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

Saturday, July 10, 2010

week ending July 10

Fed's balance sheet little changed in latest week (Reuters) - The U.S. Federal Reserve's balance sheet was little changed in the latest week, Fed data released on Thursday showed. The balance sheet -- a broad gauge of Fed lending to the financial system -- was little changed at $2.314 trillion in the week ended July 7, the same as the previous week after rounding.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 8, 2010

Federal Reserve weighs further steps - With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen.  Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent.  "If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . . I think there's plenty more we could do if we had to."

Fed Watch: What is the Threshold For More Fed Action? -Yesterday's Washington Post article suggesting the Fed was moving closer to additional policy action left me somewhat puzzled. It left out a critical piece. What is the threshold for additional action? Particularly any action of significance? Recent Fedspeak suggests the threshold is pretty high - financial crisis high. Otherwise, any action is likely to be more window dressing than anything else. Neil Irwin at the Post claims:Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent.  After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.  Note the rhetorical claim suggesting this article is sourced by "top Fed officials." But the only officials cited are St. Louis Fed President James Bullard and Boston Fed President Eric Rosengren. No one from the Board, interestingly. To be sure, Bullard is an intellectual heavy hitter. But Bullard can be difficult to read. He talks. A lot. But with Bullard, the Post reduces his quotes to pretty pedestrian stuff:

Fed's Fisher: Central Bank Has Done Enough For Economy On Wednesday, Fisher spoke to CNBC. This time, he explained the weak state of the U.S. economy in football terms. He described the economy as having charged out of end zone on the back of things like government stimulus and the inventory cycle, before slowing down in the middle of the field to fight for yardage, all the while worrying about what the referee is thinking. The officiant in this case is the government. Fisher believes the sweeping changes resulting from major health care and financial market oversight reform have left the business community unsettled. "We need clarity" in light of things such as the passage of major health-care and financial regulatory-reform legislation, and that is now lacking, Fisher told CNBC. "There is too much confusion" right now and that is leading to slower economic growth, he said

The Fed -- the Crux of the Problem - A quick look at the Econ projections of the last Fed minutes , and we can easily see why I think there's just a very clear case to be made that this Fed is negligent. Their projections in 2010 for core inflation are betweeen .9 and 1.2% (which look high, but this isn't important), and 9.1-9.5% for unemployment. The problem is that the Fed, with these projections in hand, read this as a situation which calls for no action at all. I'm actually curious what the point is of having an inflation target of 2% if you project inflation of 1%, and do nothing at all to get inflation to 2%. Seems like a credibility problem to me.  It's also interesting to look back to the Fed's predictions from June of last year. Looks to me like the Fed did really well, predicting unemployment to be 9.5 to 9.8% at the end of this year, and core inflation at 1.0 to 1.5%. We're still a few months away, but it looks like we have a fair chance to wind up in that range or at least close. So, it looks like things are going just as the Fed planned, perhaps even better. Yet, the Fed didn't see forecasts of high unemployment and rock bottom-low inflation as calling for anything to be done...

How Much Can The Fed Help? (Wonkish) Krugman - OK, there are signs that the Fed is nerving itself up to do something more to support the economy. The question is, how much are the kinds of actions likely to be on the table likely to matter?Normally, the Fed’s power comes from its ability to move short-term interest rates. Now short rates on government debt are basically zero. Long rates, and rates on private debt, aren’t. But can the Fed do anything to change them? Start with long rates on government debt. The simplest model of long-term rates is that they reflect expected short-term rates — that is, the interest rate on a 10-year bond is equal to the rate of return investors believe they would get if they put the same amount of money into 3-month Treasuries and kept rolling it over for the next 10 years. If that model were precisely correct, Fed purchases of long-term debt would have no effect at all on long-term rates — those rates would continue to reflect expected short rates, end of story. In reality, things are presumably not quite that simple... But how strong would this effect be? Even if the Fed bought a couple of trillion dollars’ worth, probably not all that large. I’m not saying don’t do it, but don’t expect miracles.

How much can the Fed help? - Krugman says, "don't get your hopes up."  Perhaps he's correct in thinking that the Fed cannot do that much, but my intuition was that when the Fed pumped $1.5 trillion into financial markets in a span of three months at the end of 2008, it did seem to have an impact.  Secondly, when Japan recently announced a paltry QE package of $100 billion, the yen actually did depreciate. This helps Japan's manufacturers, and so it employment, plus it tends to be inflationary as the price of imports rises (even if there is no complete pass-through). And imports are a higher share of US GDP than Japan's, and even with the US they are probably 3-4 times what they were back when Krugman got his Ph.D.  The Fed could also cut the discount rate -- as this "small" thing was big enough to make an impact on the dollar, which is now at .75, and in the last Fed minutes, several governors wanted to raise it again.

Don’t Expect Miracles from Monetary Policy – Thoma - I think the economy needs more help, particularly labor markets. But where will that help come from? Additional fiscal policy seems to be off the table due to worries about the deficit, worries I think are baseless, but I don’t control the fiscal policy levers. That’s the best thing to do right now, but it’s not going to happen. That leaves monetary policy, and as noted by Linda Stern, the Fed is making noises about giving the economy more help. Though the Fed isn’t willing to go this far yet, one thing they could do is to purchase long-term securities in an attempt to lower long-term interest rates. Or they could set a higher inflation target to try to lower long-term rates. The idea is that this will spur investment spending by businesses and new spending on durables by households. Paul Krugman, in a relatively wonkish post, discusses the options the Fed has, and notes that when it comes to the purchase of long-term securities (also known as quantitative easing), we shouldn’t expect too much:

Is now the time to experiment with negative interest rates? -There is a magic monetary wand out there which could accelerate economies along the road to prosperity out of the widespread destruction wrought by the global credit bubble. Massive monetary base expansion has not worked precisely because it has thwarted price reductions during the recession and it has introduced huge uncertainties about the future, notably when and how is the money printing to be reversed. So would it not be possible to bring present prices down now relative to their expected future level in a synthetic fashion?The solution to that puzzle is the negative interest rate regime which has found its way as a footnote into the economics literature over the past 100 years without exciting any enthusiasm largely because of its supposed non-practicality. But, with the practical central bankers and Keynesian finance ministers having landed us in such a mess, perhaps the definition of non-practical needs some brushing up.

Fed’s Lacker: Economy Is Recovering Despite Weak Data - The recent spate of weaker economic data doesn’t mean the U.S. recovery is faltering, and the Federal Reserve continues to get closer to the time when it will need to raise interest rates, a top central bank official said Thursday. “The economy is still growing,” Federal Reserve Bank of Richmond President Jeffrey Lacker told Dow Jones Newswires. While it’s true that “the risks of slower-than-average growth for a couple of quarter may be notched up a bit,” the official said “it’s important to remember recoveries are choppy and uneven in the early stages.”Lacker was interviewed at a time of rising concern about the state of the U.S. economy. Persistently high unemployment and the widespread belief that growth is slowing–due in large part to uncertainty over major health-care and bank reforms in Washington and the threat posed by European economic and financial problems–are driving the anxiety.

I'm Back...For my money, the interesting thing right now economically is that there hasn't been more heat put on Ben Bernanke.  As I've written, I think the case for more QE has been relatively clear for more than one year now. The frustrating thing is that even as new economic data come in which show that inflation is subdued and unemployment is not, there is no change at all in Fed policy. Bernanke believes in the same policy Wednesday as he did Monday, no matter what the BLS said Tuesday. In normal times the Fed almost certainly would have responded to the events of the past few months -- Greece, deflation, poor manufacturing and employment numbers -- by cutting the Federal Funds rate. And Bernanke's only response is to say that all he's gonna do is keep rates low until things get better. The problem is, this might not be enough.  With inflation since January a whopping 0.0%, and unemployment down to 9.5% thanks to a shrinking of the size of the labor market, the case for more Fed action could not be clearer.  To me this seems like gross negligence. Sheer, senseless incompetence -- almost like leaving a gas burner on when you leave for work, only doing it on purpose.

What might the Fed do? - Neil Irwin at the WaPo discusses some possible future actions at the Fed: Federal Reserve weighs steps to offset slowdown in economic recovery Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.  Irwin mentions a few possibilities, such as the Fed expanding the "extended period" language in the FOMC statement to describe an even longer period, or buying more agency MBS (mortgage backed securities). Professor Krugman weighs in with some analysis: How Much Can The Fed Help? I think it might be useful to revisit Bernanke's 2002 speech for hints of the roadmap: Deflation: Making Sure "It" Doesn't Happen Here This entire speech is worth rereading. Bernanke suggests several policies (many have been used), but this might be a clue to the next possible action: There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period.

What Can the Fed Do Now?  -A lot, actually. We know this because (1) Fed officials believe there is much more they could do if they wanted and (2) monetary policy has been shown to be highly effective in far worse situations. The problem is the Fed has been reluctant to act so far. It has failed to pull out all of its big guns though there are some rumblings it may be considering doing so.So what exactly are the big guns the Fed could employ in our current situation? According to these Fed economists there are three big guns that could be used: (1) [S]haping the expectations of the public about future settings of the policy rate, (2) increasing the size of the central bank’s balance sheet beyond the level needed to set the short-term policy rate at zero (“quantitative easing”); and (3) shifting the composition of the central bank’s balance sheet in order to affect the relative supplies of securities held by the public. The first big gun is in my view the most important one and can be restated as shaping expectations in general, not just expectations about the policy interest rate. Here the main idea is to convince the public that Fed is committed to a higher inflation rate or price level for the foreseeable future.

Would the Fed's Gentle Nudges Help? - As the calls for the Federal Reserve to take action for economic stimulus grow louder, the central bankers may be starting to listen. A new report indicates that policies intended to speed up growth and lower unemployment are being discussed by some Fed officials. That, of course, is in addition to already leaving short-term interest rates near zero for an "extended period." Could the changes being mulled over help?  The Washington Post reports on three strategies being pondered. Let's consider each separately:

The Fed fesses up - In my previous post I suggested that the Fed was looking for an excuse to ease.  Here is some evidence from the WaPo: Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth.And here is the connection to fiscal policy:With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns — massive infusions of cash, such as those undertaken during the depths of the financial crisis — but would reconsider if conditions worsen. God I hope QE isn’t the “big guns.”  The real “big guns” would be a higher price level target.

Is the Fed Happy with the Crappy Economy? - Yves Smith - Is the economics version of defining deviancy downward mean that the new normal of high unemployment and inadequate job growth is seen as acceptable by policymakers (at least those not up for re-election this November)? It’s one thing to recognize that we are working through a painful hangover after a private sector borrowing binge that produced a global financial crisis. It’s quite another to be complacent about bad conditions and steer clear of possible remedies.  So now that the Fed sees the banking industry as being on the mend, it has become complacent (and note I am not advocating quantitative easing; I think monetary measures are likely to have little impact when banks are reluctant to lend. But the Fed’s body language has a big influence on policy discussions, so its lack of a sense of urgency undermines initiatives on other fronts).

James Bullard Should Act Right Now- If there’s plenty more the Fed could do if it had to, then there’s plenty more the Fed could do if it wanted to. So why doesn’t it want to? Sumner:The executive and legislative branches are literally pulling out their hair trying to think of stimulus packages that won’t blow up the deficit. And here is Bullard basically saying, “Yeah, we could do “plenty” more to boosting AD without increasing the deficit by one cent, but we don’t want to. How did the world’s greatest power get into a position where there appeared to be an easy way out of 9.5% unemployment, but we weren’t doing it solely because of an independent central bank? And don’t tell me there are other reasons why AD might not solve our problems. That’s not what I said. I said Congress and the president think more AD would solve our problems. If they could boost AD without increasing the deficit they would dso so in a heartbeat. The US isn’t refraining from additional stimulus because Obama, Reid and Pelosi are sudden converts to freshwater economics, we are refraining from boosting AD because they do not control the only policy tool that is able to do so without blowing up the deficit

Risk and the Limits of Monetary Policy - Two articles in the newspaper caught my attention this morning. And as they are related, they had more significant impact.  The first was from The Washington Post. Ezra Klein discusses some moves the Fed is said to be contemplating as there are signs the recovery may not be as strong as previously thought. The efforts are largely designed to provide banks with an incentive to lend. This brings me to the second article, which was in The Wall Street Journal. This article talks about risk aversion both by borrowers and lenders. For borrowers, the desire to avoid debt when the future appears shaky is understandable.

Federal Reserve May Actually Fulfill Their Mandate - With interest rates entering their 19th straight month at near-zero levels, the Federal Reserve has been robbed of their usual big guns in monetary policy. But that doesn’t mean they don’t have a role to play in encouraging economic growth. For months since the passage of the federal stimulus has proven too small to make a difference, the Fed has sat on their hands and even openly considered selling off assets and raising interest rates, despite mass unemployment and no sign of any inflation concerns. Now, with the government paralyzed by inaction on further investment and with the economy at risk, some Fed governors are at least thinking about ways to prolong the recovery through their actions, however modest

Bernanke Created Half of 234 Years’ Worth of Money Supply - Most people still do not understand what was accomplished with the Bailouts. What helicopter Ben & Co. did — pouring trillions into the banking sector — served only to stave off a secular economic restructuring of the finance sector. The can was kicked down the road, and their hope was the wild structurally imbalanced economy was allowed to persist.By comparison, General Motors had gone down a path of bad management, poor products, lack of long term strategy. Their slide into bankruptcy was appropriate; it served to purge terrible management and awful business planning. However, Banks were not allowed to suffer the fate that all insolvent businesses are supposed to. This was a terrible error, the greatest financial tragedy of the 21st century. That they were allowed to survive mostly intact is the result of the excess influence they have on a corruptible congress and a misguided Federal Reserve.

