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

Saturday, June 12, 2010

week ending June 12

U.S. Fed's balance sheet shrinks in latest week - The U.S. Federal Reserve's balance sheet shrank in the latest week, as no foreign central bank drew loans from its emergency credit line, Fed data released on Thursday showed.The balance sheet declined to $2.314 trillion in the week ended June 9 from $2.318 trillion the previous week. For a graphic of Fed's balance sheet size, Earlier Thursday, the New York Fed said the U.S. central bank made no loans via its currency swap line in the latest week after the European Central Bank tapped the facility for $5.4 billion in the previous week.The Fed established swap arrangements with the ECB, the Bank of Canada, the Bank of England, the Swiss National Bank and the Bank of Japan in response to the re-emergence of strains in short-term funding markets in Europe.The Fed's overall lending to U.S. banks also fell in the latest week, suggesting an earlier scramble for dollars stemming from Europe's public debt problems may have passed.

Foreign Central Bank Custody Holdings At $3.073 Trillion As of Wed - Fed - The Federal Reserve's balance sheet shrunk in the latest week as foreign central banks made little use of new currency swap lines with the U.S. central bank.The Fed's asset holdings in the week ended June 9 edged down to $2.335 trillion from $2.340 trillion a week earlier, the Fed said in a report released Thursday.Meanwhile, total discount window borrowing fell to $70.79 billion on Wednesday from $71.04 billion a week earlier. Borrowing by commercial banks through the Fed's discount window dropped to $85 million on Wednesday from $115 million a week earlier. The Fed counted $1.242 billion in currency swaps outstanding under its new arrangement with foreign central banks. The New York Fed said $1.032 billion were drawn by the European Central Bank and $210 million drawn by the Bank of Japan. Last week, swaps outstanding totaled $6.642 billion, with new borrowings done by the European Central Bank alone. U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, fell to $3.073 trillion from $3.086 trillion in the previous week.

 FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 10, 2010

Q1 Flow of Funds: Household Net Worth off $11.4 Trillion from Peak - The Federal Reserve released the Q1 2010 Flow of Funds report today: Flow of Funds. According to the Fed, household net worth is now off $11.4 Trillion from the peak in 2007, but up $6.3 trillion from the trough in Q1 2009. A majority of the decline in net worth is from real estate assets with a loss of about $6.4 trillion in value from the peak. Stock market losses are still substantial too. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.

Q1 Flow Of Fund Indicates Ongoing Private Sector Credit Contraction, Consumer Wealth Growth Due Purely To Equities - The Federal Reserve has released the most recent Flow Of Funds Statement (Z.1). Plenty of data in there and we will provide a more in depth analysis later, but here are the highlights. Total household Net Worth increased by $1.1 trillion from $53.4 trillion at Q4 2009, to $54.6 trillion at March 31, 2010. However, of this incrase, the vast bulk was purely on "paper" - $0.8 was due to an increase in direct and indirect holdings of equity instruments. Credit market instruments also increased in net worth but only slightly, accounting for the balance of the increase. Decreasing components were tangible assets, which declined by $67 billion, and physical deposits, which declined by $104 billion. As the bulk of the equity instruments gains have been paper based, it is safe to say that consumer net worth as of June 30, will be materially lower than this most recent report indicates. We will therefore likely see a material decline on household net worth when it is released in early September. As for credit in the system, thank god for the government.

The view from the Fed - BEN BERNANKE clarified his views on the state of the economy in comments last night. "The unemployment rate is still going to be high for a while, and that means that a lot of people are going to be under financial stress." And, "We have right now a very accommodative, very easy monetary policy...We can’t wait until unemployment is where we’d like it to be." See? Clarified. That the Fed will raise rates while unemployment is above normal levels is no surprise at all. The Fed's own economic projections show unemployment around 7% in 2012. Fed funds futures, on the other hand, indicate that rates may go up a bit by next spring (though I wouldn't expect the Fed to hike rates in earnest for some time). Mr Bernanke seems comfortable with the "moderate pace" at which recovery is taking place. And he sounded fairly sanguine about the situation in Europe.

What the Fed believes – Economist - I ENDED an earlier post by writing, as usual, that central banks should be more aggressive in fighting unemployment. Of course, there is a large literature on the ways that central banks can fight unemployment, some key pieces of which were authored by current central bankers, and so it's difficult to understand why central bankers aren't being more aggressive. Tyler Cowen described the curious situation this way: The Keynesians have no good theory of why their advice isn’t being followed, except perhaps that the Democrats are struck with some kind of “Republican stupidity” virus. The thing is, that same virus seems to be sweeping the world, including a lot of parties on the Left. Seriously, how can Ben Bernanke have written some of the key texts on the use of monetary policy to fight unemployment and still be sitting on his hands now that he is Fed chair presiding over near-10% unemployment? Well, it's important to remember that Mr Bernanke is not a dictator. Fed decisions are made by committee. And Scott Sumner has an excellent take on how it might be possible for most members of the committee to believe that unemployment is a problem and that the Fed could do something about it and yet not act:

What the Fed believes – Economist - WE HAVE two more data points to add to our understanding of the thinking within the Federal Reserve today. I'll give the Fed this: it's remarkably stolid. Back in April, my colleague noted: After looking at the evidence, I don’t see any reason to change my view and I take comfort that the Federal Reserve doesn’t, either. Don Kohn, the vice-chairman, nicely articulated the case for the post-crisis model last October. Six months have elapsed, the Dow has hit a new cyclical high and optimism abounds yet last week Kohn said his outlook hasn’t changed.  After having a look at the Fed's new Beige Book and at Ben Bernanke's testimony to Congress, it's impressive the extent to which the Fed acknowledges the economic headwinds facing the economy, only to basically repeat the forecast it's been touting (with small nudges one way or another) for the past nine months—American economic growth of between 3% and 4% this year and next, settling down thereafter. I'm not sure if that's reassuring or troubling.

The Mankiw Rule with Quantitative Easing: Why is the Fed So Tight? - In my last post, I suggested that the Fed – at least if it behaves in a reasonable manner consistent with its past practices – is not likely to raise its federal funds rate target any time soon. I argued that the Mankiw Rule (a.k.a. Greg Mankiw’s version of the Taylor Rule) has done a good job of tracking Fed policy in the Greenspan-Bernanke era and that it has now fallen well into negative territory, out of which it will take some time to climb. Some commenters pointed out that, while the Fed obviously can’t make interest rates go negative, it did continue to loosen during the period of zero interest rates, by means of “quantitative easing” or “credit easing” – attempting to pull down the level of riskier or higher maturity interest rates by acquiring unconventional assets. I don’t think this observation really affects the main point of my previous post, but it it’s interesting to take a closer look.

Bernanke Forecasts a Plodding Recovery - NYTimes -The American economy will probably be slow to recover, with joblessness remaining high for some time, Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday evening.  Although he said that economic forecasting was a bit like reading entrails, Mr. Bernanke warned that the unemployment rate could remain near double digits for a while. He added that the central bank would probably have to start raising interest rates before the economy returns to full employment.

Testy Tuesday - Gentle Ben vs. Reality - Our catalyst was Dr. Ben Bernanke who, as we expected, attempted to boost the markets in a scheduled speech where the Fed chairman said he is hopeful the economy will gain traction and not fall back into a "double dip" recession.  "My best guess is we will have a continued recovery, but it won’t feel terrific," Bernanke said.Bernanke didn’t offer new clues about when the Fed would reverse course and start to tighten credit. However, he did say the Fed won’t be able to wait until the jobs market is fully healed before it pushed rates up.  Observing the economy, Bernanke said the news so far is "pretty good." Both consumers and companies are spending sufficiently to keep the recovery moving forward. The private sector, he said, is "picking up the baton" as government stimulus, which mainly powered the recovery in its earliest stage, starts to fade.

Bernanke Takes Cautious Tone in Congressional Testimony - Fed Chairman Ben Bernanke is trying to be reassuring about the outlook for the economy in testimony to the House Budget Committee this morning. But his wariness is palpable given what has happened in financial markets in recent weeks and uncertainty about Europe. Asked whether a double-dip recession is likely, Mr. Bernanke repeated a reassurance he offered Monday that he doesn’t think so. The Fed is forecasting moderate growth in the 3.5% range, with modest declines in unemployment, and it’s sticking with that forecast. An important transition could be underway for the economy — away from government support and toward private demand, he noted. That’s a formula for continuing expansion.But the Fed chairman doesn’t want to be called out later if the economy stumbles.

Bernanke Defends Stimulus Amid Deficit Warning - Federal Reserve Chairman Ben Bernanke pleaded with Congress to cut the federal budget deficit — but not now. In his testimony before the House Budget Committee, the central bank chief warned that the U.S. deficit is on an unsustainable path. “Achieving long-term fiscal sustainability will be difficult. But 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,” he said. The key phrase there is “in the longer run.” In his testimony Bernanke defended the stimulus spending passed during the financial crisis. Bernanke isn’t calling for immediate belt tightening, but warning that even absent the stimulus spending, the deficit must be dealt with. “Even after economic and financial conditions have returned to normal … in the absence of further policy actions, the federal budget appears to be on an unsustainable path,” he said.

Bernanke Warns Congress Not To Cut Spending, Cautions About 'Fragile' Recovery - While the conventional wisdom in Washington appears to focus largely on the need to lower the federal government's budget deficit, rather than on reducing the nation's nearly 10 percent unemployment rate, Federal Reserve Chairman Ben Bernanke sent a message Wednesday to lawmakers: Now's not the time."Right now I don't think is the time -- this very moment is not the time -- to radically reduce our spending or raise our taxes because the economy is still in recovery mode and needs that support," Bernanke testified before the House Budget Committee. Bernanke referred to the nascent economic recovery as "still pretty fragile" and cautioned that the economy "may need more assistance."

"Obviously We Can't Run Deficits Of 10% of GDP Forever" - So said Bernanke this morning - more than once. Oh really Ben?Bernanke also said:“Achieving long-term fiscal sustainability will be difficult,” Bernanke said today. “But 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.” And...Responding to a question, Bernanke said the recovery appears to have made an “important transition” from relying on government support and inventory rebuilding to private demand.  Uh, where? Note that the fiscal deficit spending never decreased after 2001 - and that it was simply "stepped up" to more than double the 2003-2007 level when this last crisis hit. Bernanke says that the primary deficit needs to be reduced to ~2%.  Ok, again, how?  We never got there from 2002 onward, so what sort of "credible" plan do you think will be presented to do it now?

Bernanke Puzzled by Gold Rally - Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk. In this case, it might instead be a risk against risk broadly. Mr. Bernanke notes that the inflation signal isn’t confirmed by movements in other asset classes. Yields on Treasury bonds tend to rise when investors worry about inflation, but those yields have been falling recently. Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year.

The Fed Should Raise Rates Because Brazil has Low Unemployment? - Wow. Raghuram Rajan says the Fed should raise rates because hiring in Brazil is robust: Moreover, even if corporations in the US are not hiring, corporations elsewhere are. Brazil’s unemployment rate, for example, is at lows not seen for decades. If the Fed were to accept the responsibilities of its de facto role as the world’s central banker, it would have to admit that its policy rates are not conducive to stable world growth.The Fed has made it very clear that it worries about conditions in other countries only to the extent that they feed back upon conditions within the US. That is, while I think US should consider the welfare of other countries when implementing policy (though in this case, the effects of low interest rates on Brazil would not be much, if any, of a concern), the Fed has made it clear that's not how it operates. It's charter has different instructions and it must abide by them.

The Seductiveness Of Demands For Pain - Krugman -Mark Thoma is astonished at Raghuram Rajan’s obviously intense desire to find some argument, any argument, for raising interest rates even though unemployment is near 10 percent. As he points out, Rajan is reduced to arguing that the Fed should raise rates because unemployment is low in Brazil.But I realized, as I read this, that I’d seen something like this before. Back in the summer of 2008, as the world was sliding into recession, Ken Rogoff demanded that the Fed and the ECB raise rates because of rising commodity prices and inflationary pressure in developing countries. Again, it was very hard to understand what model lay behind the demand. And let me throw Jeff Sachs into the mix. Brad DeLong is astonished by the recent Sachs op-ed calling for fiscal austerity now now now, in which he claims that fiscal expansion has had all sorts of negative effects that are, in fact, completely absent from the data. What’s going on here?

Fed's Beige Book: "modest" economic growth, "Shadow" inventory of Foreclosed Homes - From the Federal Reserve: Beige book On Real Estate:  Residential real estate activity improved since the last report. Most Districts noted an increase in home sales and construction prior to the April 30th deadline for the homebuyer tax credit, with contacts in many of these Districts also indicating a corresponding slowing in activity in May. Tight credit, the elevated inventory of homes available for sale, and the "shadow inventory" of foreclosed properties on banks' balance sheets held back residential development in the New York, Cleveland, Atlanta, and Chicago Districts. Commercial real estate activity generally remained weak.

Beige Book bullets - The Beige book backs Bernanke. The economy’s improving, albeit modestly, according to the aggregation of anecdotal evidence of economic activity in the 12 Federal Reserve districts. No big shockers in the report, but a few interesting items:

  • BP spill. Tourism’s up almost across the board, but the oil spill may be a drag. Atlanta reported “that the Gulf oil spill and Tennessee floods had already resulted in some vacation lodging cancellations.”
  • Car demand too strong? Here’s a problem you wouldn’t have expected a year ago: “Several Districts reported that auto production was failing to keep up with demand, pressuring already lean auto dealer stocks.”
  • Disappearing government housing props. Real estate activity picks up, only to fall back after a popular tax credit expires:
  • Leaning on the Loonie. Even after their dollar weakened slightly from parity with the greenback, Canadians still represented “a large share of customers” in one western New York mall.

Deciphering the Responses of a Fed Inflation Hawk -Two years ago, Richard Fisher, President of the Federal Reserve Bank of Dallas, was pressing for the central bank to start raising interest rates even though the economy had been stung by a worsening financial crisis. Today, though the economy is recovering, he’s happy to sit on the sideline. “I don’t think economic conditions yet call for it,” Mr. Fisher said in an interview with the Wall Street Journal Friday. Why the more dovish tone out of Dallas’s proud inflation hawk? Mr. Fisher takes many of his cues from a measure of inflation produced by Dallas Fed researchers which is behaving much differently today than it did two years ago. The measure is called a trimmed mean price index. Every month, the Commerce Department produces an index of price changes for the broad basket of goods and services purchased by households, called the personal consumption expenditures, or PCE, price index. Like the consumer price index, the PCE index can be very volatile in any given month if one component — like gasoline or tobacco prices — moves around a lot. The trimmed mean index throws out the highest and lowest marks and averages the rest.

The “Inflation” in Inflation Targeting - SanFran Fed Economic Letter- Many central banks conduct monetary policy according to an inflation targeting framework, which requires that some measure of inflation be chosen as the target. One approach would be to use an index of goods and services whose prices are market determined and not subject to frequent, idiosyncratic, and transitory changes. That could be an index based on the personal consumption expenditures prices of services and durable goods, excluding nondurable goods, similar to but distinct from the U.S. core personal consumption expenditures price index.

Fear must not blind us to deflation’s dangers - A consensus is forming that policymakers should tighten fiscal policy, sharply, in countries with large fiscal deficits. Yet what makes these policymakers sure that business and consumers will spend in response to austerity? What if they find that it tips economies into recession, or even deflation?  In last weekend’s communiqué of the Group of 20 leading economies, finance ministers and central bank governors stated that “countries with serious fiscal challenges need to accelerate the pace of consolidation”.Yet the world economy confronts two risks, not one: the first is, indeed, that much of the developed world is going to be Greece; the second is that it will be Japan. How, I wonder, will the world look back on what is now being planned? Germany’s commitment to greater fiscal austerity across the eurozone is powerful, if hardly surprising. Judged by the UK prime minister’s speech on Monday, the UK is on the same path. Happily, the US has not joined the consensus – as yet.

Protection on long-term deflation hits highest levels since 2008… Hedge funds seeking protection against deflation and dealer hedging of residual short floor positions are cited as the reasons for a rise in prices on euro zero-coupon inflation options. The cost of option protection against long-term deflation in the eurozone has reached its highest levels since late 2008. Traders suggest a number of reasons for the surge in prices of 10-year euro zero-coupon 0% floors - from hedge funds and pension funds insulating themselves against the risk of deflation, to dealers hedging short year-on-year floor positions. The move comes amid falling inflation breakevens (the difference between nominal and real yields), heightened market volatility and general uncertainty in the markets.

That Yield Spread Doesn't Mean What You Think It Means - A year and a half ago Paul Krugman warned about how to interpret an upward-sloping yield curve:The yield curve: I’m a little late getting to this, but via Mark Thoma I see that economists at the Cleveland Fed are taking some comfort from the positive slope of the yield curve. Long-term interest rates are higher than short-term rates, which is usually a sign that the economy will expand. Not this time, I’m afraid. It’s all about the zero lower bound. The reason for the historical relationship between the slope of the yield curve and the economy’s performance is that the long-term rate is, in effect, a prediction of future short-term rates. But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down.

The case for and against ultra-low rates - Unemployment is high, and projected to remain high for the foreseeable future. The output gap (the gap between the potential capacity of the economy to produce and its actual production) is assumed to be high because of the large number of unemployed. As a result, inflation is low, and inflation expectations are also low. Credit growth is very muted. By almost every metric, it would seem there are no costs to keeping interest rates near zero for the foreseeable future, especially if the government’s ability to infuse additional useful fiscal stimulus is waning. Indeed, those who worry about incipient deflation argue that even zero nominal rates may produce high real rates. They would prefer negative nominal rates (you pay someone money to lend to them), if that were at all possible. Despite these seemingly compelling arguments, I will argue in what follows that the benefits of ultra-low interest rates may be overstated and the costs understated.

What’s this “Tinkerbell” stuff all about? - It occurred to me that perhaps much of what I have been discussing recently is a bit too esoteric for normal people who don’t live and breathe Woodfordian monetary theory.  So today I’m going to try to explain the basic ideas in a very simple way.  Then in part 2. I’ll try to explain how I can use the same Woodfordian model that people like Thoma and Krugman use, and reach different conclusions. I’ll start where Nick Rowe left off yesterday.  Nick spent a lot of time discussing all the perplexities of trying to control the economy by controlling real interest rates.  Unfortunately my brain is not wired properly to understand monetary policy based on manipulating real interest rates.  I see the new Keynesians as taking a peripheral stylized fact (prices are sticky), exaggerating to the point of inaccuracy (prices don’t change at all in the short run), and then making it centerpiece of their model.

Run, don't walk, up the down escalator - If you find yourself going down the down escalator, and suddenly realise you want to go back up, you don't delay, and you don't walk back up. You turn around immediately, and you run as fast as you can till you get to the top. Over a year ago, Mark Thoma introduced his icy hill metaphor. I thought he had a good point, and it has stuck in my mind ever since. But something struck me as not quite right about his metaphor. (You don't hit the gas pedal hard halfway up an icy hill, because you will just spin your wheels).  The escalator metaphor works much better to make essentially the same point. The downward forces are: the threat of deflation; fear of lower future income; unemployed people running out of savings; all of which create an undesirable positive feedback effect by reducing aggregate demand still further once you go into a recession. If you walk up the down escalator, you might end up just standing still, until you "run out of gas" (mixing the two metaphors). For fiscal policy, "running out of gas" means the debt/GDP ratio gets "too high" to continue. (I'm ducking the question of what precisely that means). But does monetary policy ever "run out of gas"? Got paper? Got ink? Keep printing!

This is Resilience - The US economy is like Rocky Balboa — it can take multiple hard hits, spend a good deal of time beaten down…but then come back and win the fight against striking odds. As you may know, I’m a proponent of the Scott Sumner view of events surrounding the Great Recession. Indeed, I think monetary policy remains too tight relative to the needs of the economy (to return to our previous NGDP growth path). However, from Stephen Gordon (via the BEA), we learn that on net, not even fiscal policy has been particularly expansionary: But it’s important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to US GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels. And yet, even severely battered, the little engine that could keeps chugging along.

Worry Grows About Federal Debt - Bloomberg's Caroline Baum wrote a great column about how bad the prospects are for U.S. government finances, "I Want It All, Even Better If You Pay for It." Pointing to CBO director Douglas Elmendorf's observation that the government is ignoring the reality of taxes and spending, Baum blames politicians who promise more and more generous government benefits, especially to retirees, with no realistic concept of how to finance them. The U.S. can't afford to provide everyone with food, clothing and shelter, not to mention medical and child care, college tuition, a low-interest mortgage and a Social Security check until death. And she thinks "devout Keynsian" economists are wrong when they urge Congress to borrow and spend even more than it already has. Baum thinks it may already be too late to stop ballooning debt and interest payments from causing long-term economic damage. According to a plausible CBO estimate, interest payments will reach nearly $1 trillion per year by 2020, and federal debt will reach 90 percent of GDP, a level that economists Reinhart and Rogoff call a threshold beyond which economic growth slows significantly.

The Debt-Bomb Rubicon - Real Times Economics picks up on the debt theme, noting that the $13 trillion in U.S. national debt equals 88% of projected 2010 GDP (in a post earlier this week, I compared it to 2009’s GDP and arrived at 90%, but little difference; at current growth rates for both it will soon be 100% of GDP.) That puts the U.S. in a dangerous situation: We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.I’ll tell you, folks, we are crossing the Rubicon. We are going to be forced into some very hard choices, choices we have been putting off for years, no matter how the economy’s doing. That’s the real takeaway here, that soon no matter how fast the economy is growing, it won’t be able to keep up with our debts.

Debt Problem "Contained" in Europe - Quote of the day via Bloomberg: We do believe the recovery is strong,” Dominique Strauss-Kahn said in an interview with Bloomberg HT television in Istanbul. While rising debt levels are a risk to growth, mainly in Europe, authorities in the region “are now really committed to solve it” and “the problem has been contained,” he said. And this reminds us of Fed Chairman Bernanke's testimony on March 28, 2007:  "[T]he impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." Uh oh, not another problem "contained"!

U.S. Debt To Rise To $19.6 Trillion By 2015 - The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress. The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year. The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.

US Foreign Debt as % of GDP - That "bit" with the grey line through it at the end, where debt levels increase substantially, is when the NBER defined recession began (the "GFC"). Sorry about not getting all the dates in (still working out how to use spreadsheets), but the spike near the middle around 10% is 1995-06-30, the peak in the middle which peaks at nearly 15% is 1997-09-30, the trough which reaches below 10% is 2001-03-31, and the plateau after that of around 15% is 2004-09-30.

Taleb: Debt Problems Are Worse Now Than in 2008 - Nassim Taleb speaks to the issue I have been addressing here for two years, namely that the problem with our financial system is debt.  There is too much of it. And all the stimulus in the world won’t solve that problem.  The debtors either have to pay the debt off or default. Until they do, systemic risk heightens economic fragility.You can use stimulus as a way to control the deflationary impacts of the inevitable defaults, but the stimulus we have seen to date is not designed for that purpose. Rather, we have witnessed a transfer of private sector debts onto the public sector in an attempt to prevent recession and make the debt problem go away.  Instead, what has happened is the debt problem has moved from the private to the public sector.

Debt Spreading 'Like a Cancer': Black Swan Author - The economic situation today is drastically worse than a couple years ago, and the euro is doomed as a concept, Nassim Taleb, professor and author of the bestselling book "The Black Swan," told CNBC on Thursday.  "We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said. "Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added. The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relived that public attention has shifted to debt, instead of growth. The world needs to prepare itself for austerity, he warned. "We need to slash debt. Unfortunately, that's the only solution," Taleb said.

US Will Be Greece in 10 Years: Walker (CNBC)The United States is a decade away from being Greece if it fails to get on the path of fiscal responsibility, former US Comptroller of the Currency David Walker told CNBC Thursday. “When you look at the debt held by the public—federal, state and local—we’re already worse off in the United States than Spain,” said Walker, now president and CEO of the Peter G. Peterson Foundation. “We’re worse than Ireland. We’re two years away from being Portugal and 10 years ago from being Greece.” Walker said even though investment in the dollar is now a rush-to-safety move, it’s a temporary situation. “We have more rope because we have 64 percent of the world’s global reserve currency. That gives us more time. It doesn’t mean that we’re exempt from the rules of prudent finance.”

Federal Debt, Terrorism Considered Top Threats to U.S. – Gallup Terrorism and federal government debt tie as the most worrisome issues to Americans when they consider threats to the future wellbeing of the U.S. Four in 10 Americans call each an "extremely serious" threat, with healthcare costs ranking a close third. On a broader basis, a majority of Americans consider all but 1 of the 10 issues rated in the May 24-25 USA Today/Gallup poll as either "extremely serious" or "very serious" threats. Discrimination against minority groups is the sole exception, with 46% calling it extremely or very serious.

Fed's Hoenig bemoans "serious" US fiscal deficit (Reuters) - Kansas City Federal Reserve Bank President Thomas Hoenig said on Tuesday U.S. fiscal deficits are not sustainable. The "very serious" problem would become more difficult to address the longer it goes unattended, Hoenig told a forum sponsored by the regional Fed bank he oversees

The Looming Necessity of Fiscal Consolidation - Welcome to the first installment of Bartlett’s Notations,  my daily compendium of important  studies, papers and reports on the  economy and fiscal issues that haven’t  received as much attention as I think they deserve.  The looming necessity of fiscal consolidation – i.e. deficit reductions -- after the huge run-up in public debt in all major countries is encouraging new research on how and why such consolidation is necessary and how best to achieve it. An emerging theme is that consolidation efforts concentrating on spending cuts are more likely to be successful and are no more difficult to achieve politically than raising revenues. (paper summaries)

G-20 Clash Over Recovery Risks ’Sub-Potential’ Growth (Bloomberg) -- Global policy makers are starting to clash over their individual prescriptions for recovery as Europe demands lower budget deficits while the U.S. warns against pushing exports instead of domestic demand.  Treasury Secretary Timothy F. Geithner said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand. European Central Bank President Jean-Claude Trichet said fiscal tightening in “old industrialized economies” would aid the expansion by shoring up investor confidence. Each strategy carries threats for the global rebound that the G-20 said faces “significant challenges.” Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could worsen unemployment. Relying on exports leaves the world prone to trade wars and competitive currency devaluations as countries seek to give their companies an edge.

ECB Advocates Tightening as U.S. Urges Domestic Demand Growth - European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand. The impact of narrower budget gaps “on growth could not be considered negative because it would improve confidence,” Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in “old industrialized economies,” he said. The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.

Geithner at G20 Warns of Imminent Beggar Thy Neighbor Currency Policies - Yves Smith - As much as I have been a consistent critic of Geithner in his role as one of the chief enablers of the banking industry, he deserves credit for this succinct remarks at the G-20 via Bloomberg (hat tip reader Scott):Geithner flagged concern that others are turning to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength.“Stronger domestic demand in Japan and in the European surplus countries” is needed, Geithner said in a June 5 press briefing in Busan. “The value of the G-20 is to help each of us individually recognize the importance of economic policies that are in our broad collective interest.” His comments highlight a related issue. The oft-cited Reinhat/Rogoff work on financial crises shows a strong correlation of high international capital flows with more frequent and severe financial crises. While it is in theory possible to have robust international trade without large international capital flows, that would require countries to run only small trade surpluses and deficits.

G20 drops support for fiscal stimulus - Finance ministers of the world’s leading economies have been so spooked by the sovereign debt crisis that they have decided they can no longer wait until economies are growing strongly before they remove fiscal stimulus. The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, at the weekend also dropped proposals for a global banking levy, giving countries leeway to do what they thought best for their domestic circumstances. The communiqué of the meeting made clear the G20 no longer thought expansionary fiscal policy was sustainable or effective in fostering recovery because investors were no longer confident about some countries’ public finances. “Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it said. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.” These words were in marked contrast to the G20’s April communiqué, which called for support to be maintained until the recovery picked up steam.

G20 Heated Debates; Europe Politely Tells Geithner Where To Go - Demands for more stimulus fell by the wayside as concern over sovereign defaults and budget deficits caught the attention of G20 participants. Reading between the lines, it seems Europe politely told Geithner to go to hell. South Korea's deputy finance ministers says G-20 Officials Had Heated Debate on Europe There’s been “a lot of heat” in the discussions, Shin Je Yoon, deputy minister for international affairs at South Korea’s finance ministry, told reporters in Busan today during a break in a meeting of G-20 officials.Shin said the European crisis was the dominant issue discussed by G-20 officials, with mixed views about the possibility of the region’s sovereign-debt woes spreading to other parts of the world.

G20: The Time For Stimulus Is Over, Long Live Fiscal Austerity - The world's financial leaders have decided that the time for stimulus is over, and the time for global fiscal austerity is now, according to the FT. This decision by the G20 is a result of a lack of market confidence in the fiscal position of many leading countries, due to their expansion in sovereign debt. That expansion has led to speculation about the default and demise of many countries' financial positions and the euro currency. G20 leaders have also agreed not to move forward with a synchronized tax on banks. Both these decisions have massive repercussions for the global financial system. With global stimulus withdrawn, the possibility for many countries to slip back into recession remains high. And with the international banking tax dead, individual states will be able to pursue their own tax policies against their banking sectors. This may encourage financial institutions to offshore portions of their businesses away from more aggressive regimes.

G20 Channels Herbert Hoover -- "Nothing is more important than balancing the budget," asserted President Herbert Hoover in 1931 as he sought a huge tax increase in the midst of the Great Depression. The tax hike would be "indispensable to the restoration of confidence and to the very start of economic recovery," he added. And while the popular view of Hoover was of hidebound Republican fiscal conservative, he reflected the bipartisan consensus. The Democratic Party platform of 1932 called for the federal budget to be balanced immediately, while then-candidate Franklin D. Roosevelt excoriated the Hoover administration for running budget deficits. Oblivious to this precedent, the finance ministers of the Group of 20 major industrialized nations last weekend endorsed fiscal retrenchment to deal with the debt crisis that has cut a swath across southern Europe -- even as most of the industrialized world either remains in recession or shows signs of a slowing recovery.

Lost Decade, Here We Come - Krugman - The deficit hawks have taken over the G20:“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US. But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt.

Krugman: "Lost Decade, Here We Come" - First, from the Financial Times: G20 drops support for fiscal stimulus Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday ...The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. And from the G20 communiquéThe recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation.  And from Paul Krugman: Lost Decade, Here We Come It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

Madmen In Authority - Krugman - Rereading my post on the folly of the G20, it seems to me that I didn’t fully convey just how crazy the demand for fiscal austerity now now now really is. The key thing you need to realize is that eliminating stimulus spending, while it would inflict severe economic harm, would do almost nothing to reduce future debt problems. Here’s the IMF’s estimate of sources of the growth in debt over the next few years: And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now. So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

What are markets demanding? - Paul Krugman, like many other bloggers, asks a good question: Why, then, are Very Serious People demanding immediate fiscal austerity? The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. Here is a short bit from today's morning news: The euro slid 2.5 percent last week versus the greenback as credit-default swaps on France, Austria, Belgium and Germany rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments to a record. The French in particular are having serious and formerly unexpected problems and that is one of the two major EU countries, not Greece or Iceland. The French also don't have one of those impossible debt-gdp ratios. In the blogosphere, discussions of market constraints are too heavily influenced by interest rates, which also "measure" an ongoing flight to safety.

"What Do Markets Want?" - The G20 recently recommended that countries begin reducing their budget deficits immediately. The argument is based upon the idea that "giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy." However, the recovery is still relatively weak, and in What do markets want?  Kevin O'Rourke wonders why the G20 wants to risk sending Europe back into recession. He argues that "low unemployment and economic growth are among the fundamentals which have to be right, if government policies are to be credible in the eyes of the markets." Cutting deficits now, before the economies have recovered sufficiently, risks upsetting markets by causing lower growth and higher unemployment:

Editorial - The Wrong Message on Deficits - NYTimes - The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse. The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.  At a hearing on Wednesday, the Federal Reserve chairman, Ben Bernanke, said job creation and financial-stabilization programs were essential to stop recession from becoming depression, but he also called for “a strong commitment to fiscal responsibility in the longer run.” The emphasis in that statement should be on that “longer run,” but we fear many politicians weren’t listening for nuance.

A Good Crisis, Wasted, by Tim Duy: It is official. The rest of the world assumes the economy can pick up were we left off in 2006, with the US as the driver of global demand.  Once again, crisis - and along with it the opportunity to rebalance global growth - is wasted. The Greek debt crisis gave Europe's deficit hawks just the excuse they have needed to pull back on fiscal stimulus. From Bloomberg:Chancellor Angela Merkel said Germany is poised for a “decisive” round of budget cuts that will shape government policy for years to come, fueling disagreement with U.S. officials who favor measures to step up growth.  German Chancellor Angela Merkel has a cheerleader at the ECB:European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand. Elsewhere in the Euro zone, some are quite pleased to let the Euro sink.And the Chinese remain hesitant to change policy, so perhaps Europeans are wise to just throw in the towel:

Tim Duy: Lost Chance for Global Rebalancing - Professor Duy is not happy: A Good Crisis, Wasted - It is official. The rest of the world assumes the economy can pick up were we left off in 2006, with the US as the driver of global demand. And it is apparent there is little US policymakers can or will do to counter the trend. ...Don Geithner [is] tilting at windmills. His battles are futile. Financial markets know it, sensing that the global growth cannot be sustained on the back of the US alone. Of course, this was always the case; demand in the US alone was never sufficient to recreate the fabled "V" recovery of the 1980s. Market participants also know that US policymakers have their finger in the dam of a tidal wave of competitive devaluations. The Dollar, for all its warts, remains the big dog of reserve currencies, and Geithner fears the global pandemonium that would result from an actual US response to the currency manipulation of others. Thus the postponed report on currency manipulators becomes another case of "extend and pretend."

What Happens to a Global Rebalancing Deferred? - Tim Duy notes that the shifts in relative global demand that would lead to a 'rebalancing' of current account deficits and surpluses seem to be on hold. With the crisis in Europe leading to a decline in the euro, which, in turn appears to have given China cold feet about letting the yuan rise, it looks like we may be back to the status quo ante where the US is the world's "consumer of last resort". He concludes:  Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left. Michael Pettis believes that the European crisis makes the yuan revaluation more urgent, but he is not optimistic that the powers-that-be see it that way. He worries the end result will be trade tension and protectionism:  Most policymakers around the world – while publicly excoriating the US for its spendthrift habits – are intentionally or unintentionally putting into place polices that require even greater US trade deficits.

On Financial Sense: G20 Shocker - cmartenson - G20 drops support for fiscal stimulus - Wow. That's an enormous departure from past policy and creates an enormous gap between major countries, primarily the US, UK and Japan on one side and everybody else on the other.  Consider that the US and the UK are currently running deficits well north of 10% of GDP and are politically committed 100% to continued stimulus as the means to stoke domestic demand. But along comes the rest of the world saying that they are now committed to living within their budgetary means. Worse, these converts to fiscal sanity have even thrown in the towel on the very idea that stimulus works: Doubting the value of expansionary fiscal policy is the same as saying, "Keynesianism doesn't work!" I welcome their belated discovery, but am also shocked by it. Is it possible for economic sanity to break out across the world?

Time to Plan for a Post-Keynesian Era - Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crises, we need to abandon short-term thinking in favor of the long-term investments needed for sustained recovery. Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that "shovel-ready projects" could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases.

The dreadful potential of frugality - There is an identity between the financial balances of the private, government and foreign sectors, as described by Prof Godley. For every borrower there must be a lender. The private sector surplus, for instance, is equal to the public sector deficit together with the balance of payments surplus. Normally, the private sector spends less than it earns. But during booms, households and businesses become profligate. A private sector deficit appears. This situation occurred in Britain in the late 1980s, in the US in the late 1990s and once again after the economy recovered in 2002. Most contemporaries hailed the fiscal surpluses and apparent prosperity of those times. Prof Godley saw things differently. He argued that the private sector could not indefinitely spend more than it earned as it would accumulate too much debt. Nor could a balance of payments deficit be sustained for ever as foreign liabilities would become overwhelming. At some stage, the private sector’s financial balance would have to revert to its historic mean. Prof Godley suggested this would happen when asset price inflation slowed.

"Keynesian Endpoint" and "The Least Dirty Shirt" - Bloomberg: Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager. “Time, devaluations, and debt restructurings might be the only way out for many nations,” And Bill Gross chimes in too, emphasis mine: "“The world is full of dirty shirts in terms of excessive debt, and the United States is one of those countries, but it still remains the reserve currency and still remains the flight- to-quality haven,” said Bill Gross, who runs the world’s biggest bond fund at Newport Beach, California-based Pimco. “The U.S. is the least dirty shirt,”

May Treasury Deficit Comes In At $135.9 Billion - The May US deficit came in at $135.9 billion, the third highest (or, technically, lowest) May on record, but better than last May's $189.7 billion. This number was made up of total outlays of $282.7 billion and receipts of $146.8 billion, 3rd and 4th highest ever, respectively. Sequentially, the number was $53 billion worse than the April deficit of $82.7 billion. Total interest on Treasury debt was $23.8 billion, or 8% of total outlays. Surprisingly, in May, the DTS announced that only $43 billion of new debt was raised (largely due to asettlement delay of about $100 billion at the end of May which hit the June ledger).

We Need Bigger Deficits Now!, by Brad DeLong: We Are Live at The Week: As the disappointing May job numbers confirm, this is still an exceptional time—a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for not normal economics but rather “depression economics.” The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases and cutting taxes right now are exceptionally large.  The result is that the costs of borrow-and-spend policies are overturned for the short run... In normal times, a boost to government purchases or a cut in taxes ... raises interest rates, which crowds out productivity-increasing private investment spending and, dollar for dollar, leaves us poorer after the effect of the stimulus ebbs. The borrowing must then must be financed at a significant interest rate, and thus paid for with higher taxes, which reduce incomes by increasing the wedge between the private rewards and the social benefits of expanded production.

What's the worst that could happen? - Paul Kurgman argues that the G20s new found emphasis on deficit cutting is misguided and I tend to agree with him. However, clearly their are smart people on the other side. What I want to know is what do these individuals envision happening as a result of irresponsible levels of government debt. What are the consequences they see for the US, the Eurozone, the United Kingdom, etc. I ask because from where I sit we are looking at substantial consequences from a lack of aggregate demand. Perhaps, there are those who find aggregation distasteful but surely: low to non-existent inflation, very low government interest rates both absolutely and in relation to the private market, weak retail spending, weak hiring, high unemployment, below trend GDP and government revenues all combine to create a disconcerting picture.

The best case I can make for fiscal retrenchment - Following in the footsteps of Brad DeLong and in the spirit of generosity, it’s perhaps worth trying to reconstruct the best argument against stimulus and in favor of fiscal retrenchment that I can make. The story I would tell is that we’re seeing a bit of an ironic switcheroo in which the liberals who normally tell me markets aren’t perfect are now telling me not to worry about the US (or German or Japanese) fiscal deficit because interest rates are so low.  In theory, this is because these securities are “safe.” Investors are confident that these securities will be repaid, and that they’ll be repaid via a mechanism that doesn’t involve massive inflation. But what mechanism? Is it actually true that the United States has a credible plan to close its long-term fiscal deficit? Well, no it’s not. Nor is it true that the U.S. political system seems to be highly functional and capable of making the tough choices need to formulate such a plan. So why are rates really so low? It’s a bubble. Investors view US government debt as “safe” because they’re confident other investors will view it as safe.

Anti-Straw Men And Austerity – Krugman - There should be a standard phrase for the construction of anti-straw-men — for attributing to your intellectual opponents sophisticated, reasonable positions they do not in fact hold, ignoring the nonsense they actually espouse. Whatever you call it, that’s what Brad DeLong is doing in his comment on a previous post of mine. Brad suggests a possible “confidence” argument for fiscal austerity, and also suggests that this must be what lies in the minds of the OECD, Ragu Rajan, Jeff Sachs, etc.. But wait a second: both the OECD and Rajan are calling not just for fiscal austerity but for raising interest rates, a move that makes no sense unless you fear inflationary pressures when the economy is at 10 percent unemployment. (The OECD is quite specific: it wants the Fed funds rate to rise by 350 basis points by end-2011, even though its own forecast says that unemployment then will still be over 8 percent and inflation under 1 percent.) It’s very hard to see what their argument is — but one thing is for sure, it really is murky and muddled.

Paul Krugman's War on Austerity - At a time when most people are saying the path out of the financial crisis and European debt problem is for individuals and governments around the world to cut back, Paul Krugman wants us to spend, spend, spend. So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity? To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.Krugman has of course been calling for additional stimulus spending for a while. So it may be easy to dismiss Krugman as a liberal who, despite his Nobel, is no longer in touch with economics. But he's not the only one calling for more spending. Besides Krugman, Martin Wolf of the Financial Times has been arguing against government cut backs in the wake of the economic slowdown as well.

Schizoid Krugman - In Paul Krugman’s version of corporate liberalism he stills wants there to be a modicum of deployed fiscal policy, i.e. pseudo-stimulus spending to go along with the Bailout. That’s part of the “neoclassical synthesis” beloved of such pseudo-Keynesians (“bastard Keynesians” as Joan Robinson called them). So he objects to the calls for total assault on the people via “austerity”, at least for right at this moment. So he’s been in a squabble with them. But as we’ll shortly see, it’s purely an arcane squabble among the technicians of kleptocracy over the tempo and mechanisms of destruction, not over the great crime itself. In a Thursday blog post on the matter, Krugman disagrees with fellow Obama hack Brad DeLong about the motivations of austerity-mongers like the OECD, Raju Rahan, and Jeff Sachs. DeLong seeks to find a reasonable explanation for why they’re advocating something so contrary to all the “models” and all the evidence of history. (Needless to say, neither Krugman nor DeLong have any moral or political objections to austerity, just technical ones.)

Pete Peterson Has Won: Americans Rate Federal Debt as Top Threat - A fresh Gallup poll reports that Americans are most worried about….federal debts: It would appear the ground has been laid rather effectively for (among other things) an assault on Social Security and Medicare. As we have pointed out before, Social Security is not under any immediate stress, and it would take only some minor tweaks to alleviate the (well off in the future) strains. And contrary to popular perception, the reason Medicare spending will get out of hand is due to projected medical cost escalation, not demographics. In other words, the “crisis” in Medicare is a symptom of our broken health care system, and not an entitlements problem per se. But in addition to the continued ability of Big Pharma and the health insurance industry’s ability to make a bad situation worse, as witness our healthcare “reform,” consumers have also been deeply conditioned to see more treatment as better. From both a cost and side effects perspective, this is simply not often the case

Still 'Jobs, Jobs, Jobs' -- Just Not the Way the Administration Is Thinking About Them - With nearly everyone now starting his morning by chanting "jobs, jobs, jobs", what I find so puzzling -- and concerning -- is the ongoing debate in Congress between 'job creation' and 'deficit reduction' and the premise that they are mutually exclusive. Voters and workers -- who are the only ones who really count -- clearly hate unemployment much more and much more personally than they dislike deficits, which they barely understand. And if they are mutually exclusive, which I absolutely don't believe they are, then how right now, with the bogie being 22 million needed new jobs, can 'job creation' be losing out, as it seems to be.

The Case for More Stimulus - This week Congress will take up a stimulus bill liberals hope will extend benefits to the unemployed and send money to states to avoid hundreds of thousands of public sector layoffs. Republicans and conservative Democrats are dragging their heels and raising concerns about adding to another trillion-dollar deficit. What is the case against additional stimulus? It's here. To hear the case for more stimulus, I spoke with William Gale at the Brookings Institution. A lightly edited transcript follows:

Calls for Stimulus Yield to Deficit Concerns - NYTimes - At a moment when many economists warn that the American economic recovery is likely to be imperiled by prolonged high unemployment and slow growth, President Obama is discovering that the tools available to him last year — a big economic stimulus and action by the Federal Reserve — are both now politically untenable. The mood in both parties of Congress has turned decidedly anti-deficit, meaning that the job-creation programs once favored by the White House and Democratic leaders in Congress have been cut back, then cut again. It is a measure of the mood that Mr. Obama on Tuesday hailed an initiative by his administration to cut the budgets of most major government agencies by 5 percent, at a time when conventional theory would call for more government spending to lift the economy.  Even the Federal Reserve is pulling in its horns. No one could expect it to cut interest rates further — they are at rock bottom. But spurred by inflation hawks in their midst, the Fed has gotten out of the business of buying Treasury securities and mortgage bonds, one of its main strategies over the last two years for pushing down long-term interest rates.

