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

Saturday, June 5, 2010

week ending June 5

U.S. Fed's balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew slightly in the latest week, Fed data released on Thursday showed.The balance sheet -- a broad gauge of Fed lending to the financial system -- rose to $2.318 trillion in the week ended June 2 from $2.317 trillion the previous week.After declining early last year, the balance sheet had been accumulating mass amid the U.S. central bank's asset-buying program.The program, known as quantitative easing, was aimed at broadly holding down borrowing costs and supporting the ailing housing market while the economy recovered from the worst recession in 70 years.The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) totaled $1.114 trillion on June 2, up from $1.113 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 $166.72 billion compared with $167.38 billion a week earlier.

US Fed Total Discount Window Borrowings Wed $71.04 Billion- The U.S. Federal Reserve's balance sheet expanded slightly in the latest week as borrowing by commercial banks plummeted. The Fed's asset holdings in the week ended June 2 climbed to $2.340 trillion from $2.338 trillion a week earlier, the Fed said in a report released Thursday. Meanwhile, total discount window borrowing fell to $71.04 billion on Wednesday from $74.94 billion a week earlier. Borrowing by commercial banks through the Fed's discount window dropped to $115 million on Wednesday from $4.21 billion a week earlier.The European Central Bank boosted its use of a currency swap line with the Fed, borrowing an additional $5.4 billion in the week. The ECB and Bank of Japan are so far the only countries to tap the new swap lines, re-launched last month to help banks, particularly those in Europe, cope with sovereign debt worries on the continent. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.086 trillion from $3.077 trillion in the previous week. Treasurys held in custody on behalf of foreign official accounts as of Wednesday climbed to $2.277 trillion from $2.271 trillion in the previous week.

Fed's Central Bank Swaps Increase By $5.4 Billion To $6.6 Billion - The Fed lent out $6.6 billion in liquidity swaps this week to foreign banks, of which the biggest beneficiary was the ECB, with a 1 week swap of $5.4 billion and an 84 day swap of $1.0 billion. The only other bank receiving Fed aid was the Bank of Japan, which got $210 million. What is funny is that the ECB is now an example of just how large the FX imbalance in Europe is: the ECB has had to lend out $6.4 billion in dollars even as banks have hoarded €320 billion in euro deposits with the ECB, a new all time record. In other words, nobody wants euros, and everybody is dying to get their hands on dollars. But somehow the market is supposed to believe the funding situation in Europe is ok. Lastly, the $6.6 billion in total Fed liquidity swaps $5.4 billion greater than the prior week's $1.2 billion. We wonder what spin will be applied to explain the 500% increase in world dollar funding requirements.

Fed chief sees delicate dance ahead - The delicate task ahead for the Federal Reserve and other central banks is deciding when to start boosting interest rates and reeling in all the stimulus pumped out during the global financial crisis, Fed Chairman Ben Bernanke says.Bernanke, however, didn't provide any new clues on that front. As is typically the case in the early stages of an economic recovery, central bank officials "will have to weigh the risks of a premature exit against those of leaving expansionary policy in place for too long," Bernanke said Sunday in precorded remarks deliverted bia videolik to a conference sponsored by the Bank of Korea in Seoul, South Korea.Tightening credit too soon risks short-circuiting countries' economic recoveries. Waiting too long could risk unleashing inflation and sparking a dangerous new wave of speculation like the one that powered the housing boom and its devastating bust.

Bernanke: Important concerns remain about economy-- Federal Reserve board chairman Ben Bernanke said Thursday that important concerns, including the continued high rate of unemployment, remain about the U.S. economy despite four straight quarters of economic growth. In brief prepared remarks at a Fed conference in Detroit examining access to credit to small businesses in Michigan, Bernanke noted that bank lending to small businesses has been declining nationwide through the first quarter. Bernanke said it was hard to tell from the data whether the decline was due to lack of demand or supply. Policymakers face a challenge to make sure that small businesses have access to credit as the sector is "crucial" to creating jobs, Bernanke said. The Detroit conference is one of several regional events hosted by the Fed. The central bank is holding a national conference on the issue later this summer.

Most Primary Dealers Agree Fed Rate Increase Won’t Come Soon - Wall Street’s biggest banks continue to hold a somewhat fragmented outlook for the future of monetary policy, but most agree that a rise in the overnight fed funds rate lies some ways off.A survey of primary dealers, who are counterparties to the Federal Reserve and underwrite Treasury debt auctions, by Dow Jones Newswires found just one bank expecting a near-term interest-rate increase. That’s BNP Paribas, which sees a move in the current quarter. UBS sees a first increase in September, while Deutsche Bank says November.Otherwise, those who responded to questions about their monetary-policy outlook are pretty evenly split between predicting the Fed will raise rates in the closing months of the year or will wait until some time in 2011.Goldman Sachs has perhaps the boldest prediction, saying the Fed won’t move until 2012 at the earliest.

Fed’s Lockhart Warns of Higher Rates Before Jobless Rate Returns to Normal - Improving economic prospects means the time for tighter monetary policy is approaching, and the Fed may have to act even if unemployment levels remain at historically high levels, a central bank official said Thursday.“The conditions that require a change of policy are not yet at hand,” and “I continue to support the current stance of interest rate policy,” Federal Reserve Bank of Atlanta President Dennis Lockhart said.While it hasn’t yet arrived, “the time is approaching when it will be appropriate to consider recalibrating interest rate policy,” the official said.“As the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability,” Lockhart said.

Fed’s Hoenig Warns of Leaving Rates Low Too Long - The chief internal critic of the U.S. Federal Reserve’s current zero percent interest rate policy warned Thursday the central bank is playing with fire if it doesn’t raise interest rates soon.“If we do not learn from past mistakes, we will find ourselves repeating them yet again,” Federal Reserve Bank of Kansas City President Thomas Hoenig warned, pointing to periods where he believed the central bank kept rates too low for too long and created greater misery as a result. He counted the low rates maintained in the middle years of the last decade as a prime driver of the financial market meltdown that led to the worst recession in generations, saying that is an example of what the Fed must avoid doing again.

Hoenig Says Fed Should Raise Rate To 1% By End Of Summer - Reuters reports that the Kansas City hawk says Fed should hike to 1% by the end of the summer, and should sell MBS immediately and certainly by the time the hike at the end of the summer. Not stopping there he says the Fed should promptly proceed to raise rates from 1% to 3% thereafter. Hoenig also noted that the low inflation over the next year would increase as the economic recovery picks up. Of course, a raise in rates, would kill stocks, and promptly push the EURUSD to parity, also killing US exports, which is why we are confident Bernanke will completely ignore this most recent bout of deranged sanity from Hoenig.

US Monetary Policy in the 2010’s: The Mankiw Rule Today, by Andrew Harless: The Mankiw Rule suggests that the Zero Interest Rate Policy will continue for quite some time, barring dramatic changes in the inflation and/or unemployment rates.“The Mankiw Rule” is what I call Greg Mankiw’s version of the Taylor Rule. “Taylor Rule” is now the general term for a rule that sets a monetary policy interest rate (usually the federal funds rate in the US case) as a linear function of an inflation rate and a measure of economic slack. ... Unfortunately, there are now many different versions of the Taylor Rule, which all lead to different conclusions. Parsimony suggests that a good Taylor rule should have 3 characteristics: it should be as simple as possible; it should use robust, easily defined, and well-known measures of slack and inflation; and it should fit reasonably well to past monetary policy. Also, to have credibility, such a rule should have “stood the test of time” to some extent: it should fit reasonably well to some subsequent monetary policy experience after it was first proposed. The Mankiw Rule has all these characteristics.

Why 7% Unemployment Is Inflation Turning Point Fed Doesn’t Say (Bloomberg) -- Federal Reserve policy makers say full employment means a long-term jobless rate between 5 percent and 5.3 percent. Some of the most influential economists say they’re wrong.Bondholders “must worry that if the natural unemployment rate is up to 7 percent, then there’s the danger that the Fed will keep piling on more stimulus money as if they didn’t have to worry” about joblessness, Phelps, 76, a professor at Columbia University in New York, said in an interview. On a “cheerful day” Phelps said he estimates the rate, or NAIRU, has climbed to between 6.5 percent and 7 percent. On a “gloomy day,” he pegs it from 7 percent to 7.5 percent. “If you knew for sure that the natural rate was 5 percent, then it might make sense for the unemployment rate to hit 7 or 7.5 percent before you start tightening at all,” Maki, 45, said in an interview from his New York office. “That becomes a very risky strategy when the natural rate has risen, because you could be sitting at a zero percent Fed funds rate at full employment and not realize it.”

Fed’s Lockhart Disappointed by May Hiring Data - May job creation was disappointing and signals a continued need for supportive monetary policy, a U.S. central bank official said Friday. Reacting to the employment report where gains were almost entirely driven by the hiring of temporary government census workers, the Federal Reserve Bank of Atlanta President, said the data “suggests continued weak labor markets.” The government reported Friday that non-farmpayroll growth shot up by 431,000, amid a drop in the unemployment rate to 9.7% from 9.9% the month before. But the source of the gain was raising questions whether the short-lived return to life in labor markets is already sputtering out. While he cautioned against overreacting to one month’s data, the central banker reaffirmed his belief the Fed’s current zero% interest rate stance is the right one. “I don’t think that time has come yet” to raise rates, and to advocate for such an action in light of current economic circumstances is “premature,” Dennis Lockhart said.

Atlanta Fed's Lockhart: Bernanke May Have To Tighten With Considerably Higher Unemployment - The Atlanta Fed's Dennis Lockhart had prepared remarks before the Atlanta Technical College, in which he said "I continue to support the current stance of interest rate policy. But the time is approaching when it will be appropriate to consider recalibrating interest rate policy. I do not believe that time has yet arrived. The conditions that require a change of policy are not yet at hand. However, as the economy continues to improve and financial markets find firmer ground, extraordinarily low policy rates will not be needed to promote recovery and will become inconsistent with maintaining price stability. The implication is that the policy rate may have to begin to rise even while unemployment is considerably higher than before the recession."

Fed Officials Upbeat On U.S. Recovery - Two senior Federal Reserve officials were upbeat Monday about the U.S. economic recovery despite the worsening debt crisis in Europe, but gave no indication the Fed is anywhere near raising interest rates.“Right now, the prospects for continued growth in the U.S. remain relatively solid,” Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, told a news conference during a Bank of Korea seminar in Seoul. “I hope, I anticipate at this point that the U.S. won’t have a double-dip recession.” He added that the European crisis “raises some clouds on the horizon” and that the Fed would have to “be cautious” in response. Charles Evans, president of the Chicago Fed, said the U.S. recovery is “well under way” but still-low inflation means the central bank should keep rates very low “for an extended period,” in line with its official policy statement.“Inflation is severely under-running price stability, so it’s still appropriate to keep an accommodative policy,”

Bernanke says global recovery depends on emerging markets… - The global economy will depend increasingly on emerging markets to foster strong growth, Federal Reserve Chairman Ben S. Bernanke said, adding that central banks worldwide must carefully weigh the timing of their withdrawals from various economic stimulus programs put in place during the financial crisis. "The Federal Reserve and many other central banks . . . will have to manage its exit from accommodative policies," evaluating the risks of a premature exit against the ramifications of leaving them in place for too long, said Bernanke, addressing a conference sponsored by the Bank of Korea in Seoul by video Sunday. "Because economic conditions vary, the appropriate timing of the exit is likely to differ across countries. To guide these important decisions, each central bank will have to carefully monitor economic developments in its own jurisdiction."

Two Fed Presidents and Financial Externalties - You can find an interesting contrast between a policy paper written by Narayana Kocherlakota, Minneapolis Fed President, and a speech by Jeff Lacker, the Richmond Fed President. Narayana thinks that the financial sector is fraught with externalities. According to Kocherlakota, then, there are three important externalities, a risk externality (the primary focus of his paper), a systemic externality, and a fire sale externality. Now, let's turn to Lacker, who says:First, I am skeptical of the characterization of systemic risk as an externality that leads market participants to undervalue or ignore risks...Obviously, Lacker has a very different view of the world.Now, since Kocherlakota sees the financial crisis as in part an externality problem, this gets him thinking about how we can use standard Pigouvian taxation to solve the problem. There's nothing new about that of course. For example, some of the IMF's taxation proposals (see my piece here) have that flavor.

Still No Exit: The Case for More Monetary Stimulus Remains Strong - Six months ago I wrote a policy brief [pdf] in which I argued for large additional purchases of long-term bonds by the central banks of the four largest advanced economies—the United States, the euro area, Japan, and the United Kingdom—to reduce long-term interest rates. That advice remains relevant today for three of these economies. In the United Kingdom, however, policy should remain on hold pending further developments in inflation.The European sovereign debt crisis is causing euro area and UK politicians to tighten fiscal policy faster than expected, which will weigh on economic growth, and the spillover effects also will be negative for growth in Japan and the United States. This fiscal retrenchment makes it all the more important for monetary policy to support economic recovery.

Fed's Evans: Central Banks Must Guard Against 'Black Swans' - Central banks must watch for unlikely but potentially huge economic shocks, even though predicting such "black swan" events or assessing the impact of extraordinary policy measures is murky, senior Federal Reserve official Charles Evans said Tuesday."Central banks must always be on guard against risks that are relatively rare, but have potentially large and disruptive effects," Evans, the president of the Federal Reserve Bank of Chicago, said in a speech prepared for delivery at a Bank of Korea conference in Seoul. During the recent global financial crisis, aggressive easing by the Fed, with the government's stimulus measures, helped avert the "very real risk" of a " complete financial meltdown," said Evans, currently a non-voting member of the Fed's rate-setting Federal Open Market Committee.

Bank of Canada First in G7 to Hike Rates - ABC News -The Bank of Canada raised its key interest rate on Tuesday, the first G7 industrialized economy to do so after the global recession, but said the European debt crisis made its next move highly unpredictable.The rate hike, to 0.5 percent from 0.25 percent, is a response to two quarters of extraordinarily strong growth at home. But the bank cautioned investors against betting on an uninterrupted tightening campaign, due to the euro zone fiscal problems and an uneven global recovery."Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the central bank said in a statement.The rate hike itself was widely expected. In a Reuters poll of 40 analysts, 32 had forecast a quarter-point rate hike.

More on those USD swap lines… It’s a 91-page review of liquidity provisions during the financial crisis, including the multitude of currency swap lines initiated by the globe’s central banks. It’s timely because last month the Federal Reserve restarted its swap lines to help ease strains in short-term US dollar funding markets in Europe. In late 2008, right before the collapse of Lehman Brothers, the Fed also upped its dollar lending to other central banks to help boost liquidity. So far, the Fed’s latest facility has extended a little over $10bn. In 2008, it provided a whopping $554bn in USD funding. And here’s where things get interesting.From the paper: Much of the sudden demand for dollar funding in international markets immediately after Lehmans’ failure appears to have resulted from the drawing of dollar funds by commercial banks in the USA from their related foreign offices. Graph 11.1 [below]

80% Favor Auditing the Federal Reserve - Eighty percent (80%) of Americans now agree with Congress that auditing the Federal Reserve Board is a good idea, according to a new Rasmussen Reports national telephone survey. Just nine percent (9%) oppose an audit of the Fed, and 12% more are not sure. This marks little change from December. But it’s up five points from last July when Congressman Ron Paul’s proposal began to gain steam in Congress. Fed Chairman Ben Bernanke has consistently opposed such an audit of the Fed’s monetary policies, but it’s included in the major financial regulatory legislation now being pushed through Congress. Forty-six percent (46%) of Americans oppose more government regulation of the U.S. financial system, but 37% are in favor of it. Just 27% favor giving the Fed more regulatory control over the financial system.

Daniel K. Tarullo, a Star at the Fed - NYTimes - For all the criticism of the Federal Reserve for failing to anticipate and prevent the financial crisis, the central bank and its chairman, Ben S. Bernanke, are emerging with vast new responsibilities to safeguard the financial system. Alongside Mr. Bernanke is Daniel K. Tarullo, who was President Obama’s first appointment to the central bank’s board of governors, and who believes that re-engineering the regulatory system could soften the blow of a future crisis. “I would characterize my aspiration as follows,” Mr. Tarullo says in his characteristically professorial tones. “That the regulatory and supervisory reforms we undertake will significantly reduce the incidence and severity of financial crises.”

CBO Issues Fed-Flattering Propaganda - I’ve seen some eye-poppin’, credulity-stretchin’ accounts in my time. The report “The Budgetary Impact and Subsidy Costs of the Federal Reserve’s Actions During the Financial Crisis,” just released by the Congressional Budget Office, ranks with the most extreme. It claims that the budgetary cost (which corresponds roughly to expected losses) of the Fed rescue facilities launched during the financial crisis is approximately $21 billion. Moreover, its peculiar formulation (”fair value subsidies”) conveys the misleading impression that this was the extent of the central bank’s support to the financial services industry.  The closest thing to a statement of scope and objectives comes in the Preface and it is remarkably thin.

The Time We Have Is Growing Short’ - Volcker - Now we know that trillions of dollars of official funds came to the rescue of the broken system in the form of loans, capital, and guarantees. Flows of finance have been restored, albeit with large areas of continuing public support. The residential mortgage market in the United States—by far the largest sector of our capital market for the time being—remains almost wholly a ward of the government. Now, another range of uncertainty has arisen. Sovereign credits have come into question, most pointedly in the Eurozone but potentially of concern among some of our own states. Any thoughts—any longings—that participants in the financial community might have had that conditions were returning to normal (implicitly promising the return of high compensation) should by now be shattered. We are left with some very large questions: questions of understanding what happened, questions of what to do about it, and ultimately, questions of political possibilities. The way those questions are answered will determine whether, in the end, the financial crisis has, in fact, forced the changes in thinking and in policies needed to restore a well-functioning financial system and better-balanced growing economies.

How Blurry is the Line between Monetary and Fiscal Policy? - Economists have traditionally drawn a sharp distinction between monetary and fiscal policy. Monetary policy should try to promote growth and limit inflation by setting short-term interest rates, managing the money supply, and providing liquidity during times of financial stress. Fiscal policy should also encourage growth and, more broadly, promote the general welfare through careful choices about spending, taxes, and borrowing. The Federal Reserve has responsibility for monetary policy, while Congress and the President handle fiscal policy. That clean distinction was one of many casualties of the financial crisis. As credit markets froze, the Fed pursued unconventional policies that blurred the line between fiscal and monetary policy.

The (mis-)coordination of monetary and fiscal policy - Suppose the monetary authority says "We already have interest rates at zero, so monetary policy can do no more to increase aggregate demand. But fiscal policy can do more..." Suppose the fiscal authority says "We already have very high deficits and debt, so we are scared of future insolvency, so fiscal policy can do no more to increase aggregate demand. But monetary policy can do more..."No one individual admits to a loss of faith that monetary or fiscal policy can increase aggregate demand as much as is needed. But policy is the same as it would be if there were such a loss of faith. This is in part a follow-up to my earlier post on loss of faith. It's also a response to Tyler Cowen's good question (I will paraphrase): 'If increasing aggregate demand is so obvious and easy a solution, why ain't they doing it?'

What does successful monetary policy require? - Let's say the government/central bank prints up rebate checks and mails them around.  People either spend those checks or they don't.  If the checks are spent, AD goes up and the policy more or less succeeds.If people don't spend the checks, they are engaging in "balance sheet repair."  In absolute terms, things are going less well than in the previous scenario, but still they're going as well as possible, given the dour expectations.  Balance sheet repair probably is needed and it is preparation for a later expansion, once the repairs are finished.  The policy still is "as successful as a policy can be."  (The alternative of fiscal policy won't have much of a multiplier and the higher debt may cause some more balance sheet worry.)Which scenario will come to pass?  I doubt if it has much to do with the expected rate of inflation, or changes in real interest rates, at least not within normal U.S. ranges for those variables.  It probably has more to do with overall sentiment, indebtedness, joblessness, and so on.  A non-credible Fed, when it comes to the rate of future price inflation, need not crush the possibility that the funds will be spent. 

Only one degree of freedom per Fixed Announcement Date - The Bank of Canada's announcement today, raising the overnight rate target from 0.25% to 0.5%, wasn't a surprise. The surprise was the kicker at the end: "Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."Most people were expecting the Bank to continue to raise the overnight rate throughout the second half of the year. I interpret the Bank's statement as deliberately contradicting those expectations. And the forex market seemed to interpret the Bank the same way, since the Loonie fell over half a cent on the news It's tempting to think that this gives the Bank an extra degree of freedom or two when doing monetary policy. It can do something today; and it can say it will do something at the next Fixed Announcement Date, and the FAD after that... But that's not quite right.

Mind the gap - Even as inflation continues to fall [0], there are calls to raise interest rates soon in order to quell inflationary pressures. I remember reading similar calls for monetary restraint in Japan in 2000-01, when that country was struggling to escape deflation (I sure had a hard time explaining the fears to my boss, and indeed never came up with a good answer). But rather than dismiss these calls, I think it useful to revisit the different measures of the output gap, to see whether those fears of rampant inflation due to disappearing slack make sense. Fortuitously, Michael Kiley has just circulated a new paper reviewing the various concepts of the output gap (see also these previous posts: [1] [2] [3]).

West moving towards deeper financial abyss - China Daily - A year and half after the first shock waves of the global financial tsunami, Western economies - including the US and the European Union (EU) but excluding Australia and Canada, which are big natural resources exporters - are marching toward economic failure. I base this assertion on just one thing: Their governments are afraid to do the right thing. With the full knowledge of what their fatal policies will lead to, their politicians do not seem to have the political courage to rally the support of the people to accept the necessary pain and make the sacrifices as preached by the Washington Consensus. Instead, Western governments have taken the other direction.Much attention has been focused on the stagflation effect of spawning banknotes from helicopters, a metaphor for monetary quantitative easing.

The World Supply of Liquid Assets - I found this piece by Ricardo Caballero, which is a useful starting point for a discussion of the role of safe assets in the financial crisis and in the recent European sovereign debt crisis. An important feature of post-2000 financial markets in the United States was the multi-layered role of housing in somehow "lubricating" financial markets. Housing played a direct role as collateral for mortgage debt that was used to finance consumption expenditure, and mortgage-backed securities were very important as collateral in financial market arrangements. However, when everyone realized that incentive problems had caused us to vastly overvalue the direct mortgage debt, and the securities built up from it, we then had much less of what we consider to be safe, liquid assets. With less liquid assets, there has to be less trade on financial markets, as was, and still is, the case. What can governments do about this? Well, if we think there are less liquid assets than is socially optimal, the government can step in and supply more. One way to do this would be through fiscal policy.

The Euro Is Washed Up — But the Dollar Is No Better -Greece has made it obvious: The euro is doomed. This fact had been obvious to all the euro critics from the very beginning. All the arguments against the possibility of a common currency for very disparate countries had been raised, but brushed away by overzealous politicians. They’ll learn their monetary lesson the hard way in the coming years.Unfortunately the current discussion about Greece, Spain and all the other PIIGS countries is very superficial … Greece is everywhere!In fact, the whole western world and Japan are over indebted … You’ve likely read in the press about debt to GDP figures like 200 percent for Japan, 115 percent for Italy, 113 percent for Greece, 85 percent for the U.S., 76 percent for France, 73 percent for Germany, or 70 percent for the UK. These are dangerous levels, although not outrageous ones. But government officials don’t tell the whole story; they sugarcoat the real dimension of the over indebtedness.

A Plague Upon The World: The USA is a “Failed State”- Interview with Dr. Paul Craig Roberts, former Assistant Secretary US Treasury, Associate Editor Wall Street Journal, Professor of Political Economy Center for Strategic and International Studies Georgetown University Washington DC. Question:  Dr. Roberts,  the United States is regarded as the most successful state in the world today. What is responsible for American success?Dr. Roberts:  Propaganda. If truth be known, the US is a failed state. More about that later. The US owes its image of success to: (1) the vast lands and mineral resources that the US “liberated” with violence from the native inhabitants, (2) Europe’s, especially Great Britain’s, self-destruction in World War I and World War II, and (3) the economic destruction of Russia and most of Asia by communism or socialism.

Supra-national SDR reserves plan gains momentum (Reuters) - If the euro's potential as a perfect "anti-dollar" in world currency reserves has been stunted by an existential euro zone debt crisis, more radical rethinking of the global monetary system may now gain momentum.Governments around the world have for decades bristled at U.S. "seigniorage" from providing the world's de facto reserve currency -- what France's Valery Giscard d'Estaing in the 1960s called America's "exorbitant privilege".China, Russia, Brazil and the International Monetary Fund now all want a greater use and sponsorship of Special Drawing Rights -- a basket of dollars, euros, yen and sterling that acts as a claim on the IMF and its 186 member countries and a supra-national reserve asset.In essence, reserve status -- however well earned -- allows the U.S. to simply print more dollars to buy dollar-priced global goods such as oil and commodities. And any resulting drop in its exchange rate earns U.S. entities a tidy margin on overseas assets while foreigners' dollar reserves are devalued.

World Currency Unit Intended to Rival US Dollar for Sumpremacy -A new currency is intended to challenge the U.S. dollar as the world's foremost reserve currency. The WOCU, short for world currency unit, was actually launched by London-based WDX Organization in September 2009, but only seems to be gaining recognition now. Its value is determined as a derivative of the exchange rates of the world's top 20 currencies, as measured by GDP, in order to reduce the risk associated with exchange rate fluctuations. The new currency is similar to the International Monetary Fund's special drawing rights (SDR), which the IMF uses as a reserve asset to supplement the currency reserves of its member states. Both Russia and China have been pushing for the world to switch to a new currency.

Euro Pain Hits Money Funds - The European debt crisis has rippled into one of the last redoubts of safety for U.S. investors: money-market funds. Money funds are thought to be low-risk because they invest in high-quality short-term debt issued by governments and big corporations. But many funds are holding big slugs of European bank debt. As of March 31, nine of the top 10 corporate issuers of short-term debt held by Moody's-rated U.S. prime money funds were big European firms. Some funds are scaling back aggressively in shakier countries, like Spain and Ireland, according to managers and analysts. Among U.S. and European money funds rated by Fitch Ratings, for example, Spanish and Portuguese holdings declined about 27% in the first four months of this year, to about $26 billion.

How To Stop The Contagion HERE - This is an unpopular set of prescriptions.  Nonetheless, it is the only thing that will work, and either our President grows a set of clankers between his legs and forces this through one way or another or we will suffer a self-fulfilling collapse when our turn comes - and it will.(see all 9 items)

    1. ALL derivatives must be placed on an exchange and backed nightly with CASH margin.
    2. 30 or 60 days hence all derivatives not so exchange-traded with cash margin proved behind each one are deemed canceled. End of discussion. 
    3. All banks and other backstopped institutions are required to sell 5% of their retained portfolios to non-bank entities and mark their portfolios to the market - no exceptions - including all off-balance sheet entities. The "mark to fantasy", "extend and pretend" and similar games must stop right now
    4. All banks and other backstopped entities are required to adhere to "one dollar of capital" behind each dollar of unsecured lending at all times, plus six percent regulatory cushion, all in either cash or short-term (26-week or shorter) T-bills.  No ifs, ands, buts or exceptions

    Is there a general glut? - Matt Yglesias writes: We right now have the capacity to produce more—much more—than has ever been produced before in the history of the planet. There are dozens of supply-side policies that could be improved in every country on earth, but that’s not a new fact about the world. What’s new is the lack of demand, the willingness of the key leaders in Tokyo, Frankfurt, Washington, Berlin, and now it seems London as well to tolerate stagnation and disinflation in the face of some of the most exciting fundamental new opportunities for human economic betterment ever.  First, I am fully on board with Scott Sumner-like ideas to boost AD through monetary policy, as is Yglesias and are many other Keynesians.  There is no practical disagreement, but it remains an open question how effective such measures (or a bigger stimulus) would be. 

    Tyler Cowen: Is There a General Glut? - Mark Thoma- I don't get the claim that since the administration's economists are not pushing for a large, new stimulus package, it means they don't think it would work.... I don't even agree with the basic premise that they have been silent.... The mere fact that the administration... has decided that using political capital to push forcefully for more stimulus is tossing valuable political capital down a sinkhole does not imply that the administration's economic advisors see no large benefit from further stimulus.... I don't understand how making a political calculation that there is no chance Congress will sign on to a package providing significantly more help implies that "they're genuinely afraid ... that it would bring only marginal improvements," and I certainly don't see why it implies that it would come at "the cost of significant problems down the road."

    Is it all just a terrible mistake? - Right after I quoted Matt Yglesias in the last post, I saw Tyler Cowen weigh in with his own perspective on Yglesias, and the pro-stimulus crowd in general.   I think the real problems that Tyler cites are much more closely linked to falling NGDP than most people imagine.  Soon after NGDP (and NGDP expectations) started falling rapidly in August 2008, the financial crisis worsened.  I think those events were related.  It should also be noted that with a well-functioning central bank, these sorts of financial shocks do not reduce AD, or NGDP.  If the Fed targets NGDP, then problems in one sector lead to resources being re-allocated to other sectors.  There may be slightly higher frictional unemployment during this re-allocation, but nothing like the dramatically higher unemployment that results from a fall in the demand for all products (which we saw after August 2008.)  If Tyler is right, then a more expansionary monetary policy should boost not just AD, but also AS as well.  This is because with higher NGDP, there will be less fear of defaults and bank failures, which is one of the shocks driving the recession in Tyler’s view. 

    Expectations traps: They’re even more applicable to fiscal policy, by Scott Sumner: Tyler Cowen links to this post from Mark Thoma:As for Tyler’s (and others’) call for monetary policy instead of fiscal policy, here’s the problem. It relies upon changing expectations of future inflation (which changes the real interest rate). You have to get people to believe that the Fed will actually be willing to create inflation in the future when it comes time to do so. However, it’s unlikely that it will be optimal for the Fed to cause inflation when the time comes. Because of that, the best policy is to promise that you’ll create inflation, then renege on the promise when it comes time to follow through. Since people know that, and expect the Fed will not actually carry through, it’s hard to get them to change their expectations now. All that credibility the Fed has built up and protected concerning their inflation fighting credentials works against them here.Paul Krugman developed the idea of an expectations trap as a way of explaining the dilemma faced by the Bank of Japan.  Except there is just one problem.  Almost everyone agrees that Japan does not face an expectations trap.  They can devalue the yen whenever they wish, as much as they wish. ...But here’s the bigger flaw with the whole expectations trap argument. 

    Policy And The Tinkerbell Principle - Krugman - OK, I have to weigh in briefly on this debate between Mark Thoma and Scott Sumner. Mark is being too gentle here: on this issue, Scott is just wrong — actually wrong on two levels. First, he writes that But here’s the bigger flaw with the whole expectations trap argument. People think it applies to monetary policy, but they forget it applies equally to fiscal policy. (Indeed I never realized this until today.) Here’s why. Krugman’s model relies on rational expectations, indeed you can’t get the expectations trap without ratex. But if you have ratex in your model, then no policy can work unless it is expected to work. What Scott is suggesting is that all macro policy, both monetary and fiscal, is subject to what we might call the Tinkerbell Principle: you can fly, but only if you believe you can fly. But this isn’t even true about monetary policy, unless you’re at the zero lower bound. And the Tinkerbell principle NEVER applies to fiscal policy.

    Things are Different at the Zero Bound – Thoma - Here's a summary of a recent exchange with Tyler Cowen and Scott Sumner: 1. Tyler Cowen says that (New) Keynesians such as DeLong, Krugman, and Thoma advocate fiscal policy, but he thinks monetary policy is a better choice. 2. I respond by saying that monetary policy suffers from time-consistency problems that fiscal policy does not have, and that's one of the reasons I prefer fiscal policy. There are ways to revive monetary policy, but they are uncertain. 3. Scott Sumner responds by saying fiscal policy has problems too. 4. I respond by noting that the problems he is talking about are not problems in the model I am using. They may be problems in other models, and other people are free to use those models if they think they are better, but that does not change the fact that within the class of models I am using the problems are not present. 5. Scott Sumner responds by saying he was using a different model, one he made up on the spot yesterday when writing the original post. Now, assuming I've unearthed it correctly, let me turn to Scott's specific objection.

    US debt tops 13 trillion dollars for first time  US debt has reached 13 trillion dollars for the first time in history, the Treasury Department has said, stoking a political furor over government spending.Amid vast government outlays designed to end the economic crisis, the debt reached a record 13,050,826,460,886.97 dollars on June 1, according to official figures. The debt has more than doubled in the last 10 years and now stands at just under 90 percent of annual gross domestic product.

    National Debt Continues to Climb - Congress is on its holiday break this week, but there's no break in the steady increase of the national debt which is now up to $13 trillion.It took the Federal government 206 years to hit the first trillion dollars in debt.And to go from $12 to $13 trillion --just six months.In February, President Obama signed a law that's supposed to slow it down called the "Pay As You Go Act." He said "You can't spend a dollar unless you cut a dollar elsewhere."  Since then, Congress has passed about $230 billion in new spending that is not paid for.

    Number of the Week: U.S. Debt Nears Key Threshold - 88%: Gross U.S. public debt as a share of annual economic output. There’s little doubt that the U.S. needs to get its mounting debts under control. But at what point do they become a clear and present danger? By some measures, we’re reaching that point about now. As of Friday, our total national debt – the sum of all outstanding IOUs issued by the U.S. Treasury – stood at a bit more than $13 trillion, or almost 90% of our projected gross domestic product for 2010. The 90% level is significant, because recent research by economists Carmen Reinhart and Kenneth Rogoff suggests that once a developed nation’s debt crosses it, its annual economic growth tends to be about one percentage point lower. At a time when economists are saying it could take years for the U.S. to bring unemployment back down to pre-recession levels, that percentage point could make a big difference.

    U.S.'s $13 Trillion Debt Poised to Overtake GDP: Chart of Day (Bloomberg) -- President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle.” The CHART OF THE DAY tracks U.S. gross domestic product and the government’s total debt, which rose past $13 trillion for the first time this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund. The lower panel shows U.S. annual GDP growth as tracked by the IMF, which projects the world’s largest economy to expand at a slower pace than the 3.2 percent average during the past five decades. Gross, who runs the world’s largest mutual fund said in his June outlook report that “the debt super cycle trend” suggests U.S. economic growth won’t be enough to support the borrowings “if real interest rates were ever to go up instead of down.”

    Into the Abyss: The Cycle of Debt Deflation - One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” In fact, the US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.

    The Debt Cycle - A while ago, I read a comment on another website about this blog. The commentator was very positive about my analysis, but also pointed out that I was not so good on market timing. I thought of this today, as I saw the news on the latest falls in stock markets. The reason for the falls are the potential problems in Hungary, with yet more sovereign debt woes, and poor US unemployment data. In the case of the unemployment data, the really bad news is that much of the increase in employment is down to the mass hiring for the short term to conduct the US census. In fact, nearly all of the new jobs created were a result of the census. The really worrying aspect of this is that this abysmal performance is that it is taking place in the context of such massive government borrowing.I have copied the chart of US federal surplus or deficit from the St. Louis Federal Reserve. It was not so long ago that such charts were seen as regular feature of economic commentary, but they seem to have fallen out of fashion. Sometimes, it seems that it might be a good idea to remind everyone of exactly how much money is really being poured into the US economy through borrowing.

    Debt crisis: A tale of two images | The Economist - HERE are two images for you to consider. First, from Paul Krugman, a look at a chart of debt and deficit ratios: As you can see, just considering these variables, there is no reason that America and Britain should be treated differently from markets than the troubled southern European economies. America can be explained away, perhaps, by recourse to the "exorbitant privilege" associated with the world's global reserve currency. But Britain? And yet: You can see the spread on British CDS there, hugging the bottom, straight as an arrow through the crisis. What gives? One relevant factor is the term structure of British debt. Britain has far less short-term debt than most other troubled countries, which means that financing the debt is less of a problem. And because financing the debt is less of a problem, its borrowing costs are lower, which helps the government when it does need to issue new debt.

    What If We Could Eliminate All Our Debt Today? - One of the first questions David asked me was (something like):  well, couldn’t we just pay off all of the national debt today, by (somehow) collecting an average of about $40,000 per person?  (David’s $40,000 figure signaled what he was proposing to do was to pay off the $13 trillion in gross debt, not just the net–in other words, repaying the trust funds and not just our creditors.)  To which I responded that it might be theoretically possible to do that, but economically it would be stupid; unless it were done very progressively such that only old and idle wealth were confiscated (rather than income), it would cripple the economy.  (Note that the $13 trillion in gross debt is about 90 percent of GDP.)  But let’s assume we could do it without destroying our nation; let’s assume we could go “poof” and wipe the debt slate clean.  What would paying off the debt entirely today accomplish in terms of fiscal sustainability?  Not nearly as much as it would seem

    Despite U.S. deficit concerns, investors still pour money into Treasury bonds - The U.S. government debt is rising inexorably, according to the conventional wisdom in Washington, and the political system is too paralyzed to take unpopular actions to rein it in. Privately, many policymakers take it as a given that the situation will change only when the nation faces a Greek-style fiscal crisis. But apparently nobody told the people who lend the U.S. government money. On Friday, they were willing to hand over their cash to the Treasury for 10 years for 3.3 percent interest, a level so low it implies they consider the United States among the safest investments in the world. Collectively, those investors -- think mutual funds, pension funds and foreign central banks -- could lose hundreds of billions of dollars if they're mistaken and the United States has a debt crisis.  It is the Beltway vs. the bond market, and they can't both be right.

    10-Year TIPS Yield - Look at this chart and tell me that the U.S. federal government is running up against the limits of its debt capacity...

    Foreign central bank U.S. debt holdings grow - Fed (Reuters) - Foreign central banks' ownership of U.S. Treasuries and agency securities at the Federal Reserve rose in the latest week for the third week in a row, data from the U.S. central bank showed on Thursday.The combined holdings of Treasuries and agency securities by foreign central banks at the Fed grew by $8.868 billion to $3.086 trillion in the week ended June 2.Treasuries held by overseas central banks at the Fed rose by $6.39 billion to $2.277 trillion. Foreign central banks' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae (FNM.N) and Freddie Mac (FRE.N), rose by $2.479 billion to $808.93 billion in the latest week.Overseas central banks, particularly in Asia, have been huge buyers of U.S. debt in recent years and own more than a quarter of marketable Treasuries. Japan and China are the biggest two holders of Treasuries.

    Should government be spending more when real interest rates are low? -Let's look again at Brad DeLong on fiscal policy: The U.S. Treasury can borrow for thirty years, taking all CPI risk onto its own books, and pay only 1.83% per year in interest?Wow. It's not just that a greater amount of government investment meets the benefit-cost test when the government can borrow at 1.83% in inflation-proof bonds for thirty years, a whole bunch of tax postponements do as well. And so do a whole bunch of expanded social welfare programs. And so do a whole bunch of government issues of debt which are then invested in risky private ventures....the cost of borrowing for the government has fallen--the market value today of future cash tax flow earmarked for debt repayment has gone way, way up--therefore we should dedicate more future cash flow to debt repayment by borrowing more. There is no "but even." Expansionary fiscal policy is a good idea, To explain why I view it differently, let's start with a parable from the private sector. 

    The Pain Caucus - Krugman - NY Times: What’s the greatest threat to our still-fragile economic recovery? Dangers abound... But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain. When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression. Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom...

    The good professor, lack of agency, and pain - Krugman's column today ends: More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.  Come on. Bang, meet whimper. "Conventional wisdom" never made anybody suffer. It's people who do that. Who's suffering the pain? Who's inflicting it? Let me search through Krugman's column, looking for agency....Here's an extract, marked up as follows: Passive, agency-free verbiage; abstract agents, like ideas; and named institutional agents. There are no human agents in Krugman's column, so there's no markup for them. Sad, sad, sad. I understand that one deformation professionelle in the professariat is treating the Idea as a driver, but Krugman's column is just ridiculous. In a different, better world, a liberal lion like Krugman would have used his bully pulpit on Izvestia to call out accounting control fraud -- which, by definition, happens at the elite, CEO level -- and call for the prosecution of those who brought down the financial system

    OECD Economic Outlook: “Disconnected from real needs”? - OECD - Last week, we reported on the latest OECD Economic Outlook. Writing in the New York Times, Paul Krugman was highly critical of the Organisation’s analyses and policy recommendations. Here we summarise Krugman’s argument and the reply by OECD Deputy Secretary-General and Chief Economist Pier-Carlo Padoan.

    I Do Not Think That Word Means What You Think It Means, OECD Edition - Krugman - The OECD’s chief economist responds to my column about the pain caucus: To be clear, we are not arguing for contractionary policy, but for progressively less stimulus. In fact, stimulus should not be withdrawn completely until the economy returns to full employment. But the process should be started fairly soon, to take into account the well known long and variable monetary policy lags. I suppose there is some interpretation of the word “contractionary” in which raising the Fed funds rate from zero to 3.75 percent by the end of 2011, even though the OECD’s own forecast says that the unemployment rate will be above 8 percent and the inflation rate only 1 percent, isn’t contractionary. But it sure would tend to derail the economic recovery.

    Rashomon In The OECD - Krugman - The horizontal axis shows gross debt as a percentage of GDP at the end of 2009; the vertical axis shows the budget deficit as a percentage of GDP in 2009. Each point represents one advanced economy; I’ve labeled a few countries of interest. Japan is, literally, off the chart, with enormous debt and a large deficit.As you can see, I’ve identified the GIPSIs — the Club Med plus Ireland countries that are facing serious questions about solvency. As you can also see, by the debt-and-deficit criteria the US, UK, and (as you can’t see) Japan look similar enough to the crisis countries that if you didn’t know better, you might expect them to be in the same boat.But they aren’t. As of right now, the interest rates on 10-year bonds are 3.59% in the UK, 3.36% in the US, 1.29% in Japan. CDS spreads for Japan and the UK are only about a third of the level for Italy.

    Congressional Deficit Hawks Act to Slow Growth and Destroy Jobs… This could have reasonably been the headline of news articles on the decision of many moderate Democrats to demand a smaller package of unemployment benefits and assistance to state and local governments. Instead, neither article noted at all the negative impact that the cuts would be expected to have on growth. The NYT piece even invented an alternative history, telling readers that the current debt and deficit levels come from a "lavish spending spree engaged in by both parties over the past decade," as opposed to being the result of an economic collapse caused by the bursting of the housing bubble.The plans by the deficit hawks seem likely to trim $30 billion in unemployment benefits and aid to the states from the bill. Using the methodology in the Romer-Bernstein paper put out by the Obama administration to promote its stimulus package, the cuts will reduce GDP by approximately $50 billion. This will correspond to a job loss of more than 300,000 people. It is irresponsible to report on plans to reduce deficits without noting their likely impact on the economy.

    Weighing the Deficit and a Jobs Bill - NYTimes - You are a member of the Senate, and you’re starting to get spooked by the deficit. Polls show that voters are worried about it. Economists are, too. Something needs to change. But you’re tired of politicians who pound the table about the issue without actually naming programs they would cut or taxes they would increase. You know that reducing the deficit is like losing weight: it’s as straightforward as it is difficult. “We have to stop spending money we don’t have,” as Jim Cooper, a House member from Tennessee, said the other day. When Congressional leaders announced plans for a new $200 billion jobs bill recently, Mr. Cooper and other centrist House Democrats saw a chance to do something tangible. Only about a third of the bill’s cost would have been paid, by closing tax loopholes for investment managers and overseas businesses. The remaining $134 billion would have been added to the deficit. In response, the centrists said no and forced the leaders to cut the bill’s spending nearly in half. Now the slimmed-down bill is coming to the Senate, and you need to decide what to do.

    The ole Snake Oil Salesman - I don’t know what these Economists think; I only believe that Government Spending which is not labor-intensive in policy are worthless, and that the real culprit is the Tax Cuts themselves. Be sure to read the Commentary on the Post. We have a problem with Private Sector lack of investment opportunities under shortened Consumption schedules, and Tax Cuts simply provide funds to invest in the rising Government securities. It remains a question of proper investment, and neither Government or Private Sector is accomplishing that reality. I sincerely believe that a 4% rise in the real Tax rates would be an immense benefit to Government, Consumer, and Investment circles. I like that idea so much that I will advocate for a 7% real Tax rate increase, though I know I could never achieve any support. Here is the Thing: Nothing We have tried has yet to increase Private Sector movement to greater activity. We will get nowhere with Government Spending until we get that activity. We must get that performance, even if We have to reopen the CCC camps.

    Federal Budget Deficit Was $941 Billion During the First Eight Months of Fiscal Year 2010 CBO Director's Blog - The federal budget deficit was $941 billion during the first eight months of fiscal year 2010, CBO estimates in its latest monthly budget review, $51 billion less than the shortfall recorded over the same period last year. Both revenues and outlays were lower than the corresponding amounts during the same period last year, by 2 percent and 3 percent, respectively. Outlays through May were $80 billion (or 3 percent) lower than in the first eight months of fiscal year 2009, CBO estimates. The net reduction in spending reflects sharply lower outlays for the costs of the Troubled Asset Relief Program, for Treasury’s payments to Fannie Mae and Freddie Mac, and for the net costs of federal deposit insurance; altogether, outlays for those activities declined by $336 billion relative to outlays in the first eight months of 2009. Apart from outlays for those financial programs, spending through May was $257 billion (or 12 percent) higher than in the same period last year, CBO estimates.

    How the Deficit Commission Painted Itself into Corner on Social Security - It was well understood as far back as the publication of Butler and Germanis' Leninist Strategy (11th article here) in 1983 that cutting benefits in the near term for existing retirees and even for newly approaching retirees was both politically deadly and deeply inequitable, these people simply didn't have time to do alternative planning through Personal Retirement Accounts or anything else. This reality was explicitly recognized by Bush's 2001 Commission to Strengthen Social Security where it was established as Guiding Principle no 1 of 6 CSSS. Now how long this grace period should be and whether it would be permanent for that class of retirees, or whether they would ultimately share in whatever index changes were adopted vary across plans. What doesn't vary is the fact that no plan entirely based on benefit cuts can move that 2015 target number.The why and how of this below the fold.

    Why should we listen to deficit hawks? - Back in September of 2008, both President Bush and the Democratic leadership in Congress insisted that if we did not immediately hand over $700bn to the banks, the whole financial system would grind to a halt.The threat worked – the banks got their $700bn from Congress and much more from the Fed – with few questions asked. With the banks back on their feet, the Wall Street crew and their accomplices in the economics profession are again feeling their oats. They are insisting that we have to put our hopes for economic recovery on the back burner. Instead, we have to focus on deficit reduction. The reason is that we have to soothe financial markets.The claim is that if we don't act aggressively now to reduce the budget deficit then the "bond vigilantes" will start a run on US debt just as they have recently done with Greece. This is supposed to make us so scared that we will accept large cuts in social security and in other important programmes..

    Letter to a Seventh Grader - Douglas Elmendorf, CBO Director's Blog - A short time ago, I received an interesting letter from a young man in Michigan asking about federal budget deficits. I thought that perhaps other students would be interested in the kinds of questions he asked and how I answered him, so I’ve decided to share my letter to him with all of you. Here’s what I wrote:

    As Governments Borrow, Many People Save - Government deficits have stabilized in recent months, and so has private savings. It is likely that the private sector dampens the effects of government borrowing. Before the recession, which officially began at the end of 2007, the amount of government dissaving (combined for federal, state and local governments) was about zero. Thanks in large part to federal government actions, quarterly public dissaving increased to $400 per person in the first two quarters of the recession and by an additional $400 per person in the first two quarters of 2009. Since then, public dissaving has stabilized at $700 to $800 per person.National savings — the sum of public and private savings — is ultimately what matters in shaping living standards in the future; the government deficit matters only to the extent that is affects national savings. To the degree that private saving offsets public dissaving, public dissaving leaves no negative legacy.

    Deficit Dementia - Across the industrialized world, governments have responded to the economic crisis by running enormous fiscal deficits, rediscovering a deep, previously unacknowledged love for the legacy of John Maynard Keynes. Now there seems to be a gathering consensus that these deficits are unsustainable and have to be cut as quickly as possible. This seems to be the word from the Group of 30, the OECD, the EU, Obama’s deficit commission and the US Congress. If so many governments simultaneously decide to withdraw stimulus, the combined effect could well be to tip the world into a second round of economic tailspin. Just for starters, assume a multiplier of one; then the average reduction in fiscal deficits as a percentage of combined GDP has to be deducted from projected growth rates. Given plausible numbers on both sides, the result could well be negative. But the economic myopia is, if anything, even more fundamental. The deficit hawks seem to have forgotten, if they ever learned, the granddaddy of all accounting identities: a country’s current account is equal to the sum of its domestic budget positions.

    Can you feel the recovery? - MY VIEW on the current American deficit situation is fairly straightforward. In general, the real danger (in terms of a potential for significant increases in American borrowing costs) stems not from current borrowing but from the long-run impact of growth in health spending. Deficits will drop precipitously from the current level through the middle of the decade as the recovery takes off, and whatever chance there was that markets would balk at present borrowing was erased by the European debt crisis, which gave Treasuries yet another boost. So I was prepared to take issue with the meat of David Leonhardt's argument in this piece, on the fate of the latest federal jobs package:Now the slimmed-down bill is coming to the Senate, and you need to decide what to do. It would still add about $54 billion to the deficit over the next decade. This is no dilemma. The $134 billion in borrowing the first iteration of the bill would have added is worth roughly 1% of the current national debt. It's practically a rounding error.