John Hussman - Quote of the Day - Hussman: "By all appearances, Ben Bernanke has a four-second tape in his head that says "We let the banks fail during the Depression, and look what happened." Then the tape repeats. There is no subtlety that says, "yes, but we let the banks fail in the most disruptive and disorganized way possible, forcing them into piecemeal liquidation as Lehman had to do. Today, the FDIC is fully capable of preserving and transferring the operating entity while properly cutting away the failing bondholder and stockholder liabilities so that depositors and customers are not affected." This understanding would prove useful in the event we observe further credit strains."

(Question about) Bob Hall on financial frictions - Federal Reserve Bank of Minneapolis published an interview with Stanford Professor Robert Hall. The interview is terrific not just because Bob is a very smart guy, but also because interviewer Douglas Clement did a great job choosing the right questions. The whole thing's worth reading, but I wanted to focus today on Bob's comments on the role of financial frictions in the crisis and policy options to address them. Here's what Bob said on the topic in the interview: I would distinguish between conventional monetary policy which sets the interest rate and this kind of financial intervention of buying what appear to be undervalued private securities. Issuing what appear to be overvalued public securities and trading them for undervalued private securities, at least under some conditions and some models, is the right thing to do....  There's a picture that would help tell the story. It's completely compelling. This graph shows what's happened during the crisis to the interest rates faced by private decision makers: households and businesses.

Comstock: Liquidity Trap Means QE Will Fail As Private Sector Deleverages - Excerpts from Comstock’s latest weekly: Debt is discussed by the pundits on financial TV also, but in almost every case the discussion revolves around government deficits relative to GDP or government debt relative to GDP.  They are constantly comparing the U.S. government debt to every other country in the world (especially Portugal, Italy, Ireland, Greece, and Spain-PIIGS).  We believe that the government debt should be taking a back seat to the private debt which is much larger and must eventually be deleveraged.The private debt is about 6 times larger than our government’s public debt; about 4 times larger than our government’s gross debt (including the government debt used to fund our Social Security shortfall);  and about 2.5 times the gross government debt plus the total state and local debt.  Household debt alone is equal to 96% of GDP; private domestic nonfinancial debt is 183% of GDP; total credit market debt is 357% of GDP (see first chart Selected Debt Measures as a % of GDP).  Please note that the only form of debt that isn’t rolling over is the government debt

An Assignment for Mark Thoma – Kling - He claims that there is not much that the Fed can do to contribute to the recovery. I would like for Mark or for Paul Krugman to write an essay on the topic of what would happen if tomorrow the Fed stopped paying interest on reserves. I think I can guess what Scott Sumner might write.. My own view is that we would soon find out what the limits are of demand expansion policies. I think that the economy would have a lot of Recalculating to do, but it would have more than enough demand stimulus.

A Response to Arnold Kling – Thoma - Arnold Kling: An Assignment for Mark Thoma: I would like for Mark or for Paul Krugman to write an essay on the topic of what would happen if tomorrow the Fed stopped paying interest on reserves. ...I don't know if I can get a whole essay out of this. This is something the Fed is considering, but I don't think it would have a very large impact on economic activity. The reason is that I don't think the lack of investment activity, or loan activity more generally (a new report says consumer credit fell again), is due to a problem on the supply side. Banks have tightened up a bit as the economic outlook has deteriorated, but I believe the main problem is lack of loan demand. Here's one reason I hold this view: How "discouraged" are small businesses? Insights from an Atlanta Fed small business lending survey, macroblog: ..[

Mark Thoma's Response - I challenged him, and he graciously responds. I am not convinced that lowering the interest rate on reserves from one quarter of a percent to zero will have much of an effect on investment activity. What we need is a reason for firms to want to invest, and that will require a much improved outlook for the economy, something that could be aided by the government providing additional stimulus to aggregate demand. What he is suggesting is that the combined elasticities of money supply and money demand are low enough that eliminating interest payments on reserves would have a negligible effect on loan demand, which in turn means that it would have a negligible effect on the money supply and on the amount of reserves held by banks. That is a legitimate, plausible hypothesis. However, even if it is true, eliminating interest on reserves still would make sense. If monetary growth is being restrained by weak loan demand, then this eliminates the rationale for paying interest on reserves, which was to restrain the impact on the money supply of the Fed doubling its balance sheet. We might as well save taxpayers the money by eliminating the interest on reserves.

Hopped up about zero - TWO articles in today’s Wall Street Journal speculate that low interest rates are doing more harm than good. George Melloan argues they are punishing savers and rewarding high-rolling risk-taking hedge funds. David Reilly says they are choking off interbank lending because banks with excess cash don’t feel compensated for lending to other banks.I think both evidence and theory are against both these arguments. Mr Melloan’s notion that today’s lower interest rates are feeding risky behaviour is directly contradicted by Mr Reilly’s observation that bank lending is shrinking, not growing. The picture is worse if you include the moribund securitisation market. Virtually every measure of risk—the VIX, credit spreads, Libor spreads, the equity risk premium—is wider than its pre-crisis level. But even if the evidence were otherwise, the point of zero interest rates is to boost spending through the wealth effect and encourage investment; that some of that investment is intermediated by hedge and private-equity funds is irrelevant. This may have been an argument against low nominal rates in 2006 or 2007. It is not an argument against them now.

Zirp and the double dip - Greg Ip has an interesting argument: if we were really headed for a recession, he says, the yield curve would be inverted. But you can’t have an inverted yield curve when the Fed sets short rates at zero. Therefore, we won’t have a double dip. Ip concedes that Japan provides an obvious counterexample of a country which had a recession and Zirp at the same time. But he’s convinced that in the US, loose monetary policy will suffice to keep us growing: What all this tells me is that as long as the yield curve remains relatively steep, it is a powerful inducement to credit creation. Credit is currently contracting, but with time the positive lending spread will recapitalise banks and awaken interest in lending. Right now is an excellent time to start a bank: just check out the enthusiasm among private equity funds for buying failed banks from the FDIC. This is not very convincing: if zero interest rates are so good at fostering new lending, how come credit is currently contracting? After all, we’ve had zero interest rates for a good 18 months now, how long is this supposed to take?

Why Low Velocity Is Our Fundamental Economic Problem - In my Fiscal Times column today I try to explain why our economic problem results primarily from a decline in velocity (the ratio of GDP to the money supply), which impacts on the economy exactly the same way as a decline in the money supply. The following table illustrates my point.

You Shall Know The Velocity of Our Money - Gross domestic products equals output times the price level (P * Y) which is the same as the money supply times the velocity of money (M * V), ergo recessions (declines in GDP) and inadequate recoveries (failures to catch up to the trend level of GDP) are caused by either declines in the money supply or declines in the velocity of money. What’s the velocity of money? As Bruce Bartlett explains it’s “the rate of turnover of money in the economy—the number of times dollars are spent in the aggregate—which economists call velocity.” And it’s falling: I should note that there’s another interpretation here. I believe you can’t measure V directly in the MV=PY accounting identity, you just solve for V=PY/M. Which means that your result for V will depend on your measurement of M, and there are different ways of doing this—the M1 measure, the M2 measure, the M3, etc. Bartlett’s math is based on V=PY/M2 which is standard. But for a long time the Fed also calculated a broader metric, M3, composed of M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. Starting in March 2006, the Fed stopped collecting this information

Money supply chart of the day - If Matt Yglesias can wonk out with meditations on the velocity of money, then I can wonk out with a chart: The red line, here, is the total US money supply, and as you can see it’s started leveling off recently. (Source data here.) In fact, in many months it has actually declined — a rare occurrence, historically speaking. The blue bars are the month-on-month change in M2; it declined as much as 0.65% in January 2010, and in the first five months of this year — all that we have data for so far — it has fallen in three and risen in only two. The money supply in April 2010, at $8.5 trillion, was lower than it was in November 2009: it’s almost unheard-of for the money supply to shrink over so many months. More generally, I’d take issue with Matt’s assertion that the Fed’s response to the crisis has “involved a sharp increase in the M2 money supply”. Yes, M2 rose in the wake of the crisis. But the sharp rise in M2 dates back much further than that — in fact, you can trace it all the way back to the mid-1990s

What is the Current Stance of Monetary Policy? - Mathew Yglesias is making the case that the current stance of monetary policy is effectively tight. He invokes the term structure of interest rates to make his case. While I share his view, I believe a far more intuitive and convincing way to make this point is to look at the difference between the nominal interest rates on regular treasury securities and the real interest rates on treasury inflation protected securities (TIPS). The difference or spread between these two series is the market's expectation of future inflation.* To the extent changes in expected inflation are being shaped by monetary policy via its influence on aggregate demand, this measure provides a real time indicator on the stance of monetary policy. This indicator is graphed below using daily data on 5-year treasuries for the period January 4, 2010 - July 8, 2010: (Click on figure to enlarge.)

Modern monetary theory and inflation – Part 1  - It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT.

Monetary Policy or Fiscal Policy- As the United States comes to see the political limits of continuing fiscal expansion, with even some Democratic senators taking fright at the barrels of red ink leaking out into the distant future, monetary policy seems to be the primary method through which stimulus will be delivered to the U.S. economy. Indeed, a paper from a respected macroeconomist at the San Francisco Federal Reserve suggests that if the Fed desired to deliver “ future monetary stimulus consistent with the past -- and ignoring the zero lower bound -- the funds rate would be negative until late 2012." He continues that “this suggests little need to raise the funds rate target above its zero lower bound anytime soon.” Of course, some who are convinced that the Fed contributed to the recent crisis by keeping real interest rates negative too long in the period 2002 to 2004 would wonder if stimulus “consistent with the past” is appropriate. Has the Fed, like the Bourbons, learnt nothing and forgotten nothing?

The Rising Threat of Deflation - As we enter the second half of 2010--the "postcrisis" year--while markets have been obsessed with Europe's debt crisis, they have failed to notice potentially more ominous developments. The United States and Europe are heading toward--and Japan already suffers from--deflation, a classic prolonger of crises that boosts the real burden of debt and crushes profit margins. U.S. year-over-year core inflation has dropped to 0.9 percent--its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe's year-over-year core inflation rate has fallen to 0.8 percent--the lowest level ever reported in the series that began in 1991. Heavily indebted Spain's year-over-year core inflation rate is down to 0.1 percent. Meanwhile in Japan, while analysts were touting Japan's first-quarter real growth rate of 5 percent, few bothered to notice that over the past year Japan's gross domestic product (GDP) deflator had fallen 2.8 percent, reflecting an accelerating pace of deflation in a country where the price level has been falling every year since 2004. As of May, Japan's year-over-year core deflation rate stood at 1.6 percent. view this Outlook as an Adobe Acrobat PDF

"DEFLATION RISK IS STILL RISING" - When we last left the Treasury market on Friday, the market’s forecast of inflation for the 10 years ahead had fallen at the steepest pace in a year.As our chart below shows, the inflation outlook slumped to 1.73% on Friday, based on the yield spread between nominal and inflation-indexed 10-year Treasuries. That’s the lowest since early October 2009, and sharply below the previous high of 2.45% set back in late April 2010, according to the government’s interest rate data.There’s always some doubt about the market’s forecast. Divining the future is a hazardous game, and so the collective bets of the crowd aren’t foolproof. But as the inflation outlook continues to retreat, it’s getting tougher to dismiss the trend as market noise. The solution? Arresting and reversing the rapid decline in the annual pace of the money stock is arguably at the top of the list, as we discussed last week.

How close to deflation are we? Perhaps just a little closer than you thought - Atlanta Fed's macroblog: Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent. On an ex-food and energy basis, the number is a little lower, at 0.5 percent. And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.And this is before we take into account any potential mismeasurement, or "bias," in the construction of the CPI.  How big is the CPI's bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living. This so-called "Boskin Commission Report" said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.

All in on Deflation Bet? - Lumber futures fell the daily limit Tuesday, which followed a week of steady declines in energy, metals and other industrial prices. As Wednesday's Wall Street Journal reports, steel prices are falling anew. Meanwhile, the Baltic Dry Index, the leading measure of the cost of shipping dry bulk goods such as steel, has been in a four-week tailspin, totaling some 45%. According to Lombard Street Research, the Baltic index "points to the recovery's shaky foundations." These real-time indicators of industrial activity underline the slew of recent data, such as June's much-weaker-than-expected employment report and declines in both the manufacturing and service-sector Purchasing Managers Indexes. And the plunge in lumber prices corroborates the renewed slide in housing activity in the starts and sales data since the federal government's tax credits expired at the end of April. Markets are supposed to look ahead, not behind at trends that by now have become obvious even to Federal Reserve district bank presidents. Even so, even some prominent Wall Street economists don't quite get it, such as one who published a report entitled, "He's not dead, he's just sleeping."