Why is Fiscal Policy Not Stimulating? - I see that I caught Mark Thoma’s attention with my last post regarding fiscal stimulus. I’m assuming (from previous posts on both Economist’s View and CBS Moneywatch) that Mark believes fiscal stimulus has not been (maximally) effective for two reasons: It was targeted poorly.  It was too small.  I have a previous post that lays out my views on why the stimulus was ultimately ineffective at raising NGDP expectations…which is what we’re trying to stimulate. Future expected nominal income growth will increase current consumption expenditure. So what we want is for future expected NGDP to be higher by some amount…ideally we would like to have enough nominal growth as to rejoin our previous growth path (which we are something like $1.3tn below currently). Today, I would like to quote Milton Friedman regarding fiscal stimulus, which echoes my reasoning about why the fiscal stimulus package has had a less-than-spectacular impact on Y=C+I+G+NX:

How to solve the fiscal dilemma - How should governments deal with enormous budget deficits? In Europe, the playbook seems to be clear: announce enormous budget cuts (see Germany, UK) only to be told that they’re still not big enough. Jeff Sachs today has a slightly different idea. He starts off by saying that the fiscal response to the financial crisis was a bit silly, and indeed that “stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money”. If the country was headed into recession, then it was the job of central bankers to “prevent depression” while actually allowing the recession to run its course: “the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.” OK, fiscal response is off the table now, so we’re all closing that particular stable door. The question is how to stabilize national finances going forwards. And Sachs says that’s pretty much impossible in the US:

We learn why they hate social security - Apparently, these are the “good-old days” our nation’s fiscal hawks relish. The Peterson Foundation’s David Walker co-hosted CNBC’s Squawk Box this morning. The discussion followed the classic Peterson Foundation talking points—government bad, 'business' good—but ultimately led to a nostalgic reminiscence for the good old days when Americans faced debtors prisons and had no sense of “entitlement”:“The fact of the matter is we have to change how we do things. We are on an imprudent and unsustainable path in a number of ways. You talk about debtors prisons, we used to have debtors prisons, now bankruptcy is no taint. Bankruptcy is an exit strategy. Our society and our culture have changed. We need to get back to opportunity and move away from entitlement. We need to be able to provide reasonable risk but hold people accountable when they do imprudent things…it’s pretty fundamental.”…

Prune and Grow - NYTimes- Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now.  Over all, most economists seem to think the stimulus was a good idea, but there’s a general acknowledgment that we know relatively little about the relationship between fiscal policy and job creation. We are left, as Glaeser put it on The Times’s Economix blog, “wading in ignorance.” In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

Deficit reduction: David Brooks doesn't inspire confidence - The Economist -I'M SOMETIMES mystified by Tyler Cowen's taste in commentary. He calls the latest David Brooks' column one of his favourites. I think it's a total mess. Titled "Prune and grow", it's meant, I think, to be about fiscally responsible ways to invest in America's future. But Mr Brooks takes a lot of odd detours in getting to his destination.The piece begins with a rumination on the effectiveness of last year's stimulus plan. It's correct that opinions differ on the effect of the stimulus plan, but as Mr Brooks concedes, most economists think it was a good idea. Moreover, the fact that unemployment was high despite the spending tells us almost nothing about its effectiveness. As I noted yesterday, the typical economic forecast at the time the stimulus was being crafted was for a much shallower recession than what the world actually experienced. And as others have pointed out, federal stimulus has largely been offset by massive cuts at the state and local level

David Brooks and the Power of Magical Thinking at the NYTimes…David Brooks doesn't like the stimulus, as readers of his columns know. Today he engages in a bit of magical thinking in putting out his case for deficit reduction. His first invention is telling us: "deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times." This is very interesting, what "debt crisis" is Brooks referring to? We can point to a debt crisis in Greece, and arguably Portugal and Spain, but it is not clear what that has to do with the argument for stimulus in the United States. There were debt crises in Latin America in the 80s, no one ever raised these in the context of the Reagan era budget deficits. In the real world we would look to things like the ratio of debt to GDP in the United States (@60 percent) and compare it to the ratios in other countries and to the U.S. at other points in time. There are several countries with debt to GDP ratios of far more than 100 percent who are able to borrow money with no difficulty.

We Can Walk and Chew Gum at the Same Time - Today the Obama Administration is announcing a very small effort to reduce (only “unnecessary and wasteful”) deficit spending, and yet liberal groups will attack them for promoting a policy that will kill the economy–or at least prolong the recession.  And conservatives will continue to argue that any spending done in the name of “stimulus” is by definition “wasteful”–especially if they don’t get how a less-idle economy might at all benefit themselves personally.But it’s possible to argue for more and better stimulus at the same time that you call for greater fiscal responsibility.  Two prime examples, from two of my favorite “fiscal hawks” who can walk and chew gum at the same time…

Commission outlines $1 trillion in defense budget cuts - A bipartisan commission of defense experts has released a plan that would reduce the US's defense spending by nearly $1 trillion over 10 years -- a plan sure to gather support from progressives and libertarians, but unlikely to pass through Congress. The commission's report comes at a time when public concern about the US's national debt has hit a fever pitch, and the claim that nearly $1 trillion can be saved from defense spending will certainly color future debates about what government services to cut. The Sustainable Defense Task Force, put together at the behest of Rep. Barney Frank (D-MA) to "explore options for reducing the defense budget’s contribution to the federal deficit without compromising the essential security of the US," recommends saving $200 billion by reducing the presence of US troops in Western Europe and the Far East, and reducing total troop strength to 1.3 million. The report (PDF) also recommends eliminating "costly and unworkable weapons systems," for a savings of $130 billion, and reducing the US's nuclear arsenal to 1,050 warheads, for a savings of $113 billion.

Defense Spending - CBO Director's Blog - Earlier this week, CBO’s Acting Assistant Director for National Security, Matthew Goldberg, spoke to the National Commission on Fiscal Responsibility and Reform on the topic of discretionary defense spending. Last month, representatives of CBO spoke to the commission on three different occasions to provide information on tax policy, discretionary spending, and mandatory spending. Discretionary defense spending makes up half of all discretionary spending (that is, spending that is subject to the annual appropriation process) in the federal budget. The Department of Defense (DoD) requested and the Congress provided about $530 billion in appropriations for fiscal year 2010. But current plans would require greater funding in future years.

US Senate Approves Measure Voicing Concerns Over China Treasury Holdings - The U.S. Senate approved a measure Wednesday that would force the Obama administration to provide quarterly reports to Congress about dangers stemming from the growing proportion of foreign-held public debt. The measure includes language saying the "growing federal debt of the United States has the potential to jeopardize the national security and economic stability" of the U.S. It places firm focus on China, and includes inflammatory language suggesting the country as the largest holder of U.S. debt "could try to manipulate domestic and foreign policymaking of the U.S., including the U.S. relationship with Taiwan."

Shaking the Federal Money Tree - Tyler is basically right: tax cuts. Lefty economists might generally believe that increasing spending is a more efficient way of stimulating consumption than reducing taxes, but they'd almost certainly accept a big tax cut as an almost-as-good substitute. And tax cuts have two big advantages over spending. On the substantive side, they work faster. Spending takes time to work its way through the economy, but a tax cut (for example, a payroll tax holiday) boosts the economy almost immediately. And on the political side it's quite doable. Republicans would be persuadable because they love tax cuts and Democrats would be persuadable because it would help the economy. For Obama, then, it would be the best of all worlds: a fast stimulus that gets bipartisan support, something that boosts the economy while dampening the inevitable criticism he'd get for blowing up the deficit.

Ezra Klein - The government's crummy computers - The news in Peter Orszag's speech this morning is that the White House is "asking each agency to develop a list of their bottom 5 percent performing discretionary programs" in order to make cuts more obvious. This 5 percent isn't much in the scheme of things, but it's a buy-in to the idea that deficits are too high right now rather than an effort to convince people that the time for countercyclical spending hasn't passed. So that's not the news in the speech. But it's also a small part of it. The bulk of the address is about the need to modernize the federal government's IT infrastructure, and it's worth reading. Orszag notes, for instance, that "public sector productivity growth matched the private sector’s until about 1987," at which point it began falling rapidly behind. If you've identified this as roughly coinciding with the rise of personal computing and the Internet eras, well, ding-ding-ding.

Estate Tax Dormant, Billionaire’s Bequest Is Tax-Free - Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77. Had his life ended three months earlier, Mr. Duncan’s riches — Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world — would have been subject to a federal tax of at least 45 percent. If he had lived past Jan. 1, 2011, the rate would be even higher — 55 percent. Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.

Can the “Death Tax” Be Brought Back to Life? - When I wrote this op-ed in the San Francisco Chronicle more than four years ago (while I was working at the Brookings Institution), I honestly never thought we’d let the estate tax go to its outright repeal, no matter what the 2001 tax law said.  I was arguing that we needed to “freeze” estate tax law while there was at least some estate tax to save and yet little substance to the claim that it was a “death tax.” Instead, we are living to hear stories like this one that appeared in the New York Times today, because we let what I thought was highly improbable actually happen: we let the estate tax die…for heaven’s sake! And while the story talks of policymakers worrying about whether we can make the tax retroactive on estates of people that have already died this year, I’m more worried that now that the estate tax has died, it’s going to be really hard to revive it, even for the very rich people who haven’t yet died.

Americans want to Soak the Rich MMCCLXXVII - Jeff Sachs proposed higher taxes on the rich. Felix Salmon wrote I don't think this is possible, politically, in either the US or the UK. In the US, the middle classes are implacably opposed to tax hikes on people making more money than they themselves will ever make. Kevin Drum agrees with Salmon about US public opinion and asks. "Why are Americans so unsympathetic to higher taxes on zillionaires?" The answer is that Americans are sympathetic to higher taxes on the rich, as has been demonstrated by every poll on the question in the past two decades.  Matt Yglesias noted one recent poll which shows majority support for higher taxes on the rich. I just add that I know of no poll in US history which doesn’t show majority support for higher taxes on the rich. Somehow this absolutely striking, dramatic, undeniable feature of US public opinion has been overlooked. I think the reason is that policy makers and pundits agree that soaking the rich is un-American, and the fact that most citizens disagree must therefore not be conceded.

$ 250,000 per year sure is rich by US standards - It appears that someone contests my view that families with income over $250,000 per year are rich. He or she notes that two earner families can be rich by working real hard and that price levels are high in some parts of the country, so $250,000 doesn’t buy as much as it buys in other parts of the country. Let's see. In 2006 44.9 % of married couple families had two earners The Wikipedia claims that, according to the US census bureau, in 2004 51.35% of households were married couple families. According to the same source, 1.5% of households have income over $250,000.Non family households typically contain two or more families and, in fact, there are more families than households. I won't bother to look it up, but 6% is being very generous to those who claim that families with incomes over $250,000 per year are not all that rich by US standards. According to this study (the first I found) the highest bicoastal local price indices are about 1.3 times the national average.

 Tax Hikes and the 2011 Economic Collapse – Laffer - People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.  It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives. Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.

Art Laffer: Make Up Your Own Facts Here - To a man whose only tool is a hammer, pretty soon everything begins to look like a nail. I couldn’t help but be reminded of that aphorism as I read the most popular article on yesterday — Tax Hikes and the 2011 Economic Collapse — a screed on the Laffer curve and Supply Side Economics by none then than Art Laffer. If either the WSJ OpEd page or Mr. Laffer had foreseen the most recent economic collapse we just lived through, or the credit crisis, or the housing collapse, or the derivatives problem, or any of the other economic disasters that befell the country I might give their warnings some credence. But considering all this occurred with their man in the White House for 8 years, and they somehow missed it, leads me to one of two conclusions: Either they are extremely bad economists, or they are extremely partisan observers.

Volcker Tax Panel Report Takes Shape - An Obama administration tax reform panel that had appeared moribund is showing signs of life. The panel, a subcommittee of the President’s Economic Recovery Advisory Board (PERAB), is putting the final touches on its report and could be releasing it within weeks, according to people close to the situation. The subcommittee was formed in March 2009, and originally was scheduled to issue its report last December. But its chairman, former Federal Reserve Chairman Paul Volcker, said late last year that the report was being delayed so the panel could consider all its options. At the time, the Obama White House also was wrestling with how to respond to growing public worries about federal budget deficits, under pressure from Congress; ultimately President Barack Obama appointed a separate commission that will try to come up with recommendations this year for reducing the budget gap.

Neal Bill: US companies use of affiliated reinsurers to avoid taxes - US insurers are complaining about the Neal Bill, HR 3424, which would disallow a deduction to a US company for "excess non-taxed reinsurance premiums" with respect to US risks that are "paid to affiliates" (quoted language is from the long title to the bill).  The bill amends section 832 of the Code by adding a limitation on the deduction for reinsurance premiums.  The limitation only applies for "excess" premiums that are paid to offshore affiliates where the money is not taxed as subpart F income or where the premiums aren't taxed because of treaty reduction. The US industry that has benefited from being able to deduct excessive amounts paid to affiliates is up in arms.  Quelle surprise, that the corporatist community will claim that all mayhem will ensue if it loses a cherished way to reduce its corporate income tax payments.  So much of the time, however, the parade of horribles is a figment of the companies' (and their lobbyists') imaginations.

Faulty figures - THIS week's edition of The Economist has a story on how the private equity industry is reacting to legislation that would tax carried interest at a higher rate. Today the Private Equity Council, the industry's lobby group, released a report which painted a rather grim picture of the likely effects of the proposed tax increases. The headline findings suggest that private equity investment could drop by $7 billion to $27 billion a year, and lead to a loss of 36,000 to 127,000 jobs a year. It based these numbers on two analyses.

Taxing Carried Interest and the Sale of Private Equity Firms - Critics of the ongoing congressional effort to tax compensation of private equity managers as high-rate ordinary income rather than low-rate capital gains are focusing on a new objection: Whatever the tax treatment of this so-called “carried interest,” Congress would unfairly raise taxes on the sale of these partnerships by also treating a share of the returns as ordinary income rather than capital gains.  This, say the critics, is an unprecedented effort to turn what are clearly gains—profits from the sale of a business—into ordinary income. It is, warn some, the first step towards eventually eliminating favorable capital gains treatment for all such transactions. Be afraid, they warn. Be very afraid.  But matters are a lot more complicated than they first appear

Carried Interest: Senate Getting Swayed by Lobbyists - The Senate started discussion of the "extenders" legislation on Tuesday.  IN the House version, HR 4213, there is finally a carried interest provision, though it is a weak one.  (Recall that carried interest is the amount that managers of hedge, equity and other partnerships charge for managing assets of the partnerships, so it is compensation income but these "profits" partners claim that their allocations of capital gains from sales of partnership assets should retain capital gain treatment as such allocations do to partners who have contributed capital to a partnership, even though it is a payment for the managers' services.  See earlier postings on A Taxing Matter, here and here (JCT reports) and here (Weisbach study). )  After several years of attempts to tax wealthy fund managers on their compensation the same way that others are taxed--i.e., at ordinary income rates--the House included a revenue offset provision in the extenders bill that will eventually tax 75% of the carried interest at ordinary income rates. 

Navigating the Carried Interest Debate - Just more than a week ago, the House of Representatives passed a bill that would raise the rate of taxation on carried interest. It’s not the first time the House has okayed such a measure. According to ICSC, this is actually the fourth time it’s passed the House since 2007. In previous years, however, the idea has died in the Senate. This year, however, the prospect of such a bill getting through the Senate appears more likely. That’s precipitated a flurry of posts and stories in recent days weighing the measure. Real estate trade groups, including ICSC, are vigorously opposing the change in the tax rate. Jeffrey DeBoer even said the commercial real estate industry was “at war” in reference to the proposed tax. Meanwhile, Craig Huffman wrote a piece at the Huffington Post from the angle of a small developer that explained why he thinks the lower tax rate is appropriate not just for real estate investors, but for venture capitalists and private equity funds as well

Time for an international bank tax? - THERE is a new question up at Economics by invitation: Several G20 governments are proposing a coordinated bank tax to pay for future bail outs and reduce systemic risk. Is additional taxation of the banking sector a good idea? If so, how should it be done? In talks over the weekend, the G20 opted to abandon plans (for now at least) for an internationally coordinated bank tax, thanks in part to strong opposition from countries like Japan, Brazil, and Canada, whose banks did not need public assistance. In our forum, economist Beatrice Weder writes: At the moment the regulatory community does not have a convincing strategy to deal with the too-systemic-to-fail problem. A levy on systemic risk combined with a cross-border resolution fund would seem the best hope. Therefore it is very unfortunate that a number of countries in the G20 that did not experience problems in their banking sectors during this crisis are strongly opposing the implementation of such a levy. Instead of blocking the idea, countries who are sure they will never ever experience a financial crisis and that their systemic risks are zero should simply set their levy to zero.

Is Basel III already prompting bank sales? - The WSJ cites an interesting reason why BofA sold its stake in Santander Mexico: People close to the bank say the decision to sell its stake in the business was driven in part by concerns over a proposed rule under the so-called Basel regulatory accord, which would increase the capital requirements associated with holding minority stakes in other institutions. The banking industry is fighting against the proposal, arguing it would make such arrangements prohibitively expensive...I thought briefly about this possibility yesterday, when I wrote about the deal, but dismissed it. This particular provision of Basel III is still being opposed by a wide group of industry players, and might never make it in to the final rule. And even if it does, it’s going to be telegraphed long in advance: Basel III will be phased in slowly, over many years, giving BofA a lot of time to sell off minority stakes before it’s ever enforced. So the timing seems weird:

Second Dip? -As you might surmise from the conclusion of my previous post, I have been worried about the possibility of a second dip, a new recession beginning sometime in the next year or so, before the current recovery has had a chance to produce much improvement. I was surprised to read that Macroeconomic Advisors is suggesting that there is no chance of a second dip. (I was particularly surprised because MA’s own estimates of the growth impact of the waning fiscal stimulus were one of the reasons I was worried.) After reading their case for zero chance, I have to say that I am still worried. Verbally-intuitively, the case for a second dip still seems pretty overwhelming to me. I take comfort in the knowledge that I tend to have a pessimistic bias, and in the fact that sophisticated quantitative models are generally putting the odds of a second dip quite low. Here is what I see as the case for and against a second dip

Misplaced Optimism - Paul Krugman -I wish I could believe in this Macroeconomic Advisers claim that there is a zero chance of a double-dip recession. But when they say that this probability  is estimated as a function of the term slope of interest rates, stock prices, payroll employment, personal income, and industrial production I immediately lose all confidence. When short-term interest rates are up against the zero lower bound, a positive term spread tells you nothing; as I explained a year and half ago, it’s something that has to happen given the fact that short rates can go up, but not down. Failure to understand this point led to excess optimism in late 2008. I’m a bit surprised to see Macroeconomic Advisers falling into the same fallacy now

Congress Pressed for Reform Bill Deal - As Congressional negotiators begin this week to merge two bills overhauling the financial system, the White House wants them to reach an agreement before President Obama leaves for a Group of 20 meeting this month in Toronto, Sewell Chan reports in The New York Times.The administration has tried to use the summit meeting to foster a sense of urgency among lawmakers. It thinks a deal would give Mr. Obama greater leverage in efforts to persuade other countries to support proposals like a global bank tax and higher capital standards for the largest financial institutions. The higher standards are part of the legislation but would require international coordination. “We’re on the verge of legislating sweeping reforms of our financial system, to fix what was broken in our system, recognizing that those failures in the United States were very consequential to the world as a whole,” - Timothy F. Geithner

The Banking Showdown - With public attention focused on everything from the oil disaster, the diplomatic isolation of Israel, to Al and Tipper's separation, the final legislative push for financial reform begins this week as House and Senate conferees commence their work. This is the moment when lobbyists for the banking industry hope to kill provisions that they were unable to block in the House or Senate. This is no time for reformers to relent.  Much of the conference will be in public session -- a break with recent practice -- but backroom deals are likely to determine the final outcome. According to the Center for Responsive Politics, more than 1,400 former legislators and Hill staff now work for the banking lobby. The industry has about 1,800 paid lobbyists in all, compared to about 60 mostly volunteer lobbyists from several dozen consumer and labor organizations working (on their own time) under the banner of Americans for Financial Reform

The Regulation Crisis - The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized... This view was exacerbated by the way regulation works... Too many regulators, for instance, are political appointees, instead of civil servants. This erodes the kind of institutional identity that helps create esprit de corps, and often leads to politics trumping policy. Congress, meanwhile, often takes a famine-or-feast attitude toward funding, allocating less money when times are good and reinflating regulatory budgets after the inevitable disaster occurs. ... This ... also contributes to the sense that regulation is something it’s O.K. to skimp on.

Comparing Financial Regulatory Reform Bills - WSJ table

The Mechanics of the Financial Reform Conference - Typically, differences between the House and Senate are worked out in private and both chambers end up producing the same bill through an amendment process. Ironically, there hasn't been a conference committee on a banking bill since 1999, when Congress used this method to iron out disagreements in the Gramm-Leach-Bliley act -- yup, that's the bill that ended Glass-Steagall's separation of commercial and investment banks, drastically deregulating the financial industry. Because it's been eleven years, congressional staff have been working to re-learn the procedures. When you tune into the conference, you'll see a packed room -- the committee is huge...

Decision Time: Has the President Abandoned Paul Volcker’s Ideas On Financial Reform?- By Simon Johnson - The main remaining question is whether the final legislation will ultimately make the financial system at all safer than it was in the run up to the crisis of September 2008. How do big banks repeatedly get themselves into so much trouble?  Dangerous banking in today’s world involves banks trading securities and, in that context, taking positions – i.e., betting their own capital.  For example, almost all the profits made by big banks in 2009 came from securities trading.  When market conditions are favorable and traders get lucky, the people running these banks (and hopefully their shareholders) get tremendous upside.  But when this same risk-taking behavior results in big losses, the major negative impact is felt in terms of a major recession, raising government debt, and sharply lower employment.

Skin in the Game - I can’t stand it. We now have skin in the game provisions proposed by the SEC, the FDIC, the House of Representatives and the United States Senate. On CNN the other day, Congressman Barney Frank said that the most important part of the House Financial Reform bill was skin in the game in securitization. Okay, I know we’re probably stuck with it and the world will not end. Capital formation will be modestly depressed and the geniuses on the Street will work overtime to mitigate the impact of all that excess capital sloshing around. But it pains me to give up the fight. Skin in the game is certainly an attractive slogan and, superficially, it makes a great deal of sense. But no one has really looked at the data.  The worst performing sector in the fixed income world was, without doubt, loans to developers, builders and the like. All of this lending activity was on book or, in the skin in the game parlance; the lenders had nothing but skin in the game.Hello! Lehman failed. Bear failed. Merrill failed (more or less). The GSEs don’t even bear thinking about.   All of this carnage happened not because the institutions were brilliantly successful in laying off bad credit to dumb investors, but because they had skin in the game

Why Financial Reform Hinges on Defusing Derivatives - For lawmakers who will start thrashing out financial reform later this week, the most important issue is what to do about derivatives. Global economic stability hinges on managing the inherent danger in credit default swaps, synthetic credit debt obligations and similar securities. Controlling derivatives is “an absolutely essential part of protecting our financial system and making sure our financial system does what it’s supposed to do,” said Nobel Prize-winning economist Joseph Stiglitz in a conference call today to discuss the reform legislation. If that sounds like an overstatement, it’s not. The derivatives market has a total notional value of $600 trillion. That’s 10 times world GDP. More to the point, misuse of these instruments is wreaking economic havoc. They were a principal cause of the financial crisis, and more recently were implicated in the sovereign debt crisis enveloping Europe and roiling markets around the world.

KC Fed’s Hoenig Supports Controversial Derivatives Plan - Mr. Hoenig’s support came in a letter ( Read the full text) to Senate Agriculture Committee Chairman Blanche Lincoln (D., Ark.). The letter is significant because the Fed’s board in Washington has adamantly opposed the provision. The provision of the bill is often referred to as “Section 716.”“Section 716 appropriately allows banks to hedge their own portfolios with swaps or to offer them to customers in combination with traditional banking products,” the letter said. “However, it prohibits them from being a swaps broker or dealer, or conducting proprietary trading in derivatives. The risks related to these latter activities are generally inconsistent with the funding subsidy afforded institutions backed by a public safety net. Such activities should be placed in a separate entity that does not have access to government backstops. These entities should be required to place their own funds at risk.”

Banks queasy as reform deal nears - For months, Wall Street banks have been biding their time, serenely confident that Democrats would eventually drop their get-tough stance on derivatives and quietly excise a tough new proposal from the financial reform bill.  Talk about a bad bet: Now there’s a chance Wall Street will have to live with the restrictions after all — to the tune of billions in lost revenue from trading in the exotic investments.  As the battle over the biggest rewrite of industry rules since the Great Depression heads into its final days, Wall Street banks are no longer confident they can tailor financial reform to their liking — despite a parade of U.S. officials who share their distaste for the proposal, which would force banks to spin off their derivatives trading desks.

The Government’s Elite and Regulatory Capture -The fate and scope of financial reform is now left to the Senate and House conference committee, which is putting together the final bill. It is an unsettling time as the struggle over derivatives reform, the Volcker Rule and untold nuances and seemingly minor provisions are left to jockeying among elected representatives. Yet, while there are many good things in the bill that should form the core of any financial reform and subsequent acts by Congress, there is one area — perhaps the key one — that this bill fails to address. No, this is not “too big to fail.”Rather, it is the form of the top-down regulatory capture of our government elite that Simon Johnson and James Kwak argue has occurred in their book “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”

Matching Narrative to Policy - Mark Thoma writes, Regulators certainly made mistakes, and there is plenty of room for improvement, but does that mean we should abandon attempts to regulate? Of course not. It is hard to argue against the proposition that better regulation would be better. But for regulation to be better, I think there has to be some correspondence between the narrative of what went wrong and the proposed regulatory change.  I am to be talking on this at a conference in a couple of days. My current thoughts:

Warren Warns of Gutted Reform | WBUR and NPR - The fate of effective financial reform remains precarious right now, with the possibility that Washington lawmakers could produce a final bill that has “no real impact,” said Elizabeth Warren, chair of the Congressional Oversight Panel. Warren said that “herds” of lobbyists are trying to pick apart the pending legislation. “…[T]hey’re going to get one line changed, and they’re going to get one little provision dropped, and they’re going to get one more piece compromised out,” Warren said in an interview Monday night with “On Point” host Tom Ashbrook, as part of a WBUR event. “And at the end of the day, we can all congratulate ourselves that we got something that has the right title and has no real impact.”

The economics of interchange fees - Fresh off of the most substantial national liquidity crisis of the last generation and the enactment of sweeping credit card regulation in the form of the Credit CARD Act, Congress continues to deliberate, with a continuing drumbeat of support from lobbyists, a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees”— transaction charges integral to payment card systems—through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure,  inexpensive, welfare-increasing payment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders.

Why the payments system should be regulated - I’m about to head down to DC to appear on an interchange-fees panel sponsored by the libertarian types at GMU. I hope they read Mike Konczal’s blog entry (and mine, of course), but at heart I think the disagreement is simply philosophical. In my post I wrote that “all the recent increases have been pure gouging, made possible by the Visa/Mastercard duopoly”, and one of the most interesting comments in response came from billyjoerob, who wrote: Felix Salmon really should write the Critique of Pure Gouging, and draw a distinction between “pure gouging” and other ordinary profit-maximizing activities. Which is not illegal, not so far.There’s a narrow answer to this, which is that when you have a duopoly it’s important to regulate gouging. But there’s a broader answer, too, which is simply that we’re talking about payments here — and it’s perfectly natural and sensible for the government (or at least the Federal Reserve) to be involved in regulating the payments process, including clearing, settlement, interchange, and everything else.

Interchange fees: The latest salvo -Todd Zywicki’s 63-page paper on interchange fees certainly doesn’t need to be nearly as long as it is. But the fact is that you don’t need to read all that far past the abstract to realize how silly and contentious it is.For instance, Zywicki spends a lot of time making the argument that “the increased revenues merchants receive from shifting credit losses on sales to card issuers by itself exceeds interchange costs:To the extent that a part of the interchange fee represents an allocation of the cost of increased credit risk to merchants (who undeniably benefit from the increased revenues it represents and who otherwise would have to bear that risk themselves), merchant claims that any portion of these fees above the “direct administrative costs” of operating a credit system are unjustified and meritless.You can see why it might be hard to wade through 63 pages of this stuff, especially when Zywicki’s arguments are as disingenuous as this. Interchange fees are not, never have been, and never should be an attempt to charge merchants for the credit risk of their customers.

The Fed Weighs In on Credit Card Reform - NYTimes - Last year, when Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, it declined to extend new consumer protections against certain card company practices to small business accounts. This was in part because some legislators expressed concern that nobody had properly studied how such a move might affect the price and availability of credit for small companies. So Congress directed the Federal Reserve to look into the matter.  It was not terribly conclusive. On the one hand, the Fed seems to like the new disclosure rules. “Standardizing and improving disclosures for small-business credit cards would promote the informed use of credit by enhancing small businesses’ ability to compare the cost of the credit card plans available to them,” the board wrote in its report (pdf). But the Fed was less positive about limiting issuer practices, musing that “it is not apparent that the potential benefits of applying substantive restrictions similar to those in T.I.L.A. to small-business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.”

The Great Swipe Fee Robbery - Generally speaking merchants will accept debit cards for even very small transactions. But as we all know, they don't like it. In New York City, where cab drivers are required to accept electronic payment, many drivers will plead with you to use cash, citing the onerous fees collected by the banks. These swipe or interchange fees are the target of a new regulation proposed by Sen. Dick Durbin of Illinois, a liberal stalwart keen to pick a fight with the financial sector. Merchants have been urging Congress to take action on swipe fees for years, but it's only now, when esteem for the financial sector is at a low ebb, that there's been any hope of a tough regulatory response. My gut instinct is to distrust sweeping regulatory efforts. When the interests of one set of businesses are pitted against another set of businesses, I'm inclined to let consumers decide who should come out ahead. Yet swipe fees pose a number of interesting puzzles.

The Interchange Cross-Subsidy: False Analogies - Zywicki's interchange paper repeats a claim made by other opponents of interchange regulation that cross-subsidies, even regressive ones, exist throughout the economy, so there's no reason to get worked up over the interchange cross-subsidy imposed by credit card network rules.  Zywicki's examples, however, are false analogies to the credit card interchange cross-subsidy from users of low cost payment methods (cash, debit, nonrewards credit) to users of high cost payment methods (rewards credit).  The Starbucks' cross-subsidy is Starbucks' business decision.   The free parking cross-subsidy is the grocery store's business decision.  But the interchange cross-subsidy is not the merchant's business decision.  It is the card network's business decision.  Card networks force merchants to impose a cross-subsidy.  It's an affront to the nose-picking rule of commerce:  you can pick your friends, you can pick your prices, but you can't pick your friends' prices....

The credit unions’ fight against interchange regulation -Yesterday saw an enormous lobbying effort from the credit union industry; John Magill, the chief lobbyist for the Credit Union National Association, told me that there were over 400,000 “contacts” with Congress this week. He was on the phone with Harriet May, the CEO of a big El Paso credit union, GECU, and the chairman of the CUNA board. She was trying hard to persuade me that credit unions are implacably opposed to regulating interchange fees, which she was prone to characterize as “government price fixing”. I’m a fan of credit unions in general, but I’m suspicious of this lobbying effort. I’m on the board of directors of my local credit union, and I don’t think any of us are opposed to the Durbin amendment. May told me that some credit unions don’t care about this issue because they don’t issue cards — but we do, both credit and debit. In any case, May’s main argument was that debit cards are expensive for credit unions, and that interchange fees help to offset that expense. “My debit card losses are high,” she said, “but they’re offset by the interchange”.

Financial Bill to Include New Mortgage Restrictions - That big financial overhaul bill in Congress just got a lot bigger. Originally weighing in at 1,500 pages, the bill has now padded out to close to 2,000 pages thanks in large part to a decision by Democrats to add “Section 14.” Section 14 is essentially a bill the House of Representatives passed in May 2009 that would create new prohibitions on mortgage lending. The bill aimed at ending some of the practices that took place during the subprime lending fiasco, but the banking industry alleged the bill went too far and could cut off access to credit. Still, the bill passed 300 to 114, with 60 Republicans voting in support. The thrust of the mortgage section would require lenders to make sure that borrowers can repay any home loans they are sold. It puts limits on the ability of lenders to offer loans without documentation from borrowers, and has rules regarding the way loans can be refinanced.

Taka Ito: Focus on resolution authority -WE HAVE a deposit insurance system for depository institutions (commercial banks). The global financial crisis was caused by investment banks (non-depository institutions) with toxic securities. Bail-out costs were substantial, which was not covered by deposit insurance. That is why the new bank tax is proposed. The tax on asset size would discourage expansion of risky portfolios and, if and when the bail-out is needed, accumulated reserves would be available to pay for its cost. If bank tax rates are uneven across countries, a bank may shift its booking of assets (or even a headquarters) to another country, so international coordination/harmonisation is needed. So it makes sense, doesn't it? However, we need to step back and reconsider why we needed a bail-out with huge costs.The US bailed out Bear Stearns, Fanny Mae, Freddie Mac, and AIG and other banks on the logic that protection of systemic stability overrides concerns about moral hazard and non-intervention by the government into private transactions. Then it may be better to think of a mechanism to allow those institutions to fail without systemic stability concerns: conduct early examinations on the risk of investment banks and appropriate measures while they are solvent; give power to the regulatory authority to use a resolution mechanism (temporary nationalisation) for investment banks when capital becomes thin but still positive. The resolution mechanism has to be coordinated internationally, since unwinding cross-border transactions needs harmony in bankruptcy law.

The False Promise of Crisis-Resolution Funds - Ever since financial markets began to stabilize late last year, the idea of making the financial sector pay for the costs incurred by taxpayers to keep it afloat has gained increasing support among policymakers and the wider public. France and the United Kingdom have introduced a temporary tax on financial-sector bonuses, and the United States government has proposed legislation envisaging a “financial crisis responsibility fee” to recover the costs of America’s Troubled Asset Relief Program. There is also a discussion about how best to reform taxation of the financial sector, which is on average lighter relative to other corporate income and unduly favors borrowing over equity financing. But a lump-sum charge to recover past costs will not change the financial sector’s incentives concerning excessive risk-taking. Furthermore, it is unclear what, precisely, the costs are that are to be recovered.

The Too Big to Fail... Fail - The Big Picture details the huge issue with bailouts of the largest financial institutions: One of the most compelling factors was the horrific impact past bailouts have had on other competitors in the sector. Bailouts rewarded the worst managements, the least deserving shareholders, and the most reckless creditors. As it turns out, the banking sector is no different than these other industries that have been bailed out. After the government’s largesse, bad companies do well — and at the expense of the well managed, responsible, non-reckless firms. Forbes with the figures: Thanks to government subsidies ranging from a steep yield curve to bailout funds: Six giant banks made $51 billion (including the loss by Citi) in profits last year, while the rest of the banking industry — the other 980 banking institutions — all lost money (in aggregate).

Banks Profit from Near-zero Interest Rates: Another Reason for States to Own Their BanksWhile individuals, businesses and governments suffer from a credit crisis created on Wall Street, the banks responsible for the crisis are tapping into nearly-interest-free credit lines and using the  money to speculate or to make commercial loans at much higher rates. By forming their own banks, states too can  tap into very low interest rates, and can buffer themselves from another Lehman-style credit collapse.

Banks Say No. Too Bad Taxpayers Can’t. - FROM the earliest days of the credit crisis, the nation’s big financial institutions have been less than forthcoming about ballooning loan losses buried inside their books. To some degree this is understandable: denial is a powerful thing, after all, and writing off troubled loans during a period of severe stress is, for bankers, the equivalent of getting a root canal.  As profits rebound at many of these institutions, however, artful dodging becomes more disturbing. And when disguising problems winds up harming the taxpayer — the same folks who rode to the rescue of banks with billions of dollars — the denial is downright exasperating. Among the more glaring bookkeeping fictions on big banks’ balance sheets today are the values they assign to all of the bounteous second mortgage loans. doled out during the mortgage bonanza. As any realist will attest, many of these loans are worth little, and yet there they sit, at fantasy levels, on banks’ ledgers. But taxpayers are the ones holding the bag when institutions try to avoid losses by refusing to buy back problem loans they have sold to Fannie Mae and Freddie Mac, the mortgage finance giants that are wards of the state.

Banks should give customers ‘bomb-proof’ accounts, says Policy Exchange think-tank - The Government should ditch its pencilled-in plans to split up banks into utility and investment bank chunks and instead oblige them to provide customers with safeguarded accounts that are entirely ring-fenced from the riskier parts of the bank. The proposals come from the Policy Exchange think-tank, which will publish them later this week in a paper proposing the most far-reaching reforms to the banking system for decades. At the core of its proposal is the suggestion that banks should no longer be protected by deposit insurance, the scheme by which a certain proportion of savers' funds are protected by the state, and which was only introduced as a result of a European directive in 1979. The author, economist Andrew Lilico, argues that the existence of this insurance scheme encourages banks and savers to take more risks with their money, which sparks future banking crises.

U.S. Firms Hold Most Cash Since 1952 - WSJ - U.S. companies are holding more cash in the bank than at any point on record, underscoring persistent worries about financial markets and about the sustainability of the economic recovery.The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963. While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the cash on hiring or expansion amid doubts about the strength of the recovery. They are also anxious to keep cash on hand in case Europe's debt troubles lead to a new market freeze.

The Underlying Problem was Never Illiquidity –The government can mail out moderate stimulus checks or even cough up a $1 trillion ditch – digging program and a middle-class tax cut, but as long as consumers, businesses, and financial institutions remain highly leveraged, they will prefer to use their incremental cash flow to reduce what they owe.Imagine you are a bank CEO, and you were leveraged 15-to–1 before the crisis. Over half of bank loans are real estate related, and that asset class has fallen about 25 percent from the peak. The Fed extends a guarantee, swap, or loan to your bank, so now you may be liquid. But from the perspective of the marketplace, you remain insolvent — that is if your depositors pull out, you will be left holding the bag as long as the Fed expects to see this money extended from its temporary facilities back someday. So you don’t make any more loans, and your customers wouldn’t want to borrow more, even if you did press them to do so.

Chinese Banks Lend in the U.S. - There's a headline to grab attention. It’s been reported that several Chinese and other non-domestic and non-traditional lenders are rushing across the American landscape looking for deals. Take a look at the WSJ article of June 2 about the International & Commercial Bank of China’s recent loan to GE. ICBC has over a trillion dollars of assets, it’s reported to be the most profitable bank in the world and it’s ready to lend. Maybe this is just a “no duh” moment, but what a terrific business strategy for any lender not damaged by the late unpleasantness (a Southern expression still in use about the Civil War but appropriate here)! If the gnomes of Basal get their way and require US and European banks to put up massive capital over the next couple of years, strong, unimpaired semi-sovereign banks may be the best ticket in town.

Is Chinese Drywall Driving Foreclosures? - Daniel Indiviglio finds 74 studies nestled within the House and Senate financial reform bills. One of these is titled “the effect of drywall presence on foreclosures”. I dug into the house bill and found out that it is even more absurd that you might first assume: Subtitle J: Study of Effect of Drywall Presence on Foreclosures – ( Sec. 9901) Directs the HUD Secretary to study and report to Congress regarding the effect upon residential mortgage loan foreclosures of: (1) the presence of drywall imported from China between 2004 and the end of 2007; and (2) the availability of property insurance for residential structures in which such drywall is present. The amendment that created this study was offered by Mario Diaz-Balart of Florida, and according to his website he is a member of the “Congressional Contaminated Drywall Caucus”… yes, such a thing does exist. Financial reform seems to be getting distracted.

Break the Credit-Rating Rules - NYTimes -This wouldn’t be so bad if the agencies had performed well in the financial crisis. Instead, by giving undeservedly high ratings, they helped create it. If the government outsourced drivers’ licenses, and the roads filled with accidents caused by bad drivers, it would stop using those companies. Congress should do the same with the credit ratings agencies. From our different perspectives, as a law professor writing about financial markets and a commissioner of the Securities and Exchange Commission (whose views are her own and not those of the commission), we see such a move as the single most important piece of the reform puzzle, removing many of the incentives that led banks and ratings agencies to create thousands of dubious AAA-rated, subprime-mortgage-backed securities. Reliance on ratings has grown significantly since the 1970s, when the S.E.C. first referenced them in a rule governing brokerage firms. Instead of assessing the safety of brokers itself, the commission deferred to the ratings agencies. Other regulators followed suit, and within a few decades the government had essentially outsourced its oversight role.

Downgrade the Ratings Agencies - WARREN BUFFETT may be the Oracle of Omaha, but even he is hamstrung by credit ratings agencies. Appearing on Wednesday before the Financial Crisis Inquiry Commission, he said that as the chairman of Berkshire Hathaway, he has “no negotiating power” with Moody’s and Standard & Poor’s, the two major agencies, because ratings were “required in many cases by the rules.” This wouldn’t be so bad if the agencies had performed well in the financial crisis. Instead, by giving undeservedly high ratings, they helped create it.  If the government outsourced drivers’ licenses, and the roads filled with accidents caused by bad drivers, it would stop using those companies. Congress should do the same with the credit ratings agencies.

Banks in ‘Downward Spiral’ Buying Capital in CDOs (Bloomberg) -- U.S. banks are fighting to preserve the use of securities that help them appear better capitalized, even as their investments in each others’ notes perpetuate what one regulator calls a “downward spiral” of losses.  The cross-ownership, largely unnoticed by bank supervisors who generally discourage the practice, was made possible by a Wall Street innovation like the ones that allowed subprime mortgages to flourish. Small lenders, such as Riverside National Bank of Florida, were able to sell trust-preferred securities, known as TruPS, because investment bankers packaged them with those issued by dozens of other financial institutions. Riverside, which started in a trailer in 1982, bought collateralized debt obligations made up of TruPS as it grew to 65 branches and $4.8 billion assets.

FCIC Subpoenas Goldman (Update: Details on Firm’s Intransigence) - Yves Smith - Bloomberg reports that the FCIC subpoenaed documents from Goldman: The U.S. panel investigating the causes of the financial crisis issued a subpoena to Goldman Sachs Group Inc. after the Wall Street firm failed to hand over documents in a “timely manner.”The Financial Crisis Inquiry Commission “has made it clear that it is committed to using its subpoena power” if firms under review don’t comply with information requests...Yves here. It’s surprising, to say the least, that Goldman would risk precisely what took place: having a subpoena issued and the resulting media commentary, which again would focus attention on the continuing investigations against the firm. The fact is that the FCIC is thinly staffed relative to its mandate. Update: The BusinessWeek report makes clear that Goldman engaged in deliberate obstruction: Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said. Not all of the information is what the panel requested, and Goldman Sachs didn’t cooperate...

How Goldman deals with the government - The FCIC asked in January for “documents and information concerning Goldman’s synthetic and hybrid collateralized debt obligations based on mortgage-backed securities”, with a deadline of February 26. Goldman asked for an extension, and was given until March 5. Then Goldman asked for a second extension, and was given until March 8. And then Goldman’s submission was inadequate, but the FCIC allowed Goldman some time off because it was dealing simultaneously with requests from the Senate.After the Senate hearings were over, at the end of April, the FCIC started badgering Goldman again, and was eventually told that the information would arrive on May 3; on May 4, more incomplete information arrived. Lots more back-and-forth resumed, and far from trying to help out, Goldman simply said that they had already provided everything asked for back on March 8. Eventually, on May 18, the five-terabyte document dump began: that’s roughly 2.5 billion pages. More back-and-forth, including a further incomplete submission on May 21; eventually the subpoena was issued on June 4. You can see the running-out-the-clock here. And you can also see how the data dump was not a good-faith attempt to comply with the FCIC’s request.

SEC Investigation of Goldman Trading Against Its Clients Widens -The latest shoe to drop on the Goldman front is the report on Wednesday that the SEC was investigating yet another one of its synthetic CDOs, this one a $2 billion confection called Hudson. It isn’t clear whether the SEC will file charges, but this one has the potential to be particularly damaging in the court of public opinion, since this CDO was created solely as a proprietary trading position to help the firm get short subprime risk in late 2006, when the market was clearly on its last legs.Synthetic CDOs were sold to investors as the economic equivalent of cash CDOs, ones whose assets were subprime bonds rather than credit default swaps. That was always more than a bit disingenuous. Cash CDOs had for some time been the way that underwriters would dispose of the pieces of subprime bonds they were unable to sell, namely the riskier tranches. .

AIG’s Rescue Had ‘Poisonous’ Effect, U.S. Panel Says (Bloomberg) -- American International Group Inc.’s bailout had a “poisonous” effect on the U.S. financial system because it demonstrated the government would protect Wall Street firms from their own risk-taking, said a Congressional panel.The Federal Reserve could have acted earlier to find a privately funded solution for New York-based AIG before the September 2008 rescue, the Congressional Oversight Panel said today in a report. The bailout, which has swelled to $182.3 billion, transformed banks’ financial bets into fully guaranteed obligations, the panel said. “The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace,” said the panel, led by Harvard University law professor Elizabeth Warren. “The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them

Banks Took Big Risks Because Shareholders Wanted Them To - Lately, though, scholars looking into the link between bankers' pay and the financial crisis have begun gathering evidence of another problem: At financial institutions, executives looking out for the best interest of shareholders can rain economic disaster on the rest of us. I made my first acquaintance with this new line of research at a conference on governance and executive pay in the financial sector last month at Columbia University. Here's a quick rundown of the relevant working papers: In "Yesterday's Heroes: Compensation and Creative Risk-Taking" (pdf), Jose Scheinkman and Harrison Hong of Princeton and Ing-Haw Cheng of the University of Michigan studied the link between compensation and risk-taking among financial firms and found that, yeah, CEOs who took bigger risks got paid more. But there was no evidence that they were putting anything over on shareholders: the high-pay, high-risk firms had high levels of insider ownership, big holdings by institutional investors and did no worse on governance metrics than other firms.

The Continuing Collapse of Ponzi Finance and the Real Economy- Ponzi schemes are at their basis fraud, with no connection to any real value While our global financial system is not entirely a Ponzi scheme, it has vast elements which are. Many of the financial innovations of the past several decades were simply money operations, making money on money two or three levels removed from any connection to the real economy. The Ponzi aspects of the system require ever more new money, or liquidity, endangering the entire system with collapse once the liquidity dries up.Starting in the summer of 2007, liquidity began to dry up. By the fall of 2008 it had reached crisis stage, not simply damaging the Ponzi aspects of the system, but the real economy aspects too. The initial stage of the Ponzi collapse was met several ways. First, the banks and Wall Street did take some losses, but not nearly enough. Secondly, and importantly, one of the smallest elements, was the implementation of the TARP. Next was the the massive extend and pretend effort, that remains in place, allowing the banks not to account the great losses they still hold on their books, in addition to the great transference of losses onto the public ledger through the Fed and GSE's

Extend And Pretend - A Guide To The Road Ahead - It will likely surprise you but like a trolley car we are now locked into economic tracks that determine our financial destination. Financially and economically we are lurching along, rocking from side to side with the occasional unexpected jarring flash crash jolt. But unlike a trolley line, for some reason no one seems to know what the destination is. Many are asking but few are willing to tell. This road is well travelled and documented if you were to take the time to study the maps and not rely on the happy face media spin doctors for directions. Since the route of the current global economic path is now locked in, we need to either accept the ride or hastily exit. I’m up from my seat and headed for the door. What are you going to do?

