US Fed's balance sheet edges up in latest week - The U.S. Federal Reserve's balance sheet rose in the latest week, Fed data released on Thursday showed. The balance sheet rose to $2.327 trillion in the week ended June 16 from $2.314 trillion in the week ended June 9. For link to graphic see link.reuters.com/buf92kThe Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) totaled $1.128 trillion on June 16, versus $1.114 trillion the previous week.The U.S. central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was $166.21 billion compared with $166.72 billion a week earlier.Primary credit via the Fed's discount window averaged $104 million a day in the latest week compared with $105 million per day in the previous week.
FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 17, 2010
Rudebusch: The Fed's Exit Strategy for Monetary Policy - Glenn Rudebusch looks at the Fed's exit strategy for its special liquidity facilities, the lowering of short-term interest rates, and the increase in the Fed’s securities holdings. (The Fed's Exit Strategy for Monetary Policy, SF Fed) Along the way he tries to dispel worries about the "inflation monster"(see figure 4). The bottom line for interest rates is that "it seems likely that the Fed’s exit from the current accommodative stance of monetary policy will take a significant period of time." This is in contrast to Raghu Rajan who continues to argue that rates should go up, partly on the basis of the effects of low interest rates on countries like Brazil. This serves as a counterpoint to the argument that low interest rates will cause "dangerous financial imbalances, such as asset price misalignments, bubbles, or excessive leverage and speculation", e.g. see the discussion just before figure 2, as well as a more general counterpoint to the "we need to raise rates" argument.
A Near-Zero Fed Funds Rate Until 2012? - Observers of the Federal Reserve have been speculating for months about when the central bank might start lifting the benchmark short-term interest rate from near-zero, where it has been since December 2008.At first, many economists predicted that the Fed would start to tighten monetary policy by the end of 2010. Then, a growing number began to revise that prediction to the early part of 2011.But a new research paper from the Federal Reserve Bank of San Francisco suggests that if the Fed continues to follow the course of monetary policy it has pursued since the crisis, the fed funds rate won’t lift off from near-zero until 2012.If unemployment remains high while inflation remains very low, as is currently projected, “it seems likely that the Fed’s exit from the current accommodative stance of monetary policy will take a significant period of time,” according to the paper, by Glenn D. Rudebusch, a senior vice president and associate director of research at the San Francisco Fed.
Shouting fire amid a flood - SAN FRANCISCO Fed economist Glenn Rudebusch has written an interesting paper on the timing of the Federal Reserve's exit from its accommodative monetary policy stance. It's worth a read, but I just want to reproduce two charts for your consideration. This: And this: What we see in the first image is that even if one takes into account the unconventional monetary policy actions the Fed has used through this crisis, the federal funds rate target remains nearly 4 percentage points above the level at which you'd want it. And in the second image we see that the huge growth of the Fed's balance sheet has basically done nothing to increase long-run inflation expectations. Inflation is no concern at all; in fact the Fed should be doing more. As it stands, the question of the day is not what more the Fed should do but how long the Fed should wait before undoing.
Fed to Touch Extension Chord--- FED WATCHERS MAY as well take next Wednesday off. In part, that's because any mystery about the Federal Reserve's plans for its near-term monetary policy has been all but erased by events and news leaks. In the case of the latter, the page one lead story in Tuesday's Wall Street Journal reported Fed officials were mulling what steps to take if the economy stumbles or inflation diminishes further. At recent FOMC meetings, the policy-setting panel has maintained the status quo of a federal-funds target of 0-0.25% and holding policy interest rates at low levels "for an extended period." But the question always was when that extended period would expire. Indeed, Kansas City Fed President Thomas Hoenig dissented at the past three meetings because the "extended period" language appeared to shackle the Fed should an interest-rate increase be needed sooner rather than later.That no longer seems to be a concern.
Exit strategies for central banks: Lessons from the 1930s - VoxEU - Many commentators have compared the global crisis to the Great Depression. This column explores lessons that can be applied to help shape expectations and guide exit policy for central banks. It argues that the need for credit stimulus should end when failed intermediaries are resolved and positive net present value credits are reallocated to solvent lenders
Bullard: U.S. Economic Recovery Insufficient For Rate Increase - A U.S. central bank official said Monday the recent recovery in the country’s economy remains insufficient to prompt an increase in the benchmark interest rate.“The recovery will have to be firmer than it is right now and we’ll have to see more improvement” before the central bank raises its Fed funds rate, Federal Reserve Bank of St. Louis President James Bullard told reporters Mr. Bullard also said that given recent global financial market turbulence, this isn’t time to raise the Fed’s discount rate further.Still, he said sovereign debt problems in Europe won’t likely affect the timing of eventual Fed monetary tightening.
When will the Fed raise rates? -Over the last year a number of analysts have predicted the Fed would raise the Fed Funds rate "soon". They have all been wrong. The Fed's mission is to conduct "monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates". Historically the Fed has not raised the Fed Funds rate until unemployment drops significantly. Based on the the Fed's own forecasts of the unemployment rate and inflation, the Fed will probably not raise the Fed Funds rate until late 2011 at the earliest. San Francisco Fed senior vice president and associate director of research Glenn Rudebusch writes: The Fed's Exit Strategy for Monetary Policy Rudebusch's economic letter suggests that the Fed might not raise rates until 2012 ...
J.P. Morgan Pushes Back Rate Hike Forecast to Late 2011 - J.P. Morgan’s economists are pushing back their expectations of when the Federal Reserve will raise interest rates as next week’s central bank meeting quickly approaches.Bank economist Michael Feroli told clients Thursday his bank now expects the Fed to first raise rates in the fourth quarter of 2011, rather than the second quarter. “The prime motivation for the change is the behavior of inflation,” the economist wrote.“While we have been expecting core inflation to fall below 1%, the degree to which this has been located in the more persistent service price component, as well as the extent to which wage inflation has slowed, both suggest the disinflation we have witnessed could be with us for some time,” Feroli said. Pushing back estimates of rate hikes has been in fashion on Wall Street over recent weeks. Central bankers meet next week in a gathering that’s almost certain to result in the overnight target rate left at its effectively 0% stance.
Bank Currency Mismatches Adding Further Stress to Global Financial System —The Federal Reserve (FRB) has established temporary USD swap facilities with other Central Banks during each of the periods of exceptional intervention during the last 2 years (Oct 2008 and May 2010). This action provided evidence of underlying stress. A recent BIS paper (see here), presents evidence of this stress and why the FRB’s action was important and essential. The BIS reviewed banking statistics to separate banks into those with more dollar assets than dollar liabilities (i.e. long dollar) and those with fewer dollar assets than dollar liabilities (i.e. short dollar). The larger the long or short dollar position of a bank, the larger the gross currency mismatch (before hedging). Banks with long dollar positions would have either borrowed in the wholesale market or entered into an fx (dollar/domestic currency) swap. The BIS analysis is shown in the chart below.
House Lawmakers Seek Wider Fed Audit - U.S. House lawmakers negotiating changes to wide-ranging financial markets legislation plan on Wednesday to seek a limited expansion of a provision to provide greater scrutiny of the Federal Reserve.U.S. House members of the bicameral “conference committee” plan to offer an amendment to the nearly 2,000-page bill that would allow government auditors to review discount window and open market transactions by the central bank. The information collected by the Government Accountability Office would be required to be disclosed to the public within three years after the Fed enters into the transactions, according to a summary obtained by Dow Jones Newswires.
House-Senate Panel Broadens Audits of Fed - House and Senate negotiators agreed Thursday to broaden the scope of a new set of audits of the Federal Reserve by the Government Accountability Office to include transactions involving the Fed’s discount window and open market operations. But the Federal Reserve dodged attempts to extend Congressional review over its monetary policy decisions. The Senate had previously approved a provision that would require a government audit of the Federal Reserve’s emergency lending authority, a move that arose in response to the Fed’s actions in the 2008 financial crisis. But the House-Senate conference committee wanted to go further, subjecting the Fed to regular audits of its routine operations
Senate Negotiators Agree to No Confirmation of NY Fed President - Senate lawmakers negotiating the final version of a broad financial overhaul bill Thursday rejected a move to require the president of the New York Federal Reserve Bank be a presidential appointee, virtually ensuring that the proposal won’t make it into the final bill. Sen. Jack Reed (D., R.I.) had asked for the change in a House proposal to reduce the influence of commercial banks on the appointment of regional Federal Reserve bank presidents.Reed argued that the New York Fed president “has huge regulatory power,” noting that when Treasury Secretary Timothy Geithner held the position, he presided over the collapse of Lehman Brothers and the purchase of Bear Stearns.
Lawmakers Agree to Limit Banks’ Influence on Regional Fed Presidents - Senate lawmakers on the financial overhaul “conference committee” moved toward accepting a House proposal that would eliminate the vote of “class A” directors in picking regional Fed bank presidents, according to a summary distributed to reporters. Directors deemed “class A” are elected by banks to represent the interests of the industry, as opposed to the public. The agreement between the two sides would also eliminate a Senate proposal that called for the president of the Federal Reserve Bank of New York to be presidentially appointed. Critics of the proposal said it would have politicized the position. Additionally, the two sides agreed that a widely watched proposal to conduct an audit of the Fed’s response to the 2008 financial crisis would include a review of discount window and open market transactions the central bank enters into with financial firms.
Fed Emerging Intact From Challenge to Its Power - WSJ - On Thursday, senators on a panel meant to reconcile competing versions of the bill voted 10-2 to kill a provision that would have made the president of the Federal Reserve Bank of New York a White House appointment. The position is now an internal Fed appointee. Fed officials said the change would have politicized the institution. A rethink of the Fed has been part of the broader financial overhaul legislation expected to be completed in Congress this month. The House-Senate conference also has resisted a House attempt—popular in Congress but adamantly opposed by the Fed—to subject the Fed's interest-rate decisions to regular audits by the Government Accountability Office, which Congress oversees.
FedViews (Latest Forecast) - SF Fed Research (summary; series of bullet points)
US Dollar: The Mother of All Bubbles -A bubble is a significant increase in valuation supported by a set of artificial, inexplicable, and otherwise unsustainable conditions. The 'increase in valuation' can be nominal as in a price that goes 'higher' without a corresponding increase in value, or a decline in the value underlying the asset while the price remains nominally the same. (note 1) The duration of a bubble does not make it valid or 'the new normal.' Like most chronic conditions it just means that the adjustment will be all the more difficult. The US dollar as the world's reserve currency, and the unusual period of US prosperity, is an historical artifact of the post World War II era that will not continue indefinitely. When the reversion to the mean occurs, it is likely that the dollar will have to be reissued as 'the new dollar' similar to the rouble in the post-Soviet adjustment. For the UK, it looks like Argentina, or Iceland writ large, but with the sharp edge of a police state.
Monetarists warn of crunch across Atlantic economies (chart series)The money supply data from the US, Britain, and now Europe, has begun to flash warning signals of a potential crunch. Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk. The key measures of US cash, checking accounts, and time deposits - M1 and M2 - have been contracting in real terms for several months. A dramatic slowdown in Britain's broader M4 aggregates is setting off alarm bells here. Money data - a leading indicator - is telling a very different story from the daily headlines on inflation, now 4.1pc in the US, 3.7pc in Europe, and 3.3pc in Britain,
The Phillips Curve Today: Beware the White Swan -So much for the theory--let’s just stop here and take a look at the evidence in its simplest form. (To produce the chart below, I first took the rate of change in the core CPI from December to December for each year. Then I subtracted the previous year’s rate of change from the current year’s rate of change, for each year in the sample, and I plotted the result against the average unemployment rate for the current year. The core CPI series starts in 1957, so the first observation for which I could compute the change in the inflation rate is 1959. All the underlying data are from the Bureau of Labor Statistics.)The correlation isn’t perfect – and we wouldn’t expect it to be, since there are other factors that affect the inflation rate in the short run. But it’s strong enough to be quite statistically significant. And under today’s circumstances, it’s strong enough to be disturbing. The core inflation rate for 2009 was 1.8 percent. If you take the regression line at face value and plug in an average unemployment rate of 9.6 percent – a little toward the low end of what most economists expect for the year – it implies a 1.8 percentage point decline in the core inflation rate. And if you look at the actual data for January through April 2010, we are right on target for a zero percent core inflation rate.
This Does Not Look Good - Take a look at the figure below. This figure shows the difference between the nominal interest rate on the 5-year Treasury and the real interest rate on the 5-year Treasury inflation protected security (TIPS). This difference amounts to the markets expectation of future inflation. This figure, which goes through June 15, 2010, reveals a clear downward trend in inflation expectations over the first half of this year. I would like to attribute this decline to productivity growth, but it too appears to be coming down. That leaves us with one troubling possibility: the market is expecting aggregate demand to decline going forward. And unless the Fed acts to stabilize this expected fall in total spending it will effectively amount to a tightening of monetary policy. Obviously, the last thing the U.S. economy needs is a tightening of policy during an anemic recovery. I hope Ben Bernanke and the Fed are taking notice.
Deflation Fears Stir in Developed Economies - WSJ - The fears are most pronounced in Europe, where policy makers are under pressure to reduce large budget deficits now, before durable recoveries emerge. A combination of spending cuts and tax increases could weigh on economic growth and feed into deflation, which is a broad decline in consumer prices.Deflation makes it harder for consumers, businesses and governments to pay off debts. Principal repayments on debt are fixed but deflation is marked by falling incomes, so as deflation sets in the burden of paying off old debts gets greater. Officials fret about deflation because it is hard to stop. Interest rates are already near zero in the U.S. and elsewhere, so policy makers can't use the traditional tool of rate cuts to spur growth and stop deflation.
Deflation Advice, via Gary Shilling – Kalpa - If you are paying attention to the media, the Federal Reserve board members, and the global economic world, in general, you are noticing a growing concern about deflation. The June 15th WSJ cover page article by Hilsenrath began like this . . . Federal Reserve officials are beginning to debate quietly what steps they might take if the recovery surprisingly falters or if the inflation rate falls much more... While it has always been on radar screens, fear is growing that government weapons against deflation are losing the battle. A most interesting paragraph from the article describes that we should, in actuality, have negative interest rates right now:
Strange Arguments For Higher Rates, by Paul Krugman: So Raghuram Rajan has posted a further explanation of his case for raising interest rates in the face of very high unemployment, presumably a response to Mark Thoma. It’s good to see Rajan put his cards on the table — but what he says only further confirms my sense that we’re talking about some kind of psychological desire to be tough... Rajan’s argument boils down to two assertions: 1. Raising rates a bit wouldn’t significantly deter investment.2. “Unnaturally low” interest rates are distorting asset prices. The first thing to say about these two assertions is that they are essentially contradictory. If the difference between current rates and the rates Rajan wants is trivial — just a wafer thin mint — how can that same difference be leading to a major distortion in financial markets? Are we to believe that an interest rate change that matters not at all to firms making real investments somehow has huge effects on speculators? And actually, don’t asset prices themselves matter for real investment?
Antipathy To Low Rates - Krugman - Richard Serlin, in comments at Mark Thoma’s place, makes a very good point about the efforts of Rajan and others to come up with a reason to raise interest rates even in the face of high unemployment and incipient deflation. He suggests that it reflects a general distaste for anything that looks like government intervention to support the economy:I think the thinking of the libertarians and freshwater believers is that if there’s a recession, then the free market has a good reason for it. It’s a “real” business cycle phenomenon, and the best thing to do is let the free market have its recession or depression for as long as the free market wants (and we had some doozys before Keynes, and often). The Fed shouldn’t tamper with the free market, just like the fiscal branch of government shouldn’t. These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.
China and other countries buy US Treasury debt - China boosted its holdings of U.S. Treasury debt in April for the second straight month as total foreign holdings of U.S. government debt increased. China's holdings of U.S. Treasury securities rose by $5 billion to $900.2 billion in April, the Treasury Department said Tuesday. Total foreign holdings rose by $72.8 billion to $3.96 trillion.The sizable gains are being driven by fears that Greece and other European governments could default on their debt. Worries over possible defaults have sparked a flight to safety and that has benefited U.S. Treasury securities. Treasurys are considered the world's safest investment — the U.S. government has never defaulted on its debt.The April increases eased concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt with private economists forecasting strong gains in May as well because of the debt crisis.
"UK" Holdings Of US Treasuries Go Exponential, As Foreigners Now Hold $3.96 Trillion Of American Debt - According to the latest Treasury International Capital release, total foreign holdings of US debt in April increased to just under $4 trillion, or $3,957 billion, a $73 billion increase. This represents 47% of total debt held by public at the end of April of $8,434 billion. And while two of the three usual suspects increased their US debt holdings marginally, China buying $5 billion and Japan buying $11 billion, the "UK's" purchases of US debt continue to grow at an exponential phase: these have now hit $321 billion in April, having tripled over the past 6 months ($108.1 billion in October 2009), and increasing by a whopping $42 billion month over month. We put the UK in parentheses as the end purchaser in this case is anyone but an an austerity-strapped and deficit reducing UK. Whether this is the domain of the mysterious direct bidders, an offshore FRBNY holdco, or just Chinese buyers domiciled in the UK, continues to be unknown. Yet one look at the chart of UK holdings below demonstrates that something is very much wrong with this series.
Pimco Holdings Of US Government Debt Surge, Its European Debt Experiment Is Now Over - Even as most asset managers experienced a devastating May, with many recording drops in AUM of -10% or worse, there is nothing that can topple the trillion+ bond giant out of Newport, which is so large it is now virtually the market in most of its product verticals. In the May performance report, of Pimco's flagship Total Return Fund, the fund's total assets grew once again, hitting $228 billion, an increase of $3.4 billion over April, and 45% higher than last year. Combing through the fund's holdings, the firm has now officially said goodbye to the "foreign developed" bond experiment, with non US developed holdings plunging by more than 50%, to just 6%, compared to 13% in April, and a high of 19% in February. The beneficiary of this adjustment were US bond holdings, which surged from 36% to 51% of all holdings, or a MOM increase of over $35 billion! This represents about a third of all (settled) US bond issuance in May. Who needs QE2 when you have Pimco. Another notable observation is that the fund is now once again acting on margin, with a -4% net cash position. The last time the fund was on margin was in October 2009.
Debt Default: It Can Happen Here - The recent financial crisis in Greece has led to a lot of discussion about whether the United States might one day have a public debt so large that default becomes a real possibility. While the sort of problem Greece is experiencing is impossible here, we have another problem that, to my knowledge, no other nation on Earth has: a legal limit on government debt that Congress must raise periodically. This peculiarity of our fiscal system could indeed lead to a default on the debt, with repercussions that advocates of default — yes, they exist — have absolutely no clue about.
The Correlation Between Debt Levels and Worried Markets - Here's an interesting observation from the latest economic outlook from the SF Fed: looking only at current and projected debt levels, it becomes hard to distinguish the countries that markets are worried about from the countries markets are not worried about. So the message for the debt-heads is that it's not just debt levels that matter. What else matters?: History may matter as well ..., countries of most concern are those that have defaulted more frequently in the past. (See Carmen M. Reinhart and Kenneth Rogoff, This Time is Different...) None of those defaults are recent, but there were defaults that occurred during the Great Depression. That is relevant to the present because the financial shocks of the past few years are among the biggest that have happened since that time. When was the last time the US defaulted? Finally: While there is some risk that Europe's sovereign debt crisis could get much worse, the most likely outcome is that it will not. In that case, its effects on the U.S. economy are likely to be small.
Greenspan Says U.S. May Soon Reach Borrowing Limit - Former Federal Reserve Chairman Alan Greenspan said the U.S. may soon face higher borrowing costs on its swelling debt and called for a “tectonic shift” in fiscal policy to contain borrowing. “Perceptions of a large U.S. borrowing capacity are misleading,” and current long-term bond yields are masking America’s debt challenge, Greenspan wrote in an opinion piece posted on the Wall Street Journal’s website. “Long-term rate increases can emerge with unexpected suddenness,” such as the 4 percentage point surge over four months in 1979-80, he said. Greenspan rebutted “misplaced” concern that reducing the deficit would put the economic recovery in danger, entering a debate among global policy makers about how quickly to exit from stimulus measures adopted during the financial crisis. U.S. Treasury Secretary Timothy F. Geithner said this month that while fiscal tightening is needed over the “medium term,” governments must reinforce the recovery in private demand.
Greenspan: We're In Danger Of Being The Next Greece! - Former Fed Chair Alan Greenspan has an op-ed in the WSJ arguing that the runaway Federal Deficit threatens to turn the US into the next Greece.He doesn't actually think that the US debt bears any credit risk, due to our ability to print at will, but that there is a substantial risk that borrowing costs will soar.Of course, market participants are aware of our towering deficit, and yet yields continue their long march lower, so that's kind of problematic to his world view. Says Greenspan: "This is regrettable, because it is fostering a sense of complacency that can have dire consequences."
Time to Slip into Something Less Comfortable? – During the great credit party that raged around the world for the five years leading up to 2008, a few economists and investors studiously avoided the punch bowl. They stood in the corner, muttering darkly about how it would all end with the hangover of the century. They were outcasts.Now, as the markets show fresh signs of panic, much of it emanating from the sovereign debt crisis in Europe, the spotlight is swinging back their way. Despite evidence of improving conditions, most bears have changed their outlooks only marginally, if at all. Which raises the question: Is their persistent pessimism a mark of brave, nonconformist thinking, or has their negativity become a kind of crisis schtick—contrariness for the sake of notoriety? To find out if they should be feared or ignored, Bloomberg Businessweek assembled a cast of the most prominent bears from 2008, traced the development of their dark outlooks, and assessed where they see the economy going from here.
Does Fiscal Austerity Reassure Markets? - Krugman - Consider, if you will, the comparative cases of Ireland and Spain. Both countries appeared, on the surface, to be fiscally responsible until the crisis hit, with balanced budgets and relatively low debt. Both discovered that this was an illusion: revenues were buoyed by immense real estate bubbles, and when the bubbles burst they plunged into deficit — and found themselves potentially on the hook for large bank losses. The countries responded differently, however. Ireland quickly embraced harsh austerity; Spain has had to be dragged into austerity, and still faces major political unrest. So, how’s it going? This article is typical of what you read: it describes the Irish as doing what has to be done, while the Spaniards dither. And it has good things to say about how the Irish response is working: Well, I guess that’s right — if by “markets impressed” you mean a CDS spread of 226 basis points, compared with 206 points for Spain; not to mention a 10-year bond rate of 5.11 percent, compared with 4.46 percent for Spain.
The Bad Logic Of Fiscal Austerity - Krugman - So, one more time: here’s an attempt to put together some key arguments about why the rush to fiscal austerity is deeply misguided. Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP. And bear in mind that additional stimulus would lead to at least a somewhat stronger economy, and hence higher revenues. Almost surely, the true budget cost of $1 trillion in stimulus would be less than one-tenth of one percent of GDP – not much cost to pay for generating jobs when they’re badly needed and avoiding disastrous cuts in government services.
Magical Foreigners, Austerity Edition -- Krugman - For a while there, everyone on the right was in love with Chile — land of the wonderful, perfect retirement system, which proved beyond a shadow of a doubt that private accounts were the way to go. Then some people started looking at the Chilean reality, discovered that the system had big problems, and that the Chilean public actually hated the thing. So now the cause is fiscal austerity — and we keep hearing about supposed examples of countries that experienced a boom after tightening fiscal policy, supposedly demonstrating that austerity is good, not bad, for employment. First was Canada in the 1990s, which turns out to be a quite different story. Now we’re hearing about Ireland in the 1980s. So, time for a little research. And whaddya know: this story is also not at all the way it’s being told (pdf). Yes, Ireland had fiscal austerity — but it also benefited from a devaluation and an inflationary boom in the UK. Oh, and Irish interest rates fell sharply, which was possible because they were very high to begin with; that’s not much of a precedent for the United States today, which starts with very low rates.
Will austerity programs doom the recovery? -One of the great uncertainties facing the global economy heading into 2010 concerned exit strategies. At what point was it safe for governments to begin unwinding the massive stimulus programs implemented to fight off the Great Recession? We always knew this was going to be a tricky question. Cut back too soon and sink the global economy into a “double-dip” recession; wait too long and run the risk of pumping up asset bubbles, inflation and government debt. Unfortunately, jittery markets have answered this question for us, at least in part. In the wake of the Greek sovereign debt crisis, investor attention has been squarely focused on rising government debt and deficits throughout the developed world, putting pressure on policymakers to rein in fiscal spending no matter what underlying economic conditions they face. Governments are clearly getting ushered to the exits. That has raised the scary question: Are we exiting from stimulus too soon? And will the new commitment to austerity imperil the global economic rebound?
Why the United States and Europe can't cut their way to economic prosperity. - If British voters thought they had replaced the dour visage of Labour Prime Minister Gordon Brown with an optimistic one in fresh-faced Tory David Cameron, they were sadly mistaken. On June 7, the new PM Cameron brought down the hammer, telling the British public that the most urgent issue ahead "is our massive deficit and our growing debt. How we deal with these things will affect our economy and our society, indeed our whole way of life." We're not hearing that kind of rhetoric in the United States yet, but the new austerity has crossed the pond. Even though unemployment remains at 9.7 percent, the House of Representatives in May scaled back a proposed jobs bill out of concern for the deficit. President Obama recently called for federal agencies to identify cuts of up to 5 percent in 2012. States and cities are slashing budgets and raising taxes. Around the world, what economist and New York Times columnist Paul Krugman has called "the pain caucus" is in the ascendancy.
Jobless aid bill hits deficit wall in Senate -– President Barack Obama's plea for more stimulus spending as insurance against a double-dip recession hit a roadblock in the Senate on Wednesday, the victim of election-year anxiety over huge federal deficits. A dozen Democrats joined Republicans on a key 52-45 test vote rejecting an Obama-endorsed, $140 billion package of unemployment benefits, aid to states, business and family tax breaks and Medicare payments for doctors because it would swell the federal debt by $80 billion. The swing toward frugality runs counter to the advice of economists who support the bill's funding for additional jobless benefits and help to states to avoid layoffs of public service jobs. They fear that the economy could slip back into recession just as it's emerging from the biggest economic downturn since the Great Depression.
Democrats Embrace Flat Earth Economics - I had a phone call the other day from someone from the DNC, asking for a donation and preying on my fears that the GOP might retake control of Congress in 2011. My response: “What’s the difference?” Policy specifics aside, if looks like flat earth economics is going to keep a lid on aggregate demand for a long time. Just look at this article in the Washington Post on Democrats joining the effort to dismantle an unemployment aid package because of deficit fears: President Obama’s urgent plea for more spending on the economy ran into the political buzz saw of the Senate on Tuesday, where Democratic leaders began chopping apart an aid package for unemployed workers and state governments in an effort to lessen its impact on the deficit.
The Non-Jobs Bill - Congress' effort to pass a jobs bill stalled in the Senate on Wednesday. In part, the upper chamber tied itself into Senate-like knots thanks to the usual partisan wrangling. But the proposal has also rekindled a debate over the need for more economic stimulus versus fear of rising deficits. This argument is important and healthy, but wildly overblown in the context of such a small and poorly-targeted bill. In one corner are those liberals who argue that failure to pass this measure will send the economy spiraling into a catastrophic double-dip recession. This, they say, is what happened in the mid-1930s, when Congress tightened fiscal policy and a nascent post-Depression expansion collapsed. By contrast, fiscal hawks say this bill, on top of President Obama’s earlier $862 billion stimulus, is the last straw. We cannot continue to spend money we do not have without turning ourselves into Greece.
Unemployment may be at 9.7%, but the Senate is moving on - Or, at the least, they care about the deficit more. By a vote of 52 to 45, the Senate rejected a jobs package that would've extended unemployment insurance, offered some tax breaks to individuals and businesses, kept doctors in the Medicare program and more. "$77 billion or more of this is not paid for," said Sen. Ben Nelson, "and that translates into deficit spending and adding to the debt, and the American people are right: We've got to stop doing that."No, sir, they're wrong, and we don't. It's hard to say this loudly enough, but it really doesn't make sense to offset stimulus spending, at least in the short term. The point of the money is to get the economy moving faster, to give people cash to spend. This isn't like health-care reform, where you're purchasing something and you should pay for it. When you're trying to expand the economy, you need to use debt to put more money into it than would otherwise be there. There'll come a time when we need to start reducing the deficit. If we can get the economy back into gear, that time might even be soon. But for now, increasing the size of the deficit isn't some nasty side effect of stimulus spending. It is, quite literally, the point of the enterprise.
Fiscal policy: Not serious | The Economist - LAST night, the Senate opted to kill an economic assistance package consisting of measures like extensions to unemployment benefits and targeted tax breaks to individuals and businesses aiming to boost spending and hiring. The reason? Well, according to Ben Nelson the problem was that, "$77 billion or more of this is not paid for...and that translates into deficit spending and adding to the debt, and the American people are right: We've got to stop doing that." This is what passes for wisdom in the upper house, but it's completely absurd. The reasons to be concerned about debt levels are that you're worried about the ability to continue funding the government, or you're worried about high interest rates crowding out private investment, or you're worried about the fiscal burden you're passing on to future generations, or some such thing. On all of those counts, the $77 billion in deficit spending associated with this package is essentially a non-issue. It won't prevent the deficit from declining through the middle of the decade, and it won't have anything to do with the big jump in borrowing thereafter, associated with increased spending on entitlements.
No Clear Path Forward After Jobs Bill Fails Again In Senate - Deficit concerns once again trumped jobless aid in the Senate as Republicans, a lone Democrat and Sen. Joe Lieberman (I-Conn.) on Thursday evening defeated an urgent bill to reauthorize expired several expired domestic aid programs. The 56-to-40 vote left Democrats with no clear path forward on legislation that, among other things, would protect doctors from a 21 percent drop in Medicare reimbursement rates, reauthorize extended unemployment benefits, and provide $24 billion in federal assistance to state Medicaid programs, preventing an expected wave of public sector layoffs. "Tonight, every single Republican voted to deny states critical aid that would keep firefighters, police offices and teachers employed,""And tonight, every single Republican voted to tell the one in ten Americans who have lost their jobs that they are on their own."By the end of this week, 903,000 people who have been unemployed for longer than six months will have missed benefits checks they would otherwise have received had Congress managed to reauthorize the stimulus bill provisions that expired on June 1. By the end of next week, that number will climb to 1.2 million.
The Top 10 Reasons Congress Needs to Stand Tall on Stimulus - CBPP - “Most striking is the sense of political paralysis in both chambers and an almost visceral hunkering down in the face of the tough choices ahead,” Politico’s David Rogers wrote this morning regarding the Senate’s failure thus far to approve pending jobs legislation. There’s nothing funny about any of this, but with apologies to David Letterman, below is our top 10 list of reasons why Congress needs to find the courage to pass a serious jobs bill that (among other things) extends key pieces of last year’s Recovery Act that would provide additional unemployment insurance (UI) benefits, especially for the long-term unemployed, and fiscal assistance for states. These provisions helped the Recovery Act provide jobs for as many as 2.8 million workers as of the first quarter of this year, and extending them would give the economic recovery a needed boost over the rest of this year
How Victorianism Pervades Our Economic Debates - A depressing pall has been cast over American political and economic discourse -- the specter of deficit reduction. Sixteen months after a greatly pared-down stimulus package was passed by Congress, as a response to the worst economic crisis since the Great Depression, public discussion about appropriate taxing and spending priorities have become warped by an insidious, if often implicit, moralism. Official unemployment hovers around ten percent. Accounting for those who are involuntarily working part-time, or have dropped out of the labor force because they've given up looking for work (understandable, since there are about five unemployed people for every job opening), the so-called U-6 figure is closer to seventeen percent. About one in five American children lives below the poverty line and the figure is rising. Public infrastructure and public schools are suffering under the weight of long-term neglect and savage budget cuts.
The President’s fiscal dilemma - The President sent an off-key letter to Congressional leaders last Saturday. While our efforts over the past 18 months have helped break the freefall and restore growth, it is essential that we continue to explore additional measures to spur job creation and build momentum toward recovery, even as we establish a path to long-term fiscal discipline. In the letter the President presses Congress to enact the “extenders bill.” You can see his list of spending priorities for the bill. The letter is being interpreted primarily as a push for nearly $50 B in new aid to States: $23 B for teachers, and $25 B for Medicaid. The letter includes a key sentence with technical meaning: “We must take these emergency measures.” The word emergency is code for “you don’t have to offset the deficit increase resulting from this spending.” This is the green light for Congress to spend away. The letter then pivots to deficit reduction:
Ezra Klein - Worst-of-both-worlds fiscal policy - A lot of the debate over deficits right now comes down to how you feel about interest rates. Normally, interest rates should be a conversation-ending indicator. If our deficits are too high, interest rates on government debt should be high, too, as that's how the market would compensate for the risk that we won't pay people back. But interest rates, of course, are very low. Even historically low. That should mean that our deficits aren't a problem, at least not in the short term. That's the stance taken by Paul Krugman and Brad DeLong. But these are abnormal times, and some people think that our low interest rates are a product of, in the first case, catastrophes everywhere else, and in the second case, the fact that the market is staffed by idiots who miss important information for a long time and then all panic about it at once (remember the subprime crisis?). Rather than showing us that we don't have a problem, our low interest rates, according to this school of thought, are masking the fact that we do -- and making the eventual reckoning worse.
Ryan Avent; Fiscal austerity: The health deficit - PETER ORSZAG head of President Obama's Office of Management and Budget, has argued tirelessly that health reform in America is fiscal reform. And he's right. A look at the CBO's long-term budget forecast indicates that the solvency-threatening spending growth in America is overwhelmingly about Medicare and Medicaid. To get another sense of the challenge, have a look at chart below, from the IMF's latest Fiscal Monitor:On the x-axis, we have the projected fiscal adjustment over the next two decades, and on the y-axis we have projected health and pension spending increases over the next two decades. You can see America's precarious position. This is a significant problem. The conventional wisdom is that America's fiscal adjustments should be easier than those in places like Europe and Japan, thanks to more favourable demographics associated with a younger population. But while other indebted nations have older populations, they also have done much more to slow the growth of health spending.
That ’30s Feeling - Krugman - NY Times Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. But despite these warnings, the deficit hawks are prevailing in most places — nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity. What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any
The dubious nature of Money - We have another proclamation that Keynesian policies are dead. My difficulty with that claim consists of the fact that there has not been a burial as yet, and Keynesian policy has always been a rotting corpse. Even Lord Keynes had great doubts about Keynesian policy. The delayed Death scene is basically caused by the allowance Keynesian policies give Politicians to spend other peoples’ money, all without taxing anyone for anything. One has to kill that Skunk every day, and everyone gets tired of the repetitive labor. I once advocated a plan where legislators had to pay a percentage of any deficit aroused from their own Salaries, but legislative passage proved impractical. James Galbraith presents another side to the argument. His entire contention states that the elements which are functioning well should not be distorted in the balanced budget debate; a factor on which I could agree. It is not the fault of the Poor and the Elderly that Congress spent the Social Security Fund. Taxpayers paid the taxes in good faith, while legislators only used the circumstance to further their own agenda, without resort to actually funding a sound tax system.
Ezra on “Worst of Both Worlds” (Neither Walking Nor Chewing Gum) -economistmom - On his Washington Post blog today, Ezra Klein basically says the same thing I did a few days ago. The deficit hawks and stimulus lovers are so busy arguing that the other party is completely insane that they’re unable to recognize that they actually are working for the same cause (the economy, stupid)–and should be instead coming together symbiotically: It seems we’re getting the worst of both worlds: The argument over deficits is keeping us from doing what we need to do to help the economy grow right now, but it isn’t going to be enough to get us to do what we need to do to help the economy grow later, either. And the outcome of that could be ugly: If growth is anemic when the eventual fiscal crisis does come, that’s going to make a response much, much harder. I think policymakers need to be reminded that in keeping with the desirable “symbiotic” relationship, not all deficit-financed policies for short-term stimulus, and not all deficit-reducing policies for longer-term fiscal sustainability, are created equal.
Austerity is stupid, stimulus is dangerous, lying is optimal, economic choices are not scalar - When I checked out out a few weeks ago, there was a debate raging on “fiscal austerity”. Checking back in, it continues to rage. In the course of about a half an hour, I’ve read about ten posts on the subject. See e.g. Martin Wolf and Yves Smith, Mike Konczal, and just about everything Paul Krugman has written lately. While I’ve been writing, Tyler Cowen has a new post, which is fantastic. Mark Thoma has delightfully named one side of the debate the “austerians”. Surely someone can come up with a cleverly risqué coinage for those in favor of stimulus? Here are some obvious points:
I Hate Austerity - Noni Mausa -Austerity is one of several American images of virtue. Austere people are not wasteful, they save their money, they use the same dining room table and dishes for 50 years, they subscribe to Consumer Reports --and take notes. They steadily save 20% of their income for decades on end, and they buy with cash when they buy it all. They think about what they're going to say before they say it, and often say little or nothing. In any event, an austere person probably exhibits all four of the earthly virtues, and this doesn’t make him a very desirable consumer from the point of view of business. So why are we suddenly being told that the ownership society ought to be replaced by the Benedictine society, or possibly something along Buddhist lines? Ah, but you see this particular "austerity" is only intended to be temporary, partial austerity, nothing permanent.
Joseph Stiglitz: Fiscal conservatism may be good for one nation, but threatens collective disaster - What is unambiguously clear about the European economies, including that of the UK, is that if they all decide to cut their borrowing, slash spending and raise taxes, and do so at the same time, growth will be lower than it otherwise would have been. It means that there will be fewer people in work than would otherwise have been the case, and, because tax revenues will be depressed and unemployment benefit payments higher, the improvement in budget deficits will be much less than hoped for. It a classic Keynesian paradox; what is good for one nation can be disastrous for all. There is a risk that the European economy will go into a "double-dip" recession. Although obviously important, that doesn't matter so much as the big picture: stagnant economies poised on the edge of deflation. In the US, the forces of conservatism are also at work, although there are more voices, mine included, arguing for continuing public investment in the economy.But the fiscal conservatives do seem to be gaining ground, which adds to the risk of a global weakening of all the advanced industrial economies.
Richard Koo and Potential Motivations for the Pain Caucus - Krugman has been on a roll dealing with the notion that austerity needs to be introduced now, now, now in order to Appear Serious. Lately, he’s been looking, along with Mark Thoma, Yglesias, Brad Delong among others, as to what are the potential motivations behind this push.My 2 cents: I wonder if part of the motivating factor for beltway insiders and talking heads, if not academia, is that they vaguely remember the Federal Reserve “getting tough” in the early 1980s, introducing pain, and then the problems went away. And nowadays “structural reform” is in the air, Paul Volcker is back in the headlines, and it’s like it’s 1982 all over again. Except of course everything is different. I might just go ahead and live-blog Richard Koo’s book, The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession, but here’s a chart:
Fiscal Fantasies- Krugman - It’s really amazing to see how quickly the notion that contractionary fiscal policy is actually expansionary is spreading. As I noted yesterday, the Panglossian view has now become official doctrine at the ECB. So what does this view rest on? Partly on vague ideas about credibility and confidence; but largely on the supposed lessons of experience, of countries that saw economic expansion after major austerity programs. Yet if you look at these cases, every one turns out to involve key elements that make it useless as a precedent for our current situation. Here’s a list of fiscal turnarounds, which are supposed to serve as role models. What can we say about them?
Krugman: Right Result, Wrong Reason - PK continues to fight the good fight for Keynesian common sense in the face of resurgent austerity. The austerity front, which brings together Tea Partiers and Tories, blue dogs and Bundesministerien, wants to snuff out last year’s stimulus and force the North Atlantic economy to sink or swim. It’s chances of sinking are frighteningly large. Krugman says we should keep applying fiscal CPR until economic growth is in full recovery and unemployment has dropped—and until the zero lower bound on interest rates no longer binds, and normal monetary policy becomes an option.Yes but. There is an enormous hole in Krugman’s argument. A chief worry of the austeritarians is that their country—Britain, Germany, even the US—will be the new Greece, abandoned by creditors and teetering on default. Krugman’s response is that the creditor flight threat is imaginary.The markets aren’t worried, so why should we be? Does anyone else notice that this argument rests on the assumption that low interest rates today guarantee low rates tomorrow?
US political figures attack European austerity measures - An alliance of hard-right Republicans and liberal economists are increasingly anxious about the economic impact of austerity in Europe. Germany is the chief target of several angry outpourings for its plans to achieve austerity at home while maintaining exports, chiefly to the US. The net effect of chancellor Angela Merkel's plans is to limit German consumer debt while US consumers carry on spending with their credit cards. By the end of the year the German debt will be only slightly larger, while the US debt balloons. France and Britain are operating a similar policy, with the UK benefiting from a cheap pound and France a cheap euro that makes exports more affordable, but they tend to creep under the political radar. Only the US is maintaining a Keynesian stimulus package that artificially boosts demand, while mainly right-wing governments in Europe enforce austerity.
Faced with bailout or collapse, should US choose collapse…The big debate is between those who think the authorities are being too tight and those who think they are being too loose. Broadly, Europeans are on one side. Americans are on the other. The Europeans are tightening up. The Americans are letting rip. They’re both wrong, as far as we’re concerned. It’s all nonsense. Just goes to prove our dictum that people come to think what they must think when they must think it. The Euro-feds can’t afford to think they can loosen up. Their lenders have already laid down the law: ‘Keep spending like the Greeks and we’ll hit you with Greek-style interest rates.’ Just a few weeks ago the Greeks were forced to pay 16% interest. At that rate, borrowing is out of the question. The US doesn’t have to think about austerity. Not yet, at any rate. They’ve got the whole world ready to lend them money. ‘Here, take a drink of rice wine,’ say the Chinese. ‘Here is some champagne,’ say the Europeans. ‘And here’s a bottle of whiskey,’ say the jokers in the back of the room. It is only a matter of time before Americans fall down. Not so, say the Keynesians – led by Paul Krugman and Martin Wolf. They say it’s just a matter of managing the situation. Enjoy the party. You can pull yourself together later.
On the lessons from the Canadian federal deficit in the 1990s - It would appear that there is a significant constituency in both the US and in Europe agitating for immediate efforts to reduce their respective governments' deficits, and some are pointing to the Canadian experience of the 1990s. If Canada could make the swift transition from decades of large and chronic deficits to being the poster child of fiscal rectitude with no apparent ill effects, then why can't everyone else? The answer is that Europe and the US in 2010 is not Canada in 1995, in pretty much every way that matters.
Pete Peterson and the Deficit - Some commentators have vilified Peter Peterson, the investor and former Commerce secretary, for raising alarms about the deficit. They argue that Mr. Peterson is really trying to shred the American safety net. I’m not among the vilifiers. We should be taking the deficit more seriously, and Mr. Peterson is trying to make that happen. But it’s certainly true that he and his foundation would help their case by supporting more deficit-reduction measures that hurt wealthy investors like him. Landon Thomas Jr. of The Times wrote a good article in 2008 explaining Mr. Peterson’s support for a special tax provision for investment income, and now the group Citizens for Tax Justice points out the following: The Peter G. Peterson Institute, which is ostensibly concerned about the U.S. fiscal imbalance, has come out against provisions in [a Senate bill] that would prevent multinational corporations from abusing foreign tax credits….