Deflation nation: What's so bad about falling prices? - What's so bad about deflation? After all, it's a pleasant surprise when prices of many items fall. Generations of Econ 101 students and central banks have been schooled to think that inflation is the great boogeyman, since it erodes the value of savings. And for much of our lifetimes, moderate inflation has been the norm.  Making a value judgment about deflation depends in part on which side of the balance sheet you sit and on what's going on in the broader economy. Borrowers with fixed-rate loans—like the government, many businesses, and homeowners—will cheer for inflation and worry about deflation. When wages and prices grow modestly each year, it's easier to stay current with existing debt. And when there's lots of unused economic capacity—shuttered factories, large numbers of unemployed people—a little inflation can be just what the doctor ordered. Continually falling prices act as a disincentive to investment and risk-taking.

Exponential Money in a Finite World - Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today. In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw. It is this: Our monetary system must continually expand, forever.

Cleveland Fed on GDP - Dreary Outlook - The Cleveland Fed issued a report that looked at the historical relationship between lagged GDP growth and the steepness of the yield curve. They compared the ten-year with the three-month bill yield. They used this information to make a probability estimate for a double dip recession. Not surprisingly, they concluded that the probability is only 10%. I would take that bet. If anyone in Cleveland is interested, let me know. I don’t question the Cleveland Fed’s (“CF”) analysis. If you rely on history to predict the future then the probability of a slowdown is low. This argument has been made by a number of pundits of late. While historically correct, I think this is dangerous logic.

Goldman Sachs warns on global economic slowdown - As Britain enters a self-imposed period of austerity to deal with an historically large budget deficit, Jim O'Neill, one of the world's foremost economists, said that events beyond our shores could pose more of a problem than any domestic economic problems. Writing in The Sunday Telegraph, Mr O'Neill, head of global economic research at Goldman, said: "What is clear is that a persistently struggling US, in addition to a major disappointment in China, would not be good news for the rest of us." Mr O'Neill, the man who first identified the BRIC economies of Brazil, Russia, India and China as the future for global economic growth and who has previously been bullish on the recovery, goes on to pinpoint growth in China as the main concern for the global economy.  "What adds to the reality of this situation is that there appears to be growing evidence that China is slowing down."

How Can You Tell Economists Have a Sense of Humor? How can you tell economists have a sense of humor? They use decimal points. I kid, I kid. (Besides, that’s an old joke, folks.) But some forecasts for the chances of a double-dip recession have been startlingly precise. A few days ago, Joseph G. Haubrich and Kent Cherny of the Cleveland Fed wrote that “the expected chance of the economy being in a recession next June rises to 12.4 percent, up from May’s 9.9 percent and April’s 7.1 percent.” Then Andrew Tilton of Goldman Sachs sent a client note last night about his own recession forecasting  model, which “has a very low probability (1.6 percent) that the economy will be in recession six months from now.”

Bank Of America Joins Economic Slowdown Chorus, Pushes First Rate Hike Estimate Out To 2012 - Bank of America, via economist Ethan Harris, has joined the chorus of large banks reducing economic forecasts, and as a result has reduced its GDP projections for 2010 and 2011 to 3.0% and 2.6%, from 3.2% and 3.3% respectively. The inflection in 2011 is notable as now the bank sees a material slow down in the economy where before it saw growth. Also, BofA is now expecting that the Fed will leave the Fed Fund language unchanged unchanged for 18 months, until March 2012. This is not surprising: with QE2.0 around the corner, it means that the Fed will soon be implicitly lowering rates. Of course, should the Fed find some naughty pictures of Barney and Chris, it may soon pass laws that allow negative interest rates for the first time. Of course, nothing at this point would be surprising.

Implications of a Likely Economic Downturn - A week ago, we accumulated enough evidence to conclude that the U.S. economy is most probably headed into a second leg of recession. It is unclear whether this will be identified as a second recession or a continuation of an existing downturn. In either case, I've repeatedly noted that the apparent strength in the U.S. economy over the past year has been driven almost exclusively by an almost inconceivably large burst of fiscal and monetary "stimulus" last year, whereas intrinsic economic activity has stagnated. Personal income remains at its lows once government transfer payments are excluded, which is in stark contrast to typical post-war recoveries. Weekly jobless claims are pushing again toward 500,000, whereas prior post-war recoveries have seen jobless claims quickly retreat below the 400,000 figure that roughly delineates job growth from continued job losses. The most straightforward explanation of the economic data is that we've observed a stimulus-led recovery that has not translated into private economic activity, and that the effects of the stimulus are now diminishing.

European Rejection of Obama’s Stimulus Threatens U.S. Economy - Obama’s push for additional economic stimulus is not just hitting a wall in Congress. The president has also been rebuffed by the largest European countries — with potentially profound consequences for the U.S. economy and Obama’s national agenda. In the run-up to the G-20 summit in late June, the Obama administration went on a PR offensive, urging other wealthy nations to keep pumping stimulus into their economies. But with the Greek budget crisis heightening anxieties over public debt, conservative governments in Berlin, Paris, London and Rome are all on an austerity track. Instead of a pledge to inject more capital into their economies, all Obama got at the Toronto conference was a communique that emphasizes savings over stimulus.  Some economists fret that Europe’s fiscal retreat threatens to tip the U.S. deeper into recession. Meanwhile, leading analysts in Germany, the continent’s largest economy, say the trans-Atlantic spending spat underscores Obama’s limited maneuvering room in his effort to steer the fragile recovery back home.

IMF Warns Over US Housing, Unemployment, Consumer And Strong Dollar Risks - The IMF has issued a less than stellar outlook of the US economy after consultations with US government authorities, in which it cautions that even as the outlook has generally improved, major downside risks remain: "On the downside, the backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance. Most recently, and tipping the balance of risks to the downside, sovereign strains in Europe have become an increasing concern, potentially impacting the United States through financial market and, in a tail risk scenario, trade links." Also notable is the fund's warning on the state of the US consumer and the perceived overvaluation of the dollar: the United States can no longer play the role of global consumer of last resort, underscoring the importance of measures to boost growth and demand in current account surplus countries. With the U.S. dollar now moderately overvalued from a medium term perspective, this will need to be accompanied by greater exchange rate flexibility/appreciation elsewhere."

Tilted to the downside - THE IMF has revised its growth-rate projections as part of the updates to its World Economic Outlook. The headline figure for world GDP growth in 2010 is up, by another 0.4 percentage points, to 4.6%. That's in line with what the fund has been doing for the last few updates, in the course of which its projection for world growth has gone from 3.1% in the WEO released in October, to 4.6% now.  Part of the reason for the revision is better-than-expected first-quarter GDP figures in many countries. The IMF reckons that world growth was 5% during the three months to March. Factor this in, and the overall growth figure for 2010, assuming nothing else changes, goes up. As before, Asia has been outperforming both Europe and America (but particularly Europe) and past predictions of how it would do. The fund has also upped its American growth estimate, by 0.2 percentage points, to 3.3%.

With the US trapped in depression, this really is starting to feel like 1932 - The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation. "The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former US labour secretary. "All the booster rockets for getting us beyond it are failing." "Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said. Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high. Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

No double dip (w/ graph series) -Although many people are concerned about the possibility of a second economic downturn, I continue to see an economy that is growing, albeit significantly more slowly than we would have wanted. The ISM manufacturing PMI index for June was 56.2, the lowest value since December. But any value above 50 means that a plurality of managers reported that June was better than May. The uninterrupted string of above 50 readings we've seen going back to August of 2009 means that mangers have seen improvements month after month. A value of 56.2 is higher than that seen in 80% of the months over the last ten years.The Federal Reserve's index of industrial production and the Chicago Fed National Activity Index both paint a pretty favorable picture of continuing growth in May.

8 Problems That Could Trigger a Double-Dip Recession - With stock prices spiraling downward and treasury yields tanking, the market has been sending a clear message this week: The fragile economic recovery is in trouble. But just how bad is the outlook? In the aftermath of a bleak second quarter, experts are still divided about the likelihood of a double-dip recession. What's becoming clearer with each new report, though, is that the economy--even if it doesn't double dip--is steadily losing ground. The economic souring is, of course, being spearheaded by a familiar cast of characters: An anemic labor market, a skeptical consumer base, a weak housing market, and a global debt crisis that threatens to overwhelm national governments, just to name a few. Further deterioration in even one of these arenas could be enough to trigger a double-dip, which is loosely defined as a period during which a recovery is interrupted by economic contraction, usually in the form of negative GDP growth.

Big inflows into money market funds - Investors have poured tens of billions of dollars this week into money market funds – considered to be among the safest assets – amid fears that a double-dip recession in the developed world could send financial markets tumbling.The global funds, which are seen as a proxy for cash, enjoyed their biggest weekly inflows in 18 months, absorbing $33.5bn, research group EPFR Global said on Friday. Some of the world’s biggest fund managers are now holding up to 40 per cent of cash in their portfolios. Before the financial crisis, they held as little as 5 per cent.

Recession Dating and a "Double Dip" - My forecast is for U.S. economic growth to slow in the 2nd half (a sluggish and choppy recovery), but not slide into recession. However a recession is a possibility, and the following describes how NBER differentiates between a "double dip" and a new recession.The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the recognized group for dating recessions in the U.S.   If the economy slides back into recession - a possibility right now - the NBER has to decide if it is a continuation of the previous recession, or if the new period of economic decline is a new separate recession. This is just a technical question: for those impacted by the recession it makes no difference if it is called a "double dip" or a new recession.

Roubini, Bremmer and Whalen: Fixing the Financial System and Double Dipping - Below is the video of Chris Whalen of Institutional Risk Analytics, Nouriel Roubini and Ian Bremmer of the Eurasia Group giving their assessment of the financial system and the overall economy. The group was on CNBC earlier this week talking about the impact of the financial reform bill on the financial sector and the overall economy. It was mostly Whalen making calls during this video. It was interesting to see Chris Whalen doing macro because he comes at this from a banking perspective.  He sees a double dip because of a lack of good earning assets for bankers to lend against and continued balance sheet pressure at lending institutions. His view is that the reform bill and its increased capital requirements will be negative for credit growth going forward. Whalen notes that a senior Fed official told him there have been very few quarters over the past 15 years when the financial sector hasn’t benefitted from extraordinary fiscal stimulus or extraordinary actions by the central bank. We are in one of those quarters right now – and Whalen believes this bodes ill for economic growth in the real economy. More than that, Whalen thinks the Federal Reserve is in a policy cul-de-sac of its own making and suggests increasing rates now because the time value of money has skewed investing decisions away from "real collateral." 

What's a double dip? No one really knows. - Here's what we know about double dip recessions: The economy shrinks. Then grows. Then shrinks again. It's essentially a hilly economic recovery (or battle) where the ebb and flow of growth strangely takes a W-shape. Beyond that, no one can agree on what a so-called double dip is, whether or not we're about to have one, or even if we've ever had one before. Many economists define a recession as two consecutive quarters of negative GDP growth. Can it be possible to have economic expansion - albeit small, as Roubini notes - during the second part of a double dip? NBER, which has yet to formally declare an end to the U.S. recession that formally started in December 2007, believes a double dip would essentially be one continuous recession with a period of growth occurring and then back to a downturn.As if that's not vague enough, the double dip gets even murkier. Follow if you will.

A reduction in both fiscal and monetary stimulus - I have argued that both fiscal and monetary stimulus would be withdrawn sooner than most people expected. Here’s how I put it in-The mindset will not change; a depressionary relapse may be coming, Mar 2010 - I expect the following to occur: Public pressure to withdraw monetary and fiscal stimulus will work and stimulus will be reduced quicker than many anticipate – beginning sometime in early 2010. The Fed has already said it will stop buying mortgages in March and the Obama Administration is now focused on deficit reduction as evidenced by the paltry jobs bill just passed. The fiscally weak state and local governments will therefore receive little aid from the federal government. This will result in budget cuts, tax increases, and layoffs by the end of Q2 2010. And indeed, this seems to be the case. Right now, we are in a fragile recovery. All indications are that the pace of economic growth is slowing. While I think it premature to call for a double dip, some are doing so. I still think the odds favour double dip and the change in monetary and fiscal policy is a large part of why.

A polarised and pessimistic US is the big threat | The Australian WILL there be another recession next year? Three months ago, I said a double dip for Britain and the world was almost out of the question.  A month ago, I said it was extremely unlikely. Today, I still believe the probability of this dreadful outcome to be quite low. But the direction of the trend is clearly unfavourable. What has changed for the worse? The crisis in the eurozone has been even more severe than sceptics of the single currency expected. There has been a slowdown in China. And in Britain, the planned spending cuts are more drastic than expected. These problems are not fatal. Even bold commitments to open-ended monetary stimulus would not eliminate the greatest threat to global recovery, which originates not in Europe, Britain or China, but in the US. Having spent much of last month in the country, speaking to business leaders, financiers and ordinary citizens, I was astonished at the pessimism at all levels of US society, and across the political spectrum. For the first time in my 35 years of experience as a journalist and economic analyst, I found Americans much more pessimistic than the British and Europeans, or even the Japanese.

Dollar-Denominated Debt Deflation - Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be. As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread. Capital preserved as liquidity will go a long way. However, there are no no-risk scenarios. Apart from the obvious risks of fire, flood and theft, other risks to holding cash will grow over time. Liquidity can be as hard to hold on to as it sounds.