ETFs: “F” for Liquidity - A very interesting article in Barrons about the role ETFs — Extremely Troublesome Funds — played in the May 6th flash crash. It seemed the usual liquid, widely traded funds had a sudden and unexpected vulnerability, as liquidity dropped steeply, and bids faded away. “ETFs represented 70%, or 227, of the 326 securities for which trades were cancelled by the exchanges, owing to a price drop of 60% or more, according to a recent joint report issued by the SEC and the Commodity Futures Trading Commission. That was after many exchange-traded funds lost ground, along with stocks, earlier in the day because of the problems in Europe caused by Greece.

Y16.7 trillion ($182 billion) Mistake by Deutsche Bank Nearly Sinks Osaka Exchange - The international stock markets dodged a bullet this week. According to news reports like this one in Reuters, Deutsche Bank's proprietary trading unit in Japan mistakenly placed sell orders of Y16.7 trillion ($182 billion) at the Osaka Securities Exchange on Tuesday when it first opened. The reason was a software problem. The Sydney Morning Herald quotes a spokesperson for Deutsche Bank's as saying, "There was a software glitch in our automated trading system, and the consequence of the error was that a number of trades were repeatedly sent to the exchange... The error was recognised and we immediately placed cancel orders on 99.7 per cent of the trade. There is an issue somewhere in the software that needs to be identified." A software "issue somewhere"? Not exactly a confidence building statement, is it.

Wall St. Just Isn’t What It Used to Be - Working on Wall Street may be less rewarding — in money and prestige — than it has been in a very long time. Many people resent Wall Streeters for having profited from a mortgage market they revved up and then steered off a cliff. Now, an analysis of their pay has found that it declined more in 2009 than in any other year in the last eight decades — more even than in the years of the Great Depression.According to David Belkin, an economist with the city’s Independent Budget Office, the average worker in New York City’s securities industry was paid $311,279 in 2009 in salary, bonuses and exercised stock options. While that is still an enormous sum to most people, it represented a cut of about $85,000 from the average annual wages in that sector in 2008, Mr. Belkin calculated, adjusting for inflation.

Fannie & Freddie Reform Gets a Boost from the Washington Post - Sunday’s Washington Post has an encouraging editorial about the Fannie Mae and Freddie Mac reform proposal that Phill Swagel and I recently put forward. An excerpt: Their plan would] abolish the most toxic features of the old “government-sponsored enterprise” model. In particular, the plan would get Fannie and Freddie out of the business of directly purchasing mortgage-backed securities, which was highly profitable to them in large part because their implicit government guarantee enabled them to fund a large portfolio at artificially low rates. Their existing $5 trillion pile of securities and guarantees would be wound down or sold off to the private sector. But Mr. Marron and Mr. Swagel would keep a government role in Fannie and Freddie’s other business: securitizing conventional, moderately sized “conforming loans,” which is both necessary to mortgage liquidity and relatively less risky.

Fannie Mae and Freddie Mac Are Still a "Burgeoning Money Pit" for Taxpayers - If you blinked, you might have missed the ugly first-quarter report . . . from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world's biggest wards of the state.Freddie -- already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes -- recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position.The news caused nary a ripple in the placid Washington scene. Perhaps that's because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don't notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie's latest request.But taxpayers should examine Freddie's first-quarter numbers not only because the losses are our responsibility. Since they also include details on Freddie's delinquent mortgages, the company's sales of foreclosed properties and losses on those sales, the results provide a telling snapshot of the current state of the housing market.

The Fannie Mae and Freddie Mac reform proposal from Goldman Sachs - Donald Marron and Phil Swagel have written a paper which proposes a reform structure for Fannie Mae and Freddie Mac.  It should not be taken seriously – and indeed it should disqualify this pair from serious debate – a larger gift to Wall Street that does not solve the problems of the GSEs is hard to envisage.  But – as the Washington Post takes it seriously and this pair are not lightweights I thought I should have a go at explaining what is wrong with it.

Underwriting Errors Outlawed - The WSJ reports: The thrust of the mortgage section would require lenders to make sure that borrowers can repay any home loans they are sold. It puts limits on the ability of lenders to offer loans without documentation from borrowers, and has rules regarding the way loans can be refinanced. Making a loan that subsequently defaults is known as a Type I error. Turning down a loan that will subsequently be repaid is a Type II error. In the past, the Congressional harpies have gone nuts over type II errors, accusing lenders of denying loans to minority borrowers and ruining the American dream. Now, they are going nuts about Type I errors. I would love to pass a law saying that mortgage underwriters will no longer make any mistakes, but that is like passing a law saying that heavy objects dropped from ten-story windows will no longer head toward earth.

Report: FBI to "arrest hundreds of people" next week for Mortgage Fraud - From the Financial Times: FBI to target mortgage fraud The FBI is preparing to arrest hundreds of people across the US as early as next week for offences including encouraging borrowers to falsify income on mortgage applications, misleading home owners about foreclosure rescue programmes, and inflating home appraisals ... The FBI is scheduled to release its 2009 mortgage report on June 17.  The FBI usually only arrests people engaged in fraud for profit and not fraud for housing - they typically don't arrest borrowers who misrepresented their income - they arrest mortgage brokers who encouraged people to falsify their income. Although the distinction was blurred during the bubble ... Tanta wrote a great piece on this in 2007: Unwinding the Fraud for Bubbles

Commercial Real Estate Lending Historically Low - Real estate financing experts are taking some comfort in a national trade group’s report of a 12 percent rise in commercial and multifamily mortgage loan originations during the first quarter, compared with the same period of 2009.  However, observers say it’s too soon to declare a significant nationwide rebound in financing for commercial real estate, still mired in debt problems and a severe drop in new construction. And the volume of lending in that arena remains historically low, especially when measured against pre-recession levels.

Where is the CRE/CMBS crash? – During the long years of the financial crisis, the American economy has been like a retelling of the Somerset Maugham story "Appointment in Samarra," in which a man unsuccessfully runs from city to city in attempts to avoid a run-in with Death -- who, of course, is one step ahead of him. Similarly, investors have now spent years dodging disaster in one area of the markets, only to find their investments coming to a bad end elsewhere. Oddly, however, there is one sector that has been outrunning the reaper since 2007, and it's the last place you'd expect to have survived so long: commercial real estate. For much of 2008 and 2009 CRE was awash in red ink, and yet it hangs on. Richard LeFrak, chairman of the LeFrak Organization, said at the Milken Institute Global Conference in April, "The failure that we were all anticipating in the commercial real estate market, it kind of didn't happen. We blinked, it went away."

The Deflationary Impact of the Coming U.S. Commercial Real Estate Bust —Though commercial real estate (CRE) has long been viewed by analysts as the “next shoe to drop,” it has been downplayed as an issue in recent months. "Commercial real estate is a train wreck, but it's already happened," the illustrious Jamie Dimon of JP Morgan Chase (JPM) said during a company-sponsored conference. He pointed to the 38% drop in CRE prices since 2007. Indeed he could point to a 1% uptick in overall CRE prices for January, the last month that had been reported. Delivered on March 22 by Moody's/REAL Commercial Property Price Index, the number capped two prior up months and suggested that --after 13 months of consecutive declines— the market was finally turning. So did it? In a word: no. The rebound suggested by January’s number never really materialized. In fact, January has been followed by two months of declines. The Moody's/REAL CCPI registered a 2.6% drop in February. March registered a .5% drop overall, with slight upticks for apartments and warehouses offset by significant declines in office (-3.2%) and retail (-4.7%) property prices. Commercial property values are now down 44% since the peak of October 2007.[4]

Distressed CMBS Loans Now Returning Less Than Half Their Note Value - The amount of losses on distressed CMBS loans resolved in the past year has jumped 33% to where noteholders are now recovering approximately 43 cents on the dollar. And, say analysts, the losses are expected to continue to mount this year. The average loss severity rate or the ratio of realized loss to liquidation balance for U.S. commercial mortgaged-backed securities (CMBS) loans resolved with losses in 2009 was 57% compared to the 43% rate in 2008, according to new data from Fitch Ratings. Those losses outpace the cumulative historical average of 37.2%.

Commercial Property Owners Brace For Economic Impact of Gulf Oil Spill – With estimates of the economic losses of the Deepwater Horizon oil spill already as much as $11 billion in counties along Florida’s Gulf Coast alone, owners of income-generating property throughout Florida, Alabama, and Mississippi face varying degrees of financial exposure to the crisis.  Perhaps no commercial property owner is more exposed to the spill across its portfolio as the St. Joe Co. (NYSE: JOE), one of Florida's largest real estate development companies and northwest Florida's largest private landowner. Jacksonville-based St. Joe, primarily engaged in real estate development and sales, owned about 577,000 acres as of March 31 -- primarily in Florida's northwest Panhandle, where the coast could be under siege by the oil slick for months.  About 70% of St. Joe’s property is within 15 miles of the Gulf of Mexico

Moody's: CMBS Delinquencies Rise In May, Outlook Deteriorates - Moody's Investors Service said delinquencies on loans in U.S. commercial mortgage backed securities increased further in May as the agency also boosted its year-end estimate of where the rate will be. Last month's half-point jump--to 7.5% from 7%--follows two months of abating rates of growth. Meanwhile, Moody's now projects the CMBS delinquency rate will range from 9% to 11% at the end of 2010, compared with its previous outlook of 8% to 9%. Sustained joblessness in the U.S. and possible fallout from sovereign-debt problems in Europe spurred Moody's to take the more-negative view.

Drop in Home Sales in Wake of Tax Credit Tops Forecasts The withdrawal of federal tax credits for home buyers led to a steeper-than-expected plunge in May home sales in much of the U.S., as the housing market struggles to wean itself from government support. Economists and real estate analysts expected home sales to slow after the tax credit, of as much as $8,000, expired at the end of April. But early data from real estate brokers indicate that the sales decline has been far more substantial than expected, with some markets showing declines of 25% to 30%. "Anybody who wanted to buy a house probably did" before the tax credit deadline, said Jay Brinkmann, chief economist of the Mortgage Bankers Association, a trade group. Housing analysts say that the May slump is ominous but that it's too early to tell whether it portends another serious downward lurch in a market that has generally been leveling off over the past year.

Without tax credit, home demand keeps slumping (Reuters) - Home buying applications sank for a fifth straight week to a fresh 13-year low, the Mortgage Bankers Association said on Wednesday, suggesting that tax credits had robbed more from future sales than expected. Demand for loans to purchase houses fell 5.7 percent in the week ended June 4 to the lowest level since February 1997, even after adjusting to account for the Memorial Day holiday. Home buyers have been on hiatus since many rushed to sign purchase contracts ahead of the April 30 deadline for up to $8,000 in federal tax credits.

Housing after the tax credit - Diana Olick reports on housing data from ZipRealty: We've been reporting a lot of anecdotal information about life after the home buyer tax credit, but now we're starting to get some numbers. A new report from shows:
—The number of homes that closed in May are down more than 5% compared to April.
—Newly signed contracts in May dropped more than 10%, a sign of a real estate drought this summer.
—Internet searches on real estate sites are down 20 percent compared to this time in 2009.

Home sales collapse without government support - The two big overhangs to the economy remain jobs and housing. As the chart below makes clear, without extensive government subsidies, the artificially high prices of homes cannot be sustained

MBA: Mortgage Purchase Applications decline 35% over last four weeks - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey The Refinance Index decreased 14.3 percent from the previous week and the seasonally adjusted Purchase Index decreased 5.7 percent from one week earlier....“Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “Although rates remained essentially flat, refinance applications dropped this past week for the first time in a month. Despite the historically low rates, many homeowners have already refinanced recently, remain underwater on their mortgages, have uncertain job situations, or have damaged credit following this downturn, and therefore may not qualify to refinance.”

Owners Slash Prices After Tax Credit - Nearly half of home sellers in 26 of the nation’s largest markets slashed prices in May following the expiration of he Federal tax credit April 30, dropping average prices by nearly $2500 according to a monthly review of MLS-listed properties by the national online real estate brokerage ZipRealty. The same review showed that although there were more price-reduced “for sale” homes in May, the median reduction was $19,240, down slightly (1.06 percent) from April. “Home sellers may be lowering their list price to help stimulate interest from home shoppers now that the first-time and repeat homebuyer credits have expired,” said Leslie Tyler, vice president of marketing for ZipRealty

Senate Bill would extend Housing Tax Credit Closing Deadline - Home buyers hoping to take advantage of a lucrative federal tax credit would get three extra months to complete their purchases under a proposal introduced in the Senate on Thursday.  Reid and his co-sponsors hope to attach the measure to a separate bill moving through the Senate that would extend a variety of tax breaks as well as emergency unemployment benefits. But even if senators succeed in attaching the tax-credit initiative, Democrats are still struggling to assemble the votes needed to pass the overall tax bill.  To qualify for the tax credit -- $8,000 for some first-time buyers and $6,500 for certain current homeowners -- buyers must have signed a contract by April 30 and close on the their transactions by June 30.

Housing Tax Credit Fraud Extension -James Hagerty at the WSJ has the story: Tax Credit Extension Could Help Tax Cheaters. Hagerty discusses comments from two real estate agents: Glenn Kelman, chief executive of Redfin Corp. who noted that some customers who signed contracts after April 30th were pushing to close by June 30th. Kelman suspects fraud. And Schahrzad Berkland, an agent for Fidelity Pacific Real Estate in San Diego who noticed that pending sales for April have continued to rise ... something that is very odd. (Note to FBI: more fraud for you guys!) I noted yesterday: "I'm sure some people will commit fraud and backdate documents." Extending the closing date will encourage even more fraud. All the mortgage lenders have been giving priority to purchase applications over refinance applications, and 60 days is more than enough time.

House Targets Underwater Homeowners - The House GOP launched an assault Thursday on homeowners who walk away from underwater mortgages, arguing that such foreclosed-on former homeowners are using the money they save to dine out and go on cruises. "The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to 'buy season tickets to Disneyland...take a Carnival cruise to Mexico...' and go out to dinner more often," says House Republican leadership in an e-mail to colleagues explaining the anti-strategic-default effort. The GOP offered its provision as a "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. Such measures are put forward more to score political points than to craft policy, but the mood of the House can sometimes be gleaned from the vote's outcome. In this case, Democrats chose not to fight, and accepted the motion with a simple voice vote.

Verdict: HAMP Failed - "As we predicted, it [Hamp] did not work," Dobson wrote. "If we want families to escape foreclosure, a real solution to the second-lien issue must be implemented. There isn't one other than forcing the banks to eat those loans.  And as I have pointed out repeatedly, doing so likely means that all or most of these institutions are recognized as insolvent.Otherwise the Hamp program has only had the effect of loss deferral and exacerbation rather than a more responsible goal of foreclosure avoidance and loss minimization."Translation: The banks are lying and the longer they lie the worse the eventual damage will be."Force the bad loans out into the open and default them" has been my mantra since the beginning of this mess.  Why?  Because losses due to bad loans happen when the loans are made and cannot be avoided.  They can be "deferred" through various accounting tricks and games (some of which were retroactively made legal where they were not before) but doing so both fails to actually avoid the loss and increases the dollar amount of the eventual loss.

Principal Reduction More Effective Than Load Mods to Avoid Default: Deutsche - Foreclosure prevention methods focus primarily on reducing monthly payments. However, traditional modification methods of interest rate reductions and term extensions fail to properly address borrower equity, or lack thereof, according to securitization research this week by Deutsche Bank. In particular, the occurrence of re-defaults in rate and term modifications is historically higher than that of principal reduction, according to a graph in that report: The Principal Reduction Alternative (PRA), detailed by the Treasury Department in recent guidance, provides services with a new tool to complement the Home Affordable Modification Program (HAMP). The Treasury first began to push principal write-downs for HAMP in late March. PRA can help servicers reduce the debt burden on underwater borrowers, Deutsche said. Therefore, researchers expect PRA to be a more effective HAMP tool to reduce the re-default rate of modified loans.

Mortgage Applications: Home Purchase Loan Demand Slumps… U.S. home buying applications sank for a fifth straight week to a fresh 13-year low, the Mortgage Bankers Association said on Wednesday, suggesting that tax credits had robbed more from future sales than expected.Demand for loans to purchase houses fell 5.7 percent in the week ended June 4 to the lowest level since February 1997, even after adjusting to account for the Memorial Day holiday."Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April," Michael Fratantoni, MBA's vice president of research and economics, said in a statement.

Are home prices headed for another drop? - US home prices could be headed for another dip, now that a temporary tax credit offered to buyers is ending. In fact, even before the special tax incentive ended this spring, average home prices were already dipping after a relatively stable period in 2009. They've fallen about 3 percent in the past year. Where prices head next depends on a kind of tug of war between two forces. An improving economy should lend support to the housing market, while a tide of mortgage defaults and foreclosures will exert downward pressure on home values. For now, the consensus view is that modest declines in home values lie ahead.  High unemployment and foreclosures have increased the number of sellers and kept many potential buyers on the sidelines. The Obama administration goosed demand for a while with a tax credit of up to $8,000 for first-time home buyers, but it's now expiring.

‘It Makes Sense to Be Gloomy’ Many people assume that because of what I've written about in my last two books, at my other blog, and here at Financial Armageddon, I relish the thought that the world is going to hell. Not true. Although I've always been somewhat cynical about things, the fact is that I'd be much happier -- and so would my family and friends -- if we could move past the ugliness of the past four years and return to some kind of normalcy. But every time I look around, it's hard not to see that so many of the problems that got us to this point have not gone away. Indeed, one big contributor to the mess, an inflated real estate market, remains a festering sore. In the following MarketWatch report, "The Housing-Market Recession Is Not Over," an analyst who doesn't appear to be a shill for the National Association of Realtors paints a pretty negative picture:

Shadow Inventory Variants Could Trigger Regional Price Declines: Report Regional variations in the shadow inventories of distressed U.S. mortgages could be an indicator of the direction home prices will take, according to a new report published by Standard & Poor’s Ratings Services.The company’s analysts say differences in the backlog of distressed properties point to which markets will see home prices stabilize or even increase, and where additional declines may still be in store.The volume of troubled residential properties has been growing in nearly every U.S. state since 2005, S&P said, and borrowers nationwide are now defaulting on their mortgages faster than existing defaults are being resolved through liquidation. These trends have given rise to a large “shadow inventory” of distressed properties

Fannie Mae's Duncan: Home-building industry to be tested until early 2013 - Some comments from Fannie Mae chief economist Douglas Duncan ...From Douglas Duncan, chief economist for Fannie Mae, said he expects the home-building industry to be tested until early 2013 before demand will catch up with the large supply of houses on the market. He said the combination of current inventory of unsold homes plus the foreclosures not yet for sale has elevated supply by roughly 2 million houses over normal levels.He said that housing starts would be below normal levels until that inventory is absorbed.

Is bulldozer the best option for some boom-time housing? - Douglas Duncan, vice president and chief economist for Fannie Mae, raised a provocative idea this morning at a meeting of real estate journalists in Austin: Some of the misconceived housing developments built during the boom years might have to be torn down because they don't make financial sense.Duncan agreed with Stan Humphries, chief economist at, who warned that a "tremendous shadow inventory" of homes is poised to come on the market. That includes future foreclosures (due to negative equity and continued high unemployment), homes that will end up in foreclosure after a failed loan modification, and homes from what he calls "sideline sellers" who have been biding their time until markets improve. According to Humphries, home prices won't bottom out until the third quarter of this year, leading to "the second phase of the housing recession": below-normal price appreciation for several years. (The long-term appreciation norm is 3 to 5 percent per year.)Said Duncan: "Some of that shadow investment could have to be torn down. It was not economically viable when it was put in place."

Private Sector "Make Work" Jobs?Maxine Udall (girl economist) - A private sector-inflated housing bubble resulted in a huge excess of housing, which Douglas Duncan, vice president and chief economist for Fannie Mae, is now suggesting might be better to bulldoze. Who will pay for the bulldozing I wonder? Not the same people who built or financed the now worthless houses, I'll bet (although it does have possibilities as a job creation program). It seems to me that in effect this is equivalent to saying that all that private-sector housing construction (at least in some markets) was nothing but "make work." So how is this different from using public money to create jobs by hiring a million people to dig ditches that we intend to fill in later? My point being not that it's OK to use public monies to create any old make work job just because some parts of the private sector seem to have lost their ability to deliver goods and services efficiently.

The homeownership gap - 11 pp pdf - Recent years have seen a sharp rise in the number of negative equity homeowners—those who owe more on their mortgages than their houses are worth. These homeowners are included in the official homeownership rate computed by the Census Bureau, but the savings they must amass to retain their home or purchase a new home are daunting. Recognizing that these homeowners are likely to convert to renters over time, the authors of this analysis calculate an “effective” rate of homeownership that excludes negative equity households. They argue that the effective rate—5.6 percentage points below the offi cial rate—may be a useful guide to the future path of the official rate.

The wrong kind of falling homeownership -Richard Florida has long been in the same camp as me on the homeownership front: it’s too high, and creates problems like labor immobility and rental ghettoes populated only by people who can’t afford to buy. Today he says that we’ve already had a “great homeownership reset”, based on a paper by Andrew Haughwout, Richard Peach, and Joseph Tracy of the NY Fed. Take into account all the people who are underwater, on their mortgages, he says, and you’ll find that “US homeownership is already lower than you think” — just 61.6%. But the problem is that this is exactly the kind of reduction in homeownership that we don’t want. Homeownership isn’t all bad: there are upsides to it, as the authors of the paper explain. Because owners have a financial interest in their property, they have incentives to take measures that will maintain or increase the value of that property...

The Moral Responsibility of Homeowners is to Maximize Expected Utility -One of my co-bloggers argues - My concern is that there is an intergenerational unfairness to current homebuyers walking away. Past generations didn’t think of a mortgage like ruthless businessman, but rather felt some moral duty towards repayment. This made lending to homebuyers less risky, and thus kept interest rates down. Current homeowners benefitted from these lower rates, and therefore received a transfer of wealth from past generations. If the current generation abandons those social mores against strategic foreclosure and begins walking away from their mortgages en masse, then future generations will have to pay higher interest rates. To the extent lower interest rates are the result of the rectitude of my forbearers, I say thank you. But, you must forgive if me if I am skeptical about the extent.

How mortgage default could get much worse - Imagine, for instance, that a survey showed a large number of homeowners with 30-year fixed mortgages over 7%, and who had no intention of refinancing even with mortgage rates below 5.5%. On the one hand, that might be considered good news for banks: more money for them. But more realistically, it would be worrying news, since it would mean millions of people who could suddenly wake up one morning and realize how much more money they could have by changing their mortgage situation. When there’s an easy and obvious strategy which benefits consumers at the expense of banks, consumers are likely, sooner or later, to adopt it. The NFCC survey just shows that a lot of them just haven’t got to that point yet. But there’s a good chance that, eventually, they will.

Big Increase in Mortgage Foreclosures Predicted for this Year- Real estate experts predicted this week that 3.5 million homes nationally will go into foreclosure this year as risky adjustable-rate mortgages written in 2005 reset and unemployment continues.That's up from 2.8 million homeowners who faced foreclosure in 2009, and sets a pace that isn't likely to plateau until late 2011, said RealtyTrac Senior Vice President Rick Sharga. Sharga's panel of speakers, which included a Bank of America representative and Arizona-based mortgage modification executive, painted a bleak picture for anyone who thought the worst of the real estate meltdown is over

Has the second half slowdown started? - I've been forecasting a 2nd half slowdown in GDP growth based on:
1) less Federal stimulus spending in the 2nd half of 2010,
2) the end of the inventory correction,
3) more household saving leading to slower growth in personal consumption expenditures,
4) another downturn in housing (lower prices, less residential investment),
5) slowdown in China and Europe and
6) cutbacks at the state and local level.
Some recent reports - like the disappointing employment report for May, reports of pending home sales collapsing in May (after the expiration of the tax credit), soft retail sales in April, a soft month for rail traffic in May - might suggest the slowdown has already started.However other recent reports - like the ISM manufacturing and service surveys, Industrial Production and Capacity Utilization in April and U.S. auto sales - suggest decent expansion in Q2.
My guess is GDP growth in Q2 will be close to 3% - sluggish for a recovery, but about the same as Q1. So I don't think the 2nd half slowdown has started yet.

Waste on Freight Cars Gains Most Since ’94 Confirming Rebound - (Bloomberg) -- If garbage is any indication, the U.S. economy is strengthening.  The number of freight cars carrying waste jumped 45 percent in April and May from the same period last year to 79,044, according to the Washington-based Association of American Railroads. Waste freight hasn’t grown as fast for any quarter since at least 1994.  Shipments of waste and scrap have a higher correlation with economic growth than coal or copper, according to data compiled by Bloomberg News. (To see an Interactive Insight version of the story, click here.)  “It’s sort of like measuring horsepower by looking at the smoke coming out of the tail pipe,”

Retail Sales in May Underscores Uneven Path of Recovery -Poor weather in early May and a still-cautious consumer translated into a mixed bag for retailers in May, underscoring the fragile state of the economic recovery. Although more retailers topped analysts' estimates than did not, the overall gain in same-store sales fell short of what analysts were expecting. Based the results from the 28 retailers tracked by Thomson Reuters, sales at stores open at least a year rose 2.5 percent, just shy of the 2.6 percent that Wall Street predicted.The results were especially disappointing given that estimates had been trending lower ahead of the sales reports as analysts adjusted for comments made by retailers in earnings conference calls and reports on store traffic trends.

Drag on Recovery: Consumer Debt-Cutting - Anyone who has struggled with addiction knows recovery is a long, slow process.So it shouldn't come as too much of a surprise that the economic rebound is moving at such a gradual pace. Despite a vigorous bounce-back in corporate earnings and a veritable factory boom, job growth is decidedly sluggish. Gross domestic product is growing at only half of the 7% to 8% pace that typically has been seen after past deep recessions. One reason: deleveraging. After years of bingeing on debt, U.S. households are paring back. Those not doing so by choice are often being forced, because lending standards remain tight

Economists Who Understand the Economy Are Not “hoping that households will soon borrow … In a short piece on consumer borrowing the Washington Post told readers that: "economists are hoping that households will soon borrow more and help sustain the recovery." This may be true of the economists who Post reporters rely upon as sources, but it is not true of economists in general. Most households, including those at the edge of retirement have very little savings. With deficit hawks like the Washington Post editors and news reporters insisting on the need to cut Social Security and Medicare, it would be very unfortunate if these households did not increase saving and reduce their current consumption. The economists cited by the Post must want these people to live in or near poverty in their old age.

Retail Sales decline in May - On a monthly basis, retail sales decreased 1.2% from April to May (seasonally adjusted, after revisions), and sales were up 6.9% from May 2009 (easy comparison). This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline).
The red line shows retail sales ex-gasoline and shows the increase in final demand ex-gasoline has been sluggish.The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993.Retail sales ex-gasoline increased by 5.6% on a YoY basis (6.9% for all retail sales). The year-over-year comparisons are easy now since retail sales collapsed in late 2008. Retail sales bottomed in December 2008.

Wealthy Are the Only Ones Spending - The government releases its report on retail sales for May tomorrow, and economists total sales increasing 0.2% from April. That includes a positive impact from autos but a negative influence from the drop in the price of gas in the month. But a new poll from Gallup indicates that consumers who make more than $90,000 account for the bulk of that spending increase. Upper-income Americans’ self-reported spending rose 33% to an average of $145 per day in May — up from $109 per day in April. Meanwhile, middle- and lower-income Americans’ self-reported spending averaged $59 per day in May, unchanged from the previous month. It could be that many upper-income consumers are experiencing ‘frugality fatigue.’”

Number of the Week: Default, Not Thrift, Pares U.S. Debt - 122%: U.S. household debt as a share of annual disposable income. U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it. As of the end of March, the average U.S. household’s total mortgage, credit-card and other debt stood at 122% of annual disposable income, meaning it would take a bit more than 14 months to pay it all off if everyone stopped spending money on anything else. That sounds like a lot, but it’s better than it was before: At its peak in the first quarter of 2008, the debt-to-income ratio stood at 131%. Economists tend to see 100% as a reasonable level, so we’re almost a third of the way there. The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.

We’re approaching a dead end - It’s starting to be time for the next move down. The fall of the Euro is stalling a little, gold is reaching new highs. So is denial that the promised recovery has failed to materialize. On that last point, one quick glance at global stock markets should be enough. But it isn't. President Obama, as we’ve seen, said in face of Friday's job numbers that "the economy is getting stronger by the day." He said that based on data that indicate the vast majority of allegedly added jobs, as reported by his own government, are jobs in that same government, while without the, again, same, government's birth/death model, the numbers would have shown an employment loss of 200.000 or more. Plus half a million people dropped out of the work force. The real numbers are devastating, which makes the president's words all the more remarkable.

Wealth, Health, and Trust - Scott Sumner has some comments relating to a vague allusion to “culture”…but I want to be more specific: Trust is positively correlated with wealth, and happiness.[1] Denmark (a wealthy country), for instance, is the “happiest” place in the world (if you believe in happiness measures)…and not surprisingly, also has high levels of societal trust. Trust is also positively correlated with better institutions, including freer markets. Indeed, if everyone was highly skeptical of eachother, it is unlikely that a highly-functioning market would be able to evolve. Trust is also correlated with high levles of robust social norms, and the rule of law. Frances Wooley of Worthwhile Canadian Initiative has a piece on evolutionary theories of markets — which relies heavily on the development of trust between people

Robbed of jobs by the deficit cultists - Friday's US jobs report caught most economic analysts by surprise. After touting the strength of the recovery for months, they had to come to grips with the fact that the economy just is not creating very many jobs. If the temporary jobs generated by the census are pulled out of the count, the economy created just 20,000 jobs in May. The average rate of growth of non-census jobs over the last three months has been just 130,000 a month, only slightly faster than the growth of the workforce. At this rate of job growth, it will take decades, not years, to get back to normal levels of unemployment. It's time that we stop the happy talk about recovery and get serious about the country's economic problems.

Why Does it Matter? -Many people seem to think that U.S. markets are jittery because of fears about what developments in Europe might mean for the rest of the world. But even if there was no sovereign debt crisis, I would be hard-pressed to overstate just just how bad things are here at home. While I've posted plenty of articles detailing the dismal state of the U.S. economy from the perspective of the man in the street (not the one on Wall Street, mind you), all you need is Google, an internet connection, and a few moments of time to see that there's plenty more bad news where the rest came from. After reading the following articles, the first thing that pops into my head is: Why does what is happening overseas even matter?

‘A Very Deep Hole’ on Jobs - NYTimes - I know the president has a lot on his mind, but the No. 1 problem facing the U.S. continues to fester, and that problem is unemployment. The jobs report for May, released on Friday by the Labor Department, was grim. President Obama tried to put the best face on it, but it was undeniably bad news, which is why the stock markets tanked. The private sector created just 41,000 jobs in May, a dismal performance. The government hired 411,000 workers to help with the census, but those jobs are temporary and will vanish in a few months. Unemployment is crushing families and stifling the prospects of young people. Given that reality, President Obama’s take on the May numbers seemed oddly out of touch. “This report,” he said, “is a sign that our economy is getting stronger by the day.” The economy is sick, and all efforts to revive it that do not directly confront the staggering levels of joblessness are doomed.

Small Progress in Job Openings Ratio - For the first time in a year, unemployed workers in April outnumbered job openings in America by a ratio that was less than 5 to 1.  The job openings rate is calculated by dividing the number of job openings by the sum of employment and job openings, and then multiplying that quotient by 100. This rate was highest in professional and business services. There were 4.96 unemployed workers for every job opening in April, according to data released today by the Bureau of Labor Statistics. This follows 12 months where the ratio hovered around five and six: Still, the ratio indicates that the country has a long way to go, and a lot of jobs to create, before making a dent in the backlog of unemployed workers.

The Job Shortfall: Then and Now - In an interesting post a couple weeks ago, Keith Hennessey critiques the President's recent speech about employment growth, and presents the following graph, to highlight the gap between where employment is and where it "should" be. I'm not sure what the trend is in his graph; it appears to be estimated on the level of nonfarm payroll employment. I "eyeball" the length of the red line at about 11.7 jobs. The graph explicitly lists 3.4 million net job loss going from January 2009 to April 2010. I thought it interesting to costruct a similar graph corresponding to the administration of Mr. Hennessey's boss, President Bush (actually, he was my boss, too, for 5 months). The graph below incorporates the May employment release.

Men not working - The Bureau of Labor Statistics released its May employment situation report and the news was mostly grim. Sure, unemployment dropped to 9.7 percent from 9.9 percent. But don’t get too excited, because almost all the new jobs created in May were for census-takers, and these folks will be unemployed again soon.In more bad news masquerading as good, the so-called mancession appears to be easing. Most developed countries are beset by one of these male recessions, with men suffering the brunt of job losses due to their much greater representation in construction and manufacturing—both of which are hard-hit almost everywhere. In this country, at least, the mancession looks like it’s easing—until you look a little closer and realize that this is only the case because men leaving the labor force increased by 4.7 percent over last year, an increase twice that of women. In other words, men aren’t gaining jobs. They’re giving up.

CFOs Signal Worsening Job Market - More bad news on the hiring front.CFOs say they are less likely to hire people now than they were three months ago.According to the latest quarterly Robert Half Financial Hiring Index, six percent of chief financial officers said they plan to hire full-time accounting and finance employees during the third quarter of 2010.In the prior survey conducted three months ago, seven percent of CFOs indicated they planned to add full-time accounting and finance employees during the second quarter. At the time, the folks at Robert Half celebrated the fact this was the highest hiring forecast since the first quarter of 2009.Well, that party was short-lived. Meanwhile, in the latest survey, nine percent of CFOs said they anticipate staff reductions. This is up from eight percent in the prior quarterly survey.

The Other Scary Jobs Chart: The Mass Exodus From The Workforce - Friday's jobs report was pretty rough, but actually the unemployment rate dipped to 9.7%. That's because, despite the lack of private sector hiring, a large swath of jobseekers decided to, for whatever reason, quit the workforce. As Annaly Capital Management (via PragCap) notes, the civilian labor force fell by 322,000 May.The spike up in the total flow from those "unemployed" to "not in the labor force" follow what looked like a couple of months worth of the reverse: people moving on net from not in the labor force to the unemployed, looking segment. What it looks like is that a lot of frustrated workers were sold on the idea that there was some kind of recovery underway, and then realized they'd been lied to.

America’s jobless picture is alarmingly bleak - - The Great Recession is being starkly revealed as a global crisis with the US, the traditional engine of recovery, sputtering on every cylinder. The US government responded with dramatic financial support by transferring money to the household sector. But outside of these transfers the personal income of Americans is still declining; the residential market remains stagnant at best; consumer growth is nominal. The only real energy in the economy has come from the cessation of inventory liquidation, which is now the main factor in rising industrial output and any modest improvement in the economy. The mood of US households is despondent. In May only 11.3 per cent believed they would see their income rise in the following six months, while 16.6 per cent thought they would see it decline. This is the first time in over four decades that more people believe they will be worse off than better. Any massive fiscal and monetary stimulus that might reverse the trend is likely to be politically unsustainable given the growing concern over the exploding national deficit.

Impact of Decennial Census on Unemployment Rate - Last week I posted the Impact of Census 2010 on Payroll Report  My estimate was that the 2010 Census would add 417,000 payroll jobs in May; the actual was 411,000 payroll jobs.  My preliminary estimate is the Census will subtract 200,000 payroll jobs in June - and most of the remaining temporary Census jobs (564,000 total in May) will be unwound by September. I've been puzzling over how much (if any) these temporary jobs lowered the unemployment rate in May. I think these workers come from three groups:
1) already employed workers taking a part time job,
2) people not in the workforce picking up a little temporary income (like retirees or students who would otherwise not be in the workforce), and
3) the unemployed taking a part time job.

Do census jobs count? - When writing about the recent employment report, most analysts and reporters focused on the number of private sector jobs created in the previous month, only 20,000, while netting out the 411,000 temporary jobs created by the Census. Does that men the temporary Census jobs don’t count? It depends upon the question that is being asked, but yes, these jobs do matter.When we are trying to determine if the private sector has picked up steam, and if so how much, netting out the Census jobs is correct. But the Census jobs still count, and they are important. I’ve argued that the government has paid too much attention to growth policy at the expense of stabilization policy, and that it has been too shy about jobs which can be stigmatized with the “make work” label.

Government Workers Cost More to Employ - It costs about $12 more per hour to employ a state or local government worker versus a private sector employee, the Labor Department said Wednesday. Employers spent $39.81 per hour worked for state and local government workers in the first quarter compared to $27.73 per hour for those with private industry jobs. The numbers are part of the Labor Department’s quarterly series on employer costs for employee compensation and they wrap in wages and salaries as well as health benefits such as health insurance and retirement packages.The largest share of the costs comes from wages and salaries for both sets of workers: 70.6% for private employees and 65.9% for government workers. The rest of the payment comes in the form of benefits. It costs state and local governments $3.16 per hour to pay for employees’ retirement and savings plans, compared to 96 cents for private workers. Another $4.52 goes to health insurance for public workers, compared to $2.08 for private workers. And governments spend $3 per hour for its workers’ paid leave, compared to $1.88 for private workers.

How Democrats Fell Short in Job Creation - NYTimes - One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work.  It is true that President Obama and Democratic leaders in Congress favor more stimulus and have been stymied by Republicans and, more recently, conservative Blue Dog Democrats worried about the deficit. But it’s also true that Mr. Obama, Nancy Pelosi and Harry Reid have done less than they could have.  The president has not wrapped his arms around teachers, firefighters and other government workers facing layoffs and dared Republicans to oppose him, much as he did with financial reregulation. He has not pushed for a big new round of tax cuts, which could also put Republicans in a bind. And the White House has been slow to fill vacancies at the Federal Reserve that could go to officials who favor the Fed’s doing more to lift economic growth.

Where Will the Good Jobs Come From? - I have emphasized short-run job creation quite a bit recently, and I have noted, implicitly at least, that we shouldn't be too picky about the quality of the jobs that are created. Most jobs will do. But in the long-run the quality of jobs matters a lot, and when the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits -- jobs that are as good or better than the jobs they had before.  But where, exactly, will those jobs come from? I wish I had the answer. Education is part of it, better education means better jobs on average, and it's easy to imagine a substantial fraction of the population benefiting from an educational advantage. So I won't back off prior calls to improve education at all levels. But even if we substantially improve education, it won't fully solve the problem

The Woes of Labor - This vocalizes a real threat I have long recognized. Technology and Innovation have been eating up Mom and Pop stores for decades, went to chewing on Manufacturing, and is now posed to go totally without labor except for Maintenance Costs. Has Anyone been to a garage lately; it being a crime to leave a spot of Oil.  The current robotic maintenance consists of Snap-On Parts, rather than Tools; eventually this Work will be mechanized, and the Clip-Together assembly will leave Employment only for the CAD systems of design. Parts design in twenty years will only be reshaping of basic type Parts, and then no one will be allowed to Work.

Manufacturing and Trade Inventory-to-Sales Ratio: Inventory Adjustment Over - The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed that the inventory adjustment is over:  Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,354.3 billion, up 0.4 percent (±0.1%) from March 2010, but down 2.8 percent (±0.3%) from April 2009. This graph shows the inventory to sales ratio. This has declined sharply to 1.23 (SA) from the peak of 1.48 back in Jan 2009. This could decline further - the trend is definitely down over time - but clearly the inventory adjustment is over. This is important because the change in inventory added significantly to Q4 GDP growth and some to Q1 GDP. See BEA line 13: the contribution to GDP in Q4 2009 from 'Change in private inventories' was 3.79 of the 5.9 percent annualized increase in Q4 GDP. In Q1 2010. the 'change in private inventories' was 1.65 of the 3.0 percent annualized increase.

Jobs, Education & The Growing Wealth Gap - Economist Mark Thoma wrote a fine piece wondering where the good jobs will come from in the future. As many Americans struggle to find a job - any job - Thoma correctly notes that just getting a paycheck is important right now.   But he adds that ultimately it is the quality of the job that matters more in the long run to families' and the overall economy's economic prospects.  Thoma writes: But in the long-run the quality of jobs matters a lot, and when the private sector finally begins reabsorbing the unemployed, the underemployed, and the discouraged, we want people to be able to find jobs with decent wages and benefits -- jobs that are as good or better than the jobs they had before.  From my perch the trend toward higher quality jobs is not good.  It is difficult to envision what the next big growth sector will be.   Perhaps another way to express it is: what will be the next IT? So what is the next boom industry that will provide jobs to not only the currently unemployed, but also the million-plus new people entering the American economy every year?  Another good question.

Is Government Crowding Out Private Sector Jobs? - Bottom line: The government isn’t crowding out anything.  The private sector simply isn’t hiring workers. We have 15 million people who are unemployed, 6.7 million of whom have been unemployed for over 26 weeks. There are an additional 8.8 million people who are working part-time purely for economic reasons and an additional 1.1 million people who are labelled as marginally-attached discouraged workers.  There is an enormous supply of labour the private sector can choose from. Think of it this way. Per capita income in the United States is just under $40,000 per year. So total lost economic output can be calculated Total lost output and income per year? About $800 billion. Of course, some would argue there is always some lost output via frictional unemployment as people change locations, professions, etc. Fair enough. Let’s haircut the figure a massive 25% then, down to $600 billion for argument’s sake. Are you telling me we should be worrying about crowding out right now when $600 billion in income is being lost?  That doesn’t make any sense to me.

Structural versus cyclical unemployment - macroblog - One of the key functions of labor markets is matching firms looking for workers who have particular attributes (or skills) with individuals looking for work who have those attributes. What economists have been worrying a lot about recently is the potential for a substantive mismatch between the skills of those looking for work and the skills that firms want. This type of labor reallocation friction is one of many potential structural problems affecting the U.S. labor market at present (see, for example, here, here, and here).  A 2003 New York Fed article by economists Erica Groshen and Simon Potter examined the issue of structural rigidities in labor markets during the recovery from the 2001 recession.

Employers Lowballing New Hires- The job market may be recovering, but some salary offers are still a few years behind.Since the labor market began picking up steam, companies hiring for entry-level or administrative spots with pay that would normally range from $40,000 to $50,000 have been offering workers $28,000 to $38,000, says Randy Miller, founder and chief executive of ReadyMinds, a Lyndhurst, N.J., provider of online career counseling and coaching. For workers further up the food chain, an offer that might have been $100,000 a few years ago is now coming in at $85,000 or $90,000, he says."Companies are more worried these days about margins, profitability, and they are cutting costs across the board."

Jobless Claims in U.S. Decreased Last Week to 456,000 (Bloomberg) -- More Americans than anticipated filed applications for unemployment benefits last week, a sign firings remain elevated even as the economy is expanding.  Initial jobless claims dropped by 3,000 to 456,000 in the week ended June 5, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg News projected 450,000 claims, according to the median forecast. The number of people receiving unemployment insurance fell to the lowest level since 2008, while those getting extended payments climbed. The number of people continuing to receive jobless benefits declined by 255,000 in the week ended May 29 to 4.46 million, the lowest since December 2008. They were forecast to drop to 4.64 million.  The continuing claims figure does not include the number of Americans receiving extended or emergency benefits under federal programs.

Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories as provided by the BLS: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. As we've discussed before there was more turnover in the '70s and '80s - back then the 'less than 5 weeks' category was much higher as a percent of the civilian labor force than in recent years.  What really makes the current period stand out is the number of people (and percent) that have been unemployed for 27 weeks or more (red line). In the early '80s, the 27 weeks or more unemployed peaked at 2.9 million or 2.6% of the civilian labor force.

Long-Term Unemployment: It’s the Benefits (in part), Stupid - There is no doubt that this is the steepest and longest downturn of the post-World War II period. However, the number of the long-term unemployed (more than 6 months) is not a good measure of its severity. The reason is simple, benefits are available for a much longer period of time than has been the case in prior downturns. In some states benefits are available for as long as 99 weeks. This gives unemployed workers the opportunity to spend more time looking for work than would otherwise be the case. Therefore, they are less likely to take a job that means a large pay cut and/or does not fully utilize their skills. It is important to realize that this does not necessarily mean that extended benefits are raising the unemployment rate. If the long-term unemployed took low-paying jobs they would mostly be replacing other workers. However, the unusually long duration of benefits prevent a direct comparision of the number of long-term unemployed across recessions.

Unemployment Benefits Lapse Causes Panic And Confusion For The Jobless - The Lovejoys are among 42,800 long-term unemployed who will stop receiving benefits from the Pennsylvania Department of Labor & Industry by the end of this week, according to U.S. Labor Department data. Across the country, 323,400 will prematurely exhaust their benefits this week because Congress failed to reauthorize several domestic aid programs before they lapsed on June 1, after the House and Senate left Washington for a Memorial Day recess.The House passed its version of the "tax extenders" bill to preserve the unemployment benefits -- along with money to help states administer Medicaid programs and extra reimbursement for doctors who see Medicare patients, among other things -- on May 28, after the Senate had already skipped town. Now senators are fighting over the cost of the package and will probably not get it done until next week. The stimulus and several subsequent bills had given the unemployed extra weeks of benefits on top of the standard 26 weeks made available by states. In some areas, laid-off workers could get 99 weeks of benefits.