    You Want To Cut The Deficit? Here's How. - Forget everything you’ve heard about how hard it is to cut the federal deficit. Once you disregard the partisan rhetoric and put aside the election-year demagoguery, you rapidly come to a conclusion that is seldom stated as directly as this: The federal government is going to have to stop doing some of the things it’s currently doing.This applies to tax breaks as well as spending programs. In much the same way that what the government does through spending will have to come under a great deal of scrutiny, much of what Washington does through the tax code will also have to be seriously — and perhaps harshly — reappraised. With the notable exception of the $700 billion stimulus bill adopted last year, almost everything the federal government does on both the spending and tax sides of the budget in one way or another is an ongoing effort. Very few programs and provisions are put in place with planned sunsets; the assumption is that they will continue.

    The Real Problem With PAYGO - Most would probably say that the biggest problem with PAYGO is that it isn't enforced rigidly enough--Congress routinely exempts itself from it by declaring an emergency and suspending PAYGO rules. While this is indeed a problem, it isn't really a problem with PAYGO but with Congress's lack of budgetary discipline and overeagerness to ignore its constraints when it suits itself to do so. What I am concerned about is something different, a problem that is inherent in the nature of PAYGO itself. That is the idea that particular pieces of legislation need to be matched dollar-for-dollar with particular budgetary offsets, whether tax increases or budget cuts.This we see in the ridiculously-named “American Jobs and Closing Tax Loopholes Act of 2010,” whose technical explanation runs to 317 pages and makes a number of very important changes to the Tax Code. These include fundamental changes in the way the foreign tax credit is calculated that look more like punishment of multinational corporations for engaging in outsourcing than elimination an unjustified tax loophole.

    The Senate’s Push To Cut Paris Hilton’s Taxes - Unemployment is near 10 percent. Long-term unemployment is at a record high. Teachers are being laid off across the country and state governments are slashing services to the bone. $80 billion could do a lot of good addressing any of these problems. However, the U.S. Senate is considering spending that much money on something else: cutting taxes for the richest 0.2 percent of households in the country. The 2003 Bush tax cut included a gradual phase-out of the estate tax, from its 2001 level of 55 percent with a $1 million exemption to its complete repeal this year. However, to make the long-term cost of the cut seem less severe, the legislation stipulated that the tax come back in 2011 at the 2001 level. At the time, Bush’s team believed that Congress would never reinstate the tax, after having lived for at least one year without it.

    Cutting Taxes and the Deficit - Though many have tried, nobody can defy the iron law of budget gravity. It states: Deficits = Spending - Taxes When Paul, Hayworth, Rubio, and Angle proclaim that they want to balance the budget and reduce taxes, they are implying gargantuan reductions in federal expenditures. As explained previously, just to achieve President Obama's goal of reducing the deficit to 3 percent of GDP will require spending cuts and tax increases inconceivable in today's political climate. In the tea party fantasy world, we are talking about spending cuts equal to at least 6 percent of GDP. That's about $900 billion in today's terms. To get there you would, for starters, have to take drastic measures like eliminating all Social Security benefits. Or how about zeroing out the defense budget?

    In Praise of Tax Cuts! - The good thing about tax cuts is that they are timely and targeted. You can send check to families faster than you can set up federal projects. The bad thing about tax cuts is that there's no guarantee that the money is actually spent to stimulate the economy. Families might just sit on the cash, and the impact on overall demand is negligible. Tax cuts might have been especially well-suited to this downturn, Mark Thoma writes, because we've suffered through what he calls a balance sheet recession. The collapse of the Dow and real estate markets blew a hole through families' personal accounts and retirement plans. As a result, many families looking to pad their savings pocketed the tax cuts in the stimulus. That's bad for stimulating demand in the short term. But it's good for re-building balance sheets to get future consumption on stable footing.

    Does A Bank Tax Make Sense? - The temptation to raise taxes on financial institutions is almost too great to resist. These institutions were largely responsible for the recent economic crisis. While the financial collapse cost millions of Americans their livelihoods, many top bank executives happily took their bonuses (in some cases paid with taxpayer money). And the arrogance and sense of entitlement that oozes from some is beyond offensive.  But besides making the rest of us feel better and perhaps providing a fiscal windfall for deficit-strapped politicians, would a tax on financial institutions benefit society? And if so, what form should it take? These are question being asked not only in the U.S. but by much of Europe as well. The answers, sadly, are not so clear cut.   Three of the nation’s top tax experts—Doug Shackelford, Dan Shaviro, and Joel Slemrod—have put their heads to together to try to sort it all out. They didn’t find the ideal tax, but they have developed a useful way to think about bank taxes. Their paper is a useful follow-up to a recent speech by Minneapolis Fed President Narayana Kocherlokota.

    More on Taxing Banks - The other day, I posted on a paper by Doug Shackelford, Dan Shaviro, and Joel Slemrod that is a terrific framework for thinking about bank taxes. The authors looked at four ways to tax the banking business in the wake of the recent financial collapse—a transactions tax, a tax on bonuses paid to employees, and two levies on banks themselves.They rejected the first two as either misguided or unworkable, but suggested there might be some benefit to taxing financial institutions. They looked at two basic models: A tax on “excess” profits similar to a plan developed by the International Monetary Fund, and a tax on certain bank liabilities. Several readers have asked for more about these two ideas, so here goes:

    The Tax Breaks for Private Equity Partnerships - The House of Representatives approved a bill last week that would substantially raise the tax rate on the carried interest earned by the organizers and managers of private-equity partnerships. The legislation prompted outrage from The Wall Street Journal editorial page and others.The Journal, in a lead editorial, likened the American Jobs and Closing Tax Loopholes Act of 2010 to a vengeful Mel Gibson in the movie “Payback,” who, it said, “casually shoots holes in the luggage and suits of a high-living mobster played by James Coburn, who responds, ‘Man, that’s just mean.’ ”Congressional interest in carried interest is believed to have been stimulated in 2007 by a seminal article by Victor Fleischer, a professor of law at the University of Colorado, who made the case for such a tax increase. To see what this is about, consider this sketch of a simple private equity partnership with an investible fund of $1 billion.

    The government cannot be responsible for systemic credit risk - Brad DeLong‘s latest has me sputtering.  (He seems to have fallen for Caballero’s view that the government has to insure private markets against tail risk by insuring private assets — which I have addressed many times.  Note that DeLong already has a second post up on this topic.) When there is excess demand for safe, liquid, high-quality financial assets, the rule for which economic policy to pursue – if, that is, you want to avoid a deeper depression – has been well-established since 1825. If the market wants more safe, high-quality, liquid financial assets, give the market what it wants.The policy “well-established since 1825″ to which deLong refers is the Bank of England’s practice of lending generously into a financial panic.  Unfortunately, the historical episodes to which deLong refers are not really comparable to our current situation.

    In Busan, U.S. to Push for International Bank Rules -— The Treasury secretary, Timothy F. Geithner, said Wednesday that the United States would urge the world’s largest economies to pursue a financial overhaul agenda that would “restore fiscal sustainability over the medium term.” “That is a shared imperative,” Mr. Geithner told reporters at a briefing. “We all recognize it.” Mr. Geithner, who will meet on Friday and Saturday with finance ministers and central bank governors from the Group of 20 nations, said he would press for greater transparency, new restrictions on derivatives trading and more stringent capital and liquidity requirements for banks.

    Global Bank Pact Advances - International regulators are moving closer to an agreement that would require large multinational banks to raise vast sums to cushion any future losses. But in a concession to the banking industry and some governments, the rules are likely to take effect later than expected, according to people familiar with the matter.In the aftermath of the worst banking crisis since the Great Depression, regulators and finance ministers from more than 20 nations are racing to hammer out by year end the new rules concerning bank capital and liquidity. The overhaul is expected to be a focal point of this weekend's Group of 20 meetings in South Korea. It is also expected to gain momentum at a meeting of the Basel Committee on Banking Supervision. The talks remain fluid, and some U.S. officials are nervous that nationalistic turf battles could threaten a final deal, say people familiar with the process.

    Delaying Basel III - David Enrich and Damian Paletta have the latest news on the Basel III front, and the compromise seems to be coming into focus: not so much on the substance, which remains more or less intact, but rather on the timing, which could get pushed out as much as a decade. Kevin Drum is OK with that: I don’t have any problem with this. And it sounds like no one else does either. If the new requirements are stiff enough to actually make a difference, we’d be nuts to demand that banks adopt them immediately in an environment where growth is already slow, lending is anemic, and raising risk capital is difficult. The real question isn’t so much the timeframe for adopting the new rules, it’s whether the rules are any good.This makes some sense, but as anybody who’s ever faced a deadline knows, if you commit to doing something by some far-off date, you’ll end up doing absolutely nothing until suddenly it rushes up on you.What’s more, it’s worth remembering that Basel II was meant to be fully implemented by 2004, and still hasn’t really been adopted in the U.S.

    G20 drops support for fiscal stimulus - Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

    3,000 Pages of Financial Reform, but Still Not Enough - NYTimes -FOR decades, until Congress did away with it 11 years ago, a Depression-era law known as Glass-Steagall ably protected bank customers, individual investors and the financial system as a whole from the kind of outright destruction we’ve witnessed over the last few years. Glass-Steagall was a 34-page document. The two bills that the Senate and the House are currently chewing over as part of what may be a momentous financial reordering weigh in at a whopping 3,000 pages, combined. Yet despite all that verbiage, there are flaws in both bills that would let Wall Street continue devising financial black boxes that have the potential to go nuclear. And even if the best of both bills becomes law, investors, taxpayers and the economy will remain vulnerable to banking crises.

    Dallas Fed's Fisher Rages Against TBTF, Says Only Way To Remove Systemic Risk Is Shrinking The Megabanks - In a speech before the SW Graduate School of Banking, Dallas Fed's Richard Fisher comes out swinging, blasting his boss Ben Bernanke and his policy of globalized moral hazard: "Let me make my sentiments clear: It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system. It is not difficult to see where this dynamic leads—to more pronounced financial cycles and repeated crises." And just in case listeners missed the point, he followed up: "Just this morning, the Washington Post summarized the impasse that inevitably blocks treatment of the TBTF pathology. In an article on preparation for this weekend’s Group of 20 talks on bank reform, it was noted that “some” participants “remain hesitant to lean too hard on banks they consider vital to their national economies.”

    Financial Re-Regulation and Democracy, by Joseph E. Stiglitz - It has taken almost two years since the collapse of Lehman Brothers, and more than three years since the beginning of the global recession brought on by the financial sector’s misdeeds for the United States and Europe finally to reform financial regulation.But the battle – and even the victory – has left a bitter taste. Most of those responsible for the mistakes – whether at the US Federal Reserve, the US Treasury, Britain’s Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks, have not owned up to their failures.Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Fed, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes and the extent to which it is evident that it reflects the interests of the banks that it was supposed to regulate.

    U.S. Financial Reform: The roots of the problem go deeper - What should we make of the financial reform laid out in the Congress’ bill? The approach is based on the assumption that the financial system is basically sound but needs “more government” in the form of more regulation — as distinct from structural change The bill grants more resources and more authority to those charged with supervising the industry, including to the Federal Reserve as the nation’s chief financial regulator; it requires most, but not all, derivatives to be backed by a third-party clearinghouse, so that if either side fails to meet its obligations the clearinghouse steps in to cover them; it creates a consumer protection agency; and it gives the government resolution authority to take over a failing bank and dismantle it in an orderly way.. However, the danger of trying to control the banks through regulation (without bigger changes to the structure and scope of banking) is that it ignores the big lesson from the experience of 1970-2010: that the political strength of the US/EU financial sector enabled it to (a) erode banking regulation, and (b) create a parallel non-bank financial sector with almost no regulation

    Reconsidering the Rush to Reform the Financial Sector - I wish I could say that the financial reform legislation that is under consideration in Congress makes the best possible attempt to insulate the financial system from problems in the future, but I can’t make that claim. The legislation still needs to go through reconciliation to bring the House and Senate versions together, but the reforms that appear set to be enacted feel like a hodgepodge of measures rather than a set of consistent laws and regulations designed to counteract the fundamental failures within the financial system. The policies that emerged seemed to depend on what was possible rather than an overriding sense of the fundamental issues that needed to be addressed. I had hoped that financial legislation would proceed by first identifying the major problems that caused the crisis or amplified its effects, and then by putting specific measures into place designed to fix those problems. But that’s not how it went. Instead, it seemed like it was a little bit of this and a little bit of that with no real sense of overall purpose.

    Another View: Punting Financial Reform - It is certainly remarkable that S. 3217 — the Restoring American Financial Stability Act of 2010 (have all the good names for laws been taken?) — covers more than many pundits had thought politically possible.  Of far more interest to those attempting to understand the bill’s implications, it is chockablock with “punts” to the regulations that will follow once the bill is enacted into law. Politically, it turns out, the Senate bill owes its surprisingly robust content to its ambiguous scope: 1,566 pages that do not really address how the landscape of our financial system will look. Among the issues left for future resolution are, alas, several of the most important matters:

    Op-Art - Shorting Reform - Our earnings are robust, our compensation has returned to its naturally high levels and, as a result, we have very nearly regained our grip on the imaginations of the most ambitious students at the finest universities — and from that single fact many desirable outcomes follow. Thus, we have almost fully recovered from what we have agreed to call The Great Misfortune. In the next few weeks, however, ill-informed senators will meet with ill-paid representatives to reconcile their ill-conceived financial reform bills. This process cannot and should not be stopped. The American people require at least the illusion of change. But it can be rendered harmless to our interests. To this point, we have succeeded in keeping the public focused on the single issue that will have very little effect on how we do business: the quest to prevent taxpayer money from ever again being used to (as they put it) “bail out Wall Street.” As we know, we never needed their money in the first place, and by the time we need it again, we’ll be long gone. If we can keep the public, and its putative representatives, fixated on the question of whether their bill does, or does not, ensure there will be no more bailouts, we may entirely avoid a discussion of our relationship to the broader society.

    DTCC Posts CDS Market Activity Snapshot - CDS are not ready for prime time (i.e. exchange trading) Explanation => Market Activity Analysis Performed for the ISDA Credit Steering Committee. Data (The sample covers the nine month period beginning June 20, 2009 and ending on March 19, 2010) => Trade Information Warehouse Data Snapshot. Media Statement => DTCC Posts Data Industry Will Use to Increase Clearing of Credit Derivatives

    What You Can Do To Bring Wall Street Under Control- The most important remaining battle to rein in Wall Street is over Senator Blanche Lincoln’s measure to stop the big banks from being subsidized by taxpayers for their risky derivative trades. Miraculously, it’s still in the bill but it’s on life support. The bill has now gone to the conference committee where differences between the House and Senate bills are to be ironed out.But official Washington (read: dependent on Wall Street for money) is dead set against it. Even Barney Frank — who Massachusetts voters used to consider a reliable progressive until he became chair of the House Financial Services Committee — has vowed to kill Lincoln’s provision. And the White House says the measure is “not core,” which in Washington-lingo means “you’re free to dump it.” Big, big money is at stake.  Wall Street’s five largest banks have a corner on the trade, raking in about in about $30 billion in over-the-counter derivatives last year. It’s the single largest reason they’re too big to fail. So they’re spending like mad on Washington lobbyists and campaign donations in order to keep the subsidy in place.

    Consumer agency that won't die - Elizabeth Warren --When the lobbyists for the big banks announced last summer that they would kill the consumer financial protection agency, anyone versed in the ways of Washington would have believed them. After all, the big banks had all the lobbying muscle, money and connections. Time and again, the big banks’ lobbyists and their allies declared the agency dead.  But the consumer agency made it through the House and the Senate. A conference committee will soon convene to reconcile the two chambers’ versions. Insiders say the lobbyists are taken aback that they could not kill the agency outright but are promising to weaken it enough to permit business as usual for their high-paying clients.  The agency made it this far because the lobbyists were never able to undercut the basic sense behind consolidating seven different consumer protection bureaucracies into one streamlined agency that would be accountable to American families. The fact that the agency aims to help make credit card agreements and mortgage documents short and readable helped seal the deal.

    A Primer on the Consumer Financial Protection Agency -  With a financial reform bill passed in both the Senate and the House, it seems that a Consumer Financial Protection Agency is going to become a reality. It's interesting to look back at the original development of the idea and then see where we are now--and of course opening up comments for speculation on what the final agency will, and should, look like. If nothing else, the evolution of the names for the agency have been interesting--and remain unsettled! (It's a "Bureau" in the Senate bill, and an "Agency" in the House bill). For simplicity here, I call it the CFPA.

    Federal Reserve Adopts Megabanks’ Arguments, Warns Against Added Protections For Small Business Credit Card Users - The Federal Reserve warned Congress in a recent report that protecting small businesses from the kind of "harmful" credit card practices it prohibits from being used on consumers would lead to a reduction of credit and higher borrowing costs for businesses -- a similar argument advanced by the banks the Fed regulates.The American Bankers Association applauded the report and the Fed's recommendation.The report comes at a time when Congress is debating how to stimulate moribund bank lending levels to small businesses, which have been hit particularly hard by the credit crunch, financial crisis and subsequent recession.

    Why is the Fed so bank-friendly on credit cards? -Shahien Nasiripour has found an interesting report from the Federal Reserve, looking at whether the credit-card rules which apply to individuals should apply to small businesses as well. The Fed, weirdly, fudges the question, but it’s clear to me that small businesses deserve all the same protections that individuals get.At the same time, I’m impressed with how conservative small businesses are when it comes to credit cards:Despite the widespread use of credit cards, only a minority of small businesses—18 percent—reported borrowing on credit cards… In 2003, when 24 percent of small businesses reported borrowing on credit cards, credit card debt accounted for just 1.4 percent of all debt held by small businesses and the majority of credit card–borrowing firms reported borrowing less than $5,000 in total on all their credit cards.Small businesses, it seems, are like large businesses: they’re fundamentally conservative, and the overwhelming majority of them pay off their credit cards in full every month.

    The Consensus On Big Banks Shifts, But Not At Treasury - Attitudes towards big banks are changing around the world and across the political spectrum.  In the UK, the new center-right government is looking for ways to break them up: “We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.” The European Commission, among others, signals that a bank tax is coming; presumably, as suggested by the IMF, this will have higher rates for bigger banks and for banks with less capital.  And other European officials are increasingly worried by the lack of capital in German banks, by the recent reckless lending sprees in Ireland and Spain, and by the dangers posed by banks that are much bigger than their home countries (e.g., Switzerland). Yet top Obama administration officials refuse to change their opinions in the slightest; they have dug in behind the idea that they represent the moderate center on banking policy.  This is a weak position; it is simply a myth with no factual basis

    Obama Talks Left To Move Right, As Wall Street Criminals Are Given A Free Pass And Reforms Are Watered Down - In several high profile speeches, Obama lashed out at Wall Street for its greed and mendacity, proposing financial reforms that appeared to be hard hitting, if only because of the way the lobbyists for the financial services industry squealed about them.But even as he was feigning left, he and his main economic operative, Tim Geithner, were moving right, to kill off amendments that the bankers hated, like Senator Bernie Sanders’s proposal for a deep audit of the Federal Reserve Bank and the Brown-Kaufman Amendment that would have broken up the six biggest banks in America.As John Heilman explained in New York Magazine, “Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats.” He used an old trick: embracing reform publicly while modifying its toughest provisions privately. No wonder bank stocks went up when the bill passed.

    Report: Revolving Door Spins Quickly Between Congress, Wall Street  -- Organizations in the financial services sector have deployed at least 1,447 former federal employees to lobby Congress and federal agencies since the beginning of 2009, according to a joint analysis of federal disclosure records and other data released today by Public Citizen and the Center for Responsive Politics. (Download the full report here: FinancialRevolvingDoors.pdf ) This small army of registered financial services sector lobbyists includes at least 73 former members of Congress, of whom 17 served on the banking committees of either the U.S. House of Representatives or the Senate. At least 66 industry lobbyists worked for these committees as staffers, while 82 additional lobbyists once worked for congressional members who currently serve on these key committees.Further, at least 42 financial services lobbyists formerly served in some capacity in the U.S. Treasury Department. At least seven served in the Office of the Comptroller of the Currency, including two former comptrollers.“Wall Street hires former members of Congress and their staff for a reason," said David Arkush, director of Public Citizen’s Congress Watch division. "These people are influential because they have personal relationships with current members and staff. It’s hard to say no to your friends.

    BP and the Bankers -  Question of the Day: What do the oil catastrophe and the Wall Street collapse have in common? Three big things, I'd say.In both cases, a powerful, politically protected industry invented something that could not easily be repaired when it broke. We seem to be entering an age when complex technologies, whether financial or physical, sometimes literally have no solutions when they go haywire in unanticipated ways. Secondly, in both cases the proverbial ounce of prevention was not applied. Had existing laws been enforced, and had the political process not corrupted the regulatory process, these man-made calamities didn't need to happen.But the worst common element is this: both crises are teachable moments that our president could be using to transform public opinion. Yet despite these gifts from the progressive gods, President Obama seems congenitally unable to rise to the occasion.

    Reducing the risk in the financial system - Teachers are offered (up until recently) nearly guaranteed employment for life with pre-specified and certain raises. People who don’t like risk do well to become teachers.Finance executives, in contrast, are paid heavily in stock options in order to align their incentives with their shareholders. As Murphy and Hall argue, paying employees in options means paying them with undiversified and illiquid assets, which means that the value of the options to risk averse employees is half of what the option costs the company. So the more risk hungry someone is, the more they value being paid in options, the more they will want to be a finance executive.  Given this selection, it’s no wonder we end up with risk hungry finance executives.

    Goldman Sachs Spies A Way Out Of Fraud Claims - CNBC - Goldman Sachs may have found a way to compromise with the Securities and Exchange Commission that will allow both sides to declare victory. The clock is ticking on the SEC’s case against Goldman Sachs. The SEC accused Goldman with violating Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Both are anti-fraud provisions. Like most anti-fraud statutes, Section 10(b) requires the government to prove a fraudulent intent. The first subsection of Section 17(a) also requires proof of fraudulent intent. But the second and third subsections of 17(a) do not require any proof of intent to defraud. This makes accusations based on the second and third subsections much easier to prove—and perhaps easier for Goldman to stomach. In fact, subsection 17(a)(2) does not even employ any form of the word “fraud” or “deceit.” It makes the sale of a security or a derivative unlawful if a material omission renders the sale merely “misleading.”

    Escape Clause Seen for Goldman and the S.E.C. - Is there a way for Goldman Sachs and the Securities and Exchange Commission to reach a compromise on settling securities fraud charges against the firm? John Carney of thinks there is, and he believes Goldman and the S.E.C. may both be able to claim victory in their legal fight. Up to now, Goldman has resisted a conventional Wall Street settlement, in which it would pay a fine and agree not to commit further securities violations, while neither admitting nor denying the S.E.C.’s accusations. Mr. Carney says the firm insists on denying that it intentionally committed fraud. But Mr. Carney thinks the answer to an agreeable settlement might be found in technical differences in the fraud sections of the Securities Act of 1933 and the Exchange Act of 1934. Here is his explanation:

    HARRY MARKOPOLOS & THE "NEW" SEC - What have we learned? What's changed at the SEC? In search of some answers, I recently talked with Markopolos by phone. I asked what he thought of the "new" SEC, which has had a house cleaning of sorts. The Commission recently published a list of post-Madoff reforms, announcing that "the agency is continuing to reform and improve the way it operates.""They're making evolutionary changes at a rapid pace," Markopolos says of the changes at the SEC. Those changes have arrived "much more rapidly than any government agency has made in the past." That's not surprising, of course, considering that the SEC "came close to being put out of business," according to Markopolos.The threat of death is a great motivator. And certainly there have been leadership changes in the upper ranks. The SEC is also asking Congress for expanded powers to investigate, regulate and prosecute securities fraud. An encouraging start, but not nearly enough, explains Markopolos, a certified financial analyst (CFA) and certified fraud examiner (CFE).

    The Continuing Mystery of the Lehman Black Hole -We’ve taken the liberty of designating the biggest money pits of the financial crisis as “black holes.” And one the characteristics of black holes is that anything that crosses the so-called “Schwarzschild radius” does not escape. That means that it is impossible to obtain any information from inside the Schwarzschild radius.That feature seems particularly relevant as far as AIG and Lehman are concerned. With AIG, there has been no interest in ascertaining why a bailout that was supposed to total $85 billion, max, was retraded four times, with the amount going to AIG rising each time. By contrast, as we have pointed out repeatedly, UBS was made by the powers that be in Switzerland to explain in detail why it needed a rescue.For Lehman, despite the voluminous so-called Valukas report, prepared by the bankruptcy examiner, the biggest question remains unanswered. How could an investment bank that sported a positive net worth suddenly show such massive losses? Even Lehman skeptics were stunned at the magnitude of the losses.

    Grandma Lehman Sues Big Bad Wolf JPMorgan - The lawsuit (pdf) filed by the bankruptcy estate of Lehman Brothers against JPMorgan Chase contains yet another description of a giant bank eating a customer. And just as you would guess, the heart of the problem is derivatives.The complaint begins by explaining the relationships between Lehman and JPMorgan. Lehman was a full-service stock broker. JPMorgan provided clearing services for Lehman’s securities business. JPMorgan was the lead lender and administrator on a $2 billion unsecured revolving line of credit. Lehman also had a large derivatives portfolio with Jamie Dimon’s bank

    Answers on Credit Ratings Long Overdue - One of the enduring questions of the financial crisis is how the credit ratings establishment got so much so wrong for so very long. How could century-old institutions like the Moody’s Investors Service give their triple-A blessings to subprime junk? It is time — in fact, past time — for Washington to get some answers. Because despite talk of a shake-up, the companies that dominate the ratings business hope to avoid the radical overhaul their critics are calling for.  On Wednesday, the Financial Crisis Inquiry Commission, the federal panel that is trying get to the bottom of the financial crisis, will examine the ratings industry and its many failures at a hearing. There is no shortage of hard questions to ask, including the big one: How can we prevent these institutions and their sometimes cockamamie judgments from endangering our financial system again?

    Moody’s Chief Says CDO Ratings ‘Deeply Disappointing’ (Bloomberg) -- Moody’s Corp. Chief Executive Officer Raymond McDaniel said his company’s ratings of collateralized debt obligations and residential mortgage securities in the past several years have been “deeply disappointing.” McDaniel said the collapse of the housing market and subsequent financial crisis were of a magnitude “many of us would have once thought unimaginable,” according to written testimony submitted to the U.S. Financial Crisis Inquiry Commission before a hearing today in New York on credit ratings. He said he is proud of Moody’s reputation and the firm’s record of 100 years of rating trillions of dollars in debt.  “However, the performance of our credit ratings for U.S. residential mortgage-backed securities and related collateralized debt obligations over the past several years has been deeply disappointing,” he said. “Moody’s is certainly not satisfied with the performance of these ratings.”

    Buffett Defends How Rating Agencies Are Paid - The billionaire investor Warren E. Buffett told a government panel on Wednesday that as a business owner he hated the current way the credit rating agencies were paid to issue their ratings, but that he could not think of a better alternative to the current system. Currently, the issuers of securities pay the rating agencies to analyze their creditworthiness. The ratings are then made public so investors can judge whether to invest in those securities or not based on risk. The issuer-pay model has come under fire as the financial crisis raised questions about potential conflicts of interest in which rating agencies were pressured by issuers to give favorable ratings in order to maintain their business relationships with large issuers.

    Warren Buffett's Shameful Performance - Oh my God.  I never thought i would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon.  I've just finished watching the beloved Oracle of Omaha being grilled by the Financial Crisis Inquiry Commission about the catastrophic role of credit rating agencies, and it's pitiful to watch him plead ignorance on the most elemental questions about what Moody's and Standard & Poors did wrong or how they should be changed.This is the same Warren Buffett who has been all but canonized as a saint for his adherence to long-term value investing, his folksy candor, his opposition to Wall Street gimmickry and not the least for his memorable description of financial derivatives as "weapons of mass financial destruction."Where have you gone, Joe DiMaggio?  

    Credit Crisis Indicators Going Bonkers Again! Batten Down the Hatches! Heads up people. Something very big is happening in the global credit markets — something you darn well better pay attention to. The very same “Credit Crisis” indicators that were flashing red before the stock market meltdown of 2007-2008 are flashing red again.What the heck is happening? Why is the market in so much peril? Because governments worldwide did exactly what we warned them not to do! By bailing out, backstopping, and propping up countless lousy institutions and assets during the private credit crisis … rather than allowing a quicker, more painful, but ultimately cleansing collapse … they turned a Wall Street debt crisis into a sovereign debt crisis. They temporarily postponed the day of reckoning, while failing to solve the underlying problems.

    Why BP but not Wall Street? - Just 35 days after the explosion on BP’s Deep Horizon offshore drilling rig, (and two months after President Obama himself opened up vast swathes of the outer continental shelf to offshore drilling), the federal government has launched a criminal probe into the massive oil spill in the Gulf of Mexico, U.S. Attorney General Eric Holder said last Tuesday.All well and good. But it invariably begs the question as to why, some three years after the start of the greatest financial crisis since the Great Depression, there have been ZERO criminal investigations launched by Justice against Wall Street. The contrast is striking. Perhaps there are investigations proceeding as we write, but it does seem curious that Justice has held its fire against Wall Street (a large donor to the Democrats), whilst aggressively going after Big Oil (which happens to have been one of the bigger paymasters for the GOP in the last few elections).

    New records show some lobbyists are top fundraisers for political candidates - Wolff has bundled together more than $600,000 in contributions for the DCCC within the past year -- and he hopes to raise $2 million more for the committee by November. Wolff is among nearly 160 registered lobbyists who have raised at least $9 million for political parties and federal candidates over the past year, according to a Washington Post analysis of records filed under new Federal Election Commission requirements. For the first time, the records provide a clear public view into one of the most influential subcultures in Washington: lobbyists who moonlight by bundling campaign contributions for candidates and their political parties. The fundraising occurs even as the same lobbyists attempt to shape legislation to benefit their clients, including energy firms, insurers and other corporations with major financial stakes in the outcome of federal legislation. "This is one of the most critical functions that many lobbyists play in this town,"

    Interest groups to spend record amounts in 2010 elections - More than 20 major political advocacy groups plan to spend well over $400 million on campaign contributions, issue-based advertising and other election-related efforts this year, according to an informal canvas of many of Washington's largest and most influential organizations. When added together with spending by candidates and parties, political expenditures in the 2010 cycle already have topped $2 billion, according to a running tally by the nonpartisan Center for Responsive Politics. The biggest war chests appear to be amassed on the right, where groups hope to take advantage of widespread unhappiness over the recession, stimulus spending and other fiscal issues to propel Republicans into office. About two-thirds of the expected group expenditures compiled by The Washington Post will come from conservative-leaning groups.

    Sociological study reflects High financial malfeasance rates in largest US corporations - The researchers' analysis examines restatements that occurred after Congress passed the 2001 Sarbanes-Oxley Act, which held chief financial officers (CFOs) and chief executive officers (CEOs) personally responsible for corporate violations of security and exchange laws. Soon after this legislation was passed, the number of financial restatements rapidly increased. After eliminating the legitimate reasons for financial restatements such as accounting rule changes, their analysis shows that over 21 percent of the corporations in their study group restated their finances at least once, and some as many as seven times, during the study period.There are three main findings from their quantitative analysis. First, capital dependence on investors creates incentives to engage in financial malfeasance. Second, managerial strategies to increase shareholder value create incentives to engage in financial malfeasance. Third, the multilayer-subsidiary form and the political structure permitting corporate political action committees' (PAC) contributions create opportunities to engage in financial malfeasance.

    Getting paid $50,000 to raise the savings rate - In April, the personal savings rate—the percentage of disposable income that people don't spend—went up to 3.6%. That's higher than it was in March (3.1%), but still far lower than many economist types were predicting this time last year. Back in early 2009, there was talk that thanks to the Great Recession Americans were embarking on a newfound era of thrift. The savings rate was supposed to hit 8%, or even 10%.TIAA-CREF isn't giving up on the idea yet. The asset manager is running a contest to see what ideas people can come up with for raising the savings rate to 10% over the next two years. Perhaps a new government policy? Or a social business? What about an online savings tool? The pay-out is as eye-catching as the ambition. The grand prize winner gets $50,000 and a trip to South by Southwest (I'm guessing because TIAA-CREF's big target here is college students). Of course, for TIAA-CREF this is a marketing campaign.

    The Disservice Economy - Life in our service economy inevitably carries a risk of occasional disservice. And what a fascinating variety of forms disservice can take.I inhabit a world of relatively good standard services, facilitated by new information technologies. But non-standard services are another matter. Big differences between routine and non-routine quality may be consistent with profit maximization. Companies that care about customer loyalty want to minimize the probability that a customer gets aggravated. But it may not be cost-effective to provide high-quality services for low-probability events. And once a customer passes a threshold of aggravation, the intensity of further aggravation probably has few ramifications. Individual rants generally have less impact on company reputation than reports of average quality, which are largely dominated by the quality of routine transactions.

    Looking for Lending – WSJ - Real-estate prices are enticingly low in many areas of the country, prompting business owners to pursue sweet deals on storefronts, manufacturing facilities and other commercial properties. But because banks remain wary of commercial real-estate loans, landing financing to make such a purchase can be time consuming and tedious. Compared to peak prices in October 2007, commercial property values are down 42%, according to Moody's Investors Service Inc. Price index reports compiled by Moody's and Real Capital Analytics Inc. show that as of March 2010, the cost of industrial and office space fell 32% in the last two years. Retail space also plummeted 28%.But the tight credit environment is making it difficult for entrepreneurs to secure those loans.

    Fed Chief Urges More Lending to Small Business - NYTimes - Ben S. Bernanke, the Federal Reserve chairman, said Thursday that banks needed to increase lending to small businesses to reduce unemployment and help the economic recovery. Outstanding loans to small businesses declined to $660 billion in the first quarter of 2010, from almost $700 billion two years ago, Mr. Bernanke said, adding that it was difficult to tell whether the decrease was a result of reduced demand or tightened credit standards. In any case, he said, increasing the flow of capital to small companies was crucial to the recovery. “While maintaining appropriate prudence, lenders should do all they can to meet the needs of legitimate, creditworthy borrowers,” Mr. Bernanke said at a meeting at the Federal Reserve Bank of Chicago’s branch in Detroit. “Encouraging lending to small businesses that are well positioned to pay is a positive, not a negative, for the safety and soundness of our banking system.”

    Unofficial Problem Bank List: Assets increase sharply - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 4, 2010. Changes and comments from surferdude808: The Unofficial Problem Bank List finishes the week unchanged in terms of the number of institutions at 762, but there was a substantial increase in assets to $385.9 billion from $369.2 billion.CR note: The FDIC reported there were 775 institutions with assets of $431 billion on the official problem bank list at the end of Q1. There are some timing issues, but the overall number of institutions on the unofficial list is very close to the official list. The addition of Firstbank of Puerto Rico has closed the asset gap, but there is the possibility that a large regional bank may be on the official problem bank list.

    U.S. Banks' Foreclosure Holdings Increased 12.5% in Q1: Report - Foreclosed property held by U.S. banks increased 12.5 percent to $41.5 billion during the first quarter of this year, according to a recent analysis by SNL Financial, a financial market research firm out of Charlottesville, Virginia.The company says banks’ aggregate foreclosed inventory is up from $36.9 billion at year-end 2009, and $11.7 billion in the first quarter of 2008.SNL data shows that other real estate owned, or OREO (which essentially means the same as REO and is defined as real property owned by a banking institution, most frequently the result of a borrower’s default and foreclosure), represented 0.3 percent of banks’ assets in the first quarter of 2010, up from 0.1 percent in the comparable period of 2008.

    Commercial Defaults Hit Record for Both Investors and Banks - Pressures continue to drive up commercial mortgage defaults. The economic downturn has choked off demand for retail and office space, with vacancy rates rising and prospects of new occupants limited by the duress of today’s job market. At the same time, commercial real estate (CRE) values have dropped more than 40 percent in some markets, pushing a growing number of property owners severely underwater.  Plagued with the same trip wires that have set off a barrage of residential mortgage delinquencies – unemployment and negative equity – the CRE market, too, is dealing with a monstrous volume of loan defaults. Two separate studies by CRE analysts show that defaults on commercial mortgages, both held by banks and those owned by securities investors, have reached new record highs.

    CMBS Delinquency Rate Grew in Face of Massive Loan Liquidations - A total of $740.5 million of CMBS loans were liquidated in April, according to Realpoint, setting a monthly record for liquidations by a large margin. The total tops by $141.5 million the liquidations record set in March.  But despite all the liquidations, the dollar balance of CMBS loans that are now more than 30-days late grew in April to $54.65 billion, or 6.91 percent of the entire $790.9 billion universe tracked by Realpoint. That's up from $51.05 billion, or 6.395 percent of the universe in March and is due largely to the formal delinquency of some of the $3 billion of debt on Manhattan's Stuyvesant Town/Peter Cooper Village property. The loans that were liquidated last month were resolved at an average loss of 51.6 percent of their balance. But 19 loans with a balance of $190.1 million were resolved with nominal losses, of 1.5 percent or less. Exclude those and the remaining 101 loans, with a balance of $550.3 million, were resolved at an average loss of 61.6 percent apiece

    Fitch: Delinquent commercial loans rose in May - Delinquencies among U.S. commercial loans backed by securities surged in May, largely due to a $1 billion net increase in office loans falling behind in payments, Fitch Ratings said Friday. Fitch's commercial mortgage-backed securities index tracks loans on office, retail, apartment, industrial and hotel properties with mortgage payments at least 60 days overdue. The May reading shows delinquencies jumped to nearly 8 percent. The credit rating agency said the main culprit behind the increase was office delinquencies.

    For CMBS, 'Worst Is Yet to Come' - CMBS became one of the most favorite forms of real-estate finance during the boom years. Roughly $700 billion of the securities are outstanding, more than the amount of securitized credit-card, student-loan and car-loan debt combined.Investors have seen a steady rise in defaults for months. The delinquency rate reached 8.4% in June, more than triple the level one year earlier, according to Trepp, a New York company that tracks the commercial-property market. But other bad news for CMBS investors also is beginning to surface. Historically, when mortgages that were bundled into CMBS run into problems and are foreclosed on or sold, investors have lost, on average, 37% of their principal. But according to a study to be released by Fitch on Wednesday, that figure, known as the "loss-severity rate," averaged 57% last year, an all-time high. The rate will continue to exceed the historical average, through 2011, Fitch projects.

    REALTORS: Commercial Real Estate Vacancies to Peak Near Early 2011 – Vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011, according to the National Association of Realtors (NAR). NAR chief economist Lawrence Yun said there is one bright spot in commercial real estate. “The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year,” he said. “However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.”  In its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts, the Society of Industrial and Office Realtors (SIOR) confirms that significant fallout from the recession remains, but to a lesser extent. The SIOR index, measuring 10 variables, increased 2.7 percentage points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace. 

    Mezzanine Loans, Big in the Boom, Make a Comeback – NYTimes -Mezzanine loans, which are secured by stock or other ownership stakes in a company, became a popular form of secondary financing during the real estate boom, offering high returns to investors and high interest rates for borrowers. There is an estimated $100 billion in mezzanine loans outstanding across the country, and when the economy slowed and business slumped they became a special headache for borrowers. But despite built-in risks, lenders say mezzanine loans are beginning to resurface, albeit slowly.  Like the level between the first and second floors for which it is named, mezzanine loans come second in priority to the first mortgage. The loans are typically secured by stock in the company, so that if a property owner defaults, he risks not only handing over the keys to his building but also the equity tied to the asset. By comparison, when a borrower defaults on a first mortgage, only the property itself is at stake.

    Oil-spill update: Hotels report mixed results - Tourism officials and hotel operators in Gulf of Mexico coastal regions say they are struggling with occupancy and reservations, but some areas are suffering more than others....“We have had some cancellations. It is hitting the beachfront properties hard and the casinos have seen some impact ... and the charter boat companies,” said Richard Forester, executive director of the Mississippi Gulf Coast Convention and Visitors Bureau in Biloxi....“Our members are experiencing unprecedented cancellations heading into their peak season, and this advertising campaign is critical to our economic survival,” said Carol Dover, president and CEO of the Florida Restaurant and Lodging Association in Tallahassee ... Many hoteliers in Northwest Florida that are typically at 90 percent occupancy rates heading into the Memorial Day weekend, were reporting a drop in bookings by 30 percent, according to the FRLA.

    Redefining Government's Role in Secondary Mortgage Markets - FRB Atlanta - The federal government directly and explicitly projects itself into the mortgage finance space through the provision of FHA (Federal Housing Administration) and VA (Veterans Affairs) mortgage insurance and the guarantee of the timely payment of principal and interest on securities backed by such loans through Ginnie Mae (Government National Mortgage Association). These programs have historically been self-sustaining and are typically used by first-time and low- and moderate-income homebuyers.  I expect that the FHA and Ginnie Mae will continue to play an important, but more limited, role in our mortgage finance system. The government also participates in secondary mortgage markets—albeit in an indirect and more opaque way—through Fannie Mae and Freddie Mac. These government-sponsored enterprises, or GSEs, are quasi-public/quasi-private financial institutions.This unusual governance arrangement results in two sometimes opposing corporate objectives: one, fulfilling certain social policy goals and supporting related political constituencies, and two, maximizing shareholder value. By law, Fannie Mae and Freddie Mac are limited to operating in the secondary mortgage market. Their participation in this market takes two forms.

    It Wasn't Fannie, Freddie, or the CRA - I've written the CRA and Fannie/Freddie rebuttals so many times over the last few years, e.g. see here and here, and it just came up here, that it seems repetitive to take it up yet again. The argument has been discredited time and again, shriveling up almost as soon as it’s exposed to sunlight. But it keeps coming back, mainly because the anti-government narrative gives Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild.But far more outrageous is this working paper, which Bruce Bartlett brought to my attention, published last month by no less an authority than the World Bank. What galls me ... is that the World Bank would cloak a piece of political drivel with fixings of a serious economic analysis. Written by David G. Tarr,... the paper says Wall Street and the banks were led by the government like lambs to the slaughter.

    The Sky Did Not Fall When the Fed Left the MBS Market -   I thought mortgage spreads would widen out when the Fed left the market. I wasn’t sure how much, but I thought the limit was the amount of basis points of nominal yield spread between current coupon 30-year pass-throughs and Treasuries Fed purchases shaved off roughly 125bp. My former colleagues, research analysts with MBS dealers, were anticipating widening more on the order of 30 to 40bp, but in option-adjusted terms (OAS). Given the complex interest rate and credit options embedded in MBS, option-adjusted yields, durations, and so forth are considered far more robust means for determining relative value versus other bond sectors. OAS are produced by models that incorporate sophisticated prepayment models, potential home price appreciation/depreciation, forward interest rates implied by the existing Treasury or swap yield curves and market interest rate volatilities — so equating a shift in OAS to a shift in spread to Treasuries is a nonsensical project. Suffice it to say, I thought they were whistling in the dark, for courage. As it turns out, they were closer to right. As most commonly benchmarked, the MBS spread to Treasuries slid up from a 2010 low (actually almost a 12-month low) of 121bp in late March, to 146bp in early May. So, 25bp.

    Real Estate Groups Warn That Carried Interest Tax Could Harm Recovery – Legislation changing the tax treatment of so-called carried-interest income by investment partnerships will result in tax hikes that could discourage commercial real estate ventures from making investments -- and possibly put the brakes to a fledgling recovery in real estate, CRE trade groups warned this week.  Invoking the law of unintended consequences, industry leaders said real estate limited-liability corporations (LLCs) and limited partnerships (LPs) would see significant tax increases under the legislation -- even though Congress is mostly targeting hedge funds and private equity funds in trying to cope with a skyrocketing budget deficit and ongoing public chagrin over Wall Street's perceived influence over lawmakers.

    Fannie Mae: Serious Delinquencies decline in March - Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business decreased to 5.47% in March, down from 5.59% in February - and up from 3.13% in March 2009."Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans." This is the first decline since early 2006 and could be because Fannie (and Freddie and the FHA) are moving ahead with foreclosures.As noted last month, the combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 22% in Q1 2010 from Q4 2009. The REO inventory (foreclosed homes) increased 59% compared to Q1 2009 (year-over-year comparison).This graph shows the REO inventory for Fannie, Freddie and FHA through Q1 2010.Even with all the delays in foreclosure, the REO inventory has increased sharply over the last three quarters, from 135,868 at the end of Q2 2009, to 153,007 in Q3 2009, 172,357 at the end of Q4 2009 and now 209,500 at the end of Q4 2010. These are new records for all three agencies.

    Fannie Mae economist: House "price appreciation not supportable" and more - “Temporary tax credits change behavior temporarily. It’s simply shifted demand forward. ... It actually created some price appreciation that’s not supportable long term.”  Douglas Duncan, Fannie Mae Chief Economist, June 4, 2010 via Bloomberg And more on condo shadow inventory in New York from Bloomberg: Manhattan Empty Condos May Be Rentals as Leases Reign About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet ... Developers taking out construction loans borrow an additional amount for interest reserves, which is intended to cover the monthly payments on the loan while the project is under construction and until sales begin ... reserves on loans made in 2007 and 2008 will dwindle in the second half of 2010 and early 2011. We've discussed this before - the flood comes when the interest reserves run dry.

    More on the 30-year Fixed Rate Mortgage - Mark Perry writes, It wouldn't take much of an increase in inflation and short-term interest rates before many banks/thrifts could see their interest margins squeezed, and short-term rates could conceivably even rise above 5% sometime in the next 30 years, which could put the banks "upside down" again and lead to failures.  Mark, like me, remembers the way the 30-year killed off the thrift industry. Today, though, banks and thrifts are not the ones holding mortgages. The main holders now are Freddie, Fannie, and the Fed. This means that when interest rates rise, the taxpayers will lose automatically, without even having to bail out banks or thrifts. When I gave my rant last week, it was Michael Lea, an economist in the audience, who said that no other country uses 30-year fixed-rate mortgages.  That view has been disputed in various comments. Fine. But I would still bet that the vast majority of other countries rely on something other than 30-year fixed-rate loans for the majority of their mortgages.

    Number of the Week: Misrated Mortgages - 16%: The share of triple-A rated subprime-mortgage bonds issued in mid-2007 that should never have received that rating, given the information available at the time.As Congress prepares to rework the business of providing credit ratings, the firms that put their triple-A imprimatur on hundreds of billions of dollars in disastrous investments are raising a familiar refrain: We did the best job we could, given the information we had at the time.A new paper analyzing the ratings firms’ performance at the peak of the credit boom, though, adds to the evidence that their defense is shaky. It also offers a glimpse of the scale of their contribution to the financial crisis. The paper focuses on investments backed by subprime mortgage loans. Typically, bankers create these investments by stuffing thousands of mortgages into a little company that issues about a dozen separate bonds. Ratings firms decide what portion of those bonds deserve the coveted triple-A rating.

    And The Housing Fraud Continues - From a report emailed to me over the weekend:At the core of the foreclosure-prevention strategy is ignoring delinquencies. The percentage of older delinquent loans not yet in foreclosure is startling: 60% have at least 12 missed payments, and 35% have at least 18 missed payments. Add to this that three-fourths of delinquent loans are not in foreclosure, and we see that hidden losses well exceed those in the open. Uh, they're not being "ignored" - this is systemic and intentional fraud. Remember, these loans are either being held by someone or securitized into some sort of package.  When you have a loan that has no chance of "curing" (to cure a loan with 12 missed payments the borrower would have to come up with the 12 payments to bring it current!) that loan should be carried at its recovery value - that is, the value of the collateral that can be seized and sold, LESS the cost of eviction, remediation and resale.

    The Root of the Housing Bubble Remains Unchanged - The fundamental root of the housing bubble--the collusion of the Central State and banks to extend home ownership to millions of citizens who did not qualify for that burden-- remains firmly in place. The Federal government continues to pour tens of billions of dollars into this "home ownership should be for everyone" project via subsidies to Fannie Mae, Freddie Mac and FHA. Mortgage lenders have been delighted to write mortgages in our completely nationalized market in which the government backs literally 99% of all mortgages and the Federal Reserve bought $1.2 trillion in mortgages that no sane private investor would touch. Fannie Mae seeks $8.4 billion from government after loss: Fannie Mae, the largest U.S. residential mortgage funds provider, on Monday asked the government for an additional $8.4 billion after the company lost $13.1 billion in the first quarter. The government has relied heavily on both companies, which buy mortgages from lenders to stimulate more lending, to stabilize the housing market.  In other words, the housing market would collapse without this massive Federal support, and there is no end to the losses this subsidy will require.

    Things Everyone In Chicago Knows - Which happen not to be true.- Krugman - It was deeply depressing to see Raguram Rajan write this: The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans.That’s a claim that has been refuted over and over again. But what happens, I believe, is that in Chicago they don’t listen at all to what the unbelievers say and write; and so the fact that those libruls in Congress caused the bubble is just part of what everyone knows, even though it’s not true.Just to repeat the basic facts here: 1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act. 2. The housing bubble reached its point of maximum inflation in the middle years of the naughties:

    The Hard Truth About Residential Real Estate - There are 140 million personal residences in the US. Today, there are 26 million homes either directly or indirectly for sale. According to a survey by, a real estate appraisal website, 20 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 34 million homes. Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents.

    Continuing risks in the housing market - Wcw explains the economics of the housing bubble, in a smart comment: As for borrowing the money, I think the folks who did so did absolutely the right thing. When someone offers you a government-subsidized non-recourse loan on an appreciating asset, they’re giving you a put option. The more you borrow and the less you put down, the more that option is worth. These borrowers maximized their leverage. The market turned, and they exercised their put options. They are not the dumb ones, they are the smart ones. The dumb ones are the ones who gave away the farm lending this money.It’s well worth noting, here, that there was an extra necessary ingredient: fudgy accounting on the bank side. If the banks had marked those put options to market, they would either have never made the loans in the first place, or they would have noticed their balance sheets eroding long before it was too late to raise new capital.