Presenting The Wall Of Worry: The 50 Ugliest Facts About The US eCONomy

In world's debt storm, who gets hit? - Someone will pay for the world's debt crisis, but who it will be – banks, savers, investors, taxpayers – hasn't been determined yet. It should be obvious that the Greeks owe too much. But so does almost everyone. Every kind of debt is so heroic it poses an affront to nature and a challenge to the gods. Much of it is unpayable. Private debt. Public debt. Short term. Long term. US. England. Europe. All kinds of debt in all kinds of places. In America’s private sector, for example, debt exploded 6 times faster than GDP since 1950. And today, the whole world staggers under debt, with more than $3.50 of debt for every dollar of GDP. Today’s global economic problem is breathtakingly obvious: too much debt. The solution is obvious too; debt that cannot be repaid must be destroyed – by defaults, foreclosures, bankruptcies, write-downs, and restructurings.

The dollar question: Where are we? - The global crisis has led some to question the dollar’s place as the dominant currency. This column discusses three camps in the literature: those advocating a new synthetic global currency, those arguing that a new reserve currency will emerge, and those suggesting a return to sharing the role. It concludes that talk of the dollar’s death – or even its decline – are exaggerated.

China rules out option of dumping US debt – China on Wednesday ruled out the “nuclear” option of dumping its vast holdings of US Treasury securities but called on Washington to be a responsible guardian of the dollar." "The agency acknowledged that financial markets were very concerned at one point that massive US government borrowing would drive the US currency lower. But it said economic conditions elsewhere were also a factor in determining the dollar’s trend. The eurozone, for instance, was struggling with high government debt levels.

Quelle Surprise! China Decides Not to Use Nuclear Option on Itself -- Yves Smith - Today, the FT reports, with the journalistic equivalent statement of a straight face, a patently ridiculous statement from China’s State Administration of Foreign Exchange: China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.Yves here. Earth to base, China did not buy dollar assets as in investment. Its purchases were made as part of a mercantilitst strategy to keep the renminbi cheap and thus assist exporters. The wee problem is that its huge dollar assets have become a contentious issue domestically, with many Chinese resenting the fact that China’s holdings of dollar assets are likely to depreciate. Well, that was inevitable. Emerging markets currencies typically appreciate as the country develops. So any large scale investment in foreign assets in an advanced economy was likely to be a bad bet. And it was CERTAIN to be a bad bet if those assets were acquired with the deliberate intent of keeping your currency low relative to the currency being acquired.

How Large is the Outstanding Value of Sovereign Bonds? - Debt issued by governments worldwide is immense. According to the Bank for International Settlements, at year end 2009 worldwide sovereign debt exceeded $34 trillion, and is greater than the amount of corporate bonds outstanding. Japan and the US dwarf most other borrowers. Together they have about half of all sovereign debt worldwide. Still, 23 other countries have over $100 billion of debt outstanding. The other 100+ countries worldwide have a total debt of about $1.4 trillion. Note: This graph shows the sovereign debt in December 2007 and December 2009.Due to the recession and increased expenditures to rescue banking systems, total sovereign debts grew by almost 30% in just two years. Sovereigns became the majority of worldwide debt. Several countries doubled their debts from 2007 to 2009. Source: Bank for International Settlements (BIS)

It’s the 4th of July! The Gulf is Dying, the Recovery Is Stalled, 15 Million Need Jobs and the National Bird Is an Ostrich - And I would have mentioned Afghanistan and Iraq and climate change and health care . . . in the title except I ran out of room. Where is all this mindless happy talk and patriotic gibberish coming from? Americans should be ashamed of what they’ve allowed to happen to their country over the last decade and furious at those who misled them.  Dan Senor, former Bush official and neocon apologist, is a man who can’t get any of his economic facts straight, and he wasn’t even asked whether his boss’s upaid for $3 trillion wars, with tax cuts and drug plan might have some connection to the debts he now finds so offensive.

A Chart for the Fourth of July  Just before Americans started celebrating the July 4th weekend, the Congressional Budget Office (CBO) released its annual Long Term Budget Outlook. The chart shows the CBO projection of the federal debt (as a percent of GDP) assuming that current law or policies do not change as defined in the CBO alternative fiscal scenario (CBO Outlook in 2010). The chart also shows the CBO’s long term projection at the same time last year (CBO Outlook in 2009). And for comparison the chart also shows the history of the debt going back to the time of the founding of the country. Like the fireworks tonight, you can see one explosion after another, and one higher than the one before. But unlike the fireworks tonight, these are not the kind of explosions you want to see.

IMF calls for deficit cuts in US -- The International Monetary Fund is calling for the United States to make a stronger effort to curb its budget deficits. The IMF said Thursday that in addition to cutting government spending, the Obama administration will have to consider raising taxes to get the U.S. deficit down to a manageable level. The IMF proposed a range of possible tax increases that would be certain to generate huge political opposition, from reducing the popular tax deduction for home mortgages to instituting a national sales tax

Deficit Hysteria: Wrongheaded in Times of Depression - Begun in Washington, Obama announced plans to "freeze government spending for three years," starting in 2011, and said he'll establish a bipartisan fiscal commission by executive order, to cut the deficit by imposed austerity - social spending cuts, including Medicare, not defense, banker bailouts, or other handouts to corporate favorites, how Washington works under both parties, anti-populist by any standard, anti-productive when large stimulus is needed to revive the cratering economy. Yet on February 18, 2010, a White House press release announced the commission's establishment - a "bipartisan National Commission on Fiscal Responsibility and Reform," co-chaired by two deficit hawks, former Republican Senate Whip Alan Simpson and former Clinton administration White House Chief of Staff Erskine Bowles, heading an 18-member team stacked with like-minded members, Democrat and Republican austerity advocates against Medicare, Social Security, and other social spending.

Myths about the federal budget deficit - The Commission on Deficit Reduction has an opportunity to make a major contribution to both economic policy and democratic decision-making in our country. To do so, it must confront the myths that dominate the debate over the projected federal fiscal deficit. The current national debate -- as reflected in Congress, the media, and polls -- is driven by an assessment of our economic crisis which misdiagnoses it in three ways:-- The notion that the central problems of large scale unemployment and deteriorating incomes have been resolved and the government should not expand its economic stimulus but instead should contract it in order to reduce future deficits.-- The idea that austerity is needed to assure long-term prosperity.-- The often deliberate effort to use the legitimate issue of deficit reduction to shrink the civilian public sector. As a result, “everything” is not on the table, as Obama has claimed, and the public remains confused about the real trade-offs.

Niall Ferguson: The US Has 6 Years Before Debt Payments Surpass Defense Spending -The world's hottest deficit hawk Niall Ferguson brought his message of fiscal doom & gloom to the Aspen Ideas Festival, where he warned that politicians were lacking urgency over the crisis to come:And American politicians don't have a sense of urgency, Ferguson contended. They feel the country can limp along for another 20 years or so in its current financial health without making tough decisions about fiscal policy. He believes they are wrong. The federal government's debt has grown so large in the past decade that the United States will inevitably devote an increasing amount of taxes to it. Meanwhile it's facing a greater burden through the Medicare and Social Security programs as Baby Boomers age. It's also currently fighting two wars. All that while revenues have plummeted in the recession.“If you really want to see when an empire is getting vulnerable, the big giveaway is when the costs of serving the debt exceed the cost of the defense budget,” Ferguson said. That will happen in the United States within the next six years, he predicted. He also warned that the US economy could unravel very quickly, a la the Soviet Union, and that there was no reason to presume it would sink slowly into the mire.

Krugman: The Hawks Who Cried Wolf - I was struck by something I sort of knew, but hadn’t focused on: the latest round of oh-my-God-the-bond-vigilantes-are-attacking-gotta-cut is the third such round since Obama took office.First, there was a runup in interest rates in the spring of 2009 — mainly a reaction to receding fears of a second Great Depression, but widely interpreted as a sign of impending fiscal doom. Then rates went back down. Second, there was a big scare in the fall of 2009, based on, well, nothing — which is what led me to write my original post on invisible bond vigilantes. And fear of this phantom menace helped scare the Obama administration away from a second stimulus.Finally, there was the bond scare of March, in which we were turning into Greece because of a blip in rates barely visible on the charts. Since then, rates have plunged. It kind of makes you wonder: why do such claims carry any credibility? But I have a sinking feeling that the next time long rates rise even a bit — say, back to where they were a year ago — we’ll be told that the bond vigilantes have arrived. Really. And Washington will believe it.

The Celtic Tiger is not a good example - I am reading a lot about how Ireland is poised to show all of us deficit supporters the “what for”. The crazies (the Flat Earthers or deficit terrorists) are now starting to suggest that the recent Irish national accounts results for the first quarter 2010 are the sign that the austerity drive has made Ireland more competitive and that an export-led growth era is emerging. You always have to be careful when using official data to conclude anything. The reality is that the national accounts data show that the Irish economy is still declining domestically and this is causing the labour market to deteriorate even further. The growth that is being observed is generating income that is being expatriated to foreigners. So not only is the Irish economy sacrificing real goods and services to increase exports but then the benefits of that sacrifice are being sent abroad to foreigners. If that is an example of how austerity benefits the local population then it just shows how impoverished the conception held by the crazies is. Ireland remains a good example of what happens when you withdraw public spending support for an economy facing a major collapse in private spending.

Promoting Recovery While Cutting the Deficit - NYTimes - IT’S been a banner summer for the champions of fiscal austerity. At the recent Group of 20 conference in Toronto, for example, world leaders solemnly pledged to enact big spending cuts over the next several years. In Washington, deficit hawks in the Senate blocked an extension of benefits for the long-term unemployed. And at the state and local levels, revenue shortfalls have activated balanced-budget requirements, forcing extensive layoffs and spending cuts.  But as the nation struggles to emerge from the most severe downturn since the Great Depression, such cuts are the last thing we need. There is no conflict — absolutely none — between our twin goals of putting the economy back on its feet and reducing long-term deficits. On the contrary, government could take many steps that would serve both goals simultaneously. 

Stimulus Or Austerity: Is That The Right Question? - What does it mean to say there is too much global debt? In what circumstance is there too much debt when one person’s obligation to repay principal and interest is not only the legal basis of another person’s capital but also the prospect for making that capital grow at a compounded rate? Does it matter what form capital takes? Does it matter how capital ownership is distributed? Are there limits to the economic constructiveness of one person’s debts being an essential component of another person’s assets?  In saying there is too much debt in the world there is a tacit admission that it is foolhardy to have the bulk of the world’s debt owed to a tiny percentage of the world’s population. Amassed paper capital does not always stimulate growth of infrastructure and developed wealth. Speculative capital invested to generate more of the same may not be much when denominated in JOBS. In today’s world the rich take their capital and invest it in betting pools where they hope investment demand will cause it to appreciate (inflate). Hence, our “jobless recovery” — the trickle-down theory now shown to be an emperor without clothes.

125K Lost US Jobs? Bring on $7.87T Stimulus! -Not that even $7.87 trillion will probably do much for it: America is so washed up that even I have to feel sorry for it despite its leaders' wrongheaded jihad on fiscal sanity. So here we are, so many months and so many trillions after in US IOUs and America has next to nothing to show for sinking itself further into the fiscal abyss. The unemployment rate is "falling" because so many are becoming disillusioned are joining the ranks of the permanent leisure class. Factory orders are tanking. Consumer confidence is dropping. Absent government taking billion dollar hits propping the housing sector, pending home sales are drawing flies. Are there any lessons here? It was thus with great incredulity that I read (left-leaning) WSJ writer Thomas Frank's latest missive on why "We Should Avoid the Austerity Trap." This is my favourite part, though there are more, ah, entertaining bits to be found in the rest of the article: The real danger is that instead we will decide to regard the deficit as a problem entirely unto itself—a quasi-moral issue that needs to be addressed independently of the larger economy—and that we will proceed to budget-balance ourselves right back into the economic ditch.

Stop Referring to UI as Fiscal Policy - I think it is clear to all but the most dogmatic of anarcho-capitalists that unemployment insurance is something that is worth having around for (if anything) humanitarian purposes. We also know that there fairly well-understood moral hazard and adverse selection problems preventing the private sector from providing this service (on a comprehensive basis). However, governments are not immune to these problems, and must take care to build unemployment in a way that minimizes these problems. According to modern economics*, the US’ system of unemployment fails in two (major) ways:  Principal budget constraint. Since states are the entities that administer regular unemployment, and they are unable to run persistent deficits, this creates a problem of uncertainty Replacement rates are too low. In the US, for credit-constrained agents, UI only replaces around 50% of previous income on average.

Hobos and welfare for America's Rich – I mistakenly said in my Monday column that Representative Dean Heller comes from Vermont. He comes from Nevada, where 64pc of all home sales are from foreclosures and unemployment has reached 14pc. Be that as it may, there is no dispute that he described America’s long-term unemployed as “hobos”. Was he just careless, or deliberately evoking the spirit of the Great Depression? Mr Heller probably regrets his words already, but such damage cannot easily be undone. Republicans on Capitol Hill who backed the mobilization of $3 trillion of fiscal and monetary support to bail out the financial system are now going to great efforts to prevent the roll-over of temporary benefits to 1.2m jobless facing an imminent cut-off. I don’t wish to enter deeply into an internal US dispute between Republicans and Democrats, but I do think think that the American political class will have to face up to the new reality of a semi-permanent slump for a decade or more that will blight a great number of lives.

