. That means the annual cost of insuring $10 million of Greek government debt for five years is $1.131 million. CMA said that this price implied a 69% probability of default over the next five years. Since Wednesday, Greece's five-year CDS has widened 1.97 percentage points making the country the second-riskiest sovereign borrower in the world, behind Venezuela, according to CMA figures

What might history tell us about the Greek crisis? - The Greek crisis may in many ways seem unprecedented, but of course it isn’t.  I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen.  I would suggest that there at least five things we can “predict” with some degree of confidence from looking at historical precedents:

  • 1.  The euro will not survive in its current form.
  • 2.  This is the big one
  • 3.  The European crisis will be accompanied by a trade shock.
  • 4.  The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness
  • 5.  Greece’s insolvency will not be recognized for many years.

After Hitting 1,100bps In Spread, Greece Finally Relents And Puts (Parts of) Itself Up For Sale - Today, Greek CDS hit an all time wide in spread. For the first time, this unpleasant phenomenon seems to have registered in the minds of Greek oligarchs, as finally, after months of dithering, the country is taking serious steps to moderate its bankruptcy. The steps in question are asset sales, and the assets in question are islands including portions of Mykonos, and all of Nafsika. So if you work in Goldman and need a nice place (with a non extradition treaty in place very soon) to stash the several hundred gold bar collectionamassed over the past two years of record bonuses, here is your chance for a nice, cheap offshore vault, ironically in the very country whose finances you overrepresetned for years.

Greece takes Germany's advice to sell off islands - Greece appears to have heeded the advice of senior German politicians after the recession-hit country announced it was to sell off some of its sun-baked islands in order to help pay off its crippling debts.  Greece has been forced to consider all options after being bailed out by the European Union and International Monetary Fund to the tune of €110bn in May.  Parts of Rhodes and Mykonos are among those areas up for sale or long-term lease. Those looking for an entire island may want to consider 1,235-acre Nafsika, in the Ionian sea, which is on sale for €15m. Chinese and Russian investors are thought to be the main players, with the inevitable speculation that Roman Abramovich may be interested – and the equally inevitable denials.

Concerns mount over eurozone lenders - Investor worries over eurozone banks resurfaced on Tuesday after a warning by a European Central Bank governing council member that some faced funding difficulties.  The worries increased the cost of buying protection against bond default in the sector.  Christian Noyer, governor of the Banque de France, appeared to go further than other ECB council members in admitting that “some banks have started facing increasing funding problems”. He was speaking on Monday but markets only started to react on Tuesday.  Mr Noyer gave no further details but in an interview with La Tribune suggested one reason for heightened nervousness was the expiry at the end of this month of €442bn in 12-month loans provided by the ECB a year ago

Stress tests results likely to be broadened - Meetings to be held this week to determine a widening in the number of banks subject to tests, the scope of the tests, and the manner of publication; EU Commission hopes to have a procedure in place that is tougher than that in the US; the Baltic Dry Index (remember it?) is down again sharply – a possible indicator of a double-dip recession; China reverses the reversal of its policy shift and also a marginal in the reference rate of the renminbi; Gunther Schnabel and Andres Hoffmann argues that it won’t make any difference, because China will continue to sterilize and thus drive excess capital into the export sector; George Magnus says this was just a symbolic gesture to placate the hawks in Washington; Helmut Schmidt says Merkel should have co-ordinated with Sarkozy, and she should not have dramatised the situation; the Americans, meanwhile, are toning down their anti-German rhetoric ahead of the G20, having looked at the numbers of the German austerity programme.

Stress tests are good, but not enough - Thank God for José Luis Rodríguez Zapatero, the Spanish prime minister. For the first time in the three years since the outbreak of the financial crisis, a European leader has done something intelligent and surprising. Spain’s unilateral decision to publish the stress tests of its banks has bounced the European Union – at a summit in Brussels last Thursday – into following a Spanish lead, and to accept an uncharacteristic degree of transparency.  Does this mean that we are about to get on top of this wretched crisis? Well, so far, the EU has agreed to publish the stress tests of only 25 banks. They are not the main problem banks in the eurozone. There is a good chance that governments will extend those tests to other banks. But it is no reason to get too excited.  The fundamental problem is that governments are still fighting the wrong crisis. Global investors have recognised a fundamental truth, that this is not a sovereign debt crisis at heart, as Germany and the European Central Bank keep on telling us, but a banking crisis and a crisis of policy co-ordination failures.

OECD’s Gurria: Europe Must Show It Has ‘Plan B’ For Stress Tests - European policy makers must show they have a “Plan B” ready for after the stress tests which includes being ready to pump money into the region’s banks, if needed, Organization for Economic Cooperation and Development Secretary-General Angel Gurria said Friday.In an interview on the sidelines of the Group of Eight and Group of 20 meetings this weekend, Gurria said, “You have to make people understand what happens after this has occurred.” “If you’re ready to capitalize, you should say so. If you’re going to use the [European backstop] facilities, you should say so,” Gurria added, emphasizing “markets should know.”

In Spain, 100% Home Loans Are Back - Spain has one of the world's most-troubled housing markets, yet some buyers are suddenly able to get mortgages with 100% financing, and developers are building new homes on empty lots despite a huge glut. The reason: Spain's banks took possession of a large inventory of homes, buildings and land two years ago, forgiving the debt in hopes of heading off defaults. The plan was to resell the properties when the market bounced back and evade the worst impact of the looming housing crisis. But Spain's housing market has only gotten worse, and now the bill is coming due as the banks labor under the weight of an estimated €59.7 billion ($73.8 billion) in real-estate assets on their books. Under pressure to make further markdowns on the assets by their main regulator, the Bank of Spain, many banks are now scrambling to unload the properties as quickly as possible.In some cases, that means offering deals to consumers that are suspiciously like those that got the global housing market in trouble in the first place. The tactics include not just 100% loans, but also low initial teaser rates for buyers or initial payment deferrals for as long as three years.

Irish banks must scale a high debt mountain as eurozone crisis deepens – IT HAS the potential to become the ultimate financial pile-up. Irish banks, already desperately chasing deposits and managing crippling loan losses, have €77bn of liabilities maturing in 2010, with a large portion of this debt falling due in September and October. The debts must be either repaid or rolled over at a time of immense stresses in the European bond market. The problem is that, as with deposits, Irish banks could, if the process is not properly managed, end up competing with each other for funds at a vital period. This so-called 'wall of worry' represents the chief systemic threat to the banking sector in the latter half of this year, according to executives in the industry. The Financial Regulator is monitoring the situation closely, while the Department of Finance is said to be considering various contingency plans if some of the debt cannot be rolled over.