    Government-Sponsored Housing Fraud - It just never ends, does it: The proposed rule would also establish a method for evaluating and rating Enterprise performance in each underserved market for 2010 and subsequent years and describes the transactions and activities that would be considered for compliance. The Enterprises would be evaluated on four statutory assessment factors: 1) the development of loan products new ways to rip people off, more flexible underwriting guidelines willful blindness to unsustainable debt-service ratios, and other innovative approaches to providing financing other ways to rob the taxpaying and homeowning public; 2) the extent of outreach to qualified loan sellers and other market participants; 3) the volume of loans purchased relative to the market opportunities available, subject to the statutory condition that FHFA not establish specific quantitative targets; and 4) the amount of investments and grants in projects that assist in meeting the needs of the underserved markets.

    HAMP Modifications Have Just a 50% Success Rate: Moody's -The most recent Home Affordable Modification Program (HAMP) report released by the U.S. Treasury shows “extremely low conversion rates” from trial to permanent modifications, with success just a 50/50 gamble, according to commentary from Moody’s Investors ServiceAs of the end of April, servicers participating in HAMP had converted almost 300,000 permanent modifications. However, they had also canceled 277,640 trial modifications. Moody’s says this represents approximately a 50 percent success rate. The report also shows 3,744 permanent modifications have been canceled. According to Moody’s, the biggest culprits keeping conversions low are insufficient paperwork and negative equity.

    Bank Of America Finally Admits Its Mortgage Modification Program Is A Mess - Ever since the Obama administration launched the Home Affordable Modification Program (HAMP), Bank of America has lagged woefully behind the other big banks in terms of the number of borrowers that it managed to navigate through the program. So far, it has only approved 11 percent of eligible borrowers for permanent mortgage modifications.Part of the problem is that BofA was siphoning borrowers off into its own private mortgage modification program, in violation of its deal with the Treasury Department. However, the bank was also incredibly slow in getting the program up and running, and still has problems streamlining the process, as borrowers’ documents are lost and requests for modifications go unanswered. BofA had been dismissing its shortcomings by blaming its customers for failing to make it through the program. “On average we have more customers that fail the eligibility requirements than competitors,” said one of its executives last year. However, yesterday, the bank finally admitted that its program has serious shortcomings

    Pending Home Sales "Surge" in April - From the NAR: Pending Home Sales Surge Continuing The Pending Home Sales Index, a forward-looking indicator, rose 6.0 percent to 110.9 based on contracts signed in April, from an upwardly revised 104.6 in March, and is 22.4 percent higher than April 2009 when it was 90.6. That follows gains of 7.1 percent in March and 8.3 percent in February. Pending home sales are at the highest level since last October when the index reached 112.4 and first-time buyers were rushing to beat the initial deadline for the tax credit. Once again this is no surprise - the tax credit has pulled demand forward, and existing home sales will decline after June (existing home sales are counted when the contract closes).I suspect a number of these homes will never close. I've heard stories of buyers entering into two deals at the end of April, intending to cancel one. Also some short sales will probably not close on time because of the lengthy process.

    Mortgage Applications Plummet - David Rosenberg, Chief Economist at Gluskin Scheff, has the following graph showing the dramatic drop in mortgage applications for home purchases in the most recent report from the Mortgage Bankers Association.  It is interesting to note that Rosenberg does not show an end date for the recession on his graphs.  Most optimists show an end date in the middle of 2009.  Most realists show an end late third quarter or early fourth quarter.  Rosenberg is clearly a pessimist about the economy.The official end date for the recession will be determined by the NBER (National Bureau of Economic Research).  The determination often comes many months after the official date defined.  In other words, the end of the recession will be post-dated.  No date has been designated as yet.

    More than 7m Distressed Loans Weigh on Early Signs of Housing Stabilization -Early signs of stabilization in delinquent and foreclosure inventories were overshadowed by an elevated pool of more than 7m distressed loans by the end of April, according to the latest mortgage report by Lender Processing Services The year-over-year growths in delinquent and foreclosure volumes have leveled off in recent months, with the number of loans 90 or more days past due — including pre-sale foreclosure — declining by nearly 3% to just over 4.07m from nearly 4.19m in March, according to the report (download here). The share of non-current mortgages and foreclosures remains elevated, however:

    For Some Owners In Foreclosure, a Rent-Free Approach.  - A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.  This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.  Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.  The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

    In Foreclosure and ... happy? - From the NY Times: Owners Stop Paying Mortgages, and Stop Fretting. A few excerpts: Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics....More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property .... One lady said "The longer I’m in foreclosure, the better." This isn't for everyone. Streitfeld quotes Kyle Lundstedt, managing director of Lender Processing Service’s analytics group: “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

    Why Aren't Banks Foreclosing More Often On More Homeowners? - It's hard not to be both amused and angry after reading this story by David Streitfeld in yesterday's New York Times about homeowners who are intentionally not paying their mortgages but are not facing foreclosure because...well...their mortgage servicer isn't foreclosing on them.You can't call this a "movement" because it doesn't appear to be organized.  As the Times story notes, this is happening with increasing frequency because individual homeowners are realizing that the foreclosure process isn't automatic and are taking advantage of the situation by deciding not to pay. Stories like this almost certainly will encourage others to stop making payments, and, as the story also notes, a new business/industry/profession seems to be developing in mortgage payment avoidance counseling.  So, the number of homeowners who simply stop making payments and dare their servicer to do something about it may well continue to grow. The question is why are servicers letting this happen.

    Consumers Learning From Banksters - No surprise here....Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino. Yes, the tone of the article is rather negative toward these individuals. Guess what - I disagree. The banksters haven't exactly acted in a fashion that is worthy of ethical conduct by borrowers.  Let's count (some of) the ways:

    Report: BofA acknowledges "foreclosure can be very appealing to customers" From CNBC: BofA: Mortgage Walkaways Have Huge Incentive: On the conference call ... this morning, BofA's credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters ... are "more than we have ever experienced before." He went on to say, "there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers."This is just acknowledging the obvious - borrowers have "a huge incentive to walk away" and "foreclosure can be very appealing to customers". On the conference call, BofA announced a new "Principal Reduction Enhancement" program for certain underwater borrowers. Here is the press release:NHRP-eligible loans include subprime, Pay-Option ARM and prime-quality two-year hybrid ARM loans originated by Countrywide on or prior to January 1, 2009, if the amount of principal owed exceeds the current property value by at least 20 percent and the loan is 60 days or more past due.

    Foreclosures Pose Threat During Hurricanes (Video) Homes in foreclosure could bring danger to neighborhoods if a hurricane approaches. Thousands of foreclosed homes are literally falling apart, with the potential to become projectiles when the wind starts blowing. Foreclosed homes are not typically prepared for disaster, and they can be found in most area neighborhoods. Open doors or a missing garage door means hurricane-force winds could rip through the structures and lead to more flying debris. Each county has codes requiring property owners to secure any safety hazards, but when a home is in foreclosure, there is no way to enforce it.

    Foreclosures Will Plague the Markets Until 2013 - Unemployment, not just lack of equity, is driving foreclosures, Rick Sharga of RealtyTrac, the leading source of data on foreclosures, told a gathering of real estate editors.  Processing of so many foreclosed properties has slowed down and the so-called “shadow inventory” has grow so large that it will take until 2013 to work them through the system, he said. Only some 48 percent of foreclosures are underwater, Sharga told the spring meeting of the National Association of Real Estate Editors in a panel discussion of strategic defaults.  Unemployment caused the balance of owners to default, and he said that strategic defaults are a two step process; first owners find themselves owing more on a property than it is worth and then a financial crisis, such as unemployment, hits a family and they decide to walk away.The shadow inventory grew dramatically during 2009 as lenders became overwhelmed with the sheer volume of defaults.  Of the three and a half million foreclosures last year, only about 20 percent were listed for sale.  The balance is still being processed and will come onto market this year and next.  It will take three years for homes in foreclosure this year to be sold.

    Distressed House Sales: Movin' on up! - From the San Francisco Chronicle: Foreclosures shifting to affluent ZIP codes Foreclosures are going upscale across the Bay Area. ... Even more striking is the growth of mortgage defaults - the first step in the foreclosure process - in affluent ZIP codes.  While the high-end numbers are far shy of the massive wave of lower-priced foreclosures, the growth reflects a significant shift in the foreclosure landscape ... Also in play [are] option ARM (adjustable rate mortgage) that's just beginning to cause problems. Option ARMs were very popular in the mid-to-high end bubble areas.  Previous Chronicle analyses have found that option ARMs were heavily used in the Bay Area, accounting for 20 percent of all homes bought or refinanced here from 2004 to 2008. They were used for homes averaging about $823,000 in value.Although many of these loans already recast - or were refinanced - there are still quite a few that will recast over the next couple of years. Since Option ARMs were frequently used as "affordability products", many homeowners will not be able to afford the higher payments when the loans recast.

    Home Inventory Surges and Organic Housing Trends -- One of the most important housing trends to follow over the next few months is the developing rise of single family home inventory.With four consecutive monthly increases, the latest being best described as a surge, sellers appear to be bringing their homes to market at a pace that not only exceeds that of last year but also to a level that is very reminiscent of the housing turning point year of 2007.This is clearly “shadow inventory” (i.e. postponed home sales of homes held by individuals, investors and banks) now coming to market either out of stimulation from the government tax gimmick or simply as a result of the sense of a stabilization of the home markets.Make no mistake, increasing inventory will put downward pressure on prices and result in a more strained circumstance for home sellers.

    Housing Double Dip a Done Deal – Everybody take a nice long look at today's Pending Home Sales Index from the National Association of Realtors, because it's just about the last positive picture we're going to see for a while. Yes, the index rose even more than expected, as buyers rushed in to take advantage of the home buyer tax credit. And yes, those numbers will show up in Existing Home Sales in May and June, but then look out. This index is based on contracts signed in August, and that's how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you're a first time buyer and $6500 if you're a move up buyer.

    Condo Shadow Inventory - From the Las Vegas Sun: CityCenter condo closings slow in down economy ... Houston-based Metrostudy reported that Las Vegas has more than 8,200 condominium units that are sitting empty, including those still vacant in CityCenter.This is a reminder that unless these condos are listed, they do not show up as either existing or new home inventory (the new home report doesn't include high rise condos). There are some areas - like Las Vegas and Miami - that have a huge number of vacant high rise condos. But there are also many smaller buildings that are mostly vacant in a number of cities (like in New York, Raliegh, N.C. and Irvine, Ca). This is part of the shadow inventory ...

    Construction Spending increases in April - Overall construction spending increased in April, and private construction spending, both residential and non-residential, also increased in April. From the Census Bureau: April 2010 Construction at $847.3 Billion Annual Rate The U.S. Census Bureau of the Department of Commerce announced today that construction spending during April 2010 was estimated at a seasonally adjusted annual rate of $869.1 billion, 2.7 percent (±1.4%) above the revised March estimate of $845.9 billion. The first graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. Private residential construction spending appears to have bottomed in early 2009, but has been mostly moving sideways since then. Residential spending is now 61% below the peak of early 2006. The second graph shows the year-over-year change for private residential and nonresidential construction spending. Nonresidential spending is off 24.6% on a year-over-year (YoY) basis.

    Survey Finds Nearly Half of Americans Can't Afford Large Down Payments… Of more than 2,000 respondents to a survey conducted by the National Foundation for Credit Counseling (NFCC), nearly half — 49% — believe they will never afford a 20% down payment to purchase a home.The NFCC said the discouraging news implies that buying a home will always be out of reach for these people. In the past, finding the money for a down payment was only a problem for first-time homebuyers, the NFCC said. After making the first purchase, borrowers could use the proceeds of selling it as a down payment on the next one. That was in an appreciating market, however.While 12% of the respondents said they would have no trouble coming up with a 20% down payment, 20% said they would need a loan with a much lower down payment, and 18% said they would have to borrow the down-payment money regardless of how much is required.

    Is Massive Refinancing During The Bubble Years A Ticking Bomb? -During the four key years of the housing bubble - 2003-2006 - an incredible number of mortgages were refinanced.  In an earlier REAL ESTATE CHANNEL article, "Investors Played a Key Role in Creating Housing Bubble," I pointed out that homeowners "cashed out" a total of $820 billion while refinancing their mortgages in 2005-2007 according to Freddie Mac figures. This refinancing frenzy needs to be examined in more depth including the danger it might pose for the housing market down the road. In April of this year, the Financial Crisis Inquiry Commission appointed by President Obama published its Preliminary Staff Report entitled "THE MORTGAGE CRISIS."  In the report, the following chart on annual mortgage originations appears.

    Home equity extraction: Where did all the money go? - VoxEU- In this column, Federal Reserve Bank of Boston economist Daniel Cooper presents new evidence suggesting that the spending impact of equity extraction during the recent US housing boom was relatively small compared with the household balance sheet changes and residential investment. This finding contrasts with recent findings claiming that households consumed the vast majority of the money they extracted.

    The Role of Home Equity Extraction -Daniel Cooper of the Boston Fed has posted a summary of his recent study of household consumption and its relationship to home equity extraction. He uses the Panel Study on Income Dynamics (PSID), because it has detailed information on all the relevant household financial information. What Cooper wants to know is, to what extent did households use their rising home values during the bubble years to finance higher levels of consumption? His study is useful in many ways but ultimately doesn’t answer the question he is asking. The shortcomings are instructive. First the results. The summary can be seen in this table, a condensed version of Table 8 in Cooper’s original paper.

    Housing as an ATM: On the Way Up, and On the Way Down - Everyone is familiar with the idea that home equity loans were used like ATMs, and that has pretty clearly come to an end.  However, there is increasing evidence that a sort of reverse effect is now occurring. A number of analysts have pointed out that people intentionally halting their mortgage payments—so-called “strategic defaults”—might have a significant stimulus effect. Here’s a quote from Mark Zandy of Moody’s via Diana Olick at CNBC and Naked Capitalism:With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status) , this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending.Now we have an article in the New York Times on people who are cheerfully ignoring their mortgage payments while remaining in their homes. In some areas, people are able to stay in their homes, rent- and mortgage-free, for years before getting evicted. Think about the implications of that: for many people that’s probably the biggest jump in monthly discretionary income they have ever seen (or ever will).

    Jingle mail and the mortgage crisisDavid Streitfeld has a great NYT piece on the way in which jingle mail, or strategic default, seems to be reaching its logical conclusion. Right now, about 24% of all mortgaged properties are underwater. And if you’re being foreclosed upon now, you probably defaulted 438 days ago. In New York, that figure is 561 days.What’s more, the “limbo” period between default and foreclosure is growing fast: it has risen from 251 days in January 2008. Doing the math, that means that the average amount of time in limbo is growing by 1 days roughly every 4.4 days. Which means that if you default today, then you probably won’t get foreclosed upon until about 567 days from now — or roughly Christmas 2011. That’s 19 months, give or take, without having to make any mortgage payments at all. And if it turns out that your mortgage is one of the millions whose documentation is so screwed up that the loan servicer can’t prove you actually owe them any money at all, then there’s really no end to the amount of time you can sit in your house rent- and mortgage-free.

    The upside of mortgage default - I talked about “Jingle Mail 2.0” on Tech Ticker this morning, and Henry Blodget made the good point that freeing up mortgage payments for small-business operating expenses or consumer goods does provide a short-term boost to the economy — at the expense, of course, of banks’ balance sheets.I’d be interested to see a economic take on this. In theory, the economy should be better off when you’re spending your money on mortgage repayments, because those repayments go straight into bank equity, which can then get levered 10X in the form of new bank loans. Similarly, if you stop making your mortgage repayments, the write-down at your bank can be enormous, and comes out of that bank’s equity, and therefore provides a significant constraint on that bank’s ability to make new loans.But in the real world, things don’t seem to be working like that. The banks seem to be making good money while being very parsimonious in terms of new lending: all indications are that they are hoarding equity no matter what their customers do. Meanwhile, the money which would otherwise go to mortgage payments has very high utility and velocity: it keeps the employees of small businesses in their jobs, it gets spent at local businesses, and it can transform people’s lives.

    How uncertainty reduces investment - Brad DeLong writes (do read his entire post on my post, it is too long to excerpt; also read the comments on his post): I think Brad is assuming I've fallen into the "Paul Krugman is right and Austrian Business Cycle theory is wrong" trap, but it's a different story.  I have in mind a model of costly-to-reverse investment where many entrepreneurs decide to wait.  It's also the case that producing consumption goods can be risky, even non-durable consumption goods: look at the decline in the number of luxury food items in a Whole Foods over the last few years.  Brad may not be convinced, but there's no logical problem in the story. Here is one of the empirical pieces on how uncertainty reduces investment and yes RW this is also a negative supply shock, as it makes extant resources less productive, at least for the time being.  Here are more papers in the area.  Here is one recent relevant model or see the papers of Robert Pindyck.  Again, I don't wish to push "uncertainty" as the only story, it's rather the simplest means of seeing that it's not all just about weak aggregate demand.

    Opinions on shape of proper stimulus differ. Both sides have a point. - As he watches policy makers cry “fire fire” in Noah’s flood, Paul Krugman becomes almost shrill. He has a simple (rigorous) model which suggests more stimulus would be ideal and that, when in a liquidity trap, government spending should be set to give unemployment equal to the non accelerating rate of unemployment. In this model, he assumes Ricardian equivalence. That’s the problem. In the model, there is no problem with running up a large public debt. The timing of taxes doesn’t matter at all. In the real world, we are concerned about the public debt. In normal times, Krugman is very concerned because, he believes, people mistake bonds for net wealth and this distorts consumption/saving decisions. In a liquidity trap there would be an additional advantage of public spending (giving a multiplier greater than 1). However, the debt will still be with us when we exit the liquidity trap.This does not have to be true. It is possible to pay for the stimulus by cutting public spending when the economy exits the liquidity trap.

    When does large-scale public ownership work? - Matt and Ezra both comment on my post that most of the largest Chinese firms are state-owned or controlled by state-owned banks.  (Both blogs, by the way, have interesting running coverage of the same China trip.)  How can this be the case in the world's greatest economic growth miracle?  How come it works (sort of, there were lots of privatizations, starting in the 1980s) in France too? Yet state-owned industries do not have a fantastic record overall; ask England. In part this is a puzzle but in part France and China have one important feature in common: it's high status to be a ruler.  Very smart Frenchmen often grow up wanting to work for the government.  Hardly anyone in France thinks that is weird and so the French bureaucracy has some of the best talent in the country.There is also a long-standing tradition of the prestige of the Chinese mandarin.  Furthermore, and perhaps more importantly, the Chinese Communist Party is the ultimate source of control and prestige for the entire society and it too attracts many talented people.

    Will the United States suffer a "double-dip" recession? -In the past month, several unfortunate phrases have joined the lexicon, including "top kill," "Gore divorce," and "double-dip recession." On the May 21 Today show, CNBC's volatile James Cramer increased his odds of the econo­my suffering a relapse from 25 percent to 35 percent. At a mid-May investment conference, Robert Arnott, chairman of money manager Research Affiliates, predicted that "there's a better than 50 percent chance that we will see a second dip in the economy." Google searches for "double-dip" have spiked. And why not? GDP grew at a 3 percent rate in the first quarter, down sharply from 5.6 percent in the 2009 fourth quarter. The Conference Board Leading Economic Index (LEI) fell in April by 0.1 percent, the first downturn since March 2009. The debt crisis that began in Athens is threatening to tear the euro zone asunder. (Beware of Greeks bearing rifts!)

    Why We're Falling Into a Double-Dip Recession - The Labor Department reports this morning that the private sector added a measly 41,000 net new jobs in May. (The vast bulk of new jobs in May were temporary government Census workers.) But at least 100,000 new jobs are needed every month just to keep up with population growth. In other words, the labor market continues to deteriorate.   The average length of unemployment continues to rise – now up to 34.4 weeks (up from 33 weeks in April). That’s another record. More Americans are too discouraged to look for a job than last year at this time (1.1 million in May,  an increase of 291,000 from a year earlier.)Of the small number of jobs created by the private sector in May, many came from temporary help services.Which is one reason why the median wage continues to drop

    Euro Bond and CDS Spreads Widen - Here are two graphs from the Atlanta Fed weekly Financial Highlights released today (graph as of June 2nd): From the Atlanta Fed:  Despite the latest announcement of planned austerity measures by Spain, Portugal, and Italy, uncertainty around the adjustment challenges in peripheral Europe continues to weigh on the region’s bond prices.Downgrading of Spanish sovereign debt by Fitch and ongoing concerns about the Spanish banking sector further added to investor worries. Compared with two weeks ago, peripheral Europe's bond spreads to bunds have widened by 30 basis points (bps) on average. After declining early last week, sovereign debt spreads have begun widening for peripheral euro area countries. As of June 1, the 10-year bond spread stands at 503 basis points (bps) for Greece, 219 bps for Ireland, 195 bps for Portugal, and 162 bps for Spain. Similarly, CDS spreads have risen after the initial response to the stabilization package.

    How far will Europe's economic tremors reach? - From one financial angle, troubles in Greece and elsewhere in Europe may have little effect on America’s economy. THE debt crisis in Europe has already had a significant psychological impact on Wall Street, sending the Standard & Poor’s 500-stock index down 10.5 percent from its April high. But if investors are afraid that Europe’s woes could retard the recovery in the United States, a question arises: What does the crisis in Europe really mean for domestic growth? The answer depends on which aspect of the crisis you’re looking at. The possibility of another shock to global financial institutions is certainly cause for concern, as we shall see. But if investors focus solely on the fundamental health of Europe’s economy, and its ties to the United States, the situation may not look all that worrisome. To be sure, Europe is a major customer for the goods of American manufacturers. In fact, the 16 countries that use the euro represent around 13 percent of total United States exports. But the nations that are hit hardest by this crisis account for only a small fraction of that.

    MasterCard Study Says Consumer Spending Has Taken A Break - Michael McNamara, Vice President, Research and Analysis for SpendingPulse, observes Consumer Takes a Respite as Spending in Many Sectors Declines. The momentum in consumer spending that was building through the first quarter, seems to be taking a breather in the second quarter of 2010, at least so far. Financial volatility in the capital markets and ongoing macroeconomic issues could account for this shadow cast over the recovery in consumer spending. Some sectors seem to be responding to specific disruptive events, such as the expiration of the Federal housing tax credits, where previously we'd noticed a beneficial "echo" effect on housing related categories such as Furniture and Furnishings.

    Housing Bust and Labor Immobility - Here is a theme we've been discussing for a few years - when a homeowner is underwater, it is difficult to make a career move ... From Rana Cash at the Atlanta Journal-Constitution: Real estate market stalls recruiting, promotions When executive Wade Ledbetter leaped at the opportunity to move up in his company, the shackles of relocation snatched him back down to earth. That fabulous promotion came with a price: The $30,000 he’d invested in home improvements, the 20 percent he’d put down on his house and the extra payment every year for 7 1/2 years would be a wash, along with settling on a selling price well below what he’d paid for the home and just about all its contents. Negative equity is impacting one of the historic strengths of the U.S. labor market - the ability of households to easily move from one region to another for a better employment opportunity.

    Are Today’s ‘Entrepreneurs’ Actually the Unemployed? - LAST year was a fabulous one for entrepreneurs, at least according to the Kauffman Index of Entrepreneurial Activity released last month by the Ewing Marion Kauffman Foundation. “Rather than making history for its deep recession and record unemployment,” the foundation reported, “2009 might instead be remembered as the year business startups reached their highest level in 14 years — even exceeding the number of startups during the peak 1999-2000 technology boom.” Another surprise is the age of these new entrepreneurs. According to the report, most of the growth in startups was propelled by 35- to 44-year-olds, followed by people 55 to 64. Forget Internet whiz kids in their 20’s. It’s the gray-heads who are taking the reins of the new startup economy. And if you thought minorities had been hit particularly hard by this awful recession, think again. According to the report, entrepreneurship increased more among African-Americans than among whites.

    America's Growing Anxious Class - Robert Reich - According to an analysis of Bureau of Labor Statistics data, the number of self-employed Americans rose to 8.9 million last December, up from 8.7 million a year earlier. Self-employment among those 55 to 64 rose to nearly two million, 5 percent higher than in 2008. Among people over 65, the ranks of the self-employed swelled 29 percent. Many older people who had expected to retire discovered their 401(k)’s had shrunk and their homes were worthless. So they became “entrepreneurs,” too.Maybe this is a good thing. A deep recession can be the mother of invention. These Americans are now liberated from the bureaucratic straitjackets they thought they had to wear. They can now fulfill their creative dreams and find their inner entrepreneurs. All they needed was a good kick in the pants.But this upbeat interpretation doesn’t include lots of people who don’t particularly relish becoming their own employers

    Percent Job Losses During Recessions, aligned at Bottom - By request ... here is an update through April with the impact of Census hiring added. This graph shows the job losses from the start of the employment recession, in percentage terms - but this time aligned at the bottom of the recession. This assumes that the 2007 recession has reached bottom.The current recession has been bouncing along the bottom for a few months - so the choice of bottom is a little arbitrary (plus or minus a month or two).Notice that the 1990 and 2001 recessions were followed by jobless recoveries - and the eventual job recovery was gradual. In earlier recessions the recovery was somewhat similar and a little faster than the decline (somewhat symmetrical). The dotted line shows the impact of Census hiring.

    Impact of Census 2010 on Payroll Report - We are starting to see articles like this from CNBC: Strong Jobs Number on Friday Could Give the Markets a Boost Economists expect the US economy generated about 540,000 jobs in May—a large portion of which expected to come from Census hiring—and many analysts will be hoping that's enough to assuage investor fears that the European debt contagion could cause a double-dip recession.The BLS will release the May employment report on Friday. The consensus is for a gain of 540,000 payroll jobs in May, and for the unemployment rate to decline slightly to 9.8% (from 9.9%). As the CNBC article noted, a large portion of the payroll jobs in May will be temporary hires for Census 2010 (May is the peak month). It will be important to remove the Census hiring to try to determine the underlying trend.

    U.S. Economy: Manufacturing Holds Up as Exports Climb - Bloomberg -- U.S. manufacturing grew in May at a faster pace than forecast as factories added workers to meet the greatest export demand in two decades as well as a revival in domestic orders.  The Institute for Supply Management’s gauge fell to 59.7 from 60.4 in April, exceeding the median forecast of economists surveyed by Bloomberg News, which called for a decline to 59. Readings greater than 50 point to expansion. Another report showed spending on construction projects rose in April by the most since 2000.

    U.S. Light Vehicle Sales 11.6 Million SAAR in May - Based on an estimate from Autodata Corp, light vehicle sales were at a 11.63 million SAAR in May. This is up 18.1% from May 2009 (when sales were very low), and up 3.9% from the April sales rate.This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for May (red, light vehicle sales of 11.63 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967.Auto sales have recovered from the low levels of early 2009, but are still at the lowest point of the '90/'91 recession (even with a larger number of registered drivers). 

    GM, Ford Sales Top Analysts’ Estimates on SUV Demand (Bloomberg) -- General Motors Co. and Ford Motor Co. posted U.S. sales increases in May that topped analysts’ estimates as higher consumer confidence and inexpensive gasoline spurred customers to buy more sport utility vehicles. GM’s deliveries rose 17 percent from a year earlier to 223,822, the Detroit-based automaker said today in a statement. GM was expected to report a 5.9 percent increase, the average estimate of five analysts surveyed by Bloomberg. Ford sales rose 22 percent, topping the average estimate of a 16 percent gain. Chrysler Group LLC, Nissan Motor Co. and Hyundai Motor Co. also topped analysts’ delivery estimates in May as U.S. auto sales rose to 1.1 million, the eighth straight monthly increase, the longest streak in almost a decade, according to Bloomberg data. Gas prices that have stayed less than $3 a gallon boosted sales of Chevrolet Equinox and Ford Edge sport utility vehicles.

    The Great Car Reset - Are we moving beyond the auto age? Writing in Esquire, Nate Silver provides hard statistical evidence that America's once-overwhelming car-culture and driving habits have peaked. This article in Advertising Age (h/t: Patrick Adler) provides additional evidence that we may well be in the early stages of a reset in attitudes about driving and car ownership, especially among younger folks. Here are some key statistics from the article:

    • "In 1978, nearly half of 16-year-olds and three-quarters of 17-year-olds in the U.S. had their driver's licenses, according to Department of Transportation data. By 2008, the most recent year data was available, only 31 percent of 16-year-olds and 49 percent of 17-year-olds had licenses, with the decline accelerating rapidly since 1998."
    • "Twenty-somethings went from driving a disproportionate amount of the nation's highway miles in 1995 to under-indexing for driving in 2009."
    • "It's not just new drivers driving less. The share of automobile miles driven by people ages 21 to 30 in the U.S. fell to 13.7 percent in 2009 from 18.3 percent in 2001 and 20.8 percent in 1995."

    All fun until someone gets hurt - KEVIN DRUM quotes Ezra Klein, who has just returned from a trip to China, writing on the ups and downs to the use of the rhetoric of lost competitiveness: Polls and focus groups show that people go nuts for this sort of rhetoric. If you want the country to get behind your policy initiative, just tell them that China is beating us to the punch. But...Competitive language is used in service of worthy goals, but it's also dangerous stuff. We're telling Americans to fear the economic development of other countries, when what they should actually fear is the reverse.  The global economy isn't a race so much as it's a relay. And Mr Drum responds: Wait a second. "But" what? If the rhetoric works, why not use it? If competition with the Soviet Union could get us to the moon in less than a decade, why not let competition with China help jumpstart green energy development?...True, American rivalry did get Americans on the moon in the space of a decade. Of course, it also produced terrible proxy wars around the world and brought the powers to the brink of nuclear war.

    Some Hard Truths About Globalization and Jobs - The United States has been economically dominant for so long that we too easily overlook how unforgiving global competitors and investors can be when our parochial politics produce simplistic fixes for complicated challenges. Exhibit One is one of the final actions by the House of Representatives before its Memorial Day recess. The majority, convinced that they’ve found a new, economic wedge issue, passed legislation to strip our most successful global companies of a “tax break” which allegedly encourages them to “ship jobs overseas.” The provision in question lets U.S. multinationals defer paying the U.S. corporate tax on the profits of their foreign subsidiaries until those profits are formally transferred back to the U.S. parent company. The claim that this provision leads Microsoft, Google, Amgen or General Electric to ship jobs abroad is an appealing slogan, but it’s one with no real economic foundation in a global economy. 

    ADP: Private Employment increased 55,000 in May - ADP reportsNonfarm private employment increased 55,000 from April to May 2010 on a seasonally adjusted basis, according to the ADP National Employment Report. The estimated change in employment from March to April 2010 was revised, from an increase of 32,000 to an increase of 65,000. May’s rise in private employment was the fourth consecutive monthly gain. However, over these four months the increases have averaged a modest 39,000. The slow pace of improvement from February through May is consistent with the pause in the decline of initial unemployment claims that occurred during the winter months. Note: ADP is private nonfarm employment only (no government jobs).

    The ADP Says There Were 55,000 New Private Sector Jobs in May, But That's Far Short of What's Needed - It is being reported widely that, according to an ADP report, the economy gained 55,000 private sector jobs in May. We’ll know more when the government releases employment data tomorrow, though the government’s hiring of 400,000 census workers will complicate the interpretation, but the estimated figure from ADP does not represent an employment gain. Remember that we need 100,000 to 150,000 new jobs each month just just to keep up with population growth, so even if this figure is accurate we still aren’t making net gains in terms of accommodating new workers. And with millions of workers still unemployed, a growth rate for jobs that simply keeps up with population growth isn’t enough, jobs need to grow faster than population growth if we are going to reabsorb the unemployed into the workforce. Job growth is better than job loss, of course, but we shouldn’t get too excited about this figure (see Calculated Risk as well).

    The recovery: Job rich or job poor? - Atlanta Fed blog -Gross domestic product (GDP) is growing, supported by strong labor productivity numbers and modest employment growth. Even after today's downward revision to first quarter labor productivity measures, growth in labor productivity in the business sector has averaged 5.6 percent over the last three quarters—more than twice the long-run average. Okun's law has underpredicted the rise in unemployment, and some commentators call for a jobless recovery. Today, Federal Reserve Bank of Atlanta President Dennis Lockhart gave a speech on the prospects for the future of employment and labor productivity that posed the question: "… how long can firms ride this productivity growth before having to yield to new hiring to support greater activity?" To provide some context, below is a chart that shows a decomposition of GDP growth during post-WWII recessions. This decomposition does not explain growth, but it does show the relative contribution of various factors such as average labor productivity, average hours worked, the unemployment rate, and other labor market variables.

    May Employment Report: 20K Jobs ex-Census, 9.7% Unemployment Rate - From the BLS: Total nonfarm payroll employment grew by 431,000 in May, reflecting the hiring of 411,000 temporary employees to work on Census 2010, the U.S. Bureau of Labor Statistics reported today. ... The unemployment rate edged down to 9.7 percent.Census 2010 hiring was 411,000 in May. Non-farm payroll employment increased 20,000 in May ex-Census.This graph shows the unemployment rate and the year over year change in employment vs. recessions.Nonfarm payrolls increased by 431,000 in May. The economy has lost 0.6 million jobs over the last year, and 7.4 million jobs since the recession started in December 2007. Ex-Census hiring, the economy only added 20,000 jobs in May. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

    Employment Report (charts for each item mentioned) The employment report was basically more of the same and was very discouraging. Even though the headline number reported a large 431,00 increase in employment, most of this was temporary Census jobs. Private employment only increased 41,000, significantly less than in the previous few months. The unemployment rate fell, but that was just as much a result of a rise in discouraged workers as a rise in employment as measured by the household survey.Even the diffusion index ticked down.As in previous months the rise in aggregate hours worked rose nicely even though it was only up 0.3% as compared to 0.4% in the last few months. Wage gains were also moderate as average hourly earnings rose 0.3% and were up only 1.9% over the last 12 months. But because of the gains in hours worked average weekly earnings continued to improve.

    Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks -  Here are a few more graphs based on the employment report. This graph shows the job losses from the start of the employment recession, in percentage terms - but this time aligned at the bottom of the recession.The current recession bounced along the bottom for a few months - so the choice of bottom is a little arbitrary (plus or minus a month or two).The Employment-Population ratio decreased to 58.7% in May (from 58.8% in April). This had been increasing after plunging since the start of the recession. This is about the same level as in December 1983.This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.The Labor Force Participation Rate decreased to 65.0% from 65.2% in April. This is the percentage of the working age population in the labor force. This decline is disappointing, and the rate is well below the 66% to 67% rate that was normal over the last 20 years. The number of persons employed part time for economic reasons (some-times referred to as involuntary part-time workers) declined by 343,000 in May to 8.8 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

    A Good Report, With Two Dark Linings - Today’s jobs report was another good one. Job growth picked up from April to May. So did wages. The average workweek lengthened. The number of people working part-time because they could not find full-time work dropped.But the good news comes with two caveats. Much of the job growth seemed to be among temporary workers hired by the Census. The economy gained 431,000 jobs last month, up from 290,000 in April, mostly because the federal government added 412,000 workers. The private sector added only 41,000 jobs in May, down from 218,000 in April and 158,000 in March. You never want to read too much into a single month of data. This may just be just a blip. But it also could be something more — a slowdown in hiring because businesses are worried about the state of the economy. Last month had its share of worrisome economic news, much of it from Europe. In a note to clients this morning, Joshua Shapiro, an economist at MFR Incorporated in New York, pointed out that some other data, like the weekly number of new claims for jobless benefits, have also worsened recently.

    Uninspiring employment report - This morning's release of the May 2010 employment report showed an increase of 431,000 payroll jobs and a 0.2 percentage point decrease in the unemployment rate to 9.7%. The vast majority of May's new jobs (411,000, or 95%) were temporary Census jobs that will disappear over the summer. The private sector saw very modest growth, adding just 41,000 jobs, much slower than the average growth of the previous three months, which was 146,000. An ongoing concern is the size of the gap in the labor market. To put it in perspective, consider the following: in the boom of the late 1990s, the fastest year of employment growth was 2.6%, in 1998. If, in the event we have that extremely strong level of growth from here on out, we would still not get down to pre-recession unemployment rates until January 2015. The hole in the labor market is staggering, unemployment remains near 10% and long-term unemployment continues to break records. In May, nearly half -- 46% -- of all unemployed workers had been unemployed for over six months.

    That stubbornly high unemployment rate - No single datapoint — not even the monthly payrolls report — can in and of itself mark the beginning of the end of the recovery. But this month’s numbers are still depressing, coming in well below lofty expectations, and having no silver lining: there were no upward revisions to previous months, there was no big fall in the unemployment rate, there was no obvious reason to believe that the 411,000 temporary employees hired in May to work on Census 2010 would otherwise have found private-sector employment.The really recalcitrant number here is the unemployment rate, which is staying stubbornly near 10% no matter what payrolls do: when they’re healthy, more people start looking for work. But if you want a hint of a glimmer of hope, at least the broad U6 underemployment rate is heading in the right direction: it was 16.6% in May, down from a whopping 17.1% in April. (But it’s still higher than it was at the beginning of the year.)

    Down, but for the count - Economist - EVEN the banner headline figure on today's payroll employment report is a letdown. Payrolls grew by 431,000 in May, which is the best monthly performance since early in 2000. But economists had been expecting a much larger rise, on the order of 540,000. That's just the beginning of the bad news baked into what looks, on its face, like a lovely jobs report. Most of that big figure—fully 411,000 jobs—is attributable to temporary census hiring. The underlying employment trend looks quite weak. Private employment rose by just 41,000 in May, down from an increase of over 200,000 in April. Several sectors, including construction and retail trade, saw outright declines in employment, and the large growth in federal employment associated with the census was partially offset by continued declines in state and local government employment.Things look even worse in turning to the household survey. There total employment declined by 35,000. The unemployment rate ticked downward to 9.7%, but that was primarily due to a big drop in the size of the labour force—another reversal of recent trends.

    Census Jobs: Now You See Them, Now You Don’t - The U.S. economy in May added the most jobs in a decade — 431,000 — largely because of census hiring. But the boom appears to be over, and that could translate into ugly overall employment numbers in the coming months if private employment doesn’t pick up.The number of temporary workers for the decennial census peaked in early May at 585,729, according to the Census Bureau’s weekly tally. That was the week before the Labor Department conducted its survey for the May payroll figures (leading the May payroll figures to show a monthly gain of 411,000 temporary Census jobs). By the latest weekly reporting period, May 16-22, the tally of 2010 Census workers had already dropped to 549,450.Historically, May is the peak month for hiring workers to canvass homes for the decennial census. As a result, the months that follow show net losses. In May 2000, census hiring jumped by 348,000 (to 530,000 total). The next month, it fell by 225,000 and showed significant declines for three more months.

    Absent temporary employment, no job growth in May -The Bureau of Labor Statistics' employment report for May does not paint a picture of self-sustained growth in the private sector: absent the census hires and private-sector temp worker hires there was essentially no net job creation. The report showed an increase of 431,000 payroll jobs and an unemployment rate of 9.7%, a 0.2 percentage-point decrease from April's 9.9%. The vast majority of May's new jobs (411,000, or 95%) were temporary Census jobs that will disappear over the summer. Adding a mere 41,000 jobs, the private sector saw slower growth than it had in the prior three months, when the average was 146,000 a month. Furthermore, the shedding of public sector jobs at the state and local level remains an ongoing drag on employment growth. In May, state and local governments shed 22,000 jobs (15,000 at the state level and 7,000 local). Since their peak in August 2008, state and local governments have shed 231,000 jobs (46,000 at the state level and 185,000 local).

    New Jobs Numbers: Private Sector Weak, Public Sector Shrinking, Census to the Rescue - By now you’ll have already read the news that we had a strong jobs month driven by the hiring of 411,000 census workers plus a not-so-hot addition of 41,000 private sector jobs. Less noted is the fact that the “net gain in government jobs was 390,000,” which is to say we lost 21,000 non-census public sector jobs. This is one of the least-understood aspects of fiscal policy during the crisis. Once you include state and local government in the calculus, there’s been almost no net stimulus whatsoever. America has a highly decentralized public sector, so accounts of what’s going on that leave out state and local government get very misleading. The proposal that the federal government not do fiscal stimulus during the downturn is, in effect, a proposal for gigantic overall fiscal contraction from the public sector.

    State and Local Government Still Firing - While federal employment surged last month, the ailing state and local government sector continues to be a weak spot in the recovery. The state and local government sectors shed a combined 22,000 jobs last month, the largest drop since February. State and local government are down 231,000 jobs from their peak employment in August 2008, with losses in 15 of 21 months. This is to be expected, given the mammoth budget deficits governments have faced. And it’s likely that state and local government will continue to drag on employment for at least the next few months, possibly much longer. A report this week from the National Governors Association and the National Association of State Budget Officers showed that states still face some $127 billion in budget gaps over the next year.But several indicators suggest that the next round of budgeting will come from even deeper cuts, which likely means more layoffs. That’s because, unlike last year, when states passed some $24 billion in tax and fees, in the upcoming fiscal year (which is an election year and starts at the end of the month) governors projected budgets are on pace for just $3 billion in new taxes and fees. What’s more, states’ portion of the stimulus will have been pretty much spent by the close of the 2011 fiscal year that ends next June.

    Workers Left Behind - While the economy added jobs last month, prospects for the long-term unemployed are looking increasingly grim. The average length of time that the typical jobless worker has been out of work reached yet another record high, of 34.4 weeks, in May:The increasing average duration of joblessness, however, is being skewed by a sizable group of workers who lost their jobs long ago and are still unable to find new positions.Most unemployed workers churn back into the job market after a few weeks or months. But those who have already been out of jobs for a longer period of time have been falling further and further behind. Here’s a chart, taken from these Labor Department numbers, showing the percentage of all workers who are unemployed, broken down by how long they’ve been out of work:The dark blue line shows people who have been out of work for more than 27 weeks. That line has been skyrocketing for months, despite five consecutive months of net payroll growth.

    Duration of Joblessness Continues to Increase – WSJ - Persistently unemployed workers made up an even larger share of the jobless ranks last month, adding to an already vexing problem.Some 46% of all unemployed Americans had been without work for more than six months in May, up slightly from 45.9% in April, according to the latest employment report.The median spell of joblessness for everyone who was out of a job also rose higher to 23.2 weeks compared to 21.6 weeks in April.While the private sector is adding jobs, chronically unemployed workers can be at a disadvantage in obtaining them as their skills get rusty, they can suffer from depression and employers sometimes shy away from workers who have been out of jobs for a while.Expanding long-term joblessness and weak private sector hiring create a difficult backdrop for Congress, which will have to decide whether to renew unemployment insurance extensions or allow them to expire at a time when a resurgence in hiring is still uncertain. Recipients had been allowed to draw benefits for a maximum of 99 weeks in states with high unemployment. If Congress doesn’t act to continue those extensions, the maximum will fall to 46 weeks in most states.

    Duration of Unemployment in US Rises to Record 34.4 Weeks  (Bloomberg) -- Unemployed Americans are facing the longest wait on record to find work, a sign faster economic growth is needed to reduce the jobless rate from close to a 26- year high.The average duration of unemployment jumped to 34.4 weeks in May from 33 weeks the prior month and 16.5 weeks in December 2007, when the recession began, a Labor Department report showed today in Washington. The number of unemployed has almost doubled to 15 million since the start of worst slump since the 1930s.

    Chronic Joblessness Bites Deep - WSJ - The job market is improving, but one statistic presents a stark reminder of the challenges that remain: Nearly half of the unemployed—45.9%—have been out of work longer than six months, more than at any time since the Labor Department began keeping track in 1948. Even in the worst months of the early 1980s, when the jobless rate topped 10% for months on end, only about one in four of the unemployed was out of work for more than six months. Overall, seven million Americans have been looking for work for 27 weeks or more, and most of them—4.7 million—have been out of work for a year or more. Long-term unemployment has reached nearly every segment of the population, but some have been particularly hard-hit. The typical long-term unemployed worker is a white man with a high-school education or less. Older unemployed workers also tend to be out of work longer. Those between ages 65 and 69 who still wish to work have typically been jobless for 49.8 weeks.

    Congressional Democrats downshift on spending,  cut provisions to jobs bill - Congressional Democrats, worried about public perception that government spending is out of control, tapped the brakes on Friday. After agonizing all week, the House narrowly approved a jobs bill, but only after stripping it of provisions that would have extended health insurance subsidies for the unemployed. Normally, Democrats would have little trouble drumming up votes to help jobless workers. But as the economy shifts from recession to recovery, many lawmakers say their constituents are more interested in curbing the soaring national debt than in spending to aid the afflicted. Democratic moderates and freshmen who face tough races in November are applying new scrutiny even to broadly popular programs. "What might have been acceptable a month ago has moved," said Rep. Gerald E. Connolly (D-Va.), who voted against the jobs bill while praising House leaders for scaling it back.

    Does Washington Care About Unemployment? - The last time we had an oversupply of workers of this magnitude was 1983, during the Reagan-Volcker disinflation. Back then, the excess demand for high-quality financial assets was deliberately created by Paul Volcker and his Federal Reserve. In order to wring inflationary expectations out of the economy, they cut back on the money supply. That did the job.In fact, Volcker overdid it. By the start of 1983, labor unions were frantically giving back previously-promised wage increases and offering wage cuts to employers who were delighted to reopen labor contracts. The unemployment rate hit 10.5 percent. Washington, D.C. was in a panic. With high unemployment perceived as a genuine national emergency, the Federal Reserve embarked on a policy of massive monetary ease. Today, the unemployment rate is kissing 10 percent. Global financial markets are sending us a message that the excess demand for high-quality financial assets is growing again.Yet, unlike 1983, there is no sense of urgency in Washington.

    Why is Washington Dithering with Unemployment High? - Yves Smith - Brad DeLong points out that Ronald Reagan was far more concerned about unemployment than Team Obama (or Washington generally) is, and also took far more aggressive measures to combat it. From The Week (hat tip reader Marshall):By the start of 1983, labor unions were frantically giving back previously-promised wage increases and offering wage cuts to employers who were delighted to reopen labor contracts. The unemployment rate hit 10.5 percent. Washington, D.C. was in a panic. With high unemployment perceived as a genuine national emergency, the Federal Reserve embarked on a policy of massive monetary ease. The Reagan administration promised that the deficits created by its 1981 tax cuts and increased defense spending were the recipe for putting America back to work. Everybody had a plan to reduce unemployment. And every lobbyist or speculator with a scheme unrelated to jobs recast his pet project as a magic unemployment-reducing bullet.

    What Exactly Are We Crowding Out? - Maxine Udall (girl economist) - Yves Smith at Naked Capitalism asks, "Why is Washington Dithering With Unemployment High?" Brad Delong speculates that those in power or those who chatter about those in power have become disconnected from "mainstream America." Edward Glaeser provides another possible answer for DC dithering and indifference here: If nothing else, Glaeser provides the finest example of dithering I have ever personally witnessed: And so we are left wading in ignorance. It is a great tragedy that the most important area of economic decision-making is also the area where we will always know the least. A tragedy indeed. Don't just do something! Stand there.  How are teaching, public health, road-building, grid updating, new energy, and law enforcement "make-work" jobs? Some of any well-targeted fiscal stimulus would presumably go to preserving such jobs and services. In an ideal world, some "make-work" jobs would improve roads, bridges, mass transit, and other infrastructure. This is a reasonable role for government to play, especially if private entities are unwilling or unable to coordinate and produce these things. It's  "investment" in public infrastructure and in the productivity of future generations.

    Where Men Don't Work - All the data in this post are based on looking at the ratio of men over the age of 16 who are in the labor force but not unemployed.  This is what is most readily available from the census, but notice that it confounds college attendance and retirement with underemployment - issues we will have to try to deal with in the future.  The color scale runs from 25% of men employed (white) to 75% employed (fully saturated blue). The data are from the 2000 US census (from the American Fact Finder website, census summary file 3).  So again, this is dealing with the country as it was at the height of the tech-boom, in a cylical high of employment.The first map just shows a flat map of the whole country on this scale.  Like all images in this post, this can be clicked to get a pretty big (O(1MB)) version in a separate window for easier study. As you can see, there is huge geographical variation in the fraction of men working: we pretty much touch both the lower and the upper boundaries of the 25%-75% range.  Areas of particularly low employment-population for men include the south-west (especially Nevada/Arizona/New Mexico), the interior South, and Appalachia.

    Say Goodbye to Full-Time Jobs with Benefits - Jobs may be coming back, but they aren't the same ones workers were used to. Many of the jobs employers are adding are temporary or contract positions, rather than traditional full-time jobs with benefits. With unemployment remaining near 10%, employers have their pick of workers willing to accept less secure positions. In 2005, the government estimated that 31% of U.S. workers were already so-called contingent workers. Experts say that number could increase to 40% or more in the next 10 years.James Stoeckmann, senior practice leader at WorldatWork, a professional association of human resource executives, believes that full-time employees could become the minority of the nation's workforce within 20 to 30 years, leaving employees without traditional benefits such as health coverage, paid vacations and retirement plans, that most workers take for granted today.

    Want Ad: Unemployed Need Not Apply -- Job hunters are facing a new trend: businesses asking recruitment companies to keep unemployed people out of their job pools. Recruitment experts say many companies are opting out of so-called passive job seekers for a number of reasons. First, it could take longer to get them up to speed in professions that require constant training. They also say people who have not been laid off are believed to be the best in the fields, therefore more valuable.