Ezra Klein - Opportunity knocks, but America probably wont answer…Ryan Avent posts a chart at his place that I find a bit hard to read but that takes dozens of countries and compares their total anticipated increase in health and pension spending from 2011 to 2030 with the total deficit reductions that they'll need to balance their budgets over that period. The United States does not look good on this chart. Which is a reminder that our eventual deficit reduction is primarily an issue of health-care costs. And they'll be going up at the exact moment our deficit needs them going down. Which is why, as Avent says, "the mark of someone serious about debt issues is an obsession with health cost control." Stimulus spending has nothing to do with it. If you wanted to be optimistic about this, you could say that this represents a sort of opportunity. In sharp contrast to, say, France's health-care sector, our health-care sector is dramatically, joyously, wildly inefficient. We pay so much more than anyone else and get so much less that it's easy to imagine a world in which we have a drastically different health-care system that's both better than the one we have now and that's wiped out our deficit. I've always like CEPR's budget-deficit calculator, which allows you to plug other nations' per-capita health-care spending into our budget picture and see what happens. And what happens is that our deficit problem disappears entirely:
How debt imperils national security - Several months ago, a group of logistics officers at the Industrial College of the Armed Forces developed a national security strategy as a class exercise. Their No. 1 recommendation for maintaining U.S. global leadership was "restore fiscal responsibility." That's a small illustration of what's becoming a consensus among national security experts inside and outside the Obama administration: To play an effective role in the world, the United States must rebuild its economic strength at home. After a decade of war and financial crisis, America has run up debts that pose a national security problem, not just an economic one. This need to restore domestic prosperity and share the costs and burdens of global problem-solving with other nations will be one theme of the new "national security strategy" that the White House releases this week.
The national security shell game - In American public discourse, national security is the first refuge of scoundrels. For six decades good and dreadful ideas alike have been buttressed by claims that they will help make us secure. President Eisenhower used the claim to promote spending on highways and education. President George W. Bush used it to justify wiretapping and torture. Now deficit hysterics have started trilling the national security song to justify a coming attack on Social Security and Medicare.
Left-Right Defense Wonk Coalition Looks to Cut $960 Billion From Bloated Pentagon Budget - Few communities of Washington wonks run into greater structural and institutional obstacles than advocates of reduced defense spending. Defense companies put billions into PR campaigns for the necessity of this or that project that runs over cost. But undeterred by all that is a coalition of liberal and conservative defense wonks from the Project on Defense Alternatives, the Center for American Progress, the Cato Institute, Taxpayers for Common Sense, the Center for Defense Information and more. Calling themselves the Sustainable Defense Task Force — thereby taking up the “sustainability” call for budget austerity from Defense Secretary Robert Gates and his undersecretary for policy (and likely successor), Michele Flournoy — they identify up to $960 billion in spending cuts over ten years. That’s in a new report they’re releasing this morning.
How Do You Budget When There's No Agreement On What 2+2 Equals? - I was wrong when I said in the June 1 Fiscal Fitness that zero-based budgeting hadn’t been a topic for polite conversation since it was tried in Washington, D.C., in the late in 1970s. At almost the precise time that I was writing those words Georgia was considering legislation to reimpose ZBB. Three days after Perdue’s veto, CNBC host Jim Cramer and Sen. Tom Coburn (R-Okla.) talked on air about another topic that seldom makes it even to the back burner, let alone the front, of most federal budget debates: They wanted to know why the government wasn’t locking in the relatively low interest rates by borrowing more in the long term instead of in the short term. They admitted that doing this would cost taxpayers more over the next few years. But they also said this strategy would save money in the future because federal interest costs will increase when the existing short-term securities are refinanced at the higher rates that they said were likely. These two seemingly unrelated topics — ZBB and federal borrowing costs — actually have one very important thing in common: They are both based on the faulty assumption that, even though it is done in a highly political and increasingly partisan environment, budget decisions somehow can be based on undisputed or indisputable facts and figures. To say the least, that’s anything but the case.
Focus on National Security - Concerns about budget deficits and rising debt levels are leading to fractures in the heretofore unified conservative support for ever-higher defense spending. At least a few Republicans are now openly suggesting significant cuts in the defense budget, raising concerns among conservatives primarily concerned about national security. I believe that ultimately national security conservatives will be forced to choose between cuts in the defense budget and tax increases to reduce deficits.
The Myth Of The Deficit And National Security - Over at Economist's View, Mark Thoma excerpts from an excellent op-ed by Jamie Galbraith on national security and the deficit that appeared in yesterday's Los Angeles Times. Here's the whole piece from the LA Times if you want to see it for yourself. Galbraith gets into a number of issues, but his key point is that those that say the deficit hurts this country's national security aren't relying on anything substantive to make their case. It's hard not to agree. If you believe, for example, that the U.S. military activities in Iraq and Afghanistan are/were needed to enhance security here at home, then you have to admit that the effort would have been far smaller or not taken at all had it not been for a willingness to borrow to finance the activities. That, of course, implies that others were willing to lend the U.S. money to make it happen.
Estate Tax--Kyl continues working for the ultra wealthy - Jon Kyl doesn't think much about the government helping the unemployed who have been laid off because of the financial crisis, triggered by greedy excesses at the nation's biggest banks and mortgage lenders. He's afraid that providing additional unemployment compensation will keep people from working--as though it is laziness and not trying circumstances that has forced people out of jobs and on the public dole. But Kyl does work hard for his friends. He would like to repeal the estate tax, so the country's millionaires and billionaires wouldn't ever have to pay their fair share of the tax burden. Most of them pay almost no taxes during their lifetimes--especially if their wealth is inherited and most of their income is financial. They get preferential rates for the taxes they do pay, they devise all kinds of scheme to defer payment (using loans to monetize assets that need not be sold til after death), and yet are the primary beneficiaries of the governmental stability and economy that ordinary folks' taxes pay for.
On Trimming the “Extenders” Bill Without Actually Trimming the Extenders - The Senate is having a lot of trouble trimming the cost of a bill intended to continue expiring tax cuts–the so-called “extenders” bill. Trouble is, they’re not willing to actually trim the actual “extenders.” In fact, the “extenders” are such legislatively-sacred cows that they are used as a vehicle for other policies that are (oddly) not considered as sacred–like extension of unemployment benefits or even extension of the so-called “doc fix.” What the Senate is tinkering with right now are these hitch-a-ride attachments to the extenders bill and the various revenue offsets designed especially to help pay for the extenders. So the House and Senate have both complained that extending the extenders is “too expensive.” But both the House and the Senate have yet to contemplate this: if we’re not willing to put up with the offsets required to pay for these tax extenders, then maybe this tells us these tax extenders are not worth their cost!
FATCA (foreign account tax compliance act - FATCA (foreign account tax compliance act--or is it the anti-fatcat act?) The attention of US tax enforcement has been focused on offshore issues for some time. Of course, the most conspicuous part of that has been the ongoing dispute with UBS, a Swiss bank that facilitated tax evasion by US taxpayers under the Swiss banking secrecy rules. After some breakthroughs, the US was at the point of prosecuting the bank and got it to agree to release information on 4500 of the most significant accounts. But then a Swiss court intervened, requiring a parliamentary approval of the agreement. The upper house approved, but the lower house balked. The upper house has now re-approved the measure, with the hope that the lower house will now act in time to have the agreement approved before the June 18 end of the session.Further, as part of the HIRE Act, Congress passed a number of provisions earlier this year intended to make it much harder for wealthy Americans to hide assets offshore and evade paying their fair share of taxes on the income from those financial assets.
U.S. Soon Could Be Number 1 in Corporate Taxes - It is well known that the U.S. has the second highest corporate income tax among the major industrialized countries at more than 39 percent when the federal and average state rates are combined. Only Japan has a higher overall rate at nearly 40 percent. That soon could change. Reuters is reporting that Japan's ruling Democratic Party will include a corporate rate cut in its platform for the upcoming upper house elections. Should Japan cut its corporate income tax rate, the U.S. would find itself with the highest corporate tax rate in the industrialized world. The U.S. would also stand alone as one of the last remaining OECD nations to impose a world-wide tax system on corporate profits. Last year, both Japan and the United Kingdom took steps to exempt foreign earned profits from domestic taxation in order to stem the flight of capital out of their respective nations.
A Modest Tax Proposal - Here's the pitch: corporate income taxes are a drag on businesses and are ultimately paid by consumers anyway. That's bad. Conversely, a tax on carbon would reduce our oil use and spur energy efficiency. That's good! Likewise, a tax on financial transactions would reduce speculative volatility and help stabilize the financial sector. Also good! So we'd trade one bad tax for two good Pigovian taxes. What's more, although receipts from the corporate income tax are down right now thanks to the recession, within a couple of years they should be back up to around $400 billion a year. A financial services tax is probably worth around $100 billion a year, give or take, and that means we'd need a carbon tax of around $300 billion to keep everything revenue neutral. This is far higher than anything we could dream of without the grand corporate income tax bargain and holds out hope of being big enough to actually make a difference.
In Defense of Corporate Income Taxation - Kevin Drum suggests (modestly or “modestly”) that “everyone” should love the idea of trading the corporate income tax for carbon and financial transactions taxes. I should just have a chuckle and leave it at that, but then again I get emails from the Tax Foundation that are remarkably lacking in irony. Ezra Klein is happy with his policy-wonk hat on, but thinks there’s a political problem of giving fat cats an obvious break. I argue that the problem is not just political. Drum’s at least semi-serious claim is that taxing corporate income is bad because doing so is a drag on business and ends up getting paid by individuals anyway. Neither necessarily militates against corporate income taxation in the real world.Whether a “drag” on business or some other tax distortion that reduces private-sector activity (other things equal) is good or bad, on net, depends on the use to which the tax revenues are put.
Millions Pay No Income or Payroll Taxes Thanks to Refundable Credits - In 2008, the IRS paid out over $70 billion in refundable credits to people who had no income tax liability. Congress's Joint Committee on Taxation recently produced some estimates on the number of tax filers who receive refundable credits larger than what they pay in payroll taxes. This is an important contribution to the debate over the use of credits because in any discussion about the record number of non-payers, we frequently hear the refrain that "well, they do at least pay FICA taxes." In a May 28, 2010 letter to Representative Dave Camp and Senator Kent Conrad, JCT reports that between 2000 and 2006 the number of returns with refundable credits in excess of the employee's share of payroll taxes increased from 11.8 million to 16.1 million. In 2009 and 2010, those figures jumped to 23 million because of such things as the making work pay credit and the lowering of the income threshold for determining the refundable portion of the child credit to $3,000.JCT projects that the number of returns with refundable credits exceeding the employee's share of payroll taxes will hover between 14 million and 15 million for the next ten years.
Estimates of Average Federal Tax Rates – CBO Director's Blog - Yesterday CBO released estimates of average federal tax rates—households’ federal tax liability divided by their income—in 2007 for households with various amounts of income. For each income category, the report also presents estimates of average before-tax and after-tax household income; the number of households; and that category’s share of taxes and income. A page on our website, Average Federal Taxes by Income Group, includes CBO’s estimates of average federal tax rates going back to 1979, as well as other information and publications on household income and taxes.
Congressional Budget Office - Distribution of Federal Taxes…This page contains CBO's estimates of average federal tax rates (tax rates as a percentage of income) paid by households in various income categories for the four largest sources of federal revenues--individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes--as well as the average rate for the four taxes combined. The page also contains estimates of average before- and after-tax household income; the number of households in each income category; shares of taxes, income, and households for each income group; information relating to the methodology used to construct the estimates; supplementary estimates for different types of households; and estimates of the number of households that pay more in payroll taxes than they do in income taxes.
The Growing Push to Impose a Transaction Tax - Among the hot button issues that Wall Street will be following closely next week at the Group of 20 economic summit meeting in Toronto is the idea of imposing a worldwide tax on financial transactions. The move, championed by the Europeans, is aimed at curbing excess speculation and building revenue. For now, the Obama administration is not supportive of such a tax, but international pressure and the widening budget deficit could possibly prod the United States to fall in line eventually. Financial transaction taxes are nothing new. Britain has had a 0.5 percent tax on stock transfers for years. The United States had a transaction tax from 1914 until it was phased out in 1966, and it has not been seriously considered as a revenue source until now. The Institute for Policy Studies, a left-leaning think tank, issued a report on Thursday promoting the benefits of such a tax. The report, titled “Taxing the Wall Street Casino,” contends that a transaction tax could raise $177 billion a year and could have even prevented last month’s so-called flash crash, in which stocks took a huge dive in just minutes and then suddenly shot back up.
Forget about deficits. Fix the banks - Levy senior scholar James K. Galbraith argues in the Los Angeles Times this morning that deficit hawks are pursuing the wrong prey. In a nutshell: The real cause of our deficits and rising public debt is our broken banking system. The debts our economic leaders deplore were largely due to the collapse of private credit, and to the vast giveaways the federal government made to banks to prevent their failure when credit collapsed. Yet those rescues have failed to reanimate private credit markets and job creation, as the latest employment reports show. And so long as that failure persists, public deficits and rising public debt must remain facts of life.Are broken banks a national security threat? Let’s avoid going that far. But the only way to reduce public deficits eventually is to revive private credit, and the only way to do that is build a new financial system to replace the one that has failed. .
The G-20 Needs to Refocus its Financial Regulatory Agenda -The G-20 leaders meet again in Toronto on June 26–27 and hopefully will make progress on reform of the International Monetary Fund and other issues of global economic governance. But on one distinctive part of their agenda, financial regulation, achievements so far are less impressive than the initial ambition. At the first G-20 summit in November 2008 in Washington, shortly after the Lehman Brothers collapse, there was much rhetoric, especially from Europeans, in support of “global solutions to global problems.” The implied goal was global harmonization of financial rules to restore financial stability, eliminate regulatory arbitrage (banks shopping around for the most favorable regulations), and ensure fairer competition. Financial regulation represented no fewer than 38 out of that summit’s 47 action items.Fast forward to the present and most flagship projects are in jeopardy. The Basel Committee’s negotiations on bank capital, leverage, and liquidity standards are proving difficult, and may not be completed this year as planned. Accounting standard setters are not achieving convergence on key issues, including financial instruments.
The Volcker Rule and the saga of State Street Bank -Cambridge Winter Center’s Raj Date has a new paper out: Test Case on the Charles: State Street and the Volcker Rule. In order to get a sense of why the Volcker Rule would be important, he walks his audience through the story of State Street bank, the 15th largest bank that had a nice, stable boring business model and decided to jump into the deep end of finance, necessitating a bailout at the end. Raj has many graphs that tell the story about why it is a good idea to silo out the high risk from the necessary, core functioning of the banking sector. I want to focus on three. Here’s what boring banking looks like:Click through on all three for a bigger graph with explanation. There it goes, making single basis point income off acting as a custodian for trillions of dollars of assets. This custody business is profitable, safe, and boring. So where do they dive into the deep end? Here’s what exciting banking looks like:
Richard Fisher of the Dallas Fed: Larry Summers, the G-20, and Financial Dementia - Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform. As a former commercial banker, he sees quite clearly that the legislation now headed into “reconciliation” between House and Senate versions amounts to very little. He also knows that pounding away repeatedly on this theme is the best way to influence his colleagues within the Fed and across the policy community more broadly. He is now taking his game to a new, higher level. Couched in the diplomatic language of senior officials, his speech on June 3 to the SW Graduate School of Banking was both a carefully calibrated assault on the administration’s general “softly, softly” approach to the big banks and a direct refutation of arguments put forward by Larry Summers in particular.
Fed’s Plosser: Reform Legislation Passage Not End Of The Process - A U.S. central bank official warned Wednesday that even as Congress nears the final whistle on efforts to reform the nation’s financial regulatory structure, the game won’t end. “This is certainly not the end of the process of regulatory reform,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Regulators will need to work out many details left open by the legislation” and “I don’t think that Congress’ approach is necessarily the final word on designing a resolution mechanism that will end the problem of firms that are too big to fail.” Plosser isn’t currently a voting member of the interest rate setting Federal Open Market Committee, and he didn’t comment on the monetary policy or economic outlook.
Why Section 716 is the Indispensable Reform - Dominated by the world’s largest banks, the over-the-counter (OTC) derivatives market has been expanding since the break-down of the Bretton Woods Agreement in the early 1970s privatized the international monetary system by shifting the payments process from central banks to commercial banks. The proliferation of foreign exchange forwards and swaps that followed set in motion an ever-expanding menu of exotic instruments that reached a nominal value of over $600 trillion by the middle of the current decade. Central banks and financial regulators ignored the implications of the growth of this market and ignored warnings from the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) from 2002 forward that OTC derivatives were at the center of what had become a global casino in which the largest international institutions were the biggest speculators.
Sen. Lincoln Offers Clarifications on Plan to Spin Off Derivatives - The proposed clarifications she is willing to make, according to a document circulated by her office, would address some concerns raised by bank regulators but likely still lead to major protests from banks. Her proposal was panned by many lawmakers and regulators in April and May, but it stayed in the Senate bill that passed last month. Now momentum for her proposal is picking up, particularly after her surprising win in the Arkansas Democratic Senate primary last week. Her proposed changes to “Section 716” would, among other things:
1) Allow bank holding companies to spin off derivatives operations outside a bank but retain the business in a separately capitalized affiliate.
2) Give bank holding companies up to two years to spin off the business line.
3) Essentially exempt companies that aren’t major dealers in derivatives from the new rules.
Section 716 and misrepresenting the derivatives market - Most critics of Wall Street, however, do not even bother trying to sort out the innovations that work from those that never should have existed in the first place, and the unfortunate result is that they are stripping the political economy argument for breaking up large financial institutions of its intellectual credibility. This ignorance is most fully on display in the unfair vilification of the derivatives market at large, like the arguments made by proponents of Senator Lincoln’s proposal to force banks to spin off their derivatives operations into separately capitalized affiliates. The Baseline Scenario (a blog I generally really like) has published guest posts from two proponents of Section 716, Jennifer S. Taub and Jane D’Arista, lately. I’m not trying to be mean, but it scares the crap out of me that anyone would read this stuff and not immediately recognize that these people have literally no clue what they are talking about.
Has Blanche Lincoln already won? - Sen. Blanche Lincoln's proposal for derivatives reform is apparently so extreme that even the Treasury Department thinks it goes too far. And yet, increasingly, it looks like it might survive. The FT is now reporting that Paul Volcker might be onboard. So are two Federal Reserve bank presidents. The shift, it seems, has at least partially come from language clarifying that big banks like JP Morgan Chase and Goldman Sachs wouldn't have to completely get out of the derivatives business as long as they keep those businesses in a separate affiliate that maintains its own capital reserves. Whether or not banks wind up having to spin off their derivatives units, I'd say Blanche Lincoln has already come out ahead.
Keeping Loopholes Out of Derivatives Reform - The conference committee reconciling the House and Senate’s respective Wall Street reform bills got down to business this week, starting with the Senate’s text as its base. This is a good thing when it comes to crafting a regulatory regime for derivatives—the risky instruments that played a large role in the economic crisis, and particularly in the downfall of AIG—because the Senate language, authored by Sen. Blanche Lincoln (D-AR), is much stronger. Companies use derivatives to hedge against changing markets. But financial services companies also use derivatives to speculate. And a lack of regulation and information regarding this opaque market during the buildup to the financial crisis led financial behemoths to offer far more of them than they could honor—especially in the form of credit default swaps.
Clearing up misinformation about Section 716 - There’s been quite a lot of drama this week surrounding Blanche Lincoln’s swaps desk spin-off, known as “Section 716.” Ultimately, I don’t think it will amount to anything — Lincoln doesn’t have the support of a majority of either the House or Senate Dems on the conference committee (certainly not the Senate Dems), so yeah, I still think it will be stripped out. The fact that Lincoln is floating compromises just shows that she's the one who needs a deal. Nevertheless, there’s a ton of misinformation out there about Section 716, as well as the compromises Lincoln floated on Monday, so I want to clear some things up. Here are the compromises Lincoln is offering
Frontline Special On Brooksley Born's Attempt To Tame Derivatives - Think Blanche Lincoln's attempts to tame derivative trading are new? Think again. During the 1990's, its was the CFTC's Brooksley Born who was the original crusader, attempting to warn about the dangers posed by an unregulated and out of control explosion in synthetic exposure. And just like Lincoln's current role reprisal will likely end up being neutered by the Dodd-Frank tag team, so Born's warnings continuously fell on deaf and conflicted ears. To see how 12 years ago one person was predicting precisely what may happen if JPM got its way to drown the world in $1.2 quadrillion of derivatives, watch this Frontline video "The Warning" from late last year: a fascinating hour-long adventure into the shadowy Over The Counter world which everyone has an opinion on, yet so few understand.
On Your Mark, Get Set, Turf War - Get ready for a clash on Thursday between the Federal Reserve and the Commodity Futures Trading Commission.Here’s what’s going on: To bring a final compromise to the House and Senate, House lawmakers are systemically offering changes to pieces of the Senate financial overhaul bill so they can find common ground. The House makes an offer. The Senate makes a counter-offer. They pretty much meet somewhere in the middle. Then move on to the next issue. Repeat, etc. On Thursday, one of the three issues lawmakers will focus on is Title VIII, which has to do with regulation of the payment, clearing, and settlement supervision. Instead of a lengthy list of amendments to this section, the House proposal is succinct and one line:“Strike title VIII.”
Don’t Forget The Kanjorski Amendment - The Kanjorski amendment would greatly strengthen the hand of regulators vis-à-vis big banks and further reinforce their power to break up those banks. This is not, unfortunately, the same thing as the Brown-Kaufman amendment, which would have broken up the largest six banks outright. Still, the Kanjorski amendment is important for the next time that one or more major banks get into serious trouble. Judging from their current swagger and the slogans you hear from top bankers (“our risk management is now simply amazing”), we only have to wait a few years for the next bailout cycle. A great deal of discretion would remain with the regulators, and of course this is a potential danger. But the heightened public awareness of the idea that “bailouts are bad” at least increases the chances that management and directors would be replaced in a failing megabank. Whether creditors would face any losses remains a more open question – but at least the Kanjorski amendment, if applied properly, would put that possibility firmly on the table.
It’s Not a Bailout — It’s a Funeral - Expect some fighting figures of speech on Thursday, when the conference committee takes up the topic of the Orderly Liquidation Fund or “OLF.” Under the proposed financial reform legislation, the OLF is the facility that would hold the money needed by the FDIC to shut down a systemically important, insolvent financial institution before its failure can contaminate other firms and the broader economy. In other words, one purpose of the resolution authority and OLF is to avoid repeating the disorder and disruption of either the Lehman bankruptcy or the AIG bailout.To be clear, many question whether regulators will have the courage to invoke this provision and pull the plug on a dying bank.
Why Living Wills Fail -By Simon Johnson- A central idea in the financial reforms currently undergoing final negotiation in the United States – and also in similar initiatives in Europe – is that large banks must draw up “living wills” that should explain, in considerable detail, how they will be wound down in the event of future failure. The concept is appealing in theory. No one knows their business better than the banks, the reasoning goes, so they should have responsibility for explaining how they can close down their various operations – or perhaps sell more valuable parts while limiting losses for unprofitable activities. This is often presented as “smart regulation”, with government regulators requiring private sector experts to do the difficult technical work.Tuesday’s hearing of the House Energy and Commerce Committee shed considerable light on why living wills are highly unlikely to work in practice.
Russell Simmons, Interchange Crusader - It's amazing who the interchange debate will bring out of the woodwork. Hip-hop entrepreneur Russell Simmons has been making the rounds on Capitol Hill (and on Huffington Post) urging Congress not to act on interchange reform. Why is Simmons so engaged with this issue? The answer is because he makes a lot of money off of interchange from a very questionable product. Simmons markets the "RushCard" a Visa-branded prepaid debit product marketed primarily to the black community. The card provides a payment device for an ersatz deposit account, which allows cardholders to make transactions when cash is not accepted. Remember that there is no extension of credit to the consumer on the RushCard. Instead, like any prepaid debit product, the RushCard consumer is actually lending money to Bancorp Bank, the card issuer. And, as we'll see, the consumer is actually paying money to make an interest-free loan to the Bancorp Bank.
Interchange and free checking - Why do most people hate their bank? Because their relationship is based on the lie of “free checking”, and a relationship based on a lie is always going to be a dysfunctional relationship. Checking is never free, but in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.Interchange fees are a cross-subsidy too: this time it’s merchants who help pay for the checking accounts of the rich. In fact, they do more than pay for their checking accounts, they pay them a nice tax-free income, when the rich people accept debit rewards cards.With the federal government finally cracking down on overdraft fees, and with the Durbin amendment threatening interchange fees to boot, the fiction of free checking looks as though it’s reaching the end of its natural life: More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.
End Is Seen to Free Checking - Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans. Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time. Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don't generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.
Unpacking the Debit Card Amendment - As the conference committee reconciles the House and Senate versions of the financial regulatory reform bills, Sen. Richard Durbin’s (D-Ill.) amendment regulating the type and scope of fees that Visa, Mastercard and other companies can charge businesses for debit card transactions has proven one of the hottest flashpoints. But the amendment is confusing, and the topic wonky. To unpack it, I spoke with Mike Konczal, a fellow at the Roosevelt Institute and financial blogger.
New Bank Fees: How to Fight Back - Regulators in the past year have pushed through a raft of changes designed to rein in banks' most abusive practices, from excessive overdraft fees to the way lenders raise interest rates when a credit-card payment is late. The new rules are expected to slice billions from firms' profits—and more if lawmakers move forward with a bill to limit how much financial institutions can charge merchants for debit-card transactions. Banks, of course, aren't giving up those revenues without a fight. Instead, industry leaders like Bank of America Corp., Wells Fargo & Co., HSBC Holdings PLC's HSBC North America, Fifth Third Bancorp and others are experimenting with new ways to nick their customers, from imposing maintenance fees on checking accounts to rolling out new charges for services like fraud alerts, debit cards and credit reports. Making matters trickier, while the banks must disclose the new fees fully, they likely will do so only in the ordinary-looking correspondence that most consumers toss in the trash without reading. The result: Many people will learn of the new charges only after opening their monthly statements.
The So-Called Death of “Free” Checking - A lot of people are talking about the death of so-called “free” checking that could be in the works at Bank of America. Here’s Kevin Drum and Felix Salmon writing about this. Felix also mentions interchange and credit unions in his post. A few things, and then two comments I want to get at. First off, and Adam Levitin beat me to it, is that you almost certainly don’t have free checking. What you have is a monthly fee that is waived if you do certain things. See BoA here. Unless you are a student at that page, you don’t get free checking, you get a monthly fee waived if you direct deposit and/or hold a minimum balance. There was the story that was going around in February about how the recently unemployed were realizing that their “free” checking had been turned off because they no longer had any income to direct deposit. Which is to say, it was free until it wasn’t.
Banking the Unbanked--Government-Sponsored Prepaid Cards? - Blogging about the RushCard has me thinking. Prepaid debit is filling a market need for financial services (payments and safe-keeping) for the unbanked. But prepaid debit products are often as predatory in their pricing as check-cashing outlets. So two questions. First, why isn't this market working better? That is, why isn't competition pushing out the bad products and lowering prices? This can't be a credit-rationing or red-lining story, as there's no credit (and almost no risk) involved with a prepaid product. And second, is this market isn't working, what role for government? There are lots of ways to respond to market failures, and a lot depends on identifying the nature of the market failure. But one option, when the private market isn't working, is to spur it along with public competition. To this end, it's worth considering the possibility of government-sponsored prepaid debit cards as a means of providing low-cost basic financial services access (payments and safe-keeping) to the unbanked
Volcker: New Government Powers Won't Be Able To Dismantle Megabanks; Too Big To Fail Lives Despite Reform Bill - Former Federal Reserve Chairman Paul Volcker believes the centerpiece of the administration's effort to end Too Big To Fail -- the perception that the nation's largest banks will always be bailed out when in trouble -- will not actually apply to megabanks.In a September 2009 speech on Wall Street, President Barack Obama said that the administration's preferred way to dismantle failing systemically-important firms is a new "resolution authority" outside the normal bankruptcy process. But on Monday, during a discussion on CNBC, Volcker, the head of Obama's Economic Recovery Advisory Board, said the proposed authority is a "workable proposition for anything short of these biggest banks." The Senate and House financial reform bills feature the resolution authority as a way to end TBTF. The bills are based on Obama's June 2009 blueprint for reforming the financial system. According to Volcker, it isn't "workable" for the nation's megabanks.
Finreg Please Don’t Be Serious Edition: House Dems Dismantling the Volcker Rule? - And what are Democrats doing fighting for State Street’s ability to put a hedge fund and shadow bank right in the middle of their crucial, boring custodial business? Did they like the business model of AIG and State Street, and the subsequent bailouts, so much they want to do it all over again? Brian Beutler makes a great catch: Behind Closed Doors Four Key Democrats Maneuver To Weaken Financial Reform. Two sources identified four House members on the conference committee who have privately pushed to write a loophole into the Volcker rule which would allow banks to invest in hedge and private equity funds. That loophole has the strong backing of Bank of New York Mellon, and State Street Bank and Trust among other firms, but is fiercely opposed by Volcker himself, who has had tremendous influence over the shape of the reform bill. .Hey look, it’s noted TARP-recipient State Street Bank lobbying and teaming up with Democrats!Remember the Cambridge Winter analysis, released this week, of the complete 2008-2009 failure of State Street and the subsequent taxpayer bailout? If you are interested in reform and the lobbying process read it again (here’s my discussion of it).
TBTFs Remain Immune From Reform, There Is "No Way To Break Them Up" When Need Arises - When (not if) the need arises to dismantle the TBTFs, full of noncashflow producing loans, the next time around we have a Flashiest Crash, we will have no way to do so, despite the widely propagandized Obama FinReg reform. These are the words of Obama's right shoulder man Paul Volcker, who on William Isaac's program earlier noted that proposed legislation is "not going to prevent the top five banks from being saved." In that sense, the primary goal of Obama's attempt to overhaul financial regulations: the prevention of taxpayer bailouts when banks implode, is a miserable failure, yet it will not stop countless hours of self-congratulatory, teleprompterized appearances by the president, the Congressman from Fannie Mae and the Senator from Countrywide. In other news, the bankers win again, and nothing changes. Next up: how to get bank leverage to 100x all over again, without alerting the general public that next (if not this) year's bonuses will be once again fully funded by the US middle class.
Democracy Sausage - “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said. “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”
I’d love for this quote to be the epitaph for this administration. This open gloat that “We could have fought for the people and chose to fight against them.” It should be applied not just to the Kaufmann-Brown Break-Up-the-Banks amendment, but to everything (not an exhaustive list, but just some highlights) - single-payer instead of handing over the American people as a cash cow to the insurance gangsters, ending the war instead of escalating it, restoring civil liberties instead of further assaulting them, restoring the rule of law instead of further destroying it, breaking our captivity to oil and the oil rackets instead of tightening the bonds, ending corporate welfare instead of opening the sluice gates even wider, smashing all rackets instead of further entrenching them, eradicating the finance parasite instead of defending and further empowering it, thereby guaranteeing that the final crash and Depression will be as destructive and painful as possible.Is there a Global War between Financial Theocracy and Democracy? -Senate and House conferees are about to reconcile a financial reform bill that is virtually designed to institutionalize “too big to fail.” And when they do we’ll lose another battle in the ongoing war between global financial markets and democratic nation-states. This war has been going on for decades — but democracy hasn’t always been in full retreat.During the Great Depression democratic forces gained the upper hand in the war. By the late 1970s, bankers regained the advantage through the spread of a new faith in self-regulated markets.Then, suddenly, in 2008, the market gods destroyed themselves as the unregulated financial casinos crashed and burned, just like they did in 1929. At the moment when Wall Street was on its knees, we decided to bypass serious reform. Instead, we rebuilt Wall Street, using taxpayer money and guarantees – more than $10 trillion worth
Citigroup Looking Past Volcker May Seek $3 Billion for Funds (Bloomberg) -- Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said. Citi Capital Advisors, which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said. “Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.”
Creating the Next Crisis - Simon Johnson - On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach. “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said. “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.” Whether the world economy grows now at 4% or 5% matters, but it does not much affect our medium-term prospects. The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation. We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system. This can end only one way: badly.
Government Bonds and the Financial Crisis - In the last 30 years, Mr. Bini Smaghi said, according to a text of the speech, banks have drawn more and more of their funding from so-called securitization, packaging loans into securities that could be traded on open markets. Securitization put the banking system, which previously had relied on deposits to finance loans, into overdrive. As Mr. Bini Smaghi put it at a conference sponsored by Barclays, the British bank, “the securitization of previously illiquid items in banks’ balance sheets gave perhaps the strongest boost to the financial sector.”A related phenomenon is what Mr. Bini Smaghi called the “the rise of collateral.” To get access to short-term funds in the new supercharged financial system, banks borrow from each other. As collateral, they use marketable securities like bundles of real estate loans — securitizations or government bonds. The volume of interbank lending using such collateral— known as “repos” — is big, Mr. Bini Smaghi said, though there is a lack of data on how big. It is crucial to functioning of the banking system.
Financial Overhaul Likely to Be More Restrictive on Banks’ Capital Requirements - You might hear a collective “Uh Oh” on Wall Street today.Big banks had figured surely lawmakers would strip out a controversial provision in the Senate bill that would force bank holding companies to hold more capital and essentially prohibit them from counting hybrid securities as Tier 1 capital — a regulatory measuring stick essentially determining whether a company has enough in reserves to weather losses. The Senate included this provision, authored by Sen. Susan Collins (R., Maine) and pushed by Federal Deposit Insurance Corp. Chairman Sheila Bair, into their bill. The House of Representatives didn’t have a similar provision, so bankers figured this would have to fall out. The Treasury Department didn’t like it. The Federal Reserve didn’t like it. Small banks didn’t like it. Almost everyone appeared to hate it.So on Thursday, there were collective gasps when the House came back with their proposed changes to the provision and instead of offering to kill it, they are essentially proposing to tailor it in such a way that it would only affect banks with more than $15 billion of assets.
Economists Ponder Ideal Reform Of Finance Oversight - A good overview of what economists think should be done comes courtesy of the curiously named Squam Lake Report, which was given its formal unveiling Wednesday at an event held in New York that was capped by a keynote speech by Federal Reserve Chairman Ben Bernanke. The document, a year and a half in the making, is the result of work by economic luminaries, among them former Fed governor Frederic Mishkin and Yale University’s Robert Shiller. The pragmatic plan recognizes limits. Anil Kashyap of the University of Chicago Booth School said “I don’t think we want to claim any of our proposals is a silver bullet.” But beyond that, a lot of what is in the book should sound quite familiar to anyone engaged in the reform process.
'Too Big To Succeed' May Be Our Biggest Problem - The Gulf Coast oil gusher is like a big boxcar in a big runaway freight train of big, big problems: the financial industry, the health care industry, immigration policies — a linked chain of vast worriments hurtling through the contemporary landscape, seemingly out of control. Why and how has everything gotten so big? Is it the hubris of humanity that urges us to concoct dilemmas we cannot decipher? Predicaments from which we cannot extricate ourselves? Are we driven to build cars too big for parking spaces? Airplanes too big for their hangars? Metropolises too big for metro systems? Do we develop corporations, institutions, governments, ecosystems that become not too big to fail, but too big to succeed?
The US financial reform bill: Hit or flop? - VoxEU -Will the upcoming Financial Reform Bill in the US help prevent the next crisis or at least reduce its probability? This column argues that the answer is a firm “no”. It says this is not because the reform steps are damaging or wrong, but simply because they only provide the framework and do little to change incentives for banks and regulators.
Giving In on Trading, Banks Focus on Other Losses - NYT - Bankers have all but given up on defeating one of the most contentious provisions in the financial regulation bill — one that would effectively bar federally insured banks from trading for their own accounts — and are now focusing on battles like heading off a prohibition on derivatives trading. As House and Senate negotiators head into a final push to send the legislation to President Obama, they have largely agreed to stricter limits on so-called proprietary trading than those envisioned in the versions passed by either chamber. That outcome would be a victory for the White House and for the provision’s most dogged advocate, Paul A. Volcker, the former Federal Reserve chairman. But with the so-called Volcker Rule now likely to become law after appearing to be dead at earlier points in the legislative process, banks are battling hard to fend off further restrictions on their activities.
Lobbyists Can’t Reach Lawmakers - Wall Street's lobbying army is marching around Washington in a push to shape the final financial-overhaul bill. But it has gotten harder to get through the door with some lawmakers. Mr. Frank and the top Republican on the House Financial Services Committee, Rep. Spencer Bachus (R., Ala.), also have postponed scheduled fund-raising events since the conference held its first meeting on Thursday. Messrs. Frank and Bachus are among 43 lawmakers responsible for hammering out differences in the bill, which will have a broad impact on how banks are regulated and do business.There are three reasons why bending the ear of lawmakers suddenly has become a bigger challenge for financial-services industry lobbyists. Some lawmakers want to avoid even the slightest appearance that Wall Street is getting one last chance to throw its weight and money around on key provisions of the bill, including toughened oversight and other banking and securities cash cows.
Lawmakers' committee assignments and industry investments overlap… In both houses of Congress, a host of other committee chairmen and ranking members have reported that they have millions invested in business sectors that their panels oversee, according to a Post analysis of financial disclosure records through 2008, committee assignments and lawmaker investments by industry. The disclosure reports covering 2009 will be made public in the coming days. But because lawmakers still use a pen-and-paper method of reporting, it will be months before the information is entered into a database by the Center for Responsive Politics and then made available for analysis by The Post. While many lawmakers have no investments in sectors under their oversight, some congressional committees had notably high concentrations of such holdings, The Post's analysis shows.
The Cognitive Capture Dilemma - Steven M. Davidoff writes,What makes these issues so intractable is that you want regulators to interact with the people they regulate. In addition, regulators from industry sometimes best understand the industry they regulate. He correctly points out that the top bank regulators get most of their information about banking from the top bankers. However, it is wrong to imply that everyone other than top bankers has no useful information. If you burrow down a few layers (get below the suits and talk to geeks), you can get even better information. In fact, my guess is there are geeks within the bureaucracy that know stuff that folks like Geithner, Summers, and Bernanke do not know. But the in-house geeks are hard to locate, because they are not the ones who play the organizational politics game well enough to get close to the top positions at Treasury and the Fed.
NRA Agrees To Let Campaign Finance Bill Pass : NPR - Displaying its remarkable clout, the National Rifle Association agreed on Tuesday to permit House passage of tougher disclosure requirements on campaign advertising and other political activity, one day after Democrats pledged to exempt the gun-owners' group from the bill's key provisions. Supporters of the measure conceded that without the NRA's acquiescence, it was doomed to defeat."Any efforts to silence the political speech of NRA members will, as has been the case in the past, be met with strong opposition," the organization said in a statement in which it pledged to refrain from lobbying either for or against the legislation's passage as long as the exemption remains part of it.The measure requires the listing of the names of the top five donors to an organization running political ads, including unions, businesses and nonprofit organizations. It also mandates that any individual or group paying for independent campaign activities report any expenditure of $10,000 or more made in excess of 20 days before an election. Expenditures greater than $1,000 would have to be disclosed within 24 hours in the final 20 days of a campaign.
Loopholes Grow in Bill to Offset Ruling on Campaigns - Congressional Democrats are pushing hard for legislation to rein in the power of special interests by requiring more disclosure of their roles in paying for campaign advertising — but as they struggle to find the votes they need to pass it they are carving out loopholes for, yes, special interests. In a deal that left even architects of the legislation squirming with unease, authors of a bill intended to counter a Supreme Court ruling allowing corporations and unions to pour money directly into campaign commercials provided an exception this week for the National Rifle Association, one of the most powerful lobbying groups in Washington. The resulting uproar over special treatment for the pro-gun group led Democrats on Thursday to expand the exception to cover even more interest groups as they tried to secure votes for the measure, which is opposed by most Republicans.
Once again we must ask: ‘Who governs?’ -“Who governs – government or financial markets?” No clear answer has yet been given, but the question may well define the political battleground for the next five years. In one sense, next week’s emergency Budget is simply the logical working out of an intellectual theorem. The implicit premise of the coming retrenchment is that market economies are always at, or rapidly return to, full employment. It follows that a stimulus, whether fiscal or monetary, cannot improve on the existing situation. All that increased government spending does is to withdraw money from the private sector; all that printing money does is to cause inflation. Politicians clamouring for cuts in public spending do not cite Chicago University economists. They talk about the need to restore “confidence in the markets”. The argument here is that deficits do positive harm by destroying business confidence. What market participants believe to be the case becomes the case, not because their beliefs are true, but because they act on their beliefs, true or false
Extend & Pretend: A Matter Of National Security -There is something seriously wrong in America. We all sense it, but few in the mainstream media are willing to touch it or can effectively articulate it within the public’s sound-bite oriented attention span. It isn’t just about the remnants of the financial crisis; it isn’t the protracted jobs recession and slow recovery; it isn’t the trillions of dollars in deficit spending; it isn’t the degree of rampant financial malfeasants. It is something deeper which reaches into the soul of who we are as a people and society. On the surface it might appear we have lost our optimism about the future and our confidence that America is still the ‘beacon on the hill’ that countries around the world admire and look to for leadership. Though our children mouth the platitudes taught by older generations, they ring hollow in the hallways with video surveillance, motion sensors and metal detectors when recited by them. The high minded ideals seem misplaced in unemployment lines where they stand with freshly minted advanced degrees in hand, huge education debts and little hope other than the faint possibility of a non-paying internship position. It isn’t that the American people have changed. Our government has changed.
Maybe It Takes a Depression - Maxine Udall - James Kwak at Baseline Scenario provides strong evidence that Wall Street CEOs are nuts, but in reading the piece and John Heileman's New York Magazine article, Obama is from Mars, Wall Street is from Venus, it's hard not to conclude that Obama-Geithner don't have a real firm grip on reality either. Evidence of CEO nuttiness abounds. Kwak quotes from John Heileman's article: I heard the president described as ‘hostile to business,’ ‘anti-wealth,’ and ‘anti-capitalism’; as a ‘redistributionist,’ a ‘vilifier,’ and a ‘thug.’...I’d been told that one of the most prominent megabank chiefs, who once boasted to friends of voting for Obama, now refers to him privately as a ‘Chicago mob guy.’ "Chicago mob guy?" How about Chicago School guy? The efforts of the Obama administration to water down financial reform legislation seem to reflect a remarkable confidence that laissez-faire can be relied upon to produce the best outcome, in terms of risk management, in terms of resource allocation, and in terms of the public interest.
SEC: Government Destroyed Documents Regarding Pre-9/11 Put Options - On September 19, 2001, CBS reported:Sources tell CBS News that the afternoon before the attack, alarm bells were sounding over unusual trading in the U.S. stock options market. An extraordinary number of trades were betting that American Airlines stock price would fall. The trades are called "puts" and they involved at least 450,000 shares of American. But what raised the red flag is more than 80 percent of the orders were "puts", far outnumbering "call" options, those betting the stock would rise. Sources say they have never seen that kind of imbalance before, reports CBS News Correspondent Sharyl Attkisson. Normally the numbers are fairly even. After the terrorist attacks, American Airline stock price did fall obviously by 39 percent, and according to sources, that translated into well over $5 million total profit for the person or persons who bet the stock would fall.
Recipes for Ruin, in the Gulf or on Wall St. - AS the oil spill in the Gulf of Mexico follows on the heels of the financial crisis, we can discern a toxic recipe for catastrophe. The ingredients include risks that are erroneously thought to be vanishingly small, complex technology that isn’t fully grasped by either top management or regulators, and tricky relationships among companies that are not sure how much they can count on their partners. For the financial crisis, it has become clear that many chief executives and corporate directors were not aware of the risks taken by their trading desks and partners. Recent accusations against Goldman Sachs suggest the potential for conflicts of interest among banks, investors, hedge funds and rating agencies. And it is clear that regulators like the Securities and Exchange Commission, an agency staffed primarily with lawyers, are not well positioned to monitor the arcane trading strategies that helped produce the crisis.
Mismanaged Risk or Ignored Risk? - Maxine Udall - Richard Thaler opines in last Sunday's NY Times that the mismanagement of risk by Wall Street investment banks and the mismanagement of risk by oil and other extractive industries derive from similar problems: I remember thinking as I read it that it seemed a remarkably naive and kind assessment of "top management" who are presumably paid big bucks to understand and manage risk, to understand and manage complex technology and to manage tricky relationships between companies. And it ignores that regulators' powers were often either eviscerated or nonexistent particularly since the 1980's in finance and more recently in environmental matters, particularly those related to energy. James Kwak at Baseline Scenario weighs in with what I think is a better description of what the real common problems are.The problem is that there is a systematic bias within these companies against certain assessments and in favor of others.