Longer Unemployment Spell = Less Hope - A Gallup poll of unemployed adults finds that optimism about finding work fades the longer they look for jobs unsuccessfully. Workers out of work four weeks or less say by 71% to 29% they expect to find a job within four weeks. But, in contrast, only 36% of those who have been out of work for six months or more say they expect to. These results are based on April 19-May 23 interviews with 2,096 unemployed adults, aged 18 and older, conducted as part of Gallup Daily tracking.The Labor Department said Friday that 46% of Americans who don’t have jobs and are looking for them have been unemployed for more than 27 weeks. A Gallup poll of unemployed adults finds that optimism about finding work fades the longer they look for jobs unsuccessfully. Workers out of work four weeks or less say by 71% to 29% they expect to find a job within four weeks. But, in contrast, only 36% of those who have been out of work for six months or more say they expect to.These results are based on April 19-May 23 interviews with 2,096 unemployed adults, aged 18 and older, conducted as part of Gallup Daily tracking.

Unemployment and Despair - Americans who have been unemployed for more than six months are much more likely to report having emotional distress than people who have been unemployed for a shorter period, according to new Gallup survey data. The table below shows answers to some of the survey’s questions about whether respondents experienced certain negative or positive emotions the previous day. Note that respondents unemployed for longer periods were more likely to say they had experienced a given negative emotion, and less likely to say they had experienced a positive emotion (or even smiled) the day before:

In Brutal Job Market, More Than a Million Quit Looking - If you think the jobs situation has become pretty hopeless, you're not alone. Roughly 1.1 million workers have given up hope of finding employment. The staggering level of "discouraged workers" as the government calls them has swelled to historic proportions in 2010, past the million barrier for the first time since the Bureau of Labor Statistics has been tracking the number.Though a bit off its all-time high of 1.2 million recorded in February, the metric stands as perhaps the most daunting statistic of last Friday's gloomy jobs report, which showed that almost all the new employment is coming from temporary government Census jobs and not the kind that will sustain an economy.

Laid-off workers retrain but end up in same spot: Jobless… Enrollment in job-training initiatives across the USA has swelled since the recession began as dislocated workers in shrunken industries such as manufacturing, construction and real estate retool for growing fields such as health care, renewable energy and computers. But a diploma is not necessarily a ticket to a job or higher earnings, especially with the jobless rate still hovering near 10%. "Training doesn't create jobs," particularly as a nation emerges from recession, says Anthony Carnevale, head of Georgetown University's Center on Education and the Workforce. "It's jobs that create the demand for training."Part of the problem: Though economists say the recession ended last summer, high unemployment pits graduates against both experienced workers who were laid off in the slump and newly trained colleagues. Sometimes job centers funnel too many workers into the same field.

Long-Term Unemployment Deepens - - For 99 weeks, Paoletti accepted New York state and federal unemployment benefits. This spring, they ran out. Now, she is drawing down her IRA to stay afloat, underwater on her mortgage and without health insurance.She’s not alone. Indeed, Paoletti is one of a million 99ers, as the long-term unemployed who have exceeded the maximum number of weeks of benefits are known.The joblessness crisis — in the average duration of unemployment, if not the absolute unemployment rate — is unprecedented in the postwar United States. Of the 15 million unemployed in America, over 7 million have been out of work for more than six months, nearly 5 million for a year and over 1 million for two years — the worst statistics since the government started keeping count in 1948. The proportion of the unemployed out of work for more than six months has doubled in the past year, to more than 46 percent. The jobseekers-to-jobs ratio, which tells how hard positions are to get, remains around 5.6 to 1.

What if there's no fix for high unemployment? - There seems to be little doubt that unemployment is going to remain stubbornly high -- quite possibly for years to come. There's also mounting evidence that a good part of that unemployment is really structural in nature: The skills and capabilities of many experienced workers are simply no longer demanded by the market.  In manufacturing and in many clerical and administrative occupations, computerization and automation have left many formerly middle-class workers with few viable career options. Is it possible that we're creating a future in which jobs are going to be harder and harder to create?As technology continues to accelerate, the number and types of jobs that can be automated is certain to expand dramatically. It's not just factory workers that can be replaced by robots and machines: Rapidly improving software automation and specialized artificial intelligence applications will make knowledge worker and professional occupations requiring college educations and advanced skills increasingly vulnerable.

Why the Main Street Economy Isn't Getting Any Better - The common wisdom is that excessive debt-financed spending was one of the causes of the recent recession, so the news that household debt is dropping is being celebrated by business cheerleaders as reason to believe we’re on the mend. Baloney. The reason so many Americans went into such deep debt was because their wages didn’t keep up. The median wage (adjusted for inflation) dropped between 2001 and 2007, the last so-called economic expansion. So the only way typical Americans could keep spending at the rate necessary to keep themselves — and the economy — going was to borrow, especially against the value of their homes. But that borrowing ended when the housing bubble burst.. So now Americans have no choice but to pare back their debt. That’s bad news because consumer spending is 70 percent of the economy. It helps explain why we so few jobs are being created, and why we can’t escape the gravitational pull of the Great Recession without far more government spending

Thousands face jobless aid cutoff - If Congress does not act this week to extend unemployment benefits — a big likelihood — thousands of jobless workers in California could stop getting their unemployment checks, according to state employment officials.The problem most immediately affects those who are getting FedEd unemployment aid.The cutoff of unemployment checks also does not include the 124,000 Californians who have exhausted their maximum 99 weeks of benefits. Last month, the House passed a bill (HR 4213) that would allow the more recently unemployed to continue through the four extensions and FedEd until Nov. 30. A 65% subsidy of COBRA premiums was dropped from the bill, and it would provide no additional weeks for those who have exhausted their benefits.

Government must OK new domestic worker rights - Every day, 200,000 domestic workers in New York make it possible for their employers to go to work. Yet, many of these mostly immigrant women of color are employed without a living wage, health care and basic labor protections. "As far as I am concerned, these folks are the economic backbone of New York," said Assemblyman Keith Wright (D-Harlem). "[Yet] they are an invisible segment of society."That situation could - and should - be about to change. New York may soon become the first state to offer employment protection to nannies, housekeepers, elder companions, baby-sitters and cooks who work in private households. Right now, these workers are pretty much on their own. Neither the National Labor Relations Act, which guarantees employees the right to organize; the Fair Labor Standards Act, which sets federal minimum wage and overtime standards, or the civil rights laws that protect workers against discrimination apply to them."Because you work in a private house, almost anything goes," said Marilyn Marshall of Brooklyn, a nanny from Trinidad and Tobago. "They don't think of what you do as real work or of you as a real worker."

The $7.8 Trillion Question - It can be difficult for people to internalize just how economically destructive our immigration policy is. I think this is why some many folks can’t believe what a “free lunch” changing the policy would be. From my comments. [Massive Immigration] sounds about as helpful as keeping our debt problems from hurting us now by taking on more debt to get us through now. It temporarily makes now better (or at least feel better, so far its not clear it has actually made now any better in reality), but it puts a clear increased burden on the future. Not only is it not clear that immigration puts an increased burden on future generations, but its fairly clear that it decreases it.

Some States Already Have ‘Majority Minority’ of Kids -The U.S. will be a “majority minority” nation by 2042 but several states are already there, especially among their young populations, according to an analysis of Census data by William Frey at the Brookings Institution. Census data released yesterday shows that ten states have a non-white majority among kids under 15, up from six in 2000. Last year, Maryland and Georgia joined the list. “I think the majority minority population could well get to 20 states in the next two years,” says Mr. Frey, who projects that Mississippi and Illinois are two that will soon tip. Nationally the under 15 population declined from 60.8% white to 54.6% white, according to Mr. Frey.One interesting fact is that the District of Columbia has seen its white under 15 population grow considerably, to 22% in 2009 from 12.3% in 2000. The reverse “white flight” phenomenon was the subject of this Journal article. Click here for the percentage of the population of each state that is white, and how this figure has changed since 1980.

Personal Bankruptcy in America - Giant graphic of information, courtesy of Billshrink

More than 40m Now Use Food Stamps — The number of Americans receiving food stamps in March topped 40 million for the first time as the jobless rate hovered near a 26-year high. Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases totaled 40.2 million, up 21 percent from a year earlier and 1.2 percent more than in February, the Department of Agriculture said yesterday in a statement on its website. The number of recipients has set records for 16 straight months

Food Pantries Fear the Future - Less assistance, more demand strain resources— With donations drying up, state money cut and demand skyrocketing, food pantries and soup kitchens in the Hudson Valley are struggling to stay afloat. "We're doing so much more with fewer resources," said Diane Reeder, executive director of Queens Galley in Kingston. "Even our regular fundraisers aren't pulling in the kind of money we're used to seeing." The financial problems are widespread. The Regional Food Bank of Northeastern New York expects to receive a cut of $100,000, to roughly $3.2 million, from the state's Hunger Prevention and Nutrition Assistance Program for the grant year that begins July 1, said Executive Director Mark Quandt. The Florida Community Food Pantry these days runs almost entirely on that money.

In jail for being in debt - As a sheriff's deputy dumped the contents of Joy Uhlmeyer's purse into a sealed bag, she begged to know why she had just been arrested while driving home to Richfield after an Easter visit with her elderly mother. No one had an answer. Uhlmeyer spent a sleepless night in a frigid Anoka County holding cell, her hands tucked under her armpits for warmth. Then, handcuffed in a squad car, she was taken to downtown Minneapolis for booking. Finally, after 16 hours in limbo, jail officials fingerprinted Uhlmeyer and explained her offense -- missing a court hearing over an unpaid debt. "They have no right to do this to me," said the 57-year-old patient care advocate, her voice as soft as a whisper. "Not for a stupid credit card."

Three Charts on Incarceration to Break Your Heart

US Cobra Health Coverage Payment Aid Appears Likely To End - Just a few months after passing the comprehensive health-care overhaul, U.S. lawmakers appear willing to risk a short-term backslide in the push to reduce the number of uninsured Americans until the legislation's major provisions take effect in 2014.  Unless Congress passes an extension retroactively, people who lose their jobs on or after June 1 no longer will receive government financial help to cover 65% of their premium costs for Cobra health coverage, which lets them continue on their former employer's group health plan.

Unemployed face loss of health care without COBRA subsidies - While the U.S. Congress continues to delay and debate a bill to extend unemployment benefits and tax subsidies for insurance coverage, a new report shows that without those subsidies, even those still getting unemployment are virtually bankrupted because of the high cost of paying for their COBRAs for health insurance. The Detroit News reports: Newly laid-off workers in Michigan face average monthly COBRA health care premiums of $1,019, which would gobble up more than three-quarters of their jobless benefits, according to a report released today by an advocacy group urging Congress to help.“The elimination of COBRA subsidies means that people losing their jobs will also lose their health care coverage,” said Ron Pollack, executive director of Families USA…The House passed a slimmed-down $102 billion jobs bill May 28 that dropped a proposal to extend eligibility for the federal COBRA subsidy through the end of the year.

U.S. Child Born in 2009 May Cost $222,360 to Raise(Bloomberg) -- A middle-income family may spend $222,360 to raise a child born in 2009 to the age of 18, according to a U.S. Department of Agriculture study. The estimate is less than a 1 percent increase from 2008 and the smallest jump in a decade, which likely reflects the state of the economy, the USDA said today. Increases in child care, education and health services were largely offset by a decline in transportation, the study showed. The typical two-parent family spent from $11,650 to $13,530 on each child last year, the study shows.

Should This Be the Last Generation? - NYT - Have you ever thought about whether to have a child? If so, what factors entered into your decision? Was it whether having children would be good for you, your partner and others close to the possible child, such as children you may already have, or perhaps your parents? For most people contemplating reproduction, those are the dominant questions. Some may also think about the desirability of adding to the strain that the nearly seven billion people already here are putting on our planet’s environment. But very few ask whether coming into existence is a good thing for the child itself.

Life is a Series of Bailouts, and Then You Die - Reading Tim Fernholz’s excellent article on the successful Build America Bonds program and the fuzzy thinking that’s imperiling it made me want to write once again on the topic of bailout-rhetoric, which I think has become really dangerous and counterproductive to understanding. I last thought of this reading an email discussion about Joe Gagnon’s monetary policy ideas that objected to his proposal as a “backdoor bailout.”  And of course in other quarters we can’t appropriate funds to prevent teacher layoffs because that’s a “bailout.” Or we shouldn’t let the IMF prevent a fiscal meltdown in Europe because that’s a “bailout.” But, heck, economic growth is corporate bailout! Growth is a bailout for feckless state and local politicians! Everything is either a bailout or else it’s collapse.

Starting In 3 Weeks, States Are Going To Make The U.S. Budget Debate Much Worse - The start of the federal fiscal year was changed from July 1 to Oct. 1 when the Congressional Budget Act was signed into law in 1974. This was a momentous change for federal budget policymakers who had to figure out what to do with the “transition quarter” — the three months between the end of the old fiscal 1976 and the beginning of the new fiscal 1977. But the new start date meant little for the states, and few changed their fiscal year as the federal government did. As a result, in about three weeks, fiscal 2011 will begin in 46 states. The start of the states’ new fiscal year is usually the prototypical example of something that isn’t news or even worthy of commentary.  This year will different: The changes coming in state budgets in fiscal 2011 will have a substantial negative effect on the U.S. economy as a whole. According to an analysis by the National Conference of State Legislatures, in 2011 all 50 states and Puerto Rico are facing an almost $90 billion budget gap.

New bonds to help cash-strapped states also benefiting Wall Street –New federally subsidized bonds that have proven wildly popular in helping cash-strapped state and local governments fund roads, schools and other construction projects also offer a windfall to a less obvious beneficiary: Wall Street banks.  Goldman Sachs, J.P. Morgan Chase and other firms that dominate the U.S. underwriting market stand to earn millions, if not billions, of dollars under a planned expansion of the Build America Bonds program, which provides tax credits to local and state governments seeking to finance capital projects. Major banks lobbied heavily for the program's expansion under a jobs bill recently passed by the House and under consideration in the Senate. The bonds, first issued last year as part of President Obama's stimulus package, were a key factor in reviving the moribund municipal bond market over the past year. They also provide two key benefits for Wall Street firms: new customers who would not usually buy municipal debt and, in many cases, higher commissions than those for traditional tax-exempt bond deals.  Investment banks have earned more than $670 million from selling the bonds, with average fees nearly 20 percent higher than traditional tax-exempt bond issues over the past 14 months, according to new data from Thomson Reuters.

Build America Bonds May Push Cities to Bankruptcy: (Bloomberg) -- The bonds designed by the U.S. government to help municipalities recover from the worst recession since the Great Depression may cost them millions of dollars in unforeseen borrowing costs instead of saving them money.Build America Bonds were part of the American Recovery and Reinvestment Act, passed in 2009. The government offered state and local issuers a 35 percent subsidy on interest costs if they sold bonds on a taxable basis, making such financing cheaper than borrowing in the traditional tax-exempt market. Now the Treasury says it will reduce the BAB subsidies by any amount issuers owe the government. This would force municipalities to come up with the cash to repay debt service at the same time they are trying to fill holes in their budgets. Three major cities that have discussed chapter 9 bankruptcy this year -- Detroit, Los Angeles and Miami -- have sold a combined $4.5 billion in BABs. The last thing these issuers need is a surprise.

Buffett Predicts the Next CrisisTestifying before Congress last week, Buffett warned that we could be standing on the brink of the next financial crisis. A brink which begins, as it turns out, right at your city limits. Congress had asked Mr. Buffett to testify about the role that credit raters Moody's and Standard & Poor's played in the last financial crisis. But in the course of doing so, lawmakers couldn't resist the urge to pick Buffett's brain. And so it was that Financial Crisis Inquiry Commission chairman Phil Angelides asked: Where's the next big risk to our economy? Buffett's reply: I don't think [Moody's or S&P] or I can come up with anything terribly insightful about the question of the state and municipal finance five or 10 years from now except for the fact there will be a terrible problem and then the question becomes: will the federal government bail them out?

Saving Money by Slashing Prison Spending - The chart is taken from this report released today by the Center for Economic and Policy Research, a liberal research group.  The report presents a relatively unusual approach for dealing with the country’s fiscal challenges: that state and local governments could save money by cutting the incarceration rate for nonviolent offenders and bringing the rate more in line with those for our peer countries.

New York State Government Shutdown Would Have Statewide Impact With the state budget more than two months late and continued discord in Albany, the fear of an unprecedented shutdown of state government is getting more attention among state planners. In a LIVE interview with WCBS Newsradio 880's Pat Carroll and Michael Wallace, Gov. David Paterson warned of "unimaginable chaos" if the state government is forced to shut down. A shutdown would likely mean a fraction of the number of troopers patrolling highways and investigating crimes, delayed tax refunds, suspension of lottery games and closed unemployment offices just when the state is hovering around its highest unemployment rate in decades.

Poor New York State May Issue IOUs Like California (Reuters) - Cash-poor New York state might have to pay its bills with IOUs next week to avoid the "anarchy in the streets" that could result from a government shutdown, Governor David Paterson said on Thursday.It's a political variation of "Hotel California," a game the Democratic governor doesn't particularly want to play.Like California, which last year issued $2.6 billion of IOUs during a lengthy budget battle, New York might have to pay its bills this way for the first time since the 1980s because the Legislature has not enacted a $135 billion budget more than two months after the deadline.So far, New York state has dodged a shutdown -- the equivalent of a mass strike by public workers -- because the Legislature has enacted Paterson's emergency spending bills. But now two Democratic senators have suggested they might reject next week's temporary spending bill, forcing Paterson to seek the votes of Republican senators.

Budget deadline nears with no progress in sight -It's a week before the June 15 constitutional deadline for enacting a state budget, an appropriate moment to consider the status of this year's version of the annual fiscal drama. And that is? Up the proverbial creek without the proverbial paddle.In the weeks since Gov. Arnold Schwarzenegger unveiled his revised 2010-11 budget, there's been absolutely no progress on closing the deficit that approaches $20 billion. In fact, the situation may have grown worse because the extra federal funds that the governor and the Legislature have counted on are evaporating.Originally, Schwarzenegger projected that the state would get an extra $7 billion. His May revision cut that in half, but a congressional measure that would boost federal medical payments to states has stalled, perhaps permanently. And that means the state may receive no more than an extra $1 billion

Texas two-year deficit may hit $18 billion: Moody's (Reuters) - Though Texas kept the top credit rating from Moody's Investors Service, the state's next two-year deficit could soar to between $11 billion and $18 billion, depending on how long the revenue-slashing recession drags on, the credit agency said on Friday.The recession landed in AAA-rated Texas later than in many other states, and Texas's diversified economy also should revive faster, Moody's said. "The state's important energy markets, its vital position in trade and transportation routes and its robust population growth all have driven its economic expansion in recent years," Moody's said.

Illinois Debt Cost Rises as Fitch Cuts Credit Rating - The credit premium to insure debt of the State of Illinois is rising this afternoon after Fitch Ratings cut its rating on $25 billion of “general obligation” bonds issued by the State to “A” from “A+”, based on “the magnitude and persistent nature of the state’s fiscal problems and passage of a budget for fiscal (FY) 2011 that does not address either the annual operating deficit or accumulated liabilities.”Fitch assigned a credit “outlook” of “Negative” to the bonds and said it cut the State’s appropriations rating to “A-” from “A.”

Oregon's done with the days of rosy revenue forecasts - As the Oregon Legislature debates its response to the latest budget shortfall, one thing needs to be abundantly clear to both policymakers and the public -- the legacy of the last two recessions is a hole in the state's revenue stream that is essentially impossible to fill. Simply put, a radical reset of spending priorities is now more critical than ever. The shortfall for the current biennium -- after already announced spending cuts and new taxes -- now stands at $577 million. And lawmakers already are looking at a gap in excess of $2.5 billion for the 2011-13 biennium, even with expectations that Oregon's economy rebounds from the recession. But economic growth alone will not solve our problems. Any reasonable, or even optimistic, forecast of job growth in the coming years can't make up for Oregon's lost decade, 10 years in which payrolls stagnated. Fewer Oregonians are working and those who are earn less relative to other Americans.

The 20 Most Economically Stressed Counties In America - Here are the 20 most economically stressed counties with populations of at least 25,000 and their April 2010 Stress scores, according to The Associated Press Economic Stress Index:

32 Detroit schools expected to close this year - The Detroit school district will close 32 public schools this year, fewer than had been expected, as the financially struggling district tries to curtail costs while improving academics for an ever-lower number of students.  The announcement Monday by emergency financial manager Robert Bobb is part of his $1 billion, five-year facilities plan to realign the 172-school district. It follows the closure of 29 schools last fall and 35 other buildings about three years ago.  Another nine schools will be closed in 2011-12, followed by four more a year later. Bobb originally had planned to close 44 schools in June, but scaled back after several dozen meetings with parents and others.

Broward School District Pink Slips 1300 Employees - FORT LAUDERDALE - The axe has fallen at the Broward County School District and more than thousand teachers, administrators and district employees have received notices that their services will not be needed next year. On Monday, 568 teachers and 737 non-instructional employees were informed that they would be laid off on July 1st.Districts are trying to make up for a $130 million budget shortfall brought on by the slumping economy and falling property tax revenue.Still, the numbers are better than expected. At one point, the superintendent had said nearly a thousand teachers could be laid off at the end of the year. "Teachers, they're going to have to sit tight and wait to see what openings are going to be happening,"

Chicago Teachers Union to sue over class sizes - Chicago Teachers Union officials vowed to file suit today, charging that plans to raise city class sizes to 35 are unsafe and violate the municipal code. "You're looking at a very dangerous situation,'' CTU President Marilyn Stewart said at a news conference Monday."We're asking the Board [of Education] to prove that you can do this without violating the law.'' The suit -- which may be the first of its kind -- will hinge on a municipal code requirement that classrooms contain 20 square feet of floor space per person.That means a room of 35 students and one teacher must be at least 720 square feet.

Schools may suffer from oil spill - Schools in DeKalb County already struggling financially could suffer additional monetary loss because of Gulf oil spill. DeKalb Superintendent Charles Warren said Alabama has a unique funding mechanism for public education, depending heavily on sales tax and state income tax. He said the oil spill is likely to have a negative impact on both. “With the oil spill, tourism revenues are expected to be down tremendously so that’s going to hurt us on the sales tax side,” he said. “With tourism down, that means less people will be working, and that’s going to hurt us on the income tax side. It’s very troublesome for the Alabama Education Trust Fund, and it just compounds the job the Legislature is going to have to do to try to recover the losses.” The county system already recently cut more than 50 personnel, mainly due to a projected funding deficit. Warren said the oil spill could make the deficit worse.

Lower quality education and the substitution problem: is Walmart University like the GED? - In general, the availability of lower quality, lower cost, consumer choices is beneficial to low income people who often are able to afford these goods when the bottom rung of the product quality ladder is lowered. The availability of a new line of washing machines that is cheaper, crappier, and dies sooner than any kind before it can mean that many families are able for the first time to have a washing machine. However, when information is uncertain, and the decisions are being made by individuals with myopically high discount rates or high costs of attaining information about the value of the good, the the availability of these goods can make them worse off. A recent NBER paper by James Heckman, John Humphries, and Nicholas Mader sums up the economic literature on the GED, and suggests that the GED may be one of these low quality products that is doing more harm than good by causing students to substitute graduating high school for dropping out and getting a GED.  One study the authors cite found that the option of  GED causes four-year high school completion rates to fall by 5%.

Teachers Without Jobs and Education Without Hope - In Berkeley, California; Raleigh, North Carolina; and Montclair, New Jersey, they are protesting massive cuts in educational funding for both public and higher education and the laying off of thousands of teachers. The cuts are serious. According to the National Education Association, there are as many as "26,000 teachers in jeopardy of layoffs in California, 20,000 in Illinois, 13,000 in New York, 8,000 in Michigan and 6,000 in New Jersey."[1] The mainstream media coverage of these projected job losses and even the more critical analyses of these events generally reduce soaring job layoff among public schoolteachers to an unhappy consequence of the economic recession. The logic behind this assumption is not without validity, but the issue is often presented as uncomplicated and straightforward. States with dwindling tax revenues are forced to eliminate basic public services and school budgets have become a major casualty of such cuts. Operating in tandem with this simplistic justification is the view that teachers and teacher unions who oppose such layoffs and further cuts are selfish and indifferent to the needs of students.

The Uncertain Impact of Merit Pay for Teachers - Should teachers be paid more if their students’ test scores improve? States that want access to federal funds through the Department of Education’s Race to the Top program must make teacher evaluations “that take into account data on student growth,” then use those evaluations to inform decisions on “compensating, promoting, and retaining teachers and principals.” Will financial incentives make our teachers more effective, or will they be yet another educational fad that comes and goes and signifies nothing? On Thursday and Friday of last week, Harvard’s Program on Education Policy and Governance which I direct held a two-day conference on teacher merit pay. I remain convinced that Race to the Top was wise to include a push for merit pay, because it shakes up the compensation status quo, which is both rigid and replete with bonuses for things, like graduate degrees, that are statistically unrelated to student outcomes. But I left the conference with little confidence in the transformative power of a federal push for merit pay.

Glenn Reynolds: Higher education's bubble is about to burst… - It's a story of an industry that may sound familiar.The buyers think what they're buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy. Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they're buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn't. Yes, this sounds like the housing bubble, but I'm afraid it's also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it's better for us to face up to what's going on before the bubble bursts messily.

State facing staggering pension debt - For decades, the state of Illinois has put part of its pension tab on plastic, while charging up earlier and more costly retirements without socking away savings to cover the bill. Lawmakers put off tough choices by making the minimum payments to fund these pensions artificially low, then skimped and skipped payments while the pension debt grew. A few times, the state even borrowed money just to pay the bare minimum.  Consider this: It took three decades for the state to accumulate $15 billion in pension debt, just nine more years for that debt to soar to $78 billion. Add what the state has borrowed to prop up the plans, and the figure is really $89 billion and likely to grow to $95 billion this year. That's nearly $7,000 for each resident of the state.  Some experts say that debt is really closer to $166 billion.

Hotel California's $36000-per-household bill - In the United Kingdom, Tory Prime Minister David Cameron has warned that his new coalition government will have to invoke austerity cuts that could affect Brits for years, even decades. New Jersey GOP Gov. Chris Christie has turned into a conservative hero for telling an irate teacher who complained about her pay at a town hall meeting that she doesn't have to teach. Illinois Gov. Pat Quinn signed a bill in April to cut pension benefits for new state workers - it raises the full-pension retirement age to 67 and bases pension benefits on the last eight years' salaries - and he's a Democrat. The spirit has spread even to what Christie refers to as Hotel California. Gov. Arnold Schwarzenegger has vowed not to sign a budget that doesn't include pension reform for new state workers. "I will hold up the budget," Schwarzenegger told "It doesn't matter how long it drags - into the summer or fall or into November or after my administration - and I think people will support that."

CalPERS to resume seeking another $700 million in tax money - California's troubled, giant public pension fund is preparing to seek another $700 million from the state and school districts, after postponing a decision last month because of concerns about the state's massive budget deficit.The staff at the California Public Employees' Retirement System is recommending the increase, and the pension fund board is set to reconsider it Tuesday. Several board members — including state Treasurer Bill Lockyer, who questioned the move last month — now are in favor of it. Board President Rob Feckner, when asked whether the increase would be approved, said, "I think it probably will. It's the right thing to do for the system."

New York Plan Makes Fund Both Borrower and Lender - Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund. As word of the plan spread, some denounced it as a shell game and a blatant effort by state leaders to avoid making difficult decisions, like cutting government spending or reducing pension benefits. “It’s a classic Albany example of kicking the can down the road,”

Borrowing from One Pocket to Lend to the Other - Public pensions funds are the key budget challenge facing many state and local governments. Why? Because it’s been easy for officials to promise future pension benefits without setting aside enough money to pay for them (the same problem afflicts corporate pension plans and Social Security).The New York Times has a front-page story describing New York’s latest plan to put off pension funding: Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

N.Y. State "classic budgetary sleight-of-hand" - From Danny Hakim at the NY Times: New York Plan Makes Fund Both Borrower and Lender - Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.  And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.  Oh my ...

Pension Plans Go Broke as Public Payrolls Expand (Bloomberg) -- Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.  The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.  This number, 9,700, illustrates just how hard it is for political leaders to reduce headcount even as tax revenue declines, and even as the gap grows between what governments owe their workers in retirement pay and benefits and the amount they have on hand. Hard? It’s almost impossible, as that number shows.

How Pension Funds Exploit Credit Default Swaps - Credit Default Swaps have received their share of blame for the financial crisis. American International Group’s CDS business not only brought down the insurer but also nearly toppled the financial system. Even George Soros has pronounced CDSs “particularly suspect.”  Why, then, would pension funds consider venturing into the treacherous world of the CDS? The answer is simple: These swaps allow investors to hedge risk and gain easy exposure to credit markets, while offering attractive returns.“Every portfolio manager has the obligation to minimize risk and maximize returns, and CDSs can be part of a  program to accomplish this, if properly used,” says Viva Hammer, who was responsible for tax regulations governing CDSs while with the U.S. Treasury Department’s Office of Tax Policy.

Administration Advances Plan to Federalize Private Pension System - In February, the U.S. Treasury and Labor departments jointly announced they were seeking public comment on proposed design changes to employer-sponsored 401(k) plans and individual retirement accounts that would centralize the private pension system under structures created and administered by the government.  Supporters say these changes are needed to ensure Americans save more for their retirement and have lifetime income options that prevent them from outliving their retirement savings, protecting them from market risk. At stake for the millions of Americans with private retirement plans: Would they be able to continue making their own investment decisions? Or would Congress mandate both investment options and distribution methods? Government Retirement Accounts also would prevent workers from owning their retirement savings fully, as they could bequeath only half of their remaining account balances to their heirs

Seniors Are the Fastest Growing Population of Consumers Declaring Bankruptcy -  In the last ten years, Americans aged 55 and older have become the fastest growing group of consumers declaring personal bankruptcy, according to the AARP. Over half of people aged 50 and older that have debt spend the majority of their monthly income paying it off. Mortgages, home-equity loans, and large credit-card balances are just some of the reasons seniors are experiencing financial trouble. “This is a vulnerable population,” said Jow Cosentini, Director of Operations for Persels & Associates. “They are more prone to scams and if taken to the cleaners are least able to recover.” If the housing market was better, retirees might have been able to downsize their homes to pay off their debts, or get reverse mortgages. But with the housing market in the shape it’s in, many seniors don’t have enough equity in their homes to make selling the largest asset pay off.

Measuring Dependence on Social Security - One particular challenge to cutting entitlements is conveyed by this chart: It shows the breakdown of income for Americans age 65 and older. As you can see,  older Americans gets the lion’s share of their income — nearly 40 percent — from Social Security, a share that an aging populace will likely be loath to shrink. The pie chart is taken from this new report, from the Employee Benefit Research Institute, titled “Income of the Elderly Population Age 65 and Over, 2008.” The report has some other data, current and historical, that help provide some context for whom we’re talking about when we talk about restructuring the social safety net for the elderly. There is, for example, quite a bit of variation among the elderly with respect to their reliance on Social Security. In particular, lower-income older Americans are more dependent on Social Security. Here are two pie charts, taken from the same report, showing the percentage of income that comes from Social Security for Americans in the top and bottom income quintiles

Medicare and Medicaid are NOT like Social Security -In an otherwise admirable New York Times article , David Leonhardt writes: “The federal government has promised to pay out vastly more in Medicare, Medicaid and Social Security over coming decades than it will collect in taxes.” But grouping Social Security together with Medicare and Medicaid presents a highly misleading description of the nation’s fiscal challenge. And that conflation, which advocates of cutting social insurance programs have strategically promoted, has a lot to do with Washington’s misplaced priorities that the rest of the article insightfully analyzes. Despite the severe recession, Social Security remains on strong financial footing. The program’s trustees project that it will be able to continue to pay out promised benefits in full until 2037, while the Congressional Budget Office predicts 2044. Over a 75-year time horizon, the gap between promised benefits and committed taxes is less than 1 percent of gdp. That’s a manageable shortfall that can be addressed through minor adjustments.

Social Security in Other Countries - An ever-increasing number of social security agencies and organizations around the world are publicizing their programs on the World Wide Web. We have listed some of these Web sites below and will be adding to the list as we learn of new sites. Please pass along any additions or corrections using our Feedback form or e-mail to  Note: Before writing to us, you may want to review Social Security Online's privacy policy.  Also, please note that nearly all of the following links lead to web sites outside Social Security Online. The content and availability of these external sites are beyond the control of the Social Security Administration.

Medicaid funds 'critical' - WASHINGTON – Gov. Chris Gregoire warned Monday that unless Congress acts quickly to provide $23 billion in additional Medicaid funding, the state may have to lay off up to 12,000 workers. In a letter to the state’s congressional delegation, Gregoire said the state was counting on the $480 million it expected to receive from the federal government through the Federal Medical Assistance Percentage program. Absent the federal funding, the governor said, she would be forced to call a special session of the Legislature. If the Legislature acted quickly to fill the budget deficit, the state might have to cut 6,000 jobs. If the Legislature waited until January when it regularly meets, the state might have to cut 12,000 workers, Gregoire said.

AMA says Medicare cut puts seniors' health care at 'grave risk' - Congress has put the health care for older Americans on Medicare at “grave risk” by not stopping the 21% cut in doctor’s payments for serving the federal program, the American Medical Association warned.The AMA launched a multi-million dollar national advertising campaign, with ads on TV and the radio, and in newpapers, including the New York Times, USAToday and the Wall Street Journal, “encouraging the public to contact their senators and tell them to get back to work and fix Medicare now,” said J. James Rohack, AMA president, in a statement. “The Senate has turned its back on our nation’s seniors and the physicians who care for them by leaving for vacation and failing to stop a 21% Medicare cut before their self-imposed June 1 deadline,” Rohack said.

Cash-strapped states press Congress for more Medicaid help - States are turning up the pressure on federal lawmakers to help them pay their Medicaid bills, cautioning that they’ll otherwise face a dire fiscal situation that could hurt their economic recovery.The state-federal health program for the poor consumes more than 20 percent of state spending, according to the National Governors Association, and without extra federal funds advocates say states will have to raise taxes, slash social spending or cripple their Medicaid programs.They want lawmakers to extend for six months – until June 30, 2011 – enhanced Medicaid payments that were part of last year’s recovery act. The measure would cost $24 billion, and was stripped from the tax extenders package that the House approved on the Friday before the Memorial Day recess, May 28

States begging Congress for $24B Medicaid bailout - Four governors and a leading national economist urged Congress on Wednesday to send an additional $24 billion bailout to the states, saying cash-strapped governments face deep budget cuts and thousands of lost jobs without the aid. The money would flow through Medicaid, the health insurance program for the poor jointly financed by state and federal governments. Congress picked up a larger share of Medicaid costs through the 2009 stimulus bill, but that aid will expire in December. States have been hoping for a six-month extension as the slow economic recovery continues to crimp tax collections. In a recent survey, the National Conference of State Legislatures found that 30 states already were factoring the money into their budgets for 2011.

Four Governors Seek More Federal Aid for States - Yesterday, Governors Jim Doyle (D-WI), Chris Gregoire (D-WA), Mark Parkinson (D-KSA), and Ed Rendell (D-PA) sent a letter urging Congress to reinsert $24 billion in additional Medicaid funds for states, that would free up other money for other projects. Earlier this year, we reported on the trend of states' using the Medicaid matching fund program to paper over state budget shortfalls (and drive Medicaid toward insolvency): Those states most likely to adopt this scheme of enacting or expanding hospital taxes as a way of obtaining federal funds are likely to be the states facing serious budget troubles, especially involving Medicaid payments. These conditions are present in many states recently. With the American Recovery and Reinvestment Act of 2009 increasing the federal matching rate by an average of 8.7%, states have even more incentives to take advantage of hospital taxes.

Obama Calls on U.S. Senate to Prevent Cuts in Medicare Payments - (Bloomberg) -- President Barack Obama today called on the Senate to act to keep Medicare payments to doctors from being cut 21 percent at the end of this month. In his weekly address on the radio and Internet, Obama said that Republicans shouldn’t block action in the Senate to delay the long-scheduled reductions.“After years of voting to defer these cuts, the other party is now willing to walk away from the needs of our doctors and our seniors,” Obama said. Obama warned that failure to act could lead doctors to refuse patients covered by Medicare, the government health- insurance program for the elderly.

Imagine a world in which recessions don’t mean uninsurance - One of the awful consequences of recessions in a world of employer-based health care is that a lot of people lose their health-care insurance when they lose their jobs. But as the latest study on the Massachusetts reforms shows, that's not happening in the Bay State. "Unemployment among working-age adults in Massachusetts rose from 4.4 percent in December 2006 to 9.1 percent in December 2009" and "state revenues fell by $2.6 billion between fiscal years 2008 and 2009," but there was no corresponding rise in the number of uninsured, nonelderly residents*, which is sitting stubbornly at 4.8 percent.

21st Century Regress - Maxine Udall - Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it. BP continues to obliterate the Gulf of BP, the party of personal accountability and small government somehow thinks the buck for this private sector fiasco stops at President Obama, and as far as I can tell President Obama seems to have drunk this convenient kool-aid, too, with a little nudging from the furies on both sides of the MSM. Meanwhile, our lawmakers in Washington appear to be beating a hasty retreat from anything that would pass as fair and just for the unemployed, who have lost not just jobs and income, but have lost their COBRA subsidies for health insurance. According to an analysis by the National Conference of State Legislatures 50 states are facing an almost $90 billion budget gap as the close of the fiscal year approaches, which could lead to a further 900,000 jobs loss. At the same time, the AMA is claiming that cuts in Medicare payments are putting Medicare beneficiaries at risk because docs will scale back the number of elderly patients they treat. Cash-strapped state governments are putting pressure on Washington to help them pay their Medicaid bills.  Sometimes it's just too much to take in and process and I'm left feeling a tad out of sorts. So this week I did what has become my usual strategy when the 21st century overwhelms me: I retreat to the 18th century.

Democrats Restore State Medicaid Funds to Jobs Bill (Bloomberg) -- U.S. Senate Democrats restored $24.2 billion of Medicaid payments many states counted on to balance their budgets, as part of legislation intended to create jobs.  States including Illinois and Pennsylvania listed the funds in fiscal 2011 budgets before House Democrats removed the payments in a bill sent to the Senate. The money to help cover the cost of health care for the poor was restored today in the Senate leadership’s measure, paid for partly by raising to 41 cents an 8-cent tax per barrel on oil-company production.  Economic stimulus measures in 2009 extended payments for services under the health program to offset rising expenses. States, which split Medicaid costs with the federal government, confront deficits projected to reach $127.4 billion through fiscal 2012, according to the National Governors Association and the National Association of State Budget Officers.

The failure of organizational innovation in health care - Medical care is characterized by enormous inefficiency. Costs are higher and outcomes worse than almost all analyses of the industry suggest should occur. In other industries characterized by inefficiency, efficient firms expand to take over the market, or new firms enter to eliminate inefficiencies. This has not happened in medical care, however. This paper explores the reasons for this failure of innovation. I identify two factors as being particularly important in organizational stagnation: public insurance programs that are oriented to volume of care and not value, and inadequate information about quality of care. Recent reforms have aspects that bear on these problems.

Adolescent Brains Biologically Wired for Risk - There are biological motivations behind the stereotypically poor decisions and risky behavior associated with adolescence, new research from a University of Texas at Austin psychologist reveals. Previous studies have found that teenagers tend to be more sensitive to rewards than either children or adults. Now, Russell Poldrack and fellow researchers have taken the first major step in identifying which brain systems cause adolescents to have these urges and what implications these biological differences may hold for rash adolescent behavior. "Our results raise the hypothesis that these risky behaviors, such as experimenting with drugs or having unsafe sex, are actually driven by over activity in the mesolimbic dopamine system, a system which appears to be the final pathway to all addictions, in the adolescent brain," Poldrack said.

U.S. Faces Shortage of Doctors - WSJ - The new federal health-care law has raised the stakes for hospitals and schools already scrambling to train more doctors. Experts warn there won't be enough doctors to treat the millions of people newly insured under the law. At current graduation and training rates, the nation could face a shortage of as many as 150,000 doctors in the next 15 years, according to the Association of American Medical Colleges.  That shortfall is predicted despite a push by teaching hospitals and medical schools to boost the number of U.S. doctors, which now totals about 954,000. The greatest demand will be for primary-care physicians. These general practitioners, internists, family physicians and pediatricians will have a larger role under the new law, coordinating care for each patient.

The Cost Of Preventing Mistakes: The Value Of A Human Life - What the FAA has done -- and it’s been very, very effective -- is to put a price on a human life. According to the FAA, a human life in 2009 is worth three million dollars. That’s what you’re worth, according to that agency. What that means is that if there is a plane crash and 100 people die, the first thing they know is that the human cost of the incident is $300 million. And 20 years ago, the worth was one million dollars, so we’ve seen inflation over the years. Every year, the FAA bumps up that number. They’re very, very anal about that number; they care about that number a lot. You may notice that the only time change happens in aviation is after a plane crash. The FAA doesn’t do anything until there’s a plane crash.

Can a Soda Tax Protect Us From Ourselves? - NYTimes - AS governments large and small face sizable budget shortfalls, policy makers are looking for ways to raise tax revenue that will do the least harm and, perhaps, even a bit of good. One idea keeps popping up: a tax on soda and other sugary drinks. The city council in Washington recently passed such a tax. Gov. David A. Paterson has sought one in New York. And a national soda tax was briefly considered by the Senate Finance Committee as a way to help pay for President Obama’s health care overhaul.  But is a soda tax a good idea? Economists have often advocated taxing consumption rather than income, on the grounds that consumption taxes do less to discourage saving, investment and economic growth. Hence the case for broad-based consumption taxes, like a value-added tax. The main issue for the soda tax, however, is whether certain forms of consumption should be singled out for particularly high levels of taxation.

More than 40m now use food stamps - The number of Americans receiving food stamps in March topped 40 million for the first time as the jobless rate hovered near a 26-year high. Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases totaled 40.2 million, up 21 percent from a year earlier and 1.2 percent more than in February, the Department of Agriculture said yesterday in a statement on its website. The number of recipients has set records for 16 straight months. Food stamp use will rise as joblessness persists and the government tries to get more eligible families onto assistance, the USDA said.An average of 40.5 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates. The figure is projected to rise to 43.3 million in 2011.

Average Food Basket Costs Have Surged Despite Drop in Agricultural Commodity Prices – FAO - Despite recent drops in international food prices, the cost of the average food basket is 69 percent higher than six years ago. International prices of key food staples have dropped during the first five months of 2010 according to the latest edition of FAO's biannual Food Outlook report.The FAO Food Price Index averaged 164 points in May 2010, down from 174 points in January and substantially less than its peak of 214 in the spring of 2008, the report notes.A fall in international prices of cereals and sugar were among the main drivers behind this decline. Sugar prices have tumbled by half from their peak at the beginning of the year under prospects of significant production increases. But, the agency noted, this still means the cost of the typical food commodity basket around the world today is some 69 percent higher than in 2002-04.

Surging Costs Hit Food Security In Poorer Nations - Families from Pakistan to Argentina to Congo are being battered by surging food prices that are dragging more people into poverty, fueling political tensions and forcing some to give up eating meat, fruit and even tomatoes. Scraping to afford the next meal is still a grim daily reality in the developing world even though the global food crisis that dominated headlines in 2008 quickly faded in the U.S. and other rich countries. With food costing up to 70 percent of family income in the poorest countries, rising prices are squeezing household budgets and threatening to worsen malnutrition, while inflation stays moderate in the United States and Europe. Compounding the problem in many countries: prices hardly fell from their peaks in 2008, when global food prices jumped in part due to a smaller U.S. wheat harvest and demand for crops to use in biofuels.

Research Links Genetically Modified Food To Long Term Sterility - A new study done by Russian scientists suggests that Genetically Modified Food may cause long term sterility, that is, sterility in second and third generations. The scientists used hamsters for this research and divided them into groups. Each group produced about seven to eight litters of baby hamsters each without any problems. But when the researchers selected new breeding pairs from the offspring, the second generation had a slower growth rate and reached their sexual maturity later than normal. They also had a mortality rate, five times higher than the hamsters who didn’t eat soy. Even more shocking was the fact that nearly all of the third generation GM soy eating hamsters were sterile and also experienced hair growing inside their mouths.

What next for Industrial Ag? More toxic chemicals? - Though this story has been known for some time, the June 4, 2010 WSJ did a front page article titled Superweeds Hit Farm Belt, Triggering New Arms Race by Scott Kilman. This is an important story. The issues resulting from Roundup resistant weeds will shake some of the efficiencies out of the modern industrialized agriculture system itself.Roundup Ready corn, soy, and cotton have been the norm in America during this past decade. The seeds are used for 90% of soy and 80% of corn plantings. Roundup is used four times that of any other herbicide. But, nine weeds, including pigweed, horseweed and Johnsongrass, on millions of acres in more than 20 states in the Midwest and south have now developed immunity to Roundup. There is a new race under way for development of new seeds and chemical combinations. DOW is working on seeds which resist the 65-year-old 2-4-D. Spray drift from the toxic 2-4D will kill grapes and other desirable nearby crops. It is also said to disrupt hormones in trout, rodents and sheep.

Reversing the Decling in Fishing Stocks -The stock of fish is declining worldwide at a rapid and accelerating pace.  In Can Catch Shares Prevent Fisheries Collapse? the authors survey fish stocks and find that individual transferable quotas (ITQs) do appear to work in stabilizing and even increasing stocks: Although bioeconomic theory suggests that assigning secure rights to fishermen may align incentives and lead to significantly enhanced biological and economic performance, evidence to date has been only case- or region-specific. By examining 11,135 global fisheries, we found a strong link: By 2003, the fraction of ITQ-managed fisheries that were collapsed was about half that of non-ITQ fisheries. This result probably underestimates ITQ benefits, because most ITQ fisheries are young. The results of this analysis suggest that well designed catch shares may prevent fishery collapse across diverse taxa and ecosystems. One of the authors of the paper, Christopher Costello, is featured in the video below from Reason TV which covers the world wide decline in fish stocks, "capital stuffing," and the use of ITQs to solve the tragedy of the commons

Are Hybrids Good for the Environment? - Along the lines of calculators, here we feature another one, this time to calculate the eco-friendliness of that new car you’re thinking of buying.  According to“>Wired Magazine, building a Toyota Prius consumes 113 million British Thermal Units (BTU), while a gallon of gas contains about 113,000 BTU. The 2008 Prius can go 48 miles per gallon (on highways). A 1998 Toyota Tercel, on the other hand, does 35 mpg and, since it is used, the carbon cost of construction has already been paid.This would mean that it would take about 129,230 miles of driving before the 2008 Prius surpasses the 1998 Tercel in eco-friendliness.Incidentally this calculation can be made for any used car you wish to buy. You can find our worksheet that does exactly that right here.