    Employers hiring fewer full-time workers, more contractors…-- Jobs may be coming back, but they aren't the same ones workers were used to.Many of the jobs employers are adding are temporary or contract positions, rather than traditional full-time jobs with benefits. With unemployment remaining near 10%, employers have their pick of workers willing to accept less secure positions.In 2005, the government estimated that 31% of U.S. workers were already so-called contingent workers. Experts say that number could increase to 40% or more in the next 10 years.James Stoeckmann, senior practice leader at WorldatWork, a professional association of human resource executives, believes that full-time employees could become the minority of the nation's workforce within 20 to 30 years, leaving employees without traditional benefits such as health coverage, paid vacations and retirement plans, that most workers take for granted today.

    Civilians Unemployed for 27 Weeks and Over (FRED hockey stick graph)

    Unemployed and O.K. With It, if They're Not Alone - People are less unhappy about being unemployed if their friends are also out of work, according to a new study from the World Bank based on British data.Unemployment is typically associated with a significant decline in happiness. But unemployed people report a smaller drop in happiness if they are surrounded by fellow unemployed peers because the social norms about joblessness change.In other words, not being alone in your struggle to find a job can be comforting.There is a downside to having peers who are also unemployed, though: the relatively smaller drop in happiness means that people are less motivated to search for new work.This in turn has ripple effects on other workers, who see their peers’ continued unemployment and thus feel even less distressed about their own jobless state, and so they also look less intensively for new work. And the vicious cycle continues.

    Job Outlook for Teenagers Worsens - NYTimes.- This year is shaping up to be even worse than last for the millions of high school and college students looking for summer jobs. State and local governments are knee-deep in budget woes, and the stimulus money that helped cushion some government job programs last summer is running out. Private employers are also reluctant to hire until the economy shows more solid signs of recovery. With so many people competing for so few jobs, unemployed youth “are the silent victims of the economy,” Students seeking summer jobs, generally 16 to 24 years old, are at the end of the job line, behind the jobless baby boomers who are competing with new college graduates who, in turn, are trying to elbow out undergraduates and high school students. The unemployment rate for the 16-to-24 age group reached a record 19.6 percent in April, double the national average. For those job seekers, said Heidi Shierholz, an economist at the Economic Policy Institute, “This is the worst year, definitely since the early ’80s recession and very likely since the Great Depression.”

    Few Jobs for Students this Summer - From the NY Times: Fading Summer Jobs State and local governments, traditionally among the biggest seasonal employers, are knee-deep in budget woes, and the stimulus money that helped cushion some government job programs last summer is running out. Private employers are also reluctant to hire until the economy shows more solid signs of recovery. For summer jobs, this will probably be the worst year since the Great Depression.This graph shows the unemployment rate for workers 16 to 24 years old (from the BLS), and the headline unemployment rate (blue). The unemployment rate hit a record 19.6% in April for this group.This probably ties into the recent NY Times article on overwhelming student debt. When I was in college, I was able to find summer jobs that helped me pay my way through college

    Ignoring the Elephant in the Room: The Minimum Wage - In an article in the NY Times entitled "Job Outlook for Teenagers Worsens", you'll find a lot of worry about the staggeringly high unemployment rate of young people aged 16-24.  But nary a peep is made about the obvious elephant in the room: the minimum wage.That is a stark contrast to the job market for recent college graduates seeking full-time employment — a market where this is actually a slight increase from this time last year. There is no simple explanation for the large drop-off in summer jobs this decade, The recession didn't start until late in 2007, but the unemployment rate of 16-24 year olds began to increase in the second quarter of 2007.  The minimum wage was increased at the beginning of the third quarter of 2007 (July, specifically) for the first time in nearly a decade, but the increase was signed into law by then-president Bush on May 25th (the second quarter) of that year.  Employers knew for certain in the second quarter that the minimum wage was going to increase, so they scaled back their hiring of low-skilled workers in that quarter. 

    The Scandal of Child Labour in US Farming - Earlier in the month, Human Rights Watch (HRW) announced the beginning of its campaign to end child labour in US agriculture. The campaign, among other things, calls for the "same age and hour requirements to children working in agriculture that already apply to all other working children" and for the government to "strengthen provisions regarding children's exposure to pesticides".

    Prices, Wages, Food and Inequality - Mike Konczal’s inequality post as a guest blogger for Ezra is getting a bit of attention in the blogosphere. Konczal jumps off of an interesting post by Jamelle Bouie to argue that contrary to those who argue that “inequality isn’t so bad,” the unhealthy nature of the cheaper food that is purchased by the poor negates the fact that the poor face a lower inflation rate. Since he suggests I (and Will Wilkinson) think that “inequality isn’t so bad,” I wanted to correct a misconception that Konczal has about the argument of economist Christian Broda that he is responding to. Broda’s actual argument really doesn’t have anything to do with how healthy the things purchased by the poor are.

    Terribly sadly, 45 years ago Pat Moynihan was right - Only 38 percent of black children now live with married parents, compared with three-quarters of non-Hispanic white children. Many boys in fatherless families drop out of school, fail to find living-wage work and turn to idleness or crime. Many girls become poverty-stricken single mothers themselves. There are no magic bullets for the rise of out-of-wedlock births, a trend rooted in the decline in marriage rates and one that has affected other western nations as well. But as Moynihan recommended, we can expand employment programs to help young black people find work.  Our major effort, though, must be to help the very young. Such efforts might be modeled on those of the Harlem Children’s Zone, which Barack Obama promised in 2008 to help replicate in 20 cities. The project features a “baby college” offering a nine-week parenting program, all-day kindergarten classes, K-12 charter schools, after-school tutoring, summer school, family counseling and a health clinic. In 2008 it reached some 8,000 children in a 100-block area, at a cost of $58 million.  That's $7250 per student. A whole lot more money has been, and is being, wasted on programs that don't work as well.

    Black Women See Fewer Black Men at the Altar - NYTimes - It is a familiar lament of single African-American women: where are the “good” black men to marry? A new study shows that more and more black men are marrying women of other races. In fact, more than 1 in 5 black men who wed (22 percent) married a nonblack woman in 2008. This compares with about 9 percent of black women, and represents a significant increase for black men — from 15.7 percent in 2000 and 7.9 percent in 1980. Sociologists said the rate of black men marrying women of other races further reduces the already-shrunken pool of potential partners for black women seeking a black husband.  “When you add in the prison population,” said Prof. Steven Ruggles, director of the Minnesota Population Center, “it pretty well explains the extraordinarily low marriage rates of black women.”

    Defining Poverty - Yesterday, columnist Bob Samuelson criticized the Obama administration’s plans to change the definition of poverty that underlies calculation of the poverty rate. The official definition has been largely unchanged since the 1960s and a variety of experts on the left and the right have suggested improvements. The central problem, historically, is that all reforms proposed by conservatives would tend to lower the official poverty rate, while those proposed by liberals would tend to raise it. This has led to a long-term détente between both sides to maintain the status quo. Following are some Internet resources on the definition of poverty. On May 26, the Census Bureau published a Federal Register notice regarding development of a supplementary definition of poverty. In March, a working group studied this issue and its report is here. The Census poverty web page is here. The latest official poverty report is here, along with experimental definitions of poverty that adjust for things like taxes and noncash transfers

    Decline in Bankruptcy Filings May Be Temporary - The number of personal bankruptcy filings fell for the second month in May, but it may not be the start of permanent declines.Filings for consumer bankruptcy fell to 136,142 in May, down nearly 6% from the prior month, the American Bankruptcy Institute, a group of attorneys, accountants and other bankruptcy professionals, said Wednesday using data from the National Bankruptcy Research Center. Filings had also declined in April.Despite the improvement, “I think the overall arc is up,” said Samuel Gerdano, the Bankruptcy Institute’s executive director, and he predicts they will continue to rise.Personal bankruptcies are still 9% higher than the same time a year ago and are up more than 15% compared to the first five months of last year. Consumers are still struggling with high unemployment and tight credit conditions, which can be particularly damaging to small businesses that are often funded by personal lines of credit.

    Personal Bankruptcy Filings increase 9% compared to May 2009 - From the American Bankruptcy Institute: May Consumer Bankruptcy Filings up 9 Percent from Last Year The 136,142 consumer bankruptcies filed in May represented a 9 percent increase nationwide over the 124,838 filings recorded in May 2009, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the May consumer filings represented a 6 percent decrease from the 144,490 consumer filings recorded in April 2010. ...This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from on the comment from Gerdano, it appears the ABI has increased their forecast to over 1.6 million filings this year from their earlier forecast of just over 1.5 million filings this year.

    The unemployment crisis by education - I want to see if the idea of a break by education holds up in the data. I grab U3 unemployment by education level from bureau of labor statistics for those without a high school degree, those with a high school degree only, those with some college but without a bachelor degree, and those with a bachelor degree or above. All data is for people age 25 year and over. This data separated by education only goes back to 1992. Here it is plotted: (Click through for larger image.) As you can see, this crisis has been more devastating for the less educated in society. But how does it look comparably? I take the same data, and subtract the U3 unemployment rate for college graduates and above for each of the top three education lines. What’s interesting is that the unemployment rate above college graduate is consistent, or declining out of the 1992 recession, from 1992 to 2006. High school graduates had 3 percent higher unemployment rate over college graduates during the boom of 95-99, the crash of 00-03, and the weak jobless recovery of 04-07.  But during this crisis, it has skyrocketed; high school graduates now have 6 percent higher unemployment than college graduates.

    State and Local Governments Continuing to Lose Jobs - As my colleague Chad Stone explained this morning, today’s jobs report shows that “unemployment is still very high, and jobs are still hard to find” (charts here). That includes jobs in school districts and other parts of the public sector. States and localities cut 22,000 jobs in the past month, wiping out half the month’s gain in private-sector jobs (Matthew Yglesias highlights this issue as well). In total, state and local governments have cut 231,000 jobs, including 100,000 local education jobs, since the summer of 2008. This is a problem for the economy as a whole, because local businesses suffer when teachers and others don’t have paychecks to spend.These new figures are further evidence that Congress needs to include aid to states in its upcoming jobs bill — and another reason why we’ll keep bringing this issue up.

    Stimulus? What stimulus? - There has been much talk of the size of the US federal stimulus, and much debate about whether or not it has been an effective counter-cyclical policy instrument. But it's important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to US GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels.I suppose that this could be interpreted as good news: despite a contractionary fiscal stance, the US economy is in recovery. But it raises the question of how much better it could be doing if it had an expansionary fiscal policy.

    Jobless rate rises in most US cities - WSJ —The job market in April was tougher than a year ago in hundreds of U.S. metropolitan areas, according to data the U.S. Labor Department released Wednesday. The unemployment rate in April was higher than a year earlier in 291 of the 372 metropolitan areas covered by the Labor Department report. It was lower in 73 areas and unchanged in eight areas. The national unemployment rate in April was 9.5%, not seasonally adjusted. But 14 areas—11 of which were in California—reported unemployment rates of at least 15%.  The Las Vegas-Paradise region of Nevada had the largest year-over-year jump in its April unemployment rate. Its jobless rate hit 14.2% in April, up 3.7 percentage points from a year ago. In addition, four other areas had year-over-year rate increases of more than three percentage points in April: Farmington, N.M.; Yuba City, Calif.; Rockford, Ill.; and Yuma, Ariz.

    Many U.S. Cities Suffer Persistent High Unemployment -The job market in April was tougher for hundreds of U.S. metropolitan areas compared to a year ago, according to new data the U.S. Labor Department released Wednesday.Specifically, April unemployment rates were higher in 291 of the 372 metropolitan areas covered by the Labor Department report. It was lower in 73 areas and unchanged in eight areas.The national unemployment rate in April was 9.5%, on a nonseasonally adjusted basis. But 14 areas — 11 of which were in California — reported unemployment rates of at least 15%.The Las Vegas-Paradise region of Nevada had the largest year-over-year jump in its April unemployment rate. It reported a 3.7 percentage point increase in its April jobless rate compared to a year ago. In addition, four other areas had year-over-year rate increases of more than 3.0 percentage points in April: Farmington,N.M., Yuba City, Calif., Rockford, Ill., and Yuma, Ariz. Elkhart-Goshen, Ind. posted the largest year-over-year decrease in the April unemployment rate, a decrease of 4.8 percentage points.

    Unemployment spells in Michigan and South Carolina are the longest in the nation - Along with the highest rates of unemployment in a generation, the current recession has been characterized by record levels of long-term unemployment.  In April, the median length of unemployment in the United States was 21.6 weeks, up from 15.1 weeks in 2009 and well over double the median unemployment spell of 8.4 weeks at the start of the recession in December 2007. The Map shows the median length of unemployment by state in 2009, the most recent time for which state-level data are available. It shows that job searches were taking the longest in Michigan and South Carolina (19.4 weeks), followed by Florida (18.1 weeks), and Rhode Island (17.0 weeks). States where job searches were shortest include Alaska, North Dakota, and Wyoming, where the median length of unemployment was slightly less than eight weeks in 2009.

    Where Public Workers Run the Show - State and local public employees hold the biggest share of the work force in Wyoming, and the lowest share in the District of Columbia. Take a look: That chart is taken from this report on public sector wages, from the Center for Economic and Policy Research. The research organization’s calculations are based on Labor Department data.I was somewhat surprised by these numbers. It appears that more conservative states — which we traditionally think of as wanting smaller government — nonetheless have a higher share of their work force employed by the public sector.

    States passing budget cuts onto local governments - Confronted with severe revenue shortfalls, some states have found a convenient way of softening painful cutbacks and avoiding statewide tax increases: They've passed the buck to their counterparts in cities and counties.Traditionally, many states help bear the cost of jailing inmates, paving roads, running libraries and providing other services in local areas. Now, states are paring back their payments, leaving local leaders to decide how to make up the difference."They're shafting counties big time," complained Gene Oakley, the presiding commissioner of Carter County in rural southeast Missouri.

    States start to see tax revenue rebound - The good news is that states are expected to hit the bottom of their budget woes this coming fiscal year. The bad news is that there are still painful spending cuts that must be made in fiscal 2011, which starts July 1 in most states, and beyond. "From here on, for the next year or so, is going to be the bottom," said Raymond Scheppach, executive director of the National Governors Association, which released its biannual state fiscal report Thursday. Governors' recommended budgets called for a 3.6% increase in spending - the first after a record two years of declines, according to the report, which was conducted with the National Association of State Budget Officers.  That would bring general fund spending to $635.3 billion, still a far cry from the $687.3 billion expended in fiscal 2008, before the Great Recession hit.Tax revenues are expected to climb to $495.8 billion in fiscal 2011, up from $477.4 billion the previous year but down from the $541.5 billion collected in fiscal 2008.

    Text: Fiscal Condition Of US States Continues To Deteriorate - The following is the text of the results from a survey conducted by the the National Governors Association and the National Association of State Budget Officers Thursday, highlighting the continuing fiscal challenges for U.S. States:

    The Revenue Picture, State by State - State revenues rose in the first quarter of this year, largely because two states raised a lot of money through tax hikes, according to the Rockefeller Institute of Government. Here is a map of state tax revenue changes, taken from the institute’s latest report: State tax revenue increased nominally by 2.4 percent in the first quarter of this year, compared with the same period last year. The overall number was skewed, though, by legislated tax increases in New York and California. New York’s revenues rose by 15.8 percent, and California’s 19.1 percent, year over year.Things look quite different when you exclude New York and California. Tax revenues declined in 34 of the 49 states for which data are available, the institute said.

    U.S. States Plan More Spending Restraint Amid Curtailed Revenue (Bloomberg) -- U.S. states reduced spending for a second consecutive year as the worst U.S. recession since the 1930s cut tax revenue, a survey by two associations found.Governors may struggle to raise spending in fiscal 2011, which begins July 1 for 46 states, as they close deficits without the aid of federal stimulus money that runs out this year, the report by the National Governors Association and National Association of State Budget Officers said. States will have dealt with $296.6 billion of budget deficits from fiscal 2009 to 2012, covered in part by $135 billion of federal money received under stimulus legislation, according to the groups. Governors still face $127.4 billion of deficits for the rest of fiscal 2010, 2011 and 2012

    107000 Floridians lose jobless checks today -About 107,000 Floridians will lose their unemployment benefits today, a number expected to grow by 34,000 people with each passing week. Payments will stop because Congress has not reauthorized legislation to pay for the complicated mix of programs that keeps benefits flowing to millions of jobless across the country. For the state's long-term unemployed — 107,000 or so receiving checks under the "Extended Benefits" program — today marks the end of the last week of payments. For those receiving benefits under one of six programs — one state, five federal — payments will end gradually. Laid-off workers will be paid through the end of whatever tier they are on, but they will not move on to the next level.

    Half a Dozen States Are Delaying Tax Refund Checks - NYT- Procrastination is no longer just for the taxpayers who wait until the last moment to file their tax returns. Thanks to the economic downturn, at least a half-dozen cash-poor states are now delaying their tax refund checks. Hawaii initially planned to delay all tax refunds until July, when its fiscal year begins, but decided two weeks ago that its finances were healthy enough to begin sending checks to people whose tax returns were processed back in January. New York briefly postponed sending out half a billion dollars worth of refunds until its new fiscal year began in April. Rhode Island extended its tax filing deadline until May 11 to help taxpayers who were still reeling from severe floods; now the state is delaying refunds to make sure it has enough money left to pay debts coming due in June.

    “The New Normal” aka Ruin Nation - I have a phrase that I use to describe the current difficulties within state and local governments; I call it “The New Normal.”  The phrase is cribbed from PIMCO, but with me this phrase has a different meaning.  It starts with the difficulties that states and municipalities are having in meeting their budgets.  Much of this stems from pension and retiree healthcare promises.  Much of it stems from a loss of revenues from home sales, sales taxes, and lower income taxes.  In any case, it is a mess, and it is a mess that will get worse. I suspect that lower sales and income taxes will persist for a little while.  Home prices and sales will be subdued for around 3-5 years.  The oversupply is that great.But the difficulties from pensions and employee healthcare will last for decades.  States made generous promises that they did not fund.  Like profligate private corporations, the assumed that they could grow their way out of the promises that they had made.  But few considered the possibility that state or local tax revenues could shrink for a protracted period.  Also, few considered that the current cost of pension promises would eventually force its way into government funding.So now state and local governments are faced with the perfect storm.

    Congress pulls back state aid package, leaving a $2-billion hole in California budget - With the federal deficit a growing political liability, lawmakers in Congress are backing off plans to send more aid to financially strapped states, putting in jeopardy billions of dollars that California and others were counting on to balance their budgets.The potential loss of funds is a significant setback for Gov. Arnold Schwarzenegger and state lawmakers, who may not see nearly $2 billion in federal assistance that they intended to use to help bring California out of the red. The money was to be California's share of $24 billion in proposed assistance, mostly to cover healthcare spending, spread among all states. Budget experts say that is enough to wipe out about one-fourth of the combined state budget shortfalls.

    New York nearly goes broke again (Reuters) - New York state delayed paying $2.5 billion of bills as a short-term way of staying solvent but its cash crunch could get even worse in August and September, Budget Director Robert Megna said on Tuesday. "Had we not done that, I think we would have been close to broke," Megna told reporters in Albany. This is the third time since December the cash-poor state has withheld funds.This time, the state's general fund, which counts everything but federal aid and some specific revenues, ran in the red by about $500 million to $600 million, Megna told reporters. The state was able, however, to borrow from other funds, including the short-term investment fund.About $1.5 billion of the withheld funds must be paid to schools in June. The rest of the total could be paid in July.

    Paterson Now Focuses on Layoffs to Cut Budget - Days after a federal judge blocked his efforts to furlough half the state work force, Gov. David A. Paterson is drafting a plan that would lay off thousands of government workers at the beginning of next year, a move officials say is necessary to help balance the state budget. A senior administration official involved in preparing the plan said Monday that Mr. Paterson would direct state agencies to begin picking which positions could be eliminated starting Jan. 1, 2011.  That is the expiration date of the no-layoffs pledge that Mr. Paterson made to public employee unions last year in exchange for an agreement to reduce the state’s long-term pension costs.

    Gov. Paterson: New York deficit may balloon by another $1 billion if state doesn't get federal money - Gov. Paterson warned this morning that the state might have another $1 billion budget headache on its hands.Paterson, during his weekly appearance on WOR's "The John Gambling Show" said the federal government has yet to approve the additional Medicaid - or FMAP - money that the state is counting on to help balance its budget."The federal government in the tax bill last week did not pass the FMAP money, which is Medicaid money," Paterson told Gambling. "If New York doesn't get that money, our deficit is going to balloon from $9.2 billion to $10.2 billion."

    State Budget Deficit Grows To $1.23 Billion - The state budget deficit for fiscal 2009-10 continues to widen, reaching $1.23 billion at the end of May, Sen. Jake Corman, chairman of the Senate Appropriations Committee, said today.That figure is up by $125 million over April 30, due to continuing declines in major state revenues such as sales taxes, personal income taxes and corporate taxes."It is becoming more and more clear that in these very difficult economic times, Pennsylvania will have to again tighten an already-cinched belt, hold the line on spending and put off items we simply can't afford," said the Centre County Republican.June is the final month of the current fiscal year, and some state officials expect the final figure for red ink to be as much as $1.5 billion.

    Moody's downgrades Illinois bond rating  — At least one bond rating agency is taking notice that Illinois lawmakers and Gov. Pat Quinn did little to fix the state's finances this year.On Friday, Moody's lowered Illinois' bond rating down one notch to A1 in reaction to the failure of lawmakers to address the state's long-term structural budget woes. 'We view the failure to enact significant new recurring fiscal measures as a troublesome indicator with respect to Illinois' governance and management profile," Moody's said. Although the rating service said Illinois' outlook is stable because it can raise taxes and cut spending, it warned that recent budgeting failures don't bode well for the future

    State $1 billion short for budget - State tax collections continued to lag projections in May, bringing the budget deficit to more than $1 billion.That means tax revenue has come in $1 billion short of the spending levels passed in the budget for the current 2010 fiscal year.“Despite actions to reduce budgeted spending, the state’s reserves were once again drawn down further this month,” State Budget Director Chris Ruhl said. “Without the necessary spending reductions ordered by (Gov. Mitch Daniels), Indiana would be broke like so many other states with no remaining options other than raising taxes.”

    State Business Tax Receipts Down - The state of Texas was already facing a grim financial situation for the next legislative session: A budget gap that could reach $18-billion. If you were looking for a silver lining, you’ll want to ignore latest business tax numbers.RJ DeSilva with the State Comptroller’s Office says new figures show a ten percent decline from last year.“September through May for fiscal 2009, we’d collected about $4-billion,” DeSilva said. “And for the same time for this fiscal year, it’s been about $3.6-billion.”

    Connecticut Rating Cut by Fitch Ahead of Debt Sale (Bloomberg) -- Connecticut, the state with the highest tax-supported debt, had its bond rating lowered one level to AA by Fitch Ratings as it prepares to borrow money to cover a budget deficit for a second straight year.The state, whose residents are the wealthiest in the U.S., relies “on borrowing to address its ongoing fiscal challenges in the context of already high liabilities and large projected structural gaps,” Fitch analysts Doug Offerman and Laura Porter wrote in a press release today. The analysts didn’t immediately return calls seeking comment.Connecticut is preparing to borrow $956 million to close a budget gap in the fiscal year beginning July 1, after borrowing money last year to cover a deficit of $947.6 million, the analysts said. Lawmakers also chose to draw down the state’s rainy-day fund and raise the top income tax for residents after tax collections fell almost 15 percent in the year ending June 30, 2009, according to Fitch

    Build America Bonds Extended Under Jobs Bill Passed by House (Bloomberg) -- The U.S. House passed a two-year extension of the Build America Bonds program, the fastest- growing part of the $2.8 trillion municipal bond market, as part of a jobs bill. The program, which gives issuers of the taxable debt a direct federal subsidy, was created last year as part of President Barack Obama’s economic-stimulus package. It is set to expire at year-end. The jobs legislation extends the subsidies through 2012, lengthens unemployment benefits and revises some tax rules. The measure cuts aid to Build America issuers to 32 percent of coupon interest for debt sold next year from 35 percent now, and to 30 percent in 2012. It would also permit using sale proceeds to refund existing Build America issues, allowing municipalities to take advantage of any drop in interest rates. The program was adopted in the wake of the credit crisis to ease borrowing by cities and states. Issuers have used it to lower the cost of public works,

    In the Thrall of the Billionaire Boys Club -  It has the potential to become Barack Obama’s Vietnam. Not the Gulf oil spill, serious though that is. Nor Afghanistan. Other people’s mistakes are one thing. The ones that haunt forever are the ones you make yourself. I mean the system of public education.Remember the recipe for a policy disaster? Start with a handful of policy intellectuals confronting a stubborn problem, in love with a Big Idea. Fold in a bunch of ambitious Ivy League kids who don’t speak the local language. Churn up enthusiasm for the program in the gullible national press – and get ready for a decade of really bad news. My jaw dropped last week when I picked up The New York Times Magazine and turned to its cover story “The Teachers’ Unions’ Last Stand: How Obama’s Race to the Top could revolutionize Public Education,” by Steven Brill. In 8,000 breathless words, Brill described “a movement spreading across the country to hold public school teachers accountable by compensating, promoting, and even removing them according to the results they produce in class, as measured in part by student test scores.”

    The Ten Wealthiest Financiers in America Are Not Worth $900,000 an Hour - Dear Messrs, Tepper, Soros, Simons, Paulson, Cohen, Icahn, Lampert, Griffin, Arnold and Falcone,  It's now estimated that about 150,000 teachers will lose their jobs next year because of the financial crisis touched off by your industry. On behalf of the 3 million young people who would have been their students, I have a proposition for you: Donate 50 percent of your 2009 earnings to keep those 150,000 teachers in their classrooms. Each of you, on average, still would net over $935 million dollars for the year (you should be able to scrape by on that) -- and the money you'd forgo would ensure that 3 million kids would get an education. That the ten of you personally received $18.7 billion (not million) from your hedge fund proceeds in 2009 is quite a feat, given that it was the worst economic year since the Great Depression. You each got roughly $36 million a week -- over $900,000 an hour! Meanwhile, as result of the Wall Street shenanigans you helped engineer, 29 million Americans are now without work or forced into part-time jobs.

    Graduation Rates, by State and Race - Across United States public schools, just 74.9 percent of students who were freshmen in the fall of 2004 graduated from high school on time in 2008, according to a report from the National Center for Education Statistics. There was a great amount of variation among the states, though. Click the interactive chart below to see graduation rates by state in recent years:

    Overcoming Bias : Why Schools Test Often - We assumed that there were three salient fairness views in this situation: strict egalitarianism, finding all inequalities unfair; meritocratism, justifying inequalities reflecting differences in production; and libertarianism, justifying all inequalities in earnings. … The large majority of 5th graders were strict egalitarians, and, remarkably, there were almost no meritocrats at this grade level. In contrast, meritocratism was the dominant position in late adolescence, and the share of strict egalitarians fell dramatically. The share of libertarians was stable across grade levels. … From 9th grade, … efficiency considerations played a more important role for males than females. (more)This seems support for my view that frequent school scoring serves the function of making kids accept dominance and inequality:At school, our kids are rated and ranked far more often than most adults will tolerate, even though this actually slows their learning! It seems that modern schools function in part to help humans overcome their (genetically and culturally) inherited aversions to hierarchy and dominance. Modern workplaces require workers who are far more accepting than are foragers of being told what to do when, and of being explicitly ranked, and our schools prepare kids to accept this more primate-like environment. (more)

    Placing the Blame as Students Are Buried in Debt - According to the College Board’s Trends in Student Aid study, 10 percent of people who graduated in 2007-8 with student loans had borrowed $40,000 or more. The median debt for bachelor’s degree recipients who borrowed while attending private, nonprofit colleges was $22,380. The Project on Student Debt, a research and advocacy organization in Oakland, Calif., used federal data to estimate that 206,000 people graduated from college (including many from for-profit universities) with more than $40,000 in student loan debt in that same period. That’s a ninefold increase over the number of people in 1996, using 2008 dollars. No one forces borrowers to take out these loans, and Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong. Ms. Munna’s father died when she was 13, after a series of illnesses.

    College Students Are Less Empathic Than Generations Past: Scientific American Podcast -The rise of social media sites like Facebook, MySpace and Flikr, has been accompanied by fears that we are producing the most narcissistic “Generation Me” in history.   But is there any actual scientific evidence for that view? Well, a study of 14,000 college students found that today’s young people are 40 percent less empathetic than college kids from 30 years ago. The research was presented this weekend at the annual meeting of Association for Psychological Science. “It’s harder for today’s college student to empathize with others becau se so much of their social lives is done through a computer and not through real life interaction.”

    Pa. teacher pension blowup: Retirement fund is coming up way short -A meteoric climb in pension costs is poised to strain taxpayers and load millions in new expenses onto local school budgets generations to come. Payments into the Public School Employees Retirement System that were deferred from earlier in the decade are now coming due, with more than $1 billion needed to cover these costs statewide next year.In just over two years, as the 2012-13 school year gets under way, East Stroudsburg, Pleasant Valley, Pocono Mountain and Stroudsburg school districts will face $35 million in combined new pension obligations compared to the current year."That will absolutely wreak havoc on us financially," Pleasant Valley Superintendent Doug Arnold said. "The beast is at the doorstep."

    States Shrink 'Unaffordable' Benefits to Bridge $1 Trillion Gap (Bloomberg) -- Janet and Mark Hartmann, a New Jersey couple with 68 years of government jobs between them, may retire ahead of plan because the state is $102 billion short of funds needed to pay all the benefits it owes. New Jersey and 20 other states are urging early retirements, cutting benefits and demanding employees contribute more in the face of what the Pew Center on the States says is a $1 trillion gap between available assets and what’s owed workers. Declining tax revenue has left governments unable to make up the $724 billion of market losses suffered by the 100 largest state retirement plans in the two years that ended last June, according to the U.S. Census Bureau. Some states have skipped payments to retirement accounts or borrowed to make them, endangering their credit ratings.

    The union pension ponzi scheme - Last week, I wrote about multiemployer pension plans as they relates to Sen. Bob Casey’s, D-Pa., pension bailout bill. It takes a bit to unpack and I encourage you to read the whole thing, but in a nutshell:So union management bleeds one company dry, then makes an unrelated company responsible for picking up their pension obligations. Then they start bleeding them dry. When there’s no one left to bleed dry, they have Democratic senators and House members in their pocket to push this bill on the taxpayer.But wait! It actually gets even more sinister. In April, I wrote about how card check is used as a tool to pressure employers into multiemployer pension plans:But unions don’t want card check just so they can organize more workplaces and collect more dues — that’s chump change. They want to organize more workplaces so they can then use mandatory binding arbitration to force more businesses into multiemployer pension plans.

    Funding Status of U.S. Pensions Falls to 82.0 Percent in May, According to BNY Mellon Asset Management - Falling stock markets in May sent pension plan assets lower, resulting in the worst funded status for the typical U.S. corporate pension plan since October 2009, according to monthly statistics published by BNY Mellon Asset Management. The funded status in May declined 4.3 percentage points to 82.0 percent.Through the end of May, the funded status of the typical U.S. corporate plan is down 3.5 percentage points for the year.The falling stock markets resulted in a decline of 4.8 percent in assets at the typical U.S. corporate plan, while liabilities were little changed in May, rising 0.3 percent, as reported by the BNY Mellon Pension Summary Report for May 2010. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities

    Public pension funds could be in for big shock - The Government Accounting Standards Board is preparing to release a document that could send shivers through public pension systems and the taxpayers who fund them.The document, tagged a preliminary view of proposed pension accounting reforms, is scheduled for release this week. Statements on the board's website suggest coming disclosure standards that could ramp up the need for higher contributions to keep public pension funds on a stable footing. Economist Andrew Biggs, a senior fellow at the American Enterprise Institute and former deputy commissioner for the Social Security Administration, said it is not clear exactly how the standards would work, but it appears they could require state and local governments, struggling with pension obligations, to dig deeper and set aside more cash each year for pensions."If the final rules are the way the draft is laid out, it would probably raise market liability by one-third to one-fourth," Biggs said.

    Should we retire later - - There are two main factors that should influence the age at which we retire. First, improving productivity means that any given standard of living can be achieved with less work, and we would expect at least some of this benefit to take the form of an increase in leisure, including more years spent in retirement. Second, and going in the opposite direction, we are living longer and (because of higher education levels and increased difficulty of entry to the workforce) starting work later[1]. So, with a fixed retirement age, the number of years out of the workforce is increasing, while the number in the workforce is decreasing.

    Social Security and Kids - In the comments on my post on retirement last week, Chris Koresko asks a good question, writing:Would it make sense to link the size of a retiree's Social Security payment to the number of kids he has in the workforce paying Social Security taxes?After all, if not for SS it is likely that working people would be spending more of their income taking care of their parents; therefore, such a rule would help reduce the redistribution from large families to small ones. I think it would make sense, for the reason he says. His proposal, if implemented, would reduce the distribution from large to small families. But then, if one's goal is to reduce distribution [I don't call it "redistribution" because the term "redistribution" presupposes that someone distributed in the first place] why not take the next logical step: make Social Security non-distributive. How would you do that? End it. Indeed, when you look at many government programs and you start thinking about reforming them to make them less inefficient or less distributive, you can usually reason your way to ending them in toto. I have no difficulty with that.

    Whacking the Old Folks - In setting up his National Commission on Fiscal Responsibility and Reform, Barack Obama is again playing coy in public, but his intentions are widely understood among Washington insiders. The president intends to offer Social Security as a sacrificial lamb to entice conservative deficit hawks into a grand bipartisan compromise in which Democrats agree to cut Social Security benefits for future retirees while Republicans accede to significant tax increases to reduce government red ink. Obama's commission is the vehicle created to achieve this deal. He ducks questions about his preferences, saying only that "everything has to be on the table." But White House lieutenants are privately talking up a bargain along those lines. They are telling anxious liberals to trust the president to make only moderate cuts. Better to have Democrats cut Social Security, Obama advisers say, than leave the task to bloodthirsty Republicans.

    House 401(k) plan ‘slap in the face’ to Obama administration - A retirement plan fee disclosure provision that was passed in the House last Friday may clash with upcoming rules from the Labor Department -- and could dramatically delay the implementation of any new rules governing pension plan fee disclosures.Late last week, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act, which included language that would require 401(k) service providers to provide information on fees to both plan participants and plan sponsors. If fact, 401(k) service providers would need to inform plans sponsors of all fees on a participant's account, grouping them into three categories: plan administration and record-keeping fees, investment management fees and all other fees. Likewise, providers would be required to provide participants with information on their investment options, including disclosures on risk, return and investment objectives. That information would have to be sent to an employee before he or she enrolls in a retirement plan.

    Virginia leaders grapple with mushrooming Medicaid costs - More than 750,000 low-income Virginians depend on it to stay healthy. It costs more than the state's college system and prisons.Over the years, Medicaid spending has markedly increased in Virginia.  It was about 5 percent of the state general fund budget in 1985. Soon it will be nearly 20 percent, or about $3 billion, second only to public education spending."This already out-of-control, unsustainable level of increase in Medicaid funding... has got to be arrested," Gov. Bob McDonnell said recently. "We cannot continue to sustain the same level of funding in the Medicaid process."

    Medicare Cuts Payments To Doctors By 21 Percent - The rate Medicare pays doctors will be cut by 21 percent starting Tuesday. Physicians in San Diego County warn seniors may have trouble getting care if Congress doesn't rescind the cut. The Medicare pay reduction is mandated by a bill passed in 1997. Congress has delayed the pay cut three times this year. The House passed a bill that would have blocked it once again, but the Senate failed to act in time.

    Dems Kill COBRA For Older Unemployed – Health Care Reform Subsidies Next? - House Dems killed COBRA subsidies for the long-term unemployed -- generally older people -- last week, which means they won't be able to get health insurance. This group — comprising generally older workers — has pulled up the average length of time that a current worker has been unemployed to a record high of 33 weeks as of April. The percentage of unemployed people who have been looking for jobs for more than six months is at 45.9 percent, the highest in at least six decades.Think ahead to what this means for the recently-passed health care "reform." If you think there are "subsidies" to help people afford the insurance they are ordered to purchase from the giant insurance corporations, just remember how Democrats treated workers who can't find jobs.

    Pelosi: House Will Pass COBRA Subsidies, State Aid - Speaker Nancy Pelosi (D-Calif.) said on Tuesday that the House would return to the debate over COBRA subsidies and aid to state governments when Congress returns, and may package both of them together. The spending was cut from a jobs bill the House passed Friday in order to mollify Democrats concerned about the deficit. The House returns next week."There's a changed climate in terms of the size of the spending/investment packages that we're putting forth," said Pelosi in a conference call with progressive media, explaining why she scuttled COBRA and state aid. "If I had all the votes I needed in a non-Blue Dog world, I would not have had to make some of the changes I made to get some Blue Dog support."Some Democrats, said Pelosi, were reluctant to subsidize COBRA when there were still workers without health care.

    Doug Elmendorf: Health Costs and the Federal Budget (CBO pdf)

    McAllen: A Tale of Three Counties - According to Gawande, McAllen Texas has a physician culture that promotes high cost, low quality care. By comparison El Paso is portrayed as having a similar patient population to McAllen with lower costs of care.   Grand Junction, Colorado, however, the antithesis of McAllen according to the article, is credited with having a physician culture that promotes low costs and high quality.  Ultimately Gawande warns that by failing to change the physician culture nationally, “McAllen won’t be an outlier.  It will be our future.”  But is McAllen really an outlier, a harbinger of physician income-enhancing practices run amok?  A fair comparison between McAllen and Grand Junction would include a more precise analytic methodology than could be offered in Dr. Gawande’s article. 

    Good Health Care For Less Money? Yup, Still Possible - Advocates for health care reform (including yours truly) have frequently argued that it is possible to reduce the amount of care without reducing the quality--or, to put it more simply, that less care doesn't have to equal worse care.A story in today's New York Times may leave readers thinking that argument is bunk. It isn't. And while I'll have more to say on this soon--as it happens, I'm writing a longer column on this very subject--let me quickly explain the basics, since it's in the news.

    Soaring Costs Force Canada To Reassess Health Model TORONTO (Reuters) – Pressured by an aging population and the need to rein in budget deficits, Canada's provinces are taking tough measures to curb healthcare costs, a trend that could erode the principles of the popular state-funded system.Ontario, Canada's most populous province, kicked off a fierce battle with drug companies and pharmacies when it said earlier this year it would halve generic drug prices and eliminate "incentive fees" to generic drug manufacturers.British Columbia is replacing block grants to hospitals with fee-for-procedure payments and Quebec has a new flat health tax and a proposal for payments on each medical visit -- an idea that critics say is an illegal user fee.And a few provinces are also experimenting with private funding for procedures such as hip, knee and cataract surgery.

     When reform works - HEALTH care reform in Massachusetts was a template of sorts for the national reform bill recently enacted by Congress. Included in that reform was an individual mandate. New economic research from Jonathan Kolstad and Amanda Kowalski investigates the effect of the mandate in the context of reform on costs and treatment: Among the population discharged from the hospital in Massachusetts, the reform decreased uninsurance by 28% relative to its initial level. Increased coverage affected utilization patterns by decreasing length of stay and the number of inpatient admissions originating from the emergency room. We also find evidence that outpatient care reduced hospitalizations for preventable conditions. At the same time we find no evidence that the cost of hospital care increased. The reform affected nearly all age, gender, income, and race categories.

    Poll: Increasing Number Of Americans Oppose Repealing Health Care Law - Just days after Republicans released their third “bill” to repeal the health care law, a new 60 Minutes/Vanity Fair poll finds that “given the option to name the sections of the healthcare law they would most like to see the GOP repeal, 42 percent [of Americans] said they would leave the bill alone and repeal no parts“:...Polling for the new health care law doesn’t show the kind of “bump” Democrats had expected, but the numbers are slowly improving. For instance, according to a May 2010 Wall Street Journal/NBC poll, 55% of Americans said health reform should have a chance to work, versus 42% who said repeal and start over. Just 17% thought the health reform bill “would make things better, 36% said health care would get worse and 37% said it would stay the same.” “In April 2009, those numbers were 22 percent, 24 percent and 29 percent respectively.”

    Obamacare taking on water - In its May poll (conducted from May 11-16), Kaiser Health detected a noticeable decline in ObamaCare’s popularity.  Almost alone among the polls, the monthly Kaiser poll had never showed ObamaCare facing a public-opinion deficit at any time this year.  This is partly because Kaiser polls all Americans — not merely registered or likely voters — and ObamaCare polls better among the politically disengaged.Furthermore, only 44 percent now say they are “confused” by the law, compared to 55 percent last month.  To know ObamaCare is apparently not to love ObamaCare. Rasmussen, whose poll includes only likely voters, has recently registered a similarly dramatic shift against ObamaCare.  In the first eight weeks following the overhaul’s passage, Rasmussen showed strong and consistent support for repeal.  This week, the gap has ballooned to 31 points.  Americans now favor repeal by a margin of almost 2-to-1, with 63 percent favoring repeal and just 32 percent opposing it.A more detailed look at the numbers provides even more encouragement for those who are actively pushing for ObamaCare’s repeal.

    How Congress Can Blow It - Health reform is at risk, and always will be. This, from Christopher Rowland in The Boston Globe, illustrates how: A $3 million campaign by doctors, scanner operators, manufacturers, and groups devoted to women’s health helped persuade lawmakers to overrule Medicare administrators this year and restore much of the reimbursement for osteoporosis tests. In a little-noticed provision buried deep in the sweeping new health care bill, Congress decreed that Medicare shall pay $97 for each test, instead of $50.It was a stark instance of a narrowly tailored, special-interest political victory in a law trumpeted by President Obama and Democrats as putting America on a path to a more rational health care system, where decisions are made on medical evidence and patient outcomes. …

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

    Skinny people shop at Whole Foods - Researchers at the University of Washington further illustrate the link between poverty and obesity:The percentage of food shoppers who are obese is almost 10 times higher at low-cost grocery stores compared with upscale markets, a small new study shows.Researchers say the striking findings underscore poverty as a key factor in America’s growing girth.In the Seattle area, a region with an average obesity rate of about 20 percent, only about 4 percent of shoppers who filled their carts at Whole Foods Market stores were obese, compared with nearly 40 percent of shoppers at lower-priced Albertsons stores.[...]“If people wanted a diet to be cheap, they went to one supermarket,” said Adam Drewnowski, a University of Washington epidemiology professor who studies obesity and social class. “If they wanted their diet to be healthy, they went to another supermarket and spent more.”

    Moneyless man reveals how to live a cashless life without starving - For most of us, food comes in plastic packets from the supermarket. A friend, who runs tours of an organic farm for school children, gives much anecdotal evidence of this. The answer to this FAQ is in the query itself – I eat from the earth. Food is free, and indiscriminately so. The apple tree doesn't ask if you've got enough cash when you go to pick its fruit; it just gives to whoever wants an apple. We are the only species, out of millions on the planet, that is deluded enough to think that it needs money to eat. And what's worse, I often observe people walking straight past free food on their way to buy it from all over the world via the supermarket.

    UN Urges Global Move To Meat And Dairy-Free Diet - A global shift towards a vegan diet is vital to save the world from hunger, fuel poverty and the worst impacts of climate change, a UN report said today.As the global population surges towards a predicted 9.1 billion people by 2050, western tastes for diets rich in meat and dairy products are unsustainable, says the report from United Nations Environment Programme's (UNEP) international panel of sustainable resource management. It says: "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."

    Feds Hit Farm For Pollution - Melvin Petersheim owns and operates an egg-laying operation with approximately 36,000 hens. His brother, Moses, runs a dairy farm on the same property with about 80 dairy cows. The inspection determined that pollutants, including nitrogen and phosphorus from animal manure from both operations, were discharged into an unnamed tributary of Chiques Creek, a tributary of the Susquehanna River, according to EPA. EPA is ordering the facility to cease discharging pollutants into the waters until the property owners have the required permit. The farmers also must submit a compliance plan to EPA explaining what actions they have taken and will take to comply with the Clean Water Act. The farm is in the Chesapeake Bay watershed. EPA said it was taking the action as part of the federal agency's efforts to implement Obama's executive order for the Chesapeake Bay watershed and as part of a compliance and enforcement strategy to improve water quality in local waterways and the Bay.

    West Poised for Worst Grasshopper Outbreak in 30 Years - The worst grasshopper outbreak in decades may envelop the western states this summer, scientists warn. A dramatic rise in the number of grasshoppers was found during a survey of the western states conducted last year, by the U.S. Department of Agriculture (USDA). And while that may seem bad enough on its own, it's really the grasshoppers' kids that are the threat. If last summer's adults were successful during mating season, then the worst grasshopper infestation in 30 years could strike ranches and agricultural land in the Great Plains states between late July and early August, said Roeland Elliston of the USDA's Animal and Plant Health Inspection Service in Fort Collins, Colo., who worked on the survey. Ecologist David Branson who was not involved with the study but specializes in grasshopper management with the USDA in Sidney, Mont., agreed.

    Scientists breed goats that produce spider silk -- Researchers from the University of Wyoming have developed a way to incorporate spiders' silk-spinning genes into goats, allowing the researchers to harvest the silk protein from the goats’ milk for a variety of applications. For instance, due to its strength and elasticity, spider silk fiber could have several medical uses, such as for making artificial ligaments and tendons, for eye sutures, and for jaw repair. The silk could also have applications in bulletproof vests and improved car airbags. Normally, getting enough spider silk for these applications requires large numbers of spiders. However, spiders tend to be territorial, so when the researchers tried to set up spider farms, the spiders killed each other. To solve this problem, Randy Lewis, a professor of molecular biology at the University of Wyoming, and other researchers decided to put the spiders’ dragline silk gene into goats in such a way that the goats would only make the protein in their milk. Like any other genetic factor, only a certain percentage of the goats end up with the gene. For instance, of seven goat kids born in February 2010, three have tested positive for having the silk protein gene. When these transgenic goats have kids and start lactating, the researchers will collect the milk and purify the spider silk protein into “much, much higher quantities,” Lewis said.

    I've Got a Bad Feeling About This: - China has been in the news several times during the past few years with respect to  goods tainted with dangerous chemicals.  Food, milk, toys, drywall.  I mention this because recently the stock of Monsanto (MON) has been decimated, due in no small part to the fact that their dominant Roundup herbicide franchise is feeling the effects of severe competition from generic Chinese competitors. Let that sink in. Generic Chinese herbicides... How can this not end badly?  I've got a bad feeling about this...

    House Passes Legislation to Extend Biodiesel Credit (Bloomberg) -- A $1-a-gallon biodiesel tax credit that expired Dec. 31 would be extended under legislation that passed the U.S. House of Representatives today. The proposal, which also continues unemployment insurance and restores other tax breaks, would keep the biodiesel credit in place until the end of this year. “Obviously, this is a win for the industry,” said Michael Frohlich, a spokesman for the National Biodiesel Board, the industry’s primary trade group. “Each step that brings us closer to having the biodiesel tax credit reinstated is a win.” Biodiesel production has almost stopped since the tax credit expired, according to the National Biodiesel Board. There are 173 biodiesel plants in the U.S. with an annual capacity of 2.7 billion gallons.

    Exxon $600 Million Algae Investment Makes Khosla See Pipe Dream -- Inside an industrial warehouse in South San Francisco, California, Harrison Dillon, chief technology officer of startup Solazyme Inc., examines a beaker filled with a brown paste made of sugar cane waste...scientists will empty it into 5-gallon metal flasks of algae and water. The algae will gorge on the treat -- filling themselves with fatty oils as they double in size every six hours, Bloomberg Markets magazine reports in its July issue.  Down the hall, past a rainbow of algae strains arrayed in Petri dishes, Chief Executive Officer Jonathan Wolfson shows off a gallon-size bottle of slightly viscous liquid. After drying the algae, wringing out the oil and shipping it to a refinery, this is the prize: diesel fuel that Wolfson says is chemically indistinguishable from its petroleum-based equivalent and which has already powered a Jeep Liberty and a Mercedes Benz sedan. “We’ve produced tens of thousands of gallons, and by the end of 2010, I hope I can say we’ve produced hundreds of thousands,” Wolfson, 39, says. “In the next two years, we should get the cost down to the $60 to $80-a-barrel range.”

    Peak Wood: Nature Does Impose Limits - While the specifics of Peak Oil can be debated, the existence of an inflection point in which petroleum becomes increasingly difficult and expensive to extract is not. A few days ago our Melinda Burns looked at possible scenarios on how the world might cope with Peak Oil. Here, John Perlin, author of A Forest Journey: The Story of Wood and Civilization, recaps and expands on the cautionary tales he’s recounted on how the world has already experienced in the age of Peak Wood.Constant fuel wood crises taught pre-Colombian Americans in New England the precariousness of accessible wood supplies. Their minimal tool set circumscribed the distance they could gather firewood essential for survival before the task became unbearable. Reliance on stone tools made felling trees and cutting them up laborious. Lacking domesticated animals as well as wheels for carts and sails for ships for hauling added to their burden. Village sites constantly moved to access forests close enough for humans to carry such bulky cargo as it was only a matter of time they cleared the woods nearby

    Salmon Study Pits Fish Against Alaskan Mega-Mine - An Alaskan bay bitterly contested by fishermen and miners has become the site of a landmark study on population dynamics — and the findings favor the fish. Published June 2 in Nature, the analysis of Bristol Bay salmon quantifies a common-sense tenet of population dynamics: Diversity produces resilience. Had the proposed Pebble Mine been built in earlier decades, it’s possible the bay’s sockeye salmon fishery — the world’s largest, worth more than $100 million annually — might not exist today.“The long-term maintenance of the Bristol Bay sockeye fishery has sometimes been almost totally dependent on the Kvichak watershed,” where the mine would be located, said University of Washington biologist Ray Hilborn. “If the entire Kvichak watershed was made nonproductive, then historically, that would have been totally disastrous.”