UK banks exposed for $230bn on loans in Ireland –THE UK would be facing the biggest losses if Ireland, its banks or mortgage borrowers defaulted on billions of euro in debts, economic statistics show. The UK's total exposure to Ireland comes to $230bn (€186bn), far higher than the approximately $175bn exposure of Germany.While German banks, insurance companies and pension funds have been upping their holdings of Irish government and bank debt, figures from the Bank of International Settlements show the UK with a far larger exposure, caused in part by loans to the private sector, made up of developers and mortgages borrowers. "Banks headquartered in the United Kingdom have larger exposures ($230bn) than banks based in any other country. More than half of those ($128bn) were to the non-bank private sector," said the organisation.

GIIPS labour costs not moving in the "competitive" direction - Rebecca Wilder - The GIIPS (Greece, Italy, Ireland, Portugal, and Spain) hope: exports. Fiscal austerity crimps the saving of the private sector. And provided the governments make good their plans to put on the fiscal straight-jacket, there’s no other impetus for growth except foreign demand. Financial crises are often accompanied by currency crises, i.e., Sweden 1991, which drives export growth if there is sufficient external demand. For Sweden, there was.For the GIIPS, there is not. But worse yet, there's not a possibility of a currency crisis deep enough to drive sufficient external demand growth in Greece, Italy, Ireland, Portugal, and Spain. Therefore, it’s generally understood that the GIIPS will get the economic boost if internal competitiveness is restored. Put another way, in lieu of a domestic impetus to economic growth, "internal devaluation” (Marshall Auerback calls it “infernal devaluation”), i.e, dropping hourly labor costs and final goods prices through productivity gains and reform, is the only economic means to attract a sufficient boost of external income to grow the economy.

European Yield Spreads Widen on Concern Debt Crisis Deepening - (Bloomberg) -- Belgian, Italian and Spanish 10-year bonds declined, sending their yield differences with benchmark German bunds wider, on concern the region’s debt crisis is deepening as the economic recovery sputters.The bonds also fell amid speculation banks are seeking to sell the securities to pay back money borrowed in the European Central Bank’s long-term refinancing operation that expires July 1. Germany’s 10-year bond yield stayed near the lowest in more than a week before a report due June 29 that economists say will show sentiment in the 16 euro nations fell this month. “This is a supply shock,” The 10-year bund yield fell one basis point to 2.60 percent as of 9:50 a.m. in London. The yield reached 2.59 percent yesterday, the lowest since June 15. The 3 percent security maturing July 2020 gained 0.04, or 40 euro cents per 1,000-euro ($1,235) face amount, to 103.45.

Citigroup says investors should no longer treat eurozone as a single economy - Head of equities at Citigroup explains how investors can best exploit the widening imbalances; Germany might cut taxes after all, UK imposes bank levy, and says Germany and France will also do so on similar scale; Spanish parliament ratifies labour reform package, but opposition says measures are not sufficient; Bank of Spain governor says he will publish the stress test results soon, no matter what the EU decides; FT Alphaville mocks Germany’s nein to demands from abroad for a further stimulus; US commercial real estate prices are down 41% from the peak; Alesina and Perotti argue that Germany is right going for austerity now; Martin Wolf says Alesina is wrong; Jean Pisani-Ferry, meanwhile, supports the ECB’s call for an Independent Fiscal Council.

The Euro and ECB  A couple days ago, The Washington Post had an piece by Ezra Klein on the ramifications of the European debt situation on the future of the European Central Bank (ECB). I found it particularly insightful on two counts.  The first was the institutional barriers that make the ECB so difficult to manage. Specifically, each of the member countries has different views towards inflation and unemployment, which means a single policy (which focuses on inflation), is going to be unpopular in many of the member countries, particularly if they are experiencing differing economic conditions.  The second insight was the ECB's reversion to buying debt. Like the Fed, it is basically restricted from buying debt in the primary market (direct from government). As a result, it resorted to buying debt in the secondary or open market (individuals and institutions that had already purchased government debt).

EU to Weigh Bond Levy on High-Debt States, Draft Says (Bloomberg) -- European governments will consider imposing a charge on bond sales by countries that violate debt rules in the wake of the Greece-driven fiscal crisis, a draft document showed. The extra interest would be paid into a blocked account and confiscated if the debt doesn’t come back into line. The proposal, to be discussed by economic officials from the 27 European Union nations today and by finance ministers on July 12, adds sanctions on debt to the bloc’s deficit penalties, which no country has suffered in the euro’s 11½-year history. Finance ministers are under pressure to tighten the coordination of budgets to prevent a repeat of the debt shock that prompted European governments to pledge as much as 860 billion euros ($1.1 trillion) to defend the euro.

EU wants to tax bonds of countries in deficit - There is a currently a race on for ideas about the craziest pro-cyclical policies. The latest contender is the European Commission’s proposal to levy a tax on the bonds of countries with excessive deficit. We can only assume that the purpose of such a tax is to provoke a financial crisis.  We saw this report in La Repubblica this morning, who had picked it up from Bloomberg, which is quoted as saying that the tax would be a percentage on the issue of public debt by all EU countries, not only the eurozone. The article went on to say that this tax would be discussed at the Ecofin on July 12.  The Europeans have traditionally never assumed that their own economy had an impact on the rest of the world. This partly explains this uncoordinated rush to the exit – which include no calculation whatsoever on the externalities. Calculated Risk reports that the Fed is now worried about the impact of the European crisis on US growth prospects – via the financial markets which have become less robust.

Germany and France examine ‘two-tier’ euro -Germany and France are examining ways of creating a "two-tier" euro system to separate stronger northern European countries from weaker southern states. A European official has told The Daily Telegraph the dramatic option was being examined at cabinet level.Senior politicians believe their economies need to be better protected as they could not cope with another crisis on a par the one in Greece.The creation of a "super-euro" zone would initially include France, Germany, Holland, Austria, Denmark and Finland. The likes of Greece, Spain, Italy, Portugal and even Ireland would be left in a larger rump mostly Mediterranean grouping.

Germany’s super competitiveness - Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.