Ratings agency overload! - The ratings agencies have been busy this week: Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, which will do nothing for its yields or investor confidence in the Euro. A good article in Business Week here discusses the issue. Needless to say the EU Commission is clearly very unhappy about the situation. Secondly, Fitch has also been busy - BP’s credit rating was slashed an impressive six notches by it today to just two levels above junk, just hours before its top U.S. executive is grilled in front of Congress as worries over how much the company will have to pay for the Gulf of Mexico oil spill grow. Using a variety of company and industry estimates, Fitch sees immediate clean-up and claim settlements between $3 billion and $6 billion; civil fines of between $2 billion and $8 billion.
The Fractional-Reserve Banking Question – Suppose a teenager, Bill, is rummaging in the attic and finds $1,000 in physical currency in an old chest. Bill is ecstatic and runs to the local bank, where he opens a checking account and deposits the green pieces of paper. Under a 100-percent-reserve banking system, this would be the end of the story. In the act of making the deposit, Bill's currency holdings would fall by $1,000, while his checkbook balance would rise by $1,000. However, in our current system, Bill's bank would see a new profit opportunity. After the bank put the $1,000 of paper currency into its vault, its reserves would be that much higher, while its outstanding deposit liabilities would have risen by $1,000 as well (in the form of Bill's new checking account). But since banks in the United States are subject only to a reserve requirement of (approximately) 10 percent, the bank would have new excess reserves of $900. If it found a suitable borrower, the bank would have the legal ability to grant a new loan for this amount. Suppose the bank found such a borrower, Sally, and charged her 5-percent interest for a 12-month loan. Assuming she paid off the loan in a timely manner, here is what the bank's balance sheet would look like at various stages in the process:
Can’t Tell Your Banking Crisis Without a Scorecard - The superlatives about the global financial crisis are unending .. Now a couple of International Monetary Fund economists, Luc Laeven and Fabian Valencia, have updated the official scorecard in a working paper titled, “ Resolution of Banking Crises: The Good, the Bad and the Ugly.” Among the nuggets: Compared to the wave of U.S. banking failures in the 1930s and the Savings & Loan crisis of 1989, “the current wave of banking failures appear more short-lived and, at least compared to the savings and loan crisis, less dramatic in terms of the number of failing banks.”But the average U.S. bank is a whole lot bigger than in days past. “After accounting for this development,” they write, “the recent failures look a lot worse. Failed U.S. banks hold about 26% of the deposit market — when including banks that didn’t failure be received government assistance, such as Citigroup and Bank of America” — and that doesn’t count taxpayer investments in basically healthy banks like Goldman Sachs. “Using this definition of failure, 2009 is by far the worst on record.”
How to Prevent the Next Financial Crisis? Pop the Compensation Bubble - The financial reform legislation will address specific business activities that led to a massive run on the largest financial institutions in 2008. Understandably, it looks backwards to analyze what went wrong and regulate those activities. It would be naïve to think that this is a complete, long term solution to the problem of periodic, systemic financial crises.The power inherent in the financial sector as the arbiter of capital flows in our economy is formidable. Society allows the bankers to amass wealth as they wield this power because it is in the long term interest of us all. The unwritten contract demands that the financial system provide capital to generate sustainable jobs and investment opportunities for the public. The major Wall Street banks breached this contract. As I have previously written, massive changes in the sector fostered by technological advances and deregulation allowed this to happen
Fixing bankers' pay - Harvard’s Jeremy Stein has just given a very compelling presentation on the subject of executive compensation at banks. His bright idea is that you don’t regulate the level of pay at banks, and that you certainly don’t try to convert pay into stock, for reasons similar to those glossed by Justin Fox at HBR: Equity in a highly leveraged firm (banks and investment banks have debt-to-equity ratios that start at 10-to-1 and go much higher) is equivalent to a call option. That is, if the firm goes bust the equity holders only lose a little but if it does well they can reap huge rewards. So shareholders have every incentive to push executives at highly leveraged firms to take big risks (and executives with big equity stakes have every incentive to take big risks). This conforms with what we saw at Bear Stearns and Lehman Brothers, where the managers had large equity stakes. So what to do? “It’s important to get incentive alignment,”
Treasury Report Says Small Banks Not Repaying TARP –A new report by the Treasury Department shows what other earlier data has suggested: small banks are in trouble. This particular data point comes from a May report to Congress on the status of TARP repayments. It found that 101 bailed-out banks that participated in the program have missed paying the government a dividend. Nearly all of these banks are small institutions. That 101 figure is a 25% increase from February. In May, total repayments reached $194 billion, while the outstanding debt is $190 billion. There are some caveats to this milestone, however. Namely, the outstanding debt amount does not include $106 billion that has been committed to institutions but has yet to be paid out. With that added to the final tally, the outstanding debt becomes $296 billion. The news about the small banks is especially disconcerting, though, coming on the heels of other indications that these institutions--most of which are burdened with sour real estate loans--are not regaining their financial health as quickly as their larger counterparts.
Less Lending by Banks This Year - Our government has propped up housing prices every way imaginable since the credit crisis began. By doing so, and not allowing a natural floor in real estate prices to be reached, a wary public is reacting by not borrowing and the banking sector is reacting by not lending at current price levels. Of course, if the real estate prices were allowed to fall, banks would need to take losses on existing mortgage loans. But, until the process is allowed to fully play out, we are in a credit crunch. The additional factor at play here is the ongoing effort of banks to shore up capital ratios (while toxic loans are still on the books).
FDIC Bank Failures ($ Inflation Adjusted) - Courtesy of Ron Griess of the Chart Store, we have our two regular FDIC charts — plus two new ones that look at failures in dollar terms, both nominally and inflation adjusted:
Another 500 to 700 bank failures predicted - Nearly 250 U.S. banks have failed since the beginning of 2008, and a Chicago-area investment banker predicted Tuesday that another 500 to 700 U.S. lenders could be seized in coming years.Steven Hovde, chief executive of Inverness-based Hovde Financial, made the forecast at an Association for Corporate Growth event in Chicago. He noted that the outlook of other industry observers is even more grim. Fortress Investment Group, for example, said earlier this month that about 2,000 of the nation's 8,000 banks could fail in coming years. Hovde noted that larger banks are lending but said "community banks are seeing nothing but pain." He said the minute that they add any commercial real estate or land loans to their books, their examiners downgrade the loans.
Unofficial Problem Bank List increases to 781 Institutions - Here is the unofficial problem bank list for June 18, 2010. Changes and comments from surferdude808: After relative calm last week, there were many changes to the Unofficial Problem Bank List this week as the OCC finally released their actions for May. The list stands at 781 institutions with aggregate assets of $404.3 billion, up from 760 institutions with aggregate assets of $385.2 billion last week. Only one removal this week -- the failed Nevada Security Bank There were 22 additions with aggregate assets of $19.6 billion
Who’s going to pay for deposit insurance? - Tim Fernholz has the details on the new FDIC deposit-insurance cap: it looks like the temporary $250,000 limit is not only going to be made permanent, but will also be made retroactive, to cover uninsured depositors in IndyMac. And then there’s this: The $100,000 cap hadn’t been increased since 1980, and only in 2006 was it indexed to inflation; one compromise in this measure will keep the cap at $250,000 until it would have risen above that level under the inflation index.I’m not sure what this means, since $100,000 in 1980 dollars is actually slightly more than $250,000 in today’s dollars. In any case, what we haven’t seen yet is any indication of how the banks are going to reimburse the FDIC for all the money it’s spent to date and will spend in future bailing out depositors. Chances are this process is going to take decades — and giving the banks all that extra time to come up with the money is a substantial back-door bailout in its own right. It’s not like we’re asking them to borrow the money at market rates, give it to the FDIC, and then pay interest to their creditors: the difference between that and what we’re going to end up with constitutes a multi-billion-dollar subsidy from the taxpayer to the banks.
Double Dip Recession Talk Bustin’ Out All Over - Yves Smith - I’ve been quite mystified at all of this “double dip” recession talk, even though I suppose it beats the “V shaped recovery” talk. Both presuppose that we had a recovery underway, the real sort, not the type that is mainly the artifact of inventory restocking, halting and sometimes covert stimulus, (like hiring unprecedented numbers of Census workers, cash for clunkers and home purchase tax credits to induce consumers to accelerate investments) and a weaker dollar than has since gone in the reverse direction. While employment is a lagging indicator, you need to have a realistic prospect of meaningful hiring to talk of recovery. Small business was pretty much the only engine of job growth in the last expansion. Small businesses are now credit starved and suffering, and their prospects seem unlikely to turn in a meaningful fashion anytime soon. And these concerns were operative before the sucking sound of deflation coming out of Europe had become a major part of the mix.
If the data are so good, why is everyone screaming double-dip? I think the last week’s data were pretty good. I know I’m putting a bullish gloss on things here but the jobs number was up at the end of the previous week, jobless claims were better, consumer confidence is up, freight and truck traffic is up, and we saw some modest consumer deleveraging. Moreover, despite the shockingly weak retail number, if you strip out the non-core measures, the number wasn’t terrible (it wasn’t good either). So, on the whole, the data were ok. Moreover, the market seemed to like the data as shares rallied from an oversold position last week. The problem comes when you dig beneath the surface to more forward-looking data. The ECRI numbers have been misinterpreted by analysts. There is nothing in the numbers which indicates imminent double-dip recession. They are not that dire. ECRI Leading Indicators levels are now flashing red because this tool suggests slowing growth. That’s all. I have said I expect 1-2% in the 2nd half of the year. And the ECRI numbers are in line with that. Let me explain where the slowing growth is likely to come from and what that could lead to.
Roubini Sees No Double Dip In US, Spars With El-Erian - Nouriel Roubini was on CNBC earlier, sparring with Mohamed El-Erian, providing a very indecisive prediction about the future of the US economy. The RGE economist who previously would say the depression is only just starting, is unwilling to commit to a prediction of a double dip for the US, and barely do so for Europe. His anticipation of sub 2% GDP growth in H2 is... higher than that of perpetually optimistic Goldman Sachs, which sees 1.5% H2 growth. So much for swinging for the fences. But when existing subscribers expect to a given set of data, it is quite understandable. It is, nonetheless, good to see that the Doctor read the ConvergEx report we posted some time ago indicating how the Fed, and everyone else calling for a projected reduction in unemployment, are pathological liars: "With 130.2 million people presently employed, that works out to an addition of 385,000 jobs in each month, May through December – and that’s just to reach 9.4%. The low-end Fed projection is 9.3%. Considering the economy added 290,000 jobs (more on this later) last month, 385,000 seems a touch ambitious to say the least."
How to Avoid a Double-Dip Global Recession - Nouriel Roubini- There is an ongoing debate among global policymakers about when and how fast to exit from the strong monetary and fiscal stimulus that prevented the Great Recession of 2008-2009 from turning into a new Great Depression. Germany and the European Central Bank are pushing aggressively for early fiscal austerity; the United States is worried about the risks of excessively early fiscal consolidation.In fact, policymakers are damned if they do and damned if they don’t. If they take away the monetary and fiscal stimulus too soon – when private demand remains shaky – there is a risk of falling back into recession and deflation. While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse. On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads). Or, if these deficits are monetized, high inflation may force up long-term interest rates and again choke off economic recovery.
A Double Dip Recession? - The topic du jour in many parts of the economics blogosphere is whether there will be a double-dip recession in the second half of 2010. Some folks like MacroAdvisors see absolutely no chance of a recession while others like David Rosenberg see a 80% probability of another recession. Other observers like Yves Smith, meanwhile, question whether there has even been a real recovery at all. One bit of information that is stoking the coals of this debate is the ECRI's weekly leading economic indicator series. Supposedly this is one of the better leading indicator series and as a result some folks have taken notice of the recent 5-week decline in the series as evidence there is a real chance of a double-dip recession. This series is graphed below (click on figure to enlarge):I thought it would be interesting to use this series to help forecast real GDP over the second half of this year. To make this forecast I first converted the weekly series into a monthly one and plugged it into a vector autoregression (VAR) model that also had the monthly real GDP series from MacroAdvisors
Oil Spill May End Up Lifting GDP Slightly -The continuing oil spill in the Gulf of Mexico could end up adding a bit of growth to the U.S. economy as the huge cleanup efforts in some ways outweigh negative factors, analysts at J.P. Morgan Chase said.The six-month moratorium on deep-water drilling may cut U.S. oil production by around 3% in 2011 and cost more than 3,000 jobs, according to J.P. Morgan’s energy analysts.Commercial fishing in the Gulf is also likely to suffer, but that’s only about 0.005% of U.S. GDP. The impact on tourism is the hardest to measure, although it’s fair to expect that many hotel workers who lose their jobs will find it hard to get new ones. Still, cleaning up the spill will likely be enough to slightly offset the negative impact of all this on GDP, J.P. Morgan said. The bank cites estimates of 4,000 unemployed people hired for the cleanup efforts, which some reports have said could be worth between $3 and $6 billion.
Ezra Klein - Could the BP oil spill increase GDP? - Annie Lowrey notes a J.P. Morgan Chase analysis suggesting the BP spill will actually raise the country's GDP, at least in the short term. "Cleaning up the spill will likely be enough to slightly offset the negative impact of all this on GDP, J.P. Morgan said," summarizes Luca Di Leo. "The bank cites estimates of 4,000 unemployed people hired for the cleanup efforts, which some reports have said could be worth between $3 and $6 billion."This is a nice object lesson in the inadequacy of GDP as a measurement of societal well-being. I could blow up the biggest building in every city in the country and the resulting reconstruction effort could mean a big temporary increase in GDP. But blowing up buildings is not a sustainable way to grow your economy. GDP, of course, has its uses, and as Bruce Bartlett points out, it provides a rich source of historical data and we wouldn't want to abandon it completely. But there's no reason we couldn't also use more comprehensive measures, and this Urban Institute report (pdf) gives a nice overview of what they would look like.
Lies, damn lies, and growth - THE Wall Street Journal's economics blog, Real Time Economics, reported good news today from analysts at JPMorgan Chase: "Oil spill may end up lifting GDP slightly". Hey, America should blow up some more deep-water rigs! Here's the explanation: The bank cites estimates of 4,000 unemployed people hired for the cleanup efforts, which some reports have said could be worth between $3 and $6 billion. “If realized, this would likely mean a near- to medium-term boost to activity that might offset the drags,” I find it difficult to believe, even in a narrow accounting sense, that the spill will lead to a net increase in output. The long-term damage to coastal economies is sure to be astronomical. The clean-up will offset some of these costs, but I think we haven't begun to see the full extent of the financial cost of the spill. But the broader point, of course, is what it says about GDP that a massive disaster like this could potentially read as an immediate gain in income. There's also the rather substantial problem that despoilation of public goods doesn't translate into a countable loss.
CitiMortgage Suspends Foreclosures in Gulf Coast Region - The suspension will last three months and will go into effect June 17 and end Sept. 17. All foreclosure sales and evictions on REO properties will halt in the region during that time. The foreclosure suspension affects borrowers occupying homes in ZIP codes within roughly 25 miles of the coastline including Louisiana, Mississppi, Alabama and the Gulf Coast of Florida. It would total 515 counties, according a Citi spokesperson.Vikram Pandit, CEO of Citi, said the initiative aims to help residents in effected areas concentrate on more urgent matters.“In the midst of this crisis, we will continue to explore ways to help people avoid foreclosure so they and their families can remain in their homes and have one less thing to worry about,” Pandit said.
Fannie Suspends Some Mortgage Payments in Oil Spill Wake -"We want to give homeowners every opportunity to weather this unprecedented disaster, including relief from their mortgage payment if that will help them get back on their feet and stay in their homes," said Fannie president and CEO Michael Williams, in a statement. "Our policy is in place to support those who are experiencing a disaster-related hardship through no fault of their own and are acting in good faith to meet their mortgage obligation."Servicers may suspend or reduce a borrower's payments for up to 90 days under the Fannie "Special Relief Measures" policy. While payments are suspended, the servicer can determine the nature and extent of the impact the disaster is having on the condition of the property or on the borrower's financial condition.
The Utility of Chapter 11 - I am a strong proponent of the utility of chapter 11 of the U.S. Bankruptcy Code as a restructuring tool. I want to emphasize that I view chapter 11 as a "tool"—not a "fix"—in the context of financial distress. The effectiveness of this tool depends largely on who is using it and how it is being used. Companies do not fail because of chapter 11; rather, companies fail because, among other things, they wait too long to invoke the chapter 11 tool (see here), they do not understand how best to use that tool (see here), or perhaps they simply have outlived their economic utility (see here). The effectiveness, however, also depends on the construction of the tool itself. So how do we assess its construction? Although there are a number of very useful studies on the topic, I suggest we look back at the origins of chapter 11 and three of its important features:
FHA Reform Bill Passes House - Just an update on H.R. 5072: FHA Reform Act of 2010 The bill passed in the house 406-4. This bill has several provisions, but a key for the housing market is the increase in the maximum annual premium payments for mortgage insurance. The current maximum is an annual premium of 0.50% of the outstanding principal balance for loans with the original principal obligation under 95% LTV, and 0.55% for loans with the original principal obligation over 95% LTV. This legislation will increase the maximums to 1.50% and 1.55% respectively. The proposed effective date is September 30, 2010. There is no senate version yet.
Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case (Bloomberg) -- The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts. Fannie and Freddie own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them
Fannie Mae, Freddie Mac to delist shares from NYSE(AP) -- Government-sponsored mortgage purchasers Fannie Mae and Freddie Mac plan to delist their shares from the New York Stock Exchange.The companies' regulator, the Federal Housing Finance Agency, said Wednesday that it expects Fannie Mae and Freddie Mac shares to trade on the Over-the-Counter Bulletin Board, an electronic quotation service.The move to delist the shares isn't a surprise. The crash in the housing market has pounded Fannie Mae and Freddie Mac with heavy loan losses since 2007. Fannie shares have been below the $1 average price level for 30 trading days. NYSE rules require a company to take action to boost its shares or delist.The government took over the pair in September 2008 under the authority of a law passed by Congress. So far, taxpayers have poured $145 billion into Fannie and Freddie to keep them afloat and to buoy the overall housing market.
Commercial Real Estate Needs $1 Trillion Of New Capital To Bail It Out - Morningstar analyst Todd Lukasik expects a flurry of purchase activity in the commercial real estate space, starting now and then intensifying in 2011 and 2012. It's not so much that the commercial real estate market is healthy, but rather that there will be massive amounts of distressed properties as many property owners' untenable debt burdens come due. (For more background, see a previous post here)Investment capital has been massing on the sidelines, waiting for the inevitable buying opportunities which will arise.In fact, transaction activity has already begun to pick up as shown by the Morningstar tables below:
Commercial Property to Stay 40% From Peak, Pimco Says (Bloomberg) -- U.S. commercial property values are rebounding slowly and may remain as much as 40 percent below their 2007 peak levels, Pacific Investment Management Co. said.More than $500 billion of real estate will hit the market as lenders dispose of assets or restructure debt on properties where valuations have dropped below loan levels, keeping “general” prices down for three to five years Pimco, which runs the world’s biggest bond fund, said on its website.“Capital is clearly returning to commercial real estate, helping to stem the value decline in the sector,” Pimco said in a report based on research in 10 cities. “Optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations.”
Feds charge 1,200 people in mortgage fraud crackdown - Seeking to show victories against the kind of ground-level fraud that contributed to the housing crash, federal authorities said Thursday that they had filed criminal charges in recent months against 1,200 mortgage brokers and others accused of cheating banks and borrowers of $2.3 billion. White-collar crime experts said the size and scope of what the government presented Thursday — dubbed Operation Stolen Dreams — represented an unprecedented crackdown on mortgage fraud. The cases, including criminal charges against more than 30 defendants in Southern California, were announced at news conferences in Washington, New York, Ventura and elsewhere.
Radical Ideas From a Federal Housing Bureaucrat - As the chief economist of the Federal Housing Finance Agency, Patrick Lawler is usually confined in his public remarks to discussing such matters as the seasonal adjustment of home-price indexes. So I wasn’t expecting much excitement when Mr. Lawler rose to speak last week during a panel discussion at a housing-policy conference hosted by the Federal Reserve Bank of Cleveland. But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible. Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages.
Waking Up From the American Dream – NYTimes - Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis. Deep in a speech she delivered last Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
Sheila Talks Tough - Sheila Bair spoke at the Wharton School today. She laid it on the line regarding what she thinks should be done to reform the nation's mortgage market and the role that the government plays. Everyone should read this speech. Especially the current crop of “deciders” in Congress and the Administration. I agree with Ms. Bair on almost all of her points. Her speech confirms to me that she has a vision of what must be done. She is the only one in Washington who has the guts to spell it out for us. I have said in the past and will say again now that Sheila Bair should be our Treasury Secretary. We need leadership. We have none. I am convinced that what Sheila describes will happen in one form or the other. It is not a question of “if” the government’s role in the mortgage market will change. It is a question of by how much and how fast it will change. We can do this over the next 10 years and suffer a lost decade or we can accelerate the process. Ms Bair is in the sooner versus later camp.
Rethinking part of the American dream - It's time to have a serious conversation about the American approach to home ownership and mortgages. A system once celebrated for putting so many families into their own homes and for making mortgages so widely available has become, as one housing economist puts it, "a case study in failure." Beyond the complexities of securitization, the merits of home ownership tax breaks and the politics of Fannie Mae and Freddie Mac lurk two fundamental issues.David Wessel discusses America's system of home ownership, saying that although it has been celebrated for putting so many families into their own homes, it has become, as one economist put it, "a case study in failure."
Keep Out - Felix quotes from a Fed paper on homeownership: 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. Some of these measures—such as fixing a leaky roof—are closely related to the house itself. Others, such as investing resources in the betterment of the neighborhood and the community, have broader beneficial effects on the local area, creating what economists call “positive externalities.” Felix follows up on this, saying:It’s possible to argue for hours about just how big these upsides are, and whether or not they outweigh the downsides of homeownership.He goes on to focus on the first half of the equation, namely, the extent to which underwater homeowners have an incentive to allow their property to go to the dogs. I want to focus on the second half of the paragraph, on community benefits.
Homeownership and positive externalities - My post on falling homeownership sparked an interesting debate about whether and where one might find positive externalities associated with people owning their homes. Certainly a lot of old-fashioned home-improvement expenditures, which make sense insofar as they increase the value of the home, stop making sense when any increase in value just goes straight to the bank. But are there other areas in which homeowners impose more positive externalities than renters? DanHess, in the comments to my post, says that some investments make sense just on a cashflow basis, and therefore could sensibly be implemented even by someone underwater on their mortgage
Don't Blame the Dream of Home Ownership - Here is a fable that is making the rounds. It is a collection of half-truths and outright lies: The financial meltdown was the result of too many people pursuing the American Dream of home ownership. People who couldn't really afford to be homeowners became speculators. Government added to the damage with cheap mortgages, misguided laws such as the Community Reinvestment Act, and overgrown government-sponsored agencies like Fannie Mae and Freddie Mac. This stuff is a staple of rightwing talk shows. In a moment, I will rebut each element of this storyline, but first I want to single out a wildly misleading piece by the New York Times financial columnist Joe Nocera. The piece, which ran in Saturday's business section, was titled "Wake-Up Time for a Dream."
Jumbo mortgage market’s slow return to normal Realty Q&A – For the uninitiated, the mortgage world right now is divided into three parts: Conforming, jumbo conforming and jumbo. A conforming loan is one at $417,000 or less, a jumbo conforming loan is between $417,000 and $729,750, and a jumbo -- also known as super jumbo -- is anything above that. Usually, there are only two segments, conforming and jumbo. But because of the mortgage crisis, there is currently a middle ground, the jumbo conforming level. Unless Congress extends the high-cost limits on loans that can be purchased and securitized by Fannie Mae and Freddie Mac, or can be insured by the FHA, though, that middle tier is scheduled to go away on Dec. 31. Generally, any loan that is touched by Fannie or Freddie, which are now under government conservatorship, or backed by the FHA, is anywhere from 0.25 to 0.5 percentage points cheaper than those without the government's imprint. But because private investors have all but vacated the non-government jumbo sector, the difference is currently about 1%, and qualifying is extremely difficult.
Here's Why Jumbo Mortgage Delinquencies Are 50% Above Average And Rising - A quiet revolution has hit wealthy neighborhoods: financial failure. The 90-day delinquency rate on home loans worth over a million dollars hit a high in February at 13.3 percent, much higher than the overall rate of 8.6 percent. Financial failure on large-balance mortgages and high-end properties is 50 percent higher than the national average – and the national average delinquency-rate is at record highs (High-end Homeowners Falling Into Foreclosure Trap. 5/8/2010. CNBC). Given that cure rates are approximately zero percent at 90-days of delinquency (and I mean that literally), one of eight borrowers in expensive homes is dead-and-gone. This is not a trickle. This is a flood of “product” – houses that owners or banks must sell. Current listings will not entirely reflect this dire payment-history picture. The higher the value of the property, the more likely it is to be sold off grid. So when the bank owns a house, or when the bank is near to taking the keys, you don’t end it all with a scene of furniture in the front yard.
Q1 2010: Mortgage Equity Withdrawal strongly Negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity, normal principal payments and debt cancellation. For Q1 2010, the Net Equity Extraction was a record low of minus $122 billion, or a negative 4.4% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method. The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q1, and this was probably mostly because of debt cancellation per foreclosure sales, and some from modifications, and partially due to homeowners paying down their mortgages as opposed to borrowing more.
NAHB Builder Confidence declines sharply in June - Press release from the NAHB: Builder Confidence Declines in June ..Note: any number under 50 indicates that more builders view sales conditions as poor than good. This graph shows the builder confidence index from the National Association of Home Builders (NAHB). The housing market index (HMI) was at 17 in June. This was a sharp decline from 22 in May. The record low was 8 set in January 2009. This is still very low ...This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts (May starts will be released tomorrow). This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.
S&P expects up to 70% redefault on Loan Mods - From Zach Fox at SNL Financial: Analysts believe loan mod redefaults could hit 70% Diane Westerback, S&P's managing director of global surveillance analytics, told SNL that the previously reported 30% to 40% redefault rates typically only count borrowers after two or three months of payments. A year after the modification, Westerback expects redefaults to hit between 60% and 70%. ...Fitch Ratings on June 16 issued similar projections, albeit only for subprime and Alt-A loans in RMBS. The rating agency projects modifications on those product types to redefault at a 65% to 75% range, while prime loans in RMBS are expected to redefault at a rate of 55% to 65%.More shadow inventory ...
Most Modified Loans Will Re-default in 12 Months - Despite the extensive and lengthy process required to modify mortgages in default so that borrowers could afford their payments, most will default again in a year or less, according to Fitch Ratings. Fitch projects that 65 percent to 75 percent of subprime and Alt-A loans that have been modified will default again within a year. Fifty-five to 65 percent of all prime loans will default. Approximately 15 percent of all modified residential mortgages have received at least one additional modification when the first failed. Since HAMP (Home Affordable Modification Program) was launched early last year, approximately 15 percent of all mortgages have received either a HAMP or non-HAMP loan modification through May 2010. Almost 35 percent of subprime loans have received at least one modification
U.S. Home Foreclosures Climb 44% to Record in May (Bloomberg) -- U.S. home foreclosures reached a record for the second consecutive month in May, with increases in every state, as lenders stepped up property seizures, according to RealtyTrac Inc.Bank repossessions climbed 44 percent from May 2009 to 93,777, the Irvine, California-based data company said today in a statement. Foreclosure filings, including default and auction notices, rose about 1 percent to 322,920. One out of every 400 U.S. households received a filing.“We’re nowhere near out of the woods,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in a telephone interview. “We’re likely to set a quarterly record for home seizures if June is anything like May.” Lenders are completing the “inevitable progression” of taking properties from homeowners who stopped paying, Sharga said. He predicted last month that another 5 million delinquent mortgages will end in foreclosure in addition to properties that had already been repossessed.
Mortgages – Study Says Math Deficiencies Increase Foreclosure Risk – NYTimes - IF you can’t divide 300 by 2, should you qualify for a loan? That is one of the questions raised by a new study led by a Columbia University assistant business professor, Stephan Meier, who found that borrowers with poor math skills were three times more likely than others to go into foreclosure. Mr. Meier conceded that the results were not shocking, but he said he had not expected the connection between math skills and mortgage default to be so pronounced. About 340 borrowers in Connecticut, Massachusetts and Rhode Island who took out subprime loans in 2006 and 2007 were surveyed in 2008. None were in foreclosure. The respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. About 16 percent of the respondents answered at least one of the first two questions incorrectly. Mr. Meier said that the results were consistent among all levels of education and income.
Walkaway? Not So Fast . . .Currently, the United States has seen more than 5 million foreclosures completed. My expectations is that we are about halfway through the working off of the ill-advised and financially untenable home purchases of the past decade. Meaning, we likely have another 5 million foreclosures to go. Some other housing analysts think that number is too modest, and forecast millions more foreclosures. Housing expert Laurie Goodman, for example, noted in April that we maybe could have 12 million more foreclosures before the housing cycle has run its course. However, that was before a policy change at certain lenders. It seems some banks have realized that they have made it too easy for borrowers to wash their hands of a bad home purchase, and they are pushing back. Many are pursuing borrowers in recourse states for any shortfalls after a Foreclosure or Short Sale.
Lenders go after money lost in foreclosures - Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind. In many localities -- including Virginia, Maryland and the District -- lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency. Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.
Are foreclosures racist? - If you’re a high-income Latino with a mortgage, you’re almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending. Overall, there have been 790 foreclosures per 10,000 loans to blacks, and 769 for Hispanics — compared to just 452 to non-Hispanic whites. And within every income group, the disparities are startling: here’s the chart.
Challenges to Foreclosure Docs Reach a Fever Pitch - The backlash is intensifying against banks and mortgage servicers that try to foreclose on homes without all their ducks in a row.Because the notes were often sold and resold during the boom years, many financial companies lost track of the documents. Now, legal officials are accusing companies of forging the documents needed to reclaim the properties.On Monday, the Florida Attorney General's Office said it was investigating the use of "bogus assignment" documents by Lender Processing Services Inc. and its former parent, Fidelity National Financial Inc. And last week a state judge in Florida ordered a hearing to determine whether M&T Bank Corp. should be charged with fraud after it changed the assignment of a mortgage note for one borrower three separate times."Mortgage assignments are being created out of whole cloth just for the purposes of showing a transfer from one entity to another," said James Kowalski Jr., an attorney in Jacksonville, Fla., who represents the borrower in the M&T case.
Banks Getting Worried About Rising Challenges to Foreclosures? - Yves Smith - I’m not quite certain how to calibrate journalism American Banker style, but I found this article, “Challenges to Foreclosure Docs Reach a Fever Pitch,” (subscription only), to be both interesting and more than a tad disingenuous. The spin starts with the headline, it’s a doozy. The “challenge to foreclosure documents” message persists throughout the article, and it’s perilously close to a misrepresentation: Because the notes were often sold and resold during the boom years, many financial companies lost track of the documents. Now, legal officials are accusing companies of forging the documents needed to reclaim the properties. On Monday, the Florida Attorney General’s Office said it was investigating the use of “bogus assignment” documents by Lender Processing Services Inc. and its former parent, Fidelity National Financial Inc. And last week a federal judge in Florida ordered a hearing to determine whether M&T Bank Corp. should be charged with fraud after it changed the assignment of a mortgage note for one borrower three separate times…
Why It's Different This Time for Housing - IF YOU WANT TO KNOW WHY this economic is cycle is different in a single word, it would be housing. Where housing was the spark that lit every post-World War II recovery, this time it's the wet blanket that is damping a rebound. In every other cycle, Federal Reserve monetary tightening would raise mortgage rates and curtail credit to curb inflation, which would help precipitate a sharp slowdown in housing activity. But as soon as the Fed relented, the resulting drop in interest rates invariably would let loose the pent-up demand from prospective homebuyers who had been held back by tight credit. And in recent cycles, lower rates allowed homeowners to cash in by refinancing their current loans, which lowered their payments or let them take cash out of your house.
Gary Shilling: House Prices Will Fall Another 10%-20% And Won't Bottom Until 2013 - A year ago, house prices finally stopped collapsing after two years of brutal declines. Over the following few quarters, moreover, they actually rose. This led many observers to conclude that the housing bottom had been reached and that we were headed for a v-shaped bounce. Not Gary Shilling. Gary Shilling, head of economic research firm A. Gary Shilling & Co., thinks house prices still have another 10%-20% to fall. Just as bad, Gary thinks this fall will happen over the next three years, meaning that house prices won't bottom until 2013. Most people think prices have already bottomed, or will bottom later this year or next. Why is Gary so bearish? Supply versus demand. Basically, Gary says, we still have way too many houses relative to the number of people who want to buy them. Consumers are under pressure, overloaded with debts and struggling to find work, and the mass-hallucination that investing in housing was a "sure thing" is now a distant memory. These days, many would-be home buyers are moving in with relatives or downsizing or dumping second homes. And the supply-demand balance is so out of whack, in Gary's view, that even super-low interest rates won't keep prices afloat.
US Households' Lower Income Could Hurt Housing Demand - Falling U.S. household incomes will force people to buy smaller, more modest houses or to stretch more to own a home, as rebounding home prices begin to eat into affordability, a new report from Harvard University said. Real median household incomes are almost certain to end the decade lower than where they started, reversing the trend of upward momentum of the previous 30 years, the report noted. Therefore, an increase in mortgage rates or a rise in home prices will crimp affordability. "If their incomes do not bounce back quickly, Americans will have to choose whether to cut back on the size and features of their homes or allocate larger shares of their incomes to housing," the report concluded. The report, released Monday by Harvard's Joint Center for Housing Studies, also found that U.S. homeowner equity has plunged to its lowest level since 1985 as home values fell and mortgage debt rose sharply over the last decade. Home equity fell from a peak of $14.5 trillion in 2005 to $6.3 trillion in 2009.
U.S. Income Losses Could Hurt Housing Demand - Falling U.S. household incomes will force people to buy smaller, less fancy houses or stretch more to own a home, as rebounding home prices begin to eat into affordability, a new report from Harvard University said.Real median household incomes are almost certain to end the decade lower than where they started, reversing the trend of upward momentum of the previous thirty years, the report noted. Therefore, an increase in mortgage rates or a rise in home prices will crimp affordability.“If their incomes do not bounce back quickly, Americans will have to choose whether to cut back on the size and features of their homes or allocate larger shares of their incomes to housing,” the report concluded.
Catch-22 in Housing - My Fiscal Times post for today looks at a number of recent studies of housing. Among them is a forecast released yesterday by UCLA economist Ed Leamer, who warned early on that the housing market was developing into a bubble. The problem is that housing normally leads economic recoveries. So today we are in a Catch-22, he says, where the economy can't recover until housing recovers and housing can't recover until the economy recovers.
A housing recovery made of straw - the Economist - A DATA-RICH new report from Harvard's Joint Center for Housing Studies analyses the state of the American housing market in 2010, and finds it wanting. Government interventions in housing helped stablise prices and boost sales from last autumn through this spring, but: A number of other conditions are still weighing on the housing market. One of the biggest drags on the housing market is the high joblessness rate. With more than 7.8 million fewer establishment jobs than in December 2007, unemployment held at 9.9 percent in April 2010. If the past is any guide, the strength and sustainability of the housing recovery will depend most on the bounceback in employment growth...Unfortunately, most economists predict that the unemployment rate will remain elevated as discouraged workers reenter the labor force amid slow gains in jobs.
Housing markets: Stuck in place | The Economist - IS IT gauche to keep quoting one's own piece? Ten percentage points separate the states with the highest and lowest unemployment rates. But the property crash is making it much harder for Americans to move to where the jobs are. A quarter of mortgage borrowers owe more than their houses are worth. Many people are stuck in places with poor employment prospects, unable to leave for cities where their skills may be in demand. Although the economy is starting to create new and often highly remunerative jobs, they are out of reach to those who cannot move. With that in mind, have a look at this chart from the housing report mentioned in the previous post:
UCLA's Leamer: "A Homeless Recovery" - From UCLA: UCLA Anderson Forecast: U.S. recovery a long, slow climb; Calif. recovery weaker than nation's "If the next year is going to bring exceptional growth," [UCLA Anderson Forecast director Edward] Leamer writes, "consumers will need to express their optimism in the way that really counts — buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts — by not hiring workers." The result is an economic Catch-22. Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.
Peddling Relief, Industry Puts Debtors in a Deeper Hole - For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity. The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced. State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises. Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.
Number of the Week: Americans Defaulting on Foreigners - $63 billion: The decline in Americans’ payments to foreigners on mortgage loans, credit cards and other private debts since the recession began. One of the more positive results of the recession has been a shrinkage in what many see as the global economy’s biggest blemish: The U.S. current-account deficit, a measure of how much Americans’ spending exceeds their income and of how much they are borrowing from the rest of the world to fill that gap.The latest data on the deficit, though, suggest the decrease is as much a reflection of Americans’ insolvency as it is a sign of a return to financial and economic health.
Housing Starts in U.S. Fell to 593,000 Pace in May (Bloomberg) -- Builders broke ground on fewer U.S. homes in May than anticipated after the expiration of a tax credit, indicating the real-estate market will struggle without government incentives.Housing starts fell 10 percent, the biggest decline since March 2009, to a 593,000 annual rate, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, unexpectedly fell to a one-year low. Single-family starts suffered the largest drop since 1991. Builders focused less on taking on new projects and more on completing houses for those seeking to qualify for the tax credit, which required contracts be signed by April 30 and closed by the end of this month. Growth in sales and construction will now depend more on job gains and a drop in foreclosures, which have pushed down prices and created competition for builders
Housing Starts plummet in May - Total housing starts were at 593 thousand (SAAR) in May, down 10% from the revised April rate of 659,000 (revised down from 672 thousand), and up 24% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Single-family starts collapsed 17.2% to 468,000 in May. This is 30% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over a year.Here is the Census Bureau report on housing Permits, Starts and Completions.
HOUSING STARTS, BUILDING PERMITS & WHOLESALE PRICES RETREAT IN MAY - At the very least, it's clear that the housing market hit a speed bump in May. New housing starts dropped 10% in May on a seasonally adjusted annualized basis, the government reported this morning. Building permits also fell last month by nearly 6%. The year-over-year trend is still positive, but the pace of expansion has slowed considerably in both cases. Another month or two of setbacks and housing starts and permits could be posting declines vs. the year-earlier figures. If that happens (and it's not obvious that it will), the dip into negative territory on an annual basis would be a disturbing sign for the forces of expansion.Adding to the anxiety in the numbers du jour is today's update on wholesale prices, which dropped in May—the second straight monthly decline and the third so far this year. Deflationary winds generally appear to be blowing harder these days, if only marginally, as we've been discussing (see here and here, for instance). Today's producer price report won't soothe those concerns.
Industrial Production and Housing Starts - Compared to other cycles this recovery in industrial production continues to be moderate. It is stronger than in the weak recoveries, but compared to the depth of the downturns the rebound is quite weak. The good point is that in the early stage of a recovery industrial production is driven largely by inventory rebuilding. But we have probably passed that point in the cycle as the economy shifts from the recovery stage to the expansion stage. This means that we are now seeing quite strong industrial production that is driven by changes in final demand rather than by inventory restocking. This implies that good growth in industrial production is likely to continue in contrast to previous expansions when industrial production growth flattened out after inventory restocking ended.The other point in the report was that capacity utilization was rising. Normally rising capacity utilization is an important driver of business capital spending.Interactive Map: Where Americans Are Moving - Forbes - More than 10 million Americans moved from one county to another during 2008. The map below visualizes those moves. Click on any county to see comings and goings: black lines indicate net inward movement, red lines net outward movement.
Industrial Production, Capacity Utilization increase in May - From the Fed: Industrial production and Capacity Utilization Industrial production advanced 1.2 percent in May after having risen 0.7 percent in April. Manufacturing output climbed 0.9 percent last month, its third consecutive monthly gain of about 1 percent, and was 7.9 percent above its year-earlier level. Outside of manufacturing, the output of mines edged down 0.2 percent, and the output of utilities increased 4.8 percent. The jump in utilities reflected unseasonably warm temperatures that boosted air conditioning usage in May This graph shows Capacity Utilization. This series is up 9.4% from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 73.7% is still far below normal - and 7.2% below the the pre-recession levels of 80.5% in November 2007.The second graph shows industrial production since 1967. This is the highest level for industrial production since Nov 2008, but production is still 7.9% below the pre-recession levels at the end of 2007. Still a long way to go.
CHART OF THE DAY: America Industrial Output Is Breaking Record Highs In One Category -Markets were happy with today's May U.S. industrial production report, which rose by 1.2%, above consensus expectations of just a 0.8% increase. Industrial production has been rebounding quite strongly since early 2009. But here's a dose of perspective -- U.S. industrial production remains well below its peak level. In addition, different parts of the U.S. economy are performing differently.The most stark example is America's manufacturing output of equipment. As shown below, business equipment output (in black) remains well below where it was in 2007 and at a similar level to what was once achieved back in 2000. Ie., it hasn't really gone anywhere in a decade.In the meantime, America's output of defense and space equipment (in red), mostly tools of war, is at record levels. Industrial activity is clearly booming in the wrong place.
Philly Fed Index "decreased notably" in June, Employment turned slightly negative - Here is the Philadelphia Fed Index released today: Business Outlook Survey. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased notably from a reading of 21.4 in May to 8.0 in June. The index, which had edged higher for four consecutive months, fell back to its lowest reading in 10 months (see Chart). Although still positive and suggesting growth, indexes for new orders and shipments showed a mixed pattern this month — the new orders index increased 3 points, while the shipments index decreased 2 points. The current inventory index increased 13 points and moved back from a negative reading into positive territory, suggesting an increase in inventories this month. Until this month, firms’ responses had been suggesting that labor market conditions were improving, but indexes for current employment and work hours were both slightly negative. For the first time in seven months, more firms reported a decrease in employment (18 percent) than reported an increase (17 percent).
OECD: Factblog: Entrepreneurs – stuck on the starting block… Innovation is sometimes thought of solely in terms of new inventions. But, as the OECD’s Andrew Wyckoff explains, it’s much more than that – Apple’s iPod was innovative, not because it contained much in the way of new technology but because of clever design and shrewd marketing. That sort of innovation can drive economic growth. As the OECD’s Innovation Strategy demonstrates, there are real obstacles to overcome in many countries first.
Another look at consumer sentiment and consumer spending - macroblog - Two of the most commonly cited measures of consumer attitudes are the Conference Board's Consumer Confidence Index and the Thomson Reuters/University of Michigan's Index of Consumer Sentiment. A key question is, do these indicators improve consumption forecasts? Previously, economic researchers have looked at the predictive power of these indexes for consumer spending, and they generally found that the ability of consumer confidence measures to predict consumer spending largely disappeared once some other measures of economic conditions were taken into account. One such example is a study by Sydney Ludvigson, which examined the forecasting record of these confidence measures through 2002 (for other examples, see here and here). Much has happened since then, of course, and a simple inspection of the two series reveals that both confidence measures fell fairly steadily starting in August 2007 until reaching near-record lows by June 2008. Therefore, a look at the more recent predictive track record of these indicators seems warranted.
Understanding the Employment Issue - Suppose we wanted to measure the change in employment. One method, the one embraced by the BLS, is to count all of the jobs in the country in one month, count them all again in the second month, and subtract to determine the change. Since the BLS cannot count every job, it relies upon a survey (and a good one) of existing businesses. The problem? Some businesses do not respond to the survey. The BLS uses great methods to improve the response rate. 65% or more respond in time for the first report. 75% or more a month later. The final result includes response rates of about 90%, which is excellent for survey work. But what about the missing 10%? Are these non-respondents or (drum roll...) are they companies that are out of business. The difference is crucial to the result. One interesting idea is that you could just take the outcome from the respondents and infer that non-respondents were the same.This implies something important, what I call the 'Imputation Step." The question is whether we may infer, based upon actual data, that the behavior of business deaths and births is similar to the behavior of the businesses continuing in the sample.