Recent Energy Trends: Hope or Despair for Climate Change? -A pair of recent reports from the Energy Information Administration show both good news and bad news regarding energy trends and CO2 emissions. In the short run, the news from the US economy is good. Carbon emissions from energy use fell sharply in the United States during both 2008 and 2009. Falling GDP during the recession explains part of the decrease in CO2 emissions, but not all; total emissions fell faster than GDP. There was a decrease both in the energy intensity of GDP and in the carbon intensity of energy. (The decrease in the carbon intensity of energy was due, in part, to the increasing role of natural gas. See the post on this blog for February 27, 2010 for additional details.) On a global scale, the outlook is not so good. Although total energy-related carbon emissions from wealthy OECD countries are expected to stabilize over the next 25 years, the EIA projects that without major policy changes, total carbon emissions will rise steadily. Although energy intensity of GDP and carbon intensity of energy will decrease in both developed and emerging market countries, rapid growth of GDP in the latter will swamp all other effects.

Green-Energy Blues - IF ANY industry ought to be seeing silver iridescence in the dark slick of oil gushing into the Gulf of Mexico, it is renewable energy. However, since what is perhaps the biggest environmental disaster America has yet seen erupted at BP’s Macondo prospect on April 20th the RENIXX index, which measures the world’s 30 largest publicly traded renewable-energy companies, has fallen by 15%. This is even worse than the 12% fall in the MSCI world stockmarkets index in that period. Moreover, it continues a longer-term decline of more than two-thirds from the index’s all-time high in December 2007. The oil spill might have been expected to revive a sense of urgency that the world, and America in particular, should reduce its dependence on oil, not least by switching to cleaner, greener sources of energy. Instead it is increasingly common to hear investors asking gloomily, “Is green dead?”

“Green Consumerism” Largely a Myth -25-30% of emissions come from products and services that are produced in one country then traded to another…As it stands now, most emissions data focuses on the production side of our consumer society. For example, the factory that makes your gadget in China contributes to China’s emissions count. When that same gadget is shipped to a UK consumer it does not count towards the UK’s emissions count. Barrett showed that the result of this approach has led to what he called “carbon leakage.” He said that as countries become more and more service based, with demand for products and services met by imports rather than production, the overall amount of carbon leakage goes up. “The volume of emissions that are not counted goes up.” This lack of accounting for growing imports of consumer goods shows up directly in the UK’s emissions records…the Kyoto numbers show an overall emissions reduction in the UK, but consumer emissions have actually gone up in the same time period!

An Energy Bill's Coming In July. But What Kind? - Last Friday, Harry Reid sent a letter to various Senate committee chairmen telling them he wanted to get an energy bill rolling in July. BP's poisoning of the Gulf has apparently made energy reform look a lot more palatable than it did a few months ago. But Reid's letter was blurry on the details: He never said whether he wanted legislation that capped carbon emissions. An "energy bill," after all, could mean anything from the big Kerry-Lieberman climate bill to a scaled-down bill that just cracked down on oil companies and maybe added some funds for alternative energy sources. A more modest approach might give Dems a nice, tidy political win. But it wouldn't do nearly as much for the planet.

David Roberts: Everything you always wanted to know about EPA greenhouse gas regulations, but were afraid to ask - Two years ago, the U.S. Supreme Court ruled that the EPA has the authority and the obligation to regulate greenhouse gases under the Clean Air Act. At a stroke, the politics of climate change were changed. The choice was no longer between legislation or no legislation -- it was between legislation or regulation. One way or another, climate pollution would be controlled by a federal program. Most experts agree that EPA regulations will be complex and somewhat unwieldy. Industry believes they will be onerous and expensive. Conventional wisdom, at least initially, was that fear of regulation would drive utilities and manufacturers to the bargaining table, changing the dynamic in Congress. EPA was supposed to play the role of the big, silent goon in the corner, tapping his baseball bat in his hand. That theory isn't holding up too well

EPA can still regulate CO2 (for now) -So it looks like Lisa Murkowski's resolution to block the EPA from regulating greenhouse gases got shot down. The final vote was 47 to 53, with every Republican and six Dems voting in favor. In any case, this doesn't mean the EPA is now free and clear to crack down on CO2. According to Greenwire, Harry Reid had to cut a few deals to prevent even more conservative Dems from voting for the resolution. One thing he promised was a vote (sometime down the road) on a bill by Jay Rockefeller that would delay all EPA regulations on industrial polluters for at least two years. That bill wouldn't be nearly as drastic as Murkowski's resolution: It wouldn't directly attack the EPA's scientific finding that greenhouse gases are a threat to public health, and it wouldn't block the new fuel-economy rules for vehicles. But it does have a much better chance of passing. So this debate will be going on for quite some time.

One last desperate attempt to save cap and trade -Ezra Klein shows a graph and writes  What you're seeing there [will see if you click this link] is a projection for how our energy usage would change after 20 years of a Waxman-Markey-like cap-and-trade bill. As you can see, transportation -- which is probably what most Americans think would be affected -- would hardly change at all. The reason is that internal-combustion engines aren't very carbon-inefficient. We've spent so much time regulating car emissions that we've actually done a pretty good job increasing efficiency. I comment Klein’s idea that people imagine cap and trade will affect transportation a lot is very interesting. I'm not sure you are right, but if you are, then I see a deal. Cap, trade, and cut the gasoline tax. That is have some of the cap and trade revenue go to the highway trust fund so the cost of gasoline stays the same (or falls).

Lamar Alexander and the Magic Climate Plan - Lamar Alexander takes to the Wall Street Journal op-ed page to lay out his clean energy vision. It's a lot like the Republican health care vision: let's do all the popular stuff and none of the unpopular stuff it requires.Alexander outlines his incoherent vision in the form of ten handy bullet points. My favorite is #7: "Stop pretending wind power has anything to do with reducing America's dependence on oil. Windmills generate electricity—not transportation fuel." But wait. I thought I read somewhere that it's possible for cars to run on electricity. Where was that? Oh yes -- the very same op-ed, bullet points number 5 and 6:Distorting the Energy Market - The Financial Times got a look at a draft study from the International Energy Agency today and reports that "The world economy spends more than $550bn in energy subsidies a year, about 75 per cent more than previously thought." Matt Yglesias comments on the notion that removing these subsidies would move us closer to a free market in energy:The last point really is telling and important here. I can’t think of a single significant “free market” institution in America that spends nearly as much time and energy on this set of market distortions than they do bashing enviornmentalist proposals. Operationally, conservatism in the United States just isn’t about small government or free markets. That's true enough. However, the FT piece also includes this line: Iran, Russia, Saudi Arabia, India and China top the ranking, according to the report. It turns out the IEA study is about developing economies. There aren't any details about what's in the report, but it looks like they're mostly tallying consumer subsidies for things like heating oil and gasoline, not corporate welfare for Exxon Mobil

Global dirty energy subsidies top $550 billion per year - We normally talk about clean energy in terms of subsidizing it directly or else charging dirty energy sources so as to remove the unpriced negative externalities. But if you watch congress at all, you’ll notice that current policy actually subsidizes dirty energy in a baffling way. And we’re not alone. Dave Roberts flags a new analysis from the International Energy Agency that pegs global dirty energy subsidies at $550 billion a year: IEA chief economist Faith Birol: “I see fossil fuel subsidies as the appendicitis of the global energy system, which needs to be removed for a healthy, sustainable development future.” I’m stealing that one. Not only would removing these subsidies move us closer to the “free market” conservatives are fond of pretending we already have, it would immediately reduce energy use and carbon pollution

Transportation, travel, and the built environment - Interesting MIT video presentation on transportation, travel and the built environment.  Zegras observes that fundamentally, people do not desire travel …. they wish to have accessibility. Travel is a derived demand, prompted by our activities. If we could make better use of telecommunications, or, if our cities were more compact, perhaps we would find less need for vehicle trips.

Monday Map: State Gasoline Tax Rates

Is it time to raise the gas tax? - Back in 2008, when Barack Obama was running for President, he took a politically unpopular stand on the gas tax. Both John McCain and Hillary Clinton were calling for a gas-tax "holiday" to stimulate the economy. Obama took the side of most economists in saying that a lower gas tax might play well at the polls but wasn't actually smart economic policy. Where is that principle now? Boston Globe columnist Derrick Jackson points out that as Congressional debate around energy reform kicks into gear, the President is surprisingly quiet about the most obvious way to tackle excessive fossil fuel consumption: getting people to burn less gas in motor vehicles.  Jackson notes that sales of SUVs rose by 32% in May, compared to a year earlier, while sales of cars grew by just 16%.

The oil blowout will mean more subsidies for the ethanol industry. That's bad news for consumers - The most disgusting aspect of the blowout in the Gulf of Mexico isn't the video images of oil-soaked birds or the incessant blather from pundits about what BP or the Obama administration should be doing to stem the flow of oil. Instead, it's the ugly spectacle of the corn-ethanol scammers doing all they can to capitalize on the disaster so that they can justify an expansion of the longest-running robbery of taxpayers in U.S. history.  Listen to Matt Hartwig, communications director for the Renewable Fuels Association, an ethanol industry lobby group: "The Gulf of Mexico disaster serves as a stark and unfortunate reminder of the need for domestically-produced renewable biofuels." Or look at an advertisement that was recently placed in a Washington, D.C., Metro station: "No beaches have been closed due to ETHANOL spills. … America's CLEAN fuel." That gem was paid for by Growth Energy, another ethanol industry lobby group.  The blowout of BP's Macondo well has given the corn-ethanol industry yet another opportunity to push its fuel adulterant on the American consumer. And unfortunately, the Obama administration appears ready and willing to foist yet more of the corrosive, environmentally destructive, low-heat-energy fuel on motorists.

The Oil Spill's Spillovers -- In watching coverage of the crisis in the Gulf of Mexico, I — like many others — have been wondering what kind of effects it might have on alternative energy development in the United States. Are venture capitalists, expecting a tipping point, scrambling to invest in new technologies? Can we expect a flurry of new research and development spending in as-yet untried fuel sources?  Writing in Slate, the Manhattan Institute’s Robert Bryce suggests a less hopeful outcome: The blowout of BP’s Macondo well has given the corn-ethanol industry yet another opportunity to push its fuel adulterant on the American consumer.

Palaniappan & Gleick define "peak ecological water" - "Peak oil" – the peak and subsequent decline in oil production as supplies are used up and become harder to extract – is a concept that's familiar to many. The idea of peak water is less well known but now researchers from the Pacific Institute, US, have defined three types of peak water. Their hope is that this will lead to more sustainable management of water systems. "The idea of peak water, despite its flaws…signals we are at the end of the age of cheap, easy water," Meena Palaniappan of the Pacific Institute told environmentalresearchweb. "In the same way that peak oil has meant the end of cheap, easy-to-access sources of petroleum, peak water means we are going to have to go further, spend more, and expect less in the realm of freshwater. Peak water reminds us that water, which we used to think was widely available and inexpensive, can no longer be taken for granted."

NASA: Easily the hottest spring — and Jan-May — in temperature record. Plus another record 12-month global temperature - Last month tied May 1998 as the hottest on record in the NASA dataset.  More significantly, following fast on the heels of easily the hottest April — and hottest Jan-April — on record, it’s also the hottest Jan-May on record [click on figure to enlarge]. Also, the combined land-surface air and sea-surface water temperature anomaly for March-April-May was 0.73 °C above the 1951-1980 mean, blowing out the old record of 0.65 °C set in 2002. The record temperatures we’re seeing now are especially impressive because we’ve been in “the deepest solar minimum in nearly a century.”  Most significantly, the 12-month global temperature anomaly grew to 0.66 °C — easily the highest on record.

Climate Change Forces Major Vegetation Shifts -In a paper published today (June 4) in the journal Global Ecology and Biogeography, researchers present evidence that over the past century, vegetation has been gradually moving toward the poles and up mountain slopes, where temperatures are cooler, as well as toward the equator, where rainfall is greater. Moreover, an estimated one-tenth to one-half of the land mass on Earth will be highly vulnerable to climate-related vegetation shifts by the end of this century, depending upon how effectively humans are able to curb greenhouse gas emissions, according to the study. The results came from a meta-analysis of hundreds of field studies and a spatial analysis of observed 20th century climate and projected 21st century vegetation. The meta-analysis identified field studies that examined long-term vegetation shifts in which climate, rather than impacts from local human activity such as deforestation, was the dominant influence. The researchers found 15 cases of biome shifts since the 18th century that are attributable to changes in temperature and precipitation.

New Scientist: Special report: Living in denial - 7 articles - From climate change to vaccines, evolution to flu, denialists are on the march. Why are so many people refusing to accept what the evidence is telling them? In this special feature we look at the phenomenon in depth. What is denial? What attracts people to it? How does it start, and how does it spread? And finally, how should we respond to it?

Are Faulty Polls Driving Policy on Climate Change? -The New York Times on June 9 published a compelling OpEd piece authored by Jon A. Krosnick, a professor at Stanford. He reported on a series of public opinion polls which he and colleagues conducted related to climate change. Generally, the polls indicate that 70% or more of the public believe that the climate is changing, that the change is a result of human activity and that the government should act to remedy the problem. The only specific adverse reaction was to increased taxes on electricity and gasoline, which should shock no one. These results appear to run counter to the conventional wisdom, repeatedly reported by news media as the truth, that increasing numbers of Americans doubt the existence of climate change and the effects of human actions on climate. These reports were primarily founded on polls conducted by the Pew Research Center, Gallup and CNN. Professor Krosnick cited the language of the questions posed in these polls. The questions were complex. In two of them, the literal question elicited an opinion regarding news reports and other information sources on the subject of climate change. The Gallup poll question is a good example:

New Rule: Al Gore Must Come Out With a Sequel to His Film and Call It An Inconvenient Truth 2: What the F*ck Is Wrong With You People? -  A bunch of depressing new surveys reveal that people in droves are starting to believe that global warming is a hoax -- and this time, it's not just us. People are always accusing me of hating America and calling it stupid, so tonight I'd like to take a few moments to hate England and call it stupid. Because now English people don't believe in global warming either. I thought the English were smarter than that. The home of Newton and Darwin. I can't believe we let these people build our exploding oil platforms.Even scarier is why people have stopped thinking global warming is real. One major reason pollsters say is we had a very cold, snowy winter. Which is like saying the sun might not be real because last night it got dark. And my car's not real because I can't find my keys.

Arctic Ice at Low Point Compared to Recent Geologic History - Less ice covers the Arctic today than at any time in recent geologic history. That's the conclusion of an international group of researchers, who have compiled the first comprehensive history of Arctic ice.For decades, scientists have strived to collect sediment cores from the difficult-to-access Arctic Ocean floor, to discover what the Arctic was like in the past. Their most recent goal: to bring a long-term perspective to the ice loss we see today. Now, in an upcoming issue of Quarternary Science Reviews, a team led by Ohio State University has re-examined the data from past and ongoing studies -- nearly 300 in all -- and combined them to form a big-picture view of the pole's climate history stretching back millions of years. "The ice loss that we see today -- the ice loss that started in the early 20th Century and sped up during the last 30 years -- appears to be unmatched over at least the last few thousand years,"

Ocean Acidification in the Arctic: What Are the Consequences of Carbon Dioxide Increase on Marine Ecosystems? - Carbon dioxide (CO2) emissions not only lead to global warming, but also cause another, less well-known but equally disconcerting environmental change: ocean acidification. A group of 35 researchers of the EU-funded EPOCA project have just started the first major CO2 perturbation experiment in the Arctic Ocean. Their goal is to determine the response of Arctic marine life to the rapid change in ocean chemistry. Ocean acidity has increased by 30% since preindustrial times due to the uptake of anthropogenic CO2. It is projected to rise by another 100% before 2100 if CO2 emissions continue at current rates. Polar seas are considered particularly vulnerable to ocean acidification because the high solubility of CO2 in cold waters results in naturally low carbonate saturation states. CO2 induced acidification will easily render these waters sub-saturated, where seawater becomes corrosive for calcareous organisms.

Mike Roddy on Climate Progress: What about China and India? -Of all of the troubling developments concerning global warming in the last few years, accelerated emissions from China and India may be the most difficult to address. The China Ministry of industry and information technology reported that coal- fired electricity and oil sales each climbed 24 percent in the first quarter of this year compared to 2009. India has 200 GW of coal plants planned in the next decade, the largest absolute growth in the world. The furious projected pace of coal plant construction in Asia would lock in major emissions for decades to come.  Given the accelerating pace of climate related impacts, project cancellations and retrofitting of existing plants will become likely.  For practical and environmental reasons, it is much better to address this likely future now. Meanwhile, all of the news about current effects of global warming is bad. The Arctic is melting decades ahead of schedule.  Methane is shooting out of the Arctic Ocean.  Global temperatures are marching upward at an accelerating pace, and global CO2 concentration was recently measured at 392 ppm.

Nasty solar storms on the horizon - The sun is about to get a lot more active, which could have ill effects on Earth. So to prepare, top sun scientists met Tuesday to discuss the best ways to protect Earth's satellites and other vital systems from the coming solar storms. Solar storms occur when sunspots on our star erupt and spew out flumes of charged particles that can damage power systems. The sun's activity typically follows an 11-year cycle, and it looks to be coming out of a slump and gearing up for an active period. People of the 21st century rely on high-tech systems for the basics of daily life. But smart power grids, GPS navigation, air travel, financial services and emergency radio communications can all be knocked out by intense solar activity.  A major solar storm could cause twenty times more economic damage than Hurricane Katrina, warned the National Academy of Sciences in a 2008 report, "Severe Space Weather Events—Societal and Economic Impacts." [Photos: Sun storms.]

Why 2010 could be another bad year - Hurricane formation in the north Atlantic and the Caribbean is linked to a cycle called the Atlantic Multidecadal Oscillation. In a cycle lasting 20 to 40 years, sea-surface temperatures from Greenland to the equator rise and fall by about 0.5 °C. During the warm phases, about twice as many weak tropical storms grow into severe hurricanes as during the cooler phases. The last rise in sea-surface temperatures and hurricane numbers came in the mid-1990s, so the average number of storms now is above the long-term average, and well above the relatively low numbers from the 1960s to the mid-1990s. The number of hurricanes was higher than average from the 1940s to the early 1960s. Those shifts roughly kept pace with the sea-surface temperature cycle.

Gulf Oil Spill Threatens Cold-Water Reefs -Thousands of barrels of oil are leaking out of the Deepwater Horizon site each day. The oil ascends from depths of approximately 1502 m. (4928 ft.), but not all of it reaches the sea surface. The stratified seawater of the Gulf of Mexico captures or slows the ascent of the oil, and the addition of dispersants near the oil source produces tiny droplets that float for a considerable time in the water column and may never reach the surface.According to Drs. Gregor Eberli, Mark Grasmueck, and Ph.D. candidate Thiago Correa of the Marine Geology & Geophysics division of the University of Miami (UM), the oil that remains in suspension in the water column and creates plumes poses a serious risk for the planktonic and benthic (sea floor) life throughout the region, including the deep-sea reefs they study.

Years of Internal BP Probes Warned That Neglect Could Lead to Accidents – A series of internal investigations over the past decade warned senior BP managers that the company repeatedly disregarded safety and environmental rules and risked a serious accident if it did not change its ways.  The confidential inquiries, which have not previously been made public, focused on a rash of problems at BP's Alaska oil-drilling unit that undermined the company’s publicly proclaimed commitment to safe operations. They described instances in which management flouted safety by neglecting aging equipment, pressured or harassed employees not to report problems, and cut short or delayed inspections in order to reduce production costs. Executives were not held accountable for the failures, and some were promoted despite them. Similar themes about BP operations elsewhere were sounded in interviews with former employees, in lawsuits and little-noticed state inquiries, and in e-mails obtained by ProPublica. Taken together, these documents portray a company that systemically ignored its own safety policies across its North American operations - from Alaska to the Gulf of Mexico to California and Texas.

BP CEO Hayward says he’s tough: “So far I’m unscathed…. Sticks and stones may break my bones but words will never hurt me.” - And yet he steps aside from daily cleanup oversight, gets his old life back: "I don’t work weekends.… And I take all my holidays." BP is to hive off its Gulf of Mexico oil spill operation to a separate in-house business to be run by an American in a bid to isolate the “toxic” side of the company and dilute some of the anti-British feeling aimed at chief executive Tony Hayward, the company said today.The surprise announcement was made during a teleconference with City and Wall Street analysts….Ah, but the UK’s Guardian says cut-and-run Hayward thinks he is a tough guy –  assuming tough guys actually talk like six-year-olds: “They’ve thrown some words at me, but I’m a Brit. Sticks and stones may break my bones but words will never hurt me.” Seriously.

On BP’s Many Forms of Less Than Artful Dodging - 06/06/2010 - Yves Smith - As the Gulf oil leak continues to spew, albeit at a slightly lower rate now, and the American public is becoming resigned to the dreadful spectacle of continued damage to wildlife and coastlines, BP continues to act as a law unto itself. Not that that should be any surprise; the oil producer clearly believed from the onset of the crisis that its status as America’s biggest oil and gas producer made it too big to push around. Recall this stunning remark from BP’s chairman:The US is a big and important market for BP, and BP is also a big and important company for the US, with its contribution to drilling and oil and gas production. So the position goes both ways. Despite the threat of an criminal indictment hanging over its head, the company continues to insist on paying a normal quarterly dividend over vociferous objections by Obama and many senators. Now estimates of likely damage vary; earlier they ranged from $10 to $60 billion; more recent forecasts seem to top out at $35 billion

America tells Barack Obama to take control of Deepwater – and seize BP -Across the US, cries of "seize BP" are growing louder, putting pressure on President Barack Obama to slam his fist harder into Britain's crisis-stricken oil multinational.As gloops of oil begin to wash up on thousands of miles of beaches from Texas to the Florida Keys, and 88,000 miles of water have been declared a no-go zone for fishermen, nobody in the US seems in doubt that BP is to blame for the Deepwater Horizon oil spill. And many are calling for dramatic action.The Answer Coalition, a campaign group that grew out of opposition to the Iraq war, has organised a week of demonstrations in 29 US cities demanding a seizure of BP's assets. And the former labour secretary Robert Reich, who served under President Clinton, wants BP's American operations to be taken into temporary government receivership.

Don’t Get Mad, Mr. President. Get Even - The frantic and fruitless nationwide search for the president’s temper is now our sole dependable comic relief from the tragedy in the gulf. Only The Onion could have imagined the White House briefing last week where a CBS News correspondent asked the press secretary, Robert Gibbs, if he had “really seen rage from the president” and to “describe it.” Gibbs came up with Obama’s “clenched jaw” and his order to “plug the damn hole.” (Thank God he hadn’t settled for “darn.”) This evidence did not persuade anyone, least of all Spike Lee, who could be found on CNN the next night begging the president, “One time, go off!”  Not going to happen. Obama will never unleash the anger of the antagonists in “Do the Right Thing” or match James Carville’s rebooted “ragin’ Cajun” shtick. That’s not who Obama is.

BP threatened with legal case over safety of all its oil rigs - BP will come under further pressure tomorrow when a US consumer advocacy group, lawyers and a whistleblower will call for safety checks on all the company's rigs in the North Sea.The group, Food and Water Watch, has just filed for an injunction in a Houston court calling for BP to be stopped from drilling at the Atlantis platform in the Gulf of Mexico, and it will argue that the case raises questions about the way the company's rigs are operated throughout the world.Ken Abbott, a former offshore worker subcontracted to BP, will tell a press conference in London that 6,000 out of 7,000 documents supposed to be in place regarding the Atlantis platform were missing, and that his attempts to raise his concerns with the oil company were not taken seriously."We want to see independent monitoring of all BP rigs and platforms in the US and in the North Sea… We will call for action against the oil company, showing how ocean currents might direct the flow of oil onto UK and European shores should a spill occur," said Wenonah Hauter of Food and Water Watch.

BP Buys Search Terms To Redirect Users To Official Website - BP, the very company responsible for the oil spill that is already the worst in U.S. history, has purchased several phrases on search engines such as Google and Yahoo so that the first result that shows up directs information seekers to the company's official website.  A simple Google search of "oil spill" turns up several thousand news results, but the first link, highlighted at the very top of the page, is from BP. "Learn more about how BP is helping," the link's tagline reads.  A spokesman for the company confirmed to ABC News that it had, in fact, bought these search terms to make information on the spill more accessible to the public.  "We have bought search terms on search engines like Google to make it easier for people to find out more about our efforts in the Gulf and make it easier for people to find key links to information on filing claims, reporting oil on the beach and signing up to volunteer," BP spokesman Toby Odone told ABC News.

Gulf oil spill: To control message, BP buys search terms from Google - BP has purchased several search terms from Google, including the phrase 'oil spill.' A BP spokesman says the PR initiative is an attempt to inform readers of BP's clean-up efforts in the Gulf of Mexico. Late last month, as the controversy over the Gulf oil spill was just heating up, BP tussled with the folks behind a popular spoof Twitter feed. Now comes word that the PR department at BP has forked over a healthy chunk of change to control the way Web users view the company. According to BP reps, the company has purchased a range of popular search terms – including "oil spill" – from Google, the most popular search engine in the US.

How Much Oil Is Being Spilled? - It's a simple question. And unfortunately for the people of British Petroleum and the federal government, one whose answer has resulted in a considerable amount of self-inflicted damage to both the company's and the Obama administration's credibility. That damage sits on top of the liability the company and country faces as a result of the explosion in the deep water drilling rig that resulted in one of the largest oil spills in U.S. history.  The reason why is because the company has continually and reluctantly had to revise its estimates of the amount of oil being spilled dramatically upward on several different occasions, as it has become obvious that the amount of oil leaking from the company's Deepwater Horizon drilling rig has far exceeded what it was claiming was being leaked.  ABC reports: Steve Wereley, an engineering professor at Purdue University, has shown, however, and as many others would have shown had pictures of the leak been released earlier, an approximate estimate is quite easy to come by and indicates a vastly greater oil spill than BP has admitted....

Rate of Oil Leak, Still Not Clear, Puts Doubt on BP - NYT - Staring day after day at images of oil billowing from an undersea well in the Gulf of Mexico, many Americans are struggling to make sense of the numbers.  On Monday, BP said a cap was capturing 11,000 barrels of oil a day from the well. The official government estimate of the flow rate is 12,000 to 19,000 barrels a day, which means the new device should be capturing the bulk of the oil. But is it?At least one expert, Ira Leifer, who is part of a government team charged with estimating the flow rate, is convinced that the operation has made the leak worse, perhaps far worse than the 20 percent increase that government officials warned might occur when the riser was cut…. “The well pipe clearly is fluxing way more than it did before,” said Dr. Leifer, a researcher at the University of California, Santa Barbara. “By way more, I don’t mean 20 percent, I mean multiple factors.”

BP hides high-def video & oil spill volumes: RICO laws could be used - I cannot help my anger with BP turning to rage. Sitting in an airport terminal yesterday early evening, I was listening to Anderson Cooper of CNN report that BP had just released high definition video clip of the severed riser pipe to the public. BP did not do this voluntarily. In fact they were once again forced by Congressman Ed Markey and Senator Barbara Boxer to do so. All along BP had full access to high definition video of the broken riser pipes but seemed to have criminally withheld the high resolution video from government convened teams of scientists tasked with figuring out how much the volcanic oil geyser is spewing out to the gulf.Despite having this video capability from the first week of the spill, BP led the nation into a never-ending string of lies and deceit.

BP Oil-Capture-Rate Increases as Pace of Spill Stays a Mystery (Bloomberg) -- BP Plc said more oil is being recovered from its leaking Gulf of Mexico well with a cap device, as the commander of the U.S.’s spill-response team said it’s unknown how much crude continues to leak.  A drillship above the leak recovered 7,541 barrels of oil in the 12 hours to midday yesterday, BP said on its website last night. Sustained over 24 hours, that would be 36 percent more than the 11,100 barrels the London-based company gathered June 6. A governmental scientific team will reassess its estimates of the spill amount, which ranged from 12,000 barrels to 25,000 barrels a day, after BP stabilizes the recovery rate, U.S. Coast Guard Admiral Thad Allen, the national incident commander, said yesterday at a press conference at the White House. “We’re groping in the dark trying to figure out what our recovery capacity should be,” said Ian MacDonald, an oceanographer at Florida State University in Tallahassee. “They keep painting themselves into a corner and having to abandon the positions that they held before because they were not truthful about this, and didn’t try to get real numbers.”

U.S. confirms underwater oil plume from Deepwater Horizon well - An underwater three-dimensional map of the oil spill is closer to becoming a reality, now that the U.S. has for the first time confirmed the discovery of a subsurface oil plume resulting from the ruptured BP well.The government agency in charge of ocean science has received the first of several expected reports from university investigators aboard research ships detailing specific locations where oil has been found below the surface of the Gulf of Mexico. The government, which denied reports of giant underwater oil plumes in mid-May, said researchers at the time had not confirmed the presence of conglomerated oil."This research from the University of South Florida contributes to the larger, three-dimensional picture that we are in the process of constructing for the Gulf," said Jane Lubchenco, the head of the federal National Oceanic and Atmospheric Administration during a press conference in Washington. Oil at a "very low" concentration of 0.5 parts per million was found at a depth of 3,300 feet about 40 nautical miles from the exploded and spewing BP well, she said.

BP well may be spewing 100,000 barrels a day, scientist says - BP's runaway Deepwater Horizon well may be spewing what the company once-called its worst case scenario — 100,000 barrels a day, a member of the government panel tasked with determining the size of the spill told McClatchy Monday. "In the data I've seen, there's nothing inconsistent with BP's worst case scenario," Ira Leifer, an associate researcher at the Marine Science Institute of the University of California, Santa Barbara, and a member of the government's Flow Rate Technical Group, told McClatchy. Leifer said that based on satellite data he's examined, the rate of flow from the well has been increasing over time, especially since BP's "top kill" effort failed last month to stanch the flow. The decision last week to sever the well's damaged riser pipe from the its blowout preventer in order to install a "top hat" containment device has increased the flow still more _ far more, Leifer said, than the 20 percent that BP and the Obama administration predicted.

BP's Deepwater Oil Spill - Closing the Relief Ports - On June 5, a total of 10,500 barrels of oil was collected and 22 million standard cubic feet of natural gas was flared. The closing of one of the ports on the cap is now reported to have increased flow by 600 bd.On June 6, a total of 11,100 barrels of oil was collected and 22 million cubic feet of natural gas was flared. Optimization continues and improvement in oil collection is expected over the next few days. If all were carrying the same flow (and if of the same size and driving pressure this is a reasonable assumption) then the flow will rise to just over 13,000 bd when all the ports are closed, and there will still be leakage under the cap to be reduced.Given that the Enterprise can only handle 15,000 bd at most, this is one of the reasons why the ports remain open and that the system to draw off additional oil through the choke and kill lines is being accelerated.

BP Gulf of Mexico Oil Spill: BP Collected 15,000 Barrels of Gushing Oil Tuesday – CNBC - BP captured a little more than 15,000 barrels of oil with its containment cap system Tuesday from the leak in the Gulf of Mexico and is aiming to nearly double capacity to handle it at the surface, the U.S. official overseeing the operation said Wednesday. U.S. government scientists have estimated the leak to range from 12,000 barrels to 19,000 barrels a day, with one estimate as high as 25,000 barrels a day.  U.S. Coast Guard Admiral Thad Allen said at a news conference in Washington that BP is working to increase processing capacity at a drillship and a service rig at the water's surface to 28,000 barrels, or 1.18 million gallons, a day to handle the load as the company ramps up the collection rate from the seven-week-old leak.

BP plans to burn some oil pumping up to surface - Now that crews are collecting more and more oil from the sea-bottom spill, the question is where to put it. How about burning it. Equipment collecting the oil and bringing it to the surface is believed to be nearing its daily processing capacity. A floating platform could be the solution to process most of the flow, BP said. To burn it, the British oil giant is preparing to use a device called an EverGreen Burner, officials said. It turns a flow of oil and gas into a vapor that is pushed out its 12 nozzles and burned without creating visible smoke. Methods for gathering and disposing of the oil collected from the seafloor gusher are becoming clearer. What's not is how much oil is eluding capture. Scientists on a team analyzing the flow said Tuesday that the amount of crude still spewing into the Gulf of Mexico might be considerably greater than what the government and company have claimed.

Relief Wells Usually Stop Spill, But Not Necessarily Right Away - In every discussion of top hats, junk shots and other ways to halt the Gulf of Mexico oil leak, industry experts cite one procedure as the ultimate, if slow, solution: relief wells.But drilling the wells -- in this case, BP is tunneling through 3 ½ miles of rock to meet an 8 ½-inch steel pipe and plug it -- is a high-stakes, daunting task that can take months.And though the wells have worked well in other areas, they run the danger of worsening the leaks before bringing them under control. ``Basically you're running a straw down 18,000 feet trying to hit another straw,'' says Greg Pollock, head of the oil spill division of the Texas General Land Office.

Second Possible Oil Leak In The Gulf? (video) As if the Gulf region didn't have enough trouble to contend with in the form of the now-50-day-old BP oil spill, recurring reports of a second, smaller and until now largely unreported offshore oil leak at a rig owned by Diamond Offshore Drilling have surfaced this week, buoyed by a new video taken by a renowned American photographer. Update: On Tuesday evening, Diamond Offshore issued a press release denying it had anything to do with a second spill. Initial speculation of the second spill actually came on April 30 via a federal trajectory map of the BP oil spill created by the National Oceanic and Atmospheric Administration (NOAA), which noted that "the leading edge of the tarballs concentrating in the Mississippi River convergence as well as oil from an additional (unrelated) source near platform Ocean Saratoga," a rig owned by Diamond Offshore., a satellite imaging activist organization that tracks oil prospects, located the site and on May 15 reported that there was indeed evidence of a second leak.

BP's 'Good News': Subsea Oil Exists, But It's Sparse - Video -A day after government scientists confirmed the existence of undersea plumes of oil in the Gulf of Mexico , a top BP official said the concentration of oil found amounted to "good news."  "We're putting lots and lots of effort out there to see where the oil is, but I can say right now -- and I'm really pleased about that -- it's good news in that we haven't found any large concentrations of oil below the surface," BP chief operating officer Doug Suttles told "Good Morning America" today.  For weeks scientists warned about massive plumes of oil under the water's surface, and in late March, scientists aboard a research vessel in the Gulf told "GMA" they were tracking an "enormous" plume that was about four miles long and at least a mile wide . On May 30, BP CEO Tony Hayward said such claims by researchers were backed up by "no evidence" and said flatly "there aren't any plumes."

Killer Undersea Oil Plumes From BP Spill Lurk in Gulf of Mexico – (Bloomberg) -- Undersea clouds of oil that kill marine life have spread for miles in the Gulf of Mexico from BP Plc’s leaking Macondo well, according to data released by the National Oceanic and Atmospheric Administration today. Water samples collected by the R/V Weatherbird II vessel have confirmed biodegraded crude oil in two undersea layers as far as 40 nautical miles northeast of BP’s seabed leak, NOAA Administrator Jane Lubchenco said at a press briefing. The vessel’s samples show oil as deep as 3,300 feet in the water, Lubchenco said. “The bottom line is that yes, there is oil in the water column, it’s at very low concentrations, and we will continue to release those data as soon as they are available,” Lubchenco said at a press conference held jointly with Coast Guard Admiral Thad Allen. “That doesn’t mean that it does not have significant impact.” Researchers have said the oil slick washing ashore is a small portion of what has leaked and the undersea crude can wipe out marine life while remaining invisible from the surface. Lubchenco said not enough data is available to determine the quantity of oil below the surface.

Scientist Awed by Size, Density of Undersea Oil Plume in Gulf - Vast underwater concentrations of oil sprawling for miles in the Gulf of Mexico from the damaged, crude-belching BP PLC well are unprecedented in "human history" and threaten to wreak havoc on marine life, a team of scientists said today, a finding confirmed for the first time by federal officials.Researchers aboard the F.G. Walton Smith vessel briefed reporters on a two-week cruise in which they traced an underwater oil plum 15 miles wide, 3 miles long and about 600 feet thick. The plume's core is 1,100 to 1,300 meters below the surface, they said. "It's an infusion of oil and gas unlike anything else that has ever been seen anywhere, certainly in human history," said Samantha Joye of the University of Georgia, the expedition leader.Bacteria are breaking down the oil's hydrocarbons in a massive, microorganism feeding frenzy that has sent oxygen levels plunging close to what is considered "dead zone" conditions, at which most marine life are smothered for a lack of dissolved oxygen.

BP Well Bore And Casing Integrity May Be Blown, Says Florida’s Sen. Nelson - (video) Oil and gas may be leaking from the seabed surrounding the BP Macondo well in the Gulf of Mexico, Senator Bill Nelson of Florida told Andrea Mitchell today on MSNBC. Nelson, one of the most informed and diligent Congressmen on the BP gulf oil spill issue, has received reports of leaks in the well, located in the Mississippi Canyon sector. This is potentially huge and devastating news. If Nelson is correct in that assertion, and he is smart enough to not make such assertions lightly, so I think they must be taken at face value, it means the well casing and well bore are compromised and the gig is up on containment pending a completely effective attempt to seal the well from the bottom via successful “relief wells”. In fact, I have confirmed with Senator Nelson’s office that they are fully aware of the breaking news and significance of what the Senator said to Andrea Mitchell. Furthermore, contrary to the happy talk propounded by BP, the Obama Administration and the press, the likely success of the “relief well” effort on the first try in August is nowhere near a certainty; and certainly nowhere near the certainty it is being painted as

BP Still Collecting From Well As Oil Hits Florida Panhandle (CNN video) -- As oil drifted onto beaches as far east as the Florida Panhandle, a BP official said Saturday the company was pleased with its operation to funnel crude up from the ruptured undersea well to a drilling ship a mile above on the Gulf of Mexico. BP Senior Vice President Bob Fryar said the company funneled about 250,000 gallons of oil in the first 24 hours from a containment cap installed on the well to a drilling ship on the ocean surface.That's about 31 percent of the 798,000 gallons of crude federal authorities estimate is gushing into the sea every day. The company's progress was not enough to temper the frustration seething among residents along the coastline.

Power and Water Problems Loom for Florida as Oil Threat Lurks Off Shore - Informed emergency planning sources in Florida have informed WMR that the state faces severe fresh water shortages and power blackouts if the thick crude oil from the Deepwater Horizon disaster clogs sea water intakes at the largest seawater desalinisation plant in the United States -- the Tampa Bay Seawater Desalinisation Plant at Apollo Beach in Tampa, Florida.The plant, which uses seawater reverse osmosis to turn seawater into 16 to 19 million gallons of drinking water daily for residents of the Tampa Bay area, faces the threat of filtration membranes becoming clogged if oil from the Gulf of Mexico enters its intake pipes. Such an event would render the plant unable to process seawater, resulting in a major fresh water shortage for the Tampa Bay. Similarly, oil clogging the water cooling intakes at the Crystal River Nuclear Power Plant on the Gulf of Mexico coast, some 80 miles north of Tampa, could force the shutdown of the Unit 3 pressurized water nuclear reactor. Such an event would result in power shutdowns in the Florida areas served by the power plant.

What the Spill Will Kill - Now it is increasingly clear that the initial reports of undersea oil were right, that life-giving oxygen in the water column is indeed being depleted, and that unless the laws of chemistry have been repealed, dispersants are likely worsening the tentacles of undersea crude. What might have been just another oil spill—albeit a bad one—has been transformed into something unprecedented.The consequences for the delicate balance of existence in the vulnerable ecosystems of the gulf, and for the vast cycles of nature that sustain life there and beyond, are as incalculable as they are potentially devastating. "I'm not too worried about oil on the surface," says chemist Ed Overton of Louisiana State University. "It's going to cause very substantial and noticeable damage—marsh loss and coastal erosion and impact on fisheries, dead birds, dead turtles—but we'll know what that is. It's the things we don't see that worry me the most. What happens if you wipe out all those jellyfish down there? We don't know what their role is in the environment. But Mother Nature put them there for a reason," and many are in the plumes' paths.

BP Tries to Block Photos of Dead Wildlife - For animal lovers, one of the most heartbreaking aspects of the Gulf spill is the oil-drenched wildlife washing up on shore. If you're too horrified to look at any photos, you're in luck — BP doesn't want you to see them.As of Friday morning, the U.S. Fish and Wildlife Service’s tally of dead animals collected in the Gulf area was 527 birds, 235 sea turtles (six to nine times the average rate), and 30 mammals, including dolphins. Yesterday morning, the spill washed over Queen Bess Island (called “Bird Island” by locals), which is a habitat for Louisiana brown pelicans, the state bird that was once an endangered species. Forty-one of the birds were coated with oil, and that number is expected to rise.Have you seen the terrible pictures of all this carnage? Neither have I. And neither has anyone else. Wonder why? The New York Daily News reported on Wednesday that BP has ordered its contractors not to share pictures or otherwise publicize the scores of dead and injured wildlife.

Gulf Oil Spill: Slick-Coated Animals Struggle And Die As ‘Wildlife Apocalypse’ Becomes Reality - The wildlife apocalypse along the Gulf Coast that everyone has feared for weeks is fast becoming a terrible reality. Pelicans struggle to free themselves from oil, thick as tar, that gathers in hip-deep pools, while others stretch out useless wings, feathers dripping with crude. Dead birds and dolphins wash ashore, coated in the sludge. Seashells that once glinted pearly white under the hot June sun are stained crimson.Scenes like this played out along miles of shoreline Saturday, nearly seven weeks after a BP rig exploded and the wellhead a mile below the surface began belching millions of gallon of oil. The oil has steadily spread east, washing up in greater quantities in recent days, even as a cap placed by BP over the blownout well began to collect some of the escaping crude. The cap, resembling an upside-down funnel, has captured about 252,000 gallons of oil, according to Coast Guard Adm. Thad Allen, the government's point man for the crisis.

Oil spill photos (577)

Hundreds Of Oil-Covered Birds Flooding Into Louisiana Wildlife Center — A wildlife rescue center in Louisiana says it has gotten more than five times as many oily birds in the past few days than in the previous six weeks combined.The U.S. Fish and Wildlife Service reported Wednesday that the center at Fort Jackson has reported a little more than 400 birds since the BP well in the Gulf of Mexico blew out April 20. The report says more than 350 of those have been reported since Thursday. Oil from the leak has washed up on shores from Louisiana to Florida. The Coast Guard has said the cleanup could ultimately take years.

Photo gallery: Ripple effects of the BP oil spill

BP and Officials Block Some Coverage of Gulf Oil Spill - Journalists struggling to document the impact of the oil rig explosion have repeatedly found themselves turned away from public areas affected by the spill, and not only by BP and its contractors, but by local law enforcement, the Coast Guard and government officials. To some critics of the response effort by BP and the government, instances of news media being kept at bay are just another example of a broader problem of officials’ filtering what images of the spill the public sees. Scientists, too, have complained about the trickle of information that has emerged from BP and government sources. Three weeks passed, for instance, from the time the Deepwater Horizon oil rig exploded on April 20 and the first images of oil gushing from an underwater pipe were released by BP.

Human rights group: BP discouraging crews from using respirators…BP's logic seems to be that if the oil cleanup doesn't look dangerous then it must not be. The oil company has told workers not to wear respirators because it's bad for public relations, according to one human rights group. RFK Center President Kerry Kennedy traveled to the Gulf Coast to talk to cleanup workers and found that BP was trying to repress the use of safety equipment. "In all three states that I've visited, fishermen said when they went out to work on the cleanup, that if they tried to bring respirators they were told it was unnecessary equipment and would only spread hysteria," Kennedy told Fox News Friday. "When I went out with eleven people, we had respirators on and within half an hour, all of our eyes were burning and our throats were closing and we all had headaches," she explained. Kennedy was also concerned that BP was refusing to release information about the contents of the dispersant being used.

From the Ground: BP Censoring Media, Destroying Evidence - While President Obama insists that the federal government is firmly in control of the response to BP's spill in the Gulf, people in coastal communities where I visited last week in Louisiana and Alabama know an inconvenient truth: BP -- not our president -- controls the response. In fact, people on the ground say things are out of control in the gulf.Even worse, as my latest week of adventures illustrate, BP is using federal agencies to shield itself from public accountability.  For example, while flying on a small plane from New Orleans to Orange Beach, the pilot suddenly exclaimed, "Look at that!" The thin red line marking the federal flight restrictions of 3,000 feet over the oiled Gulf region had just jumped to include the coastal barrier islands off Alabama.  "There's only one reason for that," the pilot said. "BP doesn't want the media taking pictures of oil on the beaches. You should see the oil that's about six miles off the coast," he said grimly. We looked down at the wavy orange boom surrounding the islands below us. The pilot shook his head. "There's no way those booms are going to stop what's offshore from hitting those beaches."

The Dead Wildlife We'll Never Know About - Louisiana spill zone. All up and down this shoreline angry and scared people told me some scary and infuriating stories in the past few days. I heard about the the dead and dying wildlife we're never going to see because the victims are being carted away to early responder ships and to inaccessible buildings onshore.The Louisiana locals are really angry about the lying, threats, and bullying they all complain is coming their way from BP and their contractors. The dead wildlife they've seen, which then miraculously disappears, doesn't actually disappear from their memories. Some of the people I've talked with have signed non-disclosures. Whether they have or not, all agree, the people here are furious and desperate. It's a powder keg, ready to blow. This is Louisiana, they say, we don't do quiet and obedient. 