Germany fact of the day - Germany’s real effective devaluation in terms of relative unit labour costs compared with the EU27 during 1994-2009 is about 20%. The post, which focuses on German outsourcing to Eastern Europe (an effect not included in the above estimate), is interesting throughout.  Germany is sometimes called an "inflexible" country or an "inflexible" culture.  But if you look at the longer sweep of history, you can make an equally good or better case that the Germans have a remarkably flexible culture, sometimes too flexible.  In this particular case it seems to be just flexible enough. This account can help us understand why Germany is not so keen on higher inflation and a weaker euro.  Think of depreciation as a substitute for wage flexibility.  If you've managed a good deal of wage flexibility -- in part in advance -- policymakers probably don't need or want the depreciation.  It bears also on why the Germans don't so much see Keynesian economics as applying to their country

Europe to urge exit from stimulus schemes at G20: Merkel (Reuters) - Europe will push for a swift exit from fiscal stimulus programs and a focus on budget consolidation at the G20 meeting next week, German Chancellor Angela Merkel said on Saturday."European participants are of the opinion that this is urgently necessary to prevent such crises from happening again in the future," Merkel said in her weekly podcast.Leaders of the 20 biggest developed and developing economies meet on June 26-27 in Toronto, Canada.Merkel's stance contrasted with that of U.S. President Barack Obama, who this week said public finance problems should be addressed "in the medium term" -- a warning that clamping down budgets should not be done at the expense of recovery.

G-20 Rules; Time for Germany-Bashing - The implication is this: with China having made its contribution to global re-balancing, it is time to demand the same of Germany, which is the other large surplus country in the world economy, and which has just received a steroidal boost of competitiveness with the decline of the euro.  Where China was an intentional mercantilist, Germany has become an accidental mercantilist, which will further increase its current account surplus.  But Germany has responded by announcing fiscal consolidation. Some have excused this action on the grounds that the tightening involved would be small and back-loaded. But this misses the key point: Germany’s action has the wrong sign: it should be expanding demand, not just for the sake of global re-balancing but to provide some growth impetus to its dire Southern European neighbors. But in fact it is now reducing demand.  If this continues, the spotlight will have to be on Germany. China-bashing is now likely to cede to Germany-bashing.

Talking To A Dining Room Table – Krugman -Gah. I’m still in Germany, and the event was lovely. The policy conversations, not so much. We talk about the euro crisis. They say, “Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules.” I say,  No fiscal rule would have constrained the Spanish housing bubble and its consequences.And they say, “Thank you for your contribution. Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules.” Oh, and on monetary policy — I find myself recalling how Rudi Dornbusch came down to breakfast one day and greeted a German central banker — I don’t remember who — with a cheery “And stable prices to you, sir!”

Germany’s Europe Deficit - George Soros - Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realized that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.Those days are over. The euro is in crisis, and Germany is the main protagonist. Germans don’t feel so rich anymore, so they don’t want to continue serving as the deep pocket for the rest of Europe. This change in attitude is understandable, but it has brought the European integration process to a halt.

They Hate Me, Sie Wirklich ...Krugman - Via the WSJ, I see that one of Germany’s Wise Guys Men has lashed out at me in Handelsblatt over my criticism of Axel Weber: Wolfgang Franz, who heads the German government’s economic advisory panel known as the Wise Men, tore into Krugman — and the US — in an op-ed in the German business daily Wednesday, titled “How about some facts, Mr. Krugman?” “Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back? Who thereby tipped world financial markets into chaos?” he wrote. Naturally, an article titled “How about some facts?” gets some of the basic facts wrong. No, it wasn’t government encouragement of loans to low-income households that did it; that’s a zombie lie, and it’s telling that German officials don’t know that. – George Soros – Germany must reflect on the unthinkable - Germany used to be at the heart of European integration. Its statesmen used to assert that Germany had no independent foreign policy, only a European policy. After the fall of the Berlin Wall, its leaders realised that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance. Germans would contribute a little more and take a little less than others, thereby facilitating agreement.Those days are over. The euro is in crisis, and Germany is the main protagonist. Germans don’t feel so rich any more, so they don’t want to continue serving as the deep pocket for the rest of Europe. This change in attitude is understandable, but it has brought the European integration process to a halt

Germany and the International Austerity Debate  -- This weekend, President Obama will be in Canada for G-20 summit meetings of the largest world economies. There, the U.S. agenda will focus on a number of international issues, but among the most important will be encouraging other countries not to precipitously adopt austerity policies. The problem, though, is that many major countries are beginning to consolidate their economies. The divide isn't, as this The Hill writer inaccurately suggests, because Europeans worry about debt crises while the president worries about politics. There is a serious debate here over global economic policy, and cutting aggregate demand at this moment could be a very serious mistake. It's a question of interests, especially when it comes to export-oriented nations like Germany and China that rely on the rest of the world to purchase their goods and don't want to change that equation (ironically, though China hasn't exactly been cooperative, they've been less open in rejecting this idea than the Germans).

Understanding German fiscal policy - It is a common view that governments should run a deficit in bad times, and a surplus or balanced budget -- if at all possible -- in good times. I have news for the people: according to the German view of the world, these are the good times.  Thus they want to run a surplus.  I don't see that perspective being rebutted. The Germans see themselves as having made the necessary wage adjustments, in advance, and in a manner that Keynesian economics is skeptical of.  The Germans also see themselves as having produced and maintained true credibility about future fiscal policy (how many other countries can claim that?) by a constitutional amendment, a lot of tough talk, and a relatively robust real economy.  German bonds are a safe haven investment, even though Germany's numbers, such as the debt-gdp ratio, are not overwhelmingly wonderful.  Did I mention that -- after unification -- the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results?

Soros Says Germany Could Cause Euro Collapse - German's budget savings policy risks destroying the European project and a collapse of the euro cannot be ruled out, billionaire investor George Soros said in a newspaper interview released on Wednesday. "German policy is a danger for Europe, it could destroy the European project," said Soros, who earned $1 billion in 1992 by betting against the British pound. He added in an interview with German weekly Die Zeit that he "could not rule out a collapse of the euro". "Right now the Germans are dragging their neighbours into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk,"

Issing group recommends increase in bank levy for Germany - The bank levy is now essentially a global policy response: in the US, a $19 bank levy has emerged as a compromise in late night negotiations on the finance bill; in Germany an advisory group headed by Otmar Issing recommends a level totally some 5% of GDP – to be accumulated over several years; and after the UK imposed a £2bn, France also intends to introduce a levy into its forecoming budget; if you haven’t noticed, the bond market crisis has actually returned this week, with yields touching the early May peaks (and a scary chart to prove it); Mohamed El Erian says the growth vs austerity debate is beside the point: success is about fiscal consolidation that enhance long-term growth potential; and if you though that Eurointelligence is unduly pessimistic, you should read what real pessimists have to say: Albert Edwards predicts a double dip recession, and that’s even before private-sector deleveraging has started (with a really scary graph to demonstrate this); Michael Pettis, meanwhile, says and that Greece will stay in depression until the moment it defaults.