American joblessness: Sideways | The Economist - THE behaviour of American consumers has been rather confounding of late. Early in the year, retail sales were surprisingly strong, even as labour markets remained exceedingly weak. Recently, however, retail numbers have disappointed despite declines in household savings rates. Analysts, meanwhile, can't figure out what they want consumers to do. American household saving has to go up at some point; excessive borrowing drove the crisis from which the world is only now emerging. And yet, there is precious little holding the American economy up. If consumers don't keep spending, it's not clear where new economic growth may come from. In a new piece of analysis, Goldman Sachs' Jan Hatzius offers an explanation for the mixed signals. Positive spending numbers have been an aberration as American households have actually gone through a much larger retrenchment than savings rates indicate.
Five Million Jobs? - Had the annual hours of work continued to decline at the rate they did from 1909 to 1958, average annual hours in 2009 would have been about 14% lower than they were. What might the effect on job creation have been? Recall that Denison's estimates were based on his assumption that the optimal length of the workweek for total output was 48.6 hours, 52 weeks a year. He also supposed that maximum productivity would occur at 33.9 hours a week. Below that latter figure, output was assumed to fall faster than hours as hours declined. But is it reasonable to assume that the optimal hours for both output and hourly productivity would remain the same from 1909to 2009? To estimate the job creating potential of shorter hours, I assume that the trend of hours of work from 1909 to 1958 approximates the amount of working time that would be optimal for output. This suggests that in 1909 the optimal workweek was indeed 52 hours and in 1958 it was 39.6 hours. Projecting that trend indicates an optimal workweek of 29 hours in 2009 (or, alternatively, 32 hours a week with five weeks' vacation). Since a longer than optimal week subtracts output from the optimal potential, we can estimate that about six and a half percent of potential output was wasted by excessive hours of work.*
Median unemployment spell now lasts 5.4 months -The long-term unemployment situation continued to deteriorate in May, as an additional 47,000 unemployed workers crossed the six-months-unemployed threshold. There are now 6.8 million workers who have been unemployed for longer than six months, which is unsurprising given that there are now well over five unemployed workers per job opening. The median, or typical, unemployment spell was 23.2 weeks (5.4 months), and nearly half (46.0%) of all unemployed workers had been unemployed for over six months, both record highs. -- From Heidi Shierholz' May unemployment report.
A Reason for Optimism - The latest economic data has not been very good. Yet Robert Barbera — an economist at ITG, who’s been more right than most over the last couple of years — says he isn’t especially worried. Although he agrees the day-to-day data has been disappointing recently, he says the most recent jobs report was considerably stronger than many people thought. And the monthly jobs report offers a broader look at the economy than any of the other recent economic reports. In particular, Mr. Barbera points out that the disappointing growth in private-sector employment last month was accompanied by a spurt in hours worked.
The hourless recovery - Rebecca Wilder - There was an interesting blog post over at the Macroblog (Atlanta Fed) regarding productivity. One of their findings: As this chart shows, relatively high labor productivity growth during a recession is not a phenomenon isolated to the 2007–09 and 2001 recessions (for present purposes, the end of the most recent recession is identified with the trough in GDP in the second quarter of 2009). All recessions from WWII through 1970 also featured sizable growth in labor productivity. The article focuses on the contribution of productivity gains to GDP growth during a recession and the early stages of the recovery. The authors do not comment on, however, a very interesting bit of their story: the “hourless” recovery. Lockhart speaks of this curtly in his speech: Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees. The precipitous drop in hours worked has differentiated this labor downturn from previous cycles (papers here and here). According to the BLS Q1 2010 productivity report, the recovery of the 2007-2009 recession has so far been “hourless”, which is consistent with the previous two cycles.
The Frog in the Frying Pan - John Mauldin - There are three large structural changes that have been slowly but steadily happening. Going forward, the US economy will have to deal with: (1) higher volatility, (2) lower trend growth, and (3) higher structural levels of unemployment.The period of low volatility of GDP, industrial production, and initial unemployment claims is now over. For a period of over twenty years, excluding the brief 2001-02 recession, volatility of real economic data was extremely low.We are also seeing a secular decline over the last four cycles in trend growth across GDP, personal income, industrial production, and employment. There is a growing disparity in unemployment rates between the well-educated and the poorly educated; between the “haves” and “have nots.” This is a structural shift that began before the recession and has only grown stronger during the recession. The disparity in the unemployment situation is far more dramatic if you look at the breakdown of unemployment rates by educational attainment.
The Sagging of the Middle Class - It’s not that all middle-class jobs have gone missing. It’s just that their growth is sagging compared with that of other jobs. No giant sucking sound, just the gentle hissing of an inner tube losing air, threatening a flat tire that could send the American dream machine off the road. The chart above captures the takeaway point of David Autor’s new report, “The Polarization of Job Opportunities in the U.S. Labor Market,” published by the Center for American Progress and the Hamilton Project. Professor Autor ranks occupations by mean wages (using these as a proxy for skill). Between 1999 and 2007, growth took place primarily at the low end. Between 1979 and 1989, the share of high-wage jobs grew fastest. Between 1989 and 1999, the share of low-wage jobs began to grow, but high-wage jobs continued to expand. Between 1999 and 2007, growth took place primarily at the low end.The cumulative effect is polarization and increased inequality, intensified by job losses during the recent recession that also hit the middle-wage group particularly hard.
Do Economists Influence Public Policy? -We are in a deep recession and the President wants to create jobs. Most economists would say that allowing real wages to fall will help to stimulate such job growth. But, this article states that "The White House on Monday will issue new rules that strongly discourage employers from cutting health insurance benefits or increasing the costs of coverage to employees, administration officials say."This is good news for incumbent workers who already have jobs but it will clearly have the unintended consequence of discouraging these firms from hiring new workers. As economists, we have seen this before and provided are rating of two thumbs down. I'm thinking about the good work done on the unintended consequences of the Americans with Disabilities Act by Tom Deleire and by Acemoglu and Angrist in this JPE paper .
Is there no solving the U.S. unemployment problem? - The government’s dismal report on May private-sector job creation has been casting a long shadow -- a sign of just how badly many Americans (or at least, economists) wanted to believe that employment was finally coming around. My colleague Don Lee’s weekend story about new college graduates’ employment blues joins what has become a major debate, which is whether we are facing a secular rather than just cyclical problem: What if the U.S. economy, for all its celebrated dynamism, simply isn’t capable anymore of generating a meaningful number of good jobs -- not now, or even years from now? The Bureau of Labor Statistics projects that seven of the 10 employment sectors that will see the largest gains over the next decade won't require much more than some on-the-job training. These include home healthcare aides, customer service representatives and food preparers and servers. "People with bachelor's degrees will increasingly get not very highly satisfactory jobs,"
Unemployment in 2012 - The UCLA Anderson Forecast is released quarterly. Here's the latest from Forecast director Ed Leamer: Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range....The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012. So two and a half years from now unemployment will still be at 8.6%, a rate that would normally send everyone screaming for the hills. And what is the United States Congress doing about this? For all practical purposes, absolutely nothing.
Demand for Educated Workers May Outstrip Supply by 2018 - Workers with college experience have held up better during the current downturn, and new research suggests that demand for more educated employees may outstrip supply over the next decade. By 2018, the United States will see 46.8 million job openings, 63% — 29.5 million — of which will require some college education. One-third, or 16 million positions, will require a bachelor’s degree or higher, according to a report by the Georgetown University Center on Education and the Workforce. Companies will seek 22 million new postsecondary degree-holders, but just 19 million or so will have earned an associate’s degree or higher by then, according to the report. The difference averages to a 300,000 annual deficit of college graduates between 2008 and 2018.
Policy Responses to Long-Term Unemployment --We are in the midst of a jobs crisis, with the unemployment rate stuck around 9.7 percent. The labor market is particularly bleak in terms of duration of unemployment. Half of the unemployed have been out of work for more than six months, nearly five million for more than a year and one million for two. The ranks of the 99ers, who have collected the maximum weeks of state and federal unemployment insurance but remain without jobs, are increasing. This morning, Berkeley economics professor and blogger Brad DeLong asked, “So what do we know about policies to successfully move the long-term unemployed back to where they ought to be?” Atrios jokingly responded, “We could hire them to dig holes and then fill them up again,” elaborating, “the way to do it is to have the government hire people to do stuff. Inevitably not all of that stuff will be tremendously productive, but plenty of it will be.”
The Unemployed Held Hostage, Editorial, NY Times: Since June 1, when federal unemployment benefits began to expire, an estimated 325,000 jobless workers have been cut off. That number will swell to 1.25 million by the end of the month unless Congress extends the benefits. The Senate, so far, has failed to act. Some senators, including Democrats, have balked at an unrelated provision that would begin to close a tax loophole enjoyed by some of the richest Americans. You heard right. Desperately needed unemployment benefits have been held hostage to a tax break for the rich, and the Senate’s Democratic leadership has had to delay and finagle to get its own caucus in line. There is not even any genuine debate about how to pay for extended benefits. An extension through November would cost about $40 billion. But unemployment benefits are correctly considered emergency spending — they are a vital safety net, and the money is crucial to supporting consumer demand in a weak economy — and exempt from pay-as-you-go budget rules.
Senate Democrats to the unemployed: Drop Dead - After all, if Democrats fight for those who can't find work in a country where there are no jobs, Republicans might say mean things about them. We're spending trillions on a war in Afghanistan that's going nowhere, but God forbid people who can't find work should be able to put food on the table: President Obama's urgent plea for more spending on the economy ran into the political buzz saw of the Senate on Tuesday, where Democratic leaders began chopping apart an aid package for unemployed workers and state governments in an effort to lessen its impact on the deficit. The slimmed-down measure was still evolving late Tuesday. But Senate Majority Leader Harry M. Reid (Nev.) was trying to salvage one of Obama's top priorities -- $24 billion to avert the layoffs of state workers -- by scaling back other pieces of the sprawling package,Reid also took aim at jobless benefits, which some Democrats complained may be too generous in a time of economic recovery. While the revised package would extend emergency benefits through the end of November, aides said it also would take $25 out of the weekly checks received by 15 million unemployed workers, repealing a payment boost first approved in last year's economic stimulus package.
Jobs bill trimmed by billions - Closing in on 60 votes, Senate Democrats trimmed billions more from their once ambitious jobs and economic relief bill Wednesday in hopes of winning over swing Republicans and breaking the stalemate this week. The spending reductions — estimated near $20 billion — are accompanied by tax changes tailored to the small-business concerns of Sen. Olympia Snowe (R-Maine) as well as venture capital and real estate interests with influence in both parties. In the bargaining now, Senate Majority Leader Harry Reid, up for reelection in cash-strapped Nevada, is still holding onto a $24 billion, six-month extension of federal Medicaid assistance from January to June next year. The money is vital to the finances of states like Reid’s, hit hard by the economic downturn, and he has the support of President Barack Obama. But the cost of the Medicaid funding makes the program an easy target
‘Too Young Not to Work but Too Old to Work’ - Last week, thousands of Americans who have exhausted their unemployment insurance — the 99ers, named after the maximum number of weeks of state and federal benefits — sent letters and petitions to Washington as part of a futile campaign to convince the Senate to pass a bolstered version of the jobs bill, now stalled and being pared back. There were many common themes in their stories, but one of the more surprising was age. Such stories of older workers too young for retirement but struggling for months if not years to find jobs have policy experts concerned as the recession drags on and long-term unemployment continues to rise. Experts say that age discrimination is severely compounding the jobs crisis for older workers, although the phenomenon is difficult to quantify or to prove, and remains under-examined by the government. This time, it is not just making it more likely that these workers will be laid off. It is also making it much harder for them to gain new positions.
Senator aims to force unemployed to take drug tests - Sen. Orrin Hatch (R-UT) offered an amendment Tuesday that would require drug tests for those who seek welfare and unemployment benefits. States have the authority to enact drug testing requirements for their welfare programs under the 1996 Welfare Reform Act, signed into law by President Bill Clinton, but they are not mandated to conduct tests under current law."This amendment is a way to help people get off of drugs to become productive and healthy members of society, while ensuring that valuable taxpayer dollars aren't wasted," Hatch said of his proposal. "Too many Americans are locked into a life of a dangerous dependency not only on drugs, but the federal assistance that serves to enable their addiction."
More than 1 in 5 kids live in poverty - USATODAY -The rate of children living in poverty this year will climb to nearly 22%, the highest rate in two decades, according to an analysis by the non-profit Foundation for Child Development. Nearly 17% of children were living in poverty in 2006, before the recession began.The foundation's Child and Youth Well-Being Index tracks 28 key statistics about children, such as health insurance coverage, parents' employment, infant mortality and preschool enrollment.The report projects that the percentage of children living in families with an "insecure" source of food has risen from about 17% in 2007 to nearly 18% in 2010, an increase of 750,000 children. Up to 500,000 children may be homeless this year, living either in shelters or places not meant for habitation.
Highest Rate Of Child Poverty In 20 Years - A new report by the non-profit Foundation for Child Development: 2010 Child Well-Being Index. Projections: "The percentage of children living below the poverty line is expected to peak at 21 percent in 2010, the highest rate of child poverty in 20 years. We estimate that approximately 15.6 million children will be living in poverty in 2010.""We project the percent of children living in food-insecure households to climb from 16.9 percent in 2007 to 17.7 percent in 2010, which is an increase of 750,000 additional children at risk over this time period. ""Chief among the findings is that, by 2010, the recession will wipe out virtually all progress made for children in the Family Economic Well-being Domain since 1975."That's 21% of US children living below the poverty line and nearly 18% living without a secure source of food. Those are astounding numbers given that the US is the world's richest economy. Say what you may about adults living in poverty, but children have no control over the family into which they're born
Limbaugh’s solution to childhood hunger: Kids should ‘dumpster dive’ - Responding to an article Wednesday at AOL.com that reports 16 million children will go hungry this summer once free or subsidized school lunches are no longer available, Limbaugh suggested he would run a daily feature on his radio show all summer entitled "Where to find food." And, of course, the first will be: "Try your house." It's a thing called the refrigerator. You probably already know about it. Try looking there. There are also things in what's called the kitchen of your house called cupboards. And in those cupboards, most likely you're going to find Ding-Dongs, Twinkies, Lays ridgy potato chips, all kinds of dips and maybe a can of corn that you don't want, but it will be there. If that doesn't work, try a Happy Meal at McDonald's.... There's another place if none of these options work to find food; there's always the neighborhood dumpster. Now, you might find competition with homeless people there, but there are videos that have been produced to show you how to healthfully dine and how to dumpster dive and survive until school kicks back up in August.
A crime puzzle: Violent crime declines in America - Violent crime went down in America again last year. According to preliminary statistics from the FBI, the number of violent crimes dropped by about 5 percent from 2008 to 2009. Given population growth, that means that the rate of violent crime dropped even more. (So did property crime.)This is a puzzle because (a) violent crime is more common among the poor; (b) the percentage of Americans who are poor has been trending up since about 2000; and (c) the economy tanked last year. One would have expected a rise, not a fall, in violent crime. But this head-scratcher is just part of a larger puzzle – understanding long-term trends in America’s criminal violence. The most reliable measure of violent crime is the homicide rate. Americans kill one another at a much higher rate – double, quadruple, or more – than do residents of comparable western European nations. This gap persists despite a roughly 40 percent drop in our homicide rate in the last 15 years or so. This graph shows the American homicide rate over the last century-plus.
In some states, more consumers are getting jailed for debts…Debtors prisons might have gone the way of medical leeching and boneshaker bikes, but that doesn’t mean consumers in some states can’t end up in the clink if they fall behind on their bills. Today, the Minneapolis Star Tribune reports on what appears to be the rising number of arrests of debtors who have been thrown behind bars for missing court-ordered debt payments or for not appearing in court after being sued by debt collectors. The startling story reveals how debt-related arrest warrants in Minnesota have jumped 60 percent in the last four years, with 845 cases last year. That’s not a large segment of the state’s total arrests, but that doesn’t offer much comfort to those consumers who have been hauled into jail for court offenses stemming from debts as small as $250.
Obama to order federal agencies to compile "do not pay list" - President Obama will order federal agencies Friday to establish a national "do not pay list" to prevent the government from paying benefits, contracts, grants and loans to ineligible people or organizations, according to senior administration officials. The moves are part of a series to cut government waste and fraud and come amid calls for more fiscal restraint from Republicans and moderate Democrats. A memo Obama is set to sign Friday instructs the Treasury Department, Office of Management and Budget and General Services Administration to establish a government-wide database to ensure agencies no longer send government checks to dead people, delinquent or jailed contractors and other debarred or suspended firms, said officials familiar with the memo and not authorized to speak on the record. About 20,000 separate payments totaling $182 million were sent to dead people in the last three years, according to OMB.
Trickle Down Moral Sentiments - Maxine Udall - I have written elsewhere about the potential for moral trickle down effects associated with no-strings bailouts for wealthy TBTF investment banks and corporations. Yves Smith at Naked Capitalism provides evidence that the trickle has begun. Yves makes a point similar to one I have made previously: markets are the warp and moral sentiments (primary of which may be trust) are the weft of the social fabric that binds us into a cohesive and productive nation.When the fabric fails, transaction costs skyrocket and we all suffer. Even more disturbing, it looks like we are regressing to those wonderful days of yesteryear: debtors are being thrown into prison. Maybe we should bring back indentured servitude and debt bondage while we're at it. Alas, that we had not thought of jailing debtors, oh, say, in September 2008. The beauty of throwing someone into prison for a $250 debt is that court costs far in excess of the debt are paid by we, the people. Nice. More of our hard-earned money supporting the same people whose predatory lending and collection practices ran us into the ditch. Even better is when a small unpaid bill can be mutated into a large debt that allows someone to grab your house.
Migration Maps: The Real Social Networks (II) - Earlier this week I wrote about U.S. mobility at the city and county level, calling it a proxy for a kind of social network in economic, innovation and physical terms. Here is another slice of that sort of data, this time from a EU report excerpted by the ever-eclectic Michael Cembalest of JP Morgan in a new report. This table compares labor mobility in the U.S. with that of European countries. The differences are, in a word, striking, with the U.S. much more mobile than Europe. It helps reinforce one of the things that does make the U.S. a different economic case: the fluidity and impermanence of life here.
Who’s Spending Again? The Rich and the Old - Consumer spending has risen over the last year, and the savings rate has fallen. Given that the job market is still soft, it seems reasonable to ask: Which Americans would actually feel comfortable significantly increasing their spending in this environment?Some new Gallup survey data may shed some light on this question. So far, the answer appears to be the rich and the old. Each day Gallup polls Americans about how much money they recall spending the day before, not including the purchase of a home or motor vehicle or payment of normal household bills. While it’s an imperfect measure — memories can be faulty, people can lie and the numbers are not adjusted for inflation — it’s still a useful guidepost, in part because the responses can be broken down by different demographic groups.When Gallup’s chief economist, Dennis Jacobe, looked at spending by income category, for example, he found that upper-income Americans’ self-reported spending rose to an average of $145 a day in May, 33 percent higher than its level a year ago. That is also the highest monthly average since November 2008.
Reality of America’s fiscal mess starting to bite - If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that “because of 2010 budget reductions”, the Seattle government can no longer afford to “service this comfort station” each day. Hence the dirt. In recent months, America’s fiscal mess has assumed a rather surreal air. On paper, the country’s federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling as investors flee the eurozone woes. As a result, those scary numbers still seem to be a problem primarily concocted in the world of cyber finance. But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.
State Unemployment Rates: Slightly lower in May - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were slightly lower in May. Thirty-seven states and the District of Columbia recorded unemployment rate decreases over the month, 6 states had increases, and 7 states had no change, the U.S. Bureau of Labor Statistics reported today. ...In May, nonfarm payroll employment increased in 41 states and the District of Columbia, decreased in 5 states, and was unchanged in 4 states.This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Sixteen states and D.C. now have double digit unemployment rates. New Jersey is close.
Unemployment Rates by State: Nevada Overtakes Michigan for Nation’s Worst - The jobless rate in 37 states and Washington, D.C. fell in May compared to the prior month, as the nation’s unemployment rate fell to 9.7%, the Labor Department said Friday. Meanwhile, six states saw unemployment rate increases, while the rate was unchanged in seven other states.For the first time since April 2006, Michigan didn’t have the highest unemployment rate in the nation. Nevada, with a 14% rate, was the highest in the nation, as Michigan edged down to 13.6%. Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.6%, respectively. While the latest state data confirms that the labor market is improving across a broad swath of the country, there’s still a long way to go before employment returns to pre-recession levels. The vast majority of states, 31 and Washington, D.C., still have higher unemployment rates this May than they did a year ago.See the full interactive graphic.
Economy in US Slows as States Lose Federal Stimulus Funds (Bloomberg) -- Spending cuts by state and local governments from New York to California may act as a drag on the economy into 2011, only the second time in more than a half century that such reductions have restricted growth for three consecutive years. States face a cumulative budget gap of $127.4 billion as 46 prepare for the start of their fiscal year on July 1, according to a report this month by the National Governors Association and the National Association of State Budget Officers. They will have to fill that hole largely on their own, as aid from the federal government under programs including President Barack Obama’s $787 billion stimulus package starts to wind down. State and local cutbacks may trim growth by about a quarter percentage point in 2010 and 2011 after shaving it by 0.02 point in 2010, said Mark Zandi, chief economist at Moody’s Analytics Inc. He also sees the governments lopping payrolls by 200,000 during the next year after reducing them by 190,000 in the 12 months through May
Op-Ed - Unfazed by Reality - NYTimes - State and local governments are obliged by law in nearly all cases to balance their budgets, but their revenues have fallen off a cliff because of the long economic downturn. Thus, they are slashing away at important government services, laying off workers and raising fees and taxes. For the federal government to stand by like a disinterested onlooker as this carnage plays out would be crazy. President Obama has called on Congress to provide substantial relief to these localities to ward off the harmful impact of the budget cuts. In a letter to Congressional leaders of both parties, he said he was concerned that “the lingering economic damage” of the financial downturn “has left a mounting employment crisis at the state and local level that could set back the pace of our economic recovery.”
State and Local Government Budget Blues - On Saturday, President Obama asked Congress to extend federal aid to the states. Because their fiscal years run from July 1 to June 30 (the federal fiscal year runs from October 1 to September 30), the imminent expiration of temporary federal aid could lead to a sharp cutback in state spending that would hamper the economic recovery.A June 3 report from the National Governors Association and the National Association of State Budget Officers shows that the states have cut aggregate spending by $74.4 billion, or 10.8 percent, since 2008. The expiration of $55 billion in temporary federal aid to the states could lead to further substantial spending cuts beginning on July 1. Budget expert Stan Collender warned on June 8 that a sharp cutback in state spending mandated by state balanced budget requirements could have a negative effect on the economy as a whole.
Obama Presses for Aid to Cities and States — President Obama on Saturday implored Congress to provide more aid to states and cities to blunt “the devastating economic impact of budget cuts” by local governments that imperil the jobs of teachers, the police, firefighters and other public employees. In his letter, the president said state and local governments had already cut 84,000 jobs this year, and would have cut more if not for assistance from the two-year $787 billion recovery act Mr. Obama signed a month after taking office. Making the economic case for helping the states, Mr. Obama said that if teachers and others are laid off — his education secretary, Arne Duncan, has said that without federal aid, up to 300,000 fewer teachers would be in classrooms this fall — “it will mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services provided by other workers.”
Obama pleads for $50 billion in state, local aid – President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid "massive layoffs of teachers, police and firefighters" and to support the still-fragile economic recovery. In a letter to congressional leaders, Obama defended last year's huge economic stimulus package, saying it helped break the economy's free fall, but argued that more spending is urgent and unavoidable. "We must take these emergency measures," he wrote in an appeal aimed primarily at members of his own party. The letter comes as rising concern about the national debt is undermining congressional support for additional spending to bolster the economy. Many economists say more spending could help bring down persistently high unemployment, but with Republicans making an issue of the record deficits run up during the recession, many Democratic lawmakers are eager to turn off the stimulus tap.
When states don’t pay their debts - Greg Ip reports on how Illinois is going to have to start making unnecessary unemployment payments just because it’s refusing to pay its debts: Illinois owes Shore Community Services, a non-profit agency in suburban Chicago, some $1.6m for services to the mentally disabled. The agency has had to lay off a dozen staff. Jerry Gulley, the executive director, says his outfit’s line of credit could be exhausted soon. The bank will not accept the state’s IOUs as collateral. “That’s how sad it is,” shrugs Mr Gulley. Ip explained to me that these aren’t physical IOUs, like California issued, and they’re certainly not bonds — they’re just unpaid receivables. But even so, this is crazy: there’s no way that Illinois should allow the employees of a noble non-profit to be laid off just because it hasn’t got around to paying its bills. It’s the job of the state to encourage employment, not layoffs.
Monday Map: State Severance Tax Revenue - Thirty-three states receive revenue from severance taxes, which are excise taxes on natural resources such as oil or coal. The state that receives the most revenue from this type of tax—with its large oil reserves—is Alaska by far with nearly $4 billion collected in 2009 according to Census. Below is a map highlighting the states with the highest severance tax collections in 2009.
Albany Fighting Heats Up as Shutdown Edges Closer - NYT - State officials began preparing on Wednesday for what they said would be the first government shutdown in New York history as prospects for the passage of another emergency budget bill grew cloudy. Democratic and Republican legislative leaders engaged in an acrimonious public meeting in the Capitol with Gov. David A. Paterson. Republicans charged that they had been shut out of negotiations, and Democrats insisted that the Republicans shoulder some responsibility for averting a shutdown. With no agreement yet reached on a budget for the fiscal year that began April 1, the state has been relying on a series of emergency bills to stay in operation. But Republicans have voted uniformly against the last three bills. After the last vote, two Democratic senators said they would oppose the next emergency bill, suggesting that Senate leaders might not be able to muster enough votes to pass it. As a result, administration officials have started huddling with their counterparts at the state comptroller’s office to work through the consequences of a shutdown, warning that if the Legislature fails to approve the next emergency budget bill, due on Monday, the state would face unprecedented chaos.
Worst is ahead in closing New York's $8 billion gap -- After 77 days of stalled negotiations, legislative leaders said Wednesday they were close to finalizing a state budget and should have a fiscal plan nailed down soon. Maybe a week. Maybe a few days.But they’ve made almost no progress in addressing the biggest problem the budget needs to fix: closing the state’s $9.2 billion budget gap. Lawmakers so far have cut about $1.2 billion in state spending for the 2010-11 fiscal year. They’ve come to an agreement on about 50 percent of the budget. That means they still have to cut $8 billion, and they have only half the budget left from which to trim.
Illinois Sells Build Americas as Premium to Treasuries Climbs (Bloomberg) -- Illinois sold $300 million of Build America Bonds at a yield premium over Treasuries about 40 percent higher than two months ago after lawmakers failed to close a $13 billion budget deficit for the year starting July 1. The fifth most-populous U.S. state sold the taxable debt maturing in 2035 priced to yield 7.1 percent yesterday, or 297 basis points over the 2040 Treasury to which it was benchmarked, according to data compiled by Bloomberg. Illinois offered Build Americas of similar maturity at spreads of 205 basis points and 210 basis points in two April issues, Bloomberg data show.
More State Worker Layoff Talk -- State workers could be facing layoffs sooner than expected. Governor Paterson originally called for thousands of workers to be laid off beginning in January 2011. He later then said leaving it to his successor to enforce those layoffs might not be a good idea. Today speaking on the radio show "Capital Press Room", Paterson went a step farther, saying the decision is gnawing at him and reiterated the layoffs should start sooner. Paterson has repeatedly said that the state needs to start cutting jobs in order to balance the massive budget deficit.
Households Bust $1 Trillion Muni Mark - Household ownership of municipal bonds catapulted over the $1 trillion mark for the first time ever in the first quarter of 2010. Meanwhile, foreign investors seeking a greater footprint in the municipal market via taxable Build America Bonds held $71.9 billion in their largest-ever presence in the market, according to new Federal Reserve data released yesterday. Click to see chart Households held $1.02 trillion — roughly 35% — of the $2.834 trillion in outstanding municipal debt through the end of the quarter that ended March 31. Although households only increased their assets by 2.1%, or $21.3 billion, from $998.9 billion they held at the end of the fourth quarter of 2009, the latest milestone pushed the sector closer to doubling the $531.2 billion it owned in 2000. Foreign buyers — enticed by the abundance of high-yielding taxable BABs — increased their holdings 18.8% to $71.9 billion from $60.6 billion in the fourth quarter of 2009. It was a jump of 79.9% — or $31.9 billion — compared to their holdings at the end of the first quarter of 2009 and nearly 10 times the amount of muni debt they held in 2000.
America's Municipal Debt Racket - Nearly 40 years ago the Garden State borrowed $302 million to begin constructing the Meadowlands. Today, the authority that runs the Meadowlands is in hock for $830 million, which it can't pay back. The state, facing its own cavernous budget deficits, has had to assume interest payments—about $100 million this year on bonds that still stretch for decades. This tale of woe has become familiar in the world of municipal finance. Governments have loaded up on debt, stretched out repayment times, and used slick maneuvers to avoid constitutional borrowing limits. While the country's economic troubles have helped expose some of these practices, a sharp decline in tax revenues has prompted more abuse as politicians use long-term debt to kick short-term fiscal problems down the road.
Yields on BP-Backed Municipal Bonds Surge to 10% on Gulf Spill (Bloomberg) -- Interest rates on some floating-rate municipal bonds guaranteed by BP Plc have surged to as much as 10 percent on concern that the costs of cleaning up the Gulf of Mexico oil spill and litigation are spiraling higher. Yields on short-term bonds backed by London-based BP to build sewage and solid-waste disposal facilities at a chemical plant in Will County, Illinois, and a refinery in Texas City, Texas, that are now at 10 percent were as low as 0.5 percent at the start of June. The maximum rate BP will pay on the bonds is 15 percent, according to the Municipal Securities Rulemaking Board’s disclosure Web site. BP backs more than $3.5 billion of U.S. municipal obligations, according to Bloomberg data.
GANG LIFE IN EAST L.A. - East L.A. has long been a neglected neighborhood with a predominately Mexican population. It has one of the nation's highest drop out rates from schools, youth unemployment hovers around seventy-five percent in the most neglected areas, and teenage pregnancy is at an all time high in this community. There is an aspect of suicide among many of these gang kids (between ten and twenty-one years old) whose options have been cut off-no education, no work, and no opportunities for advancement. They stand on street corners and parks, flashing gang signs, inviting bullets. Its either la torcida (prison) or death: a warrior's path when even self-preservation is not at stake. And if they murder, the victims are usually the ones who look like them, the ones closest to who they are-their mirror reflections. They murder and they're killing themselves, over and over.
Property Taxes Falling in Los Angeles County; Tax Revenues Will Plunge - Mish - The Los Angeles Daily News reports Property taxes in county falling. Some 405,000 Los Angeles County homeowners will have up to 1,800 reasons to smile this year following the latest reassessment of property values. The average annual tax bill for affected homeowners will fall between $1,500 and $1,800, LA County Assessor Robert Quon said Wednesday after reviewing 405,000 homes. Similar reviews done last year and in 2008 resulted in lower property taxes for more than 330,000 homeowners. For single-family homes, the average value reduction was $162,000
San Diego May Use Bankruptcy to Roll Back Benefits (Bloomberg) -- The city of San Diego should consider Chapter 9 municipal bankruptcy to help it reduce fringe benefits, pension and health obligations. That’s one of the suggestions made by the San Diego County Grand Jury, which does the normal duties of recommending indictments as well as reporting on local governments and special districts. San Diego is the fifth major city in the U.S. this year, and the second in California, where people are talking about bankruptcy as a means to “restructure and reorganize their assets and debts while providing relief from current and future obligations,” in the words of the grand jury’s 22-page report, published on June 8. San Diego has unfunded liabilities of $2.2 billion in its pension plan and $1.3 billion for health care, which the report calls “unsustainable.”
Chicago Board of Education to Discuss $400 Million Deficit - The Chicago Board of Education meets today to figure out how to fill a $400 million budget hole. For months, Chicago Public Schools CEO Ron Huberman has blamed the massive budget deficit on a lack of funding from the state. So the Board of Education is scheduled to discuss several methods to fill that hole. Those include borrowing up to $800 million, laying off teachers and increasing individual class sizes.
States Squeeze Local Schools - State governments generally try to spare schools from budget cuts. But the recession hit tax revenue so hard that K-12 education is seeing sharp cutbacks in state funding. All major sources of state and local-government revenue—sales taxes, income taxes and property taxes—have fallen. Property taxes are the primary source of school funding, and home values have dropped sharply, particularly on the coasts. More taxpayers are appealing their property assessments to lower their bills. Stimulus dollars from the federal government have been propping up school budgets, but that aid will expire at the end of the coming school year. U.S. Sen. Tom Harkin, an Iowa Democrat, recently proposed a new $23 billion stimulus package specifically to aid public schools, but its prospects are uncertain.
In defense of teacher evaluations.- Everyone is jumping on the bandwagon, including Tyler Cowen, Greg Mankiw, and even Sandeep. They are all trumpeting this study whose bottom line is that student evaluations of teachers are inversely related to the teacher’s long-run added value. I am not jumping on the bandwagon. I have read through the paper and while I certainly may have overlooked something (and please correct me if I have) I don’t see any way the authors have ruled out the following equally plausible explanation for the statistical findings. First, students are targeting a GPA. If I am an outstanding teacher and they do unusually well in my class they don’t need to spend as much effort in their next class as those who had lousy teachers, did poorly this time around, and have some catching up to do next time. Second, students recognize when they are being taught by an outstanding teacher and they give him good evaluations.
Computer Access Leads to Lower Test Scores, Study Suggests - Giving laptop computers to students in fifth through eight grades to take home seems like an appealing idea. But economists Jacob Vigdor and Helen Ladd of Duke University’s Sanford School of Public Policy says it seems to reduce their scores on math and reading tests. The researchers looked at the questionnaires filled out by public school students in North Carolina — nearly 1 million of them between 2000 and 2005 — in which students report time spent on homework, time spent watching TV, time spent using home computers for homework as well as other data to gauge broadband access to their homes, which expanded substantially in those years. “Students who gain access to a home computer between fifth and eighth grades tend to witness a persistent decline in reading and math tests,” they conclude. The effect is modest, they say, but statistically significant. Other studies, they say, are finding similarly discouraging results. The Vigdor-Ladd paper, “Scaling the Digital Divide: Home Computer Technology and Student Achievement,” is circulated by the National Bureau of Economic Research.
The Plight of the 2010 College Graduate - The American 2010 college graduate is moving back home, for lack of a job, after racking up the highest amount of debt in attaining a college degree in history. Last summer, an online survey suggested that 80 percent of college grads returned home to live. Due to the high unemployment rate, many grads are working for free doing internships or volunteer work to gain experience. Even those with nursing and teaching degrees are having very difficult times getting jobs. About one in four 2010 education majors are finding jobs. Some college aged students are living at home and working while attending college, working in parents businesses, joining the military, or working for a while before continuing with grad school.
Education and Jobs Through 2018 - There is a great report out this morning from the Georgetown University Center for Education and the Workforce: Help Wanted: Projections of Jobs and Education Requirements through 2018. The report documents, in 110-odd pages of detail, recent trends in workforce demand for various different occupational categories, and how much education matters to them, as well as making projections out to 2018. For example, the graph above shows the drastic decline in the fraction of non-college educated workers since the 1970s, and projects that it will continue through 2018. Regular readers of this blog will be unsurprised. This report is not by a bunch of wild-eyed technology visionaries, but rather by buttoned-down labor economists. That has advantages and disadvantages. On the plus side, there is massive, solid, well argued detail here - no flights of fancy, just lots and lots of statistics and analysis, and relatively uncontroversial short-term extrapolation. I wish they had tackled the "What will it be like in 2050?" question, at least briefly.
IL: U of I President spells out grim future - Illinois’ premier public university may be owed as much as $700 million from the state by year’s end, threatening its “entire financial underpinning,” its president told a group of regional business leaders Monday.The prediction by University of Illinois Interim President Stanley Ikenberry comes just days after legislators granted state colleges the ability to borrow up to 75 percent of what the state owes them, with a maximum interest rate of 9 percent.Ikenberry said the university expects to finish the fiscal year at the end of June with $335 million in missing payments from the state – roughly 55 percent of its total appropriation
Illinois pension fund uses OTC derivatives to recoup returns, jeopardizes pensions - How bad is it? After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report. By comparison, only 20.3 percent of the Chicago Teachers’ Pension Fund is unfunded. For the quarter ended March 31, according to derivatives experts who studied TRS’ financial documents, the fund lost some $515 million on its derivatives portfolio. Since then, the fund’s derivatives positions have likely soured further, the experts said, due to worsening financial conditions in Europe.Frank Partnoy, a law and finance professor at the University of San Diego who worked on Wall Street as a derivatives structurer in the mid-1990s, said TRS’s portfolio is an indication that investing is not about what is smart but what will generate the highest returns. “It’s an epic illustration of how we’ve really gotten lost in financial complexities,” he said, after studying the Illinois Auditor General's 2009 audit of TRS and the fund's March 31 derivatives positions.
61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS - “If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG."
Long Road to Adulthood Is Growing Even Longer From the Obama administration’s new rule that allows children up to age 26 to remain on their parents’ health insurance to the large increase in the number of women older than 35 who have become first-time mothers, social scientists say young adulthood has undergone a profound shift. People between 20 and 34 are taking longer to finish their educations, establish themselves in careers, marry, have children and become financially independent, said Frank F. Furstenberg, who leads the MacArthur Foundation Research Network on Transitions to Adulthood, a team of scholars who have been studying this transformation. National surveys reveal that an overwhelming majority of Americans, including younger adults, agree that between 20 and 22, people should be finished with school, working and living on their own. But in practice many people in their 20s and early 30s have not yet reached these traditional milestones.
The GED - NBER Working Paper - The General Educational Development (GED) credential is issued on the basis of an eight hour subject-based test. The test claims to establish equivalence between dropouts and traditional high school graduates, opening the door to college and positions in the labor market. In 2008 alone, almost 500,000 dropouts passed the test, amounting to 12% of all high school credentials issued in that year. This chapter reviews the academic literature on the GED, which finds minimal value of the certificate in terms of labor market outcomes and that only a few individuals successfully use it as a path to obtain post-secondary credentials. Although the GED establishes cognitive equivalence on one measure of scholastic aptitude, recipients still face limited opportunity due to deficits in noncognitive skills such as persistence, motivation and reliability. The literature finds that the GED testing program distorts social statistics on high school completion rates, minority graduation gaps, and sources of wage growth. Recent work demonstrates that, through its availability and low cost, the GED also induces some students to drop out of school. The GED program is unique to the United States and Canada, but provides policy insight relevant to any nation's educational context.
State House to consider bill to control state pension costs -The PA State House gave preliminary approval today to on important changes to the pension system for state workers and for public school employees.The State Employees Retirement System and the Public School Employees Retirement System are both facing a costly financial spike two years from now because retirement benefits are rising at a time when investment income is down due to the recession. Under current law, the state government's cost for SERS pensions -- for state employees, legislative staff and elected officials except judges -- are due to increase from $489 million now to $1.68 billion, a spike of 245 percent.This means that pension costs, as a percentage of payrolls, would have to increase sharply over the next few years. For school system members, the percentage would rise from about 4 percent this year to 8.22 percent in the fiscal year starting July 1 and more than 20 percent of payroll by 2013. That would force school boards to raise property taxes and force the Legislature to come up with considerable additional tax funds.
Pension 'reform' will cost Pa. $52 billion - Gov. Ed Rendell and the Democrat-controlled House are trying to redefine pension "reform" by further deferring the scheduled taxpayers' contributions to the state's largest government pension plans — the Public School Employees Retirement System (PSERS) and State Employees Retirement System (SERS). The cost of this "reform" with interest is a breathtaking $52 billion. In the interim, by further underfunding these pension systems, this politically convenient diversion from spending taxpayer money enables willing policymakers to further grow government budgets under the ruse of "saving" money and "investing" elsewhere.
Retire at 55 - AN EXTRAORDINARY feature of modern retirement is that, for each generation, it's successively longer. That's not only because life-expectancy has increased, but because the retirement age has fallen. Many state pension programmes penalise work after a certain age, and in some countries that age can be as low as 55. You might wonder what could possible justify such a policy. With mounting demographic and fiscal pressures why would any government consider shrinking the pool of taxpayers and increasing the number of pension beneficiaries?The rationalisation is the persistent, but wrong, belief that the number of jobs is fixed, so that if you remove old people from the labour force, it makes way for younger workers. This idea is most prevalent in continental European countries which have high unemployment and low retirement ages. Economists' Jonathan Gruber, Kevin Milligan, and David Wise recent paper challenges the fixed-job argument. They find some startling examples of governments framing a 55 retirement age as noble—even patriotic
Supporting Older Americans -Ever wonder what the population of the United States will look like in four decades? Here you go: That chart, taken from this Census report, shows the age distribution of American men and women over the next 40 years. The darkest green bars refer to the country’s population this year. The big lump in the middle of these dark green bars shows the baby boomer generation, which is now aged 46 to 60.By 2030 — shown by the bars in the middle-shade of green — the entire baby boom generation will have moved into the ranks of the elderly.This has bigger consequences than just a longer line for the early bird special. It means that a smaller portion of the population will be working, and inversely that a larger portion of the population will be depending on government services (and/or family members and meager personal savings) in order to get by.Here is another chart from the Census report, showing the “dependency ratio” going forward. This number is a measure of the burden placed on the prime-working-age population (those ages 20-64) that needs to support older people and children:
The Retirement Revenue Mirage -One policy change tending to increase 2010 federal income tax collections is the one-time opportunity in 2010 for anyone to convert a conventional individual retirement account, in which taxes are deferred until money is withdrawn, into a Roth IRA, where investment gains are tax-free (before, conversions were limited to only people who made less than $100,000 a year). A conversion presents younger taxpayers with a large income tax bill now, which in many cases is offset by income tax savings they will enjoy in retirement.Thus, as taxpayers take advantage of the opportunity to convert, the Treasury will see an income tax bump, but this bump comes at the cost of revenue in the future, when those taxpayers would have been liable for income taxes on their retirement incomes. The conversion opportunity is a lot like government debt itself: it presents the government with more revenue to spend now, and less revenue to spend in the future.
Alan Simpson: Cutting Social Security Benefits to “Take Care of the Lesser People in Society” (video) Simpson is apparently a graduate of the Bobby Etheridge school of charm. Alex Lawson was incredibly respectful and polite as the crankly Simpson berated, interrupted and cussed him. Simpson has been a long-time supporter of rolling back the New Deal, and when asked about cuts he would recommend to the President and Congress on CNBC, Simpson said “We are going to stick to the big three,” meaning Social Security, Medicare and Medicaid. His sentiments haven’t changed. CJR’s Trudy Lieberman recently ran down Simpson’s history of delicate statements on the subject of Social Security. He is equally decorous on camera with Alex, who clearly knows a great deal more about the subject than he does. Simpson starts from the premise that the Treasury will default on the bonds issued to the Social Security trust fund, because all the best people apparently know that it’s better to default on America’s senior citizens and plunge them into poverty than it is to default on, say, the Chinese.