    Radioactive fish near nuclear plant said ordinary - State health officials say Vermont Yankee most likely was not the source of the radioactivity in the fish, a yellow perch. Fish and other living things - including humans - around the world have been absorbing tiny amounts of strontium-90 since the United States, Russia and China tested nuclear weapons in the atmosphere in the 1950s and 1960s. A fresher dose was released by the Chernobyl nuclear disaster in 1986.  "It's clearly consistent with the background levels from Chernobyl and weapons testing that went on until 1965," said Michael Dumond, chief of prevention services, which includes radiological health, for the state of New Hampshire. The river between the states is New Hampshire territory, though Dumond said New Hampshire has largely deferred to Vermont on testing samples from it. Does that mean strontium-90 is present in fish caught around the world? "Yes. It's everywhere,"

    Wind power losing its punch - The high cost of building wind farms and transmitting their electricity to population centers coupled with a reduced price advantage has slowed the growth of the industry nationwide.  The first three months of this year saw only 539 new megawatts of wind power added in the U.S., the lowest levels since early 2007, according to the American Wind Energy Association. Nevertheless, wind industry leaders meeting in Dallas last week for the Windpower 2010 convention remained optimistic. They're pinning hopes on a federal renewable electricity standard that would bring fresh gusts to the sector by increasing demand for wind power. The cost to build a wind farm has roughly doubled in the past four years due to steep increases in steel and copper prices as well as currency fluctuations. A credit crunch has further hurt growth.

    The potential for small scale hydropower development in the US -In an earlier paper (Kosnik, 2008), the potential for small scale hydropower to contribute to US renewable energy supplies, as well as reduce current carbon emissions, was investigated. It was discovered that thousands of viable sites capable of producing significant amounts of hydroelectric power were available throughout the United States. The primary objective of this paper is to determine the cost-effectiveness of developing these small scale hydropower sites. Just because a site has the necessary topographical features to allow small scale hydropower development, does not mean that it should be pursued from a cost-benefit perspective, even if it is a renewable energy resource with minimal effects on the environment. This analysis finds that while the average cost of developing small scale hydropower is relatively high, there still remain hundreds of sites on the low end of the cost scale that are cost-effective to develop right now.

    U.S. Climate-Satellite Capabilities in Jeopardy -The United States is in danger of losing its ability to monitor key climate variables from satellites, according to a new Government Accountability Office report. The country’s Earth-observing satellite program has been underfunded for a decade, and the impact of the lack of funds is finally hitting home. The GAO report found that capabilities originally slated for two new Earth-monitoring programs, NPOESS and GOES-R, run by the National Oceanic and Atmospheric Administration and the Department of Defense have been cut and adequate plans to replace them do not exist.Meanwhile, up until six months ago, NASA had 15 functional Earth-sensing satellites. Two of them went down in the past year, and of the remaining 13, 12 are past their design lifetimes. Only seven may be functional by 2016, said Waleed Abdalati, a longtime NASA satellite scientist now teaching at the Cooperative Institute for Research in Environmental Studies at the University of Colorado Boulder.

    Urgently needed: A global green New Deal - VoxEU - Nearly one-sixth of the more than $3 trillion in fiscal stimulus spent in 2008 and 2009 was allocated to green spending. But this column argues that without correcting existing market and policy distortions, the “greening” of the world economy will be short-lived. Now more than ever, the world needs a global green New Deal – and it needs the G20 to lead the way.

    The social cost of carbon - That unchecked climate change will cost us is already well established. Left unaddressed, it will cost the United States about $1.9 trillion per year by 2100, which is nearly 2 percent of the projected GDP. In order to avoid those future costs, the fundamental policy prescription would be to put a price on carbon dioxide now that accounts for these long-term consequences of our carbon output. For this to work, however, the price would have to be high enough to actually drive change.This is the basic premise of the climate bill recently offered up in the Senate. The bill would price carbon, keeping it within a firm "price collar": an upper and lower limit on the price of carbon, intended to stabilize the market. This bill sets the price of carbon at a minimum of $12 per ton (increasing at 3 percent over inflation each year) and a maximum of $25 per ton (increasing at 5 percent over inflation annually).

    Ezra Klein - Obama talks carbon pricing - Obama is finally using the BP disaster to talk about the need to get past the sticky black stuff that's choking the Gulf Coast: Now, this brings me to an issue that’s on everybody’s minds right now -- namely, what kind of energy future can ensure our long-term prosperity. The catastrophe unfolding in the gulf right now may prove to be a result of human error, or of corporations taking dangerous shortcuts to compromise safety, or a combination of both. And I’ve launched a National Commission so that the American people will have answers on exactly what happened. But we have to acknowledge that there are inherent risks to drilling four miles beneath the surface of the Earth, and these are risks these are risks that are bound to increase the harder oil extraction becomes. We also have to acknowledge that an America run solely on fossil fuels should not be the vision we have for our children and our grandchildren. [...]

    NASA: The 12-month running mean global temperature has reached a new record in 2010 — despite recent minimum of solar irradiance"We conclude that global temperature continued to rise rapidly in the past decade" and "there has been no reduction in the global warming trend of 0.15-0.20°C/decade that began in the late 1970s." June 3, 2010 Note:  Hansen wants comments on this draft, so keep ‘em coming.NASA’s Goddard Institute for Space Studies (GISS) has released a revised draft of “Global Surface Temperature Change,” by James Hansen et al.  There’s also a a summary discussion of the paper (reprinted below), and two PowerPoint posters of key figures like this one:

    No Drilling, No Energy Bill It's tempting to think common sense would have a greater influence over the debate on a new energy/climate policy. With the oil spill disaster constantly getting worse, the need for alternative energies growing more obvious, and the public's appetite for coastal drilling fading fast, the way forward seems pretty clear.And yet, a few too many policymakers fail to see it that way. Sen. Lindsey Graham (R-S.C.), who recently walked away from his own tri-partisan proposal after months of work, argued yesterday that Democratic reluctance to expanded drilling means the legislation will likely die."Why would a person who really believes in drilling put a bill on the floor right now to expand drilling and revenue sharing, knowing it can't get 50 votes?" Graham told The Hill. "The resistance to drilling has hardened on the Democratic side, so we [Republicans have] got more votes to make up."In other words, if Democratic skepticism of drilling is intensifying -- hardly an unreasonable position, under the circumstances -- then Republicans, who still demand more drilling, aren't willing to cooperate, no matter how dire the need.

    "What if carbon dioxide were as black as oil?" ...while we have readily and rightfully committed ourselves to understanding the cause of the spill, its effects and how to help restore the affected Gulf Coast region, we still can't seem to come to grips with a much more dangerous, far-reaching pollutant that is changing the fundamental chemistry of our entire planet: carbon dioxide.  Why the difference in concern? Is it as simple as out of sight, out of mind?We can see oil discoloring the ocean, blackening coastlines and covering wildlife, but carbon dioxide is colorless and odorless. We don't see it, and there's no video or sound bites, so it's easier to deny.CNN and other media outlets do not stream figures about carbon dioxide levels in the atmosphere. But it has been spewing steadily and increasingly for decades throughout our planet from power plants, factories and our cars and homes

    BP Abandons `Top Kill' Approach, Will Switch Tactics to Stop Gulf Oil Leak -  (Bloomberg) -- BP Plc began working on a new plan to cap a leaking oil well in the Gulf of Mexico after a three-day effort to stop the flow with a blast of pressurized fluids was unsuccessful.  The company started using high-horsepower pumps on May 26 to ram a mixture of mud-like drilling fluid and rubber scrap into the oil and gas that’s been gushing for more than five weeks, a process known as “top kill.” At a press conference yesterday, Doug Suttles, the BP executive in charge of the spill response, said the top kill strategy didn’t work. BP will now try a containment device known as a lower-marine riser package cap, Suttles said.

    BP's Top Kill Fails as Gulf Coast Oil-Spill Worries Grow - Shortly before Dufrene and his crew docked, British Petroleum announced that its attempt to top kill, or plug, the deep-ocean drill-pipe leak had failed. That meant that the spill, which after more than a month of spewing crude into the Gulf is already the worst man-made environmental disaster in U.S. history, will continue for weeks, if not months, as BP tries alternative ways to subdue it. It also means cleanup workers like Dufrene are likely have a more daunting job ahead of them. "I can't describe to you how much that news hurt today," Dufrene said. "This is the first moment I've felt like maybe we could lose some of these precious swamplands." (Watch the video "Portraits from the Oil Spill.")  Dufrene's reaction was echoed throughout the bayou from shrimp boaters who've watched the Deepwater spill steal their livelihoods this year to residents attending the annual seafood festival this weekend in Plaquemines parish, which includes Venice - and wondering if they'll be able to enjoy one next year. The spill is "going to destroy south Louisiana,"

    Senasational Claims By Matt Simmons About The BP Leak - Matt Simmons gained fame with his book 2005 Twilight in the Desert where he claimed that the Saudis were overstating their oil output because they hit “peak oil.” Right or wrong Simmons claimed the price of oil was going to skyrocket and three years after the book’s release the crude oil hit $147/Barrel. In January 2009 the WSJ called Simmons one of the five most important voices in the oil industry.Simmons has been wrong in the past and his views are non-conventional and often correct. Simmons is also highly connected within the oil industry so he knows who to talk to verify his claims.I have no idea if Simmons is right or wrong but his latest claims, laid out in a Bloomberg TV interview Friday (May 28) appear to be nothing short of sensational.Matt Simmons says “Top Kill” is a sideshow, misses the big problem of a second leak 5 to 7 miles away releasing up to 120,000 barrels/day. Simmons goes on to say we might need nukes to seal the leak.

      “Obama’s daughter asked the wrong question:  At the end of his buck-stops-here press conference on Thursday, he told a story about how he'd been shaving that morning when his 11-year-old daughter asked, "Did you plug the hole yet, Daddy?" It's an odd question, since of all the things the most powerful man in the world has control over, plugging the oil leak in the Gulf isn't one of them. The federal government simply lacks the relevant equipment to address a volcano of oil one mile below the ocean. Sure, no father wants to tell his child that he can't solve the biggest problem around, but the fact is that the oil companies are the only ones who do this kind of risky drilling — and the only ones who have the technology to stop it. But it's also true that Big Oil has spent years deluding itself and others into thinking that this kind of spill was impossible and that preparing for one wasn't necessary. Indeed, BP once called a blowout disaster “inconceivable.” Certainly, if you can't conceive of a disaster, you'll become more and more lax, more and more reckless, until one happens.

    BP bused in 100s of temp workers for Obama visit, state official says - Perhaps you saw news footage of President Obama in Grand Isle, La., on Friday and thought things didn't look all that bad. Well, there may have been a reason for that: The town was evidently swarmed by an army of temp workers to spruce it up for the president and the national news crews following him. Jefferson Parish Councilman Chris Roberts, whose district encompasses Grand Isle, told Yahoo! News that BP bused in "hundreds" of temporary workers to clean up local beaches. And as soon as the president was en route back to Washington, the workers were clearing out of Grand Isle too, Roberts said."The level of cleanup and cooperation we've gotten from BP in the past is in no way consistent to the effort shown on the island today," Roberts said by telephone. "As soon as the president left, they were immediately put back on the buses and sent home."

    1997 Warning on Deep Blowouts: ‘Options Are Limited’ – It should come as no surprise that experts in avoiding and stopping blowouts of oil and gas wells long ago saw the deep-ocean drilling frontier as particularly dangerous terrain. Back in 1997, an offshore-drilling newsletter ran an article by Larry Flak, a veteran well blowout expert, at Boots & Coots at the time, listing a variety of paths leading to a seabed blowout and stated flatly that stopping one would be an enormous challenge. His bottom line? “Options are limited, so prevention and fast action are critical.” Flak, who later moved to Signa Engineering, would have been great to have on hand right now, but sadly he died last year in a recreational boating accident.

    BP To Gov't Last Year: We Can Handle A 300,000 Barrels-Per-Day Spill Just Fine - Of all the bad predictions and downright misinformation we've seen surrounding the Gulf oil spill, this one ranks pretty high: BP actually told the government last year that it was prepared to respond to a blowout flowing at 300,000 barrels per day -- as much as 25 times the rate of the current spill. (The latest government estimate of flow rate from the current spill is 12,000 and 19,000 barrels per day) That assertion came in an Initial Exploration Plan for the well that ultimately blew out, filed with the Minerals Management Service in 2009. BP says in the document that it "has the capability to respond, to the maximum extent practicable, to a worst-case discharge, or a substantial threat of such a discharge, resulting from the activities proposed in our Exploration Plan." The 2009 plan document puts the volume of an uncontrolled blowout at 300,000 and 162,000 barrels per day respectively, for two wells in the Mississippi Canyon block of the Gulf. The 2009 document can be read here (.pdf)

    Documents Show Early Worries About Safety of Rig - Internal documents from BP show that there were serious problems and safety concerns with the Deepwater Horizon rig far earlier than those the company described to Congress last week. The problems involved the well casing and the blowout preventer, which are considered critical pieces in the chain of events that led to the disaster on the rig. The documents show that in March, after several weeks of problems on the rig, BP was struggling with a loss of “well control.” And as far back as 11 months ago, it was concerned about the well casing and the blowout preventer. On June 22, for example, BP engineers expressed concerns that the metal casing the company wanted to use might collapse under high pressure.

    BP Revised Permits Before Blast - WSJ - Just a week before the Deepwater Horizon exploded, BP PLC asked regulators to approve three successive changes to its oil well over 24 hours, according to federal records reviewed by the Wall Street Journal.The unusual rapid-fire requests to modify permits reveal that BP was tweaking a crucial aspect of the well's design up until its final days. One of the design decisions outlined in the revised permits, drilling experts say, may have left the well more vulnerable to the blowout that occurred April 20, killing 11 workers and leaving crude oil gushing into the Gulf of Mexico.The Minerals Management Service approved all the changes quickly, in one instance within five minutes of submission.

    They must have known that the leak was much bigger (translation)   Shocked the Norwegians who participated in the rescue operation after the Deepwater Horizon accident mean BP lying about the extent of the oil spill. The three Norwegian vessels, Boa Sub C, Ocean Intervention III and Skandi Neptune, each with a Norwegian crew on board were located nearby, when it was sent out distress signals from the oil rig. De var dermed blant de første til å delta i redningsaksjonen. They were among the first to join the rescue operation. The crew of the Norwegian boat, which was the first eyewitnesses of these first days after the disaster, told Dagbladet that they perceived that BP and the U.S. Coast Guard deliberately tried to lull the extent of the oil spill. Nordmennene ønsker av hensyn til arbeidsgiver ikke å stå fram med navn i Dagbladet. The Norwegians want of consideration for the employer not to come forward with names in the newspaper Dagbladet. - BP drove direct lies and propaganda, "says one of the Norwegians, who were in the area.

    Sand Berm Approved to Fight Oil; Scientists Skeptical -The state of Louisiana is poised to begin a large experiment in blocking oil from reaching its fragile wetlands. On 27 May, the Army Corps of Engineers granted an emergency permit to build several sand berms along 70 kilometers of barrier islands. Experts are concerned that the project will be neither durable nor effective. Oil is much easier to clean from a sandy beach than from a wetland, where removing it would probably cause additional harm to the fragile ecosystem. But Louisiana's barrier islands—long skinny beaches that are dozens of kilometers offshore—have been greatly damaged by storms. In some places, the Chandeleur Islands have been eroded into shallow shoals. Louisiana Governor Bobby Jindal proposed that engineers build a 2-meter-tall berm in front of the islands. In addition to catching oil, the berms would also shunt oily waters towards tidal inlets, making it more efficient for booms and boats to collect the oil. Jindal proposed 160 kilometers of berms at an estimated cost of $350 million

    Fear and loathing on the Gulf coast – Doug Inkley, senior scientist with the National Wildlife Federation, has spent the past week surveying the oil spill from the wrecked Deepwater Horizon rig in the Gulf of Mexico by airplane and boat, and on islands where oil has come ashore. He tells New Scientist how the experience has left him frustrated and angry that clean-up efforts are not as widespread or effective as he'd been led to believe. I expected to see the area teeming with people. In the three days I spent in the air, I only saw one skimmer boat. Yesterday I saw an island protected by booms, but booms are a last resort and very difficult to make effective: 90 per cent of the oil I saw had got passed them....

    Gulf oil spill: This disaster just got enormously worse - If the growing oil disaster in the Gulf of Mexico isn't contained soon - and the latest efforts suggest that's unlikely - then the damage to the fragile region will intensify over the coming summer months as changing currents and the potential for hurricanes complicate the containment and cleanup efforts."It's all lose, lose, lose here," said Rick Steiner, a retired University of Alaska marine scientist who's familiar with both the current Gulf oil spill and the Exxon Valdez disaster two decades ago."The failure of the top kill really magnified this disaster exponentially," he said. "I think there's a realistic probability that this enormous amount of oil will keep coming out for a couple months. This disaster just got enormously worse."

    Hurricane Season Complicates Gulf Oil Spill — As hurricane season approaches, the giant oil spill in the Gulf of Mexico takes weather forecasters into nearly uncharted waters.\The season officially starts Tuesday, and while scientists seem to agree that the sprawling slick isn't likely to affect the formation of a storm, the real worry is that a hurricane might turn the millions of gallons of floating crude into a crashing black surf.Some fear a horrific combination of damaging winds and large waves pushing oil deeper into estuaries and wetlands and coating miles of debris-littered coastline in a pungent, sticky mess.And the worst effects of an oil-soaked storm surge might not be felt for years: If oil is pushed deep into coastal marshes that act as a natural speed bump for storm surges, areas including New Orleans could be more vulnerable to bad storms for a long time.Experts say there are few, if any, studies on such a scenario.

    Tropical Depression Agatha Crossing Into Gulf Of Mexico... Perrrrrfect. (see map) Once (Pacific Storm) Agatha crosses over Guatemala, it will be renamed Alex. It just gets better by the day. Here Is A Fact Sheet On Oil Spills And Hurricanes from NOAA (pdf)

    Undersea oil pipelines vulnerable to hurricanes - As the 2010 hurricane season officially got underway Tuesday, a new report said underwater oil pipelines in the Gulf are extremely vulnerable to strong currents and waves from the hurricanes that roar by above. The findings, based on data obtained during Hurricane Ivan's savage tear across the Gulf of Mexico in 2004, will appear in an upcoming edition of Geophysical Research Letters, a journal of the American Geophysical Union."Our paper was submitted prior to the oil spill and coincidentally was accepted at about the time of the platform collapse," Teague says.  The study found that the 31,000 miles of pipelines along the seafloor of the Gulf could crack or rupture unless they are buried or their supporting foundations are built to withstand hurricane-induced currents. "Major oil leaks from damaged pipelines could have irreversible impacts on the ocean environment," the authors wrote.

    Oil spill creates huge undersea 'dead zones' - The world's most damaging oil spill – now in its 41st continuously gushing day – is creating huge unseen "dead zones" in the Gulf of Mexico, according to oceanologists and toxicologists. They say that if their fears are correct, then the sea's entire food chain could suffer years of devastation, with almost no marine life in the region escaping its effects.While the sight of tar balls and oil-covered birds on Louisiana's shoreline has been the most visible sign of the spill's environmental destruction, many scientists now believe it is underwater contamination that will have the deadliest impact. At least two submerged clouds of noxious oil and chemical dispersants have been confirmed by research vessels, and scientists are seeing initial signs of several more. The largest is some 22 miles long, six miles wide and 3,300 feet deep – a volume that would take up half of Lake Erie. Another spans an area of 20 square miles.

    Why deep-water oil spills do their damage deep down - Surface slicks may account for as little as 2 per cent of the oil now spilling into the Gulf of Mexico, according to a study of a controlled deep-water spill conducted in 2000 by the US Minerals Management Service and a consortium of oil companies, including BP. In June 2000, Project Deep Spill released hydrocarbons into the sea off the coast of Norway at a depth of about 800 metres. The tests included releases of 60 cubic metres of crude oil and 60 cubic metres of diesel fuel over separate 1-hour periods.The study challenges the estimate by federal officials, based on the amount of oil on the sea surface, that around 5000 barrels (800 cubic metres) of oil per day are pouring into the sea from the site where the BP-operated drilling rig Deepwater Horizon was destroyed by fire last month. It also adds weight to reports of massive underwater oil plumes that government officials are now downplaying.

    Toxic Oil Spill Rains Warned Could Destroy North America - A dire report prepared for President Medvedev by Russia’s Ministry of Natural Resources is warning today that the British Petroleum (BP) oil and gas leak in the Gulf of Mexico is about to become the worst environmental catastrophe in all of human history threatening the entire eastern half of the North American continent with “total destruction” Russian scientists are basing their apocalyptic destruction assessment due to BP’s use of millions of gallons of the chemical dispersal agent known as Corexit 9500 which is being pumped directly into the leak of this wellhead over a mile under the Gulf of Mexico waters and designed, this report says, to keep hidden from the American public the full, and tragic, extent of this leak that is now estimated to be over 2.9 million gallons a day.The dispersal agent Corexit 9500 is a solvent originally developed by Exxon and now manufactured by the Nalco Holding Company of Naperville, Illinois that is four times more toxic than oil (oil is toxic at 11 ppm (parts per million), Corexit 9500 at only 2.61ppm).  In a report written by Anita George-Ares and James R. Clark for Exxon Biomedical Sciences, Inc. titled “Acute Aquatic Toxicity of Three Corexit Products: An Overview” Corexit 9500 was found to be one of the most toxic dispersal agents ever developed. Even worse, according to this report, with higher water temperatures, like those now occurring in the Gulf of Mexico, its toxicity grows.

    'We Have Nothing to Hide' - The manufacturer of the oil-dispersing chemicals being used by BP PLC in the Gulf of Mexico said today that injecting the dispersant on a still-gushing wellhead was unprecedented and should be carried out with ample testing."That's a new approach," said Erik Fyrwald, CEO of Nalco, whose dispersants are marketed under the name Corexit. "Our belief is, because it is a new approach, it needs to be done with a lot of testing to make sure there are no unfavorable impacts, and we encourage that."Scientists have compared BP's heavy use of dispersants in the Gulf to a massive chemistry and biology experiment, saying it is an exercise in environmental trade-offs. The chemicals break up oil that would otherwise float on the surface into tiny droplets that can sink and be consumed by fish, bacteria and microorganisms.The consensus is that the 870,000 gallons of Corexit that have been either sprayed on the Gulf's surface or injected underwater at the broken wellhead has likely spared beaches and wetlands from an even worse oil slick, while contributing to the formation of massive, difficult-to-track oil plumes underwater that could have long-term ecological consequences.

    Toxicity Aside, Dispersants Could Undermine Natural Oil-Eaters - Right now, the biggest dispute between the government and BP over dispersants concerns their toxicity. Using planes and subs, BP crews have applied more than 37,850 liters of the chemical to the gulf over the past month, a small portion of it in the deep ocean. But neither the government nor BP expected the gusher to spew oil for this long, and concerns over the toxic effects of the dispersants have been growing. In the past few days, the government has pressured BP to scale back its dispersant use on the ocean surface and to look for less-toxic alternatives; the government said it will also look for more benign alternatives. In lab tests, toxicologists have found that concentrations of Corexit, BP's dispersant of choice, can kill shrimp or fish. But the real-world effects remain unclear, as no one has ever spread this much dispersant in one place before. The tussle, and the studies, continue. But there's another risk apart from toxicity, says David Valentine, a biogeochemist at the University of California, Santa Barbara: A chemical may undermine the cleanup effort's own microbial allies.

    Gulf Oil Blog | Background - A team of University of Georgia marine scientists is conducting research on the huge underwater oil plume that was discovered in the aftermath of the Deepwater Horizon oil rig explosion.  Throughout a two-week cruise in the Gulf of Mexico, they are posting regular updates and photos to this blog.The team now on board the R/V F.G. Walton Smith is led by Samantha Joye, UGA professor of marine sciences, Franklin College of Arts and Sciences. Joye was a member of the NOAA-supported expedition that discovered the deepwater plumes thousands of feet below the surface in the Gulf of Mexico, about two weeks ago.The group sailed from Gulfport, Miss., on Tuesday, May 25, on a scientific mission to characterize and visualize the largest of the underwater oil plumes, estimated to be more than 15 miles long, 5 miles wide and some 300 feet thick at depths ranging from approximately 2,300 feet to 4,200 feet. This plume is currently located to the south/southwest of the Deepwater Horizon site.“Nothing like these plumes has ever been seen before,” said Joye. “This is the first time such a buoyant plume has been document in a cold, pelagic environment.” Ocean temperatures range from 8 degrees C at the bottom of the plume to about 15 degrees C at the top. Send your questions to Dr. Samantha Joye ( Dr. Joye will try to address questions in her blog.

    Trust your senses -   One of the strangest things about these deepwater plumes we’ve been tracking is that we see a strong CDOM signal but there’s been no visible oil in the deepwater.  That changed today: we saw oil in the deepwater.  We sampled a station about a mile south of our previous stations (you can get our position and our ship track on, just look for the R/V Walton Smith in the Gulf of Mexico sector) and we saw the most intense CDOM signals that we’ve seen so far.  The Pelican cruise sampled near here three weeks ago but the CDOM signals we are seeing now are much stronger. In the CTD figure shown here, green is the dissolved oxygen signal, red is the signal for colored dissolved organic matter (CDOM), and blue is the transmissometer signal.  The main plume extends from about 1100m to 1300m in the water column.  Though the signals for CDOM and beam attenuation (transmissometer) are very high, there is only moderate oxygen depletion.  We hypothesize that this is because this is a relatively young region of the plume—in other words, the microorganisms have not had time to break down the organic matter yet. 

    Closing in. Today we’ve been trying to trace the deepwater plume as close as possible to the leaking wellhead.  Finally, after about 14 hours of searching and 5 unsuccessful CTD casts, we closed in on the source of the plume.  After a very long day, we finally have this feature well constrained.  We found more visible oil in the deepwater today – at different sites from yesterday – which increases our confidence in this finding. Several people have asked me how much methane versus oil is in these plumes.  We can’t answer that question yet.  But, the plumes are very much enriched in gas.  After we complete the sample analysis, we’ll be able to do this calculation.  I’ll try to make some rough calculations tomorrow to get a feel for the volume and magnitudes we are dealing with.Three people asked whether we plan to fingerprint the oil from the deep plumes.  Yes, we will be doing that as it is the only way to concretely link the plume oil to the oil leaking from the wellhead.

    Layers of oil found by USF researchers could pose 'insidious threat' -A team of scientists returned from a six-day research mission into the Gulf of Mexico this morning with an assortment of water samples and critters from the sea for tests to confirm what they fear is happening well underwater.The R/V Weatherbird II pulled into port shortly after 8 a.m., a day after University of South Florida researchers announced they believe they have found previously undetected layers of oil deep in the waters of the Gulf."We did not find any black mass of liquid oil,'' said Ernst Peebles, an associate professor at the school's College of Marine Science...And what they found truly troubled them.Scientists found evidence of dissolved hydrocarbons that they are trying to determine if they came from the oil itself or from the 850,000 gallons of dispersants that have been used to fight the gusher in the Gulf. They are invisible to the eye, but show up in tests and could eventually pose a serious concern to all kinds of marine life. "It would indeed be a very insidious threat,'' Peebles said

    Oil Spill Information - College of Marine Science - University of South Florida - St. Petersburg, Fl

    Gulf Oil Spill: Massive Underwater Plumes Spell Disaster, Scientists Say - Independent scientists and government officials say there's a disaster we can't see in the Gulf of Mexico's mysterious depths, the ruin of a world inhabited by enormous sperm whales and tiny, invisible plankton.Researchers have said they have found at least two massive underwater plumes of what appears to be oil, each hundreds of feet deep and stretching for miles. Yet the chief executive of BP PLC – which has for weeks downplayed everything from the amount of oil spewing into the Gulf to the environmental impact – said there is "no evidence" that huge amounts of oil are suspended undersea. BP CEO Tony Hayward said the oil naturally gravitates to the surface – and any oil below was just making its way up. However, researchers say the disaster in waters where light doesn't shine through could ripple across the food chain."Every fish and invertebrate contacting the oil is probably dying. I have no doubt about that,"

    BP Clashes With Scientists Over Deep Sea Oil Pollution - BP has challenged widespread scientific claims that vast plumes of oil are spreading underwater from its blown-out rig in the Gulf of Mexico. The denial comes as the oil giant prepares for a new operation to put an end to the worst oil spill in US history – which could see the leak get worse before it gets better.The company's challenge to several scientific studies is likely to put it further at odds with an increasingly angry Obama administration, which has accused it of playing down the size of the leak in an effort to limit possible fines.BP's chief executive, Tony Hayward, said it had no evidence of underwater oil clouds. "The oil is on the surface," he said. "Oil has a specific gravity that's about half that of water. It wants to get to the surface because of the difference in specific gravity."Hayward's assertion flies in the face of studies by scientists at universities in Florida, Georgia and Mississippi, among other institutions, who say they have detected huge underwater plumes of oil, including one 120 metres (400ft) deep about 50 miles from the destroyed rig.

    Underwater Oil Plumes Disputed By BP CEO Tony Hayward - — Disputing scientists' claims of large oil plumes suspended underwater in the Gulf of Mexico, BP PLC's chief executive on Sunday said the company has largely narrowed the focus of its cleanup to surface slicks rolling into Louisiana's coastal marshes.During a tour of a BP PLC staging area for cleanup workers, CEO Tony Hayward said the company's sampling showed "no evidence" that oil was suspended in large masses beneath the surface. He didn't elaborate on how the testing was done.Hayward said that oil's natural tendency is to rise to the surface, and any oil found underwater was in the process of working its way up."The oil is on the surface," Hayward said. "There aren't any plumes."  Scientists from several universities have reported plumes of what appears to be oil far from the site of BP's leaking wellhead, which is more than 5,000 beneath the surface. Those findings – from the University of South Florida, the University of Georgia, Southern Mississippi University and other institutions – were based on video images and initial observations of water samples taken in the Gulf over the last several weeks.

    Ed Markey Demands BP Produce Oil Plume Research, Data - Congressman is questioning BP CEO Tony Hayward's claim that the oil company has not found evidence of underwater oil plumes. Scientists have reported plumes as long as 22 miles.Rep. Edward Markey, D-Mass., said BP in this instance means "Blind to Plumes." He sent a letter to Hayward Monday asking for documents to back up his claims.Markey, chairman of a House Energy and Commerce Committee environmental panel, said it is vital that the government and researchers have unfettered access to all relevant data or analysis concerning underwater plumes. He also called on BP to offer "complete transparency" on its video feeds from the company's underwater operations, calling any delay or other obstacle unacceptable

    Don’t Worry About Oil Spill. Remember: Oysters Love Crude Oil! - In this informational film called Progress Parade, the final segment is "Lifeline to an Oyster," which details the oil industry's efforts in the late '50s/early '60s to prove to a bunch of wet-blanket Gulf fishermen that all that new oil drilling was not the cause of recent problems with their bivalve harvest. The charitable folks in the oil industry invested millions in research (though in the video it just looks like 3 fish tanks with some oysters and a few bottles of motor oil. Oh yeah, they also set off a bunch of dynamite near oyster beds) and came up with the result that not only did crude oil not harm oysters, but the mollusks actually did better in their oily fish tanks then they did in the somewhat oily Gulf. Don't believe it? Check out the evidence for yourself. Skip ahead to 9:17 in the video, or watch the earlier segments... all brought to you by the unbiased documentarians at the American Petroleum Institute.

    New Satellite Analysis Shows Oil Leak Moving Towards The Florida Straits - We just finished analyzing the MODIS / Aqua satellite image shot the afternoon of May 27. It again clearly shows the main body of the oil slick (solid orange line) around the site of the leaking Macondo well, and also shows deep entrainment in the Loop Current. Disturbingly, we see signs of thin surfactant - possibly oil from this spill - in the Loop Current where it moves past the Dry Tortugas and toward the Florida Straits (dashed orange line): There are natural processes that generate thin layers of oily surfactant, so this does not necessarily show that oil from the spill is moving into the Straits yet. But the spill has clearly been interacting with the Loop current since May 17, and at a speed of 1 to 2 knots (see below), ten days is enough time for some of that oil to have moved 240 to 480 nautical miles (276-552 miles). Although it's 510 miles as the crow flies from the leaking well site to Florida Straits, the convoluted path taken by the Loop Current adds up to a total distance of about 900 miles, so we may not be there yet. Consider this a possibility, not a definitive conclusion.

    U.S. Expands Gulf Fishing Ban; States Brace For Oil - The National Oceanic and Atmospheric Administration on Monday expanded the area of the Gulf of Mexico that is closed to fishing due to a giant oil spill, as states along the Gulf Coast braced for the impact on jobs and their economies.  The federal government has closed all commercial and recreational fishing across nearly 62,000 square miles, or nearly 26% of federal waters in the Gulf, up from about 60,600 square miles closed on Friday, NOAA said.

    Gulf Oil Spill: Media Access 'Slowly Being Strangled Off' Media organizations say they are being allowed only limited access to areas impacted by the Gulf oil spill through restrictions on plane and boat traffic that are making it difficult to document the worst spill in U.S. history. The Associated Press, CBS and others have reported coverage problems because of the restrictions, which officials say are needed to protect wildlife and ensure safe air traffic.Ted Jackson, a photographer for The Times-Picayune newspaper in New Orleans, said Saturday that access to the spill "is slowly being strangled off." A CBS news story said one of its reporting teams was threatened with arrest by the Coast Guard and turned back from an oiled beach at the mouth of the Mississippi River. The story said the reporters were told the denial was under "BP's rules."

    The Oil Drum: Nuking The Oil Slick - A recent interview with Matthew Simmons on Bloomberg discussed the possibility of a nuclear explosion being used to seal the leaking Macondo oil well.This idea was floated a couple of weeks back by the Russian periodical Pravda, which noted the technique was used 5 times to seal leaking wells in the old Soviet Union (once unsuccessfully in attempt to stop a gas leak in the Ukraine - though the likely environmental damage might cause you to wonder what the definition of "success" is).The first use of this technique was in Uzbekistan in 1966, with the blast 1.5 times the strength of the Hiroshima bomb and at a depth of 1.5 kilometers. Using a nuclear device in an attempt to shut down the GOM oil spill seems like using a battleship to cross a river. Success is not guaranteed and the side effects could be horrendous.There are some really mad ideas being floated in the US about this problem. The only hope is to let the drilling rig crews get on with the job. The relief well is probably the closest thing to a sure fix.

    'Flotels' await oil spill cleanup workers on Gulf - The 40-foot-long corrugated steel boxes, resembling oversized white shipping containers, are stacked two high and three wide atop a barge at Port Fourchon, the oil industry's hub on the Gulf of Mexico. This barge is a floating hotel, or "flotel," set up by BP and several subcontractors to accommodate more than 500 workers hired to clean up the worst oil spill in U.S. history. Temporary housing is the only way to station workers at Port Fourchon, a massive shipyard that serves offshore oil rigs and is surrounded by ecologically sensitive marshes and beaches. "There are no permanent residents here on the port," With the ambitious "top kill" having failed over the weekend and a relief well at least two months away, BP was ramping up its efforts to clean up the Louisiana coast. Another temporary fix — an effort to saw through the pipe leaking the oil and cap it — could be tried as soon as Wednesday. In the meantime, more than 125 miles of the state's coastline already have been hit with oil, including the resort of Grand Isle near Port Fourchon.

    'Money is killing us,' Gulf fisherman says – The latest health risk in the Gulf of Mexico is an abundance of money, says one Louisiana  fisherman.“Money,” says Clint Guidry, acting president of the Louisiana Shrimp Association, “is killing us.”BP is paying fishermen up to $3,000 a day to help clean up the oil, according to a contract between BP and one of the fishermen obtained by CNN.He says the nine fishermen who were brought to the hospital while working for BP are unwilling to talk because they fear losing their jobs. The men suffered symptoms such as shortness of breath, irritated nasal passages, nausea and headaches.“Working for BP is their livelihood, since they can’t fish anymore,” Guidry said. “BP is putting food on their tables. These gentlemen won’t talk publicly because they’re scared for their well-being and scared for their families.”

    Evaluating Gulf Coast Damage from Worst Spill in U.S. History – PBS News Hour (MP3 & transcript) Yesterday, a team of federal scientists released a report estimating that the size of the Gulf spill had surpassed that of the 1989 Exxon Valdez disaster, making it the worst in U.S. history.But the full extent of the damage to the environment is only slowly becoming clearer, with many questions still unanswered.We get more on that now from David Hollander, professor of chemical oceanography at the University of South Florida's College of Marine Science.Professor Hollander, welcome to you. I would like you to start by explaining to us the discovery by your team of scientists of a plume of oil below the surface. Now, what does that mean exactly?

    BP’s Robots to Begin Next Attempt to Curb Record Oil Spill - (Bloomberg) -- BP Plc will use undersea robots to begin cutting damaged pipe from its leaking oil well off Louisiana as early as today, risking temporarily increasing the flow as it seeks to end the largest oil spill in U.S. history.  “The chances of success are probably comparable with top kill but the risks are higher because what they’re going to do is cut off the existing riser which has been kinked on the sea- bed for the past month,” Geoffrey Maitland, a professor of energy engineering at Imperial College in London, said in an interview with Bloomberg Television today. Using remote-controlled vehicles at the mile-deep well, BP plans to shear away most of the damaged pipe that once rose from the well to the Deepwater Horizon. Then it will make a more precise cut with a diamond-toothed band saw, BP Managing Director Robert Dudley said in television interviews yesterday. That will make a clean junction for a gasket-lined cap intended to catch most of the oil and route it to the surface through a pipe, Dudley said.

    BP warn of risks in oil spill 'open heart surgery' - Under immense pressure to plug its catastrophic American oil leak, BP is preparing for a hazardous last-ditch salvage operation that risks making the gush of crude into the Gulf of Mexico even heavier if its robotic submarines fail in an inch-perfect exercise to cut through a broken pipe a mile beneath the ocean's surface.After the failure of a "top kill" effort to stuff the leak with mud and rubbish, BP's managing director, Bob Dudley, stressed the difficulty of a new plan to pipe spurting oil to a ship on the ocean's surface, describing it as highly challenging for engineers who will be asked to perform "the equivalent of open heart surgery on television for everyone".

    The BP Deepwater Oil Spill - Cutting Metal Under Water and Tuesday Open Thread 1 - (w/comments from oilmen)The decision to cut the riser and drill pipe (DP) from the top of the Blow-Out Preventer (BOP) as a first step in putting the Lower Marine Riser Package (LMRP) over the leaking oil well in the Gulf of Mexico is not quite as easy as it might sound to a layman. This post is going to talk a little about a couple of the problems, as well as an alternate way of doing it, and should end with a possibly slightly amusing anecdote.The current plan is to carry out the operation in two parts, first the main body of the riser and contained DP will be cut using a large shearing machine, and then a precision cut will be made with a diamond wire cutter to prepare the surface to act as a support and seal for the LMRP. (Illustrations are below the fold). There are a couple of reasons why this is going to be done this way, and one or two concerns that will need to be watched as the operation continues. (UPDATES At 8:45 am I see that the riser in in the shearing machine, at 9:30 am it appears that they are using a diamond circular saw to cut the choke and kill lines - h/t gel. By 11 am they had the wire saw at the riser, and had started to shear the riser beyond the bend ).(To learn more about the technical basics of LMRP, please go to this post:

    Oil Nears Florida Beaches as Effort to Contain Well Hits Snag… BP PLC, under pressure to contain a massive oil spill that is affecting an increasingly wide swath of U.S. Gulf Coast shoreline, has hit a snag while trying to sever a pipe connected to the mile-deep well as a six-foot-long oil sheen was found along Florida's Panhandle shoreline Wednesday.  Overnight, the response team was able to "successfully" make the first shear cut of the pipe, U.S. Coast Guard Adm. Thad Allen, the national incident commander for the spill, said at a news conference in Houma, La. However, a specialized saw got stuck while making a second fine cut that's needed before a containment device can be put in place.  "They are working that problem right now. The goal later on today is to finish that cut and to be able to put a containment device on top of the wellhead," Adm. Allen said.

    BP cuts pipe, plans to lower cap over Gulf spill - BP sliced off a pipe with giant shears Thursday in the latest bid to curtail the worst spill in U.S. history, but the cut was jagged and placing a cap over the gusher will now be more challenging, Coast Guard Adm. Thad Allen said. BP turned to the shears after a diamond-tipped saw became stuck in the pipe halfway through the job, yet another frustrating delay in six weeks of the Gulf of Mexico spill. The cap will be lowered and sealed over the next couple of hours, Allen said. It won't be known how much oil BP can siphon to a tanker on the surface until the cap is fitted, but the irregular cut means it won't fit as snug as officials had hoped. Even if it works, BP engineers expect oil to continue leaking into the ocean.

    BP Cuts Pipe in Effort to Contain Spill - BP PLC on Thursday completed a second cut on a fractured pipe connected to the leaking well in the Gulf of Mexico, paving the way for engineers to install a cap that officials hope will send the majority of the oil to a ship on the water's surface. BP hit a roadblock Wednesday in its latest attempt to contain the spill when a diamond-wire saw making a fine cut got stuck in the pipe. The company managed to dislodge the saw late in the day, but workers decided to complete the second cut using shears. A fine cut using the specialized saw would have allowed for a better seal than the rough cut created by the shears. Since it won't be a perfect seal, there is a chance that some oil will continue to seep out even once the containment device is in place, Mr. Allen said. He noted that authorities intend to treat the oil that escapes using subsea dispersants.

    BP Captures Some Leaking Oil - BP PLC on Friday said some oil was flowing up a pipe from a cap it placed on its broken Gulf of Mexico well, but crude still spewed and it was unclear how much could be captured. President Barack Obama was set to visit the Louisiana coast Friday, his second trip in a week and the third since the disaster unfolded following an April 20 oil rig explosion. The government's point man for the crisis, Coast Guard Adm. Thad Allen, said the cap's installation atop a severed pipe late Thursday was a positive development but it was too early to tell how effective it will be in curtailing the nation's worst oil spill. The funnel-like lid is designed to channel oil for pumping to a surface tanker.

    Gulf of Mexico oil spill: cap 'capturing 1,000 barrels a day' - The cap fitted over the ruptured Gulf of Mexico wellhead will capture roughly 1,000 barrels of oil a day, according to early estimates. Admiral Thad Allen, the official in charge of the US government response to the spill, said the figure was a "rough total" of the amount being collected since remote-controlled submarines fitted the device late Thursday. The current flow of oil gushing from the leak is estimated at between 12,000 and 19,000 barrels a day, so the amount is still small, Adm Allen acknowledged.

    Oil pours from cap over Gulf gusher, some captured - A cap placed over the gusher was collecting only a fraction of the oil, which had stained beaches with a waxy mess of tar balls and created an unusual orange foam in the surf. In Gulf Shores, Ala., wooden boardwalks leading to beachfront hotels were spotted with oil from beachgoers' feet, and some condominiums were providing solvents for guests smeared with the brown goo. At Pensacola Beach, the retreating high tide left an orange stain in its wake. Erin Tamber moved to the beach area after surviving Hurricane Katrina in New Orleans, where she had lived for 30 years. "I feel like I've gone from owning a piece of paradise to owning a toxic waste dump," she said as she inspected the beach Saturday morning.

    Gulf Oil Spill Siphoning Shows Progress (Reuters) - Efforts to siphon off oil gushing from a ruptured deep-sea wellhead in the Gulf of Mexico were starting to work, U.S. officials said on Saturday, while President Barack Obama defended his handling of the environmental crisis. The containment cap that British energy giant BP Plc clamped over the ruptured wellhead collected about 6,000 barrels of oil on Friday, U.S. Coast Guard Admiral Thad Allen said at a briefing in Theodore, Alabama. Allen said a higher collection rate could be achieve by closing vents in the cap as engineers stabilized pressure in the wellhead on the sea floor a mile deep.

    BP’s Cap Is Recovering Gulf Oil, May Get 90% of Leak (Bloomberg) -- BP Plc said its effort to divert oil leaking from its Gulf of Mexico well to a ship on the surface is working, with a goal of capturing more than 90 percent of the spill. Recovery of oil aboard the drillship began about midnight and may have reached a rate of 1,000 barrels a day, based on a BP estimate, U.S. Coast Guard Admiral Thad Allen said today during a conference call with reporters. Government scientists had estimated the well was leaking 12,000 to 19,000 barrels of oil a day, a figure that may have increased as much as 20 percent after London-based BP yesterday cut away a kinked riser pipe to install the cap.

    BP says crude may continue flowing into gulf until August – As BP readied its latest fallback plan to stop oil gushing from one of its wells in the Gulf of Mexico, the Obama administration and the company warned that the crude could continue flowing until August, compounding threats to coastal wetlands, fisheries and beaches. White House energy and climate adviser Carol M. Browner said Sunday that the oil spill was "probably the biggest environmental disaster we've ever faced in this country" and that "we are prepared for the worst." On the CBS show "Face the Nation," she said that the "American people need to know that it is possible we will have oil leaking from this well until August when the relief wells will be finished." Those two wells, which BP began drilling early this month, are expected to intersect the damaged one and seal it near the reservoir far below the seafloor. The first has reached 7,000 feet below the seafloor, and the second has reached 3,500 feet below the floor, but progress gets slower the deeper the wells go. With the arrival of hurricane season Tuesday, the drilling could be slowed if the rigs need to be evacuated during storms.

    Plan for Relief Wells Spurs Hope Amid Caution - As engineers made headway Thursday in containing the oil leak at the bottom of the Gulf of Mexico, crews on two floating rigs flanking the spot where the Deepwater Horizon exploded and sank were doing what rig crews normally do: drilling wells. The two wells, aimed at the bottom of the runaway well that has spewed millions of gallons of oil into the gulf, represent the most conventional solution to the disaster and the one that experts say is all but certain to succeed. Once either of the relief wells strikes pay dirt, the plan is to pump heavy drilling mud and cement down it to bring the blowout under control and permanently seal the damaged well. Given the string of engineering problems so far the relief well plan has faced its share of skepticism.  Doubters have pointed to past problems with relief wells, including one drilled during a blowout off southern Mexico 30 years ago that was unable to stop the gusher for three months after it was completed, and another off Australia last fall that did not hit its target until the fifth try.

    BP Needs ‘Lottery Win’ to Seal Oil Leak at First Try (Bloomberg) -- BP Plc would need the equivalent of a lottery win to succeed with its first attempt to end the Gulf of Mexico oil spill in August using a so-called relief well, the president-elect of the American Association of Petroleum Geologists said.  A relief well intercepts the damaged hole at an angle thousands of feet below the seabed and permanently closes it with heavy mud and cement. The method is the surest way for BP to end the largest oil spill in U.S. history, yet initial failure is “almost a certainty,” the association’s David Rensink said by telephone from Houston. “It would be like winning the lottery to get it on the first shot.” BP forecasts it will finish the first of two relief wells it has started drilling in early August, The challenge is intersecting the damaged well, not the actual drilling, said Rensink, who becomes president of the association in July. “What you’re doing is trying to intersect a well bore that is probably roughly a foot across with another well that is about a foot across,” he said. “It’s a hit-or-miss sort of thing. Ultimately the relief well will work. It’s just a matter of time, of continuing to poke at it until you intersect it.”

    Closing the Hole in the Gulf: A Petroleum Engineer Responds -A petroleum engineer who’s worked in the oil industry tells me BP is doing the minimum to clean up the oil and everything it can to protect its bottom line. According to the engineer, here’s what BP should be doing right now to mitigate the damage. If the President were to put BP into temporary receivership, he’d have the power to get BP to: 1. Stop releasing dispersants. So-called dispersants are toxic, and it’s crazy to add more poison to the Gulf. Dispersants do nothing to assist the environment in naturally cleaning the oil; their main use is PR. They reduce the number of ugly pictures of birds covered in pure black crude.2. Mobilize every possible tanker to siphon up crude from as close to the leak points as possible. Oil industry leaders as John Hofmeister (president of Shell Oil from 2005 until 2008) have recommended this, but inexplicably neither BP nor the federal government are talking about even trying this idea.  BP has 24 tankers that are being used to make money for BP, not for clean-up duty 3. Restart work on the second pressure relief well. BP did start work on two relief wells as the government requested, but the second has been shut down to cannabalize parts from it for the primary well kill effort.

    BP hives off ‘toxic’ Gulf spill operation to dilute anti-British feeling in US - BP is to hive off its Gulf of Mexico oil spill operation to a separate in-house business to be run by an American in a bid to isolate the "toxic" side of the company and dilute some of the anti-British feeling aimed at chief executive Tony Hayward, the company said today. The surprise announcement was made during a teleconference with City and Wall Street analysts in which Hayward attempted to shrug off the personal criticism saying words "could not break his bones".The Macondo well continues to spew out oil although a containment cap was placed on top of the leak today. Hayward said it would take a further 48 hours to know whether it was successful.