Germany, France, UK propose bank levy before summit -Germany, France and the U.K. jointly called for levies on banks’ balance sheets in an attempt to overcome opposition to the proposal by other members of the Group of 20 nations before this week’s summit. U.K. Prime Minister David Cameron’s government today announced a bank levy as part of that country’s biggest peacetime deficit reduction. France and Germany are also finalizing details of their own bank taxes, according to a joint statement issued by the German government. “All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy and to encourage banks to adjust their balance sheets to reduce this risk,” the e-mailed statement from the Finance Ministry in Berlin said.

France, Russia Vow To Promote Global Role Of G-20 - French President Nicolas Sarkozy said Saturday that he wanted to work with Russia to give developing nations a larger say in how to regulate the global economy. Global financial institutions such as the World Bank and International Monetary Fund — created at the Bretton Woods conference in New Hampshire 1944 — are outdated and must be replaced, Sarkozy told an economic forum in St. Petersburg hosted by Russian President Dmitry Medvedev ."We all need to think about the foundations for a new international financial system . We've been based on the Bretton Woods institutions of 1945, when our American friends were the only superpower," Sarkozy said. "My question is: Are we still in 1945? The answer here is, 'no,'" he said.

G-20 Split And Out Of Order - Ahead of the Toronto Group of 20 (G-20) Summit on June 26 and 27, tensions are running high. Earlier in June, the G-20 was split apart during its ministerial meetings in South Korea; most of its members could no longer afford the monumental fiscal deficits called for in the 2009 London and Pittsburgh summits, while the United States preached for continued fiscal stimuli.  The eurozone is faced with severe unemployment, stagnant output, debilitating debt, a deteriorating banking system, an arguably overvalued exchange rate, and most urgently with some member countries looking at deteriorating credit ratings and sharply higher funding costs.  Eurozone members are facing the reality that larger deficits maynot be fundable and may not even enhance economic growth. Urging Greece to expand its monumental fiscal deficits would only spread financial disorder and erode economic growth in that country for years to come.

G20 Still Challenged By Global Imbalances, Courtesy Of Europe - As G-20 leaders prepare to meet in Toronto on June 26-27, the global economy is still being driven by strong growth in emerging countries such as China, which relies heavily on cheap exports to boost its economy. China’s weekend pledge to make its exchange rate more flexible shows that pressure from the U.S. and other Group of 20 major economies may be paying off. But any rise in value of the yuan, which makes Chinese exports more expensive for Americans and the rest of the world, is expected to be slow.China’s currency move may eventually lift the spending power of its consumers, helping to rebalance growth in the world economy. In the meantime, however, Europe’s debt crisis is likely to lead several big countries (such as Germany) also to rely on weaker currencies to lift their economies via exports. And who is supposed to do the bulk of the buying? The U.S. consumer, once again.

Chinese yuan under scrutiny before G20 meeting (Reuters) - Policymakers in the world's major economies will closely monitor the Chinese yuan this week for signs it is actually moving after Beijing announced it would make its exchange rate more flexible.The Group of 20 nations will meet in Canada next weekend to hash out a course for the future as the world gradually emerges from the worst financial crisis since the 1930s.China announced on Saturday it would allow more flexibility for the yuan, also known as the renminbi or RMB, signaling it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.But China's central bank ruled out a one-off revaluation, saying there was no basis for any big appreciation. That confused the outlook for markets and prompted skepticism that China's actions would match its words.

Fiscal policy: Not all sunshine and roses | The Economist… LEST you mistakenly believe that the Chinese currency announcement set the stage for an atmosphere of bonhomie at this weekend's G20 summit, let me draw your attention to the latest pronouncements from German officials: “Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis,” Finance Minister Wolfgang Schaeuble told reporters in Berlin today alongside Merkel. “That’s why they have to be reduced.” Germany is holding to G-20 commitments on exit strategies from fiscal stimulus, and “not violating international requirements for a coordinated strategy for sustainable growth,” Schaeuble said. “We will face up to the international debate and I think we can do that with a great deal of self- confidence,” he said... German Economy Minister Rainer Bruederle, at a separate press conference earlier today, said the U.S. must join Europe in “urgently” cutting spending.

G20 countries face split on issue of stimulus spending versus tackling soaring deficits - Despite U.S. appeals to refrain from removing stimulus measures too quickly, country after country is rushing to slash spending and raise taxes to avoid suffering the same fate as Greece, which found itself on the brink of bankruptcy last month. German Chancellor Angela Merkel on Thursday defended her government's planned austerity, saying in an interview with public broadcaster ARD that "Germany has done much more to revive the global economy than most other nations." That view was echoed by German Finance Minister Wolfgang Schaeble, who wrote in an editorial published in German daily Handelsblatt and the Financial Times, that "governments should not become addicted to borrowing as a quick fix to stimulate demand."

G-20 Agenda: U.S. Stimulus vs. EU Austerity - The leaders of the European Union were the latest to send a letter to others in the Group-of-20 laying out their agenda for the meeting. While all the members of the G-20 industrialized and developing nations say they are working together to sustain global growth and reform financial regulation, the different letters show substantial differences in approaches that can turn into deep fissures if not handled properly.  The two top EU leaders — European Commission President José Manuel Barroso and European Council President Herman Van Rompuy — produced a three-page letter that argued that fiscal austerity is the way to produce “strong and sustainable growth” and said “substantial consolidation” should start “at the latest in 2011.” President Obama, in his three-page letter of June 16 laid out a very different way to “safeguard and strengthen the recovery.” Essentially he argued that the days of Keynesian stimulus were hardly over.

Despite Obama’s Plea, European Bank Renews Call for Austerity - European countries need to keep a sharper eye on one another’s finances, and sanctions against fiscal rule-breakers should kick in automatically, the European Central Bank president, Jean-Claude Trichet, said on Monday. The remarks, to members of the European Parliament’s Economic and Monetary Affairs Committee, meeting in Brussels, showed that Mr. Trichet continued to take a hard line on government spending despite a call by President Obama for Europe not to withdraw economic stimulus too hastily. Mr. Trichet stuck to the argument he has made in recent weeks that fiscal prudence is the best medicine for the European economy. Unless Europeans believe that governments can get control of their budgets, “then households are going to be frightened, they will not spend,” he said. “Companies will not prepare for the future.”