“Saving” Social Security - The issue of government debt seems to be coming up a lot news lately. Courtesy of the credit collapse and economic recession, Deficits are front page news. Classic balance budget advocates are reiterating their views, joined by hypocritical partisans who, after a decade of spending profligacy, unfunded tax cuts, new entitlement programs and a war of choice, have “suddenly” discovered the evils of borrowing.Then there are the major entitlement programs: Social Security, Medicare and the Prescription Drug plan. These are, we are told, an even bigger problem then the ordinary budget deficit. As presently configured, the entitlement deficits are set to skyrocket as the boomers retire. Social Security especially is a target of persistent fear-mongering.This is all unvarnished nonsense. Social Security is at present, financially stable; As it starts to run into increasing deficits, the political classes will be forced to respond.
State pension plan underfunded by $1 trillion? - When the majority of the country's 225 state-sponsored pension plans release their annual reports this month, the numbers will paint a bleak picture. Unfortunately, the reality may be even worse. According to the Manhattan Institute for Policy Research, pension plans for public school teachers, which comprise about half of states' total pension liabilities, were underfunded by $933 billion dollars in fiscal year 2008, almost three times the amount that the plans had reported
States come to grips with pricey pension promises - One of the most troubling social trends in recent years has been the pension gap between state and local employees (who can retire early — often very early — with instant, guaranteed, taxpayer-paid benefits) and the private sector workers whose taxes pay for those pensions. Their retirement benefits are largely self-financed and subject to market upheavals. Now, through a combination of fiscal necessity, changed accounting rules and realization that millions of public workers have become a kind of privileged new class, the politics of public pensions appear to be changing. States, without the federal government's ability to print money and with limited ability to borrow, are facing disturbing questions about how they are going to pay for worker pay and benefits, along with their share of Medicaid.
Calpers Panel Votes to Ask State for $600.7 Million (Bloomberg) -- A committee of the California Public Employees’ Retirement System, the largest U.S. public pension, recommended the fund seek an additional $600.7 million for government workers’ benefits from the state. The Benefits and Program Administration Committee, in a unanimous vote, sent the recommendation to the pension fund’s 13-member governing board for final approval tomorrow. It would increase the amount the state must pay as its share of retirement costs to $3.9 billion in the fiscal year that starts July 1, from $3.3 billion this year. State Treasurer Bill Lockyer, a member of the Calpers board, sought a one-month delay in the decision in May, saying the increase would come as the state grapples with a $19.1 billion budget deficit.
CalPERS health premiums to rise an average 9.1 percent - State workers, already financially drained by furloughs and threatened with possible pay cuts, can brace for another potential hit to their pocketbooks next year: A surge in health insurance premiums, some by more than 16 percent. A CalPERS committee on Tuesday recommended an array of premium increases and other measures to rein in its rising costs in providing health care services to 1.3 million public employees, retirees and their families. Exactly how much of the hikes – which will bring total premium costs to $6.7 billion – will be passed on to state workers will depend on what's negotiated between the state and its unions as they wrangle for new contracts.
Colorado delays Medicaid payments -Temporarily short on money, Colorado has declared a fiscal emergency and delayed payments to doctors and clinics taking care of the state's neediest patients.Under state law, the Medicaid department can delay reimbursements to doctors, hospitals and clinics during a fiscal emergency. Physicians treating patients with the health-insurance plan for the poor will not receive normally scheduled payments on June 25 or July 2, a hardship for safety-net clinics in particular that rely on public funds. State officials said they would begin catching up on payments July 9 after a new fiscal year begins
Health care costs to rise 9% in 2011 with higher deductibles - Companies that offer health plans will see their costs jump 9% in 2011, and most employees will pay higher deductibles as a result, said a report released Monday. Employers will try to offset cost increases by requiring their workers to shell out more cash before coverage kicks in, according to a survey of 700 employers by PricewaterhouseCoopers. By 2011, more than 50% of workers will have a deductible of $400 or more. In 2008, only 25% of companies said they had plans with deductibles that high.
Keep Your Health Plan Under Overhaul? Probably Not, Gov’t Analysis Concludes -Internal administration documents reveal that up to 51% of employers may have to relinquish their current health care coverage because of ObamaCare. Small firms will be even likelier to lose existing plans.The "midrange estimate is that 66% of small employer plans and 45% of large employer plans will relinquish their grandfathered status by the end of 2013," according to the document.In the worst-case scenario, 69% of employers — 80% of smaller firms — would lose that status, exposing them to far more provisions under the new health law.The 83-page document, a joint project of the departments of Health and Human Services, Labor and the IRS, examines the effects that ObamaCare's regulations would have on existing, or "grandfathered," employer-based health care plans. Draft copies of the document were reportedly leaked to House Republicans during the week and began circulating Friday morning.
Lest we forget healthcare...a few notes and links - Health care reform blog reminds us both complexity of costs...Good health care less money
Several other links point to information to quality and costs: Is more care better?...The Cost Conundrum What a Texas town can teach us about health care.... Massachussett is still wrestling with cost: The Mass Hospital Association did not offer access to their membership white papers when I asked, just public positions. These are the latest on the website. Mass Hospital Association points to wage increases as problem: Mass Hospital Association primary recommendation to cost reduction appears to be through insurance plans: ...Martha Coakley, Attorney General for MA, has a report showing utilizationhas not increased nearly as fast as prices over the last 3-4 years.
Pitfalls of the Health Mandate - The recently passed health care overhaul will affect many facets of our health system. But its truly revolutionary impact is confined to that segment of the private health-insurance market that serves individuals and employers with fewer than 100 employees, the small-group market.Before the legislation was signed into law in March, insurers offering products in the small-group market were free to customize their policies as they saw fit. They could set lifetime limits on reimbursed benefits and limits on coverage for particular services or products. They could exclude specific services, such as maternity care, or products from coverage altogether. They could set deductibles and coinsurance rates as their judgment of the market dictated.Insurers have also been free to base their premiums on strictly actuarial principles. To actuaries and economists, these business practices made perfect sense. They view it a natural way for private health insurance to operate in a commercial market. The American public, however, appears to have different ideas.
The Health Care Productivity Problem - I’ve blogged twice already about David Cutler’s recent NBER paper on inefficiencies and costs in the health care system. It’s worth some attention and it is an easy read, so I recommend checking it out in full. It includes the following figure (original source: Oliner et al., 2007).Cutler acknowledges that productivity is hard to measure in health care, and I don’t know how it’s done. Nevertheless, according to the figure, productivity growth in health, education, and social services was negative between 1995 and 2005, whereas the average across industries was 2.4%. This is not a good sign. To have any hope of obtaining a reasonable return on our massive health care (and other social program) spending, we need productivity in the sector to grow, not shrink. Cutler’s paper explains why productivity and productivity growth are low in health care and what can be done about it. He hypothesizes why we see so little innovation in health care and suggests ways to promote it.
Getting a handle on healthcare - Ezra Klein notes today that U.S. healthcare costs, which are projected to skyrocket over the next few decades, are by far the biggest driver of long-term deficits: If you wanted to be optimistic about this, you could say that this represents a sort of opportunity. In sharp contrast to, say, France's health-care sector, our health-care sector is dramatically, joyously, wildly inefficient. We pay so much more than anyone else and get so much less that it's easy to imagine a world in which we have a drastically different health-care system that's both better than the one we have now and that's wiped out our deficit. Austin Frakt links to a David Cutler paper today that describes just how inefficient our healthcare sector is: at the same time that, for example, the durable goods industry has been increasing its productivity by 7% per year, and retail trade by about 4% per year, healthcare has actually been going backward. It's been getting less efficient:
The big health care repeal vote - It happened Tuesday, and hardly anyone noticed. Rep. Dave Camp (R-Mich.) introduced an amendment that, if passed, would have scrapped the individual mandate passed as part of the Patient Protection and Affordable Care Act. It failed, 230-187 --a considerably larger margin than the one by which the original act passed. And Republicans lost the vote of Rep. Joseph Cao (R-La.), who represents a heavily Democratic district and only voted against the final bill back in March after becoming convinced that it would, in some fashion, fund abortions. You start to wonder about these margins. If Democrats lose 30-odd seats and hold the House, will there be a rump of conservatives in their party who join with the GOP to support a repeal bill? The answer to that question will largely depend on which Democrats lose, won't it?
The Massachusetts Solution - National health reform looks a lot like what has been implemented in Massachusetts. Will Massachusetts lead the way on cost control too? If so, it might look like this:There is fairly broad agreement on how to fix the system. A state commission —including representatives of government, insurers, doctors and hospitals—recommended in July that Massachusetts adopt a “global payment” system. Health professionals would be paid for caring for patients over a certain period of time, rather than compensated for each test or treatment.That’s from today’s Wall Street Journal (h/t Ezra Klein’s Wonkbook). I’ll believe that there’s “broad agreement” when I see the new payment system based on it implemented. How long will that take?
Of Course It's Not About Patient Outcomes -The abstract of a new NBER WP : In this paper we exploit an arguably exogenous shock to nurse staffing levels. We look at the impact of California Assembly Bill 394, which mandated minimum levels of patients per nurse in the hospital setting. When the law was passed, some hospitals already had acceptable staffing levels, while others had nurse staffing ratios that did not meet mandated standards. Thus changes in hospital-level staffing ratios from the pre- to post-mandate periods are driven in part by the legislation. We find persuasive evidence that AB394 did have the intended effect of decreasing patient/nurse ratios in hospitals that previously did not meet mandated standards. However, our analysis suggests that patient outcomes did not disproportionately improve in these same hospitals. That is, we find no evidence of a causal impact of the law on patient safety. It's all about rent seeking by the powerful California nurses union; any benefits to patients would be incidental.
The Audacity of Prevention: Medical Radiation - Whenever I talk about the small role that medicine has played in expanding life expectancy I like to point out that there are many procedures which by all accounts do wonders for the patient. However, rather than comforting us, then leads us to suspect that the mediocre returns from medicine writ large are because some doctors are killing many of their patients. Hospital transmitted infections are an obvious culprit yet another one seems be to radiation. As you can see from the chart Americans get MOST of their radiation exposure from medical procedures. But to me that’s not what truly troubling. What is truly troubling is that unlike natural sources there are many people in this country who have never or only very rarely been exposed to medical radiation.
Harm from Medical Imaging - In today’s Boston Globe, Marilynn Marchione writes, Americans get the most medical radiation in the world, even more than folks in other rich countries, according to several studies reviewed by the Associated Press. The US accounts for half of the most advanced procedures that use radiation, and the average American’s dose has grown sixfold over the last couple of decades. Too much radiation raises the risk of cancer. That risk is growing because people in everyday situations are getting imaging tests far too often. …More is not better. In addition to causing harm to our health, we pay for it in dollars. How much of those harmful X-rays are from duplicative or unnecessary medical imaging? I don’t know, but some. This type of redundancy is something electronic medical records could eliminate if they’re interoperable and universally accessible across providers. There outta be a law.
Death, Taxes, Soda and Fat - In our recent exchange about a soda tax, Greg Mankiw raised an important question: Do the estimates of the medical costs of obesity take into account the fact that obese people don’t live as long on average? Mr. Mankiw linked to a Dutch study that found that the obese — like smokers — had lower lifetime medical costs because they died sooner. If that’s the case, the argument for a soda tax rests solely on the notion that the government should use tax policy for paternalistic reasons: the government knows what’s best, be it eating right, avoiding cigarettes or wearing motorcycle helmets. If, on the other hand, obesity raises medical costs, the argument for a soda tax is stronger.
BBC News - Call to regulate artificial life -The public wants a say in how research in to the manufacture of synthetic life is conducted, according to a report. The Synthetic Biology Public Dialogue was commissioned by the two UK research councils responsible for funding what has been dubbed "synthetic biology". It sets out to advise the funders of this research how best to proceed. The report revealed that people are comfortable with the the idea of creating life, but only if it is properly regulated. It also found that people wanted an assurance that the research could bring tangible benefits.
Bill Gates Applies Peer Pressure on the Super Rich to Nudge Them to Give Away 50% of Their Wealth - For people worth more than a billion dollars, is there a declining marginal utility from income? Bill Gates is trying to start a virtuous collusive cycle. He wants the world's richest people to give 50% of their income to some big pot of $. The details are here . Suppose that he achieves high goal and the $600 billion dollars is collected. What would he do with this money? What cause merits this type of investment? Will other Billionaires follow Warren and Bill and give away big chunks of their hard earned $? The Carnegie Conjecture says that they will do so to not spoil their kids but many of these rich people have very large families so per-kid the fortune doesn't look so big. Does peer pressure work with this group? Is this group different from you and me?
Food prices to rise by up to 40% over next decade, UN report warns - Food prices are set to rise as much as 40% over the coming decade amid growing demand from emerging markets and for biofuel production, according to a United Nations report today which warns of rising hunger and food insecurity. Farm commodity prices have fallen from their record peaks of two years ago but are set to pick up again and are unlikely to drop back to their average levels of the past decade, according to the annual joint report from Paris-based thinktank the OECD and the UN Food and Agriculture Organisation (FAO). The forecasts are for wheat and coarse grain prices over the next 10 years to be between 15% and 40% higher in real terms, once adjusted for inflation, than their average levels during the 1997-2006 period, the decade before the price spike of 2007-08. Real prices for vegetable oils are expected to be more than 40% higher and dairy prices are projected to be between 16-45% higher.
Banks Profit While Our Farmers Fail - A recent survey by the Federal Reserve Bank of Chicago indicated that 11 percent of Wisconsin farmers with existing lines of credit may not have credit extended next year; this is especially significant because of the a 56 percent decline in net farm income in 2009. Dairy farmers have received prices far below their costs of production for nearly two years. With eroding equity, many are in immediate danger of losing their farms. Farmland is so valuable that local (but often not locally owned) banks call in farm loans at the first opportunity, destroying families, communities, and regional economies. Farms entering foreclosure are listed publicly, further devastating owners while notifying speculators and investors of chances to take advantage of distraught landowners.
Worst Locust Plague in Two Decades Threatens Crops in Australia's Victoria - The worst locust plague in more than two decades is threatening to strike Australia, the world’s fourth-largest wheat exporter, after rainfall boosted egg-laying by the insects in major crop growing regions. “There are hundreds of millions of dollars worth of crops and pastures that are potentially at risk,” Chris Adriaansen, director at the Canberra-based Australian Plague Locust Commission said in an interview by phone. “Tens of millions of dollars” will be spent during the southern hemisphere spring to reduce the affects of the infestation, he said. The forecast plague could cost Victoria’s agriculture sector A$2 billion ($1.7 billion) if left untreated, the state government said today. Widespread egg-laying across south- eastern Australia has set the scene for the biggest hatching for at least 25 years, according to the commission, which describes locusts as the nation’s most serious pest species.
Agriculture, Food Production Among Worst Environmental Offenders, Report Finds - Professor Hertwich said he was surprised to find that the environmental impacts of agriculture were greater than the production of materials such as cement and other manufactured goods. While the report does not make specific recommendations for change -- it is instead a detailed description of the problem -- Hertwich says, "it is clear that we can't all have a European average diet -- we just don't have the land and resources for that." The report itself observes that "impacts from agriculture are expected to increase substantially due to population growth, increasing consumption of animal products. Unlike fossil fuels, it is difficult to look for alternatives: people have to eat. A substantial reduction of impacts would only be possible with a substantial worldwide diet change, away from animal products."
Is Biomass a "Green" Energy Source? - If a pulp and paper factory has a lot of biomass produced as a byproduct of production, should it be encouraged to burn that stuff to generate electricity? In aggregate could such alternative energy sources help us to rely less on coal fired power plants? As discussed here, environmentalist critics are worried that too much of this activity will be triggered by well meaning subsidies for renewable power generation. The environmentalists are worried that toxic air emissions will rise as all of this biomass will be burned. If we switch over to producing more power using biofuels, how much local health damage does this create? This depends on several factors including; 1. how many people live in the airshed near where the biomass would be burned? 2. how sensitive is their health to elevated toxics levels? 3. how much are they willing to pay to avoid this marginal increase in sickness?
Nuclear Agency Weighs a Plan to Dilute Waste - A competition between nuclear waste dumps has pulled the Nuclear Regulatory Commission into an unusual reconsideration of its rules to allow moderately radioactive materials to be diluted into a milder category that is easier to bury. At issue is whether a site in Utah that is licensed to accept only the mildest category of radioactive waste, called Class A, could accept far more potent materials, known as Class B and C wastes, by blending the three together. Even low-level radioactive waste is a growing problem, with few licensed repositories to dispose of it. The problem dates from the early 1980s, when Congress said that the federal government would take care of high-level waste, like spent fuel from nuclear power plants, but that the states would have to find sites for low-level material, like the radiation sources used in cancer treatments and industrial X-rays, and filters used in nuclear plants.
Rich slammed on carbon ‘cheating’ - Some rich countries are seeking new rules under the UN climate convention that campaigners say would allow them to gain credit for "business as usual". Russia, Australia, Canada and some EU countries are among the accused. The rules relate to land-use change, which can either release or absorb carbon, depending mainly on whether forests are planted or chopped down. Rich countries, apart from the US, could account for about 5% of their annual emissions through this loophole. The US is not involved in these negotiations because the proposals fall under the Kyoto Protocol, of which it - alone among developed countries - is not a part.
The climate bill would cost you up to $146 extra a year; what does that mean? Yesterday, EPA released its long-awaited analysis of the American Power Act, Kerry and Lieberman's Senate climate bill. What most journalists and pundits have seized on is this finding: between 2010 to 2050, the legislation would cost the average American household between $79 to $146 extra a year. Now, on its face, that seems bad. Generally, people don't like to hear that they're going to have to spend more money. But some context is in order. As a backdrop, consider that the EPA analysis shows American consumption and incomes rising throughout the period the legislation is place. We're going to get richer and richer and have more and more. It's just that if we attempt to save the world, we'll be just a little bit less richer.
The Politics of Command and Control - Ed Kilgore thinks I didn’t give enough credence to party politics while explaining why Congress may abandon market-based energy policies for command-and-control policies:Leonhardt clearly believes that the transparency of cap-and-trade when it comes to costs is its major political flaw. That’s definitely a factor, but I’d argue that something more fundamental is going on. Once Democrats embraced cap-and-trade, Republicans began retreating from it as a simple matter of politics. And this distancing effort has been immensely reinforced by the rightward trend in the GOP during the last few years, in which leaders who simply denied there was any climate change problem, and/or that government had any useful role to play on the issue, have been in the ascendancy. So “cap-and-tax” was demonized and essentially placed off-limits for Republican politicians, to the point where those like Sen. Lindsay Graham (R-S.C.) and Sen. Richard Lugar (R-IN) who weren’t quite in the “denialist” camp found it easier to just support direct federal regulation.
A Core Set of Global Environmental Indicators —graphic
Tim Naish: Sea level rise heading toward upper limit of 2 meters by end of century - Director of the Antarctic Research Centre at the Victoria University of Wellington in New Zealand, Professor Naish told me: "The international scientific community assessed all the latest science post Copenhagen and it's converging on agreeing a sea level rise of one meter by the end of the century." This is double the figure quoted in the IPCC report -- possibly because the dynamic effects of large ice sheets were not included.Naish wasn't finished. "It's heading towards an upper limit of 2 meters." The impact would be considerable. "It's huge," he agreed. "One-hundred-and-fifty-million people live within one metre's elevation above sea level." Understandably, our first polar exchange theme concerns sea levels. There is dismay at the lack of trust surrounding the effects of climate change because these people are at the front line and have seen it for themselves.And the news isn't good.
The Heat Age - This April was the hottest April on record, globally, for at least 130 years, according to the worldwide temperature records maintained by NASA and the US National Oceanic and Atmospheric Administration (NOAA). The past twelve months was the hottest 12-month period since measurements began. So, could changes in solar radiation explain the warming of the planet? Measurements of incoming solar radiation show that it has not increased in the past 50 years – in fact, the record even shows a small decrease. But the record’s predominant feature is the recurrence of solar radiation cycles lasting about 11 years (called Schwabe cycles, after the astronomer who discovered them in 1843).In the past few years, we’ve been in the deepest and longest minimum of a Schwabe cycle since satellite measurements began. That’s right: while global temperatures are at a record high, the sun has been at its dimmest in decades. Changes in solar activity clearly cannot explain global warming.
NOAA: Warmest May, spring, and Jan-May on record - NOAA’s National Climatic Data Center has published its monthly “State of the Climate Report.” The combined global land and ocean surface temperature was the warmest on record for May, March-May (Northern Hemisphere spring-Southern Hemisphere autumn), and the period January-May. The warming in May is greatest precisely where climate science suggested it would be — the high northern latitudes (see “What exactly is polar amplification and why does it matter?” — precisely the worst possible place from the perspective of amplifying feedbacks (see “Tundra 4: Permafrost loss linked to Arctic sea ice loss“): And it bears repeating, the record temperatures we’re seeing now are especially impressive because we’ve been in “the deepest solar minimum in nearly a century.” Finally, the Arctic sea ice extent continues to break records itself, as data from both the Japan Aerospace Exploration Agency (JAXA) and National Snow and Ice Data Center (NSIDC) make clear:
Effects of global warming on permafrost - Rising seas, melting polar ice caps and strange weather tend to grab headlines as Earth's climate grows warmer. But there are other dramatic outcomes that scientists are only beginning to grasp and which could damage structures in northern areas, reconfigure towering mountains and alter biology.As winters get milder, changes occur underfoot and go largely unnoticed until critical thresholds are reached. Railroad tracks are deformed. Rocky peaks crack apart and spill into ravines. Whole mountainsides lose footing, creating flows of ice and mud that move as fast as a BMW on the Autobahn.Some 24% of land area in the Northern Hemisphere is underlain by perennially frozen ground. Scientists call this permafrost. Another 57% -- extending down into much of the United States and Europe -- freezes seasonally.But these numbers are changing rapidly, scientists reported here last week at a meeting of the American Geophysical Union.
P. Kuhry et al., PPP 21 (2010), Potential remobilization of belowground permafrost carbon under future global warming 
Lin Zhao et al., PPP 21 (2010), Thermal state of permafrost and active layer in Central Asia during the international polar year (see abstract)
In Cap and Trade, a Risk of Acknowledging Costs - NYTimes - This history is the basic argument for putting a price on carbon today, and the next several weeks are likely to determine whether that happens. The chances of Congress’s passing a permit — or cap-and-trade — system that applies to the whole economy are low. But it could still create a version that covered power plants, if not factories and transportation. That would be no small thing. “There is a little bit of a window,” says Jason Grumet, an energy expert and the head of the Bipartisan Policy Center in Washington. The BP spill has focused attention on energy policy, and Congress still has seven weeks before its August recess. “Setting a price on carbon in the power sector,” Mr. Grumet added, “is the most significant opportunity we have to achieve domestic greenhouse gas reductions.”
Cap'n Trade vs. The Oil Spill - BP was a founding member of the U.S. Climate Action Partnership (USCAP), a lobby dedicated to passing a cap-and-trade bill. As the nation’s largest producer of natural gas, BP saw many ways to profit from climate legislation, notably by persuading Congress to provide subsidies to coal-fired power plants that switched to gas.In February, BP quit USCAP without giving much of a reason beyond saying the company could lobby more effectively on its own than in a coalition that is increasingly dominated by power companies. Theymade out particularly well in the House’s climate bill, while natural gas producers suffered.But two months later, BP signed off on Kerry’s Senate climate bill, which was hardly a capitalist concoction. One provision BP explicitly backed, according to Congressional Quarterly and other media reports: a higher gas tax. The money would be earmarked for building more highways, thus inducing more driving and more gasoline consumption.
Some more thoughts on a carbon tax - The Economist has long advocated a carbon tax as the best way to deal with climate change. Carbon taxes are a subspecies of Pigovian tax; taxes that are designed primarily to change behaviour rather than to raise revenue. The idea is to try to manipulate the price of a good or a service in order to capture all the negative externalities it imposes. THIS week, in advance of its "emergency budget" on June 22nd, we wrote about how Britain might close its deficit, which currently stands at 11.1% of GDP. One idea we advocated was a carbon tax. We commissioned some modelling on the subject from Cambridge Econometrics (who have a model specifically designed for this sort of thing). I wrote up the headline results in a small piece to accompany the main article, but space constraints prevented me going into too much detail. Happily, space constraints don't apply on the web.
Sharing the blame for the failure of carbon taxes - David Leonhardt has a good article that is making the rounds about how it increasingly looks like non-market means of energy regulation are going to be how we fight climate change, rather than a much more efficient market oriented approach like carbon taxes. Matt Yglesias rightly lays blame at the feet of conservatives who have worked hard to stigmatize taxes in the public’s mind, and have thus poisoned anything labeled a tax; even good, market oriented things: But overall what you’re seeing here is that creating a political culture in which “tax” is a four-letter word doesn’t eliminate the demand for government to try to achieve certain goals, including curbing negative externalities. It certainly doesn’t kill off “big government.” What it does is cut out efficient solutions to public problems, push the impact of government policy off the balance sheet, and generally obscure what’s going on. I agree with all of that, but I think that many liberals also share the blame for a failure to pass a carbon tax because of their high demand for and tolerance of inefficient and wasteful energy policies.
Door number three? - AT THE New York Times Alex Tabarrok discusses President Obama's Tuesday speech on energy policy: [T]he president called for innovation and hard choices but offered little new or courageous thinking of his own. ... Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes. . Is nuclear power safe? Oil spills and coal-mine disasters should remind us that safety is always relative. Mark Thoma adds his thoughts: I was on the fence before and not really sure whether to go with the seemingly emerging consensus that nuclear power is the answer to our energy needs, there were always nagging doubts, but the problems in the gulf make me hesitant to embrace nuclear power despite assurances that the risks are minuscule. When you're faced with a challenge like global warming—that is, an one of unprecedented scope—you don't rule anything out. Nuclear power will play a role in reducing emissions. Will it (and should it) play a major role?
How energy actually gets used -This graph is the clearest visualization of our energy economy that I've seen (click): That graph comes by way of Keith Hennessey, who observes that "when battery technologies improve, the fuel and power worlds will blend in the U.S., and there will be strong and direct economic relationships between the production of electric power and the use of oil. Until that day, from an energy perspective, 'fossil fuels' conflates oil with coal and natural gas in a way that is at best confusing and at worst misleading. Substituting biofuels for oil or making vehicles more fuel efficient has almost no effect on the amount of coal or natural gas we use." And coal-fired power plants, as those who remember this graph will know, remain a bigger problem for carbon emissions than most people realize.
Oh, The Humanity - Take your pick on what's most infuriating about the oil crisis in the Gulf. There's the growing evidence that the platform blowout that caused all that crude to erupt out of the ocean floor was entirely preventable and should never have happened in the first place. What's especially unnerving, though, is that the recklessness that helped bring about the spill, and the political reaction that followed, seem to indicate a larger inability to prevent and cope with other large-scale ecological catastrophes—particularly climate change. True, the analogy's not perfect: The Deepwater Horizon blowout was a sudden and local event, while global warming is slowly creeping up on us and, well, global. But the same set of human characteristics that precipitated the one calamity may well hinder us from stopping the other.
Documents: BP cut corners in days before blowout - BP made a series of money-saving shortcuts and blunders that dramatically increased the danger of a destructive oil spill in a well that an engineer ominously described as a "nightmare" just six days before the blowout, according to documents released Monday that provide new insight into the causes of the disaster. The House Energy and Commerce Committee released dozens of internal documents that outline several problems on the deepsea rig in the days and weeks before the April 20 explosion that set in motion the largest environmental disaster in U.S. history. The committee has been investigating the explosion and its aftermath."Time after time, it appears that BP made decisions that increased the risk of a blowout to save the company time or expense. If this is what happened, BP's carelessness and complacency have inflicted a heavy toll on the Gulf, its inhabitants, and the workers on the rig," said Democratic Reps. Henry A. Waxman and Bart Stupak.
Cracks Show BP Was Battling Gulf Well as Early as February…(Bloomberg) BP Plc was struggling to seal cracks in its Macondo well as far back as February, more than two months before an explosion killed 11 and spewed oil into the Gulf of Mexico. It took 10 days to plug the first cracks, according to reports BP filed with the Minerals Management Service that were later delivered to congressional investigators. Cracks in the surrounding rock continued to complicate the drilling operation during the ensuing weeks. Left unsealed, they can allow explosive natural gas to rush up the shaft. “Once they realized they had oil down there, all the decisions they made were designed to get that oil at the lowest cost,” said Peter Galvin of the Center for Biological Diversity, which has been working with congressional investigators probing the disaster. “It’s been a doomed voyage from the beginning.”
BP Supervisor Was Fired For Expressing Safety Concerns - Ken Abbott, a former project control supervisor on BP's Atlantis deepwater oil rig, was fired in 2009 after expressing concerns about the safety of the operation. "I got a lot of pressure from the lead engineers and from the managers saying, 'Don't do that; don't push so much; we don't want to mess with that,'" Abbott told HuffPost in an interview Wednesday. "I feel like the real reason I was fired was because I was trying to raise a safety issue, and you know BP has a long history of getting rid of people who try to raise safety issues. I was one of those victims." "Management sets the tone," Abbott added. "If they think that production is more important than safety, then that's the tone of the company, and that was the tone at Atlantis."
BP Used Cheaper Design for More Wells Than Most Peers - In recent years, oil giant BP PLC used a well design that has been called "risky" by Congressional investigators in more than one out of three of its deepwater wells in the Gulf of Mexico, significantly more often than most peers, a Wall Street Journal analysis of federal data shows. The design was used on the well that exploded in the Gulf of Mexico on April 20, killing 11 workers and causing America's worst offshore oil spill. The only other major well design, which is more expensive, includes more safeguards against a natural-gas blowout of the kind that destroyed the Deepwater Horizon. A Journal analysis of records provided by the U.S. Minerals Management Service shows that BP used the less costly design—called "long string"—on 35% of its deepwater wells since July 2003, the earliest date the well-design data were available. Anadarko Petroleum Corp., a minority partner of BP's in the destroyed well, used it on 42% of its deepwater Gulf wells, though it says it doesn't do so in wells of the type drilled by BP.
More on BP - The Christian Science Monitor details 5 decisions by BP on the Deep Horizon drilling that saved costs but added to risks: (1) foregoing section casing and tiebacks, (2) using only 1/3 the recommended number of stabilizers, (3) failure to test the cement seal, (4) implementing only partial mud circulation, and (5) failure to secure the wellhead. And they don't even mention the acoustic shut-off switch. Notwithstanding, the Wall Street Journal reports that the White House misrepresented the recommendations of a panel of experts from the National Academy of Engineering regarding details of a proposed moratorium. And I must say that I find the suggestion that the company should compensate oil workers from other firms put out of work by the government's moratorium deeply troubling. I understand the politics-- let's use somebody else's money to buy off those groups that the government's own decisions may anger. And just whose money shall we use? Well, BP's, of course, which stands for British Pensioners.
In Gulf disaster, echoes and lessons of Alaska's Exxon Valdez spill - With their futures dark and confused, desperate residents of the Gulf of Mexico are turning to veterans of Alaska's Exxon Valdez oil spill for clues about what they're facing. The word from Alaska, whether it's about cleaning up, economic recovery, despondency or lawsuits: Expect years of deep trouble, but there are ways to cope "Here's a life-changing and terrible event, and the less people know about it, the more concerned they get," said Stan Senner, who served as science coordinator for the federal-state agency that was set up to study and recover from the 1989 Alaska oil spill. "No one wants to hear bad news, but even worse is just simply not knowing the news." Senner, now the director of conservation science for the nonprofit Ocean Conservancy, an environmental group, is among dozens of Exxon Valdez experts who've been trekking around the Gulf, attending community meetings, boating through marshes threatened by oil and lobbying officials to avoid mistakes made 21 years ago in Alaska.
The Spill, The Scandal and the President (8pp) Even after the president's press conference, Rolling Stone has learned, the administration knew the spill could be far worse than its "best estimate" acknowledged. That same day, the president's Flow Rate Technical Group – a team of scientists charged with establishing the gusher's output – announced a new estimate of 12,000 to 25,000 barrels, based on calculations from video of the plume. In fact, according to interviews with team members and scientists familiar with its work, that figure represents the plume group's minimum estimate. The upper range was not included in their report because scientists analyzing the flow were unable to reach a consensus on how bad it could be. "The upper bound from the plume group, if it had come out, is very high," says Timothy Crone, a marine geophysicist at Columbia University who has consulted with the government's team. "That's why they had resistance internally. We're talking 100,000 barrels a day."
U.S. and BP slow to accept Dutch expertise - Three days after the explosion of the Deepwater Horizon in the Gulf of Mexico, the Dutch government offered to help.It was willing to provide ships outfitted with oil-skimming booms, and it proposed a plan for building sand barriers to protect sensitive marshlands. The response from the Obama administration and BP, which are coordinating the cleanup: “The embassy got a nice letter from the administration that said, ‘Thanks, but no thanks,'” said Geert Visser, consul general for the Netherlands in Houston. Now, almost seven weeks later, as the oil spewing from the battered well spreads across the Gulf and soils pristine beaches and coastline, BP and our government have reconsidered.U.S. ships are being outfitted this week with four pairs of the skimming booms airlifted from the Netherlands and should be deployed within days. Each pair can process 5 million gallons of water a day, removing 20,000 tons of oil and sludge.
US turned down Britain’s offer to help clean up BP oil rig spill - A high-level British offer of help to clean up the Gulf of Mexico oil spill was rebuffed by America shortly after the accident, fuelling fresh fears of political tension between the two countries over the disaster. A few days after the BP-leased rig sank on April 22, the Cabinet Office made a direct offer to the US State Department to airlift half of Britain’s 1,200-tonne stockpile of chemical dispersants, The Times has learnt. A spokeswoman for the Department of Energy and Climate Change, which was also involved in drafting the plan, said that the US had chosen not to accept the offer. Officials said the US claimed that the chemicals held in Britain did not have the correct paperwork but the spokeswoman said: “We are not aware of any problems with licensing. I cannot say why they have not accepted the offer. That is a question for the US State Department.” One person familiar with the discussions said that the US decision seemed odd, given the severity of the crisis and the fact that the offer had been made in good faith. The Times understands that the rejection of Britain’s offer came after the US had accepted similar offers from other countries, including Saudi Arabia.
Why the United States Still Can't Get BP to Do What's Necessary - Here’s what Coast Guard Rear Adm. James A. Watson wrote to BP’s chief operating officer on Friday: “Recognizing the complexity of this challenge, every effort must be expended to speed up the process.” BP’s plans don’t “go far enough to mobilize redundant resources” in the event of an equipment failure or another problem. “BP must identify in the next 48 hours additional leak containment capacity that could be operationalized and expedited to avoid the continued discharge of oil.” Translated: You’re dragging your heels and aren’t even using all the equipment you have, damn it. You better, or I’ll … I’ll … .BP spokesman Jon Pack said the company received Watson’s letter and would respond to it as soon as possible. Translated: Too bad. Have a nice weekend.The Administration has not used legal authority to order BP to do a thing, because it hasn’t asserted any legal authority
Scale of BP oil leak revised up to 40,000 barrels a day - Scientists this week doubled the official estimate of the size of the Gulf of Mexico oil spill, with more than 40,000 barrels of oil feared to be leaking from the seabed every day – but no one knows for sure.BP has consistently played down the size of the spill. But with each new technique it deploys to siphon off more oil, the scale of the disaster and BP's hopelessly optimistic estimates become ever more apparent. The new figure of between 20,000 and 40,000 barrels dwarfs the original estimate by US authorities – based on information provided by BP and endorsed by the oil company – that the spill was just 1,000 barrels of oil per day. As recently as the end of last month, the official estimate was still as low as 5,000 barrels. This was only revised following the release by BP – under pressure from scientists and the US Congress – of new video footage of the leak at the sea bed. The most accurate way to measure the size of the spill is against the amount BP is collecting in its attempts to contain the leak. If next month BP starts to collect 50,000 barrels of oil per day, this will confirm that the original estimates massively understated the scale of the environmental catastrophe.
BP oil spill estimates double - The oil spill off the Gulf of Mexico is even worse than previously thought, with twice as much oil spewing into the ocean than earlier estimations suggested, figures show. Latest estimates from scientists studying the disaster for the US government suggest 160-380 million litres (42-100 million US gallons) of oil have already entered the Gulf. Most experts believe there is more oil gushing into the sea in an hour than officials originally said was spilling in an entire day. It is the third – and perhaps not the last – time the Obama administration has had to increase its estimate of how much oil is gushing. If the flow continues, it will easily become the worst oil spill in peacetime history. The Exxon Valdez disaster of 1989 involved a comparatively minor 41m litres of oil.
US Revises Estimate For The BP Oil Spill Higher For Third Time, Now At 35,000-60,000 Per Day As BP Cries Foul Over Counterparty Exposure - The US government has revised its estimate for the daily oil spill for the third time, now decidedly higher than the last iteration which was at 25,000-40,000 barrels per day. The latest estimate puts the high end another 50% higher, at 60,000 barrels. If this is indeed the case, it means that the amount of oil already having leaked could be as high a 3 million barrels, or 12 times the amount spilled in the Exxon Valdez. Whether this means that the previous estimate of a total possible BP liability and other payments of $80 billion have to be adjusted higher once again, is still unknown.
The numbers get worse with each look at oil flow – BusinessWeek - With each new look by scientists, the oil spill just keeps looking worse.New figures for the blown-out well at the bottom of the Gulf of Mexico show the amount of oil spewing may have been up to twice as much as previously thought, according to scientists consulting with the federal government. That could mean 42 million gallons to more than 100 million gallons of oil have already fouled the Gulf's fragile waters, affecting people who live, work and play along the coast from Louisiana to Florida -- and perhaps beyond.It is the third -- and perhaps not the last -- time the U.S. government has had to increase its estimate of how much oil is gushing. Trying to clarify what has been a contentious and confusing issue, officials gave a wide variety of estimates on Thursday. Most of the new estimates had more oil flowing in an hour than what officials once said was spilling in an entire day.
Estimates of Oil Flow Jump Higher - NYTimes -A government panel on Tuesday released yet another estimate of the amount of oil flowing from BP’s damaged well, declaring that as much as 60,000 barrels a day could be spewing into the Gulf of Mexico. That is roughly 2.5 million gallons of oil a day, and it means an amount equal to the Exxon Valdez spill could be gushing from the well about every four days. The flow was already categorized as the largest offshore oil spill in the nation’s history, but the new figures sharply increase previous estimates. Scientists on Tuesday estimated that the flow rate ranged from 35,000 to 60,000 barrels a day — up from the rate they issued only last week, of 25,000 to 30,000 barrels a day. It continues a pattern in which every new estimate of the flow rate has been dramatically higher than the one before. With BP capturing roughly 15,000 barrels a day, the new estimate suggests that as much as 45,000 barrels a day is escaping into the gulf.
BP warns that its new oil collection plan has safety risks - BP's latest plan to capture the oil gushing from the runaway Deepwater Horizon well poses significant safety risks for "several hundred people" working aboard the ships that will process the corralled crude, the oil giant has told the Coast Guard. In a letter dated Sunday, BP Vice President Doug Suttles said the new scheme would have three ships in place by the end of June capable of processing as much as 53,000 barrels of crude from the well a day, and by mid-July would have four ships collecting between 60,000 and 80,000 barrels a day.Suttles cautioned, however, that the "multi-vessel containment plan" would pose health and safety risks for workers that "must be carefully managed." "Several hundred people are working in a confined space with live hydrocarbons on up to four vessels," Suttles wrote. "This is significantly beyond both BP and industry practice." With so many vessels working in a relatively small area, Suttles wrote that there's a risk of a "major surface accident." Video of the site Sunday showed more than a dozen vessels on the scene; a jet of burning natural gas perhaps 200 feet long shot from one.
6/14 comment by dougr @ the oildrum - First of all...set aside all your thoughts of plugging the well and stopping it from blowing out oil using any method from the top down. Plugs, big valves to just shut it off, pinching the pipe closed, installing a new bop or lmrp, shooting any epoxy in it, top kills with mud etc etc etc....forget that, it won't be happening..it's done and over. In fact actually opening up the well at the subsea source and allowing it to gush more is not only exactly what has happened, it was probably necessary, or so they think anyway. So you have to ask WHY? Why make it worse?...there really can only be one answer and that answer does not bode well for all of us. It's really an inescapable conclusion at this point, unless you want to believe that every Oil and Gas professional involved suddenly just forgot everything they know or woke up one morning and drank a few big cups of stupid and got assigned to directing the response to this catastrophe. Nothing makes sense unless you take this into account, but after you do...you will see the "sense" behind what has happened and what is happening. That conclusion is this: The well bore structure is compromised "Down hole".
Then: BP Official Admits to Damage BENEATH THE SEA FLOOR… As I noted Tuesday, there is growing evidence that BP’s oil well – technically called the “well casing” or “well bore” – has suffered damage beneath the level of the sea floor.The evidence is growing stronger and stronger that there is substantial damage beneath the sea floor. Indeed, it appears that BP officials themselves have admitted to such damage. This has enormous impacts on both the amount of oil leaking into the Gulf, and the prospects for quickly stopping the leak this summer.Indeed, loss of integrity in the well itself may explain why BP is drilling its relief wells more than ten thousand feet beneath the leaking pipes on the seafloor (and see this). Yesterday, recently-retired Shell Oil President John Hofmeister said that the well casing below the sea floor may have been compromised:
Matt Simmons Revises Leak Estimate To 120,000 Barrels Per Day, Believes Oil Covers 40% Of Gulf Beneath The Surface - Matt Simmons was on Bloomberg earlier, adding some additional perspective to his original appearance on the station, in which he initially endorsed the nuclear option as the only viable way to resolve the oil spill. Simmons refutes even the latest oil spill estimate of 45,000-60,000 barrels per day, and in quoting research by the Thomas Jefferson research vessel which was compiled late on Sunday, quantifies the leak at 120,000 bpd. What is scarier is that according to the Jefferson the oil lake underneath the surface of the water could be covering up to 40% of the entire Gulf of Mexico. Simmons also says that as the leak has no casing, a relief well will not work, and the only possible resolution is, as he said previously, to use a small nuclear explosion to convert the rock to glass. Simmons concludes that as punishment for BP's arrogance and stupidity the government "will take all their cash." Now if only our own administration could tell us the truth about what is really happening in the gulf...
BP's Deepwater Oil Spill - Why the Flow Rates are Increasing - At that time the rig sank there were reports that a Coast Guard ROV examined the underwater assembly and did not see any obvious oil leaks. A couple of days later the flow was suggested at about 1,000 bd, and this then escalated to 5,000 bd. As cameras began to publicly monitor the outlet of the riser the estimates started to grow, but a not-well-publicized effort measured the flow out of the riser, and found that it was around 8,000 bd, with allowance for leaks, the overall flow was estimated to be perhaps 12,000 bd. Once the broken part of the riser was removed and a cap placed over the well, a significant portion of the escaping oil was captured and could then be measured as it flowed into the surface vessel recovering it. Those values are currently at around 15,500 bd. BP is currently planning on additional capture this week of up to another 10,000 bd, and preparing for a worst case scenario with a flow rate of 80,000 bd. These numbers vary a lot, and yet they could all be correct.Why? Well, its called erosion, and simply put, the oil and gas that are flowing out of the rock are bringing small amounts of that rock (in the form of sand) out with them. Rocks that contain lots of oil are not that strong and are easily worn away by the flow of fluid through them.
BP Suspends Oil Spill Recovery After Ship Fire (Bloomberg) -- BP Plc said it temporarily stopped collecting oil from its leaking well off Louisiana after a fire aboard the collecting vessel, allowing petroleum to again spill unhindered into the Gulf of Mexico. There was no damage as a result of the fire, which was put out “within a few minutes,” said Robert Wine, a BP spokesman. Oil recovery was shut down as a precaution at about 10:30 a.m. New York time and is expected to resume today after equipment inspection and safety checks, Wine said. The fire atop the derrick of the drillship Discoverer Enterprise may have been caused by lightning, London-based BP said today in an e-mailed statement. The company said there were no injuries. The National Weather Service had forecast isolated thunderstorms in the area.