Put Jobless Young People to Work Cleaning Up BP’s Mess and Order BP to Pay - Robert Reich - Friday’s job report was awful. For most new high school and college grads finding a job is harder than ever. Meanwhile, states are cutting summer jobs for disadvantaged young people. What to do with this army of young unemployed? Send them to the Gulf to clean up beaches and wetlands, and send the bill to BP. Most of the oil hasn’t hit land yet. When it does, hundreds of thousands of workers will be needed to clean beaches, siphon off oil from wetlands, and rescue stranded wildlife. Tens of thousands more will have to bring in new landfill, replace tarred sea walls, and rebuild shoreline infrastructure. Yet we’ve got hundreds of thousands of young people sitting on their hands right now because they can’t find jobs. Many are from affected coastal areas, where the tourist and fishing industries have been decimated by the spill. The President should order BP to establish a $5 billion clean-up fund, and immediately put America’s army of unemployed young people to work saving the Gulf coast. .

Green jobs: "Unemployed Hired to Clean Affected Beaches" -The Unified Command in Mobile announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort.  A similar program exists in Louisiana.Starting today some 400 QCR workers in Florida and Alabama began cleaning affected beaches.The QCR program secures local labor to help with a variety of tasks associated with cleaning beaches. QCR workers are trained and ready to help prevent and respond to the impacts of oil on the shoreline. The plan is to train more than 4,500 workers in the three states in the Mobile Sector (1,500 in Alabama, 1,500 in Mississippi, and 1,600 in Florida). To date there are 2,946 people trained and ready to be deployed.

Twelve (Imperfect) Ways to Clean the Gulf - It’s been nearly seven weeks since oil from BP’s deep-ocean Macondo well began gushing into the Gulf of Mexico. Over that time, the public has, understandably, become increasingly frustrated with industry and government efforts to prevent damage to wildlife and wetlands. There is the growing sense — reflected in last week’s discussion of using nuclear weapons to stop the leak and a viral video about using hay to sop up the mess — that somehow, somewhere there are more innovative and effective measures for containing and cleaning up the oil. But I can tell you, based on 21 years’ experience analyzing and observing oil spills, that the best minds in the business are already doing all they can. No special techniques that would work well to clean up the oil in this situation aren’t being tried or planned. There simply are no foolproof solutions.

Oily Tide Erases Cleanup Work - Wash, rinse and repeat. And repeat.  And then repeat some more. That's the routine for rescue workers in the Gulf of Mexico, where oil creeps back into marshes and wetlands faster than they can clean it up. Coast Guard Adm. Thad Allen, the coordinator of the federal response to the disaster, warned Monday that it could take "years" of hard work to fully scrub the Gulf Coast of all the crude. The spill "will be contained," President Obama said in Washington. "It may take some time, and it's going to take a whole lot of effort." The latest government projections show oil spreading farther to the east and west of the sunken Deepwater Horizon rig. Oil is coming on shore to the west of the Mississippi River delta near Cocodrie and is washing up on beaches in the Florida Panhandle.

A Gulf Spill Team in … New Jersey? - When it comes to an oil spill, you can never be too prepared. So officials in New Jersey have created a special “gulf spill team” in case the spillage from the BP leak seeps around the Florida coast and then travels 1,000 miles to their shores.“Right now, we are very optimistic the oil will not reach New Jersey and will not affect fishing nor the summer beach season, ” Bob Martin, commissioner of the state’s Department of Environmental Protection, said on Tuesday in a press release. “However, we are keeping close watch on this situation to be prepared for any possible scenario.”The special team includes officials from the environmental department and scientists from local universities. They are monitoring  the daily flow of the oil spill as well as how weather factors like tropical storms or hurricanes could affect it. The unit will draft a plan that may involve stocking up on oil-absorbing skimmers and booms.

A Short Report from the Gulf Coast - From reader Bubba in Alabama: For a week I have been listening to my neighbors on the coast whine (on Facebook) about the “smell” of oil. I was delighted to get back to my kids there on Friday last, and find nothing of the sort. Of course, on Friday, the gloop hit the beach, literally. Tonight, I am sad to report, it smells like the world’s biggest bar-b-que, covered in lighter fluid. That is the best I can come up with. THis whole town smells like a giant bottle of charcoal lighter fluid was dumped on it, and yes, it does make you sick.

Summer of Tears - The boat ride, out, from Lafitte, Louisiana, Sunday, May 23, 2010, to our fishing grounds was not unlike any other I have taken in my life, as a commercial fisherman from this area. I have made the trip thousands of times  As we neared Barataria Bay, the smell of crude oil in the air was getting thicker and thicker. An event that always brought joy to me all of my life, the approach of the fishing grounds, was slowly turning into a nightmare. As we entered Grand Lake, the name we fishermen call Barataria Bay, I started to see a weird, glassy look to the water and soon it became evident to me, there was oil sheen as far as I could see. . We stopped to talk to one of the fishermen, towing a boom, a young fisherman from Lafitte. What he told me floored me. He said, "What we are seeing in the lake, the oil, was but a drop in the bucket of what was to come." I became overwhelmed with what I just saw. I am not real emotional and consider myself a pretty tough guy.You have to be to survive as a fisherman. As I left that scene, tears flowed down my face and I cried. Something I have not done in a long time, but would do several more times that day

A Tourist Mecca Fears a Long-Term Oil Smear -Grand Isle, a normally picturesque seven-mile stretch of barrier beach off the Louisiana coast, is slowly waking up to a grim reality: the impact of the April 20 spill will not be measured in months, even if BP manages by fall to plug the well that is gushing oil 50 miles off the coast. It is likely to be measured in years of oil-streaked beaches and marshes, of plummeting property values in a maritime community suddenly cut off from the water, of teams of hazmat-suited workers on beaches lined with orange booms, and cleanup crews in tourist motels. “It’s shifted from a beautiful tropical paradise with people running around in bathing suits with rods and reels, having fun, to feeling more like a coastal town near a military base,” lamented Linda Magri, a real estate broker who rents summer homes and camps on the island. “We’ve got National Guard trucks running up and down.”

The Reality of Life for Louisiana Fishermen Is an Unpalatable Choice For a few afternoons last week, life seemed almost normal in Plaquemines Parish, La., a hub of fishing industry. But the reality of the oil spill was never far away. “Dredge Baby Dredge” T-shirts were scattered throughout the crowd, and there was a lot of talk about whose business was how close to the edge. John Tesvich, whose company, AmeriPure Oysters, had a booth at the festival, has seen a 50 percent drop in output since the Deepwater Horizon spill imposed rolling closures on gulf waters. The fourth-generation oyster harvester said there is a chance his business will be wiped out, depending on “which way the oil blows.”  Much of the talk was about what people — shrimpers, offshore oil workers, dock owners, charter boat operators — could do to survive. To stave off collapse, they say they have only two options: apply to the Small Business Administration for a disaster loan, or file claims with BP. Neither does much more than buy a little time.

With Drilling Stopped, La. Workers Fear Job Losses - During President Obama's visit to the Louisiana coast, he got an earful from local officials about his six-month moratorium on deep-water drilling in the Gulf of Mexico. Many people -- from work boat captains to offshore caterers -- say shutting down the industry for that long could be a bigger economic blow to the region than the oil spill itself.  The giant work boats maneuvering in the tight quarters of Port Fourchon, La., are a lifeline for the drilling rigs and oil and gas wells in the Gulf of Mexico... There's no doubt that the oil and gas industry is the biggest player in Louisiana's economy. It accounts for about 16 percent of the state's GDP, according to the Tulane University Energy Institute. Fishing only accounts for 1 percent, and tourism 4 percent. So, Guidry says, the effect of the moratorium will ripple out through the businesses that support oil and gas.

Louisiana leaders want Gulf drilling to resume - At the same time they are venting their fury on BP over the Gulf of Mexico spill and its calamitous environmental effects, Louisiana politicians are rushing to the defense of the oil-and-gas industry and pleading with Washington to bring back offshore drilling — now. As angry as they are over the disaster, state officials warn that the Obama administration's temporary ban on drilling in the Gulf has sent Louisiana's most lucrative industry into a death spiral. They contend that drilling is safe overall and that the moratorium is a knee-jerk reaction, akin to grounding every airplane in America because of a single crash. They worry, too, that the moratorium comes at a time when another major Louisiana industry — fishing — has been brought to a standstill by the mess in the Gulf.

Deepwater Drilling Moratorium Threatens Texas' Tax Revenue - Oil industry analysts are wondering how much the deepwater drilling moratorium in the Gulf of Mexico, announced last month, will impact Texas’ tax revenue. "You're talking about not just a loss of revenue for six months, you're talking about a loss of revenue for years," said Rick Slemaker, publisher of Energy Magazine. The state’s comptroller’s office collected $2.3 billion in oil and natural gas production taxes in the 2009 fiscal year. In 2008, the office collected $4.1 billion. That tax money is used to repair roads and fund schools, among other state services. State lawmakers might have to do without it when they try to balance the state budget next year.

Gulf Oil Spill Could Cost Florida Up To 195,000 Jobs, Economist Says - A University of Central Florida economist says the Gulf oil spill could cost Florida as much as 195,000 jobs and $10.9 billion in lost economic activity in a worst-case analysis of the hit on tourism. Sean Snaith, director of UCF's Institute for Economic Competitiveness said he looked at a 50 percent loss in tourism for the state's 23 Gulf Coast counties and projected out the ripple effects to come up with that "nightmarish scenario." With a 10 percent hit to tourism in the Panhandle and Florida's west coast, the state would drop 39,000 jobs and $2.2 billion in spending.

News Release - Attorney General McCollum sends letter to BP asking for $2.5 billion in escrow for state - Attorney General McCollum today sent a letter to BP asking the company to deposit no less than $2.5 billion into an interest-earning escrow account so Florida can be assured of its availability to the state and its citizens and businesses over the long-term recovery period.“Based on recent estimates from an economist, Florida could ultimately see losses as great as $2.2 billion, as well as a sharp decline in employment in the industries directly impacted by the Deepwater Horizon oil spill,” wrote the Attorney General. “As Florida braces for what will likely be a staggering blow to its economy with significant impacts to our state’s workforce and the revenues of the state and local governments, it is essential that BP establish immediately a dedicated escrow account solely for the purpose of paying claims and damages to Florida and its citizens.”

The BP Oil Spill: State and Federal Revenue Impacts - The House may pass a four-fold increase in oil taxes within the week to pay for the BP cleanup and any future oil spills. The tax hike from the current rate of 8 cents to 32 cents per barrel will be directed to the Oil Spill Liability Trust Fund, which was first funded after the Exxon Valdez spill and the passage of the Oil Pollution Control Act of 1990.  The tax provision is part of an extenders bill, H.R. 4123.  In Louisiana, controversy brews over the state's inability to levy severance tax on BP. Louisiana collects a severance tax from companies extracting oil and other natural resources from land and sub-surface land within the state's territorial boundaries. The state severance tax rate on oil is 12.5% of value per 42-gallon barrel, but only applies to oil extracted from land within three miles of Louisiana's coast line.

As US doubles oil gusher estimate, top BP brass summoned to meet Obama- New York Times: Government's new estimate puts volume of BP oil gusher at another Exxon/Valdez 'every 8 to 10 days' The United States has more than doubled the estimated size of the Gulf of Mexico oil leak, while BP's chairman was summoned to a White House meeting with President Barack Obama. Carl-Henric Svanberg, the Swede who chairs BP's board, was invited to the meeting next Wednesday along with other company officials, but there was no mention of CEO Tony Hayward, who Obama has said he would fire, if he could, for making flippant remarks about the crisis. "The potential devastation to the Gulf Coast, its economy, and its people require relentless efforts to stop the leak and contain the damage," said a letter to Svanberg from Thad Allen, the Coast Guard admiral leading the US government's response to the crisis. The letter was published online by Politico.

Scientists offer varied estimates, all high, on size of BP oil leak - Pick a number: 12,600 barrels . . . 20,000 . . . 21,500 . . . 25,000 . . . 30,000 . . . 40,000 . . . 50,000. Scientists put every one of those numbers in play Thursday as they struggled to come up with a solid estimate of how much oil is gushing each day from the black geyser at the bottom of the Gulf of Mexico. The one scientific certainty: It's a lot -- and more than some of the same scientists thought just a couple of weeks ago. It's so much that the crews trying to siphon it to the surface are going to need a bigger boat. Early in the crisis, BP and the federal government repeatedly said that the Deepwater Horizon well was spewing about 5,000 barrels (210,000 gallons) a day into the gulf. But the new estimates, released Thursday by government-appointed scientists, show that the well most likely produces 5,000 barrels before breakfast. One team that has studied video taken of the leaking riser pipe before it was cut and capped last week has concluded that the well was most likely producing 25,000 to 30,000 barrels a day. If that estimate is on target, and if the flow has been more or less consistent since the April 20 blowout, the hydrocarbon reservoir 2 1/2 miles below the sea floor has gushed five to six times the amount spilled in Alaskan waters in 1989 by the Exxon Valdez.

Experts Double Estimated Rate of Spill in Gulf - NYTimes - A government panel on Thursday essentially doubled its estimate of how much oil has been spewing from the out-of-control BP well, with the new calculation suggesting that an amount equivalent to the Exxon Valdez disaster could be flowing into the Gulf of Mexico every 8 to 10 days. The new estimate is 25,000 to 30,000 barrels of oil a day. That range, still preliminary, is far above the previous estimate of 12,000 to 19,000 barrels a day.  The higher estimates will affect not only assessments of how much environmental damage the spill has done but also how much BP might eventually pay to clean up the mess — and it will most likely increase suspicion among skeptics about how honest and forthcoming the oil company has been throughout the catastrophe. The new estimate is based on information that was gathered before BP cut a pipe called a riser on the ocean floor last week to install a new capture device, an operation that some scientists have said may have sharply increased the rate of flow. The government panel, called the Flow Rate Technical Group, is preparing yet another estimate that will cover the period after the riser was cut.

Gulf Oil Spill ‘Could Go Years’ If Not Dealt With - In a recent discussion, Vladimir Kutcherov, Professor at the Royal Institute of Technology in Sweden and the Russian State University of Oil and Gas, predicted that the present oil spill flooding the Gulf Coast shores of the United States “could go on for years and years … many years.” 1 According to Kutcherov, a leading specialist in the theory of abiogenic deep origin of petroleum, “What BP drilled into was what we call a ‘migration channel,’ a deep fault on which hydrocarbons generated in the depth of our planet migrate to the crust and are accumulated in rocks, something like Ghawar in Saudi Arabia.”3 Ghawar, the world’s most prolific oilfield has been producing millions of barrels daily for almost 70 years with no end in sight. According to the abiotic science, Ghawar like all elephant and giant oil and gas deposits all over the world, is located on a migration channel similar to that in the oil-rich Gulf of Mexico.

B.P, Halliburton and Transocean have unleashed Armageddon and now there is no stopping it. - My worst fears have been realized. If this link is true and the oil is coming through the sea floor, they have either blown out the formation or blown out the cement (which we know they did anyway to get the blowout to occur). I am beginning to realize why they have not wanted toclose the valves on the cap. The more theyclose it, the more oil is going to come up through the sea floor, next to the well casing. I listed 12 points in my attached article. The really big concern here is that their directional wells are now pointless. They are GUARANTEED to fail because you can not pump mud or cement into a blown out well. It just does not set with oil and gas roaring past.The next biggest concern is that they have to get 8 new wells in immediately to relieve the background oil and gas pressure. The oil is going to start coming up at an ever increasing rate along the casing and the blowout preventer.The oil and gas is going to act as a high pressure washer and erode away all the sandstone and mudstone.There is nothing they can do about it

"Is This the BP Doomsday Scenario?" - The relief wells being drilled are designed to tap into the existing 21" interior diameter borepipe at an angle, and nearly 1 3/4 miles below the ocean floor. By the time they reach that depth the funnel shape will have been enlarged to a massive cavern, not the 21” diameter bore pipe hole they’re pretending they intend to seal, and the escaping flow rate will be many times higher than their ability to cap it. At some point the relentless underground pressure of 120,000 PSI will overcome whatever resistance is left along the bore pipeline hole, and vent nearly completely unchecked into the atmosphere at sea level. Frozen methyl hydrate expands as a vapor of methane to 26 times it’s frozen size. It’s also remarkably flammable. What trillions of cubic feet of methane igniting simultaneously is something I cannot visualize, since nothing like this has ever occurred before anywhere on this planet. The simultaneous release of 15,000,000,000 barrels of oil is, likewise, inconceivable. BP, and the government, know all this. They cannot, and will not, reveal the true extent of this catastrophe for fear of a breakdown of civil order, public panic, massive uncontrolled population migration, loss of effective control, as well as the very real possibility of violence against BP and governmental facilities and personnel.

Gulf leak: biggest spill may not be biggest disaster - THE Deepwater Horizon blowout is the largest oil spill in US history, but its ecological impact need not be the worst. It all hinges on the amount and composition of the oil that reaches the Gulf of Mexico's most sensitive habitat: its coastal marshes. If they can be protected, the region could bounce back in just a few years.As New Scientist went to press, estimates of the volume of crude so far ejected into the waters of the Gulf ranged from 90 to 195 million litres - dwarfing the Exxon Valdez's 40-million-litre spill in 1989. But the aftermath of previous spills shows that it is not the volume that matters most."Consider three vastly different spills (see timeline, right). In 1979, the Ixtoc I well off Mexico's Gulf coast spewed 530 million litres of oil into shallow waters - three times the worst current estimates for Deepwater Horizon. Five years later, "we had to look hard to see any lasting effects", says Arne Jarnelöv of the Institute for Futures Studies in Stockholm, Sweden, who led a UN team sent to monitor the area

This Oil Spill, too, Shall Pass - Oil is not foreign to Gaia, but a part of her, a natural substance. Ocean floors normally experience ongoing oil leaks and volcanic eruptions. It is difficult to prove or disprove the numbers floating around about natural leak rates and oil industry spill statistics. Barry Ritholtz cited Dr. Roy Spencer's graph showing that the 1991-2 Gulf war time period resulted in 500 million gallons of dumped and spilled oil, and says that 250 million gallons of oil is spilled annually from global rigs and tankers. An Alaskan reporter claims that a billion gallons of oil are swallowed by our oceans each year. This would agree with Dagmar Schmidt Etkin's figures. WWII no doubt bled a great deal of oil to sea. So far, though estimates vary widely, perhaps 50 million gallons have leaked from this Deepwater Horizon event.

Punishing BP Is Harder Than Boycotting Stations - With each day that oil fouls the Gulf of Mexico, more drivers are weighing a choice at intersections across the United States: if BP is on the left and some other station is on the right, is filling up at BP an endorsement of the company’s conduct? Advocacy organizations like Public Citizen urge consumers to stay away from BP stations. About 550,000 Facebook users have clicked the “Like” button on the Boycott BP page. And angry people have picketed at BP stations.  BP doesn’t have much use for the service station business anymore. In 2007, it announced plans to sell the last 700 stations that it hadn’t already sold to franchisees. Greenpeace has chosen not to call for a boycott. Instead, its representatives pose a different challenge: people who really want to punish BP ought to try getting Beyond Petroleum themselves.

The “Boycott BP” Movement: Foolish, Counterproductive, And Pointless - Advocacy organizations like Public Citizen urge consumers to stay away from BP stations. About 550,000 Facebook users have clicked the “Like” button on the Boycott BP page. And angry people have picketed at BP stations. This doesn’t send a particularly powerful message to BP, though. After all, the company owns only a handful of the 11,000 stations that bear its brand and is trying to sell the few still on its books. So those who wish to inflict the maximum amount of pain on the company are instead putting much of the hurt on the family businesses who actually own the stations. And the gas that people buy when they fill up elsewhere? Fuel from independent gas stations, grocery chains and big-box wholesale clubs sometimes comes directly from refineries or wholesalers that BP owns outright.

If BP Is Evil Then So Are WE…The Deepwater Horizon oil rig and others like it are perhaps the best illustration so far that the days of drilling a hole in the ground in Texas, inserting a pipe and watching oil gush out are long gone. If we were ever in doubt that the world is running out of oil and so-called Peak Oil has arrived then the BP oil disaster should put that to rest, and despite the horror unfolding in the Gulf of Mexico we should get used to the idea of deepwater oil drilling because that is what will keep our cars running for a bit longer. Or should we get used to that idea?

Boehner agrees with the Chamber of Commerce that taxpayers should pay for oil spill cleanup. Late last month, Chamber of Commerce President and CEO Tom Donohue said that he feels its appropriate for taxpayers to cover some of the costs of cleaning up the Gulf Coast in the wake of British Petroleum’s ongoing oil spill. “Everybody is going to contribute to this clean up. We are all going to have to do it. We are going to have to get the money from the government and from the companies and we will figure out a way to do that,” he said. Evidently, House Minority Leader John Boehner (R-OH) agrees that taxpayers should be footing the bill, as reported by TPMDC’s Brian Beutler

BP’s Mess, and Wall Street’s - Just because you can do something, does that mean you should? It’s a question that might have saved us a lot of pain in recent months if both Goldman Sachs and British Petroleum had asked it of themselves during the last decade.  Sure, Goldman, and other Wall Street firms, could — and did — create “synthetic C.D.O.s” to allow consenting investors, including Goldman itself, to gamble on the risk in the U.S. housing market. Sure, Goldman and others could — and did — package up mortgages that should never have been issued into mortgage-backed securities and sold them to investors around the world who, in turn, abdicated their responsibility to investigate the soundness of the investment because some rating agency — paid by the underwriters — had slapped a AAA-rating on them. That technology existed, and Goldman and others just availed themselves of it, right? Besides, they were simply supplying the demands of the marketplace, right?

BP's (BP) Liability Could Already Be $80 Billion - Government scientists said BP's (NYSE: BP) leaking well may have been gushing as much as 40,000 barrels of oil a day, which is double prior estimates. If 40,000 barrels per day has been leaking from the well, then there could be nearly 2 million barrels of oil in the Gulf of Mexico. This would put BP's estimated liability at $80 billion, based on an estimated from Goldman Sachs analysts that it will cost $40,000 per barrel for clean-up, litigation and other costs related to the spill. Since a containment cap was placed on the gusher, BP said it has collected nearly 100,000 barrels and is currently collecting at a rate of about 15,000 barrels per day. This would put the amount continuing to spill into the Gulf at about 25,000 barrels per day. BP's best chance to stop the leaking well is the drilling of two relief wells, which won't likely be complete until August.

BP Oil Disaster Threatens Mississippi Delta Goods and Services Worth Far More Than BP's Value - The BP oil disaster, hurricanes and wetlands loss threaten a net value of $330 billion to $1.3 trillion in natural system goods and services, according to the first study of the Mississippi River Delta as a capital asset. Even the low end estimate of the Delta's value exceeds BP's market capitalization before the oil disaster on April 20 of $189 billion. The study was completed shortly before the spill. By protecting against hurricanes, assuring water supply, buffering climate instability, supporting fisheries and other food and fur stocks, maintaining critical habitat, providing waste treatment, and additional benefits, these natural systems provide $12 billion to $47 billion in benefits every year.

UK government says ready to help BP over spill (Reuters) - Prime Minister David Cameron said on Thursday that the British government stood ready to help BP (BP.L) with its clean up efforts following the Gulf of Mexico oil spill.Cameron, who is visiting Afghanistan, said he completely understood U.S. frustration over what he called an "environmental catastrophe". U.S. President Barack Obama has been a vocal critic of BP's handling of the spill. "I've got a series of meetings and telephone calls and other contacts with the President coming up and I'm sure that BP and what's happened off the Gulf coast will be something we will discuss," Cameron told reporters. "This is an environmental catastrophe. BP needs to do everything it can to deal with the situation and the UK government stands ready to help. I completely understand the U.S. government's frustration."

BBC News - Why is BP important to the UK economy? (graphic) "The government must put down a marker with the US administration that the survival and long-term prosperity of BP is a vital British interest," the former British ambassador to the US, Sir Christopher Meyer, has told the BBC. He urged Prime Minister David Cameron to raise the issue in his scheduled conversation with US President Barack Obama over the weekend. London Mayor Boris Johnson has expressed concern about the "anti-British rhetoric that seems to be permeating from America". Speaking on BBC Radio 4's Today programme, he said that he "would like to see a bit of cool heads rather than endlessly buck-passing and name-calling".

Perception, Reality, and Responsibility in the Gulf Oil Spill - A New York Times “Week in Review” story, headlined “Obama and the Chaos Perception,” argued the real danger for Mr. Obama’s administration—not that the spill itself remains unmanageable, but that it comes to represent a pattern in the public mind, a sense that too many dangers at once… what matters is the perception….” This is a common notion, and it’s just as common for a journalist from say, The New York Times, to pretend that newspapers like, say, The New York Times, do not play a significant role in defining those perceptions. One can find many of the same underlying attitudes in a Politico story entitled “Spill tests Obama management style.” Here the argument is slightly more refined: “Administrations are defined, fairly or not, by their capacity to control stagnant backwater agencies, in Obama’s case the Minerals Management Service, which failed to detect problems with the Deepwater Horizon well.” The story also quotes Mr. John Burke, a University of Vermont professor, who complains, “This is what you get when you elect someone with legislative, not executive experience.”

Some home truths on oil for a president showing the strain - Whatever happened to global warming? The political caravan, we are told, has moved on. Climate change is yesterday's story. Today's big threat comes not from burning too much oil, but from the countless millions of barrels of the stuff that have been pumping into the Gulf of Mexico from a leaking BP rig. The Deepwater Horizon crisis is a reminder that politicians can handle only one challenge at a time. Barack Obama had shown signs of being different. Yet even this supremely self-possessed politician has forgotten how to walk and chew gum. A president who used to pride himself on staying calm now feels it necessary to prove he can panic with the best of them. Last year Mr Obama declared that the uncontrolled build-up of carbon in the earth's atmosphere posed an existential threat to the future of the planet. Only the other day, his administration's first National Security Strategy said the danger from climate change was "real, urgent and severe".Those words, though, were written before Mr Obama read the opinion polls and concluded he had not been doing enough to feel the pain of the good people of Louisiana and the other Gulf states.

Why we don't plan for the worst -The BP oil spill in the Gulf of Mexico is the latest of several recent disastrous events for which the country, or the world, was unprepared. Setting aside terrorist attacks, where the element of surprise is part of the plan, that still leaves the Indian Ocean tsunami of 2004, Hurricane Katrina in 2005, the global economic crisis that began in 2008 (and was aggravated by Greece's recent financial collapse) and the earthquake in Haiti in January. In all these cases, observers recognized the existence of catastrophic risk but deemed it to be small. Many other risks like this are lying in wait, whether a lethal flu epidemic, widespread extinctions, nuclear accidents, abrupt global warming that causes a sudden and catastrophic rise in sea levels, or a collision with an asteroid.  Why are we so ill prepared for these disasters?

A failure of economic and environmental regulation - A few weeks after B.P.’s Deepwater Horizon oil rig blew up and crude started spewing into the Gulf, Ken Salazar, the Secretary of the Interior, ordered the breakup of the Minerals Management Service—the agency that was supposedly in charge of offshore drilling.  M.M.S.’s bad behavior was unusually egregious, but it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.  These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

How Should We Respond to Regulatory Failure? - I keep reading arguments that start with the fact that regulators have been imperfect in the past and use it to argue that we should eliminate (or substantially reduce) the amount of regulation that is imposed. However, just because regulators missed things in the past like Bernie Madoff, the financial meltdown, and the risks that BP was taking does not imply that regulation ought to be reduced or eliminated. If there is a lot of crime that should have been prevented but wasn't, do we disband the police department or try to figure out how to make it better? It would be silly to suggest that the answer to the failure to prevent crimes is to get rid of the police, and it's equally silly to assert that the solution to poor regulation is to quit trying to regulate. So sure, get rid of the unnecessary regulation where you can find it, but for the most part problem's such as BP and the financial meltdown are not the result of too much regulation.

Toxic assets and toxic oil - In some ways the Gulf of Mexico oil spill seems like a replay of the subprime lending disaster. Clever technological innovations blew up in a mess that nobody knew how to control, wreaking devastation on those innocently standing by. The actors and the scenes have changed, but you can't shake the feeling you've been through this nightmare before. Ken Rogoff sees the parallels this way: The accelerating speed of innovation seems to be outstripping government regulators' capacity to deal with risks, much less anticipate them. The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures.... The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters.

Mexico Environment Ministry Says PEMEX And Mexican Ministries To Sue BP - On the wires. Everyone kinda forgot that the Gulf Of Mexico is also bordered by... Mexico.

Can the U.S. Punish BP’s Shareholders? Room for Debate Forum – NYT - The United States Justice Department said on Wednesday that it was considering legal action to block British Petroleum from paying dividends to make sure the company covers all costs related to the oil spill in the Gulf of Mexico. Interior Secretary Ken Salazar has said BP would be asked to pay energy companies for losses if they had to lay off workers because of the moratorium on deepwater drilling. Should the U.S. stop BP from paying dividends to its shareholders? What would be the consequences of this action?

Deepwater Horizon and the Technology, Economics, and Environmental Impacts of Resource Depletion -Following the failure of the latest efforts to plug the gushing leak from BP's Deepwater Horizon oil well in the Gulf of Mexico, and amid warnings that oil could continue to flow for another two months or more, perhaps it's a good time to step back a moment mentally and look at the bigger picture - the context of our human history of resource extraction -  Perhaps it's best to start with the most familiar metaphor: resource extraction always proceeds on the basis of the low-hanging fruit principle. We typically go after the most easily accessible, highest quality portions of the resource first, and save the hard-to-get, low-quality portions for later.  Geologists use a different metaphor; they commonly speak of a "resource pyramid." The capstone represents the easily and cheaply extracted portion of the resource; the next layers are portions of the resource base that can be extracted with more difficulty and expense, and often with worse environmental impacts; while the remaining bulk of the pyramid represents resources that geologists believe are unlikely to be extracted under any realistic pricing scenario, usually because of depth, location, or quality issues. There's a pyramid for oil, one for coal, one for iron ore, and so on.

Which Horizon? - Did the nation heave a sigh of relief when BP announced that their latest gambit to "cap" the Deepwater Horizon gusher will result in hosing up fifty percent of the leaking oil? If so, the nation may be sighing too soon since the other half of the oil will still collect in underwater plumes and hover all around the Gulf Coast like those baleful mother ships in the most recent generation of alien invasion movies. I shudder to imagine the tonnage of dead wildlife flotsam that will wash up with the tide for years to come. It will seem like a "necklace of death" for several states, though even that may not be enough to distract them from the more gratifying raptures of Nascar and NFL football.   For the moment we can only speculate on what the still-unresolved incident will mean for America's oil supply. The zeal to prosecute BP for something like criminal negligence has bestirred a Department of Justice comatose during the rape-and-pillage of the US financial system. BP may be driven out of business, but then what? The net effect of the oil spill, one way or another, will be the gradual shut-down of oil drilling activity in the Gulf of Mexico.   Anyway you cut it, the US will produce less oil and import more -- and have to rely on the political stability of places like Angola and Nigeria, not to mention the simmering Middle East.

Life after the BP oil disaster - Why we need a Gulf Recovery Fund - The BP oil catastrophe is not the first oil spill in the gulf—not by a long shot. An exploratory well blew up in 1979, dumping 140 million gallons of crude oil into the ocean. In 1990, 2000, and 2008, oil tankers spilled millions of gallons into gulf and lower Mississippi waters. And the U.S. Coast Guard estimates that after Hurricane Katrina in 2005, over 7 million gallons of oil were spilled from a variety of sources, including pipelines and storage tanks.Not only the water but also the land in the five major gulf states of Texas, Louisiana, Mississippi, Alabama, and Florida, is affected by the region’s long-term relationship with oil. Researchers at Southern University, for example, find strong evidence that land erosion in the Louisiana coastal wetlands occurred parallel to oil and gas development in the region. And according to a recent White House report, the canals, pipelines, and other infrastructure the oil and gas industry constructed across Louisiana over the past eight decades resulted in the loss of over 2,000 square miles of coastal wetlands.

The oil drilling moratorium - As catastrophes go, the flood of oil in the Gulf of Mexico (GOM) ranks right up there. Today I'm going to look at the effects of the 6-month moratorium on deepwater drilling. Back on May 6, I published Oil Production In the GOM—What's At Stake? This is a follow-up based on new developments since then.Let me repeat this graph from the earlier article with my original caption. Energy consultants Wood Mackenzie released a study of the effects of the drilling moratorium on future GOM production. They found that—

  • Around 80,000 barrels of oil equivalent per day (boe/d) would be deferred from 2011 to later years. This is around four percent of our total deepwater GoM production estimate for 2011 of 1.875 million boe/d.
  • Looking farther out, tightened drilling safety regulations and longer permitting timeframes will result in slowed drilling activity, impacting timeframes in all phases of exploration, appraisal and development. These delays could defer over 350,000 boe/d (almost 19%) of deepwater GoM production in 2015 and 2016.

Deep Impact: Why The Deepwater Disaster Spells Serious Trouble

  • We can say with absolute certainty that future oil exploration and development costs are going to rise.
  • Our date with an oil supply shock now seems probable for the 2011 to 2012 timeframe.
  • A new paradigm is emerging, in which downsizing trumps growth.
  • A permanent energy crunch will lead to higher prices for all things connected to energy.
  • It would not be too strong to suggest that our federal commitment to energy efficiency is a farce. 
  • In terms of personal planning, do not take anything for granted.

    Sanders calls for repeal of $35 BILLION tax breaks for oil, gas industry - Sen. Bernie Sanders is pushing a measure to end more than $35 billion in tax breaks for the oil and gas industry. The Vermont independent today proposed putting $25 billion in savings toward reducing the deficit and $10 billion toward the Energy Efficiency and Conservation Block Grant program over five years. Such funds help municipalities build windmills, make energy efficiency improvements or improve sewer treatment plants.“If there is anything we should be learning from the Gulf disaster, it is that it is time to move aggressively away from polluting and unsafe fossil fuels, which are getting more and more difficult to produce as we move further and further offshore to drill for them,“ he said in a statement. “And, with a $13 trillion national debt, the last thing we need to be doing is giving tax breaks to big oil and gas companies that have been making record-breaking profits year after year after year.“

    The Gulf of Mexico (GOM) oil spew demonstrates that we just don’t get it - The GOM oil spew reinforces the extent to which Americans “just don’t get it” regarding the unsustainable nature of our American way of life.Our self-righteous indignation at BP regarding the GOM oil spew—our insistence that they “fix ‘their’ problem immediately”, that they insure that “nothing like this ever happens again”, and, oh yeah, that they maintain continuous flows of black gold (from somewhere else) in order to perpetuate our American way of life—demonstrate total ignorance on the part of the American public regarding how our American way of life is enabled, why it is unsustainable, and why it will soon come to an end. Our industrialized American way of life is enabled by continuous and enormous inflows of nonrenewable natural resources (NNRs)—energy resources (which include oil), metals, and minerals—the supplies of which are finite and are becoming increasingly scarce both domestically and globally.

    Demonstration Effects - The Gulf oil spill has a way of putting in perspective our other troubles.  Suppose the first few shards of evidence hold up – that BP engineers were under some pressure to cut costs by electing cheaper safety methods against the possibility of a blowout?What would be the cost, going forward, of increasing tenfold the precautionary apparatus installed at every undersea well-head around the world? Fifty cents a barrel?  A dollar?  That’s not much in a world of $75/bbl oil – surely not much more than a penny a gallon at the pump.  That the costs of enhanced safety methods, including better governmental oversight, will be borne, mostly by the consumer, is a foregone conclusionThe really daunting risks have to do not with the production of oil but with humankind’s accelerating consumption of it, and other fossil fuels – not that this is a bad thing in itself, except that it has undesirable side effects that may be accelerating even faster. 

    Rethinking Our Oil-Drenched Lifestyles - I spent a good portion of last week looking at pictures of oil-drenched birds and marveling at the chutzpah of BP. The company’s ads are contrite on the surface but brazen underneath, filled with images of pristine beaches and industrious volunteers, suggesting that soon, all will be well in the Gulf of Mexico so offshore drilling can start again. Just buck up, America, and have faith! Stiff upper lip and all that. Pity the birds; hate the company. But I couldn’t help but wonder how much I should hate myself, too. My life, after all, is one giant petroleum glut, from the diapers and diaper rash ointment for my son to the toothpaste in my bathroom to the Lycra in my jeans. Oil gets me to work and back, puts food on my plate, gets pumped into the tank in my basement every winter. Imagining a world without it is next to impossible.

    The Gulf Oil Spill and the Myth of Affordable Energy - The gulf oil spill (more accurately, the underwater gusher) has brought a new focus on U.S. energy policy. The spill has put the oil establishment on the defensive, but it is trying desperately to use the mantra of "affordable energy" to deflect criticism. "We need the oil that comes from the gulf to keep the economy moving," Sen. Mary Landrieu (D-LA) told the Wall Street Journal. "Affordable energy affects every sector of the economy,"  If we cut through the rhetoric, do the facts support the thesis that countries with "affordable" (read: cheap) energy perform better than those with more expensive energy? They do not. The price of crude oil is about the same everywhere in the world, so we can use retail gasoline prices as a proxy for national energy policy.One argument is that higher energy prices would undercut U.S. exports. However, among the world's four biggest exporters, Germany and Japan, the world export leaders in per capita terms, have far higher retail energy prices than the U.S. and China.

    The Associated Press: W.Va. gas well explosion send flames 70 feet high A crew drilling a natural gas well through an abandoned coal mine in West Virginia's Northern Panhandle hit a pocket of methane gas that somehow ignited, triggering an explosion that burned seven workers, a state inspector said Monday.The blast created a column of flame at least 70 feet high, and it will likely burn until a team of well fire experts can reach the scene to extinguish it, said Bill Hendershot, an inspector with the Department of Environmental Protection's Office of Oil and Gas.

    10 Missing After Underground Pipeline Explodes At Oil Refinery In Texas - More Coverage From CBS Station KTVT-TVAt least 10 people are reported missing after an explosion that sounded like a tornado caused a massive fire in rural north-central Texas. Cleburne city manager Chester Nolen tells the Dallas-Fort Worth television station WFAA that Monday's explosion left at least 10 people missing, and a city fire official said at least six were injured. Television images showed a large fireball and a burned out vehicle and construction equipment. Cleburne is about 50 miles southwest of Dallas.

    Accidents bring calls to suspend shale drilling - Serious accidents at Marcellus shale natural gas drilling operations in Pennsylvania and West Virginia over the past five days have prompted sanctions against one Texas-based drilling company, support for tighter federal regulations and even calls for a moratorium on drilling.  Pennsylvania Department of Environmental Protection Secretary John Hanger on Monday ordered EOG Resources Inc., formerly Enron Oil & Gas Co., to suspend all new drilling operations in the state until an independent investigation of a massive well "blowout" Thursday night near Penfield, Clearfield County, is completed. The accident occurred when EOG's operators lost control of the well after fracturing, or cracking, the Marcellus formation more than a mile underground to release the natural gas locked in the shale. High pressure pushed the gas and "frack fluid" laced with toxic chemicals out of the well for 16 hours, spraying more than 35,000 gallons and maybe as many as 1 million gallons 75 feet into the air.

    Shale Gas Well Blowout Raises Specter of New BP: Energy Markets(Bloomberg) -- A Pennsylvania natural gas well “blowout” last week helped drive prices to a 14-week high on concern that tighter restrictions on offshore drilling following BP Plc’s Gulf of Mexico spill will spread onshore.The incident at the project operated by EOG Resources Inc. shot natural gas and drilling fluids onto the ground and 75 feet (23 meters) into the air, the state Department of Environmental Protection said in a statement on June 4. The well is in the Marcellus Shale gas find in Clearfield County, about 122 miles northeast of Pittsburgh. With offshore exploration curtailed, dependence on shale gas may grow, amplifying the impact of any disruptions. A “blowout” is the industry’s term for a surge of pressurized oil or gas that causes an eruption and is what caused the explosion and fire at BP’s Macondo well in the Gulf April 20, resulting in the biggest oil spill in U.S. history.

    Ending Fossil-Fuel Aid Will Cut Oil Demand, IEA Says (Bloomberg) -- Fatih Birol, the International Energy Agency’s chief economist, called on leaders of the Group of 20 Nations to fulfill their pledge to end fossil-fuel subsidies, a move he said will cut oil demand and greenhouse-gas emissions.Stopping aid by 2020 would reduce global oil demand by 6.5 million barrels a day, he said, or about a third of the current U.S. use. Subsidies that promote consumption, such as below- market gasoline prices, totaled $557 billion in 2008, he said. Nations that use them the most include China, Venezuela, Egypt Iraq and Iran, according to IEA surveys.“This is the only single policy item that could make such a major change in the global energy and climate-change game,” Birol said in a telephone interview today. Global leaders are searching ways to reduce dependency on oil and tackle global warming as the BP Plc oil spill focuses attention on the broader cost of fossil fuels. G20 leaders, who failed to broker a deal on restricting carbon emissions at the Copenhagen climate summit, will discuss how to implement their pledge in Toronto this month, Birol said.

    The dangerous new era of "extreme energy." - Fracking, Oil Sands, and Deep-Water Drilling- The ongoing debacle in the Gulf of Mexico is a sign of many things: the incompetence of BP, poor oversight, and an industry that places too much emphasis on production technology and too little on safety technology. But it also highlights a larger truth. We've entered an age in which the production of energy, especially from fossil fuels, demands ever-more-expensive environmental trade-offs. We've entered what Michael Klare, professor at Hampshire College, calls the era of "extreme energy."The Gulf of Mexico isn't the only place where such so-called tough oil is to be found in North America. The environmental hazards of drilling in the Arctic National Wildlife Reserve are so obvious that even the Bush-era Congress and White House wouldn't go there. Analysts have enthused about the rapid development of the Alberta tar sands in Canada—friendly, nearby, democratic, non-terrorist-promoting Canada. An Alberta government Web site notes that the oil sands are "the second largest source of oil in the world after Saudi Arabia." The reserves there—171.8 billion barrels—amount to 13 percent of the global total and are about what Iraq and Russia combined have. But the gunk in the tar sands isn't really oil.

    Oil Drilling In The Arctic: Facing A Freeze - For a time it looked as though the Arctic would be the next frontier for Western oil firms, which have only limited access to the most promising prospects in sunnier climes. The retreat of the polar ice cap is making the region easier to work in, and there is thought to be lots of oil and gas to tap. But Canada is not the only country now thinking twice: America, Norway and even Russia are all contemplating tighter rules for drilling. Canada’s stay on drilling, like a similar one imposed in America, is temporary. But environmental groups and some indigenous people advocate more lasting restrictions, on the ground that the Arctic is particularly ecologically fragile, far from clean-up crews and blanketed for much of the year in oil-trapping ice.

    BP Spill Means Oil Prices Gain as Output Falls (Bloomberg) -- Higher crude prices and rising imports may be in store for the U.S. after the government slashed its forecasts for Gulf of Mexico output by 6.1 percent following the BP Plc spill, the worst in the nation’s history.  The production cut will average 26,000 barrels a day in the fourth quarter and 70,000 barrels a day next year, the Energy Department said yesterday in Washington in its monthly Short- Term Energy Outlook. The reduction, amounting to 0.5 percent of the oil processed in the U.S., follows President Barack Obama’s decision to put a moratorium on deep-water drilling in the Gulf.  The decline would coincide with an economic rebound that will boost fuel demand to the highest level since 2008, when New York oil futures jumped to a record $147.27 a barrel, the report showed. The U.S. economy grew at an annual pace of 3 percent in the first quarter, according to the Commerce Department.

    Saudi Aramco Has 260 Billion Barrels Oil Reserves (Bloomberg) -- Saudi Arabian Oil Co., the world’s biggest state oil company, has 260 billion barrels of oil reserves, said Mohammed Al-Qahtani, the executive director of the company’s Petroleum Engineering & Development unit. “To ensure availability and reliability, we have invested heavily in new developments to increase oil production capacity,” Al-Qahtani said at a conference in Beijing today. “A lack of resources isn’t a constraining factor.” Saudi Arabia is the world’s largest crude exporter, with output of 8.29 million barrels a day in May, according to data compiled by Bloomberg. The Middle Eastern kingdom had proved reserves of 264.1 billion barrels at the end of 2008, according to BP Plc’s Statistical Review of World Energy.

    The world in oil consumption, reserves, and energy production (guardian graphics) -BP may be struggling to manage the Deepwater Horizon oil spill but its publication of key energy data goes on. The latest figures from BP's annual Statistical Review of World Energy show that world oil consumption fell by 1.2m barrels per day (bpd) in 2009, the second consecutive annual decline and the largest volume since 1982. Other key findings are:

    • The world's oil production dropped by 2m bpd, or 2.6% - also the largest decline since 1982
    • Global oil refining capacity additions totalled 2m bpd, with the Asia-Pacific region accounting for 80% of the increase
    • Proven oil reserves stood at 1.33 trillion barrels last year, an increase of 700,000m barrels from 2008
    • Gas reserves grew by 2.21tn cubic metres last year, while production fell by 2.1%, marking the first decline on record

    Statistical Review of World Energy 2010 | BP - pdfs: historical, oil, gas, coal, primary energy, year in review.