Barack Obama is refusing to listen to reason on economic policy –Over the past week, the "austerity versus growth" debate has exploded into open international hostilities. A compromised form of words will already have been agreed for the communiqué to follow this weekend's meeting of G8 and G20 leaders; the sherpas who do the preparatory donkey work for these stage-managed events will have ensured But behind the anodyne platitudes of any statement, the tensions have reached fever pitch. Gone is the co-operative consensus that, in adversity 18 months ago, brought G20 nations together to fight the downturn. In its place lies a clear line of demarcation that almost exactly mirrors our own political debate in Britain over the economic consequences of George Osborne's Emergency Budget cuts. President Barack Obama, backed to some extent by Nicolas Sarkozy of France, wants economic stimulus to continue until the global recovery is unambiguously secure. In the opposite corner is Germany's Angela Merkel, now oddly aligned with Britain's new political leadership in thinking the time is right for fiscal austerity. Like much of what Mr Obama says and does these days, the US position is cynically political. With mid-term elections looming and the Democrats down in the polls, the administration hasn't yet even begun to think about deficit reduction. Obama is much more worried by the possibility of a double-dip recession and the damage this would do to his chances of a second term, than the state of the public finances.

Germany-US Rift Gets Deeper, As Merkel Openly Mocks Obama's Keynesian Guidelines - The transatlantic smackdown is getting vicious, as Angela Merkel makes a point to demonstrate her refusal to follow Obama's policies before a business audience in Berlin. As Bloomberg reports, "Chancellor Angela Merkel championed German export strength as “the right thing” for her country, spurning President Barack Obama’s call to boost private spending as both leaders  prepare for Group of 20 talks. Merkel, addressing a business audience in Berlin today, said she told Obama in a phone call that  cutting government debt is “absolutely important for us,” exposing a second point of contention ahead of the June 26-27 G-20 summit in Canada." It appears Germany's chancellor is actually prudently thinking ahead after realizing that the recent bailout of Europe has massively angered potential voters, cost her parliamentary majority, and absent damage control, her career would come to a premature end. If that means openly mocking the pinnacle of Keynesian insanity these days, Washington D.C., so be it. It is strange that our own president has yet not realized his own political career will be very short unless he follows in Merkel's footsteps.

Geithner: G20 To Focus On Growth, Confidence (Reuters) - Treasury Secretary Timothy Geithner said on Thursday that the Group of 20 leaders' summit should focus on both growth and fiscal responsibility to lay a foundation for stronger economic growth in the future. In excerpts from an interview with BBC World News America, Geithner said that belt-tightening European countries needed to decide their own mix of policies, but were focused on the need for stronger growth. "They (Europe) need to make the choice of what makes the best choice for their country -- it's going to differ across countries," Geithner said. "We're not in a position to figure out what the best mix of policies are, given what their politics are, that's the choice they have to make. But our job is to make sure we're all sitting there together, focused on this challenge of growth and confidence because growth and confidence are paramount."

Germany Fires Pre-G20 Broadside At U.S. Criticism — Germany launched a media blitz on Thursday to defend its disputed austerity plans, the latest salvo in a transatlantic war of words ahead of a key G20 summit to discuss responses to the financial crisis.  Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble chose English-language papers for the broadside against US fears that Germany's savings programme could throttle a stuttering global recovery.  "Governments should not become addicted to borrowing as a quick fix to stimulate demand," wrote Schaeuble in the Financial Times.  "Deficit spending cannot become a permanent state of affairs," he added.

Three birds with one stone: The G20 and systemic externalities – VoxEU -As G20 leaders meet to discuss financial reform, this column argues that it is not too late for an international solution. It says that the EU and US should lead the way with a tax on systemically important financial institutions. Beyond internalising the costs of systemic risk, such a levy would make an international agreement more likely and raise substantial funds.

Cameron's Austerity Sets Benchmark for G-20 Summit - U.K. Prime Minister David Cameron is showing the way on fiscal austerity as he attends his first summit of world leaders today. Whether his path leads to recovery or another recession is driving a transatlantic dispute that will dominate the talks in Canada. Chastened by the Greek crisis, Cameron’s six-week old government this week proposed Britain’s biggest round of budget cuts since World War II to reduce a deficit worth 11 percent of gross domestic product, the largest in the Group of 20.  European policy makers fear failure to patch up public finances now risks reviving a bond market selloff that required a bailout for Greece last month, while President Barack Obama says deficit reduction could hurt economic growth and employment. The U.K. presents a test case for G-20 politicians as they argue how quickly to act.

Damned if they do, damned if they don't? -In many ways, the argument over the right way to support the global recovery here at the G20 summit in Toronto is the mirror image of the debate at the London Summit last year. Back then the argument was that governments needed to act together to prevent another Great Depression. Now the worry is that they will hurt the recovery if they withdraw that support all at the same time.  But there is one crucial difference. In April 2009, any student of economic history could tell you which policies would maximise the chance of recovery - or at least minimise the chance of economic catastrophe.  The hard truth about today's situation may be that there is no perfect mix of policies that can guarantee a strong recovery after a financial crisis this severe, and a run-up in sovereign borrowing this large.

Tomorrow's G20 News Report Today - Some years ago Alan Beattie of the Financial Times wrote a generic report of all G-whatever meetings that will undoubtedly be true of today's meeting as well: By reporters everywhere An ineffectual international organization yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies. “We are seriously concerned about this most serious outbreak of seriousness,” said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat. “This is a wake-up call to the world. They must take on board the vital message that my organization exists.” The director of the body, based in one of New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day....