BP Admits That – If It Tries to Cap the Leak – the Whole Well May Blow - (video series)This has just been confirmed by BP. Specifically, BP’s Chief Operating Officer Doug Suttles told CNN last Thursday that BP’s data indicates that BP can’t cap the leaking oil, or it might cause the well casing to blow out. As I previously noted, oil industry expert Rob Cavner said that BP must “keep the well flowing to minimize oil and gas going out into the formation on the side”: Suttles denies that there is evidence that the well casing has already blown out beneath the sea floor. But many experts – including experts working for BP – say that there is damage beneath the sea floor. Indeed, Matt Simmons told Bloomberg today that America’s top research vessel – the Thomas Jefferson – found that the well casing is gone, and can no longer even be seen on the sea floor, having been destroyed:
BP's Oil Disaster: The dangers and difficulties of ‘Bottom kill’ - For the BP engineers attempting to stop the out-of-control well still gushing oil into the Gulf of Mexico following the explosion of the Deepwater Horizon oil rig on April 20, the relief well method -- so-called "bottom kill" -- is also seen as the last solution available. The company began drilling the two relief wells in May, and BP CEO Tony Hayward says that he is confident that "the relief wells ultimately will be successful." He expects that the spill in the Macondo oil field will finally be capped by early August. Hayward's forecasts, however, have not always proven to be reliable and independent experts warn that relief wells, like any well, are not without risk. "More oil could leak than before, because the field is being drilled into again," says Fred Aminzadeh, a geophysicist at the University of Southern California. Ira Leifer, a geochemist at the University of California in Santa Barbara, voices similar concerns: "In the worst case, we would suddenly be dealing with two spills, and we'd have twice the problem."
Gulf oil leak causing upheaval in marine ecology - As oil continues to leak out of the collapsed Deepwater Horizon well head, researchers are beginning to collect data on how it is changing life in the Gulf of Mexico. Earlier today, Samantha Joye of the University of Georgia in Athens spoke of what they are finding. She said that methane concentrations in a giant underwater plume emanating from the well head are as much as 10,000 times higher than background levels. The consequences of this for life in the gulf are unknown. Joye was one of the first scientists to discover deep-water plumes emanating from the ongoing spill and recently returned from a two-week research expedition on board the research vessel F. G. Walton Smith. "It's an infusion of oil and gas that has never been seen before, certainly not in human history," she said earlier today, as she described her preliminary findings.The plume is more than 24 kilometres long, 8 kilometres wide and 90 metres thick, and stretches from 700 to 1300 metres below the surface south-south-west of the collapsed Deepwater Horizon well head.
Gulf Oil Spill Killing Thousands of Animals (Video) - Rescue workers have saved thousand of birds, turtles and dolphins from the oil spill area in the Gulf of Mexico. But many others have died, and those that initially survive may experience long term ill effects. Producer Zulima Palacio has more in this report narrated by Elizabeth Lee.
Expert suggests BP is hiding oiled animal carcasses -Speaking on MSNBC's "Countdown" Monday night, Marine toxicologist Riki Ott alleged that oil giant BP is actively attempting to curb coverage of the recent oil spill by removing oiled animal carcasses from Gulf beaches."Turtle watch volunteers who walk the beaches consistently every morning at 6:00 a.m., they're saying the carcasses are disappearing," Ott told host Keith Olbermann. "People who walk the beaches at night, they've seen little baby dolphins wash up dead, flashlights, people descend out of nowhere, carcass gone in 15 minutes. There's reports from offshore of massive kills on the barrier islands from fishermen who have been working on the spill response... BP's response has been to use metal detectors to keep and prevent the people from even taking cell phones out to photograph this."While at first glance, Ott's claims might seem conspiratorial, myriad reports have fingered BP's role in attempting to silence coverage of the spill's effects. Over the weekend, reports signaled that BP had hired private security contractors to guard some Gulf coast beaches.
Dr.Riki Ott alleges BP engaged in massive cover-up to hide Gulf Disaster damage (countdown with Keith Olberman)
BP’s Deepwater Oil Spill – the Problem of Cleaning Up Marshes – ADMIRAL ALLEN: Well, I think you’ve done a very good job at describing the vexing situation that exists out there, especially in the lower area in Barataria Bay and Plaquemines Parish where there is a lot of marshland. There is no good solution when oil enters a marshland. And as we know, boom can be defeated by seascape -- it has to go over or under the top of it, depending on environmental conditions. And skimming is very, very difficult. And if you use mechanical means back in the marshes, you do as much harm to the marshes as the oil might do. And, in some cases, you’re faced with the prospect of either an in-situ burn or just to let it biodegrade.And the real issue is to stop this thing at the source, do maximum skimming, in-situ burning -- deal with it as far off shore as possible, and do everything you can to keep it from getting to shore, because once it’s into the marshes, quite frankly, I think we would all agree there’s no good solution at that point.
Louisiana berms sound like a bad idea - OF the many cleanup solutions being pursued in the Gulf of Mexico, few are as ambitious as Louisiana’s berm project. The Army Corps of Engineers recently authorized the state to construct some 45 miles of artificial berms in an effort to protect Mississippi River Delta wetlands and barrier islands from the oil gushing from the Deepwater Horizon leak, with BP promising to pay the state $360 million for the entire project. Although federal and state agencies were given only a short time to respond to the application, their comments, included in the permit documentation, raise serious concerns about the proposal and its potential effects. The Environmental Protection Agency and the Department of the Interior, for instance, question whether an effort that will take at least six months to build will appreciably diminish the amount of oil entering the delta wetlands.
BP enlists help from Kevin Costner in cleanup -BP officials have turned to a new source for help with their oil cleanup efforts: actor Kevin Costner. The oil giant announced Monday that it had ordered 32 machines from Costner's company, the actor told CNN in an exclusive interview on "AC360." The machines use a centrifuge mechanism to separate oil from water and recycle the crude at the same time, Costner said. "This is the key, it's the linchpin to people going back to work. It's certainly a way to fight oil spills in the 21st century," he said. "It creates an efficiency where there are no efficiencies out there, and it's been a long time coming." Costner said he had been working on developing the machine since 1992 or 1993 with the help of his brother, a scientist.
Efforts to Repel Gulf Oil Spill Are Described as Chaotic - It was late May. Oil had been creeping into the passes around Grand Isle. Two fleets of fishing boats were supposed to be laying out boom, the long floating barriers to corral oil and protect the fragile marshes of Barataria Bay. But the boats were gathered on the inland side of the bay — the wrong side — anchored idly as the oil oozed in from the Gulf of Mexico. BP officials said they had no way of contacting the workers on the boats. From the beginning, the effort has been bedeviled by a lack of preparation, organization, urgency and clear lines of authority among federal, state and local officials, as well as BP. As a result, officials and experts say, the damage to the coastline and wildlife has been worse than it might have been if the response had been faster and orchestrated more effectively.
U.S. Response To Oil Spill Falters - The federal government sprang into action early following the vast BP oil spill. But along the beaches and inlets of the Gulf, signs abound that the response has faltered.A Wall Street Journal examination of the government response, based on federal documents and interviews with White House, Coast Guard, state and local officials, reveals that confusion over what to do delayed some decision-making. There were disagreements among federal agencies and between national, state and local officials. The Coast Guard and BP each had written plans for responding to a massive Gulf oil spill. Both now say their plans failed to anticipate a disaster threatening so much coastline at once. The federal government, which under the law is in charge of fighting large spills, had to make things up as it went along.
Extreme temperatures in the Gulf cause spill cleanup workers to suffer heat stroke - Officials with BP, which is responsible for the cleanup, say that the gulf region’s soaring temperatures have slowed the work because of added measures to protect more than 18,000 workers on land and at sea across four states from the scorching sun. With the heat index, a measure of how hot it feels when humidity is taken into account, at 110 degrees or more in some locales, at least 100 workers have had heat-related illnesses, some of which required hospitalization, said David Michaels, assistant secretary for the Occupational Safety and Health Administration at the Department of Labor. Mr. Michaels said the department had assigned more than 20 inspectors from OSHA to watch over workers on boats and beaches and at about 20 cleanup staging areas from Louisiana to Florida.
VIDEO: Toxins in air from evaporating oil may pose greater threat than oily water - Scientists now say oil spill is leaking between 1.47 million and 2.52 million gallons a day One of the “remedies” for this horrendous disaster is to use chemical dispersants to break up (read: Hide from plain view) the oil into tiny fragments that can be much more readily absorbed. It only follows that airborne fumes would be on the A-List of health concerns.Gee, ya think?Toxins that are released into the air from evaporating oil and dispersants may pose a greater health risk to clean-up workers and Gulf residents than oily water when the thickest parts of the oil slick wash ashore. [...]The Institute for Southern Studies (ISS) reported as early as May 10 that, “the latest evaluation of air monitoring data shows a serious threat to human health from airborne chemicals emitted by the ongoing deep water gusher.”On May 14, WWLTV in New Orleans also ran a report warning of the danger of airborne toxins: (video)
Spill Takes Toll on Gulf Workers’ Psyches - Beyond the environmental and economic damage, the toll of the mammoth spill in the Gulf of Mexico is being measured in hopelessness, anxiety, stress, anger, depression and even suicidal thoughts among those most affected, social workers say. Mindful of the surge in psychological ailments after Hurricane Katrina hit the Gulf Coast in 2005, community groups are trying to tend to the collective psyche of fishermen like Mr. Le even as they address more immediate needs like financial aid.
BP oil spill: coastguard chief launches fresh attack over clean-up failure...In an open letter to BP, he gave the company just two days to explain how it can capture more oil, after raising concerns that current plans to increase the amount siphoned off from the leak would take until mid-July He also criticised the British oil major for not putting in place adequate back-up plans to deal with any equipment failure. "It is clear that additional capacity is urgently needed," said Rear Admiral Watson. "I am concerned that your current plans do not provide for maximum mobilisation of resources to provide the needed collection capacity." Tensions between BP and the Coast Guard increased after US government scientists raised estimates for the amount coming from its leak to 40,000 barrels per day from an earlier forecast of 20,000. Currently 15,800 barrels per day are being siphoned to the surface – the maximum capacity of the container ship
Fire BP, Remove Them from the Crime Scene and Let a Team of Experts Fix This Mess on BP's Dime - BP was criminally negligent in drilling the well which blew out. See this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this and this. It has bungled everything it has done since. Indeed - as discussed below - it has made things worse. And BP has tried to cover up its blunders by lowballing spill estimates, keeping reporters out of areas hardest hit by the oil (and see this, this and this) and threatening to arrest them if they try to take pictures, hiding dead birds and other sealife, telling cleanup workers they'll be fired if they use respirators, and using dispersants to hide the amount of spilled oil (the dispersants are only worsening the damage caused by the spill). Given the enormous stakes (don't forget that we are starting a potentially "extremely active" hurricane season), why are we letting BP continue to be in charge of containment operations? Remember, there is probably damage beneath the sea floor. A misstep by BP could make things much worse.
Power Blackouts And Water Shortages Threaten Florida - Some bad news for our Tampa Bay/Mons Venus-based (yes, they do have WiFi) readers: globalresearch.ca notes that Florida "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." And some even worse news for America's purported democratic/free speech regime: "The Obama administration has taken a page from the government of Soviet leader Mikhail Gorbachev and Chernobyl in censoring the bad news from the Gulf oil mega-disaster. The Chernobyl cover-up largely resulted in the hastening of glasnost and the ultimate collapse of the Soviet Union."
As businesses collapse, claimants still waiting for checks from BP - Across the gulf, residents already shellshocked by the tar balls, oil soup and dead sea life washing up on their beaches are now getting hit with a second wave: the sudden collapse of their livelihoods, and the equally intimidating challenge of getting BP to pay for it.
The 42,000 claims filed with the oil company so far go well beyond the shrimpers, oystermen and seafood processers who have been the spill's most visible victims. Hotels, restaurants, machine shops, bars and tour companies all became collateral damage when the Gulf of Mexico, one of the nation's most important fisheries and tourist destinations, became an industrial cleanup site.
Oil spill: Fishermen seeking compensation for losses fear the tax man - BP's request for tax records poses a problem for some residents of fishing communities in southeastern Louisiana — the nonconformists who haven't kept records or reported their cash income. The first step for a commercial fisherman or coastal business seeking compensation for losses suffered in the oil spill seems simple enough: Submit copies of a commercial fishing license, proof of residence and tax statements. But the request for tax records poses a serious challenge to some residents of close-knit fishing communities on the swampy edges of southeastern Louisiana, which for generations have harbored self-reliant nonconformists who don't pay much heed to everyday rules and regulations. In other words, they often get paid in cash — and don't always report it
A Tennessee Valley Authority for the Gulf Coast? - There are three things…going on. One is close that well…capture as much oil as you can, keep the pressure on BP on the relief wells. Second is immediate cleanup. And I think more can be done by the Obama administration…But I think the big third piece is coming, when President Obama comes to Florida and Alabama and Mississippi, and that is holding BP responsible for the Natural Resource Damage Act, for the Oil Spill Response Act. And, by that, I mean BP is going to end up paying somewhere from $10 billion to $15 billion, maybe even $20 billion, because they’re going — one of the only ways to save the Louisiana wetlands is going to be — you know, the Mississippi River has been channelized for navigation. Well, now the Mississippi River has to be redirected. It’s going to have to be flooded and sediment pumped into these marshlands to save it. I think the Obama administration…
Interactive map and trajectory for BP oil spill - GeoPlatform.gov/gulfresponse employs the Environmental Response Management Application (ERMA®) a web-based GIS platform developed by NOAA and the University of New Hampshire’s Coastal Response Research Center. ERMA was designed to facilitate communication and coordination among a variety of users — from federal, state and local responders to local community leaders and the public. The site was designed to be fast and user-friendly, and we plan to keep it constantly updated.The mapping tool includes only those vessels equipped with the automatic identification system and therefore is not representative of all the vessels supporting the largest oil spill response and recovery operation in U.S. history. Click the map below to use the tool yourself and see the latest information about the oil spill’s trajectory, shipping information, fishery closures and where responders are taking action.
Vacation Cancellations along the Gulf Coast - From the Mobile Press-Register: As oil washes ashore, property managers sharply cut condo rents Property managers are offering 30 percent to 50 percent cuts at condominium units and beach houses, hoping to fill rooms and prevent cancellations in the wake of the BP oil spill. "June has been gutted, as far as rental occupancies," "We've had $220,000 in cancellations in the last three days." ... "The problem is that even at those lower rates, we're not getting near enough takers. Reservation calls have gone to a fraction of what they would normally be on a daily basis."I'm not sure the lower prices will make much difference. Who wants to vacation at a beach and not be able to swim in the water? Or to see (and probably smell) the oil? The article mentions that Alabama beach resorts generate about 75% of their annual revenue in June, July and August. So this entire season is lost.
BP Hires Mercs to Block Oily Beaches -Last week, we all voted here on who should buy Blackwater now that it’s up for sale. In addition to Steve Jobs and the Salvation Army, one of the top finalists was British Petroleum. “Somebody is gonna have to keep all those sunbathers away from the beach,” one commenter noted. Well, today we can tell you: Danger Room gets results. Kinda.BP, in a move destined to go down as one of the bestest public relations moves ever, has apparently hired a private security company to help to keep pesky reporters from covering the unfolding catastrophe on the beaches of the Gulf Coast. The report comes via New Orleans’ 6WDSU reporter Scott Walker, who last week ran into representatives of a “Talon Security” trying to block him from interviewing cleanup workers on a local beach. Just which of the various companies named “Talon Security” is storming the (public) beaches for BP, however, remains unclear.
Gulf oil full of methane, adding new concerns – It is an overlooked danger in the oil spill crisis: The crude gushing from the well contains vast amounts of natural gas that could pose a serious threat to the Gulf of Mexico's fragile ecosystem. The oil emanating from the seafloor contains about 40 percent methane, compared with about 5 percent found in typical oil deposits, said John Kessler, a Texas A&M University oceanographer who is studying the impact of methane from the spill. That means huge quantities of methane have entered the Gulf, scientists say, potentially suffocating marine life and creating "dead zones" where oxygen is so depleted that nothing lives."This is the most vigorous methane eruption in modern human history," Kessler said.
BP's next challenge: Disposal of tainted sludge - Oil giant BP is facing a huge new challenge in disposing of the millions of gallons of potentially toxic oil sludge its crews are collecting from the Gulf of Mexico, according to industry experts and veterans of past spills. Crews so far have skimmed and sucked up 21.1 million gallons of oil mixed with water, according to the Deepwater Horizon Unified Command. Because the out-of-control well may continue spewing for months, that total almost certainly will surge. BP's plan for handling the gooey mess, written in conjunction with the Coast Guard, the Environmental Protection Agency and Louisiana officials, calls for reclaiming or recycling as much as possible. Some experts said that approach is the best option for the environment, but it has not worked in previous spills. It is not profitable to refine sludge that has mixed with water and seagoing debris because it can actually ruin refineries, they said.
Scientists Warn Gulf Of Mexico Sea Floor Fractured Beyond Repair - A dire report circulating in the Kremlin today that was prepared for Prime Minister Putin by Anatoly Sagalevich of Russia's Shirshov Institute of Oceanology warns that the Gulf of Mexico sea floor has been fractured “beyond all repair” and our World should begin preparing for an ecological disaster “beyond comprehension” unless “extraordinary measures” are undertaken to stop the massive flow of oil into our Planet’s eleventh largest body of water.Most important to note about Sagalevich’s warning is that he and his fellow scientists from the Russian Academy of Sciences are the only human beings to have actually been to the Gulf of Mexico oil leak site after their being called to the disaster scene by British oil giant BP shortly after the April 22nd sinking of the Deepwater Horizon oil platform. BP’s calling on Sagalevich after this catastrophe began is due to his being the holder of the World’s record for the deepest freshwater dive and his expertise with Russia’s two Deep Submergence Vehicles MIR 1 and MIR 2 [photo below] which are able to take their crews to the depth of 6,000 meters (19,685 ft).
Oil And Gas Leaks From Cracks In Seabed Confirmed - Videos Show Gulf Oil Spill Leaking From Seafloor - There have been several reports of oil and gas leaking on the cracks in the Gulf of Mexico seafloor which may cause problems with BP capping the gushing oil well.Although BP denies that there is oil or gas leaking from the cracks in the sea floor many people watching the BP Oil leak cam have witnessed explosions and leaks from the seafloor.I discussed this issue in detail when I was recently interviewed by Fintan Dunne. Well those reports from Senator Nelson and Matt Simmons among other experts are now confirmed and if you didn’t already now it could be really bad news. As Keith Olbermann put it on his MSNBC show “Countdown” when reporting about the possibility of the sea floor leaking “What’s Worse Than Doomsay? … This is It”. (video of leak from seafloor)
What Do BP And The Banks Have In Common? The Era Of Corporate Anarchy - The BP oil spill is part of the same problem as the financial crisis: They are two examples of the era we are living in, the era of corporate anarchy. In a nutshell, in this era of corporate anarchy, corporations do not have to abide by any rules—none at all. Legal, moral, ethical, even financial rules are irrelevant. They have all been rescinded in the pursuit of profit—literally nothing else matters. As a result, corporations currently exist in a state of almost pure anarchy—but an anarchy directly related to their size: The larger the corporation, the greater its absolute freedom to do and act as it pleases. That's why so many medium-sized corporations are hell-bent on growth over profits: The biggest of them all, like BP and Goldman Sachs, live in a positively Hobbesian State of Nature, free to do as they please, with nary a consequence.
A Disaster, Privately Managed - Because the disaster was slow-moving, the full might of American journalism has been brought to bear. In one sense, the public has never been more informed. But to look for clarity amid the murk is a daily riddle. The size of the spill has been a moving target, with estimates recently doubled to 25,000 or 30,000 barrels a day, even after BP stanched some of the flow. So what amount of oil was coming out of that hole in the first place? We will never know, in part because our government has never gained custody of information. What is clear is that even weeks into the disaster, public information has been privatized in whole or in part. Every disaster has chaotic elements and a need to maintain order and safety, but the economic interests of a large commercial enterprise are clearly impeding the free flow of information. Journalists in the gulf are now dealing with a hybrid informational apparatus that does not reflect government’s legally mandated bias toward openness and transparency.
WSJ Comes Up Short on BP Boycott Effects -The problem here is that the Journal doesn’t explain to us how the BP service-station model works. I’m guessing that BP doesn’t just let any old body slap its name and logo on their filling stations. Presumably, it charges a franchise fee and gets a cut of any revenue. Maybe not much for a station or two, but BP has 10,000 affiliates in the U.S. alone, the WSJ reports. Indeed, a quick Google search finds that at one of BP’s brands, am/pm, the franchise fee is $70,000 plus an ongoing royalty stream of 5 percent revenue (that excludes low-to-no margin gasoline sales). So if you’re buying candy at a BP franchised station, you’re giving high-profit-margin money to BP. If you’re serious about trying to avoid giving them money, you have to weigh that against the harm you’re doing the business owner (who, let’s face it, is probably not a small businessperson. )
U.S. Targets $20 Billion BP Pay-Out - Shares in BP tumbled more than 9 per cent on Monday as US Democratic senators called on the multinational oil company to inject $20bn immediately into a ring-fenced fund to clean up the Gulf of Mexico spill. BP’s board held a teleconference on Monday where it discussed the charged issue of whether to continue paying a dividend. Options included paying it into an escrow account to be released once the costs of the slick caused by April’s explosion on the Deepwater Horizon rig had been met, or paying a scrip dividend in shares. Investors expect the company to offer some form of suspension of the dividend to Barack Obama on Wednesday when the US president is due to meet Carl-Henric Svanberg, BP chairman, and Tony Hayward, chief executive
BP cuts dividend, to sell assets for oil spill fund (Reuters) - Oil giant BP said it would not pay three quarters of dividends, significantly reduce its investment program and sell $10 billion of assets to fund a planned $20 billion fund to pay for its Gulf of Mexico oil spill.The commitments, outlined in a statement on Wednesday, are harsher penalties than most investors had expected and follow BP chairman Carl-Henric Svanberg's meeting with President Obama on Wednesday.BP said it would cancel the previously declared first-quarter dividend scheduled for payment on June 21, and said no interim dividends will be declared for the second and third quarters of 2010. The payouts had been expected to be about $2.6 billion per quarter, in line with recent quarters
Obama bullies BP into £13.5bn fund for oil spill victims... but British pensioners will pick up the bill - British oil giant forced to suspend paying any dividends until 2011 - The crisis engulfing BP has plumbed new depths as President Obama bullied the company into depositing £13.5billion into a fund to settle compensation claims for the calamitous Gulf of Mexico oil spill. After a face-to-face showdown with the President at the White House, BP chairman Carl-Henric Svanberg revealed the payment meant the oil giant would be forced to suspend dividends to its shareholders until at least next year.
BP’s Options to Limit Liability From the Oil Spill -As the oil spill in the Gulf of Mexico worsens, the financial markets are rife with speculation about BP’s next steps to control its growing liabilities — a pot that the oil giant has further stirred by hiring investment advisers to assist it in managing these liabilities. This speculation runs the gamut from insolvency to a takeover to a $20 billion escrow account to administer claims from the oil spill. But just how realistic are any of these options? Here is a brief analysis: To understand BP’s liability, one must recognize that the company is not a monolithic entity. Rather, it is composed of scores of different corporate entities across the globe. Each of them has its own limited liability and is run separately to preserve those liability limits. In the United States, this concept of limited liability is well established and respected unless the law overrides it or a corporate parent does not treat a subsidiary entity as separate.
Anadarko Says BP Should Pay for Oil Spill After Being Reckless (Bloomberg) -- Anadarko Petroleum Corp., the Texas oil company that owns 25 percent of the damaged well pouring crude into the Gulf of Mexico, said BP Plc, the project’s operator, should pay the costs from the spill because it acted recklessly and unsafely at the drilling site. BP didn’t monitor or react to warning signs as the Macondo well was drilled, Chief Executive Officer Jim Hackett said yesterday in a statement. BP is responsible for damages under such conditions, Anadarko said. “BP’s behavior and actions likely represent gross negligence or willful misconduct and thus affect the obligations of the parties under the operating agreement,” Hackett said in the statement.
Get ready for years of ugly litigation once the BP oil spill disaster hits the courts - We are now watching Act One of the Gulf oil spill drama. It is a tragic farce. British Petroleum pretends to be contrite. The Obama administration pretends to be in charge. The economic and environmental depredations are of course very real. Everyone hopes the catastrophic, ocean-floor gusher can be stanched by early fall. I am waiting for Act Two. That is when the PR flacks go home and the lawyers take over. Lawyers are an unsentimental lot. It’s all very sad about the pelicans and the groupers, but as several attorneys explained to me: Fish can’t sue. Only people can. And once the oil spill hits the courts, the public is in for a rude awakening.
“We Cannot Consign Our Children To This Future” - It’s a lesson for all of us that we’ve known about for a long time but found it more comfortable to ignore. But even the BP tragedy/debacle isn’t enough to get even the President to really “tell it like it is.” He speaks of the need for climate change policy this way :…and yet he couldn’t seem to bring himself to talk about the kind of climate change policy that would not only avoid consigning our children to this awful environmental future, but would also avoid subjecting our children to an awful fiscal future. The policies President Obama mentioned sounded like vague “carrot” approaches–suggesting we ought to somehow encourage clean energy technologies (i.e., more subsidies! more spending!)……except for this only hint that maybe there would be taxes involved (shhhh!..don’t say the dreaded “T” word!–emphasis added):
Fareed Zakaria Chastises The Media For Focusing On Wanting Obama Appear Angry Rather Than Solutions To Oil Spill - Fareed Zakaria gave the collective American media a much needed drubbing for their ridiculously trivial coverage of the catastrophic BP Gulf oil spill. Rather than looking for solutions or presenting a history of BP safety violations to show a long history of negligent behavior, or advocating for sensible regulations to protect the country, what did the media focus their energies on? Whether or not Obama appeared angry enough about the disaster. This whole discussion is a terrible example of how the media can trivialize political discussion. The presidency is a serious job, the most serious job in the country. And here we are, asking the man to dress the part, to play-act the emotions. Give us satisfaction by just doing something, even if it’s all phony stuff, designed to give the impression of action.
BP: Is Team Obama Pushing for a Full Externalities Precedent? -This is by no means a likely outcome, but we are seeing some novel behaviors. First is that Obama finally may have succeeded in getting someone important afraid of him. This is a critically important lesson; Machiavelli told his prince it was much more important to be feared than loved. Mere anger is often negotiation posturing or a manifestation of CEO Derangement Syndrome; fear is much harder to fake. And BP is finally starting to get rattled. Per the Wall Street Journal: Mr. Hayward immediately canceled an employee town hall meeting and a trip to review clean-up on the Louisiana coast, and gathered his visibly shaken executives at the crisis center in Houston. At a top management call between Houston and London to review its “Sub-sea and Surface” agenda, the top item on “Surface” issues suddenly became “Washington politics.”“This demand is chilling,” said one executive in the meeting. “The administration keeps pushing the boundaries on what we are responsible for.”
BP Agrees to Create Fund to Pay for Spill - NYTimes— The White House and BP agreed on Wednesday that the oil giant would create an independent $20 billion fund to pay claims arising from the worst oil spill in American history. Bowing to pressure from the Obama administration, the company also said it would suspend paying dividends to its shareholders for the rest of the year and would compensate oil field workers for lost wages. The $20 billion compensation fund will be run by Kenneth Feinberg, the mediator who oversaw the 9/11 victims compensation fund. President Obama announced the agreement to reporters at the White House Wednesday afternoon, after he and his top advisers met in the morning with BP’s top executives and lawyers to finalize the agreement. After the president’s remarks, the chairman of BP, Carl-Henric Svanberg, announced the dividend suspension.
With Criminal Charges for Oil Spill, Costs to BP Could Soar - Based on the latest estimates, for example, the daily civil fine for the escaping oil alone could be $280 million. But criminal penalties, if imposed, could cause the costs to balloon still further, said David M. Uhlmann, a law professor at the University of Michigan, who headed the environmental crimes section of the Justice Department from 2000 to 2007. Even misdemeanor convictions under environmental laws could produce stunningly large fines under general federal criminal statutes, Mr. Uhlmann added. Predictions by analysts of the overall cost of the spill to BP, when criminal penalties are included, have been rising. On Wednesday, Pavel Molchanov, an analyst at Raymond James, estimated the total legal cost, including criminal fines, at $62.9 billion, which would dwarf the $20 billion escrow account to be used to pay claims of economic loss.
Gulf spill damages may hit $100 bn: La Treasurer - Louisiana's state treasurer estimated environmental and economic damages from the Gulf of Mexico oil spill could range from USD 40 billion to USD 100 billion, and that the BP USD 20 billion escrow fund was not enough. Louisiana is eager to learn the details of a special fund BP Plc agreed to create to compensate those affected by the oil gushing into the Gulf of Mexico from an accident at one of the company's oil wells, Louisiana Treasurer John Kennedy told Reuters Insider on Thursday. BP has announced it will put USD 20 billion into an escrow account, an amount that Kennedy called a good start, but not large enough to pay for the biggest oil spill in US history.
British telling Obama to cool the political attacks on BP -Someone is calling Obama on his rhetoric. Senior Tories today warned Barack Obama to back off as billions of pounds were wiped off BP shares in the row over the Gulf of Mexico oil spill. Mayor Boris Johnson demanded an end to “anti-British rhetoric, buck-passing and name-calling” after days of scathing criticism directed at BP by the President and other US politicians. Former Conservative Party chairman Lord Tebbit branded Mr Obama's conduct “despicable”. And with the dispute threatening to escalate into a diplomatic row, Mr Johnson also appeared to suggest that David Cameron should step in to defend BP.He spoke as the US onslaught against the firm became a “matter of national concern” — especially given its importance to British pensions, which lost much of their value today as BP shares plunged to a 13-year low.
BP: It's Not a Contest Between the US and Britain - It doesn’t matter if Tony Hayward is called to the White House. It doesn’t matter that President Obama says he’d like to fire him. Hayward’s first responsibility is to BP’s shareholders. Some Americans are also be BP shareholders, but their interests as U.S. citizens aren’t represented in their roles as shareholders. Their citizenship interests are represented by our government, headed by the President.As citizens, we want the hole in the Gulf plugged up as fast as possible, we want the spill contained, and we want everything cleaned up and damages paid — no matter how much it costs BP’s shareholders. But if we’re BP shareholders, we want to minimize all such expenditures — including our long-term liabilities. Get it? There’s no conflict between Britain and the United States. The conflict is between two kinds of interests — shareholder interests and citizen interests
Too Big to Fail? The BP Bailout as Corporatism - Nowhere have I seen a clearer example of the perils of corporatism playing out than in the current handling of the BP oil spill. If only Obama understood the context of the decisions he’s about to make, he might be able to use this as an opportunity to turn all this around, and put people and the planet before profits. Like so many presidents before him, Obama is being given an opportunity to choose between corporatism and commerce, between banking and the environment, between investment capital and small business, between passive extraction of value and active creation of value. And, like almost all of them, he’s going the wrong way.
BP's $20 billion spill fund echoes in Bhopal justice cry (Reuters) – Indian activists seeking justice in the world's worst industrial disaster are accusing the United States of "double standards", saying it was punishing firms polluting American soil but ignoring their mistakes abroad.The Obama administration on Wednesday pushed oil giants BP Plc to agree a $20 billion fund to pay damages for a massive oil spill in the Gulf of Mexico that has threatened fishing and tourism and killed birds and marine life.That fund has ignited calls in India for Washington to show similar accountability for U.S. firm Union Carbide. Its Indian factory in Bhopal leaked a poisonous gas 26 years ago, killing 3,500 people.Activists say 25,000 people died in the immediate aftermath and ensuing years. Former chairman of Union Carbide, Warren Anderson, who lives in the United States, has been classified as an absconder in the case by an Indian court.
Half a World From Gulf, a Spill Five Decades Old— Big oil spills are no longer news in this vast, tropical land. The Niger Delta, where the wealth underground is out of all proportion with the poverty on the surface, has endured the equivalent of the Exxon Valdez spill every year for 50 years by some estimates. The oil pours out nearly every week, and some swamps are long since lifeless. Perhaps no place on earth has been as battered by oil, experts say, leaving residents here astonished at the nonstop attention paid to the gusher half a world away in the Gulf of Mexico. It was only a few weeks ago, they say, that a burst pipe belonging to Royal Dutch Shell in the mangroves was finally shut after flowing for two months: now nothing living moves in a black-and-brown world once teeming with shrimp and crab.
BP Is Just A Symptom Of A Dangerous Addiction To Oil - The real problem is not Brit-bashing by US politicians. It is, as US commentator Thomas Friedman has pointed out, that Obama has missed an opportunity to move the discussion on to the underlying issues of climate change and the developed world's addiction to oil. The horrific effects of this addiction are not confined to the environment. A report published in Sweden last week by the European Coalition on Oil in Sudan (ECOS) went unremarked in the UK but its allegations are devastating.
Can't Live With It, Can't Live Without It- Starting in 2005, I started writing about the disastrous future consequences—the oil price shock of 2007-2008 gave us a foretaste—of America's out-of-control oil dependency. Do you know what the effect on policy of all that hard work was? Nada, Zip, Nothing, A Big Fat Zero. And the result was the same for all the others who spoke out on the issue. Some of us thought highlighting the peak oil situation would prompt Our Leaders to take action. Ha! You might as well try to stop a glacier from moving forward by standing in front of it. Crude oil—we can't live with it, and sadly, we can't live without it. Which is why none of the last eight presidents, all of whom paid lip service our oil problem, didn't do shit about it. That mitigating our oil dependency ship sailed long ago. Now it's way too late to fix the problem. This clip from the The Daily Show on Our Energy Independent Future speaks for itself. Barack Obama is the latest President to align himself with America's great tradition of Energy Futility
Just don't raise gas prices - Any informed observer knows there is a long list of reasons why developed nations should act swiftly and urgently to reduce their reliance on oil. We must do it to avoid catastrophes like the Gulf oil spill. To soften the impact of price shocks. To improve local air quality. To fight climate change. To lessen the risk of peak oil. To enhance our security and deny some of the world's most odious regimes their principal source of money and power. It's equally obvious this has been true at least since the 1973 Arab oil embargo. Gerald Ford said most of what I wrote in that first paragraph. So did Jimmy Carter, and a long list of environmentalists, generals, corporate executives, and security officials. Even George W. Bush said it. And yet, the developed world today is essentially as reliant on oil as it was in 1973. How is that possible? It's tempting to resort to conspiracy theories. But the reality is much more mundane. And depressing.
Think gas is too pricey? Think again - Most of us would call the BP spill a tragedy. Ask an economist what it is, however, and you'll hear a different word: "externality." An externality is a cost that's not paid by the person, or people, using the good that creates the cost. The BP spill is going to cost fishermen, it's going to cost the gulf's ecosystem, and it's going to cost the region's tourism industry. But that cost won't be paid by the people who wanted that oil for their cars. It'll fall on taxpayers, on Gulf Coast residents who need new jobs, on the poisoned wildlife on the seafloor. That means the gasoline you're buying at the pump is -- stick with me here -- too cheap. The price you pay is less than the product's true cost. A lot less, actually. And it's not just catastrophic spills and dramatic disruptions in the Middle East that add to the price. Gasoline has so many hidden costs that there's a cottage industry devoted to tallying them up. At least the ones that can be tallied up.
What Should the Price of Gasoline Be?: In today's WaPo Business section, in "Think gas is too pricey? Think again," Ezra Klein reports on a recent study by Ian Perry of Resources for the Future that attempts to estimate the cost of all the externalities arising from the use of gasoline in vehicular transportation. At the time of the report, the average price of gas in the US was $2.72 per gallon, but after adding in (in order of estimated costs), 52 cents for traffic congestion, 41 cents for auto accidents, 30 cents for energy security, 20 cents for climate change, 12 cents for local pollution, and 10 cents for oil dependence, this brings a supposedly more efficient prices of $4.37 per gallon. It is unclear if that 12 cents for local pollution was estimated before or after the BP oil spill in the Gulf of Mexico happened.
Business leaders predict 'global oil supply crunch and price spike' - The Chief Executive Officer of insurance giants Lloyds is warning that the world is facing a “period of deep uncertainty” over the decline of fossil fuels – and may soon be coping with $200-a-barrel oil.It may be hard to believe now, writes Dr Richard Ward in his introduction to a “stark” report just published by Lloyds and an influential UK think tank, but that’s because “the bad times have not yet hit.” He warns business managers to be ready for “dramatic changes” as oil, gas and coal supplies will soon be “less reliable and more expensive.” The world “has entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will pay for it,” he states.And that’s just CEO Ward’s introduction. The rest of the report does not disappoint. Titled Sustainable Energy Security: Strategic Risks and Opportunities for Business, it urges business leaders to adopt a “transition to a low carbon economy.” Those that do will thrive; the report talks of opportunities for forward-thinking managers that “prepare for and take advantage of the new energy reality.” However, “failure to do so could be catastrophic.”
Sir David King: Oil Extraction A Threat To The Future - Future oil extraction could create new environmental, social and technological challenges, says the UK's former chief scientist. Sir David King said that, as global oil demand started to outstrip supply, oil companies would be forced to drill in unconventional places. He cited the Gulf of Mexico oil spill as an example of the risks associated with the oil production. The scientist has called on governments to "de-fossilise" their economies and accelerate the development of alternative energy sources, such as biofuels, to reduce the world's dependence on oil. He added that global oil resorces might in fact be drying up faster that many - including governments - have been led to believe.
What happens when energy resources deplete? - One view is that energy prices will rise, substitutes will be found, and prices will come back down again, perhaps settling at a somewhat higher equilibrium reflecting the cost of producing the substitute energy source. The economy will continue to function pretty much as before. Another view, popular among those concerned about peak-oil, is that oil and energy prices will just keep rising. If scalable substitutes aren't found, some expect that oil prices will rise from their current price of $75 barrel, to $100 barrel, to $200 barrel, to $300 barrel, and eventually to $1,000 barrel or more. The problem with this view is that it doesn't take into account the amount of money people actually have available to spend. Just because oil or energy prices rise doesn't mean that people will get additional income to cover these higher expenditures. In real life, prices can't keep going up. I expect that...oil prices will end up in the uncomfortable middle--too high for the economy to buzz along, but too low to encourage much new oil production, or much new renewable production. The result is likely to be continuing recession, getting worse over time, because of what will be generally viewed as inadequate demand for oil.
Belief Systems At Turning Point - It seems to me with the BP Horizon Blowout, we may be hitting a turning point in belief systems, in more than one way. Can businesses really be expected to regulate themselves, with minimal oversight? Can technology solve our all our problems? If there are technological solutions, can they be expected immediately? Can we really depend on the oil supply that everyone has told us is here?
U.S. per Capita Oil Consumption Plummets -- The chart to the right reveals what we found when we took the U.S. Energy Information Agency's figures for the average number of thousands of barrels of Finished Petroleum Products Supplied to the U.S. per day, converted those figures to the equivalent number of U.S. gallons, then divided that result by the number of people within the United States, as measured by the U.S. Census' Resident Population Estimate for each month from January 1982 through March 2010 (we found that data in two places - here it is for between April 1980 through November 2000, and for April 2000 through the present). What we find is that since January 1982, the average daily oil consumption for individual Americans living in the United States has averaged 2.56 gallons per person. More remarkably, we see that Americans have dramatically reduced their consumption of oil and its derivative products since July 2007.
Drilling Rules Hit Alaska Pipeline -The federal government's new wariness about offshore drilling in the wake of the Gulf of Mexico oil spill is dimming what may be the best hope for extending the life of the Trans-Alaska Pipeline, a crucial artery supplying one-quarter of the West Coast's oil. The 800-mile pipeline, owned by a BP PLC-led consortium, carries about 670,000 barrels of oil a day—13% of U.S. production—from Alaska's North Slope the length of the state to Port Valdez. From there it is sent by tanker to refineries in Washington and California.That is a lot less than the two million barrels a day the pipeline carried at its peak back in 1988, because of a rapid—and probably permanent—decline in Alaska's onshore oil production. Volumes may fall low enough to halt operations by the middle of the next decade without an expensive modification of the pipeline to handle less oil. At a reduced flow, oil in the pipeline can freeze or form into a waxy buildup, raising the risk of interruptions and spills.
The End of Offshore Drilling? - In case you missed it, there's now a six-month ban on drilling for oil in the Gulf of Mexico. This presents a two-fold blow to both the affected region and the nation as a whole. First, we have to deal with the lost supply, now estimated at up to 2.5 million gallons per day. And what we're not getting from the Gulf, we'll have to find someplace else — preferably on domestic soil. Even though robust formations like the Bakken are about to shift into overdrive, it's still no secret that the days of cheap oil are over.But you know what we have plenty of? Natural gas
Saudi output slashed in 2009 - Aramco's crude output was 7.9 million barrels per day last year, the company said in an annual review released today, down from 8.9 million bpd in 2008. Opec pledged to cut output by 4.2 million bpd in late 2008 as global oil demand plummeted with slowing economic activity. Top oil exporter Saudi Arabia shouldered the biggest share of the cuts. Aramco's crude exports fell to 5.65 million bpd last year, from 6.88 million bpd in 2008, according to a Reuters report. Capacity and output from the Neutral Zone shared by Kuwait and Saudi Arabia is excluded from Aramco figures.
China agrees new gas pipeline - China and Kazakhstan have signed a deal to build and finance a natural gas pipeline and deepen their cooperation on nuclear energy, extending the two countries' ties on resources. Under the agreement signed on Saturday during a visit by Chinese President Hu Jintao, the two countries will build a 1,400-km gas pipeline. It will link with an existing gas pipeline running between China and Central Asia. Feasibility studies will also be undertaken, looking at increasing gas exports to China from the Caspian Sea area and other Central Asian countries through the pipeline, China National Petroleum Corp (CNPC) said on Sunday. Analysts said the deal underlines the importance of energy cooperation between China and central Asian countries, which are rich in natural resources. China signed a deal with Uzbekistan last Wednesday to buy 10 billion cubic meters of natural gas per year from the country. Both countries also signed a memorandum of understanding to expand their cooperation on gas.
U.S. Identifies Vast Riches of Minerals in Afghanistan --The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials. The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe. An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and BlackBerrys. The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists.
U.S. "Discovers" Nearly $1 Trillion In Mineral Deposits In Afghanistan - And there are those who wonder why the US has spent countless dollars and thousands of dead soldiers protecting a few desolate mountain passes in Afghanistan. And no, it turns out it is not just the opium trade. The NYT reports that "The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials." The article continues, "The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe." Ah yes - "previously unknown." Yet the punchline of the piece : "The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists." Because $1 trillion worth of minerals just lie there waiting to be discovered almost 10 years after the initial incursion. Next thing you know FCX already had an entire mining infrastructure in place just in case a contingency like this miraculously occurred
Tapping Afghan Mineral Riches? Good Luck - The revelation that Afghanistan is sitting on nearly $1 trillion worth of untapped mineral deposits has the potential to transform that country's future. But under even the rosiest scenarios, it does not appear the new wealth will change dynamics quickly enough in Afghanistan to aid the U.S. military effort there. U.S. officials have released new details, first reported in The New York Times, regarding major, untouched deposits of metals including gold, copper and iron, as well as the critical information-age mineral lithium. The value of the deposits far exceeds the current size of the Afghan economy.But once extraction gets seriously under way, it's not likely to be American or perhaps even Western companies that do the digging. China outbid companies from several other nations in 2007 for the right to mine copper near the Afghan village of Aynak, paying $3.4 billion for the privilege
Brazilian businesses are buying up U.S. companies. That's a good thing.A few years ago, dealmakers were abuzz—and many analysts were fearful—about the prospect of sovereign wealth funds from the Persian Gulf and China shifting their strategies from buying U.S. government bonds to purchasing U.S. companies. Since many of those bubble-era deals exploded, the sovereign wealth funds have become much less aggressive about entering the U.S. market. But now there are signs that the Brazilians may be picking up some of the slack. Last week, Brazilian meatpacker Marfrig agreed to acquire Keystone Foods for $1.25 billion. As a result, the Brazilian firm will now become a key supplier to all-American fast-food chains like Subway and McDonald's. According to Thomson Reuters, there have been eight transactions since last October involving Brazilian firms purchasing U.S. companies or assets from U.S. companies. And there are likely to be more.