    Gulf oil spill threat widens: Scientific American (Reuters) - Oil from BP's out-of-control Gulf of Mexico oil spill could threaten the Mississippi and Alabama coasts this week, U.S. forecasters said on Monday, as public anger surged over the country's worst environmental disaster.Government and BP officials are warning that the blown-out deepwater well feeding the catastrophic spill may not be shut off until August as the company begins preparations on a new but uncertain attempt to contain the leaking crude.On Tuesday, President Barack Obama will hold his first meeting with co-chairs of an oil spill commission he tapped to probe the worst oil spill in U.S. history and make policy recommendations about U.S. offshore oil drilling.The commission will be similar to those that looked into the explosion of the space shuttle Challenger in 1986 and the Three Mile Island nuclear accident in 1979.U.S. officials are treating the disaster, in its 42nd day on Monday, as the country's biggest environmental catastrophe.

    Gulf Oil Spill Threatens More U.S. States - Mississippi and Alabama are the latest states whose coastlines are threatened by the spread of oil leaking into the Gulf of Mexico.US forecasters made the prediction yesterday as the country acknowledged the spill as its worst environmental disaster.Louisiana’s wetlands and fishing grounds have been the worst hit so far, but the National Oceanic and Atmospheric Administration said moderate southerly and south-westerly winds this week could start moving oil closer to the Mississippi Delta.Experts have now warned that the leak might not be plugged before August.At least more than 20 million gallons of oil have now spilled into the Gulf of Mexico, affecting more than 70 miles of Louisana's coastline

    The only oil on our beaches is suntan oil? - In Florida, officials confirmed an oil sheen Tuesday about nine miles from Pensacola beach, a seaside tourism magnet at the start of its summer season.Winds were forecast to blow from the south and west, pushing the slick closer to western Panhandle beaches.Emergency crews began scouring the beaches for oil and shoring up miles of boom. County officials will use it to block oil from reaching inland waterways but plan to leave beaches unprotected because they are too difficult to protect and easier to clean up."It's inevitable that we will see it on the beaches," said Keith Wilkins, deputy chief of neighborhood and community services for Escambia County.

    In Memory of All That Is Lost - The anger is palpable across the Mississippi Delta. As the Deepwater Horizon oil geyser, almost a mile underwater, continues unabated, the brunt of this, the largest environmental catastrophe in United States history, is rolling onto the coast, impacting the ecology, the economy and entire ways of life. I traveled across the bayous and towns of coastal Louisiana for four days, meeting the people on the front lines of the onrush of BP’s oil slick. They are angry, out of work and read the papers about people getting sick.  One local fisherman, John Wunstell Jr., was rushed to the hospital with respiratory problems that he attributed to the noxious environment.  He and others claim BP has prohibited the use of masks, and he has filed a request for an injunction to force BP to provide masks and other protective gear to cleanup workers.

    Dying, dead marine wildlife paint dark, morbid picture of Gulf Coast following oil spill - Here's what President Obama didn't see when he visited the Gulf Coast: a dead dolphin rotting in the shore weeds."When we found this dolphin it was filled with oil. Oil was just pouring out of it. It was the saddest darn thing to look at," said a BP contract worker who took the Daily News on a surreptitious tour of the wildlife disaster unfolding in Louisiana.His motive: simple outrage."There is a lot of coverup for BP. They specifically informed us that they don't want these pictures of the dead animals. They know the ocean will wipe away most of the evidence. It's important to me that people know the truth about what's going on here," the contractor said. "The things I've seen: They just aren't right. All the life out here is just full of oil. I'm going to show you what BP never showed the President."

    The pictures BP doesn’t want you to see. This afternoon, AP photographer Charles Riedel filed some of the most disturbing images yet of the effect the BP oil spill is having on Gulf Coast birdsThis afternoon, AP This afternoon, AP photographer Charles Riedel filed some of the most disturbing images yet of the effect the BP oil spill is having on Gulf Coast birdsNo wonder BP is trying to keep journalists away from the region

    Scientist Fears Govt Muzzle on Deepwater Horizon Data - DiMarco's team wants to take as many samples and collect as much information as they can about conditions in the Gulf of Mexico, including oxygen levels in the water. DiMarco specializes in hypoxia, meaning the science of what happens when lifeforms haven't got enough oxygen. Whenever there's oil in the water, naturally occurring bacteria swoop in to eat that oil -- and in the process deprive the rest of the ecosystem of oxygen. Scientists worry that rapidly blooming, overfed bacteria could turn sections of the Gulf of Mexico into dead zones, completely anoxic regions where there's very, very little for living things to breathe. Whatever the group from Texas A&M finds, you might not hear about for an awfully long time. "I'm essentially being told that the data I'm collecting on my hypoxia cruise may or may not be subject to quarantine," DiMarco says. "Which means that we will not be able to publish it, pending the liability litigation. Oh, yeah, 20 years from now, we may be able to publish it."

    BP and Feds Withheld Videos Showing Massive Scope of Oil Spill - ABC News - New videos show more clearly than ever how BP, with little resistance from the Coast Guard or other federal agencies, kept the public in the dark about just how bad things were beneath the surface of the Gulf of Mexico.  On May 1, 11 days after the Deepwater Horizon oil rig exploded, and nine days after oil began spilling into the Gulf, the Coast Guard had still only released a single image of oil leaking a mile beneath the surface -- a fuzzy photograph of a broken pipe spewing oil.  But inside the unified command center, where BP and federal agencies were orchestrating the spill response, video monitors had already displayed hours of footage they did not make public. The images showed a far more dire situation unfolding underwater. The footage filmed by submarines showed three separate leaks, including one that was unleashing a torrent of oil into the Gulf.

    NASA - Images from Space of the Oil Spill

    Summer of oil looms for beleaguered Gulf Coast – This summer on the oil-stained Gulf Coast promises to be like no other. Just off Louisiana on Grand Isle, which was hit with oil from the spill, the beach reopened for Memorial Day weekend but with several caveats: No swimming or fishing, and stay away from oil cleanup crews. Elsewhere, fishermen were idled during what's normally a busy season, and floating hotels were being set up to house workers who will try to mop up the crude seeping into marshes. With BP making yet another attempt to stem the flow from a blown-out well in the Gulf of Mexico — this time only to contain the leak, not stop it — signs point to August before any real end is in sight. The new plan carries the risk of making the torrent worse, top government officials have warned. On top of that, hurricane season begins Tuesday.

    Gulf Oil Spill (PHOTOS): Animals In Peril (128 photos) As the Gulf of Mexico oil spill continues to extend, concern is growing for the wildlife that stand in its path, especially since many of the coastal animals are currently in their reproductive seasons. We've compiled some of the animals most threatened by the spill. Do you live in an area affected by the oil spill? Send us your pictures of animals in the path of the spill using the participation button to the right.

    Birds frozen in oil: image of a desperate summer (AP) -They are the ghastly images of a summer fouled before it started. Squawking seagulls and majestic brown pelicans coated in oil. Click. Gunk dripping from their beaks. Click. Big eyes wide open. Click. Even the professionals want to turn away. They can't."They get me. It's just inherently sad," said Nils Warnock, a wildlife recovery specialist. "You see this bird totally covered in oil and all you can see are those eyes looking at you blinking. You'd have to be pretty tough not to be affected by that image." Slideshow: Charlie Riedel's Gulf photos grimly resonate (27 images)

    An Oil-Eating Microbe That's Been Around Since 1989 Could Single-Handedly Clean Up BP's Entire Oil Spill - This video (via Reddit) has us scratching our heads and wondering why BP hasn't employed this proven tactic with its current oil spill disaster. The video, which really begins at the 2:00 minute mark, showcases a 1989 video from the Texas Land Office and Texas Water Commission.In short, it turns out there's a natural oil-eating microbe that can be reproduced by scientists. It feeds on crude oil and when it runs out of oil to eat, it simply dies and is safely consumed by marine life. There are two shots of scientists testing the microbe in both controlled and real-world environments.  So we ask BP: Why the heck aren't you using this to clean up the oil in the Gulf of Mexico?

    Washington Post Exposes BP ties to Eco-Groups, Other Media Ignore Controversy - British Petroleum’s (BP) reputation has been marred by the April oil rig explosion and subsequent oil spill which is still gushing more than 40 days later. But according to The Washington Post, the reputation of some left-wing environmental groups has also been polluted by the incident.“[T]he Nature Conservancy lists BP as one of its business partners. The Conservancy also has given BP a seat on its International Leadership Council and has accepted nearly $10 million in cash and land contributions from BP and affiliated corporations over the years,” Joe Stephens wrote for the Post May 24. It’s not just Nature Conservancy either, the Post found $2 million in donations to Conservation International and relationships between BP and other lefty activist groups Environmental Defense Fund (EDF), Sierra Club and Audubon.

    You heard it here first - Current revisions to the closure, described below, will be effective on June 1, 2010 at 6 p.m. eastern time (5 p.m. central time). All commercial and recreational fishing including catch and release is prohibited in the closed area; however, transit through the area is allowed. Map Link: The closure measures 75,920 sq mi (196,633 sq km), which is slightly more than 31% of the Gulf of Mexico exclusive economic zone. The majority of federal waters in the Gulf of Mexico are open to commercial and recreational fishing.Source: Fishery Bulletin. At this rate the closure will be 100% in 14 days.

    Fishery closure boundary as of 6 pm June 2(click on map) From the NOAA Fishery Bulletin (FB10-050): Current revisions to the closure, described below, will be effective on June 2, 2010 at 6 p.m. eastern time (5 p.m. central time). All commercial and recreational fishing including catch and release is prohibited in the closed area; however, transit through the area is allowed.The closure measures 88,522 sq mi (229,270 sq km), which is about 37% of the Gulf of Mexico exclusive economic zone. The majority of federal waters in the Gulf of Mexico are open to commercial and recreational fishing. Next stop: Florida Keys.

    Oil Spill Idles Many Louisiana Fishermen - NYTimes - As vast sections of the sea and coast have been closed off to fishing because of the gushing oil leak, the normal haul of oysters, blue crab and finned fish has been halved, and shrimp production is about a quarter of what is usually is. The exceptions are tuna and red snapper, which are caught far out at sea. Americans have yet to see major shortages or price increases at restaurants and markets because about 80 percent of the seafood consumed in the United States is imported, according to the National Fisheries Institute, a trade group. Louisiana provides only about 2 percent, the group says. But the oil slick is wreaking havoc on the fishing industry here, which brings about $2.4 billion a year to the state, the state’s seafood marketing board says. At least 27,000 jobs depend directly on the fisheries.

    Oil slick moves close to Florida beaches –Officials say an oil sheen confirmed about 9 miles off Florida's coast could hit Pensacola's beaches by the end of this week, media outlets report. "It's inevitable that we will see it on the beaches," Keith Wilkins, deputy chief of neighborhood and community services for Escambia County, told the Associated Press.The latest projections from the National Oceanic and Atmospheric Administration show the oil slick is moving into the mouth of Mobile Bay, then sliding east across Alabama's coastline and touching Florida's beaches by about Thursday, the St. Petersberg Times reports. Escambia County officials started putting out booms Tuesday to prepare for the oil's arrival, the story says. "It's all going to depend on the weather. The wind could change it," NOAA spokesman Ben Sherman told the St. Petersberg Times.Florida officials say BP has yet to answer the state's request for about $150,000 to buy sifting machines and a tractor to remove oil from the beaches, the AP reports.

    Spill could mean dark times for Sunshine State --Already reeling from a real-estate crisis and deep economic slump, Florida faces yet another financial cataclysm if oil from the Gulf spill mars its famous shores, scaring away crucial tourist traffic and wreaking havoc on its fisheries. Beaches are big business in the Sunshine State. At stake there alone are hundreds of thousands of jobs and perhaps billions of dollars in revenue, depending on when and where the oil from BP runaway well makes landfall. Although the beaches were still in the clear as of Thursday afternoon, widespread reports of vacation cancellations are already coming in. Also, the pace of new bookings in many areas has slowed, especially in the Panhandle, which looks likely to be the first -- and maybe the worst -- area affected.

    Models Show Gulf Oil May Reach US East Coast This Summer - This cheery news from the SunHerald (hat tip reader Dwight Baker):The National Center for Atmospheric Research models showed Thursday that oil could enter the Gulf’s loop current, go around the tip of Florida and as far north as Cape Hatteras, N.C. According to researchers, oil could threaten East Coast beaches by early July, but they cautioned the models were not a forecast.The oil could then head by Bermuda on its way to Europe.Martin Visbeck, a research team member with the University of Kiel in Germany, says it is unlikely any oil reaching Europe would be thick enough to be harmful. See more here: (you tube animation)

    Model Suggests Slick Could Zoom Up East Coast - WSJ - New supercomputer studies suggest it is "very likely" ocean currents will carry oil from the Deepwater Horizon spill in the Gulf of Mexico around the tip of Florida and thousands of miles up the U.S. East Coast this summer, researchers announced Thursday."It is truly a simulation, not a prediction," said Terry Wallace, principal associate director for science, technology and engineering at the Los Alamos National Laboratory in New Mexico, which collaborated on the project. "But it shows that when you inject something into the Gulf, it is likely to have much larger consequences."oceanographers. Researchers from the National Center for Atmospheric Research in Boulder, Colo., and the Los Alamos laboratory used a $100 million computer model of the world's ocean-circulation patterns to assess how currents could sweep the oil out of the Gulf.

    Gulf spill hits Florida's famous beaches (Reuters) – Tar balls and sticky oil sheen washed ashore on a northwest Florida beach on Friday, the first apparent impact on the tourism-dependent state from the Gulf of Mexico oil spill.Oil debris came ashore on Pensacola Beach, part of the Gulf Islands National Seashore which advertises "the world's whitest beaches," as the worst environmental disaster in U.S. history continued to widen.Florida, the "Sunshine State" with a $60 billion annual tourism industry, had braced for oil from the 46-day-old spill to arrive. Oil had already hit the coasts of Louisiana, Mississippi and Alabama to the west. Beachgoers on Pensacola Beach, many of them children, picked up rust colored tar blobs, ranging in size from a button to a table tennis ball, scattered along the sugar-white sands.

    BP Oil: Coming to a Beach Near You in Summer 2010 - The National Center for Atmospheric Research (NCAR) just released this horrifying animation of how ocean currents may carry all the oil in the Gulf of Mexico. According to their computer modeling of currents and the oil, the spill "might soon extend along thousands of miles of the Atlantic coast and open ocean as early as this summer.""I've had a lot of people ask me, 'Will the oil reach Florida?'" says NCAR scientist Synte Peacock in a statement accompanying the animation, which he worked on. "Actually, our best knowledge says the scope of this environmental disaster is likely to reach far beyond Florida, with impacts that have yet to be understood." The models show oil hitting Florida's Atlantic coast within a few weeks, then moving north as far as about Cape Hatteras, N.C., before heading east.

    "Oil from gulf could reach N.C. before July" - Oil pulsing from the April 20 BP spill in the Gulf of Mexico could slip into the Gulf Stream's loop current and begin to shoot up the Atlantic coastline by the end of the month - just as thousands of tourists are flocking to beaches along North and South Carolina. A computer modeling study released Thursday shows that once the slick joins the loop current, it could move northward at up to 100 miles a day. It would flow up to Cape Hatteras and then turn northeast out into the Atlantic, according to the models, which were produced by the National Center for Atmo spheric Research. The center, funded by the National Science Foundation, pro duces climate science for universities.The six models are simulations - not forecasts - meaning they don't say exactly how the oil could flow. The oil slick would be affected by local weather conditions and the ever-shifting pattern of the loop current

    A list of oil spill resources from (the) Green (blog) I’m the blog specialist here at The Times, and as someone who works on the Internet day and night, I naturally expected to find what I needed online – though not without some creative digging. And as it turns out, many, many people have been busy devising their own means of understanding the spill. In a few hours, I was able to pull together a running list of helpful sites and resources devoted to comprehending the impact of the leak in all its dimensions. Some of the sites were assembled by media organizations and environmental groups, but many more are being pulled together by individuals, schools and community groups – people like you.

    Oil Slickonomics – Part 6 - In our series entitled “Oil Slickonomics” ( we have offered three scenarios: “bad, worse and ugliest.” With the failure to cap the well, we have now clearly gone from bad to worse. Whether or not the ugliest scenario can be averted remains to be seen. To get to this third outcome the oil slick will have to reach the Gulfstream and start to threaten the Atlantic Ocean and the East Coast of the United States. To date there is no evidence of that event, but the risk continues to rise every day as the oil slick enlarges in the GOM. Presently the oil seems to be confined to a large eddy in the GOM and has not entered the Loop Current, according to NOAA; however the latest offshore trajectory forecast suggests it is dangerously close. A half-dozen research ships are tracking the oil plumes in the GOM.

    Gulf oil spill: parallels with Ixtoc raise fears of ecological tipping point - The Ixtoc disaster is still by far the largest peacetime spill, as well as a lesson-packed forerunner of the disaster in progress, as the Deepwater Horizon also exploded and sank after a blowout preventer failed.The parallels are most striking in the methods that failed to cap the damaged well head beneath."They tried to put a funnel on top of it, injected mud and saltwater and cement, but everything they tried to put in the well was forced out by the pressure," says Abundio Juarez. He was one of the top engineers in the state-owned company, Pemex, that was exploring the Ixtoc deposit at the time, although he was not directly involved in the control effort. He says the company also tried golf balls. "We sent divers down and today they have robots, but the only solution then, and now, is a relief well and that takes time."

    BP Oil Leak May Last Until Christmas in Worst Case Scenario (Bloomberg) -- BP Plc’s failure since April to plug a Gulf of Mexico oil leak has prompted forecasts the crude may continue gushing into December in what President Barack Obama has called the greatest environmental disaster in U.S. history. BP’s attempts so far to cap the well and plug the leak on the seabed a mile below the surface haven’t worked, while the start of the Atlantic hurricane season this week indicates storms in the Gulf may disrupt other efforts. “The worst-case scenario is Christmas time,” Dan Pickering, the head of research at energy investor Tudor Pickering Holt & Co. in Houston, said. “This process is teaching us to be skeptical of deadlines.” Ending the year with a still-gushing well would mean about 4 million barrels of oil spilled into the Gulf, based on the government’s current estimate of 12,000 to 19,000 barrels leaking a day. That would wipe out marine life deep at sea near the leak and elsewhere in the Gulf, and along hundreds of miles of coastline, said Harry Roberts, a professor of Coastal Studies at Louisiana State University.

    BP admits higher leak rate: 2010 Gulf oil spill now 20 times worse then Exxon Valdez. British Petroleum has now admitted that the amount of oil being spilled has actually been much higher than previously reported. According to an MSBNC report today, estimates of the total amount of oil spilled so far is 20 times more than the 10.8 million gallons spilled in the Exxon Valdez disaster in March 1989.  Right now, the spill is roughly the size of Pennsylvania. That represents one-fifth of the entire amount of water within US borders. This is - without question - the worst unnatural disaster in the history of our planet. The results can be nothing short of annihilation of every living thing in the path of this nightmarish cataclysm. There is simply too much oil out there already for the outcome to be anything less.

    BP Gulf Disaster: "Damage That Could Last For Decades - The spill is already the biggest in U.S. history. Now, the only question is how big will it get? Government estimates say there could be as much as 43 million gallons of oil already spilled into the Gulf. Private estimates are much higher; and, remember, oil could belch out of the broken well until August. If this catastrophe is the biggest, it will undoubtedly be the most expensive in terms of cleanup and damages. On CNBC yesterday, they were talking about the possibility of bankruptcy for BP. The anchors were contemplating the company selling assets to pay for things such as dividends and expenses. To BP’s credit, it is spending $40 million a day on the spill. One analyst quoted in the Christian Science Monitor is currently projecting BP will spend more than $5 billion this year alone. That figure will certainly grow as the disaster spreads around the Gulf. So far, 125 miles of Louisiana coastline has been hit with sludge from the busted well.

    Colin Powell: Oil Spill Is 'Beyond The Capacity' Of BP To Solve, Military Might Have Role - Former Secretary of State Colin Powell suggested on Sunday that the United States military has a role to play in helping contain the massive oil spill in the Gulf of Mexico, saying that the problem now was "beyond the capacity" of BP to stop. "The president has to get involved as quickly as possible," Powell told ABC's This Week. "If you don't, then public opinion starts to drag you in the media, and pushes you. And so when something like this clearly is going to get beyond the capacity of whoever caused it, get beyond the capacity of local authorities, I think the federal government has to move in quickly and move in with, to use my favorite expression, decisive force and demonstrate that it's doing everything that it can do."The statement by the revered military and political figure is a reflection of a growing discouragement over the failure of the Obama administration -- in practice or in perception -- to play a hands-on role in resolving the crisis. Asked whether he'd been satisfied with the extent of the president's response to this point, Powell was moderately critical.

    US military rejects calls to take control of oil spill - The United States military does not have the technology or the know-how to deal with the devastating oil spill, its highest ranking military officer admitted on Monday night. Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, said they had no more tactics left in their arsenal following BP’s latest failure to plug the leak. Responding to calls for the armed forces to take control of the oil spill disaster, Mr Mullen said: “We’ve looked at that continuously since the leak started – whether or not we would have submersibles that could go do this.  “And the fact is the best technology in the world, with respect to that, exists in the oil industry.”

    Nuclear Option on Gulf Oil Spill? No Way, U.S. Says - The chatter began weeks ago as armchair engineers brainstormed for ways to stop the torrent of oil spilling into the Gulf of Mexico: What about nuking the well? Decades ago, the Soviet Union reportedly used nuclear blasts to successfully seal off runaway gas wells, inserting a bomb deep underground and letting its fiery heat melt the surrounding rock to shut off the flow. Why not try it here? The idea has gained fans with each failed attempt to stem the leak and each new setback — on Wednesday, the latest rescue effort stalled when a wire saw being used to slice through the riser pipe got stuck. This week, with the failure of the “top kill” attempt, the buzz had grown loud enough that federal officials felt compelled to respond. Stephanie Mueller, a spokeswoman for the Energy Department, said that neither Energy Secretary Steven Chu nor anyone else was thinking about a nuclear blast under the gulf. The nuclear option was not — and never had been — on the table, federal officials said.

    For Five Days of Oil - The unabated oil gusher in the Gulf of Mexico is tightening its hold on President Obama, who is returning to Louisiana today to survey the damage after canceling an already-delayed trip to Indonesia and Australia. At least he can build any statement today on what appears to be the successful deployment of the “ lower marine riser package” over the cleanly cut pipe atop the gushing well (plenty of oil was still escaping Friday morning). It’s still rather stunning to consider how a single pinprick in the seabed — a tiny part of the global effort to slake humanity’s rising thirst for liquid fuels, and profit from it, of course — could create such a mess.After all, the Macondo Prospect, the name for the reservoir of oil slowly draining into the gulf — is considered a small deposit. While its dimensions remain poorly known, BP officials have estimated it contains no more than 100 million barrels of oil. That’s five days and change worth of American demand for this precious fuel. All of this for five days of oil.

    DEEPWATER HORIZON WILL BE THE END OF THE UNITED STATES OF AMERICA  - As the catastrophe worsens, as people grasp what it means... there will be blood demanded and blood spilled. The tens of millions of soon-to-be victims will not accept less. There will be an almost insatiable need for vengeance and all of the pent-up rage after swallowing all of the lies fed to the American people by Wall Street and Washington for so long will have found a single, unifying issue. The frustration built up in every corner of our lives will become a blowout exactly like the Gulf…. Because of the Gulf.We know that BP, the mainstream media and the U.S. government have at best deceived, and at worst outright lied about two key things. The first is the actual flow rate (now minimally) confirmed at 75,000 bpd. (I’m kind of leaning towards 125,000 bpd myself.) The second is the fact that there are two very huge leaks – not one. The second one is about five miles west of the bore hole. That means the explosion caused geologic ruptures. (Hello… CNN? Anybody in there?) Nobody has any credibility here. Nobody. It’s all finger pointing. It’s tasteless. It’s transparent. It’s embarrassing. It's insulting. And it is infuriating.

    The BP Oil Spill’s Lessons for Regulation, by Kenneth Rogoff - As the damaged BP oil well continues to spew millions of gallons of crude..., the immediate challenge is how to mitigate an ever-magnifying environmental catastrophe. ... The disaster, however, poses a much deeper challenge to how modern societies deal with regulating complex technologies. The accelerating speed of innovation seems to be outstripping government regulators’ capacity to deal with risks, much less anticipate them.  The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters. Suddenly, instead of a world of “peak oil” with ever-depleting resources, technology offered the promise of extending supplies for another generation. ... Some developing countries, most notably Brazil, have discovered huge potential offshore riches. Now all bets are off. ... Will Brazil really risk its spectacular coastline for oil, now that everyone has been reminded of what can happen? What about Nigeria, where other risks are amplified by civil strife? ...

    Oil Companies Weigh Strategies to Fend Off Tougher Regulations…When the Obama administration imposed new restrictions last week on offshore drilling in the wake of the BP oil spill, officials carved out an exemption that received little public attention: Companies working in shallow waters, unlike deep-sea operators like BP, could again begin drilling for oil and gas. The decision, which followed a furious appeal from lawmakers allied with the oil industry, represented a surprising victory for the shallow-water drillers in the midst of what could prove the biggest environmental disaster in United States history. And it reflected the intense lobbying efforts at work from all sides, as Congress and the administration consider ways to prevent another drilling disaster off the nation’s coasts. Environmentalists and their supporters in Congress, hoping to seize the political momentum, are working to push through measures to extend bans on new offshore drilling, strengthen safety and environmental safeguards and raise to $10 billion or more the cap on civil liability for an oil producer in a spill.

    CEO: BP will make good on $10 billion in profit payouts to shareholders, despite spill -BP's shareholders may receive more this year from the company's coffers than those affected by the spill in the Gulf of Mexico will receive in their lifetime. BP CEO Tony Hayward has indicated that he will go ahead with massive dividend payouts to shareholders in the aftermath of the worst oil spill in US history. $10 billion in payouts are scheduled for this year. The cost of the spill has been estimated in the tens of billions, but ExxonMobil only ended up paying a $507 million settlement for the 1994 Exxon Valdez spill after 20 years of appeals. BP's dividend ratio is now at 7.4 percent per year, more than twice the average payout of companies listed in the S&P 500. This means that US investors who hold BP stock effectively earn 7.4% interest on their shares -- more when US tax law is taken into account -- in addition to any gains or losses as a result of price shifts in the stock's value.

    First The Gulf, Now The Marcellus Shale: Gas Well Rupture Forces Mile-Wide Evacuation In PA - The Pittsburgh Channel reports that an explosion at a gas well in the Marcellus Shale, has forced a mile-wide evacuation in Clearfield County, PA. The irony of this event occurring even as CNBC shows some guy mopping up oil with hay from a bucket is beyond sublime. Also, so much for clear energy. There are no details as yet which company's well was responsible for the explosion, although there are is one junk-bond laden firm which comes to mind.

    Spillonomics - Underestimating Risk - Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.” Much of this indifference stemmed from an obsession with profits, come what may. But there also appears to have been another factor, one more universally human, at work. The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.

    Lifting the Cap - The cap has received some attention in the wake of the BP spill, and Michael Greenstone, an M.I.T. economist and the new director of the Hamilton Project, expands the problem in a Politico commentary this morning:This misalignment of incentives is a classic case of moral hazard. Firms or people behave differently when they are protected from risk.Consider that oil companies make decisions about where to drill, and which safety equipment to use, based on benefit-cost analyses of the impact on their bottom line. For example, in choosing a location, oil companies assess whether the expected value of the oil exceeds the costs. …So the cap inevitably distorts the way companies evaluate their risk. Locations where damages from a spill may be costly — for example, places near coasts or in sensitive environmental areas — seem more attractive for drilling with the cap than if firms actually were responsible for all damages.

    Ben Stein: I’m Responsible (In Part) For BP - On Larry King the other day, in regard to the BP Oil Spill: STEIN: I don't know if it's trillions. I'm not sure there are any trillion-dollar companies but it's a very, very large company and it will be sued and it has insurance and it has reinsurance. And the risk will be spread all over the place. But at the end of the day, if somebody knew something like this was likely to happen and just said, keep pumping like mad, I think there may be criminal liability. I have always felt that if someone does something seriously bad a criminal sanction is better than a sanction on the stockholders. They should be put in prison.  But let's take a bit of a reality check here, shall we? The owners vote for the board of directors.  So the owners - that is, the stockholders, are responsible for the entire board, that is, the entire group of people who are in supervisory positions over those who made the call on the rig.

    BP Spill: How Litigious Yanks Hurt UK Pensioners - Before you fire off angry e-mails in my direction, note that it's the Evening Standard's idea behind this post's title, not mine. Aside from hyperconsuming debt and grub, another American pastime is suing the bejesus out of all comers. (Possibly for rather irresponsible consumption of excess debt and grub, it ought to be noted.) While again reading the evening paper on the ride home, the newspaper's editorial section comes up with its own opinion of the Deepwater Horizon mess. While ranking offshore drilling as being high on net catastrophic potential, they tacitly believe that it is something worth pursuing in a world of dwindling natural resources. Therefore, American politicians' "smack BP and toss its execs in jail" attitude borne of American thirst for energy is misguided. Ultimately, pensioners whose funds hold many BP shares and rely on dividends from them are the real victims of US litigation lust (or so they say). There is something to be said for this line of argument. Alike the Mexican border being turned into on big crack house for America, this spill may be more an indictment of the energy-intensive American way of life than anything else. However, it would have helped if BP were more forthright about its damage limitation capabilities. At any rate, here's the op-ed:

    The BP Disaster: Still, a Very Public Problem - Hard to believe it’s been almost a month since I first wrote about the BP oil spill–which I noted at the time was more appropriately considered an “explosion” and not just a “spill.”  (Actually, an “unstoppable gusher” is a still better description, as we’ve since learned.)I wrote at the time that if government has a goal of “maximizing social welfare,” the best policy response would be to recognize this as a classic “negative externality” situation and use the best policy tool we have to address it–some sort of tax or charge on fossil fuels–explaining it this way But what I neglected to consider is that a tax or charge on fossil fuels in general would not really get at putting a price on the extra social costs associated with the risky offshore drilling methods.  A carbon tax would be able to price the external costs associated with global warming, but would not put an extra marginal cost on riskier versus safer ways of producing (or more specifically, extracting) oil.   That additional social cost needs to be imposed on the producers making the decisions about how to produce the oil, or else the incentives to produce using safer methods (especially if they are more expensive than dangerous methods) won’t be there.

    Can We Do Better at Managing Rare, Big Risks? - NYTimes - It should come as no surprise that experts in avoiding and stopping blowouts of oil and gas wells long ago saw the deep-ocean drilling frontier as particularly dangerous terrain, but industry — with federal assent, and our assent — drilled on. So now, Gulf Coast residents face months, likely years, of environmental and economic disruption as a result of a known, but inadequately addressed, risk. There are plenty of signs of failed government oversight and hints of corporate malfeasance in the steps that led to the seabed gusher in the Gulf of Mexico. But the larger question of how best to manage certain hazards looms, too.Over the weekend, I published a post exploring our seeming inability to deal well with hazards that are foreseeable, but complex and rare — the gulf oil gusher being the example of the moment.I sent the piece to a variety of specialists in risk perception and response. Some of the varied, and valuable, reactions are appended below

    Spill Draws Criminal Probe - The U.S. has launched criminal and civil investigations into the Gulf of Mexico oil spill—the latest move by the Obama administration to show it is taking aggressive action amid bipartisan criticism of its response to the disaster."We have what we think is a sufficient basis for us to have begun a criminal investigation," said U.S. Attorney General Eric Holder Tuesday after meeting in New Orleans with state attorneys general and federal prosecutors from the region. Mr. Holder noted that 11 people died in the April 20 rig accident that precipitated the spill.In a press conference, Mr. Holder said there is "a wide range of possible violations." He declined to specify the target of the investigation because he said authorities aren't "clear on who should ultimately be held liable" and didn't want to "cast aspersions."

    Externalities and Criminal Investigations - No corporate law professor (or follower of business generally) should be surprised that the Obama administration announced today that criminal charges may be brought against BP for the spill in the Gulf of Mexico and ensuing failure to remedy the situation.  This case can be analogized to many of the corporate law scandals in the past decade, specifically the financial meltdown of 2008 ncaused by the collapse of the subprime mortgage-backed securities market.BP could have been negligent in two ways.  First, its well-capping procedure could have been a suboptimal choice -- choosing a less expensive procedure with foreseeably higher risks of failure.  Second, the company may be negligent in not having a great plan in place for remedying such failure.  And just as we all stood and watched the stock market decine in value in October 2007 and beyond, we all just stand and watch the oil spread without consensus or a clear idea of how to stop it.

    Prosecuting Crimes Against the Earth - Prosecutors must examine all witness statements, internal documents and any physical evidence that remains after the explosion. But if the news articles are accurate, the Justice Department should bring criminal charges against BP, and possibly Transocean and Halliburton, for violations of the Clean Water Act, the Migratory Bird Treaty Act and the Refuse Act — the same charges brought in the Exxon Valdez case. Exxon ultimately paid a criminal fine of $125 million, the largest ever for an environmental crime. In this case, though, a fine of that size may not satisfy the many people who are outraged by the gulf spill. The public expects felony charges and multibillion-dollar fines. All three of the environmental laws that may have been broken provide for criminal penalties, but only the Clean Water Act includes felony charges. For the government to prove a felony violation of the act it would need to demonstrate that the defendant knew oil would be discharged into United States waters. A felony violation can be easy to prove when a business dumps waste into a river, but it’s harder in the case of an oil spill.

    Why Obama Should Put BP Under Temporary Receivership, by Robert Reich: It’s time for the federal government to put BP under temporary receivership, which gives the government authority to take over BP’s operations in the Gulf of Mexico until the gusher is stopped. This is the only way the public know what’s going on, be confident enough resources are being put to stopping the gusher, ensure BP’s strategy is correct, know the government has enough clout to force BP to use a different one if necessary, and be sure the President is ultimately in charge. If the government can take over giant global insurer AIG and the auto giant General Motors and replace their CEOs, in order to keep them financially solvent, it should be able to put BP’s north American operations into temporary receivership in order to stop one of the worst environmental disasters in U.S. history.The Obama administration keeps saying BP is in charge because BP has the equipment and expertise necessary to do what’s necessary. But under temporary receivership, BP would continue to have the equipment and expertise. The only difference: the firm would unambiguously be working in the public’s interest. As it is now, BP continues to be responsible primarily to its shareholders, not to the American public. ...

    Putting BP Under Temporary Receivership: Some Qs and Ans - Robert Reich

    WTF Alert: BP CEO is a Mere PR Problem? - Yves Smith - What term do you use to describe spin about spin? Spin squared? Meta spin?Whatever you chose to call it, a classic example is in full view in a New York Times article, “Another Torrent BP Works to Stem: Its C.E.O.” If you were to believe the New York Times, which all too often appears to take dictation rather than engage in reporting, the big problem with the BP CEO, Tony Hayward, is that he has made some pretty shocking statements over the course of the Deepwater Horizon leak. The framing is “BP…now finds itself with one more problem: Tony Hayward, its gaffe-prone chief executive.” What is truly astonishing is the way the article absolves Hayward of any managerial responsibility for the crisis. It refuses to acknowledge that these off-putting remarks are an accurate reflection of an astonishingly self-serving world view and that Hayward is ultimately responsible for this colossal mess. In Japan, executives resign and even commit seppuku for far less.

    Why Obama Must Shut Down BP Atlantis - BP's Atlantis platform became active in October 2007. Located over 150 miles off the coast of Louisiana in "Hurricane Alley" at a water depth of more than 7,000 feet, Atlantis is one of the deepest moored semi-submersible oil and gas platforms in the world and it poses a serious, immediate and potentially irreparable threat to the Gulf of Mexico's marine environment, oil workers and communities.In June 2009, a BP whistleblower named Kenneth Abbott informed Food & Water Watch that BP was operating the massive Atlantis platform without proper up-to-date and engineer-approved safety documentation. We began writing and calling the Minerals Management Service (MMS) to urge them to take action. It took the agency six months to agree to meet with us. 10 days after the Horizon spill on April 20, MMS responded to our most recent information request, but it appears that the agency has done nothing and it plans to continue doing nothing. It is clear that the cozy relationship between BP and MMS is resulting in irresponsible and dangerous practices.

    Transocean Request to Cap Liability ‘Unconscionable,’ U.S. Says (Bloomberg) -- Transocean Ltd.’s request that its liability in connection with what may be the largest oil spill in U.S. history be limited to $26.7 million is “simply unconscionable,” the Justice Department said. U.S. Assistant Attorney General Tony West, in a May 24 letter to Transocean attorney Frank Piccolo, questioned the company’s legal argument that the 150-year-old Limitation of Liability Act caps its damages. The owners of the RMS Titanic, a passenger ocean liner that sank in 1912 after hitting an iceberg, also tried to use the law to avoid making payments to the ship’s survivors and the estates of those who died. “It is simply unconscionable, in the circumstances of this case, that Transocean is attempting to use the same shield of liability, potentially leaving thousands of people who have been damaged by your clients’ actions with no remedy,” West wrote in his letter, which the Justice Department released under a Freedom of Information Act request.

    Gulf oil well disaster could mean explosive profits for Halliburton - The oil well explosion in the Gulf of Mexico could be a well-timed and profitable accident for Halliburton, the global oil company with the famous connection to former U.S. Vice President Dick Cheney. Just eight days before the uber-Valdez accident, Houston-based Halliburton acquired Boots & Coots Services, also based in Houston,  in a $240 million cash and stock deal.  Boots & Coots, which uses the graphic of a burning oil well to represent the ampersand in its name, specializes in "pressure control and well intervention services."  In other words, when an oil well explodes, Boots & Coots can step in and help remedy the problem. In a release, Jerry Winchester, Boots & Coots president and CEO, says "Combining the resources of both companies creates the premier intervention company across the globe.”

    capture - The much-publicized report by the Department of the Interior’s Inspector General on conduct by employees of the Minerals Management Service (MMS) provides a lurid example of a fundamental problem underlying US economic regulation: regulatory capture. As highlighted by many examples over the years, US regulatory agencies are particularly susceptible to “capture” by the very industries they are meant to be regulation.  Those very familiar with specific areas of regulation will be aware of  a pervasive and multi-level industry influence over the ways in which those industries are regulated. In other words, the industry, through its direct and indirect influence on the regulators, is able to shape the standards the regulators apply and the way in which these standards are enforced. The techniques range widely....I cannot think of a single area of economic regulation that has been or is currently free of some form of regulatory capture.

    95 Californias or 74 Texases to replace offshore oil - As the Deepwater Horizon rig disaster continues to unfold, the peak oil community has a “teachable moment” in which it can illuminate the reality of our energy plight. The public has had a crash course in the challenges of offshore oil, and learned a whole new vocabulary. They are more aware than ever that the days of cheap and easy oil are gone. What they do not yet grasp are the challenges in transitioning from fossil fuels to renewables. The Greens (anti-fossil fuel agitators) want to end offshore drilling, but don’t realize that their alternatives are in the wrong scale or the wrong time frame to make a difference. The Browns (the fossil fuel industry) are in full damage-control mode while rapidly losing the public trust. Meanwhile, the politicians are focused on who’s to blame and who will pay, while skirting the fundamental problem of our addiction to oil. We need to get this conversation back on track. Let’s begin with some simple facts.

    In 1979, Less Complicated Oil Leak Took 10 Months To Stop - The BP oil spill has been called an "unprecedented disaster" by both the president and BP's top executive. But the Deepwater Horizon catastrophe has echoes of a 1979 spill, when a rig in the southern Gulf exploded after the blowout preventer failed.Thirty-one years later, we haven't come that far technologically with how we deal with underwater oil drilling spills. The Mexican company running the Ixtoc I rig attempted a slew of now-familiar remedies --- they pumped mud into the well, capped it with a metal "sombrero," shot lead balls into the well and drilled relief wells -- but it took 10 months to stop the leak even though the drilling was taking place just 160 feet below the surface. The Deepwater Horizon, which blew on April 20, was drilling 5,000 feet underwater.The story of the Ixtoc disaster, one of the worst in drilling history, began on June 3, 1979

    An expensive spill - AS A brief follow-up to the post I wrote over the weekend, on the economics of offshore drilling, have a look at this quote, via Paul Kedrosky: "From 2000 to 2004, we saw finding and development, F&D, costs rise from $4 to $6 per barrel. By 2008 we saw those costs rise to $18 per barrel. This is massive cost inflation," Khan said. "In order for companies to meet their cost of capital at $18 per barrel in F&D costs, we need an $80 oil price. So far these costs have been flattening out. A higher level of regulation could add to that."Which would be appropriate, I argued earlier, given the huge potential social costs of accidents at ultra-deep offshore wells. I mentioned that a tax would be the best way to raise the cost of drilling, as it would have the added advantage of raising money for the clean-up process, but regulation can function in a similar manner.Of course, rising market prices for oil could overcome the cost of regulation and set off a drilling bonanza. And given the outlook for oil supply, rising prices might be a good bet

    BP’s behaviour in the Gulf is appalling. But our thirst for oil is the real issue - As this piece is written, act one of the Gulf of Mexico tragedy continues, agonisingly, to unfold. We, the people of the region, keep hoping to leave behind the terrifying explosions and ghastly loss of human life, the dread invoked by black jets billowing endlessly from below and the floating oil spreading over an ever-growing area.We want to move on to act two, which will feature many dirty shovels, corpses of birds and people crying over the loss of a landscape they love. Act three has yet to be written; it will employ an enormous cast of lawyers and last for decades, but in that time there will be some healing, we hope. That's what we need to happen as soon as possible, but we can't seem to get the damned thing plugged up.

    We Are Oil Responsible; Can We Get Serious About Kicking the Habit? - Make no mistake:BP stinks. Their Gulf accident and safety violation record, their lack of transparency, their short-term profit focus are all sickening. But ultimately, BP is only truly responsible for this spill if you believe that drilling for oil in a mile of water can ever be done safely. BP is part of a system that has made us all dependent on oil and petroleum-based products, and with our consumption spurring demand, we must all shoulder some of the blame for the calamity in the Gulf of Mexico and beyond.It's not just about the gas for driving cars. Oil is everywhere, trickling throughout our consumer-driven society. Denture adhesives, electric blankets, bras and bubble gum…they all contain oil. Cameras, carpets, umbrellas, vitamin capsules…ditto. Perhaps we are finally waking up to realize that what once seemed so cheap and plentiful is actually very, very expensive--and becoming more so. While scientists and politicians argue about whether Peak Oil (the moment of the global peak in oil production) has occurred or when it will, the fact is that it is becoming increasingly difficult to extract a complex product derived from ancient sunlight and the earth's immense pressure.

    Spill May Cut World Oil Supply 500,000 BPD (Reuters) - A one-year delay on new deepwater projects stemming from the Gulf of Mexico well rupture could cut world oil supply by 500,000 barrels per day between 2013 to 2017, Bernstein Research said in a note to clients on Friday. "Although this may seem small in a global context, such a situation would decrease OPEC spare capacity, especially in the second half of the decade, which would lead to an increase in the oil price," the firm wrote.Still, it is unclear if this is a likely scenario, Bernstein wrote.The world consumes more than 80 million barrels per day of crude oil

    What Is Energy Security? - Natl Journal Forum -The oil spill in the Gulf of Mexico has amplified the ideological battle about "energy security." Many opponents of offshore drilling near the United States say that the spill demonstrates how insecure it is to rely on domestic petroleum production, and they urge a much more rapid, government-led transition to alternative energy sources and technologies. Those on the other side say America's security would be greatly harmed by a freeze or slowdown in offshore exploration. Does the threat of an Middle East embargo or an artificial hike in oil prices justify a policy of maximizing U.S. production.

    Gulf oil production by water depth - Useful, simple graphic showing twenty years of trends in Gulf of Mexico oil production by water depth. In the figure, shallow is 0-999 ft, deepwater is 1,000-4,999 ft, and ultra-deepwater is anything over 5,000 ft. As I've been arguing, part of what we're seeing here is the inevitable "normal accidents" from changing technology as we transition from one extraction depth regime to another. This next figure, also from the EIA, shows rig locations and water depths in the Gulf:

    Nigeria's Agony Dwarfs Gulf Oil Spill; US and Europe Do Nothing -The farther we travelled, the more nauseous it became. Soon we were swimming in pools of light Nigerian crude, the best-quality oil in the world. One of the many hundreds of 40-year-old pipelines that crisscross the Niger delta had corroded and spewed oil for several months.Forest and farmland were now covered in a sheen of greasy oil. Drinking wells were polluted and people were distraught. No one knew how much oil had leaked. "We lost our nets, huts and fishing pots," said Chief Promise, village leader of Otuegwe and our guide. "This is where we fished and farmed. We have lost our forest. We told Shell of the spill within days, but they did nothing for six months."That was the Niger delta a few years ago, where, according to Nigerian academics, writers and environment groups, oil companies have acted with such impunity and recklessness that much of the region has been devastated by leaks.In fact, more oil is spilled from the delta's network of terminals, pipes, pumping stations and oil platforms every year than has been lost in the Gulf of Mexico, the site of a major ecological catastrophe caused by oil that has poured from a leak triggered by the explosion that wrecked BP's Deepwater Horizon rig last month.

    A Spill Afar: Should It Matter? - For the last month, Americans have watched with growing horror as a huge leak on a BP oil rig has poured millions of gallons of oil into the Gulf of Mexico. As I wrote on Sunday in the Week in Review section of The Times, there is also shock that technology has so far not been able to control it. But it is important to remember that this mammoth polluting event, so extraordinary here, is not so unusual in some parts of the world. In an article published Sunday in The Guardian of London, John Vidal, the paper’s environment editor, movingly recalls a trip to the Niger Delta a few years ago, where he literally swam in “pools of light Nigerian crude.” A network of decades-old pipes and oil extraction equipment in the delta has been plagued by serious leaks and spills. “More oil is spilled from the delta’s network of terminals, pipes, pumping stations and oil platforms every year than has been lost in the Gulf of Mexico,” he writes.O.K., Nigeria may seem far away to most Americans. So what does this have to do with us? Well, consider this: According to Mr. Vidal’s piece, the Niger Delta supplies 40 percent of all of the crude oil imported by the United States imports. Companies that drill in the area include BP, Shell and Exxon.

    Matthew Simmons Reflects On Deepwater Horizon Disaster –Matthew R. Simmons watched on television in April as the Deepwater Horizon rig blew sky high, and he knew he was seeing the end of the energy business as he had known it. “I thought, Jesus Christ, this is unbelievable,” said Simmons, the Houston investment banker who represented Transocean—the company that owned the doomed oil rig and leased it to British oil giant BP—in two mergers and the sale of two rigs. “This must be the biggest blowout we’ve ever had.” More than a month after the April 20 explosion that mortally crippled the rig, Simmons told in an interview that the disaster could leave the centuries-old Louisiana fishing industry in tatters and the tourism industry along the entire Gulf Coast soiled by crude. “It’s going to profoundly change everything we know about the energy game,” said Simmons, founder of the energy-devoted investment bank Simmons & Company.

    Deepwater Companies Pull Up Stakes, and Some May Never Return -The company and its contractors had drilled about 12,000 feet down from a seabed located about 1,200 feet from the surface of the Gulf of Mexico, in Ewing Bank Block 834. The oil they were looking for was supposed to be at 21,000 feet.But now the company is pulling up stakes, under Obama administration orders to put a halt to most deepwater drilling in the Gulf, where a BP PLC well has been stubbornly billowing crude since late April despite repeated attempts to plug or divert it.Walter executives aren't sure whether the well will get drilled when, and if, deepwater exploration is allowed to resume.They aren't alone. Chevron Corp., Royal Dutch Shell PLC and BHP Billiton have all announced shutdowns in the Gulf. When the Deepwater Horizon incident occurred, Melbourne, Australia-based BHP was running five drilling rigs in the Gulf at a cost of about $1 million a day. Now, those five are sitting idle.

    Oil - Dig deeper - PAUL KEDROSKY has the best charts: Mr Kedrosky adds: As I've been arguing, part of what we're seeing here is the inevitable "normal accidents" from changing technology as we transition from one extraction depth regime to another. As oil production from "easy" fields declines, demand pressures push up prices, which makes extraction from more difficult fields profitable. But accidents at more difficult fields may prove much harder to address, particularly when the difficulty arises from the location of the wellhead under a mile or more of seawater. But if there is a greater potential risk at out-of-the-way fields, with greater potential social costs, then that cost should be reflected in the price of oil, ideally by a consumption tax, the proceeds of which could be used in part to finance a clean-up fund.

    Could U.S. Lose 200 Rigs by the End of Summer? - Philadelphia Oil Service Sector index, commonly known by its ticker OSX, is based on the stock market movements of 15 oil service company components. By overlaying the OSX with the Baker Hughes US Rig Count; one can make the argument that some correlation between the two may exist.We would expect US rig market to continue tracking OSX, albeit with a slight lag. If the recent fall of the OSX and commodities foreshadows a similar move in the US rig count, then a pullback to 1300 rigs or a 15% decline from current level of 1518 rigs would not be a huge surprise. Of the 200 rigs that would be sidelined, a split of 45% oil and 55% gas rigs removed from the count seems plausible. From a timing stand-point this assumes that approximately 445 oil rigs and 855 gas rigs will remain active as we roll from summer into fall

    Global crude benchmark WTI is flawed, according to expert – "As an oiler, you care about benchmarks that reflect physical oil," says Johannes Benigni, MD for JBC Energy at energy news and pricing agency Platts' crude oil markets conference in London on Friday. "Right now, WTI is an instrument for the financial players, which is perfectly fine, but for the oilers it is not currently relevant. The Canadians, the Brazilians and the West Africans are using Brent as a reference.""The nature of benchmark WTI is it has a delivery mechanism in Cushing, Oklahoma, [US]. It means you come again and again to a situation where there are distortions in the marketplace," he added. "There's nothing wrong with WTI – it is reflecting supply and demand, but it is local supply and demand – it is limited."