Beyond the false growth vs austerity debate - FT - Mohamed El-Erian - This weekend’s G20 meeting will likely fuel, not resolve, the heated debate triggered by a combination of exploding debt and deficits in industrial countries, and the recognition that many now face a future of muted growth and high unemployment.In one corner stand the “growth now” camp, arguing that expansion is a pre-requisite to service their debt sustainably. Without it tax receipts implode, investment is turned away, and meeting future debt payments is harder. This camp abhors Europe’s shift towards austerity, questions Tuesday’s tough UK budget, and urges countries like Germany to adopt expansionary policies. Some advocate additional fiscal stimulus even for high deficit countries, like the US. Against them stand the “austerity now” camp. They point to worsening sovereign debt ratings, noting especially that (despite Europe’s rescue package) Greek and Spanish debt risk is back to worrisome levels. They are concerned a coming sell-off in equity and corporate bond markets will deter new investments and aggravate many country’s debt problems. The two sides are both right, and wrong. Their impasse will persist until both understand that the debate is incomplete. In particular their discussion takes too narrow an historical perspective, looking excessively to the past experience of industrial countries as opposed to also reflecting that of emerging economies

Norway Foreign Minister Blasts G-20, Calls It "Greatest Setback For International Community Since World War II" - Der Spiegel conducts a stunning interview with Norway's foreign minister Jonas Gahr Støre, in which the Scandinavian official rips the G-20 (which is meeting this weekend in Toronto), in a manner far more vicious than any of the tens of thousands of protesters could hope to ever do. Støre essentially compares the Group of Twenty to the most cataclysmic event in the history of mankind: calling it "the "greatest setback" for the international community since World War II." Any other day, this would result in a diplomatic gaffe, and the expulsions of various ambassadors. Today, with the entire world agreeing with the Norwegian, except those, of course, in attendance in Toronto, nobody bats an eyelid. One of the smartest countries in Europe (having refused to join the utter disaster that is the European Union... twice) once again proves its wit, when its minister "questions the legitimacy" of the G-20, stating "We no longer live in the 19th century, a time when the major powers met and redrew the map of the world. No one needs a new Congress of Vienna."

Weber Defies Trichet Over Bailout as ECB Succession Approaches -- On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council -- including his boss, President Jean-Claude Trichet.  “The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.  His comments, in an interview with the Frankfurt-based Boersen-Zeitung that was later posted on the Bundesbank’s website, came after he had spent part of the previous night on an emergency ECB conference call, Bloomberg Markets magazine reports in its August 2010 issue.

The Naked ECB - In theory, we have always known that the ECB would, if necessary, make decisions on the basis of majority rule. But, until now, no such case had arisen, and there were no procedures for disclosing votes. The argument against transparency has been that, in the unusual circumstances of the ECB, to expose the votes of individual members of the Governing Council would put pressure on them as representatives of member states. The governor from a country in recession might feel almost bound to vote against an increase in interest rates, or for a cut, regardless of overall conditions in the eurozone. It also exposes a more fundamental problem. The voting structure in the ECB is flawed. In any federal system, a balance must be struck between those who are charged with assessing economic conditions in the whole monetary area and those who represent the interests of particular regions.

Be Careful for What You Wish - By John Mauldin - “Everyone” is upset with the level of fiscal deficits being run by nearly every developed country. And with much justification. The levels of fiscal deficits are unsustainable and threaten to bring many countries to the desperate situation that Greece now finds itself in. We must balance the budget is the cry of fiscal conservatives. But there are unseen consequences in moving both too fast or too slow in the effort to get the deficits under control. Today we look at them as we explore what a fine mess we have gotten ourselves into. (I am working without internet today so the letter will be shorter with fewer references than normal.)

A (timely) bank crisis management critique -Authorities moved too quickly to solve the 2008 financial crisis.’ That’s a statement you don’t hear very often, but it’s an idea that comes courtesy of an innocuous-enough sounding BIS working paper*. It’s a comparison of policy responses to today’s financial crisis with the Nordic banking crisis of the early 1990s. The so-called Swedish model, when governments forced asset writedowns, recapitalised and even nationalised some ailing banks, is one that’s often held up as an exemplary way of solving systemic banking crises. But in doing their comparison, the authors offer up an interesting critique of what might be missing from the more recent responses to financial crises. Here’s the thrust of their thesis:

European Banks Step Up Reliance on ECB - Banks in Europe’s periphery are stepping up their reliance on European Central Bank funding, economists at RBS conclude in a research note.Since the middle of 2008 through May, the ECB has added about 332 billion euros into the banking system. Of that, banks in Greece, Portugal, Spain and Ireland account for 225 billion euros, RBS estimates, or about two-thirds of the total, up from just 40% one year ago.“The increase in the reliance to the ECB repo operations in May was most pronounced in Portugal, where ECB lending doubled to 36.8 billion euros,” RBS notes. According to the Bank of Portugal’s monthly balance sheet, banks there tapped the ECB for 36.8 billion euros last month compared to 18.4 billion euros in April. Some of the stepped-up reliance on the ECB reflects the maturity later this month of a 442 billion euros one-year loan operation from the ECB. Banks “are relying on the facilities that are available to offset that drawdown in liquidity,”

Why central bankers will lose more sleep - As if the lives of central bankers haven't been hard enough. First they had to ride cavalry-like to the rescue as financial markets went into full-fledged meltdown and economies sank into the Great Recession. Ever since, they've been faced with that tricky game of figuring out when to start reversing the super easy monetary policy used to unlock credit and support sagging economic growth. Now it seems to me that the weight of sustaining the entire global recovery is getting hoisted onto their shoulders. Why is that? Blame the austerity bandwagon.Financial markets, jittery about rising government debt in the wake of the Greek crisis, are pushing politicians across the planet to scale back fiscal spending, perhaps before the recovery is really strong enough to handle it. The U.K. and Japan have become the latest to jump on board. Though there is no full agreement on the impact such budget cutting will have on the recovery, most economists believe the austerity measures are coming too soon and see it as a negative for growth.

Central banks show euro losing appeal as loonie gains - The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the U.S. and Japan.  Russia may add the Australian and Canadian dollars to its international reserves for the first time after fluctuations in the U.S. currency and euro, Alexei Ulyukayev, the first deputy chairman of the nation’s central bank, said in an interview in Moscow on June 15. The International Monetary Fund may add the Aussie and loonie to a basket of currencies it uses in transactions, strategists at UBS AG, the world’s second-largest foreign-exchange trader, predict. Reserve managers are joining private-sector investors including Pacific Investment Management Co., which runs the world’s biggest bond fund, in boosting allocations to nations with improving economies and the ability to reduce budget deficits after the European Union was forced to commit almost $1 trillion to prevent a sovereign default by Greece.