What do commodity prices reflect about broader economic expectations and risks? -Gold prices are pushing repeatedly record highs. But there is no inflation on the horizon; indeed, deflation is a far greater risk right now. This can be gleaned by the fact that prices of other commodities, ranging from oil to minerals to agricultural commodities, are trending down, by record-low long-term treasury rates and low rates on inflation-indexed bonds, and by high unemployment and stagnant wages. The trend in CPI data is down too. What gives? Jim Hamilton nails it: There's a common thread to all the above figures, and it's not fears about inflation. Instead it's worries about the level of real economic activity, showing up in a flight to safety. U.S. Treasuries remain the instrument of choice for investors who think nothing looks safe. But with the long-run fiscal challenges facing the United States, are 10-year Treasuries really the safest place to put your money? The yellow metal seems to be one way some people are hedging that bet.
More Evidence Of Booming US Demand: Traffic At LA Ports Surged In May - There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of the nation's container port traffic. Sometimes port traffic gives us an early hint of changes in the trade deficit. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported. Loaded inbound traffic was up 18.3% compared to May 2009. Inbound traffic was still down 5% vs. two years ago (May 08). Loaded outbound traffic was up 9.4% from May 2009. Just as with imports, exports are still off from 2 years ago (off 7.3%).
Baltic Dry Index Rolls Over - The Baltic Dry index, which is the closest proxy for China's bubbleliciousness, has dropped to one month lows, and continues accelerating its drop to the downside. The dry bulk shipping sector, which was the bubble of late 2007 and early 2008, does not appear poised to make a repeat appearance just yet. As concerns over commodity overstocking in China, and Australian extraction concerns courtesy of the recent supertax, keep investors awake at night, is CNBC's "favorite" index about to retrace its 2009 lows? Furthermore, if the recent Afghanistan raw material discovery is even close to scale, the next big "thing" in Asia will be the Railroad Dry index, as construction of the world's biggest railway hub in Kabul is likely already underway. Throw in a few nuclear power plants, a couple of smelters, discover some bauxite and soon Afghanistan will eclipse Australia and Brazil as the premier commodity production center in the world.
U.S. Presses China as Trade Gap Grows - WSJ - New data Thursday showed the U.S. trade deficit widened in April as the government stepped up pressure on China to implement changes aimed at narrowing the trade gap. The Commerce Department said the U.S. deficit in international trade of goods and services increased 0.6% to $40.29 billion from a revised $40.05 billion the month before. Exports fell by $813 million, while higher oil prices helped to drive imports up by $1.61 billion. The U.S. trade deficit with China expanded to $19.31 billion in April from $16.90 billion in March, adding to a trend that some economists worry could revive the international trade imbalances that many see as a major contributor to the recent financial crisis. In Washington, U.S. Treasury Secretary Timothy Geithner told senators Thursday that China was taking some steps to address U.S. concerns about its currency and trade policy, but also vowed to press for more fundamental change.
'Honey Laundering', Schumer, and China Bashing - Though I highly suspect the venerable Senator Charles Schumer (D-NY) would like nothing better than to slap tariffs on Swedish pop like he does for anything remotely "harming" US industry--perhaps New York wants to contribute more to the endless parade of American entertainment bimbettes --his quixotic quest to bash others is reaching a fever pitch. Let me share with you some not-so-fine words that have since been bandied about "a country without soul" (US senator on China), "baby-kissing politicians" (Chinese media on US politicians) and yes, the eponymous "honey laundering" episode -
US/China Rhetoric Escalates Over Rise in Chinese Exports -China posted a 48.5% increase in exports in May over its level the prior year, which led to much consternation and chest thumping in DC. Recall that Treasury Secretary Geithner was under considerable pressure from Congress to certify China a currency manipulator on April 15 (one of two semi-annual opportunities). China posted a rather surprising trade deficit for March (conveniently announced a few days before the Treasury report was due) and engaged in its usual fulminating, which led the Treasury to back down. Some attributed the unexpected deficit to the timing of the New Year (when factories are closed); some claimed the shutdowns were extended to make sure the surplus fell. Now that China’s surpluses appear to be rising with a vengeance, Congress is pushing for a remedy and the Chinese are escalating their rhetoric. From The Hill; In an article published on its English-language web site, Xinhua said lawmakers were “playing a dangerous game” that will “inevitably mislead the American public, and poison the atmosphere of Sino-U.S. economic cooperation.”
Lawmaker warns of US law on renminbi - A senior US lawmaker on Wednesday stepped up warnings to China against holding down its exchange rate, threatening to resort to legislation if Beijing did not change currency policy by next week’s meeting of the Group of 20 big economies. “Seven years of patience from the United States and the international community have run out,” said Sander Levin, chairman of the House of Representatives ways and means committee. "The administration constructively set the G20 meeting as an important juncture for China to change its inflexible currency practices. If China does not act and the administration does not respond promptly thereafter, the Congress will act.” G20 heads of government meet in Toronto at the end of next week.
Showdown Looms Over China's Currency at G-20 - This time the gloves could come off. The Group of 20 developed and developing nations summit in Toronto later this month could be the scene of a tense battle over China's exchange rate. Escalating rhetoric from U.S. Treasury Secretary Timothy Geithner and senators such as Charles Schumer (D., N.Y.) Thursday was echoed Friday by Lorenzo Bini-Smaghi, a key member of the European Central Bank's policy-setting council, who blamed "the rigidity of the Chinese monetary regime" for slowing down the recovery in the developed world. The U.S. and Europe should jointly pressure China for reform, he urged.
Global imbalances: Tipping the scales - The Economist - THIS week, let me remind you, the question at Economics by invitation concerns the issue of Chinese revaluation. Should China revalue now, is revaluation an important part of rebalancing, and should rebalancing be a top priority? In one contribution, Mark Thoma writes: Addressing imbalances should be a global priority, but the first step in this process is to gain a better understanding of the forces—including government polices—behind global financial flows. We need to understand how global imbalances contributed to the crisis so we can avoid a repeat in the future. This echoes the conclusion of a new piece at Vox, in which Kati Suominen notes: To date studies on the exact contribution of global imbalances or their drivers to the crisis are inconclusive. More hard evidence is needed to answer the question in the title: Did global imbalances cause the crisis? But arguing that the imbalances played a sideshow in 2008-09 is not to claim that they are innocuous.As Ms Suominen mentions earlier in the piece, many of those predicting a massive crisis (including Nouriel Roubini) did so based on the expectation that it would be precipitated by a sudden unwinding of imbalances.
Global Imbalances - My Fiscal Times column today looks at the problem of global imbalances--too much saving in countries like China being exported to countries like the U.S. with too little. Economists have long known that large capital inflows can be destabilizing in small countries, but they have tended to think that large economies like ours were immune to such problems. However, a growing body of research links capital inflows to the creation of financial bubbles in advanced economies as well. Some economists have even become sympathetic to the idea of capital controls. A better solution would be to raise national saving by reducing the federal budget deficit, which represents negative saving, as soon as economic conditions improve.
Should China allow the Yuan to Rise? - Thoma - At The Economist's Guest Network, we were asked: Should China allow the yuan to rise? Is a stronger yuan the most important route to global rebalancing? And should addressing imbalances currently be a top global policy priority? My response is here. There several are more here from Roach, Pettis, Bordo, Calvo, and Subramanian, and more responses may be posted later.
Stage set for currency move, but will China play ball? All the planets are aligned for China to make its long-awaited move on its currency, at least on one view of events. After a few months of small trade surpluses and even one monthly deficit, May’s trade figures recorded a healthy rebound in exports. China’s May trade was in the black to the tune of $19.5bn, with exports rising 48.5 per cent year-on-year.The figure is closely watched in Chinese policy circles. Exports don’t drive economic growth as much as many US Congressmen would have you believe. But trade is hugely important for creating jobs, which is the key to broader social stability. The Commerce Ministry, which has always battled moves to allow the currency to appreciate, will have its arguments weakened by the export sector’s return to rude health.
China Says Yuan Rise Can't Solve Sino-US Trade Gap (Bloomberg) -- Appreciation of China’s currency won’t resolve the Sino-U.S. trade imbalance or the consumer debt, low savings rate and unemployment in the world’s largest economy, Qin Gang, spokesman for the Chinese foreign ministry said today.""China hopes that U.S. politicians will “seriously consider” how to solve the structural problems in their economy and not blame others, Qin said today. The U.S. should not politicize the yuan or use it as an excuse for protectionism, he said in a statement in response to a question about the U.S. lawmakers’ proposal.""The exchange rate isn’t the main reason for the U.S. trade shortfall with China, Qin said, adding that the gap is due to the division of labor brought about by globalization. Washington’s restrictions on technology exports to Beijing are also an important reason for the imbalance, he said
China warns against finger-pointing (Reuters) - Finger-pointing at the G20 will be self-defeating for an international forum that should be focused on coordination, not criticism, of economic policies, a senior Chinese government official said. Underlining the extent to which China wants to shield its currency policy from censure, a second official said that the Group of 20 summit in Canada on June 26-27 was not the right place for discussing "the yuan issue." The comments appeared to be an attempt to draw a line in the sand about what should be discussed at the summit of wealthy and emerging economies, cast as a warning that controversy could hinder the global recovery by rattling market confidence. Financial markets are watching the G20, which Chinese President Hu Jintao will attend, for any statements about China's policy of pegging the yuan to the dollar after the United States stepped up its criticism in recent days.
Yuan exchange rate of no concern to others - The main focus of China's currency policy is the well-being of its people and any adjustment to the exchange rate is not the concern of other countries, government officials said Friday ahead of President Hu Jintao's trip to next week's G-20 meeting. The gathering in Toronto should focus on the European Union debt crisis and ways countries can cooperate to ensure strong and sustainable economic growth, Vice Finance Minister Zhu Guangyao told reporters.
"The renminbi is China's currency and this is not an issue that the international community should discuss," Vice Foreign Minister Cui Tiankai told reporters.
Call China's Currency Policy What It Is: A Declaration Of War - As long as the value of the yuan in international trade is not an issue addressable by the international community, China’s policy of growing its money supply (M1 & M2 equivalents) at over 20% annually is the same thing as China declaring war on the world. As thinking people have come to understand, a large country’s monetary policies can impact the long-term economic sovereignty of other countries in the global trade era as effectively as military policies.
China Signals End to Yuan’s 23-Month Peg Before G-20 (Bloomberg) -- China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a time-frame for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”
China Says It Will Increase Yuan's Flexibility - WSJ - China's central bank issued a statement Saturday saying it plans further reform of its currency's exchange rate system. The statement didn't announce specific new measures, but it will fuel expectations that China will let the yuan start rising in value against the U.S. currency, after nearly two years of being effectively pegged around 6.83 yuan per dollar.The statement, which comes ahead of a meeting of the Group of 20 economies next week where the yuan issue was expected to be discussed, sets a sharply different tone than other recent statements by Chinese officials playing down the exchange-rate issue.
China Issues Statement on Yuan Exchange Rate Flexibility -The following is the full statement by the People’s Bank of China on yuan flexibility. (Read related article)
Change is in the air - THE new print edition contains a piece on global imbalances focused on the relationship between China and America. It reads in part: America’s huge trade deficit with China (see chart) sets it apart from many other G20 members. Getting global imbalances onto the G20’s agenda took some work. China first resisted the idea, fearing the group would put it under too much pressure. But for champions of yuan reform the hope is less that the G20 sides with America against China, more that China feels comfortable enough to use the forum to unveil a policy shift that is in its own long-run interest. That's looking pretty prescient. Ahead of next weekend's G30 summit in Toronto, China's central bank has posted a statement on its website, declaring: In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility...
China Needs a Service-Sector Revolution - China is getting its exchange-rate adjustment whether it likes it or not. While Chinese officials continue to mull the right time to let the renminbi rise, manufacturing workers are voting with their feet – and their picket lines. Honda has offered its transmission-factory workers in China a 24% wage increase to head off a crippling strike. Foxconn, the Taiwanese contract manufacturer for Apple and Dell, has announced wage increases of as much as 70%. Shenzhen, to head off trouble, has announced a 16% increase in the minimum wage. Beijing’s municipal authorities have preemptively boosted the city’s minimum wage by 20%. The result will be to raise the prices of China’s exports and fuel demand for imports. The effect will be much the same as a currency appreciation. ... With exports of manufactures becoming more expensive, China will have to ... move ... toward the model of a more mature economy, in which employment is increasingly concentrated in the service sector. ... But the bad news is that the transition now being asked of China – to shift toward services without experiencing a significant decline in economy-wide productivity growth – is unprecedented in Asia. Every high-growth, manufacturing-intensive Asian economy that has attempted it has suffered a massive slowdown.
China overheating? - THIS week's question on Economics by Invitation debates the issue of Chinese revaluation. But is the booming Chinese economy the result of misguided policies? That certainly seems to be the conclusion when you read Xu Xiaonian's interview in the Global Times (provocatively titled "China is drinking tainted economic waters"). Mr Xu makes some very targeted criticisms that cut at the heart of China's economic policies. First he says that China's recovery was almost entirely based on government stimulus: Next he discusses fundamental problems with the rebalancing notion: China's economy has structural problems that cannot be easily solved by palliatives. Too much investment, too little consumption and purely relying on domestic investment and external demand-driven economic growth will no longer support sustainable development. And if this wasn't enough, he takes on the policy-makers:Cantonese like the number eight because they believe the number is lucky. I have no idea why decision-makers in the government like the number eight when it comes to growth figures. What is their logic? Where is their evidence?
What does China’s May FDI tell us? - With the rhetoric over currency back up again, scant attention is paid towards real economic data. China has just released its May foreign direct investment data and it certainly warrants more examination than what the WSJ has given it. Yes total FDI for the 1st 5 months were up only 14% YOY, and from a low base at that. But things become more interesting once you breakdown the data. Manufacturing FDI actually slipped 4% during the 1st 5 months, not surprising as China’s cost advantage is eroding fast. However, FDI in the service sector was UP by a whopping 32%! The economic rebalancing act is working at warp speed. In fact, 58% of respondents to an earlier survey conducted by the US Chamber of Commerce saw market access as the primary incentive for investing in China. Of course the transition will be bumpy, but the Chinese consumption story will drive economic storytelling for the coming decade.
The RMB And The WTO - China says that accusing it of subsidizing its exports via its exchange rate policy — and imposing a countervailing duty — would violate WTO rules. Hmm. Before we talk legalese, let’s focus on the essentials. An export subsidy is WTO-illegal. An import tariff is WTO-illegal. A deliberately undervalued currency, maintained by massive foreign exchange intervention over a period of years, is in effect a combination of an export subsidy and an import tariff. So how can China’s actions be legal, and a US response illegal? Well, the rules on currency manipulation are written in a confusing fashion, and seem to pass the buck or maybe the yuan — back and forth between the WTO and the IMF.
The renminbi takes small step toward reserve status - China has hammered another nail in the coffin of the US dollar. Well, sort of. Beijing has decided to expand dramatically the pilot scheme that allows Chinese companies to conduct international trade using the renminbi, rather than the dollar. According to state media, the programme will be extended to 20 provinces and municipalities across China - although the planned timing and other details were thin on the ground. Until now, only selected companies in Shanghai and the southern province of Guangdong have been eligible for inclusion. Chinese officials have long said that the global economy is too reliant on the dollar. Indeed, most Chinese cross-border trade is denominated in the currency, and dollar assets account for the bulk of China’s $2,500bn of foreign exchange reserves.
China’s workers learn to speak up — but carefully - The workers are rising in the workers' republic. In China's south coastal provinces, which long ago supplanted the American Midwest as the world's premier manufacturing belt, employees have gone on strike at a series of factories. Nobody knows how many plants have been threatened with shutdowns or have ground to a halt; one American attorney who's spent a good deal of time with such workers estimates that it may be close to 1,000. Now that China's industrial might is established, and many of the world's leading manufacturers are so deeply and profitably invested in China that large-scale relocation is almost unimaginable, the wage suppression that fueled China's rise is beginning to cause the party as many problems as it once solved. Inequality is rampant; a young, better-educated workforce, cognizant of the new Chinese prosperity and frustrated at their inability to share in it, is no longer content simply to reap the marginal benefits of swapping rural for factory life.
Why China's pay unrest is healthy - There’s trouble in the assembly plant of the world. Chinese workers in several plants are bypassing state-controlled trade unions and confronting management. Consumers across the globe face a cost hike at a key stage in the thousands of supply chains that bring them electronics, clothes and toys.As for China’s own competitive position, higher wage inflation may push some low-value business to India or Vietnam – or poorer parts of China, which have plenty of room to develop basic industries – but this is unlikely to cause too much disruption. The pay claims so far have in any case been concentrated, as one would expect, in higher-value production. A bigger risk to the Chinese economy would be an authoritarian overreaction by the state. Some western companies have reportedly shortened their supply chains recently, European businesses moving production from east Asia to eastern Europe or north Africa. But they seem mainly concerned with reliability and speed, not pure cost. The worst thing China could do is to introduce higher political risk into such a calculus.
China's high saving rate: myth and reality- BIS 31pp pdf- The saving rate of China is high from many perspectives – historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.
Pollution and Government Failure in China -Upon arriving in Shanghai recently, the author was immediately struck by two inescapable observations: the massive sprawl of real-estate construction and the rotten, ubiquitous smog. While Chinese growth has been bolstered by other factors, both of these phenomena are results of the Chinese state's socialist intervention in environmental law.The Chinese state's arrogation of all pollution litigation to its own courts is a clear collectivization of environmental property rights — most notably rights to air and property surfaces, most of which are covered in soot after a few years of operation.The state's subsequent, systematic refusal to enforce property owners' claims against pollution damages to the serviceability of their air and the appearances of their structures' outward surfaces, then, constitutes a redistribution of these collectivized rights to "dirty" industries and other heavy polluters.
Chinese government plans more curbs on energy consumption - China is about to get tougher on energy-intensive industries, according to Xie Zhenhua, a top official responsible for the country’s climate-change policies. Xie, vice-chairman of the powerful National Development and Reform Commission, sounded a note of alarm about China’s decrease in energy efficiency this year and outlined stricter policies to curb energy consumption in an interview with the People’s Daily earlier this week. Xie said the government may cap electricity supplies in some areas, and that any subsidies provided to energy-intensive industries must end immediately. The Chinese government has set an ambitious goal of reducing China’s energy intensity-a measure of the energy consumption vis a vis GDP-by 20 per cent between 2005 and 2010. Energy intensity has fallen since 2005, but a Western diplomat said that it looks like China is unlikely to meet its goal by year-end.
China may avoid housing bubble, says Grantham Emerging Markets Report – Noted investor and critic of U.S. monetary policy, Jeremy Grantham, said China may manage to avoid a housing collapse similar to that seen in the West, according to comments quoted in China media Wednesday. He described Beijing's approach to tacking rapidly rising real-estate prices as "experimental," saying that the Chinese government is "adventurous in trying new things, and they're really quite aware of potential dangers," according to a report in the state-run China Daily. China's situation is also less serious than the one seen before the U.S. housing crash, since fewer Chinese own luxury homes and most had to make larger down payments than their American counterparts.
China Sells 3-, 5-Year Debt at Higher-Than-Expected Yields (Bloomberg) -- China’s finance ministry offered higher-than-expected yields at bond auctions today as a shortage of cash in the banking system damped demand for the 43.8 billion yuan ($6.4 billion) of notes it was selling to raise funds for local governments. The 28.6 billion yuan of three-year notes sold drew bids for 1.02 times the amount offered and the 15.2 billion yuan of five-year debt was subscribed 1.06 times. The average ratio at previous treasury bond auctions this year was 1.7 times. “The abnormally high yields suggest the auction would have failed if the ministry could have settled for less than the planned sales amount,” said Hu Hangyu, a Beijing-based fixed- income analyst with Citic Securities Co., China’s biggest listed brokerage
China: Where's the inflation? - Last week the inflation numbers for May came in. At 3.1% year on year, inflation was slightly higher than expected. Here is what an article in Saturday’s People’s Daily had to say: Inflation in China edged higher in May, exceeding the official target of 3 percent for the year, amid some initial signs that the world’s major developing economy’s investment has slowed. The National Bureau of Statistics reported Friday that consumer prices in May rose jumped 3.1 percent from a year earlier, accelerating from April’s 2.8 percent rate. To make things worse, producer price index, a major gauge of inflation at the gate of manufacturers, soared a staggering 7.1 percent. 3.1% CPI inflation, if that number isn’t understated, isn’t really a lot to worry about although 7.1% PPI inflation is much more problematic. Much of the price increase was in food prices, so of course inflation is worse for lower-income households than for higher income. This means that real income growth is likely to be understated for the rich and overstated for the poor.
First, China. Next: the Great Firewall of... Australia? – TIME - The concept of government-backed web censorship is usually associated with nations where human rights and freedom of speech are routinely curtailed. But if Canberra's plans for a mandatory Internet filter go ahead, Australia may soon become the first Western democracy to join the ranks of Iran, China and a handful of other nations where access to the Internet is restricted by the state. Plans for a mandatory Internet filter have been a long-term subject of controversy since they were first announced by Stephen Conroy, the Minister for Broadband, Communications and the Digital Economy, in May 2008 as part of an $106 million "cybersafety plan." The plan's stated purpose is to protect children when they go online by preventing them from stumbling on illegal material like child pornography. To do this, Conroy's Ministry has recommended blacking out about 10,000 websites deemed by the Australian Communications and Media Authority (ACMA) to be so offensive that they are categorized as 'RC,' or Refused Classification.
Good capital, bad capital - THIS week's edition of The Economist has a story on the South Korean government imposing capital controls to stabilise the won. It's quite remarkable that within the span of a few weeks Korea, China, Argentina and India have made noises about limiting inflows. Are regulations limiting capital flows effective? The intuitive view would be that any barriers on capital mobility lead to distortions and misallocation of resources. That may be true, but in some instances capital controls could be helpful in shielding domestic financial institutions. When faced with a surge in flows, the policy options facing governments are predictable. It can allow the currency to appreciate, cut interest rates, start building up reserves or impose controls. If the government believes that the surge is temporary and the currency is correctly valued then the last two options make sense. The issue with capital controls though is that it is very hard to gauge if they work in practice.
Indian inflation tops 10 per cent, increasing pressure on RBI - Last month, the prime minister promised wholesale price inflation would fall by the end of the year to 5-6 per cent. Such a fall would take a lot of pressure off the government.But the RBI has not made an early delivery on Singh’s promise. Quite the opposite, in fact. Today’s inflation numbers show price pressures remain strong, amid rapid economic growth, with wholesale price inflation in May rising to 10.2 per cent year-on -year, above most economists’ estimates.Worse still, it appears that inflation had already hit double digits earlier in the year. The final WPI inflation figures for March were revised to 11per cent. They were earlier stated as 9.9 per cent. Prices are rising faster than expected by any serious observers except the leaders of the opposition Hindu nationalist Bharatiya Janata Party. More interest rate hikes are surely on the way. Some analysts predict the repo rate rising 100 basis points from the current rate of 5.25 per cent in the months to the end of December.
Clogged rail lines slow India's development - S. K. Sahai’s firm ships containers 2,400 nautical miles from Singapore to a port here in four or five days. But it typically takes more than two weeks to make the next leg of the journey, 870 miles by rail to New Delhi. For most of that time the containers idle at the Jawaharlal Nehru Port near Mumbai because railway terminals, trains and tracks are severely backlogged all along the route. Economists say India must invest heavily in transportation to achieve a long-term annual growth rate of 10 percent — the goal recently set by the prime minister, Manmohan Singh. But whether measured by highways, airways or — particularly — far-reaching railways, India’s transportation is falling short.
Developing Economies To Account For Largest Share Of Output - This year is likely to be among the last in which developed economies account for the largest share of global economic output, according to a report published Wednesday by the Organization for Economic Cooperation and Development. The Paris-based think tank said that in 2010, its 31 developed-country members will account for 51% of world economic output. But with the rapid growth of China, India and other developing economies, that share has narrowed from 60% in 2000 and the OECD predicts it will shrink further to 43% by 2030. “The world’s center of gravity has moved towards the east and south,” the OECD said. “This realignment of the world economy is not a transitory phenomenon, but represents a structural change of historical significance.”
South Korea unveils currency controls| Reuters - South Korea announced on Sunday long-anticipated currency controls, saying it aimed to curb rapid shifts in capital flows that were linked to short-term foreign debt and posed a risk to the world's ninth-biggest exporter.The authorities, alarmed by the won's sharp swings during recent market turbulence caused by Europe's debt problems, have been priming investors for weeks for action aimed at stabilizing its currency and cooling overseas borrowing. The well-flagged new restrictions slap limits on banks' and other financial institutions' currency forwards, cross-currency swaps as well as non-deliverable currency forwards.
Australian housing market ‘a time bomb’ - THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham. Mr Grantham famously reported a year before the global financial crisis: "In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist". The Australian reported he said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.
Japan’s Prime Minister Warns That Debt Could Bring a Crisis Like That of Greece— Japan’s newly installed prime minister startled the nation on Friday by warning that it could face a financial crisis of Greek proportions if it does not tackle its colossal debt. The stark words from the prime minister, Naoto Kan, followed by just hours the resignation of his banking minister and ally in the governing Democratic Party, Shizuka Kamei — an advocate of big spending. Mr. Kamei’s departure seemed to signal that the new government would focus on reducing Japan’s heavy government debt, called sovereign debt, by far the highest in the industrialized world, and cutting back on the wasteful public works projects. “It is difficult to sustain a policy that relies too heavily on issuing debt,” Mr. Kan told the Japanese Parliament in his first policy speech. “As we have seen with the financial confusion in the European Community stemming from Greece, our finances could collapse if trust in national bonds is lost and growing national debt is left alone.”
I understand why Asia's worried about Europe - Rebecca Wilder - A negative export growth trend has been established - explicitly in the Philippines and likely going forward in China (see Goldman Sachs report below). And these countries have strong trade ties with Europe - the Eurozone was 15% of 2009 world GDP (PPP value) according to the IMF. Therefore, recent nominal appreciation of the Philippine peso and Chinese yuan against the euro, and expected real appreciation - Europe's self-imposed economic contraction stemming from harsh fiscal austerity measures will drag prices downward - may very well hamper the economic recovery for key Asian economies via the export channel. The chart illustrates the contribution to overall export growth from the Philippines six largest trading partners - together these countries account for roughly 50% of total exports. The 2nd chart illustrates the contribution to overall export growth from China's six largest trading partners - again, these countries jointly demand roughly 50% of total Chinese exports.
Asia’s Economy to Grow by 50% in Five Years - IMFdirect -The new issue of the IMF’s Finance & Development magazine explores how the region is moving into a leadership role in the world economy. Anoop Singh, Director of the IMF’s Asia and Pacific Department, says that, based on expected trends, within five years Asia’s economy will be about 50 percent larger than it is today and be comparable in size to the economies of the United States and Europe. The issue looks at Asia’s biggest economy, China, which has relied heavily on exports to grow, and its need to increase domestic demand and to promote global integration if it is to continue to thrive. China is not the only Asian economy that heavily depends on exports and all of them might take some cues from the region’s second-biggest economy, India, which has a highly developed services sector. This magazine also covers how best to reform central banking in the aftermath of the global economic crisis; the pernicious effects of derivatives trading on municipal government finances in Europe and the United States; and some ominous news for governments hoping to rely on better times to help them reduce their debt burdens
It is time for Asia to rewrite the rules of capitalism - Advocates of the western model tend to play down its dramatic effects on natural resources and the environment. ... Instead, they argue that human ingenuity aided by innovations in the markets will find solutions. This is rooted in an irrational belief that we can have everything: ever-growing material wealth and a healthy natural environment. Imagine a world in which, by 2050, four to five billion Asians are consuming like Americans. The result would be catastrophic, yet this is what Asians are being told to aspire to. This is why Asian governments must intervene. Limits must be placed on various forms of consumption... This starts with access to resources and the rights to various forms of consumption. Their core task is to rewrite the rules of capitalism – by putting resource constraints at the centre of policymaking.
Contagion is spreading - The European debt crisis has claimed its latest victim -- not in Frankfurt, but a six-hour plane journey away from the headquarters of the European Central Bank. The long-mooted plan to introduce a single currency for the states of the six-nation Gulf Cooperation Council has been put on hold. The reason: disruptive currents from the Mediterranean have washed through to the balmy waters of the Gulf. Foreign ministers at a Gulf Cooperation Council meeting in Jeddah at the end of last month expressed caution about plans for a single currency -- at one stage envisaged as being implemented in 2010, then put back to 2015.
Central Bank Introduces New Approach On Speculation -Russia’s Central bank announced on Monday that starting from this month it is tying the Rouble exchange rate to the oil price, in a move which will make it more volatile but reduce speculation. In recent months the Central Bank has been fighting an appreciating Rouble, backed by high oil prices and the inflow of short term capital, with investors and capital markets following the trend. For the time being that operiod appears to be over with the rouble weakening against the currency basket in the wake of a major slump in the Euro and the subsequent flight of global capital to dollar safety. Deputy Head of the Central Bank, Alexey Ulyukayev, warned last week that the long trend of a strengthening Rouble wasn’t likely to continue into the future, with rising imports likely to bring the trade balance down.
BIS reports Bank Exposure to Euro area countries facing market pressure - The Bank for International Settlements (BIS) put out the BIS Quarterly Review, June 2010 yesterday. As part of the review, the BIS estimated the exposures of banks by nationality to the residents of Greece, Ireland, Portugal and Spain: As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain). Together, they had $727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece (Graph 3).French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies.
Europe’s Banks Face Second Funding Squeeze on Sovereign Crisis (Bloomberg) -- European banks at risk of writedowns from the sovereign debt crisis face a funding squeeze that may depress earnings, curb lending and imperil economic recovery in the region.Investors are shunning bank securities on concern Greek, Portuguese and Spanish bonds held by the lenders will plunge in value. Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank.
Europe embraces the cult of austerity – but at what cost? - Eurozone finance ministers were still committed to spending their way to recovery only a few months ago. Then came the Greek debt crisis, which threatened to engulf the continent. Despite warnings from the US, Britain and its EU neighbours are braced for unprecedented public sector cuts. "Germany has never agreed to an austerity package to this extent, but these cuts have to be made in order for the country to establish a stable economic future," Merkel said. Across Europe other governments, scared by the Greek debt crisis, the repercussions of which imperil the very existence of the euro, have been doing the same, raising the spectre of mass layoffs in public services in the name of European unity.On Monday, David Cameron said the state of the public finances was far worse than he had expected as he prepared Britain for the worst. Elsewhere, Italy has approved austerity measures worth ¤24bn over the next three years. There will be public sector pay freezes and salary cuts of up to 10% for the highest earners.
Austerity Europe: who faces the cuts | Business | The Guardian - an examination of which countries face the most stringent measures
The problem with too much labor protection - It's not that there aren't enough available workers in Spain. With an unemployment rate at a staggering 20%, there's no shortage of people who hotels, restaurants and other companies could hire. But they don't. The reason is that employers don't want to create jobs. It's simply too costly. Blame the country's overly strict labor laws. Mandated severance payments – of as much as 45 days per year of service – make laying off employees prohibitively expensive, and that makes firms reluctant to hire them in the first place. Managers do have the option of taking on temporary staff on fixed-term contracts. If those workers get dismissed, they don't receive the same giant severance payments as permanent employees, allowing companies to downsize at reduced cost. But that choice has its own downside. With workers around for only a short time, they have little commitment to their jobs, and employers have even less reason to train them properly. That affects company performance and competitiveness.
Credit crunch in Spain - Government bonds were sold off sharply as the Spanish Treasury secretary and a leading banker admitted companies and banks were having difficulties raising funds.Francisco González, chairman of BBVA, Spain’s second-biggest lender, said: “For the majority of companies and Spanish financial firms, international capital markets are closed.”Carlos Ocana, treasury secretary, said the credit freeze affecting Spanish banks and corporations was “definitely a problem”.The article seems to blame this outcome on Spain's fiscal austerity drive; I'll note that's not the only possible interpretation of the data. El Pais for instance suggests that not enough fiscal austerity has been forthcoming and they seem to be working with the same sources but with more detail. In any case, markets are demanding something. By the way, the Spaniards are planning a general strike for September; I'm sure the markets found that reassuring. This German article, from FAZ, suggests that something will need to be done about Spain very soon.
Spain Says Banks in Credit Crunch—Spanish officials acknowledged that the country's banks and companies are having difficulty finding credit, underscoring the pressure Madrid faces to pursue deep structural changes to win back investor confidence. Spain has been scrambling in recent weeks to convince markets that it can repair both its ballooning deficit and its troubled banking sector. Investors are particularly concerned that Spain would be unable to supply its banks with more capital, if needed, without emergency aid from the European Union and the International Monetary Fund.
Spain cut off from international financial markets The crisis has now reached a new dramatic momentum, as Spain is now effectively cut off from international capital markets. El Pais has some interesting statistics showing the reliance of the Spanish banking system on the ECB. While Spain’s share in the ECB is 9%, Spanish banks now accounts for 16.5% of direct ECB borrowing. The amounts borrowed represent a 26.5% increase over May. The paper quotes the chairman of BBVA as saying that for the majority of companies and financial firms, the international capital market was closed. He said that the country urgently needed to tackle three issues simultaneously: sustainability of public finances, growth, and financial sector reform. The FT writes in its coverage that what appears to have happened in Spain is that the government’s austerity plan is undermining investors’ confidence in the recovery. Spanish 10 year bond yields rose by a quarter of one percent to 4.67%, as the spread to Germany is now 200bp. The Spanish banking system is now wholly reliant on the ECB for funding.
Spain, Portugal Debt May 'Snowball,' EU Says (Bloomberg) -- Debt levels in Spain and Portugal may “snowball” in coming years and additional budget cuts are needed to meet deficit targets announced just a month ago, according to a draft European Commission document. The deficit-reduction measures announced by the two nations as part of a European Union agreement on May 10 to create a 750 billion-euro ($920 billion) financial backstop for indebted countries aren’t sufficient, the report obtained by Bloomberg News said. Spain pledged to cut the EU’s third-highest deficit to 9.3 percent of gross domestic product this year and to 6 percent in 2011. Portugal vowed to lower its shortfall to 7.3 percent of GDP in 2010 and to 4.6 percent in 2011. “While the newly announced measures are significant and the targets imply impressive budgetary consolidation, more measures are needed to meet those targets, in particular for 2011,”
Spanish banks break ECB loan record-- Spanish banks are borrowing record amounts from the European Central Bank as the country's financial institutions struggle to gain funding from the international capital markets. Spanish banks borrowed €85.6 billion ($105.7 billion) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 percent of net eurozone loans offered by the central bank. This is the highest amount since the launch of the eurozone in 1999 and a disproportionately large share of the emergency funds provided by the euro's monetary guardian, according to analysis by Royal Bank of Scotland and Evolution. Spanish banks account for 11 percent of the eurozone banking system
Will Spain face a debt crisis? - We can all recall the turmoil in global financial markets when Greece fell into a debt crisis. Well, that would look about as exciting as a sing-along with Barney if Spain experienced a similar meltdown. Spain is a much, much bigger economy, the world's 9th-largest in fact, and the ripple effects from a Spanish debt crisis would have very serious consequences around the world. The spread on yields between Spanish and German sovereign bonds – a key measure of perceived risk – has been rising and reached its widest level since the introduction of the euro mid-week (though it later narrowed). Then it appears that Spanish banks and companies are having a harder time raising funds. According to The Wall Street Journal, Spain's treasury secretary admitted credit was tightening for the country. This is a worrying sign of where sentiment is going on Spain.But when you crunch some numbers, it quickly becomes apparent that Spain is NOT Greece. Spain's circumstances are quite different. And you begin questioning why markets have been so jittery about a Spanish debt crisis.
German media report: EU to prepare bail out Spain -Frankfurter Allgemeine says talks will start before this week’s summit, as the situation in the inter-bank markets has deteriorated once again; the focus of the package is the state of the Spanish banking sector, as new figures emerge showing massive exposure by French and German banks to the private sector in Spain; the paper says in a comment that the €750bn rescue package looks like another bank rescue package; Le Monde worries about a declassement, as the spread of French bonds over German bonds rises above 50bp; the end of Belgium has a come a step closer as the two Flemish separatist parties score near 50V% of the votes in Flanders – a political tsunami; NVA is now the largest party in Belgium, but its leader says he wants to reach out to the French-speaking Socialist and make a deal to break the gridlock; Herman van Rompuy tells the FT that in his experience, budget consolidation has no effect on growth; Wolfgang Munchau writes in his column that the economic experience of men like van Rompuy is entirely irrelevant; Paul Krugman, meanwhile, advocates that the US slaps tariffs on China and Germany for their egocentrical policies.
EU again denies rescue plan for Spanish economy -The European Commission on Monday again denied reports that the EU was preparing rescue plans for the Spanish economy. "There is no such request, there is no such plan whatsoever to provide financial assistance to any member state," said Amadeu Altafaj Tardio, spokesman for European Economic Affairs Commissioner Olli Rehn. Altafaj was commenting on a report by Germany's Frankfurter Allgemeine Zeitung claiming that European Commission President Jose Manuel Barroso and European Central Bank President Jean-Claude Trichet would seek aid for Spain.
EU denies planning Spain credit line with IMF, U.S. (Reuters) - The EU and International Monetary Fund on Wednesday denied a report that they and the U.S. Treasury were drawing up a safety net for Spain including a credit line of up to 250 billion euros ($335 billion).Amadeu Altafaj, a spokesman for the European Commission, said the report in the Spanish newspaper El Economista was "very bizarre" and added: "I can firmly deny it."An IMF spokeswoman said it was "totally unfounded." But market worries about Spain's debt position continued to simmer, with the yield spread on Spanish/German 10-year bonds rising to a euro lifetime high of 223 basis points."The noise surrounding some form of backstop facility for Spain has increased dramatically," said Silvio Peruzzo, an economist at RBS in London.A 440 billion euro ($543 billion) special-purpose vehicle (SPV) is already in place for any euro zone country that runs into Greek-style payment problems, finalized earlier this month by ministers from the 16 countries that use the single currency.
Spanish debt wilts amid €250bn rescue plan confusion - European debt markets remain under high stress on persistent reports that Spain is in secret talks with EU officials and the International Monetary Fund for a support package of up to €250bn (£208bn), the largest rescue in history. The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise €25bn of debt in a cluster of auctions in July. Elena Salgado, Spain's finance minister, reacted angrily to a report in the Spanish daily El Economista claiming that the support plans are well advanced. "It has been denied by the Spanish government, by the European Commission, and by the IMF. How much more can we deny it?" she said.
IMF Head Flying To Spain - IMF head Dominique Strauss-Khan is flying to Spain "to discuss global economic developments with the Prime Minister, and to consult with him on developments in Spain, including the government's economic policies and reforms" according to Reuters. The last time the IMF sent a delegation to a country was on April 15th when the IMF together with representatives from the EU and ECB took a jaunt over to Athens. A month later the country was insolvent. We can't wait for the official denial that this visit has nothing to do with the frozen Spanish liquidity market (like Greece), and that there is nothing to worry about (like Greece), only to end up with a full blown IMF rescue package of the Pyrenean country (just like Greece). This merely confirms the move in PIIGS spreads which despite the joke that is the market moved 10%+ wider on the day. The next domino is about to fall, and no matter how much rumored collusion between two French banks and the Federal Reserve is injected, the EURUSD is likely about to tank.
IMF visit fuels speculation on Spain bailout - The head of the International Monetary Fund is to visit Spain amid reports Madrid is seeking a bailout while the government bit the bullet and approved crucial reforms of its rigid job market. The cabinet agreed the sweeping labour reforms, deemed essential for reviving the economy and fending off a Greek-style debt crisis, despite a union call for a general strike against them. The reforms -- which make it easier and cheaper for firms to fire workers -- must still be voted on by parliament, where the government is seven seats short of a majority.
Is Spain Next? - Amidst rumors that Spain will be the next of the "PIGS" countries to seek a rescue package from the EU and IMF, the Bank for International Settlements has just published its Quarterly Review. The Review is always a must-read for those interested in understanding the current state of the global economy and international financial markets. I noticed two particular items of interest related to the ongoing eurozone problems. The first is the detailed overview (Box 2, page 8) of the policy responses undertaken by the EU, IMF, and major G-20 central banks to restore financial market confidence in the eurozone. What is most striking is the speed and magnitude of the policy response. Indeed, what European governments have quickly and forcefully moved to shore up Greece and the broader European financial system. The second item, of perhaps even greater interest and relevance, is the release of the latest BIS data on bank exposure to the "PIGS" countries.
A public choice theory of the IMF - As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality
Spain: 'If the river is noisy it's because it has water' -Well, this was a delightfully daft rumour of a Spanish bailout on Wednesday.Here’s the denial first, via Reuters: RTRS-EU COMMISSION DENIES REPORT THAT EU, IMF AND U.S. TREASURY DRAWING UP LIQUIDITY PLAN FOR SPAIN While the report in question appeared in the Spanish newspaper El Economista (translation FT Alphaville’s):A liquidity plan, confirmed by sources close to the issuing entity, and also corroborated by senior business leaders, will incorporate financial aid in the form of a credit line amounting to between 200,000 and 250,000 million euros, compared with 110 000 million that went to Greece. The IMF chief Dominique Strauss-Kahn is due to arrive in Spain for talks on Friday, but the government has denied that a bailout is on the agenda. It would be a curious credit line in any case — Spain is already covered by the eurozone’s freshly-minted €440bn SPV, and would also have access to an IMF lending programme if capital markets shut down.
European Commission wants Spain to cut even more - Considering that the latest financial crisis in Spain is triggered by uncertainty over the economic impact of the announced austerity programme, the European Commission now wants the Spanish government to do even more. On top of the €11bn cuts already announce, Brussels wants the Zapatero government to nail down another €8bn to achieve the total structural adjustment of 1.75% next year. Of those, €5bn will comes from the central state, and another €3bn from the regions. The goal is to reduce the deficit to 6% in 2011. El Pais reports that of the €11bn specified so far, roughly over half came from the central government through the reduction in wages, while the rest came from the region which are already raising taxes. The paper quotes finance minister Elena Salgado as saying the purpose was to regain the confidence of the markets. (We think the up-front austerity programmes are the reasons the market have lost the confidence.) The European Commission has also asked Spain to implement labour market and pension reforms.
Moody's Downgrades Greece Ratings to Junk - Moody's Investors Service on Monday downgraded Greece's government bond ratings by four notches to junk status of Ba1 from A3, reflecting its view of the country's medium-term credit fundamentals. "The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone/IMF support package. The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible, and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels," said Sarah Carlson, Moody's senior analyst. "Nevertheless, the macroeconomic and implementation risks associated with the program are substantial and more consistent with a Ba1 rating,"
Greece Cut to Junk at S&P as Contagion Spreads (Bloomberg) -- Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time a euro member has lost its investment grade since the currency’s 1999 debut. The euro weakened and stock markets throughout the region plunged. Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The move, which puts Greek debt on a par with bonds issued by Azerbaijan and Egypt, came minutes after the rating company reduced Portugal by two steps to A- from A+. The turmoil comes as European Union policy makers struggle to agree on measures to ease the panic over swelling budget deficits. Leaders of the 16 euro nations may hold a summit after the Greek government’s decision last week to tap a 45 billion- euro ($60 billion) emergency-aid package failed to reassure investors, a European diplomat and Spanish official said.