    The true value of energy is the net energy - To reduce Odum’s assertion to a pithy phrase—it takes energy to get energy – and for the past 150 years society has accessed enormous quantities of energy in the form of fossil fuels at a very low cost. Early U.S. oil production provided 100 barrels of oil for every barrel spent in getting that oil (Cleveland 2005), while traditional fuel sources (e.g. biomass) returned much less. This huge increase in net energy enabled society to build cities, increase crop yields, build cars, etc… Today, the circumstances are different, as nearly all of the easy-to-find and easy-to-produce oil wells have been found and produced. For example, Ghawar, the world’s biggest oil field, was discovered in 1948, and even with all of the advances in seismic technology over the past 60 years, nary an oil well of nearly the same magnitude has been found. What has become very clear over the past decade and especially the past month is that the energy cost of getting oil has increased. We need only to compare the wooden oil derricks used to produce the fields of the early 20th century to that used currently in the Gulf of Mexico – two billion dollar ultra-deep water platforms.

    BBC News - Russia becomes leading oil producer, BP says - Russia overtook Saudi Arabia to become the world's leading oil producer in 2009, while global oil consumption fell the most since 1982, BP has said. According to the oil giant's latest Statistical Review of World Energy, Russia increased oil production by 1.5% in 2009, claiming a 12.9% market share. Production in Saudi Arabia fell 10.6%, giving the country a 12% market share. Global oil consumption fell by 1.2m barrels a day, or 1.7%, while natural gas use dropped 2.1%.  The world's oil production dropped by 2m barrels a day, or 2.6%, also the largest decline since 1982.

    EIA: From forecast of oil supply abundance to decade of stagnation - The EIA, the statistics arm of the US Department of Energy, recently released its International Energy Outlook (IEO) for 2010. This is an important document for forecasters, as it represents the EIA's integrated view of the global energy markets in the years to come and contains a long term forecast on the range of energy sources and CO2. Like it or hate it, the IEO is a touchstone for the energy industry and is treated as the authoritative government forecast in the press and in capital raising documents like prospectuses. It influences policy-makers, the media, public opinion and investors. What it says matters. And what does it say?  That peak oil is all but on us.

    Uncle Sam: Peak Oil Could Be Here or Could Not - The US Department of Energy is all but admitting that that the Peak Oil thesis; the theory that there isn’t enough oil in the ground to meet the world’s demand, is essentially true. Every year the US Energy Information Agency (EIA) which is part of the Energy Department puts out an influential report called the Global Energy Outlook. This is a projection of global energy production and energy consumption.  According to the 2010 version of this document energy consumption will grow by 49% between 2007 and 2035. At the same time EIA predicts that oil production will only increase by less than 1% between 2010 and 2020. In other words the oil supply isn’t keeping up with the demand for energy. If this is true Peak Oil is apparently here folks.

    Peak oil and apocalypse then -Oil is the backbone resource of industrial society, but the Oil Age will come to an end, someday. The pessimists say the world reached maximum oil production in 2008. Middle-of-the-road optimists say peak oil won’t occur until 2030. Either way, production is already past its peak and on a terminal decline in 54 of the 65 largest oil-producing countries in the world, including Mexico, Norway, Indonesia and Australia. It’s been declining in the lower 48 states of the United States since 1970. What will happen when cheap oil is no longer available and supplies start running short? In an interview with, Jörg Friedrichs, a lecturer in politics at the University of Oxford, examines how different parts of the world would likely react to a peak oil scenario.." Summary: Responses would range from predatory militarism to authoritarian retrenchment and the mobilization of local resilience.

    Imagining Life Without Oil, and Being Ready - Americans have long been fascinated by disaster scenarios, from the population explosion to the cold war to global warming. These days the doomers, as Mrs. Wilkerson jokingly calls herself and likeminded others, have a new focus: peak oil. They argue that oil supplies peaked as early as 2008 and will decline rapidly, taking the economy with them. Located somewhere between the environmental movement and the bunkered survivalists, the peak oil crowd is small but growing, reaching from health food stores to Congress, where a Democrat and a Republican formed a Congressional Peak Oil Caucus.  And they have been resourceful, sharing the concerns of other “collapsitarians,” including global debt and climate change — both caused by overuse of diminishing oil supplies, they maintain.

    China's natural gas consumption to triple in 2010: PetroChina - China's annual natural gas consumption is expected to triple to hit 300 billion cubic meters in 2020, Zhou Jiping, president of PetroChina Co., said yesterday.  In 2009, China's natural gas consumption was 88.7 billion cu m.  Zhou pointed out at an energy conference that it is a practical way to raise the ratio of natural gas in China's energy composition in order to achieve the goal of reducing carbon emission. By the end of 2009, PetroChina, the country's largest oil producer, had proven natural gas reserves of 1.79 trillion cu m, said Zhou. Last year, the firm's overseas natural gas output was 5.5 billion cu m. Currently, China imports natural gas from the Middle Asia via a new pipeline.

  • Kass: Copper Concerns - "The collapse in the commodity index is telling us that the peak in global industrial growth is imminent; it's here right now. Markets are going to have to deal with the reality of a slowdown." According to Bloomberg, the Journal of Commerce Industrial Price Commodity Smoothed Price Index, "which tracks the growth rate of steel, cattle, hides, tallow and burlap, plunged by 57%" last month. This index is usually a reasonably good tell on prospective growth as it includes a number of commodities that aren't exchange-traded and are therefore less apt to be controlled by speculators. As well, the index of 18 industrial materials "declined the most since October 2008." Many pay special attention to the price of Dr. Copper -- the commodity is famously said to have a PhD in economics. This is not surprising, for as seen in the chart below, the correlation between copper prices and the S&P 500 is unusually high.

    More on the financialization of commodities - The round-turn in the commodities market over the past five years has been breathtaking.  Take a look at a long-term, monthly chart of the CRB Index below.  You can the run-up into the oil price boom of 2008 and the subsequent crash exacerbated by the global financial crisis. What is interesting to us isn’t the price action, per se.  Rather how it is that we got to this place where commodities markets now seem to move in lockstep with the broader financial markets (S&P 500 in gray).  A post by Justin Lahart at Real Time Economics prompted this line of thinking on the current state of commodities investing.  This was a topic we delved into a great deal when this blog was brand new.  However in light of the past few years it is worth revisiting.

  • China’s Hunger Fuels Exports in Remote Russia - The Kimkan open pit mine in Siberia is a muddy square mile surrounded by birch and cedar forests so vast they seem to stretch to the ends of the earth. As with many places in Siberia, it is nearly impossible to drive here. Yet just under the surface, Russian geologists say, lies enough iron ore to build hundreds of millions of cars. That is why Chinese government officials and business executives are interested, despite a decades-old legacy of bilateral distrust along this stretch of Russia-China borderland. This year, a delegation from the Industrial and Commercial Bank of China made its way to Kimkan by helicopter to gaze at the bulldozers peeling back topsoil and to chat with the mine foreman. “I’m standing on a billion tons of iron ore,” Mr. Ryabov said he told the Chinese visitors. They were impressed, he recalled. “They said, ‘Hurry up; we’re ready.’"

    China Tightening On Rare Earth Minerals? -- China has proposed further mining restrictions on rare earth minerals, elements that are essential for green technologies. The move would increase China's monopoly on the elements and comes just six months after China cut its target output from rare earth mines by 8.1 percent for 2010 and imposed a moratorium on all new mining licenses until June 30, 2011.China produces 97 percent of the world's supply of rare earth elements, although it has only about 53 percent of the world's rare earth deposits. Demand for the 17 rare earth minerals has tripled in the last decade to 120,000 tons.The elements are indispensable to a range of green energy and high-tech components such as wind turbines, low-energy light bulbs, batteries for hybrid and electric cars, lasers, fiber-optic cables and cell phones.  Each Toyota Prius, for example, uses 25 pounds of rare earth elements. The elements also used for military applications, such as missiles.

    Trade Deficit increases slightly in April - The Census Bureau reports[T]otal April exports of $148.8 billion and imports of $189.1 billion resulted in a goods and services deficit of $40.3 billion, up from $40.0 billion in March, revised. April exports were $1.0 billion less than March exports of $149.8 billion. April imports were $0.8 billion less than March imports of $189.9 billion.The first graph shows the monthly U.S. exports and imports in dollars through April 2010. On a year-over-year basis, exports are up 20% and imports are up 24%. This is an easy comparison because of the collapse in trade at the end of 2008 and into early 2009.  The second graph shows the U.S. trade deficit, with and without petroleum, through April.

    CAFTA: More Proof US is Losing SE Asia to China - It is no big secret that the US is making a ham out of its efforts to engage Southeast Asia. While Barack Obama can't even be bothered to get on board Air Force One for a trip to Indonesia, some others are making a move on what was once an American lake--the Pacific. How lame has America become, you ask? For starters, the United States was overtaken by China as Southeast Asia's third largest trading partner after Japan and the EU in either 2008 or 2009 depending on which figures you use. Worse yet for American trade interests, note that America was already overtaken in the trade volume sweepstakes before the ASEAN-China Free Trade Area came into existence at the start of 2010. With sentiment for trade deals in Congress as good as that towards BP, China will most likely leave America further behind, quixotic "Trans-Pacific Partnership" aside. Below is a table from China's Ministry of Commerce showing how trade volume has Chinese trade has expanded considerably in the first four months of 2010 with ASEAN:

    Tim Geithner and the game of chinese chicken - Always entertaining to see US Treasury secretary Tim Geithner in front of the Senate finance committee, like a beleaguered nephew being harangued by a posse of irascible uncles. And the occasional aunt. Charles Schumer, number 3 Democrat in the Senate, is threatening to bring his currency bill against China in the next two weeks, which would allow US companies to include estimates of currency undervaluation in antidumping and countervailing duty calculations. Whether Schumer actually means this is anybody’s guess - there is a big element of playing chicken with Beijing, threatening a zero option like imposing import restrictions of dubious World Trade Organisation legality while secretly hoping never actually to have to do it. The more interesting part was Geithner’s reaction - he gave the impression of being a man who had given up counselling patience to Congress and was tired of trying to discourage a combative legislative solution. Instead, he seemed to be lining up with the senators against China.

    Geithner signals U.S. patience waning on China currency - Treasury Secretary Timothy Geithner indicated U.S. patience on China's currency policy was wearing thin on Thursday as a key lawmaker warned that he would move soon on legislation that would penalize Chinese goods. Striking his toughest tone on the yuan since delaying a decision in early April on whether to name China a currency manipulator, Geithner told a U.S. Senate hearing Chinese policies had a harmful worldwide impact.
    "A stronger renminbi would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export," he told the Senate Finance Committee. "The time is long past for any Treasury Department to admit publicly what everyone else already knows, that China is manipulating the value of its currency in order to gain an unfair advantage in international trade," said Charles Grassley, the senior Republican Senator on the committee.

    China’s May Exports Rise 48.5%, Property Prices Jump (Bloomberg) -- China’s exports jumped the most in six years and property prices rose at a near-record pace, signs that the economy is withstanding the sovereign-debt crisis in Europe and remains at risk of overheating. Exports gained 48.5 percent in May from a year earlier, the customs bureau said today, more than the 32 percent median estimate in a Bloomberg News survey of 32 economists. None expected such a big gain. Real-estate prices rose 12.4 percent across 70 cities, the statistics bureau said separately. Today’s data “may be the good news before the bad news as the European debt crisis curbs the region’s demand and property- market corrections drag on investment,” said CICC’s Xing Ziqiang, a Beijing-based economist. “Exports may decelerate rapidly later this year and economic growth may slow to around 7.5 percent in the fourth quarter.” - China export surge stirs US anger - A surge in Chinese exports and rising anger in the US Congress will put renewed pressure on China to allow its currency to rise against the US dollar. Chinese trade figures showed exports leaping by 48.5 per cent in May over the year before, way ahead of analysts’ forecasts. Data released in the US showed America’s trade deficit widening slightly in April, with some economists arguing that the improvement in net trade and its contribution to US growth appeared to have stalled.The data gave more ammunition to China’s critics in Congress, who have said they will proceed with legislation to restrict Chinese imports to correct the perceived misalignment of the country’s currency.Thursday, Tim Geithner, Treasury secretary, warned China that congressional anger could result in rapid action. “I think the strength of the sentiment in Congress is overwhelmingly strong, it’s bipartisan and it reflects how important this is to the United States,” he told the Senate finance committee

    Back to normal - EARLIER this week, I defended the idea that there had been progress in global rebalancing through the crisis. And that's true. But rebalancing isn't going to happen overnight, and it isn't going to be easy. Recent trouble in Europe has boosted the dollar and made the world even more reliant on American demand. And the effects are showing. In China: Figures on China's exports may have been leaked yesterday but the numbers are still very striking. An annual export growth rate of 48.5% pushed the May trade surplus to $19.5 billion, up from just $1.7 billion in April and far larger than the consensus forecast of $8.2 billion (according to the Royal Bank of Canada). And in America: By itself, this temporary return to form isn't a big threat to global recovery. The big risk is that the pressure on American producers will generate a protectionist backlash. That's what the Peterson Institute's Fred Bergsten argued in a recent Financial Times piece, and the willingness of administration officials to be more assertive on the exchange rate issue offers some support to the idea.

    As China’s Wages Rise, Export Prices Could Follow - The cost of doing business in China is going up.  Coastal factories are increasing hourly payments to workers. Local governments are raising minimum wage standards. And if China allows its currency, the renminbi, to appreciate against the United States dollar later this year, as many economists are predicting, the relative cost of manufacturing in China will almost certainly rise.  The salaries of factory workers in China are still low compared to those in the United States and Europe: the hourly wage in southern China is only about 75 cents an hour. But economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones.  “For a long time, China has been the anchor of global disinflation,”  “But this may be the beginning of the end of an era.”

    Is China in a housing bubble? Until November or December of last year, when high housing prices started to be a focus of popular anger, the Chinese government was really touting construction and real estate as key drivers of the economy. That made sense: Construction employs a lot of labor, and particularly unskilled labor. But in the process, a situation took hold where you have people building projects and prices are going higher but you've also got slumping rents and high vacancy. You have entire office buildings and malls and luxury residences with no lights on. They're completely unoccupied. There are different dynamics in the commercial sector and the residential sector. The commercial sector is a classic leveraged bubble: Loans went out through state-owned banks, many of them to state-owned enterprises, and people built these projects. A lot of those loans are probably not good. The collateral beneath them is probably not good. And it's not just Beijing and Shanghai. In some ways, places like b Beijing and Shanghai can absorb it more because they'll have future growth. But the smaller cities are much more vulnerable to bubbles. Residential real estate is a more complex story

    Dissecting China's Housing Market - Multimedia – WSJ

    Kroeber to Faber: China is very big, Marc…One of the most hotly debated topics among emerging markets watchers is China’s economic direction – both in the long and short-term. Indeed, says Hong Kong-based research house Gavekal in a Wednesday note, in the US and Europe, ‘it seems that most of the people we talk to are firm partisans of the Jim Chanos line that the Chinese economy is on a “treadmill to hell”.’ Gavekal’s long-time China commentator Arthur Kroeber and investor/commentator Marc “Dr GloomBoomDoom” Faber locked verbal chopsticks in a video debate on the question of whether China is overheating. The occasion was to launch Reuters’ new multimedia website Reuters Insider.Kroeber observed that recent Chinese labour unrest could only force companies to improve wages and conditions, and therefore will help shift the economy towards greater consumption.A litte more cheekily, perhaps, came Kroeber’s low-key response to Faber’s typically bleak observation that China was an accident waiting to happen “You have no idea how big China is,” Kroeber rejoindered.

    China: leaked trade data revives currency debate - There is good news and bad news for the Chinese authorities in the leaked economic data for May published today by Reuters which have sent markets around the world into a flurry of excitement. The good news is that there are few signs Europe’s financial crisis has had much impact on China’s exports, which Reuters reported rose by 50 per cent last month, year-on-year, well above a forecast increase of 30 per cent. The bad news is that inflation was higher again at 3.1 per cent, according to Reuters, breaking the government’s 3 per cent annual target, while another month of heavy net bank lending of Rmb630bn could suggest the authorities are struggling to rein in loose monetary policy.

    China’s PBOC Says Debt Crisis, Trade to Affect Growth(Bloomberg) -- China’s economic growth will be affected by the international sovereign debt crisis and trade frictions, the People’s Bank of China said.The world’s fastest-growing major economy still doesn’t have a “solid” recovery in domestic demand, and has to sustain consumer spending growth, the nation’s central bank said in a statement posted on its website today. Governments worldwide exiting stimulus spending will also impact its growth, it said.Chinese policy makers are evaluating the impact of the European debt crisis, which flared just as China unleashed measures to damp surging property prices and stepped up liquidity control.

  • China's Foul Assets, Fouler Yet_Andy Xie_Caixin - Powerful interest groups have paralyzed China's macro policy, with ominous long-term consequences. Local governments consider high land prices their lifeline. State-owned enterprises don't want interest rates to rise. Exporters are vehemently against currency appreciation. China's macro policies have been reduced to psychotherapy, relying on sound bites and small technical moves to scare speculators. In the meantime, inflation continues to pick up momentum. Unless the central government bites the bullet and makes choices, the economy might experience a disruptive adjustment in the foreseeable future. The first key point is that local governments have become dependent on the property sector for revenue as profits from manufacturing decline and the need to spend increases. Attracting industry has been the main means of economic development and fiscal revenue for two decades. Coastal provinces grew rich by nurturing export-oriented industries. But those economics have changed in the past five years. Rising costs have sharply curtailed manufacturers' profits, and most local governments now offer subsidies to attract industries. The real revenue game has shifted to property.

    China Said to Consider Controls on Yuan Forward Transactions…China is considering controls on yuan forward transactions to deter investors from betting on an end to its 23-month peg to the dollar, according to two people familiar with the matter. The State Administration of Foreign Exchange, the nation’s top currency regulator, is seeking opinions from banks about the policy change, said the people, who asked not to be identified as the consultations aren’t public. The rule may raise the minimum requirement for a bank’s foreign-exchange holdings if contracts obliging them to deliver yuan to clients in the future exceed those in which they agree to receive the local currency.  China has been seeking to limit inflows of capital betting on yuan appreciation, as central bank Governor Zhou Xiaochuan prepares to end a link to the dollar adopted in July 2008 to protect exporters during the financial crisis. Banks are currently required to hold enough foreign exchange to meet commitments at the day’s end. Under the new system, they may have to hold more than needed, the people said.

    Chinese Labor Markets Tight Since Last Year - Yves Smith - The reaction in the Western media to the doubling of entry-level salaries at the Foxconn factories in Shenzhen was as if it was a change in the world order. Chinese workers treated as if they have bargaining power! Honda increasing wages 24%! Beijing increasing municipal pay 20%! Increases like this do not come out of nowhere. We had pointed out, even by the notoriously poor quality of Chinese statistics, inflation is particularly difficult to guesstimate, and there was good reason to think it was running at a faster pace than most believed.  Chinese labor markets have been intermittently reported to be tight, but that factoid did not seem to penetrate the consciousness of many observers (and in fairness, it could, like the GDP figures, have been exaggerated for political purposes). The Sydney Morning Herald provides some context:The story of China’s rapidly rising wages and diminishing pool of surplus agricultural workers is well known among a small group of Chinese scholars centred on Professor Cai Fang, director of population and labour economics at the Chinese Academy of Social Sciences...

    China's pvt sector provides 90 pct of jobs - Over 150 million people in China found employment in the first few months of 2010 and 90 per cent of these jobs were provided by the private sector, a Chinese cabinet minister has said.  At the end of this year's first quarter, private firms employed more than 152 million people, and more than 700,000 laid-off workers in 2009 found jobs again in the private sector, Zhou Bohua, minister of state administration for industry and commerce, was quoted as saying by the Global Times.  Meanwhile, Zhong Youping, vice minister, said China had 7.55 million private companies at the end of March this year, up almost 14 per cent from the same period last year, with a total registered capital exceeding 15 trillion yuan ($2.2 trillion).

    Chinese labour unrest spreads - Chinese labour protests that have forced shutdowns at foreign factories have spread beyond south China’s industrial heartland, posing a dangerous new challenge for Beijing. More FT video. Workers at a Taiwanese machinery factory outside Shanghai clashed with police on Tuesday, leaving about 50 protesters injured. The confrontation represented an escalation of recent industrial action in the country, which until this week had been largely peaceful and concentrated in the southern province of Guangdong. The violence at KOK International in Kunshan, a factory town in southern Jiangsu province, came just a day after Honda struggled to contain the fallout from its second strike in as many weeks. That strike, at Foshan Fengfu Autoparts, a joint venture majority held by a Honda subsidiary, forced the Japanese carmaker to suspend production at its car assembly plants in nearby Guangzhou, the capital of Guangdong province

    China’s Rising Wages Won’t Deter Investment, Xie Says – (Bloomberg) -- A doubling of China’s manufacturing wages over the next five years won’t deter foreign investment because Asian rivals such as India and Indonesia lack comparable infrastructure, former Morgan Stanley economist Andy Xie said. Labor strikes and worker suicides have forced companies ranging from Foxconn Technology Group to Honda Motor Co. to raise salaries as local governments announce increases to minimum pay levels. Demands for higher pay are fast becoming an issue in China and companies need to get used to it, said Jun Ma, an economist at Deutsche Bank AG.“China’s workers are getting a break for the first time,” Xie, who is now an independent economist, said on Bloomberg Television in Hong Kong. The world’s third-biggest economy remains in a “sweet spot” and will continue to be the most popular hub for foreign manufacturers on the nation’s superior infrastructure, he said.

    Changes in China Could Raise Prices - NYTimes - The cost of doing business in China is going up. Coastal factories are raising salaries, local governments are hiking minimum wage standards and if China allows its currency, the renminbi, to appreciate against the U.S. dollar later this year, as many economists are predicting, the cost of manufacturing in China will almost certainly rise. Although the salaries of factory workers in China are still low compared to those in the United States and Europe (the minimum wage in southern China is close to $125 a month), economists say the changes will eventually ripple through the global economy, driving up the prices of everything from T-shirts and sneakers to computer servers and smart phones. “For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse, referring to how the two decade-long shift to manufacturing in China helped many global companies lower costs and prices. “But this may be the beginning of the end of an era.”

    China's farm produce prices drop five weeks in a row - Farm produce prices in China's 36 large and medium-sized cities have fallen for five consecutive weeks, the Ministry of Commerce said Tuesday.  In the week ending June 6, farm produce prices dropped 0.6 percent in those cities from a week earlier, said a statement posted on the ministry's website. Vegetable prices dropped sharply last week with the wholesale prices of 18 kinds of vegetables tumbling 7 percent from a week earlier, the statement said.  Food prices account for 34 percent of the weighting in China's consumer price index (CPI), a major gauge of inflation

    Who will be the next China? - This morning the New York Times is the latest to ring in with an article about rising wages in China:This is not a new argument. More than four years ago, BusinessWeek published a story with the headline, "How Rising Wages Are Changing the Game In China." But recent events, like salary hikes at suicide-prone Foxconn and strikes at Honda plants, are again putting the issue into the spotlight.This is good news for workers in China, who have long been stuck between the rock of low wages and the hard place of increasing living costs. But could there be broader implications? Could this prompt the world's corporations to start looking elsewhere for cheap labor? A recent WSJ dispatch argues that the migration is already underway.

    World-Wide Hiring Set to Pick Up - A survey of employers showed stronger hiring plans in 30 out of 36 countries and territories for the third quarter, compared to a year ago. Compared to the previous quarter, 23 countries predicted more hiring, according to Manpower Inc.’s employment outlook survey released Tuesday.Taiwan led the pack with net employment projections increasing 27 points from the previous year. Net employment subtracts the portion of employers decreasing hiring from the portion who are increasing employment.“Optimism among Taiwanese employers is underpinned by strong forecasts in the manufacturing industry sector where nearly half of all employers surveyed anticipate adding to their staff in the next three months,” the report states. India, China, Peru and Australia also expect strong job growth.

    Universities in Africa: the forgotten link? - The working conditions are very poor in many African universities. I had a chance a few days ago to attend a class at The University of Lome, in Togo. My high school buddy, Zakari, is an assistant professor of mathematics there. With a meager salary, he has a daunting task to accomplish every semester. When he started teaching over a year ago, he was assigned to share an office with three tenured professors and another assistant professor. There is one computer and one printer to share, no copier, and no internet. Zakari teaches four classes this term, with about 18 instructional hours per week. This year, he says, he has graded over 7000 exams already, and the academic year is yet to finish.

    Argentina unveils tighter controls on dollar buys - Argentina’s government has unveiled stricter controls on dollar purchases in what it says is a crackdown on money laundering and tax evasion. Though people will still be able to buy $2m a month without justifying their purchases, the idea is to eliminate cash transactions and use tax data to scrutinise operations. Here’s what economist Miguel Kiguel had to say:In line with … higher demand and with the fear of losing reserves, it has emerged in the local media that the Central Bank is going to announce new regulatory measures for the currency market. We do not believe that these stricter controls will be effective to reduce capital flight but they could be taken as a sign that the government is willing to increase controls to avoid losing reserves. However, it is difficult for these stricter controls to prevent capital flight and it is more likely that they will end up an incentive for the informal market, increasing the spread between the informal and official dollar.

    Declining Latin American inequality: Market forces or state action? - VoxEU - Income inequality in Latin America has declined steadily in recent years, after rising throughout the 1990s. This column presents one of the first attempts to understand why, exploring the forces behind a diminished earnings gap and increased government transfers. It says that that further redistribution would benefit both equality and growth.

    Euro Debt Crisis to Slow Gulf Currency Plans, Al-Khalifa Says - The four Persian Gulf states planning a single currency will temporarily halt their preparations because of the debt crisis facing the euro region, said Sheikh Mohammed bin Essa al-Khalifa, chief executive of Bahrain’s Economic Development Board. Saudi Arabia, Kuwait, Qatar and Bahrain took an initial step toward a single currency on March 30 when their central bank governors held the first meeting of the Monetary Council, a precursor to a united central bank. Kuwait’s dinar is pegged to a basket of currencies while the other three countries have a peg to the dollar.

    Asian Single-Currency Plan Must Go on Despite Euro, ADB Says (Bloomberg) -- Asia needs to increase economic integration and loosen trade and investment controls to pave the way for a single currency, according to the Asian Development Bank Institute. The region may be the world’s largest economic bloc by 2050 and will need a shared currency to bring down transaction costs and protect local policy from outside influence, Masahiro Kawai, head of the Tokyo-based institute, said in an interview on June 4. Plans for a common exchange rate must go head even as Europe faces challenges with the decade-old euro, he said. “Europe’s crisis is giving Asia a lot of lessons but it doesn’t prevent Asia from seeking a monetary union,” Kawai said. “Instead, it shows that to achieve monetary union, you need lots of preparation. First is to make sure the economies are integrated. Barriers must come down so that investment, trade, finance and people can move freely across economies.”

    Economy surpasses estimate, grows 5% | The Japan Times - The economy expanded more than initially estimated in the first quarter, driven by exports and consumer spending, which was revised upward, the government said Thursday.  Gross domestic product rose at an annualized 5 percent rate in the three months that ended March 31, faster than the 4.9 percent that was estimated, the Cabinet Office said. "The economic recovery is starting to spread," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute. "So it's not just fast growth, it's quality growth as well."The median estimate in a survey of 18 economists was for 4.2 percent growth. The expansion was better than all of the economists' forecasts because a downward revision in business spending was smaller than they anticipated.

    Koo: Japan Nears End of 25-Year (!) Balance-Sheet Recession (scribd embed) It only took … oooh, 2.5 decades, but Richard Koo at Nomura says Japan is finally nearing the other side of its endless balance-sheet recession. The U.S. is at year two of its own credit unwind, so if you see parallels, as many (including me) do, we have a long slog ahead.

    Japan PM: 'risk of collapse' from debt mountain - Japan's new Prime Minister Naoto Kan on Friday pledged a fiscal policy overhaul to reduce the country's massive public debt mountain, warning of a Greece-style meltdown. "Our country's outstanding public debt is huge," the centre-left leader said in his first policy address since taking office Tuesday. "Our public finances have become the worst of any developed country." After decades of stimulus spending and feeble tax receipts, Japan's public debt is now nearly double its gross domestic product, forcing the government to issue ever more bonds to pay for hefty outlays. "It is difficult to continue our fiscal policies by heavily relying on the issuance of government bonds," said Kan, the former finance minister.

    InfoViewer: The name is Bond - Japanese government bond - The name is Bond, Japanese government bond. Stuck with the tricky job of making debt issued by the world's most indebted government an attractive investment prospect, Japan's ministry of finance has hit upon a novel sales pitch.  A high-profile advertising campaign to persuade millions of small-time investors to buy the country's sovereign debt has gone for raw sex appeal: "Women have a thing for men who own JGBs!! . . . right!?" Owning bonds might not be everyone's idea of the way to a woman's heart but, according to the finance ministry advert, women prefer men who invest insolid government debt because they are sensible investors. The campaign is an attempt by Japan's governing Democratic party to clean up the fiscal mess bequeathed by the free-spending Liberal Democratic party, which dominated power in the country for half a century until last August.

    This Is Neither an Offer to Sell nor a Solicitation of an Offer to Buy Japanese Government Securities; Such an Offer Can Be Made Only in the Prospectus...I know that I have said that more than half of the job of a U.S. Treasury Secretary is that of being a bond salesman. But Tim Geithner has a long way to go before he reaches the level of the bond sales campaigns of the Japanese government: (what are you looking for in a man campaign)

    Y16.7 trillion ($182 billion) Mistake by Deutsche Bank Nearly Sinks Osaka Exchange - The international stock markets dodged a bullet this week. According to news reports like this one in Reuters, Deutsche Bank's proprietary trading unit in Japan mistakenly placed sell orders of Y16.7 trillion ($182 billion) at the Osaka Securities Exchange on Tuesday when it first opened. The reason was a software problem. The Sydney Morning Herald quotes a spokesperson for Deutsche Bank's as saying, "There was a software glitch in our automated trading system, and the consequence of the error was that a number of trades were repeatedly sent to the exchange... The error was recognised and we immediately placed cancel orders on 99.7 per cent of the trade. There is an issue somewhere in the software that needs to be identified." A software "issue somewhere"? Not exactly a confidence building statement, is it.

    Lesson's from Japan's reversal of unconventional monetary policy - IMF paper - In responding to the global crisis, central banks in several advanced economies ventured beyond traditional monetary policy. A variety of unorthodox measures, including purchases of public and private assets, have significantly enlarged their balance sheets. As recoveries take hold, focus will increasingly shift from countering the Great Recession to orchestrating an exit and returning to a more normal monetary framework. Five years ago, as its economy recovered from a severe financial crisis, Japan attempted just such an exit. This note revisits the Bank of Japan’s experience and draws potential lessons for managing an orderly exit today, with a focus on technical aspects, practicalities, and communication strategies. While the nature of the assets acquired during the present crisis could pose additional complications, parts of Japan’s arsenal—communication, flexibility, a sufficient set of policy tools and a strategy for using them, safeguards against potential losses, the revival of risk appetite through decisive restructuring of balance sheets, and refinements to the monetary framework upon exit—also could be important this time around.

    Never again - IN HIS Financial Times column today Stephen Roach praises Asia for learning the lessons of its 1997-98 crisis “very well”. Too well, I’d say. Mr Roach notes Asia boosted its foreign exchange reserves to $5 trillion in the wake of its 1990s crisis, thereby insulating itself from the global demand shock that followed Lehman Brothers’ failure. I have a different interpretation. Asia’s reaction to its own crisis helped create this crisis. It accumulated far more reserves than it needed to deal with balance of payments shocks, especially since by moving to floating currencies they’d significantly minimised the chances of such shocks. Those reserves had to be invested somewhere and that turned out to be developed nation bond markets, leading to artificially low interest rates and a corresponding build-up in leverage and risk.Did all those reserves actually protect Asia from the latest crisis? Hardly. Emerging Asia’s reserves went up, not down, between 2007 and 2010. Mr Roach himself notes that Asia was hurt by a loss of external demand, not capital flight. By that interpretation, I’d say Asia’s mercantilist pursuit of export-led growth left it more, not less, vulnerable to the latest shock.

    China’s not the answer for the Eurozone by Rebecca Wilder - The chart below illustrates the dynamics of annual export growth to China for the top 6 countries of the Eurozone measured by GDP in 2009: Germany, France, Italy, Spain, Netherlands, and Belgium. Presumably, the bulk of China’s export demand would flow to these countries.S ince the Eurozone's annual export growth to China bottomed out in May 2009, many of the Eurozone economies (some not shown in chart) have registered, on average, double-digit monthly export growth to China: But 75% of the Eurozone’s exports to China flow from just three countries: Germany, 54%, France, 11%, and Italy 10% (average Jan 2009 – Feb 2010 and see table below). This makes sense, given that Germany, France, and Italy are the three largest countries in the Eurozone. However, compared to the size of their economies, Belgium and Germany are the true beneficiaries of China’s external demand, not Spain, France, nor Italy. China is not the answer: not for Europe; not for the US; and not for the UK.

    Greek crisis may spill over to dampen Indian exports: Study -A new study by the Federation of Indian Chambers of Commerce and Industry (FICCI) has expressed concern that the sovereign debt crisis of Greece may spread over to other European nations which could have catastrophic impact on Indian exports. The Quick Survey by FICCI, eliciting the views of a group of economists, is of the view that there is a good chance that other vulnerable economies in the region such as Portugal, Spain and Ireland may face a situation similar to that of Greece given their already weak public finances. A majority of the economists have also pointed out that countries like France could also come under some pressure as the countries' banking sectors have large exposure to some of the above mentioned countries.

    Can Emerging Markets Save the World Economy? - Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy. ...So it is important to know whether this breakout growth phase is sustainable. The answer comes in two parts. One depends on emerging economies’ ability to manage their own success; the other relates to the extent to which the global economy can accommodate this success. The answer to the first question is reassuring; the answer to the second is not.

    The real vultures vs the eurozone - Some of the more serious euro sceptics have themselves served on committees of the International Swaps and Derivatives Association. (By the way, a group of vultures is officially referred to as a “committee”). They know that if you buy protection on, say, Greece, which is CDS-speak for going short, the country could reschedule its debt without there being a formal declaration of default, or “credit event”.See, under the ISDA rules, before you get to collect on that “naked short sale” on Greek sovereign CDS, one of the association’s “Determination Committees” needs to rule that there has been a “credit event”, or default. You can be sure the committees will be heavily salted with people who are very, very disinclined to anger major governments. By “major”, I mean European, American, or Japanese. So Greece could have a “voluntary” exchange offer that resulted in a one-third or one-half cut in the value of its debt, and you, naked short, would hold a document worth nothing. Real vultures knew that before chancellor Merkel violated the game laws by shooting at them. They sold their CDS hedges to the usual hapless bank bureaucrats months ago

    Panicked European banks flood ECB with record deposits - Overnight deposits at the European Central Bank (ECB), which represent European banks losing confidence in the short-term creditworthiness of their peers, have hit a record high. This is shown by the Alphaville graphic below.This is a worsening of one of the three signs that the European bailout has failed. The other two being the collapsing euro to record long-term lows, and credit default swap spreads for Eurozone periphery nations rising back towards new record highs.

    Which Banks Hold Europe’s Troubled Loans? - NYTimes - IT’S a $2.6 trillion mystery. That’s the amount that foreign banks and other financial companies have lent to public and private institutions in Greece, Spain and Portugal, three countries so mired in economic troubles that analysts and investors assume that a significant portion of that mountain of debt may never be repaid.  The problem is, alas, that no one — not investors, not regulators, not even bankers themselves — knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe’s already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks — which appear to hold more than half of that $2.6 trillion in debt — nearly stopped lending money to one another.

    On The Trail Of Europe's "Mysterious" $2.6 Trillion In Toxic Debt - The NYT has a pretty good article about the "mystery" of Europe mega toxic loans, which amount to $2.6 trillion just to Greece, Spain and Portugal, in that all attempts to find out just who is on the hook for all this debt have apparently yielded no results. We disagree: this is a topic that has been beaten to death before on ZH, and it is all too well known that France and Germany will go bust overnight if PIIGS debt is allowed to be marked even halfway to market pro forma for governmental bailouts, on the banks' balance sheets. Throw in Austria and Italy if the Hungarian crisis (amusingly, the Hungarian government is now scrambling to undo the harm it caused with its fast and loose words of caution last week, but too late - it has now lost all credibility) spreads to Eastern Europe, and the mystery is solved. But at least the NYT has some pretty charts.

    German Unions ‘Mobilize’ Resistance to Merkel’s Budget Cuts (Bloomberg) -- Germany’s main labor federation said it will mobilize protests against Chancellor Angela Merkel’s planned budget cuts, which it criticized as unfair to the poor and jobless.Opposition parties, led by the Social Democrats, also denounced the four-year program to trim 81.6 billion euros ($97.6 billion) in federal spending between 2011 and 2014, presented by Merkel yesterday in a bid to bolster the euro.“This misguided savings package won’t go without an appropriate response by the unions,” Michael Sommer, head of the DGB labor federation, was cited as saying “We will also mobilize against the cuts in government jobs. Reaction to Merkel’s plan reflects widening resistance to austerity measures as European governments try to reduce deficits and debt that are undermining the euro. Spanish Prime Minister Jose Luis Rodriguez Zapatero is bracing for the biggest strike since his 2004 election and Greece saw violent protests in which three bank employees died in May.

    Greek Default Seen by Almost 75% in Poll Doubtful About Trichet (Bloomberg) -- Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet, with 73 percent calling a default by Greece likely. Only 23 percent say they expect the region’s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. More than 40 percent say Greece is likely to abandon the euro.

    Banks With State Debt Ignore Not-If-But-When Default (Bloomberg) -- European banking shares indicate a Greek debt default may be just a matter of time. Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July. A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer, Deutsche Bank AG’s London-based chief economist.

    BBC News – Hungary debt fears worry markets - The value of Hungary's currency has fallen sharply against the euro on fears the country could be facing a Greek-style debt crisis.  "In Hungary, the previous [Socialist] government falsified data," said a spokesman for Hungary's Prime Minister, Viktor Orban.  "In Greece, they also falsified data. In Greece the moment of truth has arrived. Hungary is still before that." The Hungarian currency, the forint, fell by 5.6% against the euro.  The cost of insuring the country's debt, via so-called credit default swaps, also jumped by one percentage point.

    "Hungary: Never mind - The furious backpedaling continues ...From the WSJ: Hungary Seeks to Reassure Lenders and Investors Hungary's new cabinet huddled in an emergency session over the weekend to devise an economic plan aimed at restoring confidence in the nation's creditworthiness, as the government backtracked on officials' earlier comments that the country could default on its debts.From Reuters: Analysis: Hungary faces struggle to regain trust of markets Hungary is likely to take months to regain the trust of financial markets after politicians in its new government made controversial comments ...

    Hungary: The Hungarian view - Was the Hungary-related market swoon on Friday the result of misguided naivete on the part of investors who really have no idea how to parse statements from Hungarian politicians? Erik D’Amato, in Budapest, certainly thinks so: In what must be one of the craziest episodes I’ve witnessed in almost 20 years covering financial markets, a global mini-meltdown has been triggered or at least stoked by people listening to – and taking seriously – the ramblings of a few Hungarian politicians…And all because people foolishly assumed that some Hungarian politicians might be telling the truth!  The point here is that the incoming government ran on a platform of fiscal easing: that’s usually a good way of getting elected. And so in order to make the fiscal cuts necessary to remain compliant with EU and IMF conditionality, they had to get very serious very quickly — in public — about the severity of the government’s financial problems. New to government, they went too far.

    Hungary government says aims to meet 2010 deficit goal - Hungary's government said on Saturday it still aimed to meet this year's deficit target, as it sought to draw a line under "exaggerated" talk of a possible Greek-style debt crisis that had unnerved markets a day earlier. State secretary Mihaly Varga, leading a review of the country's public finances, said Hungary's previous socialist governments had hidden the true extent of the fiscal shortfall, and that additional measures would be needed to reach the 3.8 percent of GDP goal agreed with international lenders.Analysts welcomed the government's intention to meet the target, which they said should calm markets somewhat on Monday, although details were needed and any tax cuts should be offset by spending cuts. The market consensus for this year's deficit is 5 percent.

    Who’s exposed to Hungary -Hungary may be frantically trying to backpedal its way out of the eyebrow-raising, and market-moving, comments made by some of its politicians and spokespeople last week.But that hasn’t stopped JP Morgan from publishing a table of which European banks are most exposed to the country. Fittingly from an Austro-Hungarian historical perspective, and unsurprisingly given what we learned in last-year’s eastern Europe scare, Austrian banks appear at the top of the list:  Nevertheless, given those new, reassuring, comments from Hungarian officials, JPM says:All in all, the situation should be broadly contained after the initial concerns and some of the banks that have exposure to Hungary and that suffered last week should reasonably see some relief, although we believe it is fair to say that investors will remain very wary, given last week’s seriously alarming messages. Indeed CEE region may attract further scrutiny by the market having been so far less touched by the events and concerns that have affected the Euro area.

    BBC News – Spanish public sector to strike against austerity plan - Spanish public sector workers have held a day-long strike in protest against an average 5% cut in pay that comes into effect this month. The cuts are part of a government austerity package aimed at reducing the country's budget deficit, swollen by almost two years of recession. Earlier, several thousand protesters gathered at Madrid's finance ministry blowing horns and chanting slogans. Heavy rain hampered an evening rally through the city's streets.  Spanish unions said 75-80% of public sector workers had joined the day-long strike.

  • Spain Hit by Strike Over Austerity Measures - NYTimes - Spanish public workers went on strike on Tuesday against a cut in their wages in what could be the first of several union-led protests against the government’s latest austerity measures. The strike reduced hospital care, mail distribution and other public services to a minimum, but did not cause a nationwide paralysis. Trade unions said that 75 percent of the country’s 2.5 million public workers had gone on strike — a number that was contested by the government, which put the level of participation at about 11.85 percent.  Reports suggested that some regions were far more affected than others, particularly Catalonia, where the transport network was disrupted and protesters briefly cut off the city’s main thoroughfare by burning tires. The public sector strike came on top of a separate protest by truck drivers angered by the cost of diesel fuel, which has notably hit traffic at the border with France.

    Bund Spread With Spain Nears Danger Zone (Bloomberg) -- The premium investors receive for holding Spain’s debt compared with Germany’s has risen to near a level that may trigger another flight to quality, according to Citigroup Inc. The difference in yield between the nations’ 10-year securities widened today to 2.04 percentage points, a level not seen since before the introduction of the euro in 1999. A close this week of 1.98 percentage points will signal renewed sovereign-debt concern in Europe, according to Tom Fitzpatrick, an analyst in New York at Citigroup, one of the 18 primary dealers required to bid at Treasury auctions.

    Morgan Stanley's Peters sees Spain risk - (Reuters) - The European debt crisis cannot be reined in until Greece restructures its debt, something it must do this year, a veteran bond analyst said on Monday. Even so, Spain, as the most sizable European sovereign debt market that has recently come under pressure, is the euro zone's biggest risk, said Greg Peters, global head of fixed income and economic research with Morgan Stanley. Greece is "basically socializing the problem and dragging everyone else down with them," he said, adding that Greece could restructure by the end of the year. But ultimately, Peters said, Spain is what matters. He also said he is concerned about France.Spain "has been the linchpin," he said. Greece and Portugal "don't matter as much in the scheme of things. Spain does." Peters said his ultimate concern is that the European crisis could spread to Britain and possibly the United States.

    Spain: labor market reform talks fail – CNBC - Spanish unions and employers failed to agree on labor market reforms deemed crucial for resurrecting the economy and allaying jitters over its public finances, the government said Thursday as wary investors again sent its borrowing costs soaring. The failure of the 11-hour negotiation that broke up just before dawn means the government will now propose its own plan for changing the rules that govern Spain's labor market. The negotiations were aimed at creating consensus on reforms to encourage companies to hire, resurrect an economy saddled with a 20 percent jobless rate and reassure markets that Spain can trim its heavy deficit and debt loads.Spain's labor laws have been widely criticized as rigid and discouraging companies from taking on workers. For instance, Spanish workers who are laid off get severance pay of as much 45 days per year worked, among the highest levels in Europe.

    Spanish reform talks fail, borrowing costs rise - Spanish unions and employers failed to agree on labor market reforms deemed crucial for resurrecting the economy and allaying jitters over its public finances, the government said Thursday as wary investors again sent its borrowing costs soaring.  The failure of the 11-hour negotiation that broke up just before dawn means the government will now propose its own plan for changing the rules that govern Spain's labor market. The negotiations were aimed at creating consensus on reforms to encourage companies to hire, resurrect an economy saddled with a 20 percent jobless rate and reassure markets that Spain can trim its heavy deficit and debt loads.

    Trouble in the Spanish CDS market » "Los inversores piden mayor prima por asegurar el riesgo de España a un año que a tres años." In other words, Spain is riskier in the next year than it is three years from now, just like Greece and Portugal.  That means the market thinks things will be coming to a head.  Some very good pictures of the prices, and further commentary (in Spanish), is here.  The article also states: En cualquier caso, este indicador significa que el mercado, ahora sí, nos sitúa en el mismo “subgrupo” que Grecia y Portugal. I don't need to translate that one for you.

    Walls (European Union, Kleptocracy, Relocalization) - According to Simon Johnson at Baseline Scenario Eurozone commentators in their hysteria have been calling Spain their “Maginot Line”, meaning that although they could possibly let Greece and Ireland go, the EU has to either prop up Spain’s tottering debt or be destroyed itself. They don’t seem to understand the “Maginot” reference very well, if they think that’s a ringing call and an auspicious portent. Historically the Maginot Line was the physically and financially massive, ponderous, immovable, inflexible wall the French built along their border with Germany. When the war came things didn’t happen the way the French guaranteed it would. So what can we learn from this? What does it mean to cite the “Maginot mentality”?

    The demographics of housing bubbles - I  like Landon Thomas’s profile of Ed Hugh, and I love the way that Thomas distilled one key argument:“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more.” …Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries.By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust.