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

    Production Costs Climb for Canadian Oil Sands, Companies Say (Bloomberg) -- The financial crisis and the global recession had limited effect on efforts to lower production costs for Canadian oil sands, companies including Statoil ASA and Canadian Oil Sands Trust said.“Both operating expenditures and maintenance capital have been on a rising trend and when oil prices accelerate, that trend accelerates along with it and we got a very good taste of that in the last five years,” Marcel Coutu, chief executive officer of Canadian Oil Sands said today at an Oslo conference. “When oil prices crash, those operating costs unfortunately lag and it takes some time for them to come down.”Labor costs have led an across-the-board increase, Coutu said  For new projects, the capital costs per daily barrel of oil have climbed to $35,000 from $12,000 to $15,000 at the start of the decade, Robert Skinner, senior vice president at Statoil said in an interview.The Norwegian company estimates break-even prices for projects using steam assisted gravity drainage technology at $65 to $75 a barrel, Skinner said. Cost for new supply is at $60 to $80 a barrel, depending on whether it’s from drilling or mining, Greg Stringham, vice president for oil sands at the petroleum association, said at the conference.

    Petrobras Strikes Pre-Salt Oil at Brazil’s Marlim (Bloomberg) -- Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, said it found light oil almost three miles below the ocean floor at the Marlim field off the country’s southeastern coast. The shares rose.The Brava discovery may hold about 380 million barrels of recoverable oil and natural gas in the pre-salt layer, equal to 2.6 percent of the company’s proven reserves, Petrobras said today in a regulatory filing. The proximity to existing production equipment will help speed up output, Petrobras said.The company plans to more than double oil production to 5.7 million barrels a day by 2020 as it develops fields sitting below a layer of salt in deep waters of the Atlantic Ocean. The company is spending as much as $220 billion to finance offshore oilfields including Tupi, the Western Hemisphere’s largest discovery since Mexico’s Cantarell in 1976.

    Peak Oil Stress Map - The map above is a first rough cut at where the stress of peak oil (or any oil shock) is likely to be greatest.  It comes from taking county level data from the Census Quick Facts and extracting two variables: the average travel time to work (from the 2000 census), and the median household income (from 2008 data).  The idea is that if average travel time is long, that probably indicates that people in that county need a lot of oil to run their cars.  On the other hand, if income is low, they are probably going to have more trouble paying for that oil.  So I divided the travel time by median income, and then rescaled that index by its own average and standard deviation to produce a map of where the problems are likely to be greatest.

    Singularity > Climate Change > Peak Oil > Financial Crisis - While lying awake late at night worrying about what kind of world my children will inherit, I find it helpful to come up with schemas for the most obvious and inevitable of the large societal problems.  It makes them seem slightly more manageable to place them in order of importance, or time.  Further, being clear on what are the biggest and most important problems is an essential prerequisite to thinking about solutions: these problems all interact, and solutions to the smaller of them may not be radical enough to address the larger of them.In this post, I would like to argue for the above ordering of problems.  I mean the '>' symbol in two senses: "A > B" meaning both "The main impact of A will fall later in time than the main impact of B", and also "A is a more serious and fundamental threat to humanity than B".  While a full explication of the arguments would occupy a number of books, today you are going to have to make do with a single measly blog post, albeit longer than usual.

    The Data Singularity, Part II: Human-Sizing Big Data - In my previous post , I discussed the forces behind what I’m calling The Data Singularity. My basic thesis is that as information generating processes become more frictionless — as humans have been excised from information read-write loops — the velocity and volume of data in the world is increasing, and at an exponential rate.But where we go from here? What are the consequences of living in an age where every datum is stored? Where are the bottlenecks, pain points, and opportunities? Which technologies are addressing these?The upshot is this: a new class of tools are evolving for Big Data because traditional approaches can’t scale up. But these tools share a common goal: scaling down data, and making it human-sized. That’s the “reduce” part of MapReduce, the single statistic from analysis, or the hundred pixel line from one hundred million events.What’s happening today isn’t entirely new, though. There were echoes of it decades ago, when surveillance satellites first began scanning the globe.

    What You Can Do in Anticipation of Peak Oil - My intent in Survival+ was to offer up the principles of practical action rather than add another checklist to the many good lists already out there. So let's start with the "big context" of energy. Here is a chart depicting Peak Oil. Note that fossil fuels don't just suddenly drop to zero; they remain available but in ever-diminishing quantities. (chart) Thus we can expect not a suddenly fossil-fuel-less context but one in which the oil available to be consumed in the U.S. daily drops from the current level of 19 million barrels a day to say, 9 million barrels a day (MBD). Thus everyone consuming oil will have to get by on less. Politically, $10/gallon gasoline will create a "problem" for politicos currently in power, and thus we can safely predict that the Federal government will institute some sort of rationing system.

    China's Thirst for Oil Could Come Up Short - "Inkfish" are smoke-spewing, single-cylinder engine contraptions driven by many poorer Chinese. They symbolize why China's vehicle market—now the world's largest—mightn't necessarily be a source of rapidly growing oil consumption ad infinitum. This year, China is expected to consume 11% of global oil production, says the International Energy Agency. However, it has accounted for 45% of the growth in global oil demand over the past decade. As China's vast population grows richer, so the thinking goes, so will its appetite for more of everything. Yet, as Deutsche Bank's Paul Sankey points out, Chinese passenger-vehicle sales surged 77% year-on-year in the first quarter. Yet apparent gasoline demand rose by just 3%. Why the disconnect? About 50 million engines are manufactured in China every year, says Mr. Perkowski. So while 13.6 million cars, trucks and buses were sold in China last year, another 36 million or so other, low-technology vehicles were sold, including those inkfish. A big reason for the apparent surge in sales, therefore, is the switch from nonconventional vehicles to conventional vehicles

    China sees safety tweaks after Macondo - CNOOC President Fu Chengyu had said the Macondo accident will raise the general level safety costs for the entire industry - citing the evaluation of CNOOC's specialist team after continual sessions since the accident took place.  Fu said China does not hold so much offshore engineering power as the United States and the nation's priority has always been prevention. A chief CNOOC energy researcher echoes Fu’s sentiments in an interview with People’s Daily. Chen Zhidong said the US is expected to adjust its offshore oil and gas production standards and China will also have to make some adjustments. Analysts speaking to People’s Daily see an increase in cost of production and crude prices in the long term

    42,719 Pounds of Minerals for Every American Last Year - Last year, every person in the United States needed more than 21 tons of minerals and energy fuels to maintain their standard of living, according to statistics compiled by the Mineral Information Institute, an Affiliate of the Society for Mining, Metallurgy and Exploration Foundation.With the life expectancy in the U.S. now averaging 77.8 years, this means that the average American will need to have 3.3 million pounds of resources to be mined to provide the products and materials they will depend upon in their lifetime. The population of the U.S. is over 304 million people, so this means that last year, nearly 6 billion tons of different rocks and minerals had to be mined somewhere, to make the things we use in our everyday lives.

    Commodity Prices Decline and Futures - From Bloomberg: Commodities’ Biggest Drop Since Lehman Bear Signal. The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. From the WSJ: Steel Prices Under Pressure. From the WSJ: China Bites Into Commodities Reserves The Dow Jones-UBS Commodity Index last week dropped to its lowest level since July, before recouping some of its losses. The index is down 9.9% this year.  In April, China posted a significant drop in imports for some commodities, leaving many analysts wondering whether China's appetite for commodities has abated.

    Commodities’ Biggest Drop Since Lehman Bear Signal (Bloomberg) -- The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil. The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February. Separate reports today showed manufacturing slowdowns last month in China, Europe and the U.S.

    Is Gold Just Another Fiat Currency? - Below is a clip from Sky News which demonstrates that a Gold Rush is developing in China, with many now distrustful of fiat currencies. China is now the number one consumer of gold. But all across the world, we are witnessing the same currency revulsion and distrust of central banks, which has buoyed the price of gold. Nevertheless, the video does point to a certain mania amongst investors that sounds more like speculation and risk seeking than investing and risk aversion. Witness the Chinese man quoted saying, "I think investing in gold bullion is very good. Recently, the price of gold has been increasing all the time and I think it will rise even more." That is exactly the psychology we witnessed in Emerging Markets shares in the mid-1990s, in Internet stocks in the late 1990s and in housing in the 2000s. In this week’s Barron’s, Richard Wiggins, chief investment strategist for First Michigan Bank, says that gold is just another fiat currency.

    China Weighs Tighter Controls on Rare Elements - NYTimes - China is planning to tighten its control over its rare earth minerals by allowing just a handful of state companies to oversee the mining of the scarce elements, which are vital to some of the world’s greenest technologies. The State Council, China’s highest legislative body, is weighing a proposal to put the government in control of private and unauthorized mines that produce rare earth minerals, a strategic resource that much of the world depends on, according to China Daily, the official English-language newspaper. Rare earth minerals are an unusual group of natural elements that are vital for high-performance electric motors in hybrid cars, wind turbines, efficient light bulbs and even missiles. China now accounts for over 90 percent of the world’s production of the minerals. Some governments and global companies have recently expressed concern about whether China is planning to restrict exports of its rare earth minerals or force global companies to move factories to China to complete production of items using the minerals.

    China tightens stranglehold on rare earth minerals - China is to further tighten its stranglehold on the mining of rare earth metals essential for the manufacture of high-tech products from iPods to wind turbines and military missiles. Mining rights for the 17 rare earth elements will now be restricted to only a handful of Chinese state-controlled mining companies, according to a draft proposal submitted this week for approval to China’s State Council, or cabinet. The move comes just six months after China - which produces 95pc of the world’s rare earth metals - capped production levels for 2010 and imposed a moratorium on all new mining licenses until June 30, 2011.

    Government investigates resource shortages - The British government is making a review of current, ongoing global shortages of vital raw materials.This will go beyond the notion of peak oil to look at the supply of a series of key natural resources, following rises in commodity prices, food riots and accusations that various countries - particularly China and Japan – are beginning to stockpile important minerals in an attempt to protect their businesses from global competition. A report in the UK Guardian newspaper, Government review to examine threat of world resources shortage, states that the country’s Department for Food, Environment and Rural Affairs is leading the initiative. The ministry believes that, “every sector of the British economy was directly or indirectly vulnerable to future shortages.” The government is taking the initiative following widespread reporting on the pending collapse of various natural resources, including a December report by the World Business Council for Sustainable Development that 49 strategically important resources may become harder to obtain. This, EU starts screening raw materials ‘critical list,’ states:

    Vladimir Putin, Transaction Cost Economist - I find the whole upstream-downstream dispute in the metals markets in Russia very fascinating.  Putin held a meeting with the head of Russia’s Federal Antimonopoly Service, Igor Artemyev, at which he gave a soliloquy telling how it was going to be.  Most notably, Putin advocated the return to a system of long term contracts with fixed prices (or prices based on a formula—press accounts vary. The largest producers and consumers of metal could return to the practice of long-term contracts with a fixed price formula, which would rule out the possibility of price hikes. He said that the government believes that the supplies of metal, iron ore and coke to the domestic market should be viewed as a priority.But as some bank analysts point out, this doesn’t solve the problem.  Fixed prices  are almost always wrong, out of alignment with current market conditions.   One party of the other has a reason to squawk that current prices are out of line.  And with commodities (the role of which in the Russian economy Putin’s soliloquy emphasizes with pride, in a very revealing counterpoint to Medvedev’s embarrassment at Russia’s commodity-centric economy), since prices are very volatile, misalignments are frequently large.

    It's not just Europe - I see many financial commentators bravely trying to explain recent ups and downs in asset and commodity prices in terms of news coming out of Europe. But a Eurocentric perspective misses an important part of the story. My primary concern about the situation in Europe has been that as the probability of default in one country increases, that can increase the risk premium on sovereign debt for other countries as well. Rising interest costs could then force those other countries to restructure their debt. The falling dominos would undermine the net worth of banks that extended the sovereign loans, hindering the banks' access to short-term credit and their ability in turn to fund private-sector loans in a potential replay of the events of 2008.The excess in the 3-month LIBOR bank borrowing cost over the 3-month T-bill rate, known as the TED spread, would be one potential indicator of such concerns. This has risen to new highs for 2010, but is still far below the values we saw in 2007-2009.

    10 million face famine in West Africa - At this time of year, the Gadabeji Reserve should be a refuge for the nomadic tribes who travel across a moonscape on the edge of the Sahara to graze their cattle. But the grass is meagre after a drought killed off last year's crops. Now the cattle are too weak to stand and too skinny to sell, leaving the poor without any way to buy grain to feed their families. The threat of famine is again stalking the Sahel, a band of semi-arid land stretching across Africa south of the Sahara. Its countries constitute a virtual list of the worst famines in recent decades: Ethiopia, Sudan, Eritrea and Somalia. The UN World Food Programme is warning that some 10 million people face hunger over the next three months before the harvest in September – if it comes.

    Battling a Virus Ravaging East Africa’s Cassava Crops - That newcomer, brown streak, is now ravaging cassava crops in a great swath around Lake Victoria, threatening millions of East Africans who grow the tuber as their staple food. Although it has been seen on coastal farms for 70 years, a mutant version emerged in Africa’s interior in 2004, “and there has been explosive, pandemic-style spread since then,” said Claude M. Fauquet, director of cassava research at the Donald Danforth Plant Science Center in St. Louis. “The speed is just unprecedented, and the farmers are really desperate.” The threat could become global. After rice and wheat, cassava is the world’s third-largest source of calories. Under many names, including manioc, tapioca and yuca, it is eaten by 800 million people in Africa, South America and Asia. The danger has been likened to that of Phytophthora infestans, the blight that struck European potatoes in the 1840s, setting off a famine that killed perhaps a million people in Ireland and forced even more to emigrate. That event changed the history of all English-speaking countries.

    Egypt, Sudan lock horns with lower Africa over control of the Nile River…A war of words over control of the Nile has broken out between Egypt, which sees the river as its lifeblood, and countries upstream complaining they are denied a fair share of the river's water. Presidents and officials from half a dozen countries have been crisscrossing Africa holding talks in the latest escalation of a decades-old dispute.At its heart lies a 1929 accord, signed during Britain's colonial rule in Africa, which gives Egypt and Sudan rights over all the water in the world's longest river.The Nile Waters Agreement, which still holds today, guarantees Egypt 55.5 billion cubic meters of the Nile's 84 billion total flow. Sudan gets the rest. But the remotest headstream of the Nile rises 4,145 miles to the south, in Burundi's Ruvyironza River. Its myriad tributaries drain a basin the size of the Amazon rainforest across 10 countries – the Democratic Republic of Congo, Tanzania, Burundi, Rwanda, Uganda, Kenya, Ethiopia, Eritrea, Sudan, and Egypt. Under the deal, and another reaffirming its principles in 1959, those last two have final say on projects affecting the Nile's flow. None of the others may tap into the river's bounty – for irrigation, for example – unless Cairo and Khartoum agree, and without that, upstream nations have struggled to access international finance to fund such projects.

    The Child Mortality Map

    Corruption Resources - The World Bank maintains a web page devoted to its work on corruption. Holder’s estimate of $1 trillion in bribes appears to date from 2004, based on 2001/2002 data. See here. The OECD also maintains a web page regarding its work on corruption and the Anti-Bribery Convention, which has been signed by 38 countries to criminalize the payment of bribes.In 2005, USAID published a report detailing the US Government’s anticorruption strategy. A 2008 study by PricewaterhouseCoopers surveyed businesses on the problem of corruption. Sixty-three percent reported that they had experienced actual or attempted corruption and 39% of executives said they had lost contracts because of corrupt officials.Transparency International is the principal private organization involved in the anti-corruption effort. It publishes an annual Corruption Perceptions Index. In 2009, New Zealand was ranked as the least corrupt nation; the US came in at number 19. Somalia was perceived to be the most corrupt nation on earth. Kroll, the worldwide risk consulting company, produces an annual Global Fraud Report. The latest report was issued in April 2010. The section regarding the US focused on bankruptcy fraud in the real estate sector.The complete text of a 2006 economic history of corruption in America from the National Bureau of Economic Research is available here.A thorough review of economic theory related to corruption by Swedish economist Jakob Svensson is available here. IMF economist Paolo Mauro authored one of the primary theoretical articles on corruption in the August 1995 issue of the Quarterly Journal of Economics. It’s available online here. Accessible summary here.The leading academic authority on corruption is Prof. Susan Rose-Ackerman of the Yale Law School.

    Why India's Poor Are Poor? - I ran across this story on National Public Radio's Planet Money blog. It makes a good prima facie case that there is a role for manufacturing in developing economies. I don't disagree that there is. But what I found more interesting were the links to other stories at the end. What popped into my head was, "maybe there are also strong institutional reasons that the poor remain poor." If bribery is necessary for progress in an economy, how can the poor progress without the means to pay the bribes? I suspect that if bribery is so widespread, it would take a bribe to land a better-paying job in the manufacturing sector. I'm just saying....

    Mark Mobius, Stephen Roach bullish on India –Mumbai: Global market top guns Mark Mobius and Stephen Roach remain bullish on India and believe the Euro crisis will have little impact on the domestic economy. “Looking at the fundamentals, the growth rates in emerging markets (EM) are much higher than that in developed markets (DM) currently, which makes EMs like India (expected GDP growth of 7-8% in CY2010) more interesting. As compared to average 5% growth in EMs, the DMs have been growing at around 2%. Also, debt-to-gross domestic ratios (GDP) are significantly lower in EMs while the foreign currency reserves are higher,” said Mobius, executive chairman, Templeton Asset Management.

    Brazil's bubble gets bigger - Yet more evidence that Brazil’s economy is growing too quickly for comfort: figures for industrial production in April published today showed a year on year increase of 17.4 per cent, more even than the whopping 16.1 per cent consensus among market economists. The quarter on quarter, seasonally adjusted annualised rate of growth was even bigger, at 19.1 per cent.It is true that April’s figure actually showed a decline from March, falling by 0.7 per cent (the consensus was for a fall of 1.0 per cent). But this was probably due to a slowdown in inventory replacement, after March’s month on month surge of 3.4 per cent. Growth certainly seems to be advancing in fits and starts this year.

    Brazil, India, China May Be Overheating, Roubini Says (Bloomberg) -- Nouriel Roubini, the New York University professor who predicted the global financial crisis before markets peaked, said the Brazilian, Chinese and Indian economies may be overheating and developing asset bubbles. The outlook for Brazil’s economy is “very positive,” though the debt crisis in the euro zone countries and a slow “u-shaped” recovery globally could dent the country’s growth, Roubini said today at an event in Sao Paulo. “In Brazil, like in many other emerging market economies, there is now evidence of overheating of the economy,” Roubini said. “Expected and actual inflation is starting to rise, and that implies that over the next few quarters there has to be a tightening of monetary policy, gradually but progressively, in order to make sure that inflation expectations remain anchored.”

    Hundreds die in Indian heatwave - Record temperatures in northern India have claimed hundreds of lives in what is believed to be the hottest summer in the country since records began in the late 1800s. The death toll is expected to rise with experts forecasting temperatures approaching 50C (122F) in coming weeks. More than 100 people are reported to have died in the state of Gujarat where the mercury topped at 48.5C last week. At least 90 died in Maharashtra, 35 in Rajasthan and 34 in Bihar.Hospitals in Gujarat have been receiving around 300 people a day suffering from food poisoning and heat stroke, ministers said. Officials admit the figures are only a fraction of the total as most of the casualties are found in remote rural villages.Wildlife and livestock has also suffered with voluntary organisations in Gujarat reporting the deaths of bats and crows and dozens of peacocks reported dead at a forest reserve in Uttar Pradesh.

    Water shortage looms for China, India - About 2.4 billion people live in "water-stressed" countries such as China, according to a 2009 report by the Pacific Institute, an Oakland, California-based nonprofit scientific research group. Water scarcity and pollution reduce China's gross domestic product by about 2.3 percent, the World Bank said in a 2007 report. Water demand in the next two decades will double in India and rise 32 percent in China, according to the 2030 Water Resources Group, a research collaboration between the World Bank, management consulting firm McKinsey & Co. and industrial water users such as Coca-Cola. China's 1.33 billion people each have 2,117 cubic meters of water available per year, compared with 1,614 cubic meters in India and as much as 9,943 cubic meters in the United States, according to the Food and Agriculture Organization of the United Nations. The 1.2 billion people in India, where farmers use 80 percent of available water, will exhaust their fresh-water supplies by 2050 at the current rate, the World Bank estimates

    Chinese state organ warns of agricultural speculators who hoard with “evil intent” (FT beyondbrics)It seems the Chinese housing bubble is at the root of all the country’s problems, even the rising price of vegetables. Officials from China’s powerful state planning agency, the National Development and Reform Commission, are blaming “speculative capital” escaping from real estate and the stock market for rapid price rises in agricultural produce such as rice, corn, garlic, mung beans and ginseng.“During the slump in stock and real estate markets, hot money is prone to flow into the agricultural market,” and “agricultural products that can be preserved for a long time are likely to be speculated on,” state media paraphrased a senior official from the NDRC as saying.The price rises are closely related to “profiteers who are spreading rumours, hoarding and cornering with evil intent,” state media paraphrased another NDRC official as saying.

    Chinese Edge Toward Supercomputing Record – NYTimes - A Chinese supercomputer has been ranked as the world’s second-fastest machine, surpassing European and Japanese systems and underscoring China’s aggressive commitment to science and technology. The Dawning Nebulae, based at the National Supercomputing Center in Shenzhen, China, has achieved a sustained computing speed of 1.27 petaflops — the equivalent of one thousand trillion mathematical operations a second — in the latest semiannual ranking of the world’s fastest 500 computers. The Chinese machine is actually now ranked as the world’s fastest in terms of theoretical peak performance, but that is considered a less significant measure than the actual computing speed achieved on a standardized computing test.

    China Steel Exports ‘Hard to Sustain’ on Oversupply (Bloomberg) -- Strong growth in steel exports from China, the largest producer, will be “hard to sustain,” as the global market is oversupplied, said an official from the China Iron & Steel Association. “China’s steel production faces a predicament after a fairly good start in the first four months,” Luo Bingsheng, vice chairman of the association said at a conference in Shanghai today. “Production costs will continue to rise, while the sales prices of steel products have been falling since mid- April.” Chinese steel product exports have doubled in the first four months of the year as the global economy recovers. Crude steel output in China rose 27 percent to a record in April. Benchmark steel prices have dropped from an 18-month high in April.

    Labor Unrest May Signal New Phase in China Economy - Rapidly rising industrial wages are beginning to allow China’s workers to share in their country’s rising prosperity. The question is whether these gains can be maintained and even increased without disrupting supply lines to companies around the world, and without discouraging much future investment by Chinese and global companies alike. The biggest eye-opener for multinationals in China recently has been a nine-day-old strike at a sprawling Honda transmission factory here in Foshan, about 100 miles northwest of Hong Kong. The strike, which has forced Honda to suspend production at all four of its joint venture assembly plants in China, has shown that Chinese authorities are willing to tolerate work stoppages at least temporarily, even at high-tech operations on which many other factories depend.

    Beijing to Raise Minimum Wage in City by 20% - NYTimes (Reuters) — Beijing will increase the city’s minimum wage by 20 percent, state media reported on Thursday, the latest sign of rising labor costs in the world’s third-largest economy. Minimum wage in the Chinese capital will be increased to 960 renminbi ($140) a month from 800 renminbi on July 1, the official Xinhua news agency said. Provinces and cities throughout the country have raised their minimum wage this year as companies have reported growing labor shortages with migrant workers from the interior choosing to seek jobs in small cities closer to their homes. A strike at a Honda Motor car parts factory that began month was resolved Wednesday after the company offered its workers a 24 percent pay raise, showing how the balance of power in the country’s factories is gradually tipping toward workers.

    Higher wages in China: good news for the economy - Chinese wage inflation has become something of a hot topic after Honda and Foxconn both decided to increase worker salaries this week - in Foxconn’s case by as much as 30 per cent. And now the Chinese union of KFC workers is also demanding more cash.So will rising wages nudge China’s crown as factory of the world? And is it a boon for its neighbours? Stephen Green at Standard Chartered disagrees. His bank surveyed manufacturers in China’s Guangdong earlier in the year about wages. They majority of those asked said they were expecting pay to rise by around 10 per cent. And while a few Chinese firms and multinationals have tentatively started to peer over the borders into Vietnam, Thailand or across to Indonesia, most companies thought that any relocation would be within China.Wage inflation is good news because it, first, helps spread the economic activity across the rest of the Chinese mainland - something the government has actively pursued by spending billions of dollars on improving road and rail infrastructure. Second, it means China can move towards a consumer-driven economy - something the US and Europe have been hoping for. As Green puts it: “Higher wages mean that now a worker in a Nike factory can go out and buy a motorbike, or a television”.

    Jobs and kids: Female employment and fertility in rural China - VoxEU - Understanding the relationship between female employment and fertility is a vital ingredient for effective population policy. This column presents new findings from China based on well over 2000 women between 20 and 52 years old. It finds that non-agricultural jobs for women reduce the number of children per woman by 0.64 and the probability of having more than one child by 54.8%.

    Beijing in a sweat as China's economy overheats - China is struggling to contain the threat of an overheating economy in the face of rising house prices, inflationary wage increases and a continuing surge in money supply, the head of the country’s second-largest bank has warned. Guo Shuqing, chairman of China Construction Bank, said that the latest figures for China’s M1 money supply – a key predictor of inflation – had raised concerns that the country’s vast stimulus and bank-lending was running too hot. “I saw the figures for last month and M1 is still very high, increasing 31pc from last year, which is one per cent higher than last month,” he said in an interview with The Daily Telegraph. “We are seeing a lot of money coming to China which is creating a current and capital account surpluses.”

    Land prices and the Chinese public sector - On the morning of May 29 my group was taken to see the village of Cha’an outside Dalian. Or perhaps I should say the former village. What happened, essentially, is that back in 2006 the former “village” of rudimentary structures was razed and the government constructed a large and extremely nice park (it’s in a very scenic area), reforested the hillsides, and constructed a series of apartment complexes. The former villagers now live in modest but up-to-date structures. You see some stories of Chinese people being serious dispossessed in this kind of process, but in the case of Cha’an the local authorities seem to have decided (wisely, in my view, as well as fairly) that it doesn’t make sense to treat people poorly. So people who lost homes in the reconstruction were compensated with multiple homes in the new Cha’an.This all naturally raises the question of how the village government was able to finance all this. The answer is that they used the rising price of land near prosperous Chinese cities to do it.

    China Property Risk Is Worse Than in US - CNBC - The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, said recent government measures to cool the property market needed to be part of a long-term push to bring high housing prices under control.He added that there were still signs that the economy was overheating and recommended modest increases in interest rates and the level of the currency. “The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”

    New home deals may fall 70% -- Shanghai Daily - NEW home transactions in Shanghai may plunge 70 percent in May from a month earlier as several real estate developers are reluctant to slash prices amid uncertainties in the local market.There were just 258,000 square meters of new homes, excluding those designated for relocated residents under urban redevelopment plans, sold in the first 27 days of this month, Shanghai Uwin Real Estate Information Services Co said yesterday."For the whole month, the figure should be around 300,000 square meters, and that could be a plunge from a month earlier when 1.02 million square meters of new houses were sold across the city,"

    China's Property Market Freezes Up - Government policy changes have thrown China's booming property market into a period of paralysis that some industry executives say will last for several months, weighing on global growth prospects already battered by the turmoil in Europe. A rebound in China's property market has been central to the nation's rapid recovery from the financial crisis, but surging housing prices had led to increasingly open discontent from middle-class families in major cities. After months of indecision, Beijing in mid-April announced a package of policies intended to blow the froth out of the market by restricting speculative purchases. Officials may have gotten more than they bargained for. Though still too recent for their effect to show up in official economic statistics, early indications are that the new measures have sharply cooled the property market. Arriving around the same time as the debt crisis in Greece, China's new restrictions caused many investors and businesses to question the strength of the global recovery.

    WSJ: China's Property Market Freezes Up - The WSJ has an article tonight about the Chinese real estate market and the recent government actions: China's Property Market Freezes Up Beijing in mid-April announced a package of policies intended to blow the froth out of the market by restricting speculative purchases. ... The housing market in many—though not all—Chinese cities seems to have nearly ground to a halt after the government moves.This slowdown is showing up in commodity prices. A key question is how the Chinese government will react.Professor Michael Pettis, of the Peking University’s Guanghua School of Management, expects the Chinese government to take action to cushion the slow down, see Beijing’s stop-and-go measures: As I have said many times before, I suspect we will see a lot of discontinuity in policymaking this year – amid lots of panicking – and recent events show just how. In the past few months Beijing seems to have become so worried about signs of overheating that, after trying unsuccessfully many times to pare growth carefully, it has given up the scalpel and has brought out the sledgehammer.

    China Car-Sales Growth Slows on ‘Diminishing Wealth’ (Bloomberg) -- China’s passenger-car sales growth slowed in May as falling stock prices eroded wealth and consumer prices rose in the world’s largest automobile market. Sales of cars, sport-utility vehicles and multipurpose vehicles rose 25 percent from a year earlier to 885,800 last month, the China Automotive Technology & Research Center said in an e-mailed statement today. That compares with 34 percent growth in April, according to the center. A “diminishing wealth effect” along with high gasoline prices may contribute to a slowdown in auto sales, Credit Suisse Group AG analysts Adrian Chan and Hung Bin Toh wrote in a report last week. Vehicle sales could decline from year-earlier levels in the second half of 2010, they said.  “China had a sharp and noticeable ramp-up of sales last year, and it’s impossible to imagine the country maintaining the same type of growth momentum,”

    China's shift away from cheap labor hard on all -- Global manufacturers struggling with life-or-death pressures to control costs are finding that the legions of low-wage Chinese workers they rely on have limits.A strike at Honda Motor Co. and the official response to a spate of suicides at Foxconn Technology, a maker of electronics for industry giants such as Apple, Dell and Hewlett-Packard, suggests China's leaders are at least tacitly allowing workers to talk back.Over the weekend, the top communist party leader in Guangdong province visited Foxconn's sprawling factory where 10 workers have committed suicide and urged the company to adopt a "better, more humane working environment" for its mostly young workers, state media reported."The 80s and 90s generation workers need more care and respect and need to be motivated to work with enthusiasm," said Guangdong party chief Wang Yang, who has backed efforts to shift Guangdong up the industrial ladder away from reliance on exports of low tech, cheap products.

    Ezra Klein - Human capital and China - China has made English classes a major priority. But what's striking about Shanghai and Beijing is that few people -- even in the hotels that cater to Westerners -- actually speak much English. Or even a bit of English. It's a noticeable difference from other major cities (like Rio de Janeiro) where English is not the native tongue, but there's nevertheless a longer experience with it.The reason for this is that there's no one to teach English to a nation of 1.3 billion. The people who are proficient in both Chinese and English have better job opportunities than public school teacher. So you've got a lot of English classes, but fairly few English teachers, and so not much in the way of English proficiency. Maybe computer software will eventually make up the gap, but settling on a program and rolling it out across the country is a major project.

    Should larger reserve holdings be more diversified? -The notable increase of foreign-exchange reserve holdings by emerging market central banks was only temporarily interrupted during the 2008/2009 crisis. At the end of 2009, reserves held by emerging market central banks stood at $5.3 trillion, a five-fold increase over the past decade and close to $300 billion above the pre-crisis peak level.Large foreign-exchange reserve holdings by emerging market central banks are back on the radar of academics, policymakers, and market participants. One prediction has been that the large increases in reserve holdings should lead to more diversified portfolios. This column argues that this may not necessarily be the case – diversification depends on whether reserves are precautionary or not.

    Is China a free market success? - I don’t know why I get so annoyed by these endless debates over the “lessons” of the “Chinese miracle,” but I do.  Here is Ezra Klein (and Matt Yglesias):“Something that emerges quite quickly and a bit unexpectedly from being taken around on an economics-focused tour of China is that the Chinese economic miracle is really a great deal less of a ‘free market’ miracle than the conventional understanding in the United States would suggest,” writes Matthew Yglesias. That’s definitely correct, though it’s worth wondering why anyone thinks of China as a free-market success story. It would really help if people stopped calling one of the poorest economies in East Asia a “miracle.”  The problem seems to be that people insist on thinking in binary terms; free market or communist, successful or unsuccessful.  Here’s what really going on.

    Two Paths to Greater Efficiency - Paul Krugman’s 1994 article on “The Myth of Asia’s Miracle” was written before China had gotten rich enough to be generally considered miraculous. But as I’ve passed these ten days in China, I’m increasingly convinced that it’s must-reading for understanding China’s medium-term economic prospects. I won’t try to summarize the piece, but instead will just offer my Krugman-inspired take on what we’re seeing in China. The basic story is that living standards ultimate derive from productivity, and there are two ways for an undeveloped country like China to obtain productivity growth. One is to simply shift people out of a low-productivity sector (like farming in China) and into a higher productivity sector (in China, factory labor). Another would be to actually raise the in-sector productivity by getting better at farming or manufacturing or what have you. In the specific case of China, it’s crucial to note that the productivity wedge between sweatshops and rice paddies is enormous which strongly suggests that a huge amount of what China’s achieved has been achieved through the former method.

    Why our elites are wrong on Asian business model…I think our elites have it wrong. It is my contention that China produces GDP growth without per capita wealth creation. It is analogous to a cocktail party without the cocktails; what is the point? Furthermore, I fear that, should China suffer an economic reversal, it might have especially ominous implications for Japan. I am concerned about the lopsided nature of Japan's finances, with its domestic liabilities - pension and insurance schemes - being supported by the country's substantial overseas dollar hoard. Japan is, in effect, short its own currency and, to aggravate matters further, so is the international hedge fund community.

    Taking a breather - REPORTS on manufacturing activity around the world rolled in today, and they all looked somewhat similar. Figures from China, Europe, and America all revealed a slower pace of manufacturing growth in May. Both China and Europe saw a 1.8 percentage point decline for the month in their respective purchasing manager's index, while the America decline came in at 0.7 percentage points. All three indexes remained in expansionary territory, but the uniform slowdown, in concert with the past month's declines in markets and commodity prices, raises the question of whether the global recovery is slowing. It isn't just America, Europe, and China, either; have a look at this chart of May PMI changes across countries, from the Wall Street Journal. In May, manufacturing growth slowed in Australia, Brazil, and South Korea (notable exceptions to the trend include Japan and India).

    World-Wide Factory Activity by Country - Manufacturing activity continued to expand in much of the world in May, though the pace of expansion slowed in most countries. Greece was joined by Hungary as the only two countries registering a contraction.India, Japan, Ireland, Turkey, Switzerland and Czech Republic saw a faster pace of growth in their purchasing manager indexes in May, while the U.K.’s level was unchanged. The U.S. and China were among the nations that recorded a slower pace of growth last month. Though Dan Greenhaus of Miller Tabak notes that China’s May data is nearly always lower than April.Turning to the U.S.. Mr. Greenhaus notes that though the pace of manufacturing growth is slowing, the report contains positive elements. “That new export orders continued to expand given the concerns surrounding growth in the Eurozone and Asia is unquestionably a positive,” he said.  Interactive: Click on the top of any column to resort the chart.

    WTO Bashes PRC in Trade Report; So Does US There appear to be some fireworks in store as the WTO is about to release its biannual survey of China's trade practices in a Trade Policy Review. Think of it as the trade equivalent of the IMF's Article IV surveillance. This publication is the third such report to come out since China joined the WTO in 2001. The ever-reliable Reuters alerts us to potentially controversial viewpoints aired by the WTO. Although it's supposed not to take sides in looming trade disputes, it's said to clearly fault China on disallowing the export of rare earth metals and other important but not-so-abundant raw materials (more on this in a recent post): China's curbs on exports of some raw materials to conserve resources may not meet the stated goals while giving Chinese manufacturers an unfair advantage, the World Trade Organization said on Monday. The remarks, in a report prepared for China's two-yearly trade policy review, constituted a rare comment by the WTO's secretariat on a current dispute between members.

    Quant Easing: Weak £ Draws Tourists (from PRC)  - While I'm not exactly a happy camper being paid in rather useless pounds, it seems tourists are flocking to London in droves given the exceptionally weak currency that makes for veritable bargains. I myself have make a note of this fact before. Nowhere is this situation more apparent than in the West End of London where there is a high concentration of retail outlets. (Yes, my school is in is area.) The West End was famously immortalized in song by the Pet Shop Boys' "West End Girls" after...I don't really know what. To no one's real surprise, retailers there cite an influx of Chinese power shoppers as those keeping them afloat. What's more, they are lobbying the government to ease visa restrictions so that our Chinese friends can buy more pieces of Britannia. A nation of shopkeepers, indeed. Given the moribund economic outlook for the UK, the West End is expecting a parade of highs leading to the 2012 Olympics.

    The Next Black Swan- A Yuan Devaluation - China Bluff Exposed, Regime Overthrown- China's communist regime continued to print money, lending it to everybody that wanted and didn't want it. The giant housing, infrastructure, and manufacturing bubble came to a violent crash when the debts where not paid and inflation forced the authorities to tighten despite massive unemployment. The combination of high inflation and high unemployment in the urban centers took the people to the streets. The Chinese citizens refused to accept state intervention in the economy and their personal life demanding more personal and economic freedom resulting in prolonged civil unrest which almost reached a full scaled civil war. The collapse of the Chinese regime and economy resulted in a colossal bust for commodity prices, albeit temporarily and caused a severe recession in Australia, Brazil, Russia, Argentina, and the Gulf States. Well we predict that one of the next big shocks to the global financial system, happening probably as early as 2011 is not a Yuan revaluation as many expect but a Yuan devaluation!

    Chinese exporters ditch wounded euro for dollars (Reuters) - Chinese exporters who made a big push only a year ago to bill in euros are increasingly turning their backs on the wounded European currency and demanding dollars instead.By contrst, Beijing last week said a report it was reviewing the euro portion in its mountain of foreign exchange reserves was groundless and it calmed markets by saying that Europe remained a key investment market. But Chinese exporters and the local governments that oversee them are less confident. They are trying to keep a wider berth from the euro, at least for now.

    Iran selling 45 billion euros of reserves for dollars -- Iran’s central bank began the first phase of the 45 billion-euro (US$55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31. Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55% of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said.Iran’s shift out of euros has been prompted by the single currency’s decline, said Jaam-e-Jam, which is owned by the state broadcaster. Other central banks, including those of the Persian Gulf states, also are selling their euro reserves, it said.

    Spain labor reform deadline extended one week (Reuters) - The deadline for a deal on crucial labor market reforms in Spain between the government, unions and business representatives has been extended for a week from the end of the month, the Labor Ministry said on Saturday.The government had threatened to push through the reforms by passing a bill unilaterally if no three-way agreement was reached by May 31, while the two largest trade unions had warned they would call a general strike in response.Talks on Saturday adjourned without any advances, the Spanish news agency Europa Press said, citing union sources, adding that negotiations would continue through the weekend

    Fitch’s downward revision on Spain adds pressure on government - The polls are showing that the Jose Luis Zapatero has suffered a collapse in his approval rating, as Spaniards are questioning his handling of the economy, while the opposition would gain a clear majority to govern, the FT writes. The opinion poll was conducted by Sigma Dos for El Mundo also showed that 50.6% of voters wanted early elections. Zapatero is not likely to improve his approval rates with a labour market reform proposal he is currently putting together. El Pais reports that the reform seeks to generalise the permanent contract with cheaper dismissals, and to restrict the use of temporary contracts. Attempts to find an agreement with trade unions and employers federations are about to fail, so that the government is putting together the reform project. Dismissal is one of the most controversial issues and was long rejected by Zapatero, but new circumstances made him reconsider. On Friday afternoon, Fitch Rating downgraded Spanish sovereign debt to AA+, the second highest rating.

    Failed “Top-Kill” is a Symbol of Ongoing Distress -The distress signals were numerous and global, starting with Fitch’s decision to downgrade Spain’s sovereign debt rating by one notch on Friday. They continued over the weekend when BP’s “top-kill” effort failed and tensions rose in the Middle East. Overnight brought weaker than expected economic data in China and a curious warning from the ECB about the weakened state of banks within the EU. Risk aversion and currency volatility soared in response this morning, but after a decent rally attempt by U.S. stocks during the middle of the day, equities succumbed to yet another late sell off this afternoon. Whether or not we experience even lower prices in the near future, we may one day look back at the BP oil spill as a symbol of our ongoing distress.Slow as they have been to issue actual downgrades to sovereign nations during the European version of the debt crisis, the ratings agencies are operating at light speed compared to their efforts to rescind previously gleaming opinions during the last cycle’s mortgage meltdown. Fitch took the first swipe at Spain on Friday, knocking Madrid’s credit down to AA+ from AAA

    Spain orders banks to come clean on debts to restore shattered faith – The Bank of Spain has ordered the country's lenders to face up to bad debts and set aside reserves of up to 30pc on property holdings in a bid to restore global confidence in the Spanish financial system after weeks of investor flight. The new rules target the savings banks or cajas that account for the lion's share of the €445bn (£377bn) of property debt accumulated during the credit boom, when real interest rates were negative. The authorities acted after severe strains in the inter-bank market had begun to raise questions about the ability of Spanish lenders to access routine funds from global peers. Deutsche Bank said Spanish lenders need to refinance €125bn by late 2011. "Liquidity is our main area of concern. Savings banks are in a very weak and risky position," it said.

    Caja Madrid Said To Ask For 3 Billion Euros Of Support - The stream of negative news from Spain's savings bank sector continued on Tuesday, with a report that the second largest player, Caja Madrid, will tap the government for 3 billion euros ($3.6 billion) of rescue funds. The savings bank said last Friday it was in talks to merge with several regional cajas -- Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja. More bad news emerged for Caja Madrid when Standard & Poor's placed its A/A-1 long and short-term ratings on the savings bank on CreditWatch negative, saying it expects "pronounced pressure" on its operating profit this year and into 2011. The negative status reflects the possibility of lowering counterparty credit ratings on Caja Madrid, though S&P said any downgrade is unlikely to exceed one notch. It's standalone credit profile and its hybrid securities could suffer a downgrade by one or more notches, warned the ratings agency.

    Spain Socialists face deep crisis as support dives (Reuters) - Spain's Socialist government grappled with a deepening political crisis on Sunday, with reforms of a "dysfunctional" labor market hanging by a thread and its chances of survival beyond the autumn looking shaky.Weekend opinion polls showed Prime Minister Jose Luis Rodriguez Zapatero's government far behind the opposition, and that many voters believe he will have to call early elections as support for a 2011 austerity budget will be hard to muster."The government faces not only an economic crisis, but a political crisis too because the way it's governing is not good enough," said Angel Laborda, an economist at Spanish savings banks consultancy FUNCAS. "I believe that early elections will be called, sooner or later."Spain's Socialists are battling to prove to nervous world markets the euro zone's fourth largest economy will not go down the same path as Greece, but with growing political opposition at home their ability to push through reforms is limited.

    Spain Trapped in Perverse Cycle as Wage Cuts Deepen Crisis -The Spanish Inquisition used to burn Englishmen in Sevilla's Plaza de San Francisco when they had the chance. There must have been some nostalgia for this practice when the news hit that Fitch Ratings had stripped the country of its AAA status. The downgrade could not have come at a more dreadful moment. The EU's €750bn "shield" for eurozone debtors has halted an incipient run on Club Med banks, but it has failed to restore full confidence for the obvious reason that such a guarantee cannot plausibly be extended from Greece to Portugal and then to Spain. The sums are too large, the number of solvent creditors too reduced, the intra-EMU politics too poisonous. Pierre Lellouche, France's Europe minister, compares the shield to Nato's Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all.

    Spain's $38 Billion Maturing Debt Fuels Sovereign Swaps Surge (Bloomberg) -- Credit-default swaps on European sovereign debt rose for the third day as speculation Spain will struggle to refinance $38 billion of debt next month stoked concern the region’s deficit crisis may worsen. “Worries over the amount of debt maturing over the next three months is casting a shadow over the market and clouding investor sentiment,” said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London.Spain is struggling to cut the euro region’s third-largest budget gap as the economy, still reeling from the collapse of a debt-fueled construction boom, is forecast to contract for a second full year. Prime Minister Jose Luis Rodriguez Zapatero has angered traditional allies by cutting public wages and freezing pensions, triggering a record drop in consumer confidence in May.

    FT Alphaville– The Spanish waterfall - Along with Fitch’s Friday downgrade of Spain’s sovereign ratings, came this lesser-noted mark-down:Fitch Takes Rating Action on CDOs Guaranteed by Spain. Fitch Ratings-London-28 May 2010: Fitch Ratings has today downgraded 10 classes of CDO notes and affirmed 14 classes of CDO notes following the agency’s downgrade of Spain’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘AA+’ from ‘AAA’ . . .Stop right there. The Bank of Spain guarantees CDOs, we hear you cry? Why yes, it does. In fact the Bank implicitly guarantees the following, according to Fitch (click to enlarge) :

    FT Alphaville » BNP Paribas: ‘Avoid Spanish banks for now’ - Add the credit analysts at BNP Paribas to the growing list of those concerned about the robustness of the Spanish banks. In a note published on Wednesday, analyst Olivia Frieser observed, in a comment on the findings of the June 2010 edition of the ECB’s Financial Stability Review, that Spanish banking sector assets total approximately €3,200bn.Frieser also detailed the potentially troublesome exposures of Spanish banks: The exposure of the Spanish banking sector to construction and property development is €445bn as of end December 2009. Of this, there are €165.5bn that the Bank of Spain considers as potentially troubled: €42.8bn of doubtful loans, €59bn of substandard loans, €59.7bn of asset foreclosures…and finally €4bn in write-offs. However, we’d argue this is not the only potentially troubled exposure of Spanish banks.

    Debt Crisis Drying Up European Lending, Espirito Santo Says (Bloomberg) -- Europe’s sovereign debt crisis is making financial institutions reluctant to lend, threatening to choke off credit to the region’s banks and consumers, said a senior executive of Banco Espirito Santo SA. “There is a problem with the real economy, because now credit is shortening completely,” said Jose Maria Espirito Santo Ricciardi, head of the investment banking unit of Portugal’s largest traded bank. “I will not say capital markets are completely closed, but it has been difficult, more for the banks than for sovereigns. Namely, the medium and small banks are having problems.”  Lending growth in Portugal will slow to about 2 percent this year from 9 percent in 2009, Ricciardi said in an interview May 27 at Bloomberg’s headquarters in New York. Espirito Santo “will lend much less” and “many, many banks” in the region are in the same situation, he said.

    Europe Banks Face Bond Sales Risk, Higher Loan Losses  (Bloomberg) -- Europe’s banks will have to write off 195 billion euros ($237 billion) of bad debts by 2011 and their ability to sell bonds may be curtailed as governments finance fiscal deficits, the European Central Bank said. With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report yesterday. “The risk that this implies for bank funding costs also raises the possibility of a setback to the recovery in banking sector profitability.”

    BBC News – Insulin giant pulls medicine from Greece over price cut - The world's leading supplier of the anti-diabetes drug insulin is withdrawing a state-of-the-art medication from Greece. Novo Nordisk, a Danish company, objects to a government decree ordering a 25% price cut in all medicines. A campaign group has condemned the move as "brutal capitalist blackmail". More than 50,000 Greeks with diabetes use Novo Nordisk's product, which is injected via an easy-to-use fountain pen-like device. A spokesman for the Danish pharmaceutical company said it was withdrawing the product from the Greek market because the price cut would force its business in Greece to run at a loss.

    Debt-hit Greece threatened with health supply freeze -  Greece's debt-plagued state hospitals faced a supply embargo after providers rejected Saturday a government compromise plan to repay billions of euros owed for equipment and medicine purchases."This proposal forces our companies to shut down altogether," Panagiotis Stravolaimos, head of the association of science and health providers (SEP) told Mega channel on Saturday."I do not think there is any possibility of agreement on this," he said.The finance ministry on Friday said it would issue bonds to pay back most of the 5.6 billion euros (6.9 billion dollars) of accumulated state hospital debt.

    The two-pronged Greece bailout - When the Greece crisis first erupted, the choice facing European policymakers was clear. Should they bail out Greece, giving it all the money it needs to pay its debts as they come due, or should they let the Greek chips fall as they may, and then bail out their national banks instead to the degree those banks lost money on their Greek bonds? Some kind of bailout was inevitable; the only question was whether it would be a sovereign bailout or a bank bailout. It’s now becoming clear that the choice that the Europeans plumped for was “both of the above”. And the Bundesbank isn’t happy about that:  Since the European Central Bank began purchasing government bonds three weeks ago, it has spent about €25 billion on Greek debt, according to a senior Bundesbank official who declined to be named. When the ECB buys up Greek debt in the secondary market, it doesn’t help Greece very much, since Greece no longer requires market access to roll over its debts. Instead, the main beneficiaries of this operation are European banks:

    Greece To Proceed With Long-Delayed Privatization Plans - The Greek government Wednesday announced long-delayed plans to privatize state-owned companies as part of its attempt to fix the country's public finances and chip away at the massive public debt.In a news conference, Finance Minister George Papaconstantinou said the government would move to privatize 49% of the operations division of loss-making state owned railways company OSE.Other moves will include privatizing state holdings in various casinos, selling a 39% stake in the Greek post office, and disposing of stakes in a variety of state-owned services including the waterworks companies of Greece's two major cities.The government is also restructuring Greece's natural gas monopoly to prepare it for privatization.