Krugman: Two Imaginary Creatures Dominating the Discussion on Austerity - Paul Krugman discussed his recent article Myths of Austerity in the New York Times with GPS's Fareed Zakaria about why the deficit hawks are dead wrong on the path our country needs to take to get the economy back on track. It's too bad Krugman isn't a member of that deficit commission instead of wingnuts like Alan Simpson. I'd feel like they were sincere in trying to get our economy out of the ditch instead of using the problems we're having as an excuse to destroy Social Security and Medicaid and what's left of our middle class. For "balance" Zakaria followed this interview with deficit hawk Niall Ferguson. In the end even Zakaria admitted that there is a strong case for short term government spending, not that the Republicans and the Ben Nelsons of the world are going to allow it.Transcript via CNN below the fold

Memories Of Scare Tactics Past - Krugman - When writing about previous invisible attacks of the invisible bond vigilantes, I almost forgot what else was going on during the first of those imaginary onslaughts: the spring of 2009 was also the period of the great inflation scare, in which everyone from Glenn Beck to Federal Reserve presidents was warning us that an awful surge in prices was just around the corner. Funny how that didn’t happen. Now, everyone makes wrong predictions. But this particular failure goes deeper than just not seeing what was coming. At the heart of the inflation/deflation debate was and is a debate between two visions of the economy.  One vision, which is the one I subscribe to, is basically an updated Keynesian view: sticky prices revised gradually based on unemployment and excess capacity, the possibility of persistent economic malfunction because people are trying to hoard cash rather than buying real goods. The other vision was basically a crude quantity theory of money view: hey, the Fed is printing money, the government is running deficits, so high inflation, maybe even hyperinflation, is staring us in the face.

Arguments From Authority - Krugman - A quick note on David Brooks’s column today. I have no idea what he’s talking about when he says, The Demand Siders don’t have a good explanation for the past two years Funny, I thought we had a perfectly good explanation: severe downturn in demand from the financial crisis, and a stimulus which we warned from the beginning wasn’t nearly big enough. And as I’ve been trying to point out, events have strongly confirmed a demand-side view of the world. But there’s something else in David’s column, which I see a lot: the argument that because a lot of important people believe something, it must make sense: many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong? Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

Confidence Fairies Have Infiltrated The White House - Krugman -  I was struck by something that George Stephanopoulos said: he claimed to have been speaking to an administration official who asserted that what we need to get businesses investing is for business to know that the government has stopped — presumably, that means no new spending, no new regulation, whatever. GS is a careful guy, so this must be true. And it’s shocking — not that people are saying this, but that someone inside the administration is saying it. It’s garbage, of course: businesses are refusing to invest because they don’t see enough demand for their products. And administration economists know that it’s garbage. But obviously some people in the WH — I’m guessing a political person, but who knows — have bought the right-wing line hook, line, and sinker. We’ll never know what might have happened if Obama and co. had actually had the courage of their convictions; what we do know is that they have undermined their own message at every turn.

Mayberry Machiavellis: Obama Political Team Handcuffing Recovery - Under the leadership of President George W. Bush, science, empirical evidence and expert advice struggled to be heard above the din of politics. Today, a new band of Mayberry Machiavellis has gained control, counseling President Obama to ignore the advice of his economic team and press forward with deficit reduction ahead of job creation. Senior White House adviser David Axelrod told the New York Times recently that "it's my job to report what the public mood is." The public mood, said Axelrod, is anti-spending and anti-deficit and so the smart politics is to alleviate those concerns. "I've made the point that as a matter of policy and a matter of politics that we need to focus on this, and the president certainly agrees with that," said Axelrod of the deficit hawkery that the administration has engaged in over the last several months. It's an odd political strategy because Axelrod knows that if it succeeds, it will be both bad policy and bad politics.

Do We Need A Second Stimulus? - New York Time's columnist and Nobel laureate Paul Krugman has been making the case in print and on television that the feds had better get off the stick and get more money moving before the economic recovery melts away. This contrasts with the Euro talk of fiscal restraint and a chorus of Republicans who are pointing toward that ever growing mountain of debt as we pile on deficits. Adding to the debate is a meaty report from Goldman Sachs chief economist Jan Hatzius entitled 'No Rush For the Exit' in which he argues that aggressive U.S. monetary and fiscal policy—the federal stimulus— is now giving way to the deflationary drag of a depressed labor market.  Like other economists, he's also worried about the inventory cycle, which provided a nice boost to growth in recent months but has now pretty much run its course. Bottom line: More help is needed.

"Fire!" in Noah's Flood. Optimal scare tactics? - Suppose I were an American blogger. Suppose I had a very large popular following, that believed everything I said. But suppose the people who actually influenced and controlled policy thought I was a total airhead.I'm not sure what I would do, but I know what I would be very tempted to do: yell "Inflation is coming! Monetary policy is far too loose, with 0% interest rates, and those idiots at the Fed won't realise it until it's too late!". I would be very tempted to cry "Fire! Fire!" in Noah's Flood. And my prophecy might be self-fulfilling.  The same low nominal interest rates that would be too low in a world where people expect inflation and real growth are simultaneously too high in a world where people expect deflation and real decline. My yelling "Fire!" in Noah's Flood might be the best way to loosen monetary policy.

Bleeding The Patient - I'm going to embroider this on a pillow: When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions. --- Paul Krugman That's from yesterday's column in which he explains that these Very Serious People have all decided to believe in fantasies about invisible bond vigilantes and confidence fairies, making wild assumptions about people's future behavior based on well ... prejudices, fads and fashions. And sadly for all of us, those fads and fashions happen to be based on a fascination with austere "tough love" at a time when we are in such a weakened state that such things might just kill us. And what's most amazing is that it has almost nothing to do with the arcane subject of macroeconomics at all. It has to do with the notion that a bunch of politicians and economists are making important decisions based upon what they perceive to be human behavior.

Are stimulus skeptics logically incoherent? - Mankiw -Paul Krugman writes: There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs?....I have never seen a coherent objection to this line of argument. A coherent objection to this line of argument might be the following: If the government borrowed the money to spend, it would need to eventually pay the money back. That means higher future taxes, on top of the future tax increases that President Obama already will need to impose to finance his spending plans. Higher future taxes reduce demand today for at least a couple reasons. First, there are Ricardian effects to the extent that consumers take future taxes into account when calculating their permanent income. Second, those future taxes are not likely to be lump-sum but will be distortionary; it is plausible that at least some of those future tax distortions may adversely affect the incentive to invest today

The Power of Doing Nothing: US Deficit Edition - This has made the rounds a bit but I think the core message has yet to sink in. Despite, the supposedly dire fiscal situation the US finds itself — the long-term entitlement problems, an aging population, etc – doing absolutely nothing would close the long run fiscal gap. Now of course no one believes that we are going to do absolutely nothing. Some form of both Obama and Bush tax cuts will be extended. The Alternative Minimum Tax will be “fixed.” The reimbursement caps to Medicare docs will expanded. However, understand this: a problem cannot be worse than its cure.  If these things: ending tax cuts and  holding to reimbursements caps are a cure for our budgetary ailments then they represents the absolute worst that our problem could be.

Going Long and Short on the Budget - The worst federal budget policy is the one we’re now following: ignoring the looming large future deficits while refusing to enact temporary fiscal stimulus to combat the recession.So says Laurence Seidman of the University of Delaware. His solution is threefold. First, Congress should enact a law requiring it to balance the budget so long as the unemployment rate is below 6 percent. Second:At the same time, Congress should enact a set of temporary tax cuts and expenditures to stimulate the economy. This legislation must contain a phase-down schedule so that these temporary measures are phased out as the unemployment rate, which is currently over 9 percent, falls below 9 percent, then 8 percent, then 7 percent, and are completely terminated when the unemployment rate falls to 6 percent. Finally, Mr. Seidman writes, Congress should change “benefit formulas and earmarked tax rates in Social Security, Medicare and Medicaid,” to close the long-term deficit.

The Arrogant David Brooks - David Brooks has decided to jump into the debate over stimulus with both feet. In a column in which he warns against arrogance he tells readers that additional stimulus would: "risk national insolvency on the basis of a model."Mr. Brooks doesn't tell readers how he has determined that further stimulus carries this risk. He doesn't explain how raising the country's debt to GDP ratio by 4-8 percentage points over the next few few years would jeopardize the creditworthiness of the U.S. government. This is certainly a rather strong assertion, given that even with this additional indebtedness, the debt to GDP ratio in the United States would still be far lower than it had been at prior points in its history. Financial markets also don't seem to share Mr. Brooks view that national insolvency is a serious concern. The people who are putting their money on the line are willing to buy 10-year Treasury bonds at just 3.0 percent interest rates. That would seem to suggest that insolvency in not a real concern, but Mr. Brooks insists that President Obama should hesitate on stimulus because he thinks that insolvency is a problem anyhow.

Ezra Klein: Is there more consensus on (some) stimulus than we think? - At first glance, David Brooks and Paul Krugman have released precisely opposite columns over the past few days. Krugman's Sunday effort blasted the Senate for failing to pass further stimulus in the form of unemployment benefits. "We’re facing a coalition of the heartless, the clueless and the confused," he lamented. Brooks's column is an effort to punch holes in the case for stimulus. "Debt-fueled government spending doesn’t increase confidence," he writes. "It destroys it." But if you actually look at their prescriptions, they are, in this case, similar. Krugman wants to see unemployment benefits extended. So, it turns out, does Brooks. "Extend unemployment insurance," he recommends. "That’s a foolish place to begin budget-balancing." He goes on to argue for a program that would "mitigate the pain caused by the state governments that are slashing spending" by tying state and local aid to the passage of state budgets that make long-term sense -- but notice that he's recommending state and local aid.

Ezra Klein - Outlining the stimulus and deficits debate - I've been frustrated by the imprecision afflicting the debate over stimulus and deficits. Yesterday, for instance, saw a column by David Brooks that many viewed as anti-stimulus but in fact advocated the two forms of stimulus -- unemployment benefits and state and local aid -- presently on the table. So it may be worth spending a couple of minutes outlining the various positions in this debate. For the purposes of this post, I'm just going to assume all positions are held with total sincerity, as this is simply to outline different poles in the debate.

Fiscal Stimulus versus Fiscal Austerity - In case you missed it, on the 4th of July CNN’s Fareed Zakaria (on his “GPS” show) hosted a debate between Paul Krugman and Niall Ferguson (video embedded above; link to video on CNN site is here). But as I’ve mentioned before, I don’t think it has to be a “versus” situation.  We can do both, and in fact, that would be the ideal combination of strategies to promote both a better outlook for the federal budget as well as a stronger longer-term economy.  Last week I did a radio show on Minnesota Public Radio with UC Berkeley’s Alan Auerbach (you can listen here –the first few minutes are the most relevant), and both of us were singing that tune. And if you keep watching the CNN video until you get to Fareed’s own conclusion–following his careful consideration of Krugman’s and Ferguson’s different sides of the issue–you’ll notice he seems to feel the same way.

Long-Term Deficit Posers - Adam Ozimek has a question: Here is something I don’t understand about austerity now proponents: is cutting short term spending a second best alternative to fixing the long-term budget problem? Or does the optimal policy response include BOTH short-term spending cuts and a long-term budget fix? If the answer is the latter, then I want to know what problems aren’t solved by fixing the long-term budget problems that also require short term cuts? I'm not in favor of short-term budget cuts, but just for the sake of conversation I thought I'd take a crack at providing the best answer I can think of to this. But then I clicked the link, and it turns out Ozimek already did it: I think the best case against short term stimulus is to say that the government can’t be trusted to combine a serious long-term budget fix with a short term stimulus package. I'm more sympathetic to this argument than Ozimek himself is, but the real problem with it is simple: it assumes the austerity crowd is sincerely in favor of long-term budget cuts in the first place. They aren't. They say they are, of course, but the reality is that long-term cuts mean essentially one thing: cuts to Medicare.

Further Adventures in Fake Deficit Hawkery – Krugman - One of the prime arguments of the austerity now now now people has been that you can’t do the sensible thing — run deficits while the economy is depressed, then turn to budget-balancing once recovery is well in place — because that will lack credibility. Only by imposing immediate suffering, at great cost to employment, can you convince the invisible bond vigilantes that you really mean business. And then I learn from Digby that some of these same people just love Paul Ryan’s budget plan — a plan that calls for a huge increase in public debt over the near term, offset by hypothetical spending cuts four decades from now:  There’s only one way to read this: it’s not about the deficit — it’s about the deficit as an excuse to dismantle social programs.

The Federal Budget Deficit So Far This Year—About $1 Trillion - CBO Director's Blog - Yesterday, CBO issued its Monthly Budget Review, which discussed the status of the federal budget through the end of June, encompassing the first nine months of fiscal year 2020.  At that point, the deficit was about $1.0 trillion, about $80 billion dollars less than the shortfall last year at this time. Revenues were about the same as they were last year ($1.6 trillion)—reflecting increases in receipts from corporate income taxes and from the Federal Reserve's payments to the Treasury, which were largely offset by decreases in individual income and payroll taxes. Receipts from corporate income taxes were up by about $31 billion (or 31 percent), the result of both improved economic conditions and lower depreciation charges. Receipts from the Fed increased by $35 billion, primarily because the central bank has increased the amount of assets it holds and has shifted to riskier investments in support of the housing market and the broader economy.