Normal adjustment mechanisms – Australia is a commodity sensitive economy.  Greece is tourism sensitive.  Tourism is almost as big in Greece as mining is in Australia.   But unlike Greece Australia has a really effective adjustment mechanism to a decline in demand for its product.  When metals prices/demand falls the Australian dollar falls.  One way to think about it is that when metal prices halve (a surprisingly common occurrence) then Australian export labor just is not as productive (in the sense that it earns less USD or hard currency per hour of work– not in terms of metal output).  We could solve this problem by paying everyone less (which involves the changing of many internal prices with complex and hard-won contract terms) or by simply changing a single variable – the price of the Australian dollar.  It is much easier for the market to adjust a single variable (the currency) than to adjust many (everyone’s wages) and so – more-or-less – that is what happens

July 1 could be the day liquidity dies - We’ve mentioned July 1 a couple times before.That’s the day the European Central Bank’s first and largest 12-month Long Term Refinancing Operation (LTRO) will run out. It’s also the day Barclays US money market analyst Joseph Abate expects three-month dollar Libor to start rising, to as much as 75 basis points.The reasoning is that the start of the 12M LTRO, which added €442bn in market liquidity in June 2009, was the thing that kicked off the decline in dollar Libor, shifting it down by about 25bps between Spring and September 2009, when a second LTRO was launched. You can see the effect of the first LTRO expiry in this December 2009 Deutsche Bank chart:A Run on Central Banks? – The latest phase of the global credit crisis, which has thrust Europe into the center of investors’ concerns, raises questions about the ability of central banks around the world to continue bailing out the financial sector open-endedly. Already, the turmoil has forced a policy about-face by the European Central Bank as it resorts to making direct purchases of sovereign debt in the same way that the U.S. Federal Reserve took on Treasuries and piles of battered mortgage bonds in an effort to stem America’s historic housing crash.

Why independent central banks fail - The Achilles heel of independent central banks is that the fiscal authority believes, rightly or wrongly, that fiscal policy also affects the inflation rate.  Thus when you have a disagreement between the fiscal and monetary authorities as to the appropriate rate of inflation, the two will end up pulling in opposite directions, producing massive economic waste in the form of higher than necessary marginal tax rates to pay for wasteful deficit spending.We all saw this (two mules) problem in Japan during the 1990s and early 2000s, but somehow assumed (or at least I did, Krugman didn’t) that our policymakers were more sensible.  I also think most economists missed this problem because they don’t think of the fiscal authority as influencing the inflation rate.  For some reason even those economists who look at stabilization policy in the old-fashioned two-pronged way (use of both fiscal and monetary stimulus) tend to think that monetary policy affects inflation whereas fiscal stimulus affects real growth.  I have talked about this issue quite a bit, but still haven’t heard any good explanations for the ubiquity of this strange way of framing stabilization policy.  After all, both fiscal and monetary stimulus impact AD, and hence both influence output and prices.

Making a market in sovereign CDS -Whatever the cause of sovereign CDS spread widening, if governments don’t like it, the answer is clear. Write CDS on yourself. The principle is actually well established in the corporate area. An ISDA claim is pari passu with senior debt, therefore in the event of default a self-written CDS gets recovery. (OK, it is a little more complicated than that given the auction process, but it’s broadly right.) Therefore if you think, say, recovery = 33%, a self written CDS is equivalent to a CDS written by a risk free counterparty on a third of the notional. Governments need simply go into the sovereign CDS market and write protection on themselves in crushing size. That would bring spreads in fast, and raise them some premium income in the process. Simples.

An interactive global debt map - THE headlines are all about sovereign debt at the moment. But that is only part of the problem. Debt has risen across the economy, from consumers on credit cards, though industrial companies borrowing for expansion and financial companies using debt to buy risky assets. The interactive graphic above shows the overall debt levels for a wide range of countries, based on data supplied by the McKinsey Global Institute. In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on this map) found the limit in practice when they hit eight-to-ten times GDP. The debt is also broken down by sector. Note the huge size of Britain’s banks relative to its economy, and the high level of Spanish corporate debt. These figures will worry owners of government bonds since the 2008 crisis showed that governments may be forced to stand behind private sector debt.

Ten Commandments for Fiscal Adjustment in Advanced Economies - IMF- Advanced economies are facing the difficult challenge of implementing fiscal adjustment strategies without undermining a still fragile economic recovery. Fiscal adjustment is key to high private investment and long-term growth. It may also be key, at least in some countries, to avoiding disorderly financial market conditions, which would have a more immediate impact on growth, through effects on confidence and lending. But too much adjustment could also hamper growth, and this is not a trivial risk. How should fiscal strategies be designed to make them consistent with both short-term and long-term growth requirements?We offer ten commandments to make this possible. Put simply, what advanced countries need is clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms. With a little help from monetary policy, and from their (emerging market) friends

Rebalancing the global economy: A primer for policymakers – VoxEU - The global balances are a thorn in the side of the G20. This column launches a new eBook with the aim of providing policymakers and their advisers with up-to-date, comprehensive analyses of the central facets of global economic imbalances and to identify and evaluate potential national and systemic responses to this challenge.

Market Liberalism against Democracy - Charlemagne writes about European Commission officials. I would not be astonished if a majority of the [British] public assume that EU officials are primarily motivated by pay, perks and privileges. Actually, from Mr Farage’s point of view, I suspect the truth is still more worrying. EU officials, in my experience, want “more Europe” because they want “more Europe”. … EU officials live in a world in which nationalism is the great evil. … They are often highly educated, in a geeky sort of way … The town’s defining ethos of anti-nationalism is often admirable. EU officials are easy to get on with, and a decent bunch in my experience. But it brings problems: I find a lot of people in this town at best naive about how much integration public opinion will accept, and at worst a bit hostile to democracy. Get a Brussels dinner party onto referendums, and hear people rave about the madness of asking ordinary people their opinions of the European project.I found this pretty interesting because I was thinking about writing a piece last week about how Charlemagne himself represents a political tendency that is “a bit hostile to democracy.”

UK Banks Hit With $3 Billion Tax; France, Germany Follow - Britain slapped a 2 billion pound ($3.1 billion) annual tax on banks on Tuesday and Germany and France said they will follow suit, telling the industry it must pay for its part in the financial crisis.  Germany, France and Britain issued a joint statement saying they would all introduce levies on their banks to ensure no country is disadvantaged. Britain's tax was less harsh than some previous estimates, however, adding to evidence that resistance from other leading economies to imposing similar levies may cap the scale of steps taken by governments.

Osborne Increases U.K. Value-Added Tax Rate to 20% - British Chancellor of the Exchequer George Osborne increased the value-added tax rate to 20 percent from 17.5 percent in the first permanent change to the levy on sales of goods and services in almost two decades. “The years of debt and spending make this unavoidable,” Osborne told Parliament in London in his emergency budget today as he announced a package of spending cuts and tax increases to cut the U.K.’s record deficit. The rate will increase from January and produce more than 13 billion pounds ($19 billion) a year of extra revenue by the end of this Parliament in 2015, Osborne said. “That is 13 billion pounds we don’t have to find from extra spending cuts or income-tax rises,” he said.