    Greece to Sell State Assets to Raise 3 Billion Euros (Bloomberg) -- Greece plans to sell stakes in railway and water companies and the postal service to raise 3 billion euros ($3.7 billion) and help reduce a budget deficit that sparked the debt crisis across southern Europe. “We decided to accelerate the privatizations process,” Greek Finance Minister George Papaconstantinou told reporters in Athens today. The government aims to raise 1 billion euros a year for the next three years from the sales. The crisis that originated in Greece prompted the region’s leaders to unveil an unprecedented 750 billion-euro ($920 billion) loan package to restore calm to markets. Greece last month took the first tranche of an emergency loan from the European Union and the International Monetary Fund.

    Greece urged to give up euro - THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight. “So part of the package of leaving the euro must be to convert the debt into the new domestic currency unilaterally.”

    Can I interest you in a small Mediterranean country?- GREECE continues to struggle to address its troublesome budget gap:The government will sell 49 percent of the state railroad, list ports and airports on the stock market and privatize the country's casinos, the Finance Ministry said after a cabinet meeting in Athens. The government will also sell stakes in water utilities serving Athens and Thessaloniki, sell 39 percent of the post office, and combine its vast real estate assets into a holding company to be listed on the stock market...This has to be one of the saddest paragraphs I've read in a while:NATO figures show that Greece spent 2.8 percent of G.D.P. on its armed forces in 2008, or about €6.9 billion. That makes it the most expensive military budget in Europe in per capita terms, and second only to the United States in the alliance.

    Italy’s fiscal austerity: Slash and burn | The Economist - FROM blithe denial to rank alarmism in a matter of days. For over a year, Silvio Berlusconi has been claiming that the Italian economy was not as badly affected by the global crisis as others (even though GDP shrank in 2009 by more than in France, Spain and Britain). It is testimony to Mr Berlusconi’s salesmanship (and perhaps his sway over Italian television) that he was widely believed. Even more impressively, his government has persuaded the financial markets that there is no problem with Italy’s public accounts, despite having a primary budget deficit (ie, before interest payments) and the euro zone’s biggest public debt. On May 24th the IMF gave Italy’s management of its finances a positive assessment. So it came as a shock to many Italians to hear just hours later from Mr Berlusconi’s close adviser, Gianni Letta, that a long-denied emergency budget would include “very heavy, very tough sacrifices” to save Italy “from the Greece risk”.

    Italy’s Municipalities Face Derivative Losses of $1.4 Billion -  (Bloomberg) -- Italian municipalities face losses of about 1.1 billion euros ($1.4 billion) on derivative contracts with the country’s banks, outstripping gains by 11 times.  Combined losses at the end of March 2010 compared with an estimated 100 million euros of gains on derivatives among Italian regions, cities and towns, data from the Bank of Italy show. At 227 million euros, local authorities of Campania have the largest so-called mark-to-market losses among the country’s 20 regions, according to the data.  Four banks are on trial in Milan for fraud in the sale of derivatives to the city, a case that may set a precedent for other municipalities. The Bank of Italy data is based on derivative agreements with domestic banks and local units of foreign institutions. The mark-to-market losses, because theoretical, aren’t included in municipalities’ debt calculations, the central bank said.

    Two million idle Italian youngsters run risk of becoming ‘lost generation’ -A leading sociologist has warned that Italy risks "losing a generation" of young talent as it struggles to climb out of its crippling downturn. On the day the Rome government launched a desperate package of cuts to trim its debt and avoid the meltdown suffered by neighbour Greece, figures showed that two million young Italians are now drifting, neither studying nor working.The ranks of idle Italians accounts for more than a fifth of all 15- to 29-year-olds, thanks mainly to a surge in the industrial north, where the job market shrivelled last year as national GDP dropped 5%. "Young people with more qualifications and with a well-off family behind them go abroad, and get along; all the others are left behind," said sociologist Chiara Saraceno. With so many people kicking their heels, the number of 18-34-year-olds still living with their parents rose to almost 60% last year, up from 49% in 1983. Among those between 30 and 34, a third are still enjoying home-cooked pasta. The downturn turned them into hostages in their own homes.

    Ireland Shows Revival Signs, Offers Lesson to Greece (Bloomberg) -- Ireland, which endured one of the worst recessions of any developed economy since the Great Depression, is showing signs of reviving. The economy may be expanding again after shrinking 7 percent in 2009, economists say. Growth will hit 3 percent next year, almost twice the euro-area average, the Organization for Economic Cooperation and Development said on May 27. “We’re close to the bottom,” Irish central bank Governor Patrick Honohan said in a May 28 interview in his Dublin office. “Here at the central bank, we are projecting an upturn in the second half of 2010.” Irish exports will rise this year for the first time since 2007, the OECD said. That’s helping Ireland pull out of the slump even as it continues the spending cuts started in 2008 to reduce Europe’s biggest deficit.

    Hungary Warns About Deficit - The European Commission on Thursday urged Hungary to cut its budget deficit faster as the government warned that its 2010 fiscal deficit may reach almost twice the target agreed with lenders including the EU.The new center-right government has warned in recent weeks that the deficit could be much higher than the agreed target of 3.8 percent of GDP. The government has blamed "fiscal skeletons" left by the previous Socialist administration.A top government official said the deficit could be 7.0-7.5 percent of GDP. Analysts were quick to point out that Hungary's state finances are not comparable to Greece

    Hungary in ‘Grave’ State, Official Says; Forint Falls (Bloomberg) -- Hungary’s is in a “grave situation” because the previous government “manipulated” figures and “lied” about the state of the economy, said Peter Szijjarto, spokesman for Prime Minister Viktor Orban. The forint fell for a second day, dropping as much as 2.1 percent against the euro. A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said today at a news conference in Budapest. The government will publish an action plan within 72 hours after the committee reports its findings, he said. Hungary needed a 20 billion-euro ($24 billion) international bailout to avert a default in 2008. Orban, who took over May 29 after winning elections by pledging to cut taxes and stimulate the economy, yesterday failed to get European Union approval for looser fiscal policy.

    Meet The Latest European Contagion Casualty: Hungary - If you are wondering where the latest bout of Euro weakness is coming from, look no further than long-forgotten Eastern Europe. From Bloomberg: "Hungary’s forint weakened against the euro, erasing earlier gains after reported deputy chairman of the ruling Fidesz party, Lajos Kosa, said that the country has a “slim chance to avoid the Greek situation” and that the new government’s primary objective is to avoid a sovereign default." It is rather amazing how long Eastern Europe has managed to squeek through the cracks. Will Hungary be the first rerouting of the PIIGS crisis into this latest European market. This means that another under the radar player, Austria, is about to get whacked big.

    Democracy Failure Follows Market Failure - If you owned a Hungarian bond here and you found a bid you would hit it wouldn't you? So should everybody, and then comes Romania with a recently failed auction, and then Ukraine which already received one round of bailout and will clearly need more. Then comes Western Europe, even Germany with its exposure to Eastern Europe, Japan... If dominos start falling it will be nearly impossible to stop them unless theree is enough private wealth left at one point to back specific sovereign entity. With the overall leverage in the system that could mean very few people, though Japan has proved resilient for that very reason despite a huge debt-to-GDP ratio. And even though 4 PMs in 4 years shows that public opinion is losing its discipline in the empire of the rising sun, their politicians still have the good taste of resigning. This is the kind of event that can be the spark of a global systemic crash that would leave very few standing if any.

    Romania expects 125,000 public sector jobs cuts – CNBC - Some 125,000 public sector jobs need to be cut in 2011 to ease pressure on the state budget as the country remains mired in a deep recession, a government official has said.Andreea Paul-Vass, economic counselor to the prime minister said late Thursday the public sector would need to shed 250,000 jobs to return to 2007 levels, when the government started hiring more agressively thanks to a three-year economic boom. Finance Minister Sebastian Vladescu said earlier this year that 70,000 state-paid jobs should be slashed in 2010.

    Country-by-country look at Europe's debt crisis, AP - Europe's governments are struggling to deal with a mountain of debt made worse by the past three years of global financial and economic turmoil. Here are thumbnail sketches of how some of the countries involved are faring — and what they're doing to escape the crisis.

    Eurozone unemployment rises to highest level in decade - Unemployment continued to rise in the eurozone in April, to 10.1 per cent, the highest level of joblessness in more than a decade. Policymakers had hoped that unemployment had reached a plateau at March’s 10.0 per cent level, where it had stayed for two months before April’s modest rise.Unemployment in the 16 countries that use the euro is now at its highest level since before the inception of the European single currency in 1999, according to seasonally-adjusted data from the European Union’s statistical arm. Youth unemployment breached the 20 per cent mark, up from 19.9 per cent in March. It is now once again above 40 per cent in Spain.

    Unemployment Rate increases in Europe, Euro Slides - The euro is at a four year low this morning at 1.2174 dollars From Eurostat: Euro area unemployment rate at 10.1% The euro area1 (EA16) seasonally-adjusted unemployment rate was 10.1% in April 2010, compared with 10.0% in March. It was 9.2% in April 2009. The EU271 unemployment rate was 9.7% in April 2010, unchanged compared with March. It was 8.7% in April 2009.Eurostat estimates that 23.311 million men and women in the EU27, of whom 15.860 million were in the euro area, were unemployed in April 2010. Among the Member States, the lowest unemployment rates were recorded in the Netherlands (4.1%) and Austria (4.9%), and the highest rates in Latvia (22.5%), Spain (19.7%) and Estonia (19.0% in the first quarter of 2010).

    European Debt Crisis Feeding Into Economy, Data Show - Signs emerged Tuesday that Europe’s sovereign debt crisis was feeding through into the euro area economy, as unemployment rose and a survey pointed to a slowdown in the recovery of manufacturing, with a sharp decline in Greece. While Greece accounts for less than 3 percent of the euro area gross domestic product, a survey of purchasing managers by Markit Economics pointed to a plunge in manufacturing that would make it that much more difficult for the country to solve the debt problems that are at the heart of Europe’s crisis. Manufacturing growth in Spain also may be losing momentum, according to Markit. Meanwhile, Spain retained the dubious distinction of being the euro zone country with the highest unemployment rate — 19.7 percent, compared with an average of 10.1 percent for the 16 countries using the single currency. Unemployment for the euro area as a whole in April was up from 10 percent in March, according to Eurostat, the European Union’s statistics agency.

    France warns on credit rating (Reuters) - France admitted on Sunday that keeping its top-notch credit rating would be "a stretch" without some tough budget decisions, following German hints that Berlin may resort to raising taxes to help bring down its deficit. Euro zone trade unions are preparing for possible confrontations in the coming week if governments impose austerity measures or labor reforms unilaterally.But ministers made clear they were ready to take unpopular steps to prevent the Greek debt crisis spreading to their economies, although doubts are growing about whether the Spanish government in particular has enough support to get its way.Budget Minister Francois Baroin indicated on Sunday that France should not take for granted its AAA rating, which allows Paris to borrow relatively cheaply on international markets and finance its big budget deficit.

    Editorial – Europe’s Endangered Banks – NYTimes - So far, Europe’s troubles have not hurt American banks, which own little debt from beleaguered Greece, Portugal or Spain. But the American and European financial sectors are entwined, and it is unclear whether American banks are prepared for what could happen. Doubts remain about the solvency of the weaker European countries, despite the plan by the European Union and the International Monetary Fund to make up to $1 trillion available to indebted economies. The plan has brought needed respite to financial markets. Crucially, the European Central Bank threw a lifeline to banks in the euro area, promising to buy tens of billions worth of weak-country debt from them, a small portion. The German Bundestag overcame public resistance and approved the rescue package. But it has a fundamental shortcoming: it relies on deep budget cuts from countries that are in a recession or teetering on the edge. Several have weak governments that may not be able to carry through the prescribed fixes. Even if they do, the budget cuts are likely to make them even weaker.

    A Busted Formula - There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back. But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain? We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. 

    As Deflation Looms, E.C.B. Keeps Its Eye Firmly on Inflation - NYTimes - If the European Central Bank has one monetary dragon it considers essential to slay, it is inflation. Keeping inflation under control is the central bank’s primary legal responsibility, and as Europe struggles to overcome economic problems caused by the sovereign debt crisis, inflation has remained the bank’s primary focus. But some economists say it has become a driving obsession that has blinded the bank to a potentially bigger threat to Europe: deflation. The central bank’s doubters grew louder after it made a big show of taking measures to cancel out the supposed inflationary impact of the government bond purchases it began on May 10 to help keep Greece and several other euro zone countries from defaulting on their debts.

    The ECB Will Only Exacerbate Upcoming Deflation By Fighting The Wrong War - While ECB president Jean-Claude Trichet remains concerned about maintaining his inflation-fighting credentials by, there are some who believe he's fighting the wrong battle.The ECB has been buying government bonds in a bid to bring down European sovereigns' interest rates, but in order to 'mop up' the liquidity this creates, the central bank has been taking short-term deposits from banks in an equal and countervailing amount.This has meant that the net new liquidity from these measures has been zero, in a bid to prevent inflation from rising. Problem is, there are many who believe deflation is the larger risk right now for Europe, thus the ECB's actions to prevent inflation could actually be making things worse. Already, deflationary forces have shown up in some of the data. Ireland's price index fell in April and inflation was below 1% for five other Eurozone nations as highlighted by the New York Times. We highlighted other signs of deflation back in early March as well.Moreover, austerity measures and wage reforms aimed at fixing broken European budgets will be highly deflationary.

    Why it's a really good thing that the ECB has overpaid for Greek junk bonds -Those of us who argue for monetary policy as a way for countries (and fake countries like the Eurozone) to escape a recession, even in an alleged "liquidity trap", recognise that any increase in the money supply should be permanent, and perceived as permanent, to do much good. Even some Keynesians, like Paul Krugman, recognise that monetary policy could do a lot of good if only it could be made permanent. He just doubts that any central bank could credibly commit to making it permanent. One way for a central bank to credibly commit to increasing the money supply permanently is to increase the money supply by buying bonds, then publicly burn the bonds. Publicly trash the asset side of its own balance sheet. That means the central bank won't be able to buy back the money in future. So it's a permanent increase in the money supply, and seen as such. . A second way is to overpay for junk bonds. That's what the European Central Bank has just done. This second way is better than the first, because it creates a negative feedback loop between the amount of money created permanently and the amount of money that needs to be created permanently.

    World Economy: Political Risk Is the Next Worry - Traditionally, political risk has been interpreted to mean war, coups d’état, sudden and disruptive regulatory action, and expropriation of property. But today the meaning of political risk can be broadened to include the perception that governments are unwilling or unable to reform their economies, that they are rushing into an era of regulation without calculating the potential collateral damage, and that they or too preoccupied with national troubles to manage a complex global economy. Growing political risk is raising uncertainty about when and where the next big problem will arise. When markets looked at the early European response to the Greek crisis, for example, they saw governments paralyzed, not knowing what to do at first, then lacking the courage to roll out a rescue plan large enough to slow the contagion.  At every stage, government inaction or delay made the problem worse.

    The grasshoppers and the ants – elucidating the fable - Fables seek to illuminate reality. The goal of the one I told last week – concerning “the grasshoppers and the ants” – was to provide a simplified account of the world economy. Today I wish to address two questions: who benefits from the trade flows between import-surplus grasshoppers and export-surplus ants? Can the two co-exist fruitfully? First, who benefits? Robin Harding raised this question in response to my advice to ants: “If you want to accumulate enduring wealth, do not lend to grasshoppers.” He asked: what about the gains for the grasshoppers?The traditional answer is that both sides should gain from any voluntary exchange. That includes these “inter-temporal exchanges” – in which ants offer goods to grasshoppers now in return for future repayment.Yet this assumes that the decisions are well informed, markets are flexible and contracts are enforced. None of these assumptions seems all that plausible. Some economists question whether the benefits of trade in goods and services apply to trade in finance at all.

    Are we on the cusp of a second banking crisis? - Paul Mason reports here on fears of a second banking crisis - closely tied to the sovereign debt crisis. “Across the European banking system there is too much unfinished business” - there is much to be done to cleanse the system of bad assets and recapitalize the banks? Given the scale of public sector debt and the lack of room for further bail outs - are some banks too big to save? Will banks have to agree a hair-cut on their existing loans? Is a bank tax needed to create a new bail out fund? This radio 4 Today programme discussion between George Magnus and Robert Peston is also worth a listen: Eurozone crisis ‘has ensnared’ governments

    The electoral consequences of large fiscal adjustments - The conventional wisdom about the political economy of fiscal adjustments is that deficit reduction policies cause recessions. Recessions, combined with the direct political costs of tax increases and spending cuts create serious problems for incumbent governments at the polls. The governments which raise taxes or cut spending – the latter especially in Europe – are voted out of office. Therefore Europe is doomed to failure. Fiscally responsible governments which try to cut spending will lose elections and fiscally irresponsible ones will survive and fiscal problems will persist or worsen. This view is conventional but vastly incorrect.

    Why the optimists are wrong about the eurozone - Want to hear the optimists’ case for the eurozone’s future? Austerity programmes coupled with a weak euro might just save it. The argument is that fiscal indiscipline has caused the crisis. Austerity must therefore solve it. A weak euro and a global recovery would cushion the impact of austerity. In addition, the financial guarantees and the bans on short sales would see off the speculators. End of crisis. The optimists have not had a good crisis so far. This will not change. Here is why. First, fiscal adjustment programmes will be necessary eventually but European governments are currently repeating their age-old mistake of cutting spending and raising taxes well before the economy has recovered. Furthermore, Italy and Spain will both need to accompany fiscal adjustment with structural reforms. There are no such reforms on the horizon in Italy. Spain is about to decide a labour reform package. But it will almost certainly not deal with the fundamental problem. Second, the euro’s exchange rate has indeed weakened, and may weaken further. But it will probably not do so sufficiently to solve southern Europe’s competitiveness problems.

    Europe’s Competitiveness Obsession - The President of the European Central Bank is said to show at each meeting of the European Council a graph depicting the evolution of relative wage costs across the eurozone’s 16 member countries. This chart shows increasing divergences over the last ten years, with the countries now facing difficulties (Greece, Portugal, and Spain) having lost competitiveness by around 20% relative to Germany. In other words, since 1999, wage costs have increased by about 20% less in Germany than in southern Europe. The conclusion seems straightforward. The eurozone’s southern European members must reduce their wage costs to claw back the competitiveness that they have lost since adopting the common currency.But this approach risks leading in the wrong direction

    Axel Weber blames stimulus for crisis, criticises ECB decision to buy bonds, and rejects common bond - We expected that this argument would come up eventually, but it took a while for the erstwhile critics of the stimulus plans to articulate it publically. And it was Axel Weber who did it, when he attacked the European Commission for its call in November 2008 to spend 1.2% on discretionary stimulus programmes, which has led to an increase in the deficit. (But just do the math: The projected increases in the debt trajectory of members states - Spain from 40 to 80, but also in Germany from 70 to 80% - are mostly due to the sudden drop in tax revenues, which would have been worse without those stimulus programmes, whose own says is relatively small.)  FT Deutschland writes that he also rejected proposals for a common European bond.

    European Central Bank’s Report Issues Warning - NYTimes - Despite recent improvements in the health of European banks, they remain vulnerable to a daunting array of hazards that are expected to produce another round of sizable write-offs during the next couple of years, the European Central Bank said Monday, in a report that cataloged in alarming detail the problems facing the region’s financial institutions. The challenges for banks in the 16-nation euro zone include exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts, economic problems in East European countries, and a potential collision between the banks’ own substantial refinancing needs and government demand for additional loans, the central bank said. In its twice-yearly review of risks facing the nations that use the euro currency, the central bank expressed particular concern about banks’ need to refinance long-term debt of an estimated 800 billion euros, or $984 billion, by the end of 2012. Borrowing costs could rise as the banks compete with governments in the bond market, “making it challenging to roll over a sizable amount of maturing bonds by the end of 2012,” the report said.

    Eurozone banks could be hit by £165bn writedowns, says ECB – Banks within the eurozone will suffer “considerable” loan losses in 2010 and 2011, which could amount to a further €195bn (£165bn) in write-downs, the European Central Bank (ECB) has warned.  Predictions of further potential writedowns are contained in the ECB’s latest Financial Stability report. The bank said that public finances posed the biggest threat to the eurozone. “We are experiencing now a second wave of writedowns, which relate to the performance of loans,” said Lucas Papademos, the ECB’s vice-president.

    ECB warns banks face second wave of loan losses – The European Central Bank warned on Monday that eurozone banks face up to 195 billion euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and disclosed it had increased purchases of eurozone government bonds. As the euro recouped losses but remained on the back foot after a cut in Spain’s credit rating and China warned that the global economy remained vulnerable to sovereign debt risks, Spain assured investors it would reform its rigid labour market even if employers and trade unions cannot agree.  That was the first time it has given an estimate for next year. Although total write-downs from bad loans and securities between 2007 and the end of 2010 were likely to be lower than previously expected, the ECB said in its latest Financial Stability Report, write-downs this year and next year would be still larger if heightened sovereign debt risk and the impact of government belt-tightening dragged down economic growth.

    ECB reports on financial stability, warns of "contagion" The ECB released the twice yearly Finanical Stability Review report today. Here are couple of articles about the report: From the Financial Times: ECB warns of ‘hazardous contagion’ The eurozone’s financial sector and economy are facing “hazardous contagion” effects from the region’s debt crisis, according to the European Central Bank ... Taking into account writedowns already reported and loan loss provisions, some €90bn of writedowns have yet to feed through, it said. For 2011, it expected banks would have to make additional loan-loss provisions of about €105.From the NY Times: Europe’s Banks at Risk From Slower Growth, Report Says ... the E.C.B. expressed particular concern about banks’ need to refinance some €800 billion, or $980 billion, in long-term debt by the end of 2012. Borrowing costs could rise as the banks compete with governments in the bond market “making it challenging to roll over a sizeable amount of maturing bonds by the end of 2012,” the report said.\

    If the European climate turns nasty, the ECB could suffer from exposure - Here's an interesting statistic which brings home the rather tricky state of Europe's finances, not to mention its politics.  The European Central Bank (ECB), that one-time paragon of sound money, has capital and reserves of €77.3bn (£66bn). But thanks to events in Greece, it is now supporting lending to Hellenic banks of €88.4bn, or at least it was at the end of April. Quite where that has got to by now is anybody's guess. And that April figure is a €17.8bn increase on the March total, according to Simon Ward, chief economist at Henderson Global Investors.

    U.K. Urges Euro Banks Stress Tests - Originally posted on the Real Time Brussels blog. The U.K. Treasury has just joined the U.S. in urging European authorities to conduct what a Treasury minister calls “genuine, rigorous” stress testing of banks. In excerpts of a speech he’s due to deliver tonight in Brussels, Mark Hoban, financial secretary to the Treasury, says the tests are needed because “it is clear that doubts remain over the solvency of some European banks.” He talks about how Britain backed a bank levy—but not of the type that the European Commission proposed last week. Britain wants proceeds of the levy to go into general government funds rather than a bank resolution fund, as proposed by the commission.

    Banks' Overnight Deposits With ECB Increase to Record (Bloomberg) -- Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other. Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking sector.

    CDS, spreads etc, it is all getting worse again - We are back to where we were before the rescue package was announced, as markets panic over continue failure to reach agreement on the SPV, and the destructive comments by Germany’s Bundesbank; as Spanish spreads reach new record, Zapatero sets June 18 as the decision date for the labour reforms; Nada es Gratis says fiscal adjustment in Spain will extremely painful, and will not bring the fast deficit reduction that people hope for; use of the ECB’s deposit facility have reached a new record as banks have a high demand for low-yielding liquidity; Germany’s finance ministers is pondering to raise the solidarity surcharge from 5.5% to 8% of a taxpayers’ total tax liability, plus other tax increases; Greece announced a privatisation programme of state-own holding companies; Chris Patten, meanwhile, writes that Europe has thrived on a combination of pragmatism and vision.

    Next phase of financial crisis may be the hardest (Reuters) - It took $5 trillion and an unprecedented global coalition of G20 countries to stabilize the economy after investment bank Lehman Brothers collapsed in 2008. Quelling the next phase of the financial crisis may be even harder.To stop the panic that erupted nearly two years ago, governments transferred a mountain of debt from private to public accounts. Now, those government debts are distressing financial markets and there is nowhere left to shift the burden. Europe's clumsy response to Greece's debt woes highlighted the economic and political headaches that await debt-laden countries and those who finance their borrowing. European leaders have yet to convince investors that they have a credible short-term plan to contain government deficits and a long-term answer to the region's slow growth.

    Europe's Democracy Deficit - Welcome to the eurozone and the European Union, struggling to maintain its credibility in the face of market speculation, popular protests and government ambivalence. The euro has lost about 14 percent of its value against the dollar this year alone. The weakest members of the eurozone—Greece, Portugal, Ireland and Spain—are threatened with ejection. Italy may soon find itself among them. Meanwhile, the strongest, France and Germany, are questioning the currency's survival. The curious thing about this crisis is that on paper Europe's economies are not in terrible shape compared with the rest of the Western world. But Europe's primary problem—the reason it has been lurching from crisis to crisis as the markets tank, the Greeks and Spaniards protest, and the Germans and French bicker—is not its fiscal deficit but its democratic deficit.

    Euro Likely to Survive Debt Crisis, Stiglitz Says (Bloomberg) -- The euro will survive Europe’s debt crisis even as spending cuts and tax increases restrain economic growth, Nobel Prize-winning economist Joseph Stiglitz said.Political leaders will do “everything to save the euro and they will muddle through,” Stiglitz, a Columbia University professor, said in an interview in Stockholm today. “Europe is likely to go through a weak period” as governments implement “more austerity measures in the face of a weak economy.”A Greek default is “not so likely now,” since “Europe has committed itself to providing the funds at a reasonable interest rate,” Stiglitz, 67, said. Greece pledged to implement austerity measures equal to almost 14 percent of GDP in exchange for the rescue funds.

    PIGS - Less Euro at the Door - Natural forces are at work in Europe, powerful forces, in fact forces that are not evident. It is amazing how little the financial analysts notice the forces at all. Since the year 2007, a hidden force began to put pressure on the European Union financial underpinning. Like any fiat currency, the foundation resorts to debt. It came to my attention almost three full years ago that Spanish EuroBonds had a yield slightly higher than the benchmark German. Commentary swirled that the EuroBonds were not homogeneous, and therefore the Euro currency was badly flawed. They were identifiable by the markings on the bond IDs. German EuroBonds carry an 'X' in the ID. So the arbitrage professionals went to work, buying the German and selling the Spanish bonds. The flaw was to the structural foundation to the Euro currency, not the market that traded them, surely not the alert speculators.

    Europe Default Insurance Jumps—The cost of insuring debt issued by European sovereign borrowers rose Friday as a weaker euro, speculation in the market about losses at French banks and concerns about Hungary added to persisting doubts over economic recovery in Europe. While Spain has taken a beating lately, investors also appear to be taking their frustration out on stronger euro members like Italy and even France—Europe's second-biggest economy after Germany. French banking giant Société Générale Friday was hit by rumors of losses tied to derivatives, which has sent its stock plummeting

    How soon might Greece default? - I spent most of this afternoon attending a fascinating discussion looking at Greece from the perspective of emerging-market veterans who are used to sovereign debt default and restructurings. There was quite a lot of consensus on the panel, and not in a good way: everybody agreed that the bailout of Greece was only postponing the inevitable, and many people reckoned that it wasn’t going to postpone it very long: one pair of hedge fund managers in the audience reckoned that it would last about six months before the default finally happens.The form of the default, too, seemed pretty clear: an act of parliament in Greece would do most of the work, given that most Greek debt is issued under Greek law. It will be a par exchange — the new bonds will have the same face value as the old bonds, but with lower coupons and extended maturities — so that with a bit of accounting fudgery, no banks would need to mark their Greek debt to market and take a huge loss.

    Euro Exit Is Ludicrous Idea for Any Country (Bloomberg) The sovereign-debt problem isn’t in any sense the end of the euro zone; not even the beginning of the end. The foreign- exchange rate of the euro may fluctuate against other leading currencies, as is to be expected in a floating-rate regime, but Greece isn’t going to withdraw from the euro zone, nor is it likely to be expelled by the other members. Whatever the legal position, the view that Greece, or any other country in the throes of recession, should withdraw in order to benefit from devaluation of their currencies, is simply ludicrous. It is difficult to introduce a new currency at the best of times. But when the first item on the agenda of a new currency is likely to be a substantial devaluation, the mere suggestion might be sufficient to spark a civil war between creditors and debtors. Given that all public as well as private-sector debts are denominated in euros, or other hard currencies, the introduction of a new drachma would provide little respite. It would probably cause the domestic banking system to collapse as its assets were devalued relative to its liabilities, and the government to default as the international community would hardly perceive such a move as being in its interests.

    Europe's Core Is Burning, As Austria Next On The Implosion Radar; German, France CDS Blow Out - Austria, the country most exposed to weakness in Central and Eastern Europe, is back on the radar. After having avoided skeptical investor scrutiny even as the bulk of Europe was collapsing all around it, the country is today's top CDS widener, yet still stunningly trades inside of France and Belgium. Look for this spread to blow out over the next week. Then again, the biggest CDS wideners are precisely the countries formerly seen safe: Austria, France, Germany and Belgium are all the top movers in CDS. So much for the whole North vs South division in Europe.

    The Maginot Line Illusion - Simon Johnson - Many commentators suggest Spain is now the euro zone’s Maginot line.  The argument is clear:  Spain, with GDP over $1.3 trillion (8th largest in the world; 5th largest in Europe) and its large outstanding bank and public debt, is simply too big to fail without causing irreparable harm to the euro zone financial system.  If we dig in here, the reasoning goes, eurozone market upheavals can be stopped. Just as Germany did in 1940, in past weeks global market forces circumvented this new Maginot line without serious resistance.  The events that shook equity markets were not just in Spain; they were everywhere in the world.  The cost of protecting against default on India’s largest private bank rose 79BP, or 44%, and the cost of protecting against major Korean banks’ default similarly rose 45%.  Oil prices collapsed and emerging markets found their access to credit markets dried up.  The interest rate for lending between banks in US dollars (LIBOR) shot up, and investors piled funds into their currently perceived “safe-havens” driving down the yields of German, French, and US bonds.But who is really safe in Europe?  With France running an 8% GDP budget deficit (for 2010) and a debt/GDP ratio of 83.6%, should we be confident they are safe while Spain is not (with debt/GDP at 65%)?

    The World from Berlin: ‘Angela Merkel Is Flying Completely Blind’ –The shock resignation of Germany's president has landed Chancellor Angela Merkel in yet another major political crisis. German commentators say she needs to act fast to find a replacement. Labor Minister Ursula von der Leyen is emerging as the leading candidate.

    As the dust settles after Monday's surprise resignation by German President Horst Köhler, the debate in the country has turned to his possible successor.Now, a new favorite appears to have emerged: Ursula von der Leyen. German media reported Wednesday that von der Leyen, the current labor minister, is Chancellor Angela Merkel's preferred candidate for the position. Von der Leyen's candidacy "is firming up," sources in Merkel's Christian Democrats told SPIEGEL ONLINE.

    The rebellion against Merkel - As Christian Wulff is set to become Germany’s next president, Merkel is once again accused of leading from behind, when she agreed to drop her preferred candidate; there is much commentary in the German press this morning about Merkel’s increasing isolation in the party; George Paul Hefty, the veteran political commentator of Frankfurter Allgemeine, calls on her to quit the party leadership and focus on governing; the conservative die Welt endorses the opposition candidate; El Pais has a good primer on Spanish labour market reform, which is likely to be decided by decree on June 16; the trade unions are considering a general strike in response to the measures; the IMF welcomes Italy’s austerity package, but says more needs to be done; Tito Boeri and Massimo Bordignon do not welcome the austerity packaging, saying it relies on bad and mostly unenforceable spending cuts, and assaults on tax avoidance; Hungary’s deficit is set to explode, as the government party is warning of a Greek-style situation; Thomas Piketti says the ECB should refinance governments just as they refinance the banks – a 0% interest; we have a graph showing the rise, fall, and rise of CDS spreads; Mark Schieritz, meanwhile, argues that the German panic over ECB bond purchases is out of proportion, and that even the worst-case scenario of a Greek default is unlikely to cause disaster.

    FT Alphaville » Willkommen im Hotel Kalifornia - Here’s an interesting coda, and/or reality check, to recent attempts at predicting the ultimate fate of the eurozone amid Europe’s sovereign debt crisis. Germany really can’t leave the single currency even if it wanted to — and hasn’t been able to for a while, as its banks’ assets show fairly well. On those German bank assets, Barclays Capital’s Thorsten Polleit observes:…German banks have been accumulating significant exposures vis-à-vis foreign banks and non-banks in recent years, largely within Europe. This has been driven by a lacklustre domestic credit market and, in particular by the ‘New Economy’ boom in 2001, when German banks increasingly sought profit opportunities in foreign markets.Which is really all about the Bank-Asset-Bergs. These also received a boost in 2001 when state guarantees for the country’s Landesbanken were abolished, with a five-year adjustment period for lending. This led them to look for high yields abroad — including a dalliance with US subprime assets in 2006 and 2007

    How Hitler is making the European economic crisis even worse. - In the United States, the desire to avoid mistakes made in the distant and recent past have led to perhaps excessively vigorous fiscal and monetary policies. For Europeans, the desire to avoid mistakes made in the distant past has led to an excess of caution. When they look to history for guidance, European policymakers aren't looking at Washington in 2009, or Japan in the 1990s, or the United States in the 1930s. Rather, they look to Europe in the 1920s, a period when hyperinflation ravaged economies, disrupted the social order, destroyed social democracies, and led to the rise of Nazism. A whiff of inflation and we think about Jimmy Carter. In Germany, when there's a hint of a whiff of a trace of inflation, they think about Hitler.

    Sovereign Credit-Default Swaps Surge on Hungarian Debt Crisis (Bloomberg) -- Credit-default swaps on sovereign bonds surged to a record on speculation Europe’s debt crisis is worsening after Hungary said it’s in a “very grave situation” because a previous government lied about the economy. The cost of insuring against losses on Hungarian sovereign debt rose 63 basis points to 371, according to CMA DataVision at 3:30 p.m. in London, after earlier reaching 416 basis points. Swaps on France, Austria, Belgium and Germany also rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments as high as a record 174.4 basis points.  Hungary’s bonds fell after a spokesman for Prime Minister Viktor Orban said talk of a default is “not an exaggeration” because a previous administration “manipulated” figures. The country was bailed out with a 20 billion-euro ($24 billion) aid package from the European Union and International Monetary Fund in 2008.

    Euro sinks to four-year low as Hungary fears being the next Greece - The euro sank to a four-year low against the dollar today amid warnings that Hungary could be the next European country to suffer a Greek-style debt crisis.Fresh fears around unwieldy European sovereign debts sent the euro falling through $1.20 and knocked stock markets in Europe and the US. A spokesman for Hungarian prime minister Viktor Orban set off alarm bells among investors when he conceded in a television interview that the Hungarian budget was in a "much worse" state than the previous government had indicated and "skeletons were continuously falling out of the closet". The comments from the new government, which was sworn in less than a week ago, left Hungary's currency, the forint, at a year low against the euro. The country expects to adopt the euro in 2014.The new government said it would announce an action plan soon to tackle its economic problems, and intends to publish figures showing the "true" state of the 2010 budget over the weekend or early next week.

    Euro Tumbles on Debt-Crisis Concern, Touching Lowest Since 2006 (Bloomberg) -- The euro tumbled for a second week against the dollar, falling to its lowest level in more than four years as concern that Europe’s debt crisis is spreading pushed investors to the safest currencies. Europe’s shared currency plunged below $1.20 for the first time since March 2006 and dropped for a sixth straight week versus the yen. The dollar and the yen climbed as a lower-than- forecast payrolls report yesterday fueled concern the U.S. economic recovery may be slowing, damping demand for growth- linked currencies. U.S. retail sales growth slowed to 0.2 percent in May, data next week may show. “There’s one driver of the market, and it’s called Europe,” “Will budget cuts hurt European growth? Will Europe’s crisis hurt U.S. companies? Will contagion spread through the global financial system?”

    Debt Insurance Soars Across EU -The cost of insuring debt issued by European sovereign borrowers rose Friday as a weaker euro, speculation in the market about losses at French banks and concerns about Hungary added to persisting doubts over economic recovery in Europe. While Spain has taken a beating lately, investors also appear to be taking their frustration out on stronger euro members like Italy and even France—Europe's second-biggest economy after Germany. Budget deficits in France and Italy are small compared with those in Greece and Ireland—and possibly Hungary, which isn't a euro-zone member. But the derivatives market is growing concerned regardless as European debt jitters persist. It now costs $290,000 a year to insure $10 million of Italian government bonds against default for five years, up from $237,000 on Thursday, according to data provider Markit

    Sovereign funds and the problem of plenty Because of their size and rapid growth sovereign wealth funds (SWFs) face many of the same problems as other large and long-term institutional investors in a particularly acute form. They must find investment opportunities on a big enough scale to generate sound long-term returns without overwhelming the underlying markets.But because SWFs hold money in trust on behalf of the nation, they face additional constraints. Managers are under pressure at home to pursue prudent strategies that avoid large losses gambling with the national patrimony, while investments overseas arouse sensitivities in host countries where their investments are located.

    Euro corporates face sovereign risks - For European corporate borrowers, having their own houses in order may prove little help as sovereign credit-worthiness deteriorates.European nations need to fund more than a trillion euros in debt in the coming year to finance shortfalls caused by falling tax receipts, countercyclical stimulative spending, and plain old bad management.As we have seen in Greece, at the worst this funding is not available from the market, but even relatively stronger nations like France have substantial funding needs stretching out as far as the eye can see.This opens up the possibility that private borrowers, banks and corporations alike, may be “crowded out” of debt markets, as sovereign borrowers suck up the available credit.That would drive up the cost of financing for corporations, making investment, hiring, and production less attractive. As banks in Europe are particularly reliant on external, short-term non-deposit funding a bout of crowding out could have nasty consequences for global financial stability

    Wary banks park cash in ECB instead of lending to each other – European banks are recycling cash from the European Central Bank (ECB) back to the ECB, because they are too nervous to lend it to other banks. Figures show they deposited record amounts of cash in the ECB's overnight deposit facility this month. Wednesday's total of more than €320bn beat the previous record of €316bn set a day earlier. This is more than the sums deposited with the ECB after the collapse of US investment bank Lehman Brothers in September 2008 precipitated the global financial crisis. Banks earn only 0.25pc interest on excess funds placed with the ECB. But many prefer this to higher rates on the inter-bank market, because of the fears of other banks' exposure to government borrowings, especially in Greece. "The banking crisis is back," said Norbert Aul, an interest-rate strategist at Commerzbank in London.  "The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it's deemed safer to park cash with the ECB rather than lend it on."

    Hungary Cools Default Talk, Commits to Budget Goal (Bloomberg) -- Hungary’s economic situation is stable and recent comments about a possible default were “unfortunate,” the government said, pledging to stick to the budget deficit goal approved by the country’s creditors. “Any comparison with countries that have much higher credit default swap ratings than Hungary is unfortunate,” State Secretary Mihaly Varga told reporters today in Budapest. “The comments that have been made about this issue are exaggerated and if they come from colleagues that’s unfortunate.” Comments from Hungarian officials over the previous two days sparked concern that Europe’s sovereign debt crisis may be spreading to eastern Europe. That helped weaken the euro, pushed Hungary’s currency to a 12-month low and borrowing costs rose the most since October 2008, when the country needed an international bailout to avert a default.

    UK says should be exempt from any EU budget sanctions (Reuters) - Sanctions for violators of European Union budget rules may be a good idea for euro zone members, but should not apply to countries like Britain that have their own currency, Foreign Secretary William Hague said on Thursday.Hague also said Britain would support its EU partners in dealing with current financial turmoil, but "without being drawn further into the euro zone." The Greek debt crisis has brought calls for stronger enforcement of EU budget rules, known as the Stability and Growth Pact. Germany wants stiffer penalties for violators and EU finance ministers gave broad backing for tougher sanctions last month.

    Japan May Spark Next Sovereign Debt Crisis, Kusano Global Says (Bloomberg) -- Japan may spark the next global debt crisis unless the nation’s new leader addresses its widening fiscal deficit, Kusano Global Frontier Co. said.  Prime Minister Yukio Hatoyama’s resignation two days ago may hamper the ruling Democratic Party of Japan’s plan to cut government debt, the world’s largest, said Toyomi Kusano, president and chief executive officer at Kusano Global, a hedge-fund research firm in Tokyo. Finance Minister Naoto Kan, who said he will run for leadership of the DPJ, has pledged to hammer out this month a mid-term plan on improving finances.  “What is bothering foreign investors the most is Japan’s debt issue and the related risk of Japan triggering the next sovereign debt crisis,” Kusano said in an interview.

    Global rebound anemic: Roubini (Reuters) – Advanced economies face years of anemic growth and the risk of a double-dip recession as their citizens cope with sluggish employment and highly indebted governments, economist Nouriel Roubini said on Monday.A sovereign debt crisis in the euro zone has rattled financial markets in recent weeks as investors worry that fiscal austerity measures dictated by a $1 trillion European Union-International Monetary Fund rescue plan could stifle already hobbled global growth.In contrast, some emerging markets risk overheating and are showing symptoms of a potential asset bubble."Labor market conditions will remain very weak in some advanced economies." said Roubini, known as Dr. Doom

    Solutions for a crisis in its sovereign stage - Roubini and Das -The largest financial crisis in history is spreading from private to sovereign entities. At best, Europe’s recovery will suffer as the collapsing euro subtracts from growth in its key trading partners. At worst, a disintegration of the single currency or a wave of disorderly defaults could unhinge the financial system and precipitate a double-dip recession.  Instead of Balkanised local responses, we need a comprehensive solution to this global problem.First, the eurozone must get its act together. It must deregulate, liberalise, reform the south and stoke demand in the north to restore dynamism and growth; ease monetary policy to prevent deflation and boost competitiveness;  Second, creditors need to take a hit, and debtors adjust. Third, it is time for radical reform of finance. The majority of proposals on the table are inadequate or irrelevant. . We need to go back to Glass-Steagal on steroids.Last, the global economy must be rebalanced. Deficit countries need to boost savings and investment; surplus countries to stimulate consumption. The quid pro quo for fiscal and financial reform in deficit countries must be deregulation of product, service and labour markets to boost incomes in surplus countries.

    Naive Thinking About Sovereign Risk - There  is more to sovereign risk than merely worrying about debt/gdp ratios. Small such ratios can you into big trouble if your external debt is denominated in another currency, while large such ratios can be relatively little concern if your debt is largely in your currency. There are many other factors too, like a floating currency, independence of central bank, political flexibility, reserve currency status, entitlement programs, government guarantees of non-public debt, etc. The folks at CreditSuisse have created a new figure making this point by re-ranking sovereigns according to credit risk based on this multifactor model. The upshot is that China, Germany, Switzerland, the U.S., Australia, Japan, and Canada lead the way in terms of least sovereign credit risk. Agree or disagree with the absolute levels from the model, the point stands that naive models of sovereign risk are mostly fodder for idiotic headline writers, not helpful standalone measures for assessing real risk.

    Did we miss a trick? - Larry Elliott has a thought provoking article in today’s Guardian. He quotes Roubini, who says: Zombie capitalism is where governments continue to buy up worthless paper from banks, where fundamentally insolvent institutions are kept alive for fear that their failure would cause systemic risk, where every country tries to export its way out of trouble, where the shrinkage of the financial sector depresses growth rates, and where the global imbalances between surplus and deficit countries remain worryingly large. That looks a more likely option.What, then, are the prospects for reform and renewal? At the very least, this route is likely to be long, hard and strewn with setbacks. It may not be chosen … until there is system failure.  This is an interesting thesis. I don’t wholly buy it, but the idea that precisely by doing enough to fix the immediate problem, but not enough to address its causes, we have left ourselves exposed to a Japanese style slow, shallow but long lasting recession is interesting.

    No Soup For You! – cassandra -They wait nervously in line curling behind them outside the shopfront. A straight and orderly queue. No pushing. No standing too close to the counter, or unnecessarily entering the kiosk before one's moment. Eyes wandering everywhere but the server. Whatever you do: Don't stare. No smelly perfumes or wisecracks. And no idle chat or loud laughter while in line. "What's on today?", the young Greek -looking girl discreetly whispers into her Italian-looking friend's ear, careful not to offend the Soup Nazi's sensibilities, the wrath of which has the most dire consequences for the soup-needy and soup-desperate alike. "Mediterranean Bean...I think...", comes the reply out of the corner of his mouth, making like a ventriloquist. The customer in front takes his bag, shuffles left to the cash-register as if mid-waltz, and politely hands the server his crisp ten-dollar bill. "NEXT!" She steps forward. His gaze focuses upon her, she hesitates, "One large soup, please..." she blurts out finally....and errrr ummm do you accept Travelers Cheques..?!?!" He stops ladling. Nostrils flare. Eyes narrow. "WHAT??? Travelers Checques...Where do you think you are....GREECE?!?! NO SOUP FOR YOU!!" "NEXT!". Her friend follows behind as they depart empty handed. Now, the American steps forward: "One extra-large soup please....."

    Six Impossible Things - Alice laughed. “There’s no use trying,” she said” One believe impossible things.”“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.” Economists and policy makers seem to want to believe impossible things in regards to the current debt crisis percolating throughout the world. And believing in them, they are adopting policies that will result in, well, tragedy. Today we address what passes for wisdom among the political crowd and see where we are headed, especially in Europe.

    Czech Prez Vaclav Klaus: Cato-tonic Euroskeptic - Merriam-Webster defines "catatonic" this way: of, relating to, being, resembling, or affected by schizophrenia characterized especially by a marked psychomotor disturbance that may involve stupor or mutism, negativism, rigidity, purposeless excitement, and inappropriate or bizarre posturing. Certainly, the Cato Institute is no stranger to accusations of being any of the above through its own faults. While Cato occasionally comes out with useful material, other times it's not quite so credible. It is a longstanding global warming denier despite the overwhelming evidence to the contrary. It also uses reports in a tendentious manner to uphold its preferred viewpoints. Today, we feature yet another fine example of bizarre Cato-tonic posturing. I have previously talked about Euroskeptic President Vaclav Klaus in his failed quest to subvert the passing of the Lisbon Treaty [1, 2]. Now, though, he is back with another episode of bellyaching concerning various Eastern European countries' efforts to join the Eurozone. From the folks at Cato comes this rant from Klaus on...When Will the Euro Collapse? Here are some excerpts:

    Czech Republic President says 'The Euro Zone Has Failed' - Has the Euro Zone "project" been a success or a failure? Václav Klaus, president of Czech Republic makes a solid case 'The Euro Zone Has Failed'As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe—for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).This has not happened. Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time.

    Europe Is Wayward Caboose Threatening to Derail Recovery Train - Three economists gave a dubious assessment of the global economic picture, casting China and emerging markets as the locomotive of the recovery, with the U.S. a reliable freight car and Europe a wayward and iffy caboose.The nearly $1 trillion package Europe recently fashioned to fend off crises — particularly ones in Greece and other countries along the euro-zone’s southern periphery — drew scathing reviews.“The ECB did what they did because they wanted to keep the euro-zone together,” said Mickey Levy, chief economist at the Bank of America Merrill Lynch. However, the financial backstop “is only kicking the can down the road” and “doesn’t resolve the problem… Europe has a heap of structural problems.”Mr. Levy, in a panel discussion Thursday at the Council on Foreign Relations in New York, said a restructuring of Greek debt looks inevitable, and noted that an exit from the 16-nation euro zone isn’t out of the question.

    A Worldwide Financial Crisis Couldn't Happen Again. Could It? - Is this Global Meltdown part II? Unsurprisingly, most economists say no: stop that alarmist talk, ignore fresh signs of trouble in Spain, and look at the improving data. But with Britain and other countries barely back on their feet after the deepest downturn in decades, the doomsayers see double-dip recession, contagion, market mayhem and no easy way out. They warn that shares will plummet as investors take stock of the unprecedented scale of a swathe of sovereign debt crises. They see confidence-shattering debt defaults, a eurozone in a perpetual identity crisis and years of financial pain as households ultimately foot the bill for the bailouts ushered through in Meltdown part I. Others are sceptical and dismiss the latest bout of market turmoil as mere jitters or perhaps a correction to more realistic prices.  In Europe, they argue, the Greek problems are familiar and containable and, just in the nick of time, the various authorities have put the right solutions in place, from a €750bn rescue fund to deficit reduction measures such as wage freezes for Italy's public sector.

    The “gas now, pay later” myth - In today’s UK Guardian there was an article – A worldwide financial crisis couldn’t happen again. Could it? – that exemplifies the growing sense I have that policy makers are steering the world economy back into recession.The article compares the viewpoints of the optimists who “see economies shaking off recession and corporate results improving” with the perspectives of the pessimists who “see a growing debt crisis and a new slump that the world would be powerless to halt”.\The direction of fiscal and monetary policy at present in many countries would suggest that the pessimists will be closer to the mark but for the wrong reasons. Indeed, the very arguments they present as informed economic commentary are the very reasons their predictions are likely to be fulfilled.So it is case of not understanding the problem and its solution; implementing the opposite policy stance; and making things worse as a result.

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