The Pointlessness of Short-term Austerity - What Adam Ozimek said:Here is something I don’t understand about austerity now proponents: is cutting short term spending a second best alternative to fixing the long-term budget problem? Or does the optimal policy response include BOTH short-term spending cuts and a long-term budget fix? If the answer is the latter, then I want to know what problems aren’t solved by fixing the long-term budged problems that also require short term cuts? These question, it seems to me and to Ozimek, don’t have good answers. If the debt-averse wanted to say “you can have your stimulus but only if paired with measures to close the long-tern deficit” that would be a form of bargaining that I wouldn’t approve of, but the relationship between ends and means seems clear. What’s more, then we could bargain about it. But to say “because we’re not adopting measures that close the long-term deficit, we need short-term fiscal austerity” doesn’t make any kind of sense. It’d be like a pack-a-day guy deciding that it’s hard to quit smoking so he’s going to stop eating bananas

Martin Wolf Continues Attack on Fiscal Austerity - Martin Wolf, the Financial Times’ esteemed economics editor, launches another salvo against misguided austerity measures today. It’s also noteworthy that he argues from a Modern Monetary Theory perspective. Wolf first stresses that yields on government bonds show that inflationsitas are all wet: Markets are saying something important… On Monday, the yield on 10-year government bonds was 1.1 per cent in Japan, 2.6 per cent in Germany, 3 per cent in the US and 3.3 per cent in the UK (see chart) Based on yields on index-linked securities, real interest rates on borrowing by these governments are very low (1.2 per cent, or less, in the US, Germany and UK). Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation. Wolf next establishes that the private sector in countries all around the world is saving. The OECD forecasts that savings in advanced economies will be 7% of GDP, or roughly $3 trillion. Wolf then explains how this all plays out:

Self-defeating Austerity -Suppose you slash spending equal to 1 percent of GDP. That looks like a budget saving, right? But if you do it in the face of an economy up against the zero bound, so that the Fed can’t offset the demand effects with lower rates, it’s going to shrink the economy. Let me use a multiplier of 1.4; you can adjust the numbers as you wish.Now, a weaker economy means less revenue. Assume that every dollar up or down in GDP means $0.25 in revenue, which is conservative. Then the fiscal austerity reduces revenue by 0.35 percent of GDP; the true saving is only 0.65 percent.Now, the government has to borrow those funds; let’s say the real interest rate is 3 percent (it’s actually much lower now). Then the long run impact of the austerity on the fiscal position is to reduce real interest payments by 0.0195 percent of GDP.But wait: what if there are long-run negative effects of a deeper slump on the economy? The WSJ piece showed one example: workers driven permanently out of the labor force. There’s also the negative effect of a depressed economy on business investment. There’s the waste of talent because young people have their lifetime careers derailed. And so on. .

A Specter is Haunting America ...The specter of fiscal mindlessness I'm just back from two weeks in Europe. During that time, growth indicators have signaled a slowdown [0] in the midst of a massive negative output gap [1], while a substantial bloc in the Congress refuses to think in a sensible fashion about fiscal policy. This point is most forcefully illustrated by the inability of the Senate to move forward on extending unemployment insurance. (It makes me wonder if some were asking the question, "Are there no poorhouses?") First, a recap of the output gap, as estimated by the Congressional Budget Office, and the projected gap using the latest available Macroeconomic Advisers' forecast. In log terms, the output gap for 2010Q2 is 5.57% (5.42% in level terms). Consistent with the Administration's forecasts as well as CBO's, considerable slack will exist in the economy for at least another year. And yet, I often hear calls for monetary restraint because of incipient inflationary pressures, which I haven't seen any evidence of (see also Figure 3 in Rudebusch's discussion).

Goldman Sees "Disturbing Signs" If Government Does Not Bow Down To Krugman, Reflate Monetary And Fiscal Bubbles- Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.

What Went Wrong? – Krugman - The Obama administration is in a difficult spot. It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress. The administration has chosen to deal with this by trying to have it both ways — condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track. How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try. Now, I don’t have any inside information on what really happened; I do talk to WH economists, but they don’t offer — and I don’t ask for — any information on internal wrangling. But based on public reporting, like the Ryan Lizza article on Larry Summers — which reads rather differently now that we know how things are really working out, or more accurately not working out — it looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long. That’s the assumption embedded in the now infamous Romer-Bernstein chart, above.

Krugman's Insanity, And The Hard Mathematical Truth - There's dumb and then there's knowingly-misleading.  This last piece is the latter: The Obama administration is in a difficult spot. It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress. The Obama administration is in a tough spot of its own making.The "stimulus" was never going to work: it couldn't, mathematically. Why not?  Because of this ugly little reality:I don't know how much larger one could have made the so-called "stimulus."  But just as in 2003 it failed to produce lasting prosperity or turn around the economy because the Ponzi Economic "pull forward" on demand (via increased credit) had hit the wall. That's the ultimate failure of all of these so-called "economists."  They simply disregard debt - on purpose. This is idiotic, and worse, it's intentionally misleading.  Anyone with half a brain knows that debt has to be repaid.

The American people want more government spending - The new conventional wisdom in Washington is that more spending to promote job creation is out of the question, because the public has changed its priorities and is obsessed with the danger of federal deficits. The actual views of the American people are at odds with the corporate media’s portrayal of a nation of deficit hawks. According to a June 11-13 USA Today/Gallup Poll, 60 percent of Americans favor "additional government spending to create jobs and stimulate the economy." Only 38 percent of the respondents opposed the proposal, while 2 percent had no opinion. Federal deficits are an obsession with American elites, including many establishment Democrats. But deficit reduction is not the leading priority of the American people.

Arthur B. Laffer: Unemployment Benefits Aren't Stimulus - The current debate over extending and increasing federal unemployment benefits encapsulates the disagreement between the Democrats in power in Washington and their Republican opponents. What the consequences will be of raising unemployment benefits in today's depressed economy is at issue.The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view. The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics.

Laffer Loses His Mind - At least he had one in the first place.... but it's definitely gone now: While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.  Oh wait.  That's correct.  So where's the "loss of mind"?  Right here:My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound? Oh Christ. We've not blown enough bubbles, right?

The Obama Shock Doctrine - Part 74 in our continuing series: Why economists are not like physicists or oncologists. Ed Prescott is a Nobel-prize winning economist. But according to Stephen Williamson, an economist who attended a presentation given by Prescott on Wednesday in Montreal, Prescott believes the recession is President Obama's fault. (Italics mine) Ed Prescott did pathbreaking work in the economics profession, and his Nobel prize is well-deserved. However, I doubt that there were any people in the room yesterday who took Ed seriously. Ed's key points were: 1. Monetary policy does not matter. 2. Financial factors are the symptoms, not the causes, of the recent downturn. 3. The recession was due to an Obama shock, i.e. labor supply fell because US workers anticipate higher future taxes. Perhaps Prescott delivered a more nuanced explanation of this thesis than Williamson's summary does justice to. But on the face of it, there's really no other way to describe it than complete lunacy.

How Obama caused the recession - The idea that Obama (or rather, the wisdom of crowds in anticipating the election of a socialist-Islamist Obama administration) caused the recession is getting another run, this time from Nobel[1] prizewinner Ed Prescott. I haven’t been able to track down more than a precis of Prescott’s argument, but I assume it’s similar to the version put forward by Casey Mulligan. I had a go at this in my Zombie economics book [2], and here on CT, so, I thought I would link to it here, to give a bit of context to the current flap.

Rush Limbaugh: Obama Created Recession As 'Payback' For Racism -Rush Limbaugh said on his July 2 radio show that he believes Obama tanked the economy on purpose, both as "payback" for 230 years of racial oppression and because Obama simply doesn't like America.  He railed: "Who is Obama? Why is he doing this? Why? Why is he doing it? Is he stupid? Is it an accident? Is he doing it on purpose or what have you? ... I think we face something we've never faced before in the country -- and that is, we're now governed by people who do not like the country, who do not have the same reverence for it that we do. Our greatest threat (and this is saying something) is internal." Limbaugh went on to compare Obama to the Black Panthers

Cutting Off Unemployment Benefits Could Worsen Deficit - Deficit concerns have been the major stumbling block to extending unemployment benefits, but cutting off older workers could make the long-term budget outlook worse.  Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright. Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.

Why We Must Reduce Military Spending - Rep. Barney Frank and Rep. Ron Paul - As members of opposing political parties, we disagree on a number of important issues. But we must not allow honest disagreement over some issues to interfere with our ability to work together when we do agree. By far the single most important of these is our current initiative to include substantial reductions in the projected level of American military spending as part of future deficit reduction efforts. For decades, the subject of military expenditures has been glaringly absent from public debate. Yet the Pentagon budget for 2010 is $693 billion -- more than all other discretionary spending programs combined. Even subtracting the cost of the wars in Iraq and Afghanistan, military spending still amounts to over 42% of total spending. It is irrefutably clear to us that if we do not make substantial cuts in the projected levels of Pentagon spending, we will do substantial damage to our economy and dramatically reduce our quality of life.

Why Taxes Are Going Up - It’s hard to imagine that spending restraint alone can solve America’s long-run fiscal woes. Facing an aging population and rising health care costs, the federal government will continue to expand even if policymakers take serious steps to trim spending. That’s why policy wonks are working so hard to evaluate ways to raise more revenue. Cutting back on loopholes and other tax expenditures, taxing carbon emissions, introducing a value-added tax – all of these deserve attention in case America decides that it wants to finance a substantially larger federal government.However, that focus sometimes overshadows a key fact about our tax system: Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy.

Taxes Need to Come Up, But That Doesn’t Mean Tax Rates Have To - Today’s blog post by Donald Marron and column by the Washington Post’s Ruth Marcus give me occasion to say “here, here” as well as an excuse to trot out yet again a really old point (or maybe three points) I’ve made over and over again on this blog (but which I personally never tire of as long as it’s clear most Americans and our policymakers still don’t get it): We need more tax revenue; the current-law baseline is a good “role model” for the right level of revenue; but… sticking to current-law baseline revenue levels doesn’t require sticking to current tax law, and doesn’t even require seeing marginal tax rates go up. Donald explains “why taxes are [inevitably] going up” (it’s going to be impossible to flat-line health spending or otherwise reform entitlements fast enough), and he points out that the CBO baseline shows us that taxes are already scheduled to go up according to what’s already in current tax law:

The value added tax:Too costly for the United States - working paper - 54pp pdf

Tax Burdens and Economic Growth – Answering the Objections  Consistent with findings in Presimetrics, the book I wrote with Michael Kanell which will be released in August, I’ve had some posts whose results contradict standard economic theory. In some cases, readers have insisted that the results must be some sort of anomaly. Perhaps the biggest offender is a graph which appeared in this post. The graph shows growth rates in real GDP per capita by Presidency, where each President is color coded by whether he increased the tax burden (in this case defined as federal government revenues as a share of GDP) or decreased it: The graph shows that Presidents who cut the tax burden produced slower growth, on average, than Presidents who increased the tax burden. For many people, this doesn’t make sense at all. (An explanation for why these results show up is provided here. Now, I’ve already some of the objections that have been raised to this, mostly in private or in comments at the Angry Bear blog.  In fact, the graph above by itself answers one of the objections

The happiest places on Earth are heavily taxed -- Northern Europeans are the happiest people on the planet, according to a new survey.  The Organization for Economic Cooperation and Development says people in Denmark, Finland and the Netherlands are the most content with their lives. The three ranked first, second and third, respectively, in the OECD's rankings of "life satisfaction," or happiness.  There are myriad reasons, of course, for happiness: health, welfare, prosperity, leisure time, strong family, social connections and so on. But there is another common denominator among this group of happy people: taxes.  Northern Europeans pay some of the highest taxes in the world. Danes pay about two-thirds of their income in taxes. Why be so happy about that? It all comes down to what you get in return.

Putting Systemic Risk on the Radar Screen - FRB Cleveland - As the nation ponders its response to the greatest financial crisis in generations, plans for regulatory reform are everywhere. Proposals to break up big financial companies, create a new agency for consumer protection, and lay out additional rules for derivatives, insurance companies, and hedge funds—they’re all on the table. Many proposals call for enhanced supervision and regulation to combat systemic risk. Some proposals would tie leverage restrictions, capital requirements, or deposit insurance to systemic risk. Federal Reserve Bank of Cleveland President Sandra Pianalto has outlined three tiers of supervision with various levels and types of systemic significance.1 Regardless of the outcome of current regulatory reform deliberations, systemic risk and systemic risk supervision seem destined to be a part of our new financial order.

Fed’s Kocherlakota: Tax Financial Institutions Based on Risks They Create -The inevitability of future financial crises and the inability of regulatory overhaul to stop it mean banks should be taxed according to the bailout risk they present, a U.S. central bank official said Wednesday. “A financial institution should be taxed for the amount of risk it creates that is borne by taxpayers,” Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said. “Once the firm faces the correct tax, it will choose to produce that risk with a cost-minimizing mix of capital, liquidity, incentive compensation and other factors,” the official said. The official sees this taxation of financial institutions as a way to help deal with the inevitable crises to come.