Greek Bonds to Be Removed From Citi, Barclays Indexes (Bloomberg) -- Greek government bonds will be removed from bond indexes managed by Citigroup Inc. and Barclays Plc at the end of this month after they were downgraded to junk by Moody’s Investors Service. The bonds will be removed from Citigroup’s World Government Bond Index, the EMU Government Bond Index and the World Broad Investment-Grade Bond Index, the U.S. bank said in an e-mailed statement today. They will no longer be eligible for Barclays Capital’s Global Aggregate, Global Treasury, Euro Aggregate and Euro Treasury indexes from the end of June, Laurent Fransolet, head of European fixed-income strategy at the bank in London, wrote in an e-mailed response to questions today. .
After Capital Flight, Greece Faces Brain Drain – As Greece stumbles its way through a protracted fiscal crisis and ever deeper into recession, many Greeks are searching for better opportunities overseas. In the past few months, the number of Greeks enquiring about positions abroad, attending job fairs from foreign employers, or simply packing up and leaving, has increased. And many experts say the flow may soon turn into a flood as the harsh reality of the recession bites and unemployment continues to rise. Greece, traditionally one of Europe's poorest countries, is no stranger to emigration. But what sets the current trend apart and makes it particularly troubling, experts say, is a slow but steady "brain drain" as the country's brightest and best try their luck abroad. With them goes a chunk of the country's middle class that would otherwise create wealth, start up companies, consume, and pay, at the very least, indirect taxes at home--a loss that could have a profound impact on Greece's long-term ability to remake itself into a modern, competitive economy.
Greece's tourism industry under threat as strikes, riots scare visitors away - An angry tourist, sun hat on head and camera dangling from neck, stood in the middle of the open-top double-decker tour bus, hands outstretched in a "thumbs down" sign.About two dozen striking Greeks were blocking a main avenue in front of parliament, forcing the driver to manoeuvre awkwardly and deprive visitors of their drive-by photos.It's scenes such as these — road closures, strikes shutting down archeological sites, the blockading of the main port of Piraeus turning away thousands of cruise passengers — that have horrified people in Greece's vital tourism industry as the country struggles to emerge from a vicious debt crisis that brought it to the brink of bankruptcy..Tourism industry experts say they are currently seeing a drop of 10 to 12 per cent in bookings compared to 2009, which was itself a poor year. With tourism accounting for about 15.5 per cent of gross domestic product, Greece can ill afford to see a prolonged downturn in an industry that provides about one in every five jobs.
The hospitals in Greece run out of medical supplies because of debts - The problems of many state hospitals in Greece are growing because of the “embargo” of suppliers of medical supplies, who insist on the immediate settling of the bulk of the hospitals’ debts, Greek TV channel ERT reports. The debt of the hospital to suppliers exceeds EUR 5 billion. Greek Minister of Health Mariliza Xenogiannakopoulou urged the suppliers to be more responsible to the patients, and pointed that EUR 1.2 billion out of the EUR-6.2-billion debt had already been settled. The situation in some hospitals is so serious, because of the “embargo”, that planned operations and laboratory tests are being postponed.
Greek debt should be written off says Nobel economist -The drawing of similarities between the Greek debt crisis and the early days of the sub-prime crisis has set off alarm bells around the world. As financial market nervousness spreads, foreign banks are refusing to lend to Spain. Now one of the world's leading economists says the Greek Government's debt should be written off and the country leave the Euro-zone so it can rebuild. Professor Mryon Scholes shared the Nobel Prize in 1997 for his modelling work on derivatives, variations of these products were blamed for some of the most spectacular collapses during the global financial crisis. Professor Scholes says banks in Europe will have to follow the US lead where one trillion dollars in debts have been written off and that Europe's turmoil will inevitably spread to Asia.
Satyajit Das: Nowhere to Run, Nowhere to Hide - No one, including the IMF, seriously believes that the austerity program announced by Greece will work. Argentina had debt to GDP of around 60% and a budget deficit of 6%. Adjustments necessary to halve both failed. After a long drawn out struggle between 1999 and 2001, Argentina was forced to reschedule its debt and have still not quite made their way back to normality. Many of the vulnerable countries in Europe are in a much worse position than Argentina in 1999. Rapid economic growth or high inflation would improve Greece’s prospects for survival. Neither is a realistic option. The Euro-zone could continue to finance Greece, which would require extension of the current package, which is initially for 3 years. Greece may not be able to avoid a debt restructuring. For the countries like, Ireland, Spain, Portugal as well the others, the savage austerity measures required are unlikely to be palatable and probably won’t work in any case. All roads may lead eventually to debt restructuring.
Italy's debt reaches 1.812 trillion euro -Italy's public debt, one of the highest in the world, reached a record 1.812 trillion euros (2.219 trillion dollars) in April, the Bank of Italy said on Monday. The figure was a 0.8-percent rise on the March level of 1.797 trillion euros, the central bank said, without indicating the percentage of gross domestic product that the figure represents. Last year public debt reached 115.8 per cent of GDP, and it is forecast to rise to 118.4 per cent this year. The public debt last spiked in October 2009, when it stood at 1.802 trillion euros. The Bank of Italy also said tax receipts fell back 1.8 percent to 104.7 billion euros in the first four months of the year compared with the same period in 2009.
Italy and Portugal's economies 'unsustainable', study finds - Brussels - Economic development in Italy and Portugal is "unsustainable" and will only be improved by radical reforms, while Spain is "in danger" of joining them, a study published Wednesday concluded. Greece sowed panic this spring as its finances imploded under the burden of high debt and leaden growth. The crisis sparked fears that states such as Spain, Portugal, Italy and Ireland could follow suit. "Structural reform is necessary in many countries if we wish to avoid future crises. In particular, Greece and Italy, as well as Spain (and) Portugal ... must carry out reforms," the Brussels-based European Policy Centre (EPC) think tank wrote. Hungary, Latvia and Romania, all of which have had to be bailed out by the European Union and International Monetary Fund, must also reform their economies to "improve governance, competitiveness and productivity and deal effectively with long-term challenges."
What’s Good for Spanish Banks is Good For French Banks. Or the Other Way Around. Whatever. – BIS chart series
Hard times force French to work longer -- to age 62 - The French government abandoned a sacred totem of its generous welfare system Wednesday to combat mounting deficits, announcing that workers soon will no longer have the right to retire at age 60 but will have to wait until they are 62. Labor Minister Eric Woerth, who unveiled a long-debated reform, said the change was made inevitable by Europe's lengthening life expectancy combined with the global economic crisis and an accumulation of government debt. His ministry has forecast a deficit of nearly $40 billion in the pension program alone this year as more people take payments and retirement taxes shrink because of the slowed economy."All our European partners have done this by working longer," he said at a televised news conference. "We cannot avoid joining this movement."
To fight deficits, France plans to raise minimum retirement age from 60 to 62 -The French government abandoned a sacred totem of its generous welfare system Wednesday to combat mounting deficits, announcing that workers soon will no longer have the right to retire at age 60 but will have to wait until they are 62. Labor Minister Eric Woerth, who unveiled the long-debated change, said the move was made inevitable by Europeans' lengthening life expectancy, the global economic crisis and an accumulation of government debt. His ministry has forecast a deficit of nearly $40 billion in the pension program this year as more people take payments and retirement taxes shrink because of the slowed economy.
French reforms substantial but insufficient - After one of the longest drum rolls in history, France finally announced a substantial reform of its generous pay-as-you-go pension system on Wednesday, but it won’t be sufficient to solve the problem.Raising the legal retirement age gradually to 62 in 2018 breaks a taboo in a country where the right to retire at 60 was widely considered one of the major social achievements of the late Socialist President Francçois Mitterrand, adopted in 1983.Despite a string of concessions meant to ensure social justice, President Nicolas Sarkozy’s centre-right government will face strong trade union opposition, with strikes and demonstrations likely after the summer break.
France urged to spell out budget deficit cuts - The French government was on Tuesday urged by the European Commission to spell out in more detail how it intends to reduce its budget deficit and warned that bigger spending cuts or tax rises than envisaged might be needed. At a forecast 8 per cent of gross domestic product this year, France has the largest public deficit of the three large eurozone economies. But it has so far given little detail of how it intends to reduce its deficit to 3 per cent of GDP by 2013, as promised under a fiscal consolidation programme agreed with the European Union.
France economy: Waiting in the wings - EIU - Until recently the debt crisis in the euro area had largely spared France, which had benefited from financing conditions only slightly less favourable than those for Germany. Since the end of May, however, spreads between French and German 10-year bonds have widened, while CDS rates on French government debt have also drifted upwards. Investors may be beginning to reappraise France's status as a relative safe haven.A record of lax fiscal control spanning decades provides few grounds for confidence over the dynamics of French public debt. There is a very real risk of a steep rise in the interest burden in the future, so that France not only loses its cherished "AAA" rating on its sovereign debt, but also its ability to control its finances and avoid a debt trap in the longer term.
Debt Burden Falls Heavily on Germany and France - NYTimes— French and German banks have lent nearly $1 trillion to the most troubled European countries and are more exposed to the debt crisis than the banks of any other countries, according to a new report that is likely to add pressure on institutions to detail their holdings. French banks had lent $493 billion to Spain, Greece, Portugal and Ireland by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks. The report sheds light on where the risks from Spain and other troubled euro-zone countries are concentrated, but left open the question of which individual banks would be most endangered by declines in the prices of sovereign bonds or a surge in bad loans made to companies and individuals. The B.I.S. did not identify individual institutions, in line with its confidentiality rules.
French, German exposure to risky countries nearly $1 trillion - French and German banks remain the most exposed to Europe's riskiest economies, holding nearly $958 billion of debt from Spain, Portugal, Greece and Ireland, according to the latest figures from the Bank for International Settlements. The total for France and Germany represents 61% of the $1.58 trillion exposure held by banks in the euro zone at the end of 2009 the BIS data released late Sunday showed. In turn, the euro-zone banks accounted for almost two-thirds of the total worldwide exposure of internationally active banks to those four countries. Of the combined exposure of French and German banks, around $174 billion was sovereign debt, while the remainder was owed by individuals and companies, the BIS said.
Stimulus vs. Austerity: Is Germany Saving Itself to Death? - German Chancellor Angela Merkel has chosen the path of austerity to push her country out of a debt crisis that threatens to weigh on generations to come. Two German economists debate the merits of the government's savings program on SPIEGEL ONLINE: Should Berlin cut back or spend to ensure economic health?
Angela Merkel’s government threatened with collapse - German chancellor Angela Merkel's centre-right coalition government looked to be close to collapse today, weakened by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. Less than eight months after it took office, the government was given only a narrow chance of running to a full term by the majority of Germans, 53% of whom said in a poll they expected it to fall. Merkel called at the weekend for the government partners to bury the hatchet over their disagreements after a week when relations reached such a low that members of her government had variously referred to each other as "wild pigs" and "gherkin troops" (rank amateurs). But much of the mistrust and anger is being directed at Merkel herself. This week's Spiegel magazine called her the Trummerfrau, a reference to German women who cleared away the rubble after second world war bombings. It painted a picture of a woman presiding over a government in ruins and used its title page to request the government in one word to "Aufhören!", or stop.
Germany spending is not the cure - Many analysts blame Germany’s fiscal prudence for worsening the crisis. This essay argues that the monomaniacal focus on aggregate demand is based on slightly outdated and oversimplified Keynesianism. The real constraint on European growth is not Germany’s fiscal policy. It is the supply side rigidities that plague all European nations – especially those at the heart of this crisis. The demand side matters, but is it foolish to think that German budget deficit of 5% instead of 3% of GDP would solve Europe’s problems.
German Billionaires for a 'Rich Tax' - Via tax.com, I came across the following article: A group of 51 German millionaires and billionaires founded a Club of the Wealthy and wrote to Chancellor Angela Merkel proposing to give up 10 percent of their income in the form of a “Rich Tax” for 10 years to consolidate the budget. It’s a noble proposal, I suppose, and one that would be welcome here in the States. In fact a number of American states have tried to get residents to plug government budget holes through voluntary donations. Even the United States Treasury accepts such charity. (Although, for linguistic reasons, national debt may weigh more heavily on the consciences of the German upper-crust than its American counterpart.) Still, ultimately, as tax.com’s David Brunori notes, these fiscal troubles can’t be fixed by donations from rich people alone. They probably can’t even be fixed by new, mandatory taxes on rich people alone — which is why a broader-based tax like a value-added tax may be in the country’s future.
EU rule-breakers 'should lose their voting rights' - Governments which breach European Union budgetary guidelines should have their EU voting rights "suspended" to prevent any resurgence of the debt and euro crisis, France and Germany said last night. In a show of unity after reports of sharp Franco-German divisions on the future governance of the euro, Chancellor Angela Merkel and President Nicolas Sarkozy said that they would put forward common proposals – including amendments to the EU treaties if needed – to punish member states who ignored debt and deficit rules.The two leaders, who were forced to cancel a meeting last week because of the depth of their disagreements, also put forward a compromise plan for an "economic government" of the EU.
Does Germany or Greece leave the Euro first? - I've heard (non-serious) talk that Germany should leave the Eurozone instead of Greece. The Euro would then fall in value and all would be better, supposedly.That makes some logical sense, but I don't think it can work that way. Let's say the new DM-euro currency would suddenly be worth fifteen percent more than the now-depreciated new euro. Everyone would want to claim that their "old euros" should count as DM-euros and it would be very hard to suddenly introduce a border-defined scheme of money stamping. The problem would be Germany's to solve. Yes they could survive a massive inflow of currency from around the Eurozone (presumably checked by bank holidays elsewhere), but why would they wish to court it? Furthermore they have to count on the other countries to get the bank holidays right, which is likely but hardly certain. Alternatively, let's say the new Drachma-euro is suddenly worth fifteen or twenty percent less. Logically that's quite similar to the first case.
Spain plays high-stakes poker game with Germany as borrowing costs surge - Spain has upped the ante in a high-stakes poker game with Germany, pushing for the release of EU stress test results for major banks in a move that risks precipitiating a dramatic escalation of Europe's financial crisis. "We're not afraid of transparency," said the Spanish Banking Association (AEB), saying the full truth would put an end to rumours battering Spain's instutitions. El Pais reported that the government backs the initiative, putting it on a collision course with Germany which insists on secrecy. Josef Ackermann, head of Deutsche Bank, warned last week that it would be "very dangerous" to publish the results of each bank, fearing that it would trigger flight from weak lenders and set off a chain reaction. The Spanish authorities have little to lose by publishing the data given the near paralysis in the country's debt markets. Funding is frozen for much of the private sector.
Spain is About to Make Trouble for German and French Banks - Yves Smith - Ooh, this might get ugly.The ECB rather firmly resisted the idea of releasing its recent stress test results on individual European banks. And with good reason: many observers suspect that some of the big German and French banks look less than robust. (And this is before we get to the obvious elephant in the room: since they were modeled on the too-bank-friendly US stress tests, even this measure is likely to be too permissive). Desperate times are now producing desperate measures. Spanish firms are locked out of international credit markets. Its banks are getting funding from the ECB. The Spanish authorities think this is all misguided prejudice (which is not entirely accurate, its savings bank, the cajas, which were not subject to the ECB stress tests, are a bit of a mess, to put it politely. The last few weeks has witnessed rescues and forced marriages among the cajas). So it has decided to defy the ECB and publish the results of the tests on specific Spanish banks.
Germany and Spain to announce stress test results - Spanish central bank announces it will publish the stress tests, thus putting others under pressure; German government source, too, said they were now open to the idea; goal is to alleviate market concerns over banking sector’s health; main challenge ahead for the Spanish banking sector is to reduce dependency on wholesale market, on property loans, and excess capacity; Spanish bond spreads yesterday rose to a new record of two and a quarter percent; market participants are becoming very pessimistic about the state of European banks; France came out with its pension reform proposals: the retirement age is raised to 62 (still one of the lowest in Europe); Gonzales-Paramo says the ECB will keep on buying and buying; forecasts put the growth effect of the stimulus packages at around minus half a percent in 2011; Adam Posen says talk about the ECB loosing its virginity was “idle chatter”.
The first (albeit small) intelligent decision in three years - At the behest of Spain, the European Union yesterday took the first material decision at genuine crisis resolution since the start of the financial crisis in August 2007 – with a decision to publish stress tests of the 25 largest banks by July, and to extend the tests to smaller banks. The decision became necessary as the financial markets are now beginning to treat the European sovereign debt crisis as a banking crisis. The previous strategy – consisting of ECB bond purchasing programme, the erection of a financial shield, and austerity programme, has failed to impress financial markets. El Pais declared a Spanish victory, saying that yesterday’s decision was prompted by a call from Jose Luis Zapatero at the summit on his fellow leaders to publish the results. Earlier this week, Spain took the unilateral decision to publish its own stress test results, to demonstrate to financial markets that Spanish banking system is healthy. The FT said in its coverage that the decision was reached after a “battle” won by Zapatero and Barroso.
EU Stress Tests Face Questions Over Stringency, Government Help (Bloomberg) -- The European Union’s decision to publish the results of stress tests on the region’s lenders was welcomed by shareholders seeking more transparency. Investors still want to know how tough the terms of the tests will be. The studies will be done “institution by institution,” French President Nicolas Sarkozy told reporters at an EU summit in Brussels yesterday. German Chancellor Angela Merkel said it was important to give “maximum transparency.” Asked how the governments would react if the tests revealed shortcomings, she said the EU has “taken precautions,” including a 750 billion- euro ($928 billion) financial backstop. Merkel and Sarkozy rebuffed concerns from executives including Deutsche Bank AG Chief Executive Officer Josef Ackermann that publishing the tests could undermine confidence in the banks unless governments promise aid. When the U.S. carried out similar stress tests more than a year ago, it pledged to provide capital to banks that couldn’t raise it. The EU still hasn’t disclosed details of its tests, including whether they include a sovereign debt restructuring, raising concern among money managers they may not be stringent enough.
FT.com – Belgium elections show rise in separatism - Separatist parties emerged as the dominant political force in Belgium following Sunday’s parliamentary elections, presaging a tense summer of negotiations as the divided country seeks to piece together a government.In early returns the Flemish separatist N-VA party topped the polls in the Dutch-speaking north of the country, ousting the Christian Democrats of outgoing premier Yves Leterme as the joint largest party at federal level.The nationalists were on course to grab 30 of the 150 seats in the lower house, edging out the Francophone Socialist party, which dominated the polls in the south of the country at the expense of the Liberals
The limits of the small-country mindset - The European Union is a tyranny of small countries, and this has served it well. But the small-country syndrome is counterproductive when it comes to macroeconomics. I was struck last week by two remarks from Herman Van Rompuy, the president of the European Council. He defended the fast spreading austerity programmes on the grounds of the robust economic recovery. And on intra-eurozone imbalances, he said it was mostly a problem of countries with current account deficits. Mr Van Rompuy, like the majority of EU leaders, hails from a small country – in his case, Belgium. When small-country politicians talk about economics, they naturally talk within the framework of a small open economy. One of the most important characteristics of a small open economy is that its own actions have little impact on the rest of the world. In a small open economy, success boils down to competitiveness, more or less. Running the Irish economy is like running a very large business, or a football club.
The assault on workers’ rights continues - I have been trying to maintain a theme focusing on the absurdity of our economic systems and the way in which governments allow themselves to be held to ransom by a small group of largely unproductive financial traders and the associated institutions (credit rating agencies). I was reminded of this again today when I read a report on growing murders of trade union officials and the purging of working conditions in various countries as the economic crisis worsened. When you juxtapose this sort of news – about things that really matter – with the nonsensical antics of the financial markets in Europe you realise we have totally lost any notion of priority. In finance, they refer to bond trading as investing but I prefer the definition of investment that you find in economics – the augmentation of productive capacity. It reflects my view that financial markets are mostly unproductive and that what we should be focusing on are real things – employment, productivity, social protection etc.
Fiscal austerity: Thin sliced | The Economist - I HAVE been remiss this week in not highlighting work from the current print edition on the total impact of European austerity plans. Buffeted by market pressures, southern European countries have embarked on dramatic fiscal adjustments, and even those not immediately targeted by markets—including France, Germany, and Britain—have been putting together plans to cut back.The rush to trim has generated real fear that with global recovery still uncertain the drag from government contraction could prove costly. If Europe's economy falls back into recession that will slow adjustments in Asia and place more pressure on sapped American consumers. The whole edifice of recovery would look that much more fragile.It's worth putting all of this in perspective. This week, the paper asks: just what does all the austerity amount to?
Soros: European recession next year “almost inevitable” (Reuters) - Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire investor George Soros said on Tuesday. Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union. The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said. Germany had imposed its criteria on how a 750 billion euro ($1 trillion) euro zone rescue mechanism should be used and was imposing its own standards -- a trade surplus and a high savings rate -- on the rest of Europe, Soros said."But you can't be a creditor country, a surplus country, without somebody being in deficit," he said. "That's the real danger of the present situation -- that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral," he said
Magical Thinking at the ECB – Krugman - And the march to a lost decade continues. In its latest Monthly Bulletin (pdf) , the European Central Bank goes all in for immediate fiscal austerity. It justifies this by buying in, wholeheartedly, to the notion that fiscal contraction is actually expansionary. As evidence, it points to … well, things I’ve already debunked: the allegedly expansionary Irish fiscal contraction of the 1980s that was probably largely about devaluation and falling interest rates, the Alesina-Ardagna study that makes no effort to distinguish between liquidity-trap and non-trap episodes (and whose method for identifying fiscal stimulus doesn’t seem to capture actual policy.) It’s hard to escape the sense that people, especially in Europe, have decided they want fiscal austerity, and will grab hold of any rationale they can think of. More about all that in tomorrow’s column. I’m getting a very bad feeling about the world’s economic prospects.
Weak Euro Casts Uneven Benefits Across Bloc - The euro zone's trade balance swung to a surplus in April, indicating that a weak euro and strong demand in overseas markets such as the U.S. and China are offsetting strains in trouble spots along Europe's southern fringe. The benefit is being felt by countries such as Germany, whose economy depends more on trade than others in the region. So while Europe's near-term growth outlook brightens, the growing gap between the haves and have-nots will likely keep Greece, Spain and others under pressure as they face fiscal austerity.
The Euro: Despite the Markets and Prophets of Doom, It Is Safer than Ever - There has been little love by financial markets for European leaders these days. But one has to wonder about the level of disdain reflected in recent surveys of City of London economists1 and global investors showing agreement about the likelihood of a breakup of the eurozone. How can a majority of 25 City of London economists conclude that “a euro breakup of greater or lesser proportions will occur during the next Parliamentary term“—within five years, in other words—a view supported by 40 percent of global investors polled by Bloomberg? Not the economic and political facts, it would seem.
Eurozone governance: What went wrong and how to repair it --VoxEU - The crisis has revealed deep flaws in the Eurozone’s governance regime. This essay argues that EU leaders should address fundamental questions about the operational principles upon which the euro is based. Key choices for Eurozone leaders are the nature of the economic policy framework, the optimal degree of decentralisation, and the identification of reforms that will ensure the policy regime can deal with all eventualities.
Fiscal policy at a crossroads: The need for constrained discretion -VoxEU - The inability of governments to maintain fiscal discipline is not new. But this essay argues that numerical budget rules are a far from optimal solution. They cannot be enforced and can produce highly procyclical policy during downturns. Instead, it proposes constraints on fiscal discretion imposed, monitored, and enforced by an independent fiscal policy council.
Nightmare vision for Europe as EU chief warns ‘democracy could disappear’ in Greece, Spain and Portugal - Democracy could ‘collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned. In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ‘apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money. The stark warning came as it emerged that EU chiefs have begun work on an emergency bailout package for Spain which is likely to run into hundreds of billions of pounds.
New eBook: Completing the Eurozone rescue -The euro’s crisis is not over. Measures taken in May were critical but they were palliatives not a cure. The Eurozone rescue needs to be completed. This column introduces a new Vox eBook that gathers the thinking of a dozen leading economists on what more needs to be done.
Completing the Eurozone rescue: What more needs to be done? (VoxEU) The euro’s crisis is not over. Measures taken in May were critical but they were palliatives not a cure. The Eurozone rescue needs to be completed. A new Vox eBook that gathers the thinking of a dozen leading economists on what more needs to be done. Click here to download the full PDF. Introduction: Richard Baldwin and Daniel Gros
Drawing a line under Europe’s crisis
The Eurozone needs a political union, or at least elements of oneThe Eurozone's levitation
Eurozone governance: What went wrong and how to repair it
The European bicycle must accelerate
What more do European governments need to do to save the Eurozone in the medium run?
The narrative outside of Europe about Europe’s fiscal crisis is wrong
Rethinking national fiscal policies in Europe
A credible Stability and Growth Pact: Raising the bar for budgetary transparency
Fiscal policy at a crossroads: The need for constrained discretion
Fiscal consolidation as a policy strategy to exit the global crisis
German spending is not the cure
The long shadow of the fall of the wall
According To AXA, There Is "No Chance" European Bail Out Package Will Succeed - Some late night words of caution from one of the UK's best journalists. In a report obtained by Ambrose Evans-Pritchard, French financial firm AXA is quoted as essentially saying that the chance of the Eurozone's survival is nil. Why a European bank would issue it own suicide note is unclear, although the firm's logic is sound: "The markets are very nervous because they can see that there is a fatal flaw in the system and no clear way out. We are in a very major crisis that has even broader implications than the credit crisis two years ago. The politicians have not yet twigged to this." Ms Zemek said the rescue had bought a "maximum" of 18 months respite before deeper structural damage hits home, with a "probable" default by Greece setting off a chain reaction across Southern Europe. "It would be the end of the euro as we know it. The long-term implications are at best a split in the eurozone, at worst the destruction of the euro. It is not going to end happily however you slice it."
Growth and the Right - Should the current recovery falter, as some recent economic statistics suggest it might, the national stage might be perfectly set for a surge by Tea Party Republicans. That, anyway, could be the inference drawn from a new study by two European economists, Markus Brückner and Hans Peter Grüner, who analyzed the link between slow growth and rising support for European parties right and left. Their conclusion is straightforward: For every percentage-point decline in G.D.P. growth over the course of a half-year, support for right-wing and nationalist parties grew.“Economic growth is an important and independent determinant of political radicalism,” they wrote. “A lower growth rate increases the support for extreme political platforms.”
Martin Weiss: Glimpses Of The End Game -Will the world’s money printing presses inevitably run amuck, trashing any remaining value in paper currencies? Will major governments ultimately default on their debts, destroying the global credit system? Will our entire civilization crumble? My answer: The threats are certainly real. But the final outcome could be very different indeed. Austerity. Austerity can come in many forms: Governments may impose austerity strictly in reaction to market-driven forces … or by pro-actively taking the lead. Austerity may come with wild inflation … or without. It could trigger deep social upheaval … or merely sporadic protests. But regardless of how austerity finally arrives, it cannot happen without across-the-board cutbacks in government payrolls, severe reductions in unemployment benefits, massive cuts in pensions, big hits to social welfare programs, and invariably, NO MORE ECONOMIC STIMULUS!
Fierce Urgency - After the financial storms of May, people in the knife-and-fork-using nations may feel that all our troubles with money have been sorted out and settled. Greece had an apoplexy and Europe somehow survived -- at least so far. Spain fell to its knees and apparently remains there, in mid-aria, waiting for an orchestra to strike up the next measure. Portugal is trying to hide in plain sight, like a beach-goer who has lost swimsuit in the surf. Hungary choked on something last week and was left sitting at the table with its face in a plate of goulash. Iceland has been put on, well, on ice after stiffing its British account holders. The Brits have discovered that they have enough money to run their country in the style of Edward the confessor. France is weeping over all the Spanish, Greek, and Portuguese bad paper in its bank vaults. Italy, having become a wholly-owned subsidiary of Silvio Berlusconi, is eating lunch under the grape arbors. The Baltic states are sinking into a northern peat bog of penury.... And Germany remains upright, wondering how it can wiggle out of this sad-ass collective of fazed cookies.
The lunatics are back in charge of the economy and they want cuts, cuts, cuts - The Germans are doing it. The Greeks, the Spanish and the Portuguese believe they have no choice but to do it. George Osborne believes it is his patriotic duty to do it. Around the world, cutting budget deficits has become the priority for policymakers fearful that rising debt levels will leave them at the mercy of capricious financial markets. Mervyn King has applauded the return of fiscal conservatism. So has the Organisation for Economic Co-operation and Development. Two months after they urged that budgetary support be maintained until recovery was fully entrenched, finance ministers and central bank governors from the G20 said they welcomed the plans announced by some countries to begin deficit cutting without delay. Budget deficits are certainly high across the G20 and beyond. But they are high primarily because of the severity of the worst recession since the second world war and because of the action taken collectively by governments to prevent that recession turning into something far, far worse.
European Bond Spreads continue to widen - Here are two graphs from the Atlanta Fed weekly Financial Highlights released today (graph as of June 16th):From the Atlanta Fed: After initially declining in early May, sovereign debt spreads have begun widening for peripheral euro-area countries. As of June 16, the 10-year bond spread (over German bonds) stands at 640 basis points (bps) for Greece, 283 bps for Ireland, 274 bps for Portugal, and 209 bps for Spain. The spread to Spanish bonds has increased 110 bps since May 11, from 1% to 2.09%, while Portuguese bond spreads are 121 bps higher during the same period. Note: The Atlanta Fed data is one day old. Nemo has links to the current data on the sidebar of his site. The spreads have widened further today: Greece is up to 668 bps, Ireland 290 bps, Portugal 293 bps, and Spain 211 bps. Oh, and Hungary is up sharply to 495 bps.
UK's budget office cuts outlook as austerity looms - Britain's new Office for Budget Responsibility offered a bleak outlook Monday in its first forecasts for economic growth and public finances, setting a baseline for the new government's emergency budget next week.The agency — created by Prime Minister David Cameron's coalition government as it prepares painful austerity cuts — predicted economic growth of 2.6 percent in 2011, down from the 3.25 percent estimated by the previous government.
The wrong medicine for a bad economy - Brad DeLong points to a BBC article reporting that British business confidence has plummeted precipitously since the new government started talking about severe spending cuts that would be "unavoidably tough." "The government has understandably been keen to emphasize the extent of the sacrifices that we all will need to make as public borrowing is brought under control,"]"But there is a significant risk that the rhetoric has begun to impact on business confidence, and fears of the economic impact of spending cuts may be causing businesses to rein back on growth plans."Fiscal austerity, in other words, is not good for "animal spirits." Spending cuts will suck demand out of the UK economy, forcing businesses to cut back their own spending, likely leading to layoffs, which in turn will depress growth even further. There's no mystery here. If the United States similarly attempted to balance its budget on an accelerated time frame, the economic damage would be equally severe. The worst prescription for dealing with high unemployment would be to follow the British example.ually severe. The worst prescription for dealing with high unemployment would be to follow the British example.
PIMCO on British National Solvency - Sovereign risk is a key risk for the UK but in a slightly different way to the economies of continental Europe. The UK government deficit, which is currently running at around 11% of GDP, is one of the highest both on record and within the developed world. That creates a potential risk as regards to the ability of the government to finance its debt. However, unlike countries within the eurozone, the UK has the advantage of an independent floating currency, making it highly unlikely it will suffer the problems currently besetting parts of the eurozone. With its own currency, the UK will always have the ability to repay its debts, but it may devalue the debt in real terms when viewed in non- GBP terms. Therefore, UK sovereign debt risk will continue to be an issue as long as UK debt levels remain high, which in turn will put pressure on the currency and the inflation rate, and potentially erode the longer-term value of government debt.
Julius Says US, UK at Risk as Investors Seek 'Weakest Link' (Bloomberg) -- The sovereign-debt crisis engulfing Greece risks spreading to Britain and the U.S. unless decisive steps are taken to rein in their budget deficits, said former Bank of England policy maker DeAnne Julius.“We’re living in a world economy where there are massive pools of liquidity and the tides shift and they usually shift to target the weakest link,” Julius said in a Bloomberg Television interview in London today. “At the moment that’s been Greece. They’re now looking around to see where else in Europe and the euro area it might be, and indeed I think the risk that this economy and the U.S. faces is that unless we get control of our debt burden we could be in line at some point as well.”
The essence of central bank independence - Price stability is a function of two things: a central bank’s power to refuse to buy government bonds, and whether a governor can be fired (without cause). These two variables “have all the predictive power for inflation associated with central bank independence,” said the BoE’s Adam Posen in a characteristically punchy speech yesterday.This simple formula is quite shocking. Many common indicators of independence are omitted. Central bank mandates have little explanatory power. Neither does a bank’s technical independence from the political process; legislation, after all, can be ignored or rewritten. Topically, a central bank’s purchase of government bonds has no impact on inflation, according to Mr Posen, as long as the purchase was voluntary. Indeed, more harm than good may come from a bank obstinately refusing to enter the fray:
The phantom securities which haunt the BoE, quantified - Some moral hazard maths du jour, courtesy of the Bank of England. In the depths of the financial crisis, the Old Lady began expanding the bank collateral eligible for use at its various liquidity operations, and starting new ones up. Unsurprisingly, given market conditions at the time, banks flocked to make use of the facilities. In fact, they began creating things specifically for use at the BoE, which the Bank gave the attention-grabbing title of ‘phantom securities.’ In its latest Quarterly Bulletin, the Bank of England outlines in excruciating detail its risk management procedure for all the collateral it accepts as part of its liquidity operations, including those phantom synthetic securities. In doing so, it also lets slip some info on the stuff it’s been accepting:
Global Banking: The Bank for International Settlements - Who controls global monetary affairs? The BIS! Based in Basle, Switzerland, the BIS is central bank to central banks. The BIS has greater immunity than a sovereign nation, is accountable to no one, runs global monetary affairs and is privately owned. This is a must-read report to understand the globalization process.
The BIS: The Bankers' Money-Launderer - If the Mafia were ever to find a genie-in-a-bottle, and thus obtain the mandatory “three wishes”, there could be considerable debate over how it would choose to expend two of those wishes. However, it is an absolute certainty that one of the wishes would be used to invent a perfect “money-launderer” - an entity who could “launder” infinite amounts of their ill-gotten gains, with absolute secrecy and discretion. The cabal of Western bankers has no need to rely upon the fortunes of chance to provide them with their own, perfect money-launderer, however. They already have the Bank for International Settlements (or “BIS”). In this respect, I am indebted to a regular reader who supplied me with a wonderful piece which thoroughly reviews the creation of, and the Charter for this most-odious of institutions.
Currency Collapse May Stimulate Economic Expansion, BIS Says (Bloomberg) -- Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements. Currency collapses are associated with permanent output losses of about 6 percent of GDP, on average, though the drop tends to appear beforehand, the Basel, Switzerland-based BIS said in its quarterly review yesterday. “This suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation,” Camilo E. Tovar wrote in the study. “To gain a full understanding of the implications of currency collapses on economic activity it is important to carefully examine the full circle of events surrounding the episode.” The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, “more commonly in Africa than in Asia or Latin America,” since 1960, Tovar said.
How I Learned to Stop Worrying And Love the Currency Collapse - If one reads this carefully, the BIS is really referencing a devaluation of about 22% which is hardly 'a collapse.' Here are some examples of post WW II currency collapses. It depends on the timeframe, specifically the rate and extent with which the devaluation occurs. Also, it matters about what the devaluation has been against. Is it a relationship primarily to a reference point like the US dollar, largely affecting a narrow band of imports, or is it a true and general devaluation marked by soaring prices and monetary inflation domestically. As I recall, China devalued the yuan by about 33% in the 1990's, and then pegged to the dollar, while 'persuading' first Bill Clinton and then George W. to allow them to maintain favored nation status, with the dispensation of 44% import tariffs, even while maintaining an artificially devalued currency, under full currency controls, and that fixed in a peg to the dollar.
Obama urges G-20 Nations to continue stimulus; Cautions about a Double-dip - From President Obama: Letter from the President to G-20 Leaders Our highest priority in Toronto must be to safeguard and strengthen the recovery. We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now. This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong. It is essential that we have a self-sustaining recovery that creates the good jobs that our people need. In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avoid a slowdown in economic activity.He also cautioned about global imbalances: A strong and sustainable global recovery needs to be built on balanced global demand. Significant weaknesses exist across G-20 economies. I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses.
Why plans for early fiscal tightening carry global risks - Yet again, we hear the cry of the old economic religion: repent before it is too late; the wages of fiscal sin is death. But is it already time to retrench? I doubt it. At least, we must recognise the risks: delayed retrenchment poses the danger of inflation and even default; premature retrenchment threatens recession and even deflation, as I argued last week. Having barely survived the biggest financial meltdown in history, we need to appreciate that these downside risks are serious. I am addressing those who recognise that past mistakes have put the world economy into a deep hole and want to escape as quickly as possible. Yet sensible people believe that the biggest danger now is delaying fiscal tightening. They do so for four reasons. First, they fear that the financial markets, having turned on Greece, Portugal and Spain, will soon turn on the UK and even the US; second, they believe that deficits crowd out the private spending needed for recovery; third, they argue that high deficits must lead to inflation; and, finally, they believe fiscal deficits fail to support demand
Banking on the IMF - The biggest financial nightmare looming over the world economy is the insolvency of a large international bank. Be it because of a sovereign default or because of large losses accumulated under complacent accounting rules, the insolvency of a large bank (particularly a European bank) is far from a remote possibility. Even if it were a remote possibility, the 2008 financial crisis has taught us that rare events occur.What makes this possibility the financial nightmare of choice, worse than the collapse of Lehman Brothers in 2008, is the fear that many sovereign states have already shot all their bullets and would thus be powerless to intervene. Credit default swaps (CDS) of major southern European banks trade slightly lower than the CDS of their sovereign states, indicating that the market does not perceive the latter as able to support the former.To minimize the risk of an unruly collapse, it is necessary to approve an international resolution mechanism with authority over all major international financial institutions. The goal would not be to rescue banks and their creditors, but to minimize the disruption that an uncontrolled default might cause.This institution should be an international version of the US Chapter 11 Bankruptcy Code.
IMF Finance & Development, June 2010 - Lowering Public Debt -LAST year’s global recession may have yielded to a global recovery, but at least in one respect its legacy is here to stay. In many countries, public debt as a percentage of gross domestic product (GDP) has increased rapidly since the onset of the global crisis and is slated to rise even more in the coming years because it will take time to reduce government fiscal deficits from their current high levels. Once the recovery has taken a firm hold and no longer depends on life support provided by large-scale fiscal stimulus, the focus must turn to bringing down debt. Past experience shows it can indeed be done, but this task will likely become more challenging going forward.
After the Fall - IMF F&D - Globalization has made both advanced and emerging market economies more exposed to external shocks, as their rising openness to trade and financial flows creates wider channels for cross-country spillovers of shocks. These forces have also increased the burden on monetary policy. It is much harder now for a central bank to use instruments such as interest rate changes to attain domestic objectives; as capital sloshes around the globe it can create many difficulties in managing monetary policy, especially in economies with shallow financial systems. And yet, monetary policy is gaining importance as a first line of defense against external shocks and breakdowns in the financial system, because it can be far more nimble than other macroeconomic policy tools. This has generated a rich debate: what the right framework is for monetary policy, what the scope of a central bank’s objectives should be, and what the optimal degree of central bank independence is. Even as clarity about optimal monetary frameworks has diminished, a remarkable outcome of the crisis has been a convergence in the nature of the debates about central banking in economies at different stages of economic and institutional development.
A Stylized View of the Global Economy -Let’s try a thought experiment. Divide the would into two camps. 1) Countries that are importing more than they export, and are increasing debt levels. 2) Countries that are exporting more than they import, and are acquiring debt claims that will provide future goods and services. While writing at RealMoney, I would often bring up the problem of neomercantilism. Given what I have already described, the problem is that Group 2 favors their exporters and producers, and sell cheaply to consumers in Group 1. Who loses? Consumers in Group 2, and producers in Group 1. In any case, in aggregate, nations in Group 2 build up financial claims against nations in Group 1. And there is the problem. These nations are overly indebted already, and the ability for them to make good on all of their obligations is speculative, regardless of what their bond rating is. Few of the nations in Group 1 are doing well right now, unless their economies have a large natural resource extraction component to them, such as Norway, Australia, and Canada. They look at their economies and say, “Loosen monetary policy! What do you mean we can’t loosen further? Run deficits! What do you mean our ability to do that is limited?!”
Fiscal Fantasies- Krugman - It’s really amazing to see how quickly the notion that contractionary fiscal policy is actually expansionary is spreading. As I noted yesterday, the Panglossian view has now become official doctrine at the ECB. So what does this view rest on? Partly on vague ideas about credibility and confidence; but largely on the supposed lessons of experience, of countries that saw economic expansion after major austerity programs. Yet if you look at these cases, every one turns out to involve key elements that make it useless as a precedent for our current situation. Here’s a list of fiscal turnarounds, which are supposed to serve as role models. What can we say about them?
100 Italian Economists Wake Up, Say Austerity Will Destroy Europe - The Telegraph's Ambrose Evans-Pritchard points to a letter signed by 100 Italian economists (technically Keynesianites, but in the great Ponzi, the two have become synonymous) in which they note that "the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies." Not to mention that Italian university budgets will be slashed. These 100 establishmentarians would be wise to do the whole "look to your left, then to your right, in one year two of those people will be out on the street." While the core of the complaint has to do with the core premise of austerity, arguing that a fiscal injection is much more needed than a haircut, AEP does have a great point, that while conducting fiscal contraction is possible, it needs to be at least offset by monetary loosening. And the still relatively hawkish ECB has very little room in that regard.
No Keynesianism in the Berliner Morgenpost - Other people have suggested that Die Zeit or the FAZ are more representative of German opinion. Among elites for sure, but if you walk through Berlin for days you will see the Berliner Morgenpost for sale much more often, by an order of magnitude. Anyway, I noticed a piece in the 12 June edition, entitled "Germany is driving European economic growth." What's most striking about thie article, and other sources, is how much Keynesianism has failed to influence either German policy or German public opinion. In the piece, there is no mention of international imbalances or aggregate demand issues, but rather Germany is lauded for exporting so much and for serving as the economic locomotive for European economic activity. Furthermore this is a news story, not an Op-Ed.
After Europe, does Keynesian economics make sense? –The global financial crisis ignited a resurgence in Keynesian thought -- specifically, the idea that government should spend big to pull out of a recession. But given Europe's sovereign debt crisis, is it time to ask where Keynes may have gone wrong? Or did European leaders misinterpret his teachings? And, given the growing complexity of the global financial system, are Keynes' ideas perhaps outdated? Economic leaders are now questioning -- and in some cases challenging -- Keynes' general philosophy that more spending is better than less during economic downturns.At a meeting last week in South Korea, the Group of 20 finance ministers and central bank governors, alarmed by the public finances of some countries, made clear that they could no longer wait until economies pick up steam before removing fiscal stimulus. This was a marked shift in tone. It was only about two months ago that G20 leaders called for ongoing support of expansionary fiscal policy until economies were growing stronger.But too much public spending has proven unsustainable in parts of Europe. Government finances of Portugal, Italy, Ireland, Greece, Spain -- and now possibly Hungary -- are shaky. And despite a bailout of nearly $1 trillion to keep Greece afloat, global investors continue to worry about whether the region can contain its debt crisis and prevent a default.
1 comment:
Capital control of flows in Argentina is being applied as you say. The problem is that there is so much tourism that nothing can be done to stop it. It is good for the economy though, for example the apartment rental buenos aires is really increasing and that reactivates currency flow too.
I, as a tourist, think that more tourists should be allowedso that they can get to know the beautiful attractions and spend money on the things they like. That is a good way of creating employment.
Cheers,
Brooke
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