The spectre of laissez-faire stalks Britain - The relish with which David Cameron announced that our whole way of life would be affected for years by impending cuts, and no one in the land would be exempt from the asperities about to be inflicted, suggested to many that he and his fellow cabinet-millionaires will probably weather the coming storm better than the rest of us. His parade of Margaret Thatcher, who resembled nothing so much as a faded kabuki performer, outside 10 Downing Street, was also highly symbolic. It was a redemptive moment, the "ultimate" triumph of policies she advocated (but did not entirely follow) 30 years ago. It exhibited the qualities of purification ritual, reversion to a more severe form of capitalism; and in the process a transformation of nanny state into stepmother state.

New jobseekers ’squeeze out’ long-term unemployed in rush for jobs – Telegraph -Graduates who are prepared to take a drop in salary to find a job face direct competition with the growing number of long-term unemployed looking for work, employment experts have warned. Official figures out yesterday revealed the number of people out of work for more than 12 months soared to a 13-year high in the three months to May. Long-term unemployment has increased by 85,000 over the quarter to 772,000, the Office for National Statistics (ONS) said, the highest figure since April 1997. But the Government’s welfare-to-work providers, who attempt to help the long-term jobless find work, warned new university or college leavers who traditionally may have applied for higher-paid roles were now lowering their expectations and searching for less lucrative salaries just to pay the bills.

Sovereign Crisis Has Stoked Stability Risks, BOE Says (Bloomberg) -- The Bank of England said the sovereign debt crisis in Europe has increased the risk of instability in the U.K. financial system, and banks need to raise more capital to guard against shocks. “The speed with which Greece’s problems were transmitted to other countries and markets highlighted persistent fault lines in the global financial system,” the central bank said in its Financial Stability Report today in London. “U.K. banks face a number of challenges and need to maintain resilience in a difficult environment.” Investor concern that countries including Greece will struggle to reduce public deficits has raised banks’ borrowing costs. U.K. banks face 800 billion pounds ($1.2 trillion) of debt maturing by the end of next year. While the European Union bailout plan helped alleviate the crisis, funding challenges may prompt banks to limit lending to preserve capital, jeopardizing the recovery, the Bank of England said.

The new wave of bank taxes - Maybe this was inevitable: the UK has moved from its clever one-off supertax on bankers’ bonuses to a much more permanent — and indeed rising — tax on bank balance sheets: The government said on Tuesday it proposed to introduce a 0.07 percent levy on banks’ balance sheets, rising from an initial 0.04 percent tax to be applied from January 1, 2011. The UK is in a fiscal crunch, and it needs to raise money anywhere it can, so this makes sense. The nation as a whole is deeply in debt, and rising taxes on all sectors of the economy are a way of enforcing savings to prevent that debt from spiraling out of control. I would have liked, however, to see the tax be a little less flat. If the Fiscal Commission is looking across the pond to see what the UK is doing, then I’d urge them to think a bit more inventively: make the tax progressive, with too-big-to-fail banks paying a higher rate; and maybe link it to leverage, somehow, as well.

Cameron Betting on Prosperity From Austerity while Obama Delays - World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right. Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid. Such a strategy in the past has also “resulted in significant bond and equity-market outperformance,” according to an April 14 Goldman Sachs report.

A short video about the Austerity Budget -Yesterday's emergency Budget will lead to a UK fiscal contraction bigger than any we have seen in our lifetimes.  In this 8 minute video, I look at the implications for the UK bond markets, inflation, and the economy. Watch the video here In brief, the UK will comfortably keep its AAA credit rating; the Bank of England's Monetary Policy Committee will have an inflationary headache as a result of the VAT hike; and a double-dip recession is increasingly likely for the UK as a result of this exceptionally austere Budget.  This Budget flies in the face of everything we learnt from the experience of the Great Depression - it puts the UK's credit rating ahead of the population's standard of living.  This may prove to be the right thing to have done, but it is an incredibly risky economic strategy.

Facing Deficit, Britain Unveils Emergency Budget – NYTimes - After only six weeks in office, the government of Prime Minister David Cameron took what his coalition of Conservatives and Liberal Democrats acknowledged was a historic gamble: that austerity measures will help balance the government’s books without pitching the country into a double-dip recession. The cuts and tax increases, including average budget reductions of 25 percent for almost all government departments over the next five years, will make Britain a leader among European countries, including Ireland, Greece and Spain, competing to show they can slash spending and appease investors worried about surging debt. But the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak.

Details of Britain's "Emergency Budget" - The UK's Chancellor, George Osborne, earlier this week revealed the "Emergency Budget" of the fledgling coalition government. The budget is aimed at reducing the structural deficit (approximately $130 billion) and achieving a balanced budget by 2015/16. It will be governed by Osborne's "80:20 rule". 80 percent will come from reducing costs and 20 percent from increasing taxation. This budget comes close to that with the Chancellor admitting it was in fact only 77:23. (details follow)

Emergency Budget: George Osborne’s austerity package haunted by spectre of 1981 - The ghost of Geoffrey Howe's 1981 budget will hang heavy over Westminster tomorrow when George Osborne stands to reveal details of a package of tax, spending and welfare austerity unparalleled in a generation. Howe is seen by the current crop of Conservative MPs and the free-market thinktanks as an appropriate role model for the new chancellor. The budget of 1981 is considered the epitome of soundness, an exercise in rigour that laid the foundations for the strong economic recovery. What Britain at large remembers about 1981 is either the royal wedding between Charles and Diana or victory over the Aussies in Botham's Ashes. What political anoraks remember was the Howe budget.

A bloodbath none were prepared for - Fortune favours the brave, or so George Osborne, the new chancellor of the exchequer, and the coalition government must hope. For brave he has surely been. He has announced a dramatic fiscal tightening, though the gory details are to be revealed in the spending review to be completed by October. Yet what he has already outlined is a savage Budget. The government must now win the argument that this tightening was essential. If public sector unrest and a weakening economy bite hard over the next few years, the bravery is going to look like rashness. The core of this Budget lies in the plan for extra fiscal tightening. What does this mean? It means, quite simply, tightening until the pips squeak. Structural reductions in public net borrowing will average 1.4 per cent a year – unquestionably, an impressive headwind against growth