Financial Reform: What Must Be Done - iMFdirect - We have to work together to build the support among governments and the public for a commitment to strong supervision. This is something that must come out of this crisis. The IMF has intensified its focus on the quality of supervision in its regular financial sector surveillance and will work with the Financial Stability Board (FSB) and others to develop specific recommendations to strengthen oversight and supervision.The G-20 has declared enhanced supervision to be the second pillar of financial reform; their support and focus on supervision will give an important emphasis to this work.The financial crisis has exposed the need for reform of the financial sector. Under the leadership of the FSB, the IMF, the World Bank, and the standard setters, FSB member countries have embarked on an ambitious agenda to reduce the likelihood and costs of future financial crises. We must stay focused on this important goal and not allow the challenges before us to overwhelm us

The ABCs of Reform - Eliot Spitzer - How Washington blew its chance to bring real change to Wall Street.Even acknowledging the truism that making laws is like making sausage, often leading any observer toward becoming a vegetarian, if not a vegan, some legislation stands out as especially unpleasant. With that in mind, what conclusions can we draw about the financial reregulation bill now making its way through Congress? First, the bill does virtually nothing to confront the single greatest structural problem we face: the continued growth of too big to fail, or TBTF, institutions. Indeed, over the course of the crisis we have gone in the wrong direction, with the banking industry now more concentrated than it was several years ago. There is no reason to believe that this trend will change or that the federal guarantees of TBTF institutions will be withdrawn.

Banks Already Moving to Evade Volcker Rule - Yves Smith - Although it was unclear how the high concept behind the Volcker rule would translate into legislation, we had doubts from the get-go. The idea is sound: firms that are ultimately playing with government money should be involved only in socially valuable transaction intermediation and fundraising (and all major dealers around the world are backstopped, pretenses about “living wills” and resolution regimes are fig leaves). Speculating or investing solely to boost profits for the house should be a no-no. The banks can raise funds on artificially cheap terms, thanks to government support, and they have incentives to direct them to high risk activities, the very sort that have the most upside to them and the most potential to leave the taxpayer with losses. However comments from Volcker early on, which were picked up elsewhere, suggested an implementation that is close to useless: defining only trades not executed with customers as prop trades. This is just silly.

Financial reform's unfinished agenda - A KEY CAUSE of the financial crisis was that financial institutions took on far too much leverage -- they risked vast multiples of capital, rendering them vulnerable to the slightest downturn in asset prices. It follows that regulators should set higher capital requirements. "The top three things to get done," Treasury Secretary Timothy F. Geithner told the New York Times in March, "are capital, capital and capital." The Dodd-Frank financial reform bill authorizes and encourages higher capital requirements but leaves the details up to regulators.  U.S. regulators, in turn, must await the outcome of an obscure discussion among technocrats meeting under the auspices of the Basel Committee on Banking Supervision. Named for its Swiss headquarters, this international group sets capital standards for banks around the world, on the sound theory that countries should present multinational banks with a united regulatory front. The Basel group has been blamed for contributing to the recent crisis because it had contemplated capital standards based on banks' unrealistically low calculations of risk in their portfolios. The current negotiations are supposed to rectify that.

Regulate short-funding to make banking safe - This column argues that government measures to restore confidence in the financial system have achieved a “pause in the panic”, but this is not enough. Governments still need to reverse the dramatic slide of the financial system towards unstable funding – a trend which holds a gun to the heads of governments and central banks.

The End of the Age of Credit - A financial overhaul that was supposed to be a momentous effort has finally been voted in, only to reveal that none of the Wall Street banks will be effectively affected until 2022. At the same time, Capitol Hill has thrown out a proposal to provide emergency support for millions of Americans who remain unemployed for more than 26 weeks, while those who haven't found a job for 99 weeks or more are in the indefinite doghouse. It truly is a matter of bail the banks and screw the people. What remains to be seen is how those people will react. All the more so when they find out that those same Wall Street banks will soon come calling again for more bailouts, which is now inevitable and guaranteed to happen. Nor is this an exclusively American phenomenon. European countries face the same fate, even though it's not as easy over there as a Republican filibuster to condemn citizens to abject poverty. The options are dead(ly) simple. We will find out over the next few months that our banks are screamingly underfunded, and that not bailing them out will lead to bank runs and panics. How bad the situation already is becomes obvious through for instance Reuters' James Saft, who writes that in the next three years, Global banks face $5 trillion rollover

On Dodd-Frank: An Overlooked Provision, Section 716, and the Volcker Rule - So what do I think of Dodd-Frank? I'm glad you asked. Before I get to some of the specifics, let me just say that in terms of broad policy, I am, unlike the vast majority of commentators, quite happy with the way the bill turned out. Barney Frank and Chris Dodd deserve a tremendous amount of credit for shepherding such a massive and impactful bill through Congress, and I think naming the bill "Dodd-Frank" is much deserved. The political and legislative realities involved in getting a major piece of legislation through Congress (and this is an uber-major piece of legislation) are so daunting nowadays that I had been expecting a far weaker bill from the beginning. That Dodd and Frank were able to get as much as they did is an extraordinary accomplishment.

On Dodd-Frank: Major Swap Participants, Swap Execution Facilities, and Block Trades - This will be a huge issue for hedge funds. And unfortunately, this is an area where Dodd-Frank is a total mess. For some reason, Barney Frank and Chris Dodd allowed Blanche Lincoln's definition of "major swap participant" (MSP) to remain in the bill, despite the fact that it was widely panned by, well, everyone (including regulators). In any event, the bill defines MSP as anyone who is not a swap dealer and who (emphasis mine):(i) maintains a substantial position in swaps for any of the major swap categories as determined by the Commission (excluding "positions held for hedging or mitigating commercial risk," and certian pension funds);(ii) whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or (iii)(I) is a financial entity that is highly leveraged relative to the amount of capital it holds and that is not subject to capital requirements established by an appropriate Federal banking agency; and (II) maintains a substantial position in outstanding swaps in any major swap category as determined by the Commission.The bolded parts represent completely undefined and highly ambiguous terms which currently have no legal meaning.

Reforming the Over-the-Counter Derivatives Market - While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency problem: moving the settlement or trading of derivatives to exchanges or clearinghouses.

Ezra Klein - Regulators, mount up! - Reporting my weekend column on the role that regulators will play in the success -- or failure -- of health-care reform and financial regulation left me heavily convinced about the importance of securing strong leadership for these efforts in the first place.  According to CNN's count, there are at least 68 instances where the regulators are charged both with figuring out what to do and with doing it. That means that getting the right regulators in place is going to be crucial to making these bills work. And one of my main conclusions on that front is that if you're going to attract serious talent, you need leadership who's attractive to serious talent. Don Berwick, the administration's nominee to lead the Center for Medicaid and Medicare Services, is a legend in health-care circles. You really could imagine the best young people in the field rushing to work with him, particularly when health-care reform is just starting up. Similarly, if you're looking for a way to attract smart young lawyers and financial types who want to stand between banks and consumers, you want to go with Elizabeth Warren (Elizabeth Warren on Consumer Protection (MMBM) embedded above), the person who inspired most of them to join that cause in the first place.

The hard work falls to the regulators - The Wall Street bill, for instance, has more than 30 studies in it and does not prescribe things like the level of capital a bank has to hold or the precise way the Volcker rule is implemented or what is to be done about the ratings agencies. It leaves those decisions to regulators. Both bills require the creation of institutions, such as the Consumer Financial Protection Bureau and the state health insurance exchanges. And both require existing agencies, like the Federal Reserve and the Centers for Medicare and Medicaid Services, to take on much larger roles. All of this tends to play poorly politically, with naysayers worrying about unelected bureaucrats making important decisions behind closed doors. But in some ways, the greater danger is that the doors will be open and the wrong people will walk through. As Eric Patashnik argues in his book "Reforms at Risk," recent efforts to open the regulatory process have mainly helped lobbyists and special interests. The people who show up and know what to do during the third phase of public comment for a regulatory act that most voters will never know happened are those who are paid to show up and trained to know what to do. Thus the implementation period brings a dangerous asymmetry: The public quiets down, as people think action has been taken, but the lobbyists mount up.

The financial-reform bill and auto dealerships - The reform bill was potentially alarming for auto dealers because they’re major players in the consumer-credit business. There are close to eight hundred and fifty billion dollars’ worth of auto loans outstanding in the U.S.—about as much as our total credit-card debt—and car dealers broker about eighty per cent of them. Since the central task of the new consumer financial-protection agency is to oversee the market for consumer credit, which has become something of a cesspool in recent years, it would have been natural for car dealers to fall under its jurisdiction. Instead, the dealers won a special exemption: the agency can’t touch them. The auto dealers won their exemption the old-fashioned way, by lobbying the hell out of Congress. But the fact that they succeeded where bigger, more powerful companies didn’t reveals something important about the politics of influence on Capitol Hill: lobbying isn’t just about money. The companies that lobbied most successfully around the financial-reform bill didn’t necessarily pay the most

A Fault in Reg Reform: Deciding Who s Accountable When Things Go Wrong - But aside from dissolving the widely criticized OTS, the financial reform legislation does little to ensure accountability among regulators....publicly at least, regulators have largely appeared more interested in either deflecting blame or admitting it only in the context that everyone else — fellow bank regulators, bank executives, nonbank lenders — was culpable, too. "With the benefit of hindsight, it is clear that the Fed and other regulators, both here and abroad, did not sufficiently understand some of the critical vulnerabilities in the financial system, including the consequences of inappropriate incentives, and the opacity and the large number of self-amplifying mechanisms that were embedded within the system," Bill Dudley, the president of the Federal Reserve Bank of New York, said in a December speech. At the time, it was as strong a mea culpa as anyone had heard from

One Paragraph on the Financial Reform Bill - From Mike Konczal: “Examples? Off the top of my head, ones with a paper trail: [Treasury] fought the Collins amendment for quality of bank capital, fought leverage requirements like a 15-to-1 cap, fought prefunding the resolution mechanism, fought Section 716 spinning out swap desks, removed foreign exchange swaps and introduced end user exemption from derivative language between the Obama white paper and the House Bill, believed they could have gotten the SAFE Banking Amendment to break up the banks but didn’t try, pushed against the full Audit the Fed and encouraged the Scott Brown deal.” (By the way, if you’re missing your financial commentary fix during my self-imposed hiatus, I recommend Mike’s blog highly)

Mike Konczal Talks FinReg on GRITtv: Taxpayers Still on the Hook for Wall Street’s Recklessness - Roosevelt Institute Fellow Mike Konczal joined Demos’s Nomi Prins and GRITtv host Laura Flanders last week to discuss the state of financial reform, whether the current bill does enough to change the culture of risk on Wall Street, and whether taxpayers are going to be stuck holding the bag — again.Mike notes that one of the key questions of reform is “who’s going to pay for this, and ideally we want the people who caused the trouble to pay for it, not regular citizens.” Instead, he says Republicans like Scott Brown have transferred the cost from banks to the FDIC and the savings accounts of average Americans.

About Those Virgins - I don’t buy the arguments David Galland gives about the shamans and the virgins when talking about financial reform. He says: dancing around open fires bedecked in certain animal skins or allowing shamans to sacrifice virgins were seen as effective methods for controlling the natural chaos of things.He’s talking about policy makers in Washington of course. They are the shamans dancing around the open fires ready to sacrifice the ‘free market’ virgins in order to control the chaos that markets sometimes bring with them. The thrust of his post – that over-regulation is poison – is something I agree with wholeheartedly. Moreover, I think David and I probably agree on a number of other things as well. One of them is that we never had free markets. In this sense I see the shaman and virgin analogy as a nice tale but a straw man argument that doesn’t really fit the bill.

Wall Street’s pity party snit fit - In one universe, the bank reform bill likely to be signed into law in the United States is generally regarded by critics as not quite up to the task of delivering on its primary goal: preventing a repeat of the financial crisis that broke the global economy in 2008. In this universe, there are differences among those who believe that the bill, while manifestly imperfect, still represents an improvement on the status quo, and those who dismiss it as irredeemably irrelevant, but there is nonetheless a widespread consensus that resistance from Republicans and moderate Democrats, in combination with a cautious White House, resulted in legislation that is much milder than what would seem to have been called for under the circumstances. Now let's visit another universe, one constructed from anonymous comments relayed to Politico reporters from enraged Wall Streeters. In "Wall St. Plans Payback For Reg Reform," we learn that there is a "great deal of frustration" being felt by bankers towards Democratic politicians who have the gall to come to Wall Street asking for money, after having dared to vote for bank reform

Too Big to Fail = Too Powerful to Pay -Scholars and industry analysts are currently debating whether the Dodd-Frank Wall Street Reform and Consumer Protection Act – passed on June 30 by the House and pending before the Senate – represents meaningful reform. On one issue, however, the outcome is already clear. The largest banks have defeated provisions that would require them to make a meaningful contribution toward the huge subsidies they receive as "too big to fail" (TBTF) institutions. The current financial crisis has underscored the enormous advantages enjoyed by big financial conglomerates. The federal government infused $290 billion of capital into the nineteen largest bank holding companies (BHCs) and AIG. The same institutions issued $235 billion of bonds guaranteed by the FDIC. Those capital infusions and bond guarantees were provided on very favorable terms and represented a large transfer of wealth from the federal government to TBTF institutions. Federal regulators confirmed the TBTF status of the nineteen largest BHCs – each with more than $100 billion in assets – by announcing that the federal government would provide any additional capital those institutions needed to pass their stress test in 2009.