    Greek-style budget fraud investigation in Bulgaria - New Greek-style budgetary fraud is possibly looming in Europe, as the European Commission announced it was sending an exploratory mission to Bulgaria to assess the reliability of the country's statistics, which were significantly revised in a short period of time "from a balanced budget to a deficit".Economic and Financial Affairs Commissioner Olli Rehn announced on Tuesday (8 June) at a press conference following the Ecofin Council in Luxembourg that the Commission has "doubts" about the Bulgarian budgetary statistics and that a "methodological mission" will be sent to Sofia shortly to assess the situation. The Commission's concerns are related to two aspects. First, Brussels regrets having "only belatedly been informed by the Bulgarian authorities about sizeable revisions in the budgetary outlook," Rehn's spokesperson told journalists in Brussels yesterday

    Romania's repeated rejection of tenders could send a negative signal to the markets-Source - A sale of one-year sovereign debt by Romania failed on Monday as investors spooked by a possible fiscal crisis in neighbouring Hungary and worries over domestic reforms sought yields the government was unwilling to pay. The setback marked the third time in a month that the finance ministry has rejected all bids in a bond tender, indicating increasing doubts about Romania's efforts to cut public spending and ensure flows IMF-led aid to kick-start its economy. Romania rejected all bids in the tender, which was for 1.2 billion lei ($340 million) of 364-day treasury bills. An analyst said the market might have been looking for yields of around 7 percent.

    Eurozone Lethal Zone - Over the past week the calls for calm were throttled into incoherency by new waves of bad news. Redolent of Greece last fall, Hungary announced that its impending budget deficits will be worse than expected. This resounded ominously among the similarly precarious budgetary perches throughout Eastern Europe. It’s unclear how exposed Austrian banks are. (By which I mean, whether they’re far more insolvent than we previously thought. Of course, all the banks are insolvent.) Meanwhile Ireland, already deeply enmeshed in bailouts and “austerity”, indicated that its own ongoing bailout will soon need another bailout. But all of us who scoffed at there being any such thing as a final, sustainable Greek bailout were of course just being silly, right? The Greek and Icelandic protestors who are in combat against embarking upon the bailout-austerity path in the first place are now proven correct. They saw what happened to Latvia, how the austerity immolation is burning the people alive while the bailout helped the banksters only. Now they see the same thing playing out in Ireland. Keep fighting. Meanwhile the speculators, the finance terrorists, are extending their attacks from the Mediterranean countries to Belgium and France itself. Suddenly all ”safe havens” other than the dollar itself don’t look so safe.

    Oh no, another stability pact beckons - First drafts of the new governance procedures are circulating, and undershoot even the lowest expectations. No real agenda on economic governance, except stronger sanctions; Ecofin likely to agree on European stability fund, after France and Germany finally agreed; Funds will be lend at market conditions, no authorisation required from national parliaments; Also today, Angela Merkel and Nicolas Sarkozy are to stitch up their differences over diner in Berlin tonight; Germany close to agreement on austerity programme with severe cuts in public spending; G20 supports drive for austerity; Euro fell under $1.20 amid fears that debt crisis spread throughout Europe; Paul Krugman predicts lost decade for the world economy; Angela Merkel might not get her presidential candidate through; Wolfgang Munchau argues that central bank transparency has become crucial again; The procedure for enhanced cooperation, meanwhile, has been evoked for the first time, not by finance ministers but by justice ministers for common rules on divorce.

    Italy is the biggest threat to the euro, says Cowley - Italy, not Greece, is the main threat to the eurozone says global bond star Stewart Cowley, who also warns on the future of the dollar, believing the yen could become the world's safe haven currency. Cowley, who is head of fixed income at Old Mutual Asset Managers, thinks Greece is too insignificant to threaten the future of the euro.I'n actual money terms, countries such as Spain, Portugal and Ireland are but nothing compared to the gargantuan needs of Italy,' Cowley said. 'Each year Italians need to pay out (or borrow) over €35 billion just to meet their interest payments. And yet Italy has a debt to GDP ratio of 118% (second only to Greece’s 125%) and is much bigger in actual size. For instance, Italy has a bond market as big as that of Germany. We seem to have lost our sense of proportion as to where the real problem lies in Europe.'

    Italy's Financial Resilience 'Eroding, Fragile,' Unicredit Says (Bloomberg) -- Italy’s greater resilience to the sovereign-debt crisis than nations like Greece and Portugal is “eroding and fragile,” and the nation must step up fiscal reforms, Unicredit SpA said.“Italy still is different than the rest of the periphery in some important ways, but the difference is eroding, and the trend must be reversed now,” Unicredit analysts including London-based Marco Annunziata said in an e-mailed note. Italy is the “‘swing factor’ in the current European crisis, as the largest of the vulnerable countries and the most vulnerable of the large,” they wrote.Though Italy’s government has made a “step in the right direction” by cutting spending rather than raising taxes, the nation must speed up structural and productivity reforms to improve economic growth, they wrote.

  • Contagion Spreading Yet Further To Core Euro Zone - France is coming under scrutiny, with one astute market contact noting that France CDS prices are now about equal to UK.  This comes even as French bonds have underperformed Germany this past week, with 10-year spreads between the widening by 23 bp.  We’ll stress again that it’s not a question of fundamentals, as France is closer to Germany than it is to the periphery.  No, what’s worrisome is that France is coming under pressures as the contagion continues unabated.  The fact that it is spreading to core euro zone is not a good thing.  Belgium and Austria, two other core euro zone countries, have also seen bond spreads widen and CDS prices rise in recent days.  European officials have yet to find the “game-changer” that turns market sentiment around, and so we see continued spread-widening in euro zone bond markets as well as ongoing EUR weakness.  We believe that the “game-changer” remains debt restructuring coupled with aggressive IMF and World Bank-backed structural reforms, a la Latin America under the Brady Plan.  A muddle-through approach will only lead to a Lost Decade for the euro zone

    French Connection: The Eurozone Crisis Worsens Sharply - The big news is France.  With sentiment worsening across Europe, France has lost its relative safe haven status – credit default swap spreads on French government debt were up sharply today.The trigger – oddly enough – was Hungary’s announcement that its budget is worse than expected (blaming the previous government; this is starting to become the European pattern) and in the current fragile environment discussed yesterday, this relatively small piece of news spooked investors.  But these developments only reinforced a trend that was already in place. It did not help that the Irish Minister of Finance announced Ireland has 74.2bn euros of guaranteed bank loans, bonds, and systemic support falling due between now and Oct 1.  This is around 55% of GNP.  It sounds like everyone backed by the Irish government had the “clever” idea to roll over their debts to just before the guarantees expire. The big losers are Portugal-Ireland-Italy-Greece-and-Spain as always, but Belgium is now in the line of fire, and France is clearly under pressure.

    French and peripheral euro zone debt spreads, CDS up - The cost of protecting government debt against default in France as well as several peripheral euro zone sovereigns rose on Monday over heightened worries about risks to Hungary's burgeoning debt. The premium investors demand to hold French 10-year bonds rather than safer haven German Bunds also rose to its highest since late April 2009. The Italian 10-year BTP yielded 174 bps over Bunds, a record high. Five-year credit default swaps (CDS) on French government debt rose to 100 basis points from 92 bps on Friday, according to CDS monitor Markit. It means the cost rises to 100,000 euros to protect 10 million euros-worth of French government bonds. Austria's CDS rose to 128 bps from 106 bps on Friday. Austria has considerable exposure to the Hungarian economy. Markit said that Hungary's CDS rose to 438 bps from 421 bps on Friday.

    Franco-German Relations Cool Over Eurozone Crisis - Minutes before President Nicolas Sarkozy was to leave to fly to Berlin for a Franco-German summit, Chancellor Angela Merkel telephoned to postpone the meeting. Officially, the cancellation was forced by a timetabling problem. Chancellor Merkel was embroiled in her emergency plans to cut €80bn (£66bn) from the German budget by 2014. In truth, the postponement is evidence that the Franco-German partnership, which has steered the European Union for half a century, is struggling to survive one of the worst crises in the history of the EU.The Merkel-Sarkozy meeting was supposed to agree a joint position on the deficit crisis threatening the European single currency before a European summit in Brussels next Thursday. Officials in both France and Germany say that the two countries were so deeply divided that a meeting on Monday would have been pointless and failure might have caused a further market backlash against the euro.

    France joins Germany in wanting to ban naked short selling - French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote a two-page letter to the European Commission seeking to ban naked short sales of sovereign credit default swaps, while also wanting to ban some government debt and some equities. Last month, Germany already banned naked sovereign credit default swaps, yet this move by one single economy is not enough. After German had imposed this ban, we witnessed global stock markets tumble while the euro dollar pair to decline to the lowest levels in four years.

    Shuffling towards a Euro naked shorts ban - Just when you thought it was safe to go back naked and short into the water…French President Nicolas Sarkozy and German Chancellor Angela Merkel have upped the ante on banning regulating short-selling in Europe.In a letter to the President of the European Commission on Wednesday, they spell out why they are rather keen to put a ban back on the table (translation ours): In the face of recent developments in the markets, we believe that the European Commission should urgently accelerate efforts to achieve stricter controls on the markets for CDS on bonds and short-selling, and put forward all possible measures in this area even before the July meeting of the Economic and Financial Affairs Council [Ecofin] ....

    Europe urged to speed curbs on market speculators - The European Commission on Wednesday rebuffed claims from Germany and France that it was moving too slowly to regulate risky financial practices and said that a consensus was needed among all members of the 27-nation bloc before a decision was made.  In a joint letter to the European Commission president, José Manuel Barroso, President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany said that Europe needed to speed up proposals on financial regulation, including the possibility of banning the kinds of bets against assets that traders do not actually own — a practice known as naked short-selling.  Mrs. Merkel says that the practice has worsened the debt crisis in Europe. In the letter, which was sent Tuesday, she and Mr. Sarkozy said new proposals banning some speculative trading should be made by July.

    Deutsche reveals £1.5bn short on Iberian companies - Germany's largest bank, which is protected from the shorting of its shares after a government ban, has a £1.5bn short position on the debt of Spanish and Portuguese companies. Deutsche Bank had a £900m short on Spanish corporate credit and a £660m short position in the debt of Portuguese companies at the end of March, according to its chief risk officer Hugo Banziger.  Speaking at the Goldman Sachs European financial conference in Madrid yesterday, Mr Banziger laid out Deutsche Bank's exposure to Southern Europe, which has been the target of intense speculation by hedge funds as fears have grown of a sovereign debt crisis.

    I Thought Germany Banned Naked Shorts? -If so, what's this? Deutsche Bank said today that it has a net £900m short position on Spanish government debt and a £660m short on the Portuguese sovereign, as the German government attempts to ban all short sales in European sovereign debt.  The position will be doubly embarrassing for the German government, as Deutsche Bank's own shares are currently the subject of a short trading ban imposed by the country’s authorities at the same time as sovereign ban.  So a bank organized and operated under the laws of Germany, which has banned naked short sales, is in fact naked short sovereign debt? Hmmmm... so let's see.... the flagship bank of a given nation circumvents the laws of that very same nation and nobody in the government does anything about it?Laws mean nothing unless they are enforced, and this is just another case of "laws are only for the little people."

    Merkel Says Recovery Can’t Trump Cutting of Budget Deficits German Chancellor Angela Merkel said economic growth can’t come at the expense of reductions in budget deficits, hinting at differences with the U.S. over the pace of paring public spending.The German government “believes we must not achieve growth at the expense of high deficits,” Merkel told a news conference. Treasury Secretary Timothy Geithner, who attended a meeting of G-20 finance chiefs in South Korea that ended today, called on Japan and European countries such as Germany to boost domestic demand to complement the U.S. “shift towards higher savings.”Merkel is pressing European countries for budget savings to protect the stability of the euro, which has declined 16 percent versus the dollar this year amid investor concern about deficits in countries such as Greece. She’s heading a two-day Cabinet meeting starting tomorrow in Berlin to set budget cuts for 2011.

    Merkel Seeks ‘Decisive’ German Cuts as Geithner Urges Spending - Chancellor Angela Merkel said Germany is poised for a “decisive” round of budget cuts that will shape government policy for years to come, fueling disagreement with U.S. officials who favor measures to step up growth. Speaking at the start of two days of Cabinet talks in Berlin called to identify potential annual savings of 10 billion euros ($12 billion), Merkel said Europe’s debt crisis underscores the need for efforts to ensure the euro’s stability. “It’s not exaggerated to say that this Cabinet conclave will give important direction for Germany in coming years, years that will be decisive,” Merkel told reporters today before the meeting in the Chancellery. “We can only spend what we receive in income.”

    BBC News – German cabinet backs Merkel fiscal austerity plan - German Chancellor Angela Merkel has been given the backing of her coalition cabinet for a fiscal austerity programme. Berlin will cut the budget deficit by a record 80bn euros ($96bn; £66bn) by 2014. The plan would cut the deficit by about 3% of GDP. The total deficit in 2009 was 3.1%, but is projected to grow to more than 5% this year. "Germany has an outstanding chance to set a good example," said Mrs Merkel. Germany is reluctantly providing the biggest national share of the euro rescue package and the bailout for Greece. Among the measures agreed were a plan to slash 30bn euros from the welfare budget, including a cut in subsidies to parents who stay at home.

    The World from Berlin: Merkel’s Austerity Program Is ‘Faint-Hearted and Unbalanced’ – SPIEGEL -The German government's newly announced budget cuts may be a signal for the struggling euro, but the decision not to hike taxes on the rich will fuel public protest against the measures, say media commentators. If Chancellor Angela Merkel was hoping for a fresh start for her embattled government, this wasn't it. After eight months of in-fighting, stalling and setbacks, Chancellor Angela Merkel's government finally took a landmark decision on Monday, announcing the country's largest package of budget cutbacks since World War II. It plans to cut the budget by a total of around €80 billion ($95 billion) by 2014 to meet the requirements of the EU's stability pact and of the so-called "debt brake" enshrined in the German constitution.

    Deutschland: Ein Sommermärchen - Data on German factory orders - watched here almost as closely as the football scores - showed a 2.8 per cent rise in April, extending the already-exceptional 5.1 per cent increases seen in March. The fastest growth was in orders from outside the eurozone. Goldman Sachs now forecasts that German gross domestic product might have increased by as much as 1.3 per cent in the second quarter (although others might wait to see Tuesday’s industrial production data before revising their forecasts upwards). All of which might appear, well, something of a fairy story given that the eurozone is supposedly gripped by a suffocating economic crisis brought on by the public debts of its southern European members. But Germany’s strength is also a reminder that, first, the falling euro is providing a welcome boost to Germany and thus the eurozone and, second, there is a chance that continental Europe’s economic rebound may survive the current financial storms.

    To heckles, Merkel unveils $144b in savings - Chancellor Angela Merkel yesterday unveiled a major austerity package aimed at finding savings of more than 85 billion ($144 billion) by 2014, but it was immediately criticised by the opposition and trade unions, which pledged that they would unite to fight cutbacks they claimed would undermine the country's social welfare system. She said the cuts were designed to bring the budget deficit under control. Net borrowing, which soared to 85.8 billion, this year - about 48 billion more than 2009 - was at its highest since World War II. "The savings offer no perspective whatsoever," said union leader Michael Sommer.

    Europes fate depends on -Germany. Financial meltdown has been averted in Europe – for now. But the future of the European Union and the fate of the eurozone still hang in the balance. If Europe doesn’t find a way to reactivate the continent’s economy soon, it will be doomed to years of gloom and endless mutual recrimination about “who sabotaged the European project.” European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening. The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. But trying to redress budget deficits in the midst of a collapse in domestic demand makes problems worse, not better. A shrinking economy makes private and public debt look less sustainable, which does nothing for market confidence

    German economic strength ‘a fallacy’: Charles Dumas interview – While the vulnerabilities of Europe’s peripheral economies have been exposed by the sovereign debt crisis, the idea that Germany’s economy remains robust has gone largely unquestioned.But Charles Dumas, chairman and chief economist at Lombard Street Research in London, says the idea of German economic strength is a “fallacy”, and argues that it is essential the country leaves the single currency if it is to rectify its fiscal imbalances.

    Swiss neutrality -WHEN talking about nations that have excess foreign exchange reserves, Switzerland probably wouldn't be at the top of your list. It doesn't fit the pattern that characterises the hoarders. It isn't a developing economy, distrustful of large capital inflows or a rich oil-exporting country. Yet Switzerland is now the world's seventh-largest reserve asset holder, after massive intervention in the currency markets by the country's central bank. Data released on Tuesday by the Swiss National Bank (SNB) show that in May it increased its reserves by $68 billion to take total reserves to around $200 billion. These are huge numbers, comparable to China's monthly interventions. So why are the Swiss intervening so heavily to arrest the franc's appreciation? The most obvious reason is that like all other countries, they are concerned with the fall of the euro and what that means for its own exports. But the scale of the intervention makes you wonder whether this is an expensive subsidy to the export sector. It could also be a move to protect the banking industry from defaults due to Swiss franc loans held by Hungary, as the Financial Times notes:

    A lurch to the right – and to more austerity – forecast in today’s Dutch election -Dutch opinion polls forecast a victory of the right wing VVD, which might lead to a coalition of the right; Balkenende is likely to be ousted; Klaus Regling is tipped to the CEO of the SPV to bail out the eurozone; the German federal finance agency will raise the money for the SPV; ECB bond purchases are levelling off; finance ministers accept Estonia’s entry into the eurozone, but France and Italy are sceptical; Spain wants to accelerate pension reform, and expects decision by late summer; EU is to press ahead with a bank levy; tensions are growing between France and Germany about the governance of the eurozone; Harold James says a convertible renminbi might well become a leading global reserve currency; Wolfgang Munchau says Germany’s austerity plan won’t work, because there is no evidence that Germany’s anaemic economic growth is likely to improve; Martin Wolf, meanwhile, says the current policy mix suggests that deflation are very real threat.

    Victory for the austerity party - Austerity wins, as the winner of the Dutch elections is the liberal VVW, followed closed by the Labour party. Jan Peter Balkenende’s Christian Democrats come fourth, behind the Geert Wilder’s anti-immigrationists; Balkenende quit party chairmanship and national politics; three or four party coalition now considered the most likely options; Belgian separatist Bard de Wever says he favours strong regions within a strong Europe; Poul Nyrup Rasmussen says he favours a European debt agency and a single European bond; EU Commission politely ignores Merkel-Sarkozy letter calling for an EU wide short sale ban; France and Germany now quarrel about who cancelled the dinner on Monday; the Spanish government has made a final attempt to seek a consensus on labour market reforms; Portugal managed to raise some money at a bond auction, but a penal rate; Paul Krugman, meanwhile, says Europe’s fiscal contractions affects the rest of the world.

    Nuclear fusion dream hit by EU's cash dilemma - A £15bn international bid to harness the fusion process that powers the Sun is facing a major funding crisis. Scientists have revealed that the cost of the International Thermonuclear Experiment Reactor (Iter) has trebled from its original £5bn price tag in the past three years. At the same time, financial crises have beset all the nations involved in the project.As a result, construction of Iter – at Cadarache in France – has already been pushed back from 2015 to 2019, and further delays are likely. Some scientists say there is a risk that the entire project could be cancelled. Because it is hoped that fusion plants could one day supply the world with cheap, non-polluting power, the crisis facing Iter represents a substantial threat to plans to tackle the planet's energy and climate problems. Much of Iter's difficulties stem from Europe, with the EU – which is struggling to prevent financial crisis spreading through its member states – having been warned last month that it will have to find an extra £1bn to plug a shortfall in construction funds by the end of next year.

    Euro Weakens to 2001 Low Versus Yen Amid Europe Debt Concerns (Bloomberg) -- The yen rose against the Australian and New Zealand dollars as losses in stocks and concern Europe’s sovereign-debt crisis will slow the global economic recovery encouraged demand for a refuge.  Japan’s currency touched an eight-year high versus the euro after a report showed last week that U.S. employers hired fewer workers in May than forecast and officials in Hungary compared their country to Greece, claiming the previous administration lied about public finances. The MSCI World Index of shares fell 0.8 percent today. “Risk aversion remains the underlying theme for the market, and that provides support for the yen,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “People are worried about signs of economic slowdown. These are not conditions that are favorable to risk- seeking activities.”

    Euro Ministers Endorse Currency’s Level as Drop Boosts Exports (Bloomberg) -- European finance ministers indicated that they are in no rush to halt the euro’s slide against the dollar, calling the currency’s current level a tonic for the economic recovery.The 16-nation currency has tumbled 13 percent since mid- April as the Greece-fueled debt crisis exposed cracks in the monetary union and prompted deficit cuts across Europe that may hobble growth.The euro had been “too strong for the economy,” Belgian Finance Minister Didier Reynders told reporters before a meeting of European financial officials in Luxembourg today. A rate of $1.20 “is not so bad for competitiveness.”Exports combined with government spending to lift Europe’s economy by 0.2 percent in the first quarter, the third straight quarterly rise after the deepest recession since World War II

    G-20 Silence on Euro Drop Signals Approval, Morgan Stanley Says (Bloomberg) -- Group of 20 finance chiefs’ lack of comment on the 17 percent drop in the euro versus the dollar this year at last week’s meeting signals they approve of the shared currency’s direction, according to Morgan Stanley. “Despite the volatility we’ve seen in currency markets, there haven’t been complaints about the path of the euro,” Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley, said in an interview on Bloomberg Television’s “In the Loop With Betty Liu.” The currency has fallen this year against all of its most- traded counterparts tracked by Bloomberg on concern Europe’s sovereign-debt crisis will slow the economic recovery.

    Overnight Deposits With ECB Rise to Euro-Era Record (Bloomberg) -- Overnight deposits with the European Central Bank rose to a record as Hungary heightened concerns about a sovereign debt crisis that’s making banks wary of lending to each other. Banks lodged 351 billion euros ($418 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 299 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have been close to or exceeded 300 billion euros for the past seven sessions.Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. Deposits rose on June 4 as Hungary’s week-old government compared the country to Greece and claimed the previous administration lied about public finances.

    Overnight Deposits at ECB Increase to Record 369 Billion Euros -June 10 (Bloomberg) -- Overnight deposits with the European Central Bank rose to a record as the sovereign debt crisis made banks wary of lending to each other. Banks lodged 369 billion euros ($444 billion) in the ECB’s overnight deposit facility at 0.25 percent, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999."

  • ECB to put unlimited funds into banks - THE European Central Bank will provide unlimited liquidity to banks until the end of this year and press on with its policy of buying euro government bonds -- because eurozone credit markets are still not functioning properly."It's appropriate to continue to do what we've decided" on purchases of sovereign and corporate bonds, ECB president Jean-Claude Trichet said in Frankfurt yesterday. "We have a money market which is not functioning perfectly." The ECB is buying debt from Ireland and other countries and pumping unlimited funds into the banking system as part of a strategy by European policy makers to stop the euro region from breaking apart.

    European Central Bank will extend its offerings of unlimited cash - The European Central Bank will extend its offerings of unlimited cash and keep buying government bonds as it tries to ease tensions in money markets and fight the European debt crisis, the head of the bank said Thursday.  "It's appropriate to continue to do what we've decided" on purchases of sovereign and corporate bonds, Jean-Claude Trichet said in Frankfurt, Germany, where the bank is based. Earlier, the central bank kept its benchmark interest rate at 1 percent. Trichet said the ECB plans to offer further help to banks struggling to raise cash in money markets.  The ECB will give banks access to unlimited funds at a fixed rate in July, August and September, Trichet said.

    Destocking the euro - Which reserve currencies are left for central bankers, concerned first about the dollar, and now the euro? Central bank reserves might seem remote. But they have the power to affect every taxpayer in the euro-dollar areas. If your currency is a reserve currency, your government - and therefore you - effectively enjoy cheaper debt. So, as the euro drops to a four-year low, are central banks destocking the euro? Well, there’s no shortage of rumours of concern. China, Iran, Taiwan and now Egypt have been mooted. South Korea and Kuwait have issued denials, and, as Peter points out, if they are destocking, they would be mad to mention it:

    ECB: "Euro run" competition - The European Central Bank

    Trichet Refuses to Give Further Details on Asset Purchases  (Bloomberg) -- European Central Bank President Jean-Claude Trichet said the ECB will only give details on the amount of government bonds it has bought and doesn’t plan to provide further information at the moment. He also said the ECB has no immediate plans to sell debt certificates to absorb excess liquidity pumped into markets through the bond purchases. At the same time, the ECB is looking at all options, he said.“We’re looking at all possible instruments but there’s absolutely nothing immediate in this domain,” Trichet said at a press conference in Frankfurt.

    Spreading European Fiscal Crisis Hurts Banks: Credit Markets (Bloomberg) -- Signs the global economic recovery is faltering and Europe's fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they're owed by that region's most indebted nations. Europe's debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. Data. A U.S. jobs report at the end of last week fell short of economists' forecasts, while a spokesman for Hungary's prime minister said that suggestions the eastern European nation may default was "no exaggeration."

    Euro will be 'dead in five years' - The euro will have broken up before the end of this Parliamentary term, according to the bulk of economists taking part in a wide-ranging economic survey for The Sunday Telegraph. The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election. The findings underline suspicions that the new Chancellor, George Osborne, will have to firefight a full-blown crisis in Britain's biggest trading partner in his first years in office.  Of the 25 leading City economists who took part in the Telegraph survey, 12 predicted that the euro would not survive in its current form this Parliamentary term, compared with eight who suspected it would. Five declared themselves undecided. The finding is only one of a number of remarkable conclusions...

  • Bond Maths: iPIGS + CBs = GSEs - We know that Reserve Managers have been selling Euros on any bounce for a good part of the year. Recent comments from Iran and anecdotal evidence from market makers is that these guys want to get rid of their Peripheral paper and fast. And this is very similar to the GSEs in 2008. Specifically, there are a bunch of essentially insolvent and borderline-liquid entities (the iPIGS™) that have had an implicit guarantee from a higher authority (Greater Germania). The EU/IMF package has made this guarantee slightly stronger, but it is still not explicit given that Germany could just bugger off and leave them to rot.  Let's have a look at what happened to the GSEs.

    Who Lost Europe?, by Dani Rodrik -Having suffered a deeper economic collapse in 2009 than the United States did, Europe’s economy is poised for a much more sluggish recovery – if one can call it that. The International Monetary Fund expects the eurozone to expand by only 1% this year and 1.5% in 2011, compared to 3.1 and 2.6% for the US. Even Japan, in a deep slump since the 1990’s, is expected to grow faster than Europe. European growth is constrained by debt problems and continued concerns about the solvency of Greece and other highly indebted EU members. As the private sector deleverages and attempts to rebuild its balance sheets, consumption and investment demand have collapsed, bringing output down with them. European leaders have so far offered no solution to the growth conundrum other than belt tightening. The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment.

    Rodrik: Who Lost Europe? - Thoma - Germany says it took the time and effort to build a solid house, just like the bric-house countries, and the pigs will have to fight the big bad financial wolves on their own. If Germany opens the its bric-house doors and lets the pigs in where they are safe, they'll never learn their lesson. They'll keep relying upon structures that collapse when the slightest financial wind blows against them. What the bric house residents are forgetting, however, is the mutual dependence that exists. If the pigs perish, so will the source of income that pays for the bric house they live in. The other countries do need to build houses that are safe from the wolves, but that's a lesson that seems likely to be learned even if the bric-house residents open their doors and foot the bill required to provide safe shelter. Allowing the pigs to be completely destroyed is not in the bric-house country's best interest.

    DLC: In 1980 there were 150 million European children. Now there are 110 million. -Boys and girls are already growing scarcer in Europe and East Asia. Europe, from Ireland and Iceland to Vladivostok, was home to 150 million children in 1980 and now has 110 million. East Asia's censuses find an almost equally speed drop, from 400 million kids in 1980 to 300 million today. Over the next 30 years, by the UN's projections, the combined European and East Asian total is likely to drop again, from today's 410 million to 345 million. The 'oldest' country in the world is Japan, where the median age is 45 and the number of children has dropped from 28 million in 1980 to 16 million now, and may be nearing 10 million by 2040. Next in the graying line comes Germany, with a median age of 44; then Italy at 43, Greece and Austria at 42, Korea at 41 and so on.

    BBC News – Out with Keynes, in with Hoover? - Quite a month: Greece, and the rest of the eurozone, gets a $1tn rescue package, the euro hits four-year lows, BP has a third of its market value wiped out by the worst oil spill in US history, and the world's biggest stock markets lose all their gains since the beginning of the year. There was also the worry over the 40% supertax on mining companies by the Australian government. And there were rumours, hotly denied, that China was going cool on European debt, all interspersed with a smattering of poor figures on the US economy. The biggest negative is the growth outlook in the eurozone. As the Nobel prize-winning economist Joseph Stiglitz has pointed out, the European economies seem to be embracing the policies of Herbert Hoover.

    A plague of debt - The Financial Times reports that the European Central Bank (ECB) has warned of a “financial contagion” risk from concerns about the debt of some European governments. Many readers of this blog will recall that a similar concern was important in the late 1990s, when debt and currency problems seemed to spread among Asian and Latin American countries. Financial contagion can occur in many ways. A modern financial system is highly interdependent, with financial corporations holding the liabilities of other financial corporations, often in foreign countries. Also, perceptions that a particular debtor might default on some of its debt can quickly lead to worries about similar debtors and financial instruments. For example, after the Penn Central Railroad went bankrupt in 1970, there was panic selling of commercial paper, leading to a near-collapse of the commercial paper market.

    On the Maybe Not So Slow Motion European Train Wreck - 06/06/2010 - Yves Smith - I owe readers a longer comment on this, since we may be going into crisis mode (ah, the joys of waking up and toddling out to the computer to see what wheels are falling off the global financial system today).Your humble blogger may be a bit jaded (two years of watching the crisis and another near year of seeing not enough done to prevent another one may have something to do with it). But this all feels like it was and will be terribly predictable, not in the particulars, but in the general trajectory. The markets got three pieces of bad news on Friday: Hungary and rumors of large derivative losses at SocGen (which led the euro to tank) followed by a disappointing jobs report. Again, the rattled nerves evident in various news reports and blog posts may abate by Monday, but the sucking sound of deflation and creaking of bank balance sheets is finally calling into question the cheery assumption that patching up the financial system with baling wire and duct tape was a viable long term plan

     Flaherty, Carney Warn Europe a Growing Risk to Canada Growth (Bloomberg) -- Canadian policy makers emerged from meetings of Group of 20 officials last weekend warning the impact of Europe’s debt crisis on Canada may escalate. Bank of Canada Governor Mark Carney said that while the country has so far been only been modestly affected, there are “scenarios” where things may get worse as European governments rein in deficits. Finance Minister Jim Flaherty said Canada isn’t an “island.”“We’ve had a series of events that are prompting a series of fiscal tightening,” Carney told reporters in Busan, South Korea, where the meeting was held. “If everybody does that and everybody does that at the same time, it will slow the pace of global growth and you need other sources of demand to crowd in on that.”

    The world moves Britain's way - The world has moved - and it has moved in this government's direction. That was the message of this weekend's meeting of G20 finance ministers and central bank governors in Korea, and it felt like sweet vindication for George Osborne. Ever since Mr Osborne opposed fiscal stimulus in the autumn of 2008, Gordon Brown had said said that the international community was on their side - and the Conservatives were "in a minority of one". Not any more.  Truth be told, big new stimulus programmes have been off the agenda - almost everywhere - for quite a while. But as recently as April, these same men and women were talking about the need for most governments to sustain the support for the economy that they already had in place. But the statement agreed in Busan on Saturday focuses on the importance of "sustainable public finances" - and the need for countries to take "credible, growth-friendly measures" to achieve that.

    Cameron Warns Britons of ‘Decades’ of Austerity – NYTimes - Prime Minister David Cameron said Monday that Britain’s financial situation was “even worse than we thought” and that the country would have to make savage spending cuts to bring its swelling deficit under control. Stern and grim-faced in a speech in Milton Keynes, north of London, Mr. Cameron said, “How we deal with these things will affect our economy, our society — indeed our whole way of life.” “The decisions we make will affect every single person in our country,” he said. “And the effects of those decisions will stay with us for years, perhaps decades, to come.”  Mr. Cameron said that at more than 11 percent, Britain’s budget deficit was the largest ever faced by the country in peacetime. But he warned that the structural deficit was more worrisome. Britain owes more than $1.12 trillion, he said, and in five years will owe nearly double that if nothing is done now. The country already spends more on interest payments on its debt than it does running its schools, he said, adding that determining how to reduce the deficit and cut down on borrowing is “the most urgent issue facing Britain today.”

    Cameron Prepares U.K. for Cuts Hurting ‘Every Single Person'… (Bloomberg) -- U.K. Prime Minister David Cameron, preparing voters for the deepest spending cuts in a generation, said the previous Labour government left the public finances in a weaker state than he anticipated. “The overall scale of the problem is even worse than we thought,” Cameron said in a speech today in Milton Keynes, 50 miles (80 kilometers) north of London. “The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades to come.”  The U.K.’s Conservative-Liberal Democrat coalition is seeking public backing for cuts that will be the deepest since Margaret Thatcher was prime minister in the 1980s and that will last longer than any other since World War II. The pound has fallen more than 10 percent against the dollar this year amid concern the government will struggle to fix the public finances.

    S&P to review UK rating outlook after budget (Reuters) - Ratings agency Standard and Poor's is likely to make a decision on its negative outlook on the UK shortly after the budget on June 22, the agency's head of sovereign ratings said on Tuesday. The ratings agency wants to see if British fiscal strategies are credible before deciding on any action on the sovereign's AAA rating, David Beers told Reuters and Reuters Insider television. Asked if a change on even the United States' AAA rating was conceivable, Beers said: "Yes."  On the UK, he said: "I think we can make a judgement after the budget. We may have to wait longer, we will lead the market through that, but I think that's appropriate. We'll see what the Chancellor tells us."

    Budget cutbacks in Britain, Europe spell more trouble for U.S. economy - The European debt crisis sent more shockwaves rumbling toward the U.S. economy on Monday as British Prime Minister David Cameron announced drastic cutbacks in government spending and Germany pressed ahead with its own austerity plans - steps that are almost certain to impede America's recovery. The European policy decisions are likely to have a negative effect on the creation of new U.S. jobs, the United States' competitiveness overseas and the strength of the global economy overall. In Britain, Cameron warned that spending cuts would be felt "for years, perhaps even decades." And German Chancellor Angela Merkel, who presides over Europe's biggest economy, announced similar plans for spending cuts, higher taxes and other belt-tightening measures.

    Fitch Says U.K. Fiscal Challenge ‘Formidable;’ Pound Declines  (Bloomberg) -- Britain is facing a fiscal challenge and needs to accelerate plans to reduce its budget deficit, Fitch Ratings said. The pound extended declines. “The scale of the U.K.’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget,” Fitch analysts including Brian Coulton in London wrote in a report today. Interest payments on U.K. debt, rated AAA at Fitch, may reach a “staggering” 70 billion pounds ($101 billion) in five years, from 31 billion pounds in the past fiscal year, Prime Minister David Cameron said yesterday. Standard & Poor’s, which also gives Britain the top credit grade, has a “negative” outlook amid concern about the deficit.

    Oy, Canada - Krugman - Marshall Auerback points out that the new UK government, in arguing that fiscal austerity won’t destroy the economic recovery, is pointing — wrongly — to Canada’s experience in the 1990s. Actually, it’s even worse than Auerback says. As he points out, Canada was able to offset the contractionary effects of fiscal austerity through increased exports to a booming US economy. What he doesn’t point out is that this export boom had a lot to do with this:  Yep, you can have fiscal austerity without contraction if you have a massive devaluation against your main trading partner. So we can have austerity without a new depression as long as all the world’s major economies devalue against … oh, wait. And monetary policy, of course, wasn’t up against the zero lower bound, so the Bank of Canada could and did offset fiscal austerity with looser monetary policy (which partly explains the drop in the loonie.)

    Exchange rate angst and rebalancing - As the euro has plummeted against the USD, there's been concern that efforts to rebalance the global economy will face increasing headwinds. [Bergsten] [Duy]. This worry is only added to by the already widening US trade deficit [1]. In this post, I don't want to dispute the difficulty of effecting global rebalancing. It was already a difficult task, even before the euro area's recent debt-related travails. What I do want to do is to put the recent exchange rate movements in perspective. My three observations are as follows:

    • The euro is a relatively small component of the US trade weighted exchange rate.
    • The persistence of exchange rate movements is important in determining the impact on trade flows.
    • Rebalancing was never going to be effected by exchange rate re-alignments alone.

    The euro and the dollar. First, here is a graph of the dollar/euro exchange rate expressed in units of USD per EUR.

    IMF Says Risks to Global Economy Have Risen ‘Significantly’ (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.Most advanced economies are experiencing a “subdued” recovery, Shinohara said in remarks prepared for delivery in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.” Shinohara’s remarks come days after finance chiefs from the Group of 20 diverged on prescriptions for sustaining the global recovery. U.S. Treasury Secretary Timothy F. Geithner called on Japan and European countries with trade surpluses to boost domestic demand, while Europe’s representatives said reining in budget deficits was the top priority.

    While Strauss-Kahn understands the problems of the eurozone, von Rompuy does not - At the eurogroup meeting Herman von Rompuy presents his priorities for reforming the eurozone governance: a new stability pact and an agenda to reduce current account imbalances; The assumption here is that imbalances are entirely structural and only the problem of deficit countries; The IMF advocates a more comprehensive response in its Article 4 conclusions, calling for policy actions also from surplus countries; Bond yields are rising in the eurozone despite ECB bond purchases; Germany presents its austerity package for 2011-2014 with a cumulated spending affect of €26.6bn; Biggest saving items are reduction in welfare payments, further job cuts in the public sector, reductions in subsidies, a new tax on nuclear energy and a budget cut for the Bundeswehr by €2bn; Gunter Nonnenmacher argues that this austerity programme marks the true beginning of the coalition; Jean Quatremer worries about the impact of the German austerity package on Europe; Thomas Klau argues that Merkel has chosen at the national context rather than the European to reclaim leadership; A diner between Merkel and Sarkozy has been postponed; Jeffrey Sachs, meanwhile, says that Keynesianism has experienced its last hurrah during this crisis.

    Van Rompuy caves in: he now accepts Berlin’s position of no institutional change -At a meeting with Merkel, van Rompuy says no new institutions are necessary to deal with euro crisis; everything stays the same; Bank of Italy calculates that austerity will shave 0.5% of GDP; ECB revises its 2011 growth forecasts downward, and predicts irregular patterns; also continues to purchase bonds, but once again fails to provide details; debt spreads are now at pre-crisis levels in some crisis; German constitutional court rejects issuing an injunction against the SPV; NRC Handelsblad says a coalition of the right, including Geert Wilders PVV, is the most logical choice now; Polish parliament confirms Marek Belka as the new central bank chief; Gillian Tett, meanwhile, wonders why the Europeans are still resisting stress tests.

    The OECDs perverted view of fiscal policy - It is interesting how the big neo-liberal economic organisations like the IMF and the OECD are trying to re-assert their intellectual authority on the policy debate again after being unable to provide any meaningful insights into the cause of the global crisis or its immediate remedies. They were relatively quiet in the early days of the crisis and the IMF even issued an apology, albeit a conditional one. It is clear that the policies the OECD and the IMF have promoted over the last decades have not helped those in poorer nations solve poverty and have also maintained persistently high levels of labour underutilisation across most advanced economies. It is also clear that the economic policies these agencies have been promoting for years were instrumental in creating the conditions that ultimately led to the collapse in 2007. Now they are emerging, unashamed, and touting even more destructive policy frameworks.

    The G20 Votes for Global Depression - The Communiqué of the past weekend’s G20 meeting illustrates that deficit hawks have gained ascendancy in global policy making circles. Great Depression II, here we come. “Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” the Communiqué noted. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.” European Central Bank President Jean-Claude Trichet said fiscal tightening in “old industrialized economies” would aid the global economic “expansion” by shoring up investor confidence. German Chancellor Angela Merkel said Germany was poised for a “decisive” round of budget cuts that would shape government policy for years to come.

    Soros Says ‘We Have Just Entered Act II’ of Crisis (Bloomberg) -- Billionaire investor George Soros said “we have just entered Act II” of the crisis as Europe’s fiscal woes worsen and governments are pressured to curb budget deficits that may push the global economy back into recession. “The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.” Soros, 79, said the current situation in the world economy is “eerily” reminiscent of the 1930s with governments under pressure to narrow their budget deficits at a time when the economic recovery is weak.

    Roubini Urges ECB to Cut Rates to Offset Austerity – (Bloomberg) -- The European Central Bank should slash its benchmark interest rate to zero and expand government bond purchases to offset the recessionary effects of euro-area austerity measures, New York University economist Nouriel Roubini said. “That has to be the policy mix: tight fiscal, but much more easy money, looser monetary policy, more quantitative easing and also a weakening of the euro,” said Roubini, who predicted the financial crisis, in an interview in Rome today. Greece’s near default has prompted governments from Berlin to Madrid to implement budget cuts to convince investors they can tame deficits, threatening to crimp the region’s fragile economic recovery. The ECB has supported European Union efforts to boost confidence in the euro and the region’s debt by buying government bonds and making unlimited short-term funds available to banks.

    Memo to Deficit Hawks: Let’s Get the Facts Right - The sovereign debt crisis in Greece has sparked a panic wave of radical policy demands for fiscal discipline throughout the European Union from a perverse coalition of neoliberal public finance ideologues and anti-government conservatives. Proponents of fiscal discipline argue that the EMU and its common currency, the euro, would not be sustainable without the drastic restructuring of public finance in all eurozone member states through a combination of tax increases and deficit reduction through fiscal austerity. But creditors, mostly transnational banks, will be protected from having to accept “haircuts” on their holdings of sovereign debt.Yet such harsh approaches of tight fiscal austerity at a time when the global recession of 2008 is still waiting in vain for a recovery will risk increasing the danger of a double dip recession in 2011 in a secular bear market. The alarmist voices of these fiscal deficit hawks clamor for fiscal austerity programs that are essentially punitive for eurozone workers while continuing to tolerate abusive financial market manipulation that will benefit only the financial elite as the economic pain is passed on to the general public.

    Geithner: Global Reliance on U.S. Consumer Will Curb Growth… Treasury Secretary Timothy Geithner told his Group of 20 counterparts that the pace of the global recovery depends on domestic demand in Japan and Europe, and countries shouldn’t rely on spending by U.S. consumers. “The necessary shift towards higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand” and end to the yuan peg in China, Geithner wrote in a letter before a two-day G-20 meeting in Busan, South Korea that ended today.  Geithner’s remarks underscore signs of differences over how quickly to rein in public spending, with the Treasury chief warning that fiscal tightening won’t “succeed unless we are able to strengthen confidence in the global recovery.” French Finance Minister Christine Lagarde said yesterday that budget consolidation is “priority No. 1” for most G-20 members.

    Update on European Bond and CDS Spreads - Here are two graphs from the Atlanta Fed weekly Financial Highlights released today: Atlanta Fed: Following a decline after the initial reports of the EU/IMF €750 billion package and ECB bond purchases, peripheral euro area bond spreads (over German bonds) have widened. In particular, the bond spreads for Italy and Spain have widened the most relative to their levels before the rescue package was unveiled.After initially declining four weeks ago, sovereign debt spreads have begun widening for peripheral euro area countries. As of June 9, the 10-year bond spread stands at 554 basis points (bps) for Greece, 258 bps for Ireland, 265 bps for Portugal, and 211 bps for Spain.  The spread to Italian bonds has increased 76 bps since May 11, from 1% to 1.75%, while Portuguese bond spreads are 112 bps higher during the same period. U.K. bond spreads are essentially unchanged.

    Dealing With Chermany – Krugman - So here’s where we are: China has done nothing to change its policy of massive currency manipulation, and its exports are surging. Meanwhile, Europe is going wild for fiscal austerity. Angela Merkel says that budget cuts will make Germany more competitive — but competitive against whom, exactly? You know the answer, don’t you? Yep: everyone is counting on the US to become the consumer of last resort, sucking in imports thanks to a weak euro and a manipulated renminbi. Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits. This is not going to work — and the United States has to take steps to protect itself.

    China and Germany - Paul Krugman calls for U.S. policymakers to “get tough” with China and Germany over trade and related issues. I’m not sure how relevant this is to Krugman’s analysis, but I do think it’s worth observing that even though this “Chermany” duo makes a pair in some ways, in other respects they’re quite different. Anecdotally, when I was in Germany and would ask business leaders and policymakers if they thought Germany should alter the export-oriented nature of the economy, the answer was always and everywhere “no.” Not a single German person outlined to me a single policy measure that they endorsed to achieve that goal, nor did any of them endorse the goal. China was totally different. Absolutely everyone in China at least claimed to believe that export-led growth was not a path to sustainable Chinese development or a sustainable Chinese economy. People didn’t agree with each other about the best way to rebalance the Chinese economy and people didn’t necessarily agree with the U.S. Treasury Department about the centrality of the currency peg.

    Getting tough with Germany? -  After proposing that we get tough with the Chinese, Krugman wrote: And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity. Nicely, nicely isn’t working. Time to get tough. Yet Germany already has passed a constitutional amendment mandating a more or less balanced budget by 2016.  Germany also has EU treaty obligations (admittedly, they broke them in the past, though I suspect they view those lawless days as behind them) limiting the German fiscal deficit to three percent of gdp. Would trade sanctions on Germany lead to a trade war with the entire EU directly, or only indirectly?

    The Global Transmission of European Austerity - Krugman - Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included? We do have a framework for thinking about this issue: the Mundell-Fleming model. And according to that model (does anyone still learn this stuff?), fiscal contraction in one country under floating exchange rates is in fact contractionary for the world as a whole. The reason is that fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. Nonetheless, something much like this transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem. Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.

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