The next big debate in financial reform - Now that we know the shape that regulatory reform is likely to take on both sides of the Atlantic, it is time to focus on the next big question: how do we deal with the differences in the European versus U.S. approaches to reform?  You cannot ignore these since financial transactions will have a tendency to migrate to the least-regulated jurisdictions, leading to all kinds of hue and cry about losing financial competitiveness. This is the familiar problem of regulatory arbitrage.     The choice is clear here.  Either we put our faith in some Basel or other international process that will deliver global convergence on standards and on how to deal with systemic risk issues. Or else we go the national route, and ensure that national financial systems are ring-fenced and protected against regulatory arbitrage and contagion.The first approach remains the conventional wisdom among the financial technocracy.  It receives support in a new report authored by Stijn Claessens, Richard J. Herring, and Dirk Schoenmaker.  Meanwhile, Simon Johnson seems to support the second approach. 

No, Really? (Hard Knocks From Easy Money) - Wow, it took this long for the mainstream media to publish a piece like this? Super-low interest rates also ensure that the big banks, fated to be wards of the government if the new financial reform becomes law, will have generous margins between their borrowing costs and lending revenues. This will enable them to further pad their balance sheets and correct the mistakes of yesteryear. ..There's a flip side, however. It only takes simple math to know that when interest rates are kept low, so are returns on savings and investment. Read that last sentence again. Part of the "strategy", if you will, is to drive money into things that are more dangerous.  But there are plenty of people out there - indeed, perhaps most investors - who have absolutely no business being in anything with material amounts of risk.

New Paper: "Shadow Banking" - For a little light reading: Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley Boesky (now at BofA) of the NY Fed have written a new Staff Report: Shadow Banking It is hard to summarize this paper, but here are a couple of excerpts: At the eve of the financial crisis, the volume of credit intermediated by the shadow banking system was close to $20 trillion, or nearly twice as large as the volume of credit intermediated by the traditional banking system at roughly $11 trillion.... Some segments of the shadow banking system have emerged through various channels of arbitrage with limited economic value ...

Gridlock on the road to serfdom - Not for the first time, Glenn Beck has demonstrated preternatural powers. The Fox News presenter has apparently caused a surge in sales for The Road to Serfdom, the classic 1944 anti-authoritarian screed by the great Austrian-British political economist Friedrich Hayek. Nothing wrong with book recommendations. It’s only fair for the Tea Party wing of the US political mansion to have its own Oprah Winfrey. And better that people buy The Road to Serfdom than, say, anything by Mr Beck.  Still, it’s not clear this outbreak of neo-Hayekianism is a good thing. If it were the great man’s economics getting a fresh airing, fair enough. I’d rather like to hear a good exposition of the views of the Austrian school – that we need a good bust to work off the capacity created during the boom.  In fact, it’s the politics that the Beckian-Hayekians want – specifically taking the charge that state economic planning can be a slippery slope towards totalitarianism. This would be an interesting thesis, had it not turned out to be manifestly wrong.There’s a debate to be had on the boundaries between private and public. But it’s hard to have it with people who look at a state-run Swedish kindergarten and see a boot stamping on a human face forever.

My Tea Party - Now that congress has passed a fake financial reform bill that will accomplish absolutely nothing to correct a recently engrained culture of swindling, I want to start my own tea party. I don't want to associate it with the other tea parties that have already formed because I am allergic to much of the idiot ideology they express - especially the bent for merging Christian fundamentalism with governance.    One of the few things I agree on with the existing tea parties is that the Republicans and Democrats have made themselves hopeless hostages of political money and bargained away their legitimacy. In line with my general belief that American life must downscale or die, I'm not wholly persuaded that federalism can survive in any case - but assuming it will lumber on for a while anyway, the two major parties cannot retain their monopoly on power. Indeed, it is in the natural order of things that this country must periodically endure a realignment of political ideas and political power. This tends to occur during moments of cultural convulsion, and that is exactly the moment we are in as the sun sets on the fossil fuel based industrial extravaganza and we enter a crisis of intense resource austerity.

The Invisible Hand of Doom - Economist Adam Smith coined the “Invisible Hand” to describe the self-regulating nature of the marketplace. Then maybe. Utter nonsense now! This write/pictorial will make the invisible visible.  Summary: 99.9% of economist have NO clue what the “Invisible Hand” is. That is ONE reason they never saw this crisis coming and still are calling for this inane jobless recovery and housing recovery. The Invisible Hand is the hand which corporations use to control our elected clowns. The “Invisible Hand” is the hand that robbed you, charging this $10,400,000,000,000.00 bag of horse manure to you, your children and their children on that credit card known as TaxTreasury.

The Crisis & the Euro - I believe that misconceptions play a large role in shaping history, and the euro crisis is a case in point.  Let me start with the previous crisis, the bankruptcy of Lehman Brothers. As Mervyn King of the Bank of England explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit, to replace the credit that had disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and reestablish macroeconomic balance. The second phase of the maneuver—getting the economy on a new, better course—is running into difficulties.

What do banking crises have to do with consumption? - For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy.  It is more likely to be a vice.  In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth.  Why?  Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital.  For reasons I discuss below, this will have a large adverse impact on private consumption. Let’s go through the major banking systems.  First, the crisis started in the US and, perhaps as a consequence, US banks have already identified a lot of their problem loans and have been the most diligent about rebuilding their capital bases.  They nonetheless still have a long ways to go, even though a large part of the bad loan problem was directly or indirectly transferred to the US government.  By the way, transferring bad loans to the government may be good for the banks but will have the same adverse impact on consumption.  I try to explain why below.

Why Does the Economic News Seem To Be So Different From Your Reality?  - There are numerous vested interests on Wall Street, in Washington, and in the corporate conglomerates who see nothing wrong in distorting information, 'spinning the news,' and sometimes even outright lying, when it comes to reporting on the economic situation. They are promoting a story, and often an agenda. They hide behind the safe harbor provisions of the law, and the subjective aspects of economics. They use euphemisms such as 'talking your book' to describe calculated deception. Straight news reporting is less seen in the mainstream media these days, since solid investigative journalism is considered too costly to the professional corporate management. Much cheaper to allow paid shills to take scripted shots at one another, in the manner of professional wrestling. This is how the voters are informed, and how public policy is shaped. And when it comes to economics, the establishment is firmly in control of the message. The selection of guests is carefully scripted to support a point of view.

‘Liar Loans’ Make a Comeback - As I was reading this, I kept thinking, “Who’s going to buy these loans?” The answer, at least according to this, is nobody. The companies are going to hold these loans on their books: The banks extending these loans are small community and regional outfits attracted to their relatively high interest rates (anything from 25 basis to 200 basis points over a conventional loan’s interest rate). The lenders intend to keep the loans in their portfolios rather than securitize them. Good luck with that as interest rates rise. My guess is that this will cause the FDIC to blow up faster than it would have otherwise.

The Confidence Game: a commentary on the Ackman-MBIA book - For those that do not know financial insurers were a handful of AAA rated companies who guaranteed financial products (mostly municipal and quasi government debt and structured finance) and – through their guarantee – imparted their AAA rating.  All of the financial insurers got into some trouble and a few have failed.  MBIA somehow soldiers on – Ambac has been split by its insurance regulator.  These companies were ground zero of the crisis.   But I will start at the beginning and with an example which is more than a decade old – but which I think explains both the use of and failure of financial guarantors for structured finance.

N.Y. Fed: AIG Put Forth Waiver -The Federal Reserve Bank of New York said Friday that a broad legal release that was part of agreements in 2008 to cancel credit-derivative contracts between American International Group Inc. and various banks was put forth by lawyers for the insurer and accepted by the regional Fed bank. According to a statement Friday on the New York Fed's website, the legal waiver resulted from "AIG's desire for a broader release for itself." The statement and related documents were released partly in response to questions last week by the Financial Crisis Inquiry Commission, a bipartisan panel probing the causes of the crisis.

Tremble, Banks, Tremble - The financial crisis in America isn't over. It's ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector. To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations—Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task. It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

Don't Let Goldman Sachs Off the Hook - Cheap Fed funding is a subsidy during good times, and a bailout during bad times. These subsidies are supposed to spur productive activity. We want Fed money to be fueling business and consumer lending -- we don't want it to be encouraging gambling in the securities and derivatives casinos. Those businesses are risky, they create big horrible asset bubbles and then put taxpayers on the hook for losses when the Fed backs them. That's why securities houses like Goldman and Morgan were never, ever granted Fed funding until the fall of 2008. And Goldman has leveraged that Fed funding for all it's worth. Goldman had to create a commercial bank unit in order to borrow from the Fed, and Goldman chose to house its riskiest businesses in that unit in order to make sure that they would benefit from both cheap Fed funding and the better credit ratings that funding creates. Goldman has about $40 trillion in derivatives operations functioning under its commercial bank unit, which does nothing else but accept money from the Fed. The Fed is funding Goldman's casino, and the economy is getting nothing of value in return.

US Banks Risk 'Untold Problem' as Muni Debt Holdings Swell - Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession. Commercial lenders added more than $84 billion to their holdings since 2003, according to the Federal Reserve, pushing total investments to $216.2 billion at the end of the first quarter. Bank regulators and ratings companies are ramping up scrutiny of banks most at risk of being forced to raise more capital should debt prices slide.

Another bail-out coming, and an empty bag - The pressure on state and muni bonds is increasing, and we haven't even entered the first inning of that one, the players are still tossing balls in the outfield. David Goldman writes in the Asia Times that everyone who needs to be, will eventually be bailed out: The Bank-Insurance-Municipal Daisy Chain (Why the Federal Government Will Bail Out the States and Municipalities)If municipal debt actually defaulted, the capital position of the banking system would be impacted, bank preferred debt might stop paying, and the holders of bank preferred debt–starting with the insurers–would be in serious trouble.For all of Warren Buffett’s dire warnings about municipal finances, the fact is that the federal government can’t let major municipal debtors (at the level of states, for example) go under without also bringing down the banking system and everything else. 

Fear of double dip recession rising among CFOs -A survey of Chief Financial Officers conducted by Deloitte has found that business optimism dropped in the second quarter to the lowest level for a year.  A balance of 24 per cent of CFOs felt more optimistic in the second quarter than in the first, down from a balance of 40 per cent in the first quarter. On average CFOs said there was a 38 per cent chance of a double-dip recession, up from the previous quarter when on average CFOs said there was a 33 per cent chance of a double-dip recession. Around two thirds of CFOs said that the recent "austerity" Budget of tax hikes and spending cuts could damage companies in the short term. However the decline in positive sentiment was also hit by market volatility caused in large part by concerns about eurozone debt. Ian Stewart, Chief Economist at Deloitte, said, "The latest CFO survey paints a picture of concern about growth coupled with improvements in the corporate credit and liquidity environment.

Are Profits Hurting Capitalism? - NYTimes - A STREAM of disheartening economic news last week, including flagging consumer confidence and meager private-sector job growth, is leading experts to worry that the recession is coming back. At the same time, many policymakers, particularly in Europe, are slashing government budgets in an effort to lower debt levels and thereby restore investor confidence, reduce interest rates and promote growth. There is an unrecognized problem with this approach: Reductions in deficits have implications for the private sector. Higher taxes draw cash from households and businesses, while lower government expenditures withhold money from the economy. Making matters worse, businesses are already plowing fewer profits back into their own enterprises. Over the past decade and a half, corporations have been saving more and investing less in their own businesses.

Our New York Times Op Ed on the Corporate Savings Glut -- Yves Smith - Rob Parenteau and I have an op-ed at the New York Times today. Rob’s last post here argued energetically that the now-established trend of the corporate sector to save, as opposed to invest in growth, in advanced economies, and even most emerging economies, was tantamount to capitalists abandoning their traditional role. It reminded me of an article I had written in 2005, “The Incredible Shrinking Corporation,” for the Conference Board’s magazine Across the Board, on how companies were trying to starve themselves into attractive- looking performance though the then-unprecedented act of saving in a time of economic expansion, which is tantamount to disinvestment. Rob’s post made further key points about the macroeconomic implications of corporate savings (given the norm of households savings as well) and made some policy recommendations.  I wish the headline were different (”Are Profits Hurting Capitalism?“), since the article is clearly about the corporate savings glut.  Rob and I thought readers would be interested in the how the draft we submitted compared with the edited version. The draft was titled “It’s the Corporate Savings Glut, Stupid! The Hysteria of Marching to Austeria”:

Economics: Why are firms saving so much? - The Economist - IF THE private sector continues to save hard even as governments try to borrow less, the risks of a double-dip recession rise. Much of the recent increase in private-sector saving comes from businesses. What explains the rise in corporate thrift? How long will it last, and what policies might reduce it? Guest contributions: 8

Economics: Look at the difference between large and small firms | The Economist - THINK it's possible to take both an optimistic and a pessimistic view of why firms have increased their saving. The pessimistic view is that firms see more trouble ahead, a double dip perhaps— trouble that could very well originate in the financial sector, once again making credit difficult to get at a time when firms' need for credit rises. If businesses cannot get the credit they need to carry them through the downturn, then they may not make it to the other side. Thus, the increase in saving is insurance against the prospect of bad times ahead. The optimistic view is that firms are saving now in anticipation of better times ahead. While they aren't ready to invest yet due to residual uncertainty, they believe there is a pretty good chance that good times are just around the corner. When the good times come, they want to have the funds available to move quickly—there will be many profitable opportunities for firms that can move fast. Thus, the increase in saving is due to speculative balances being held in liquid form so that they can be accessed as needed if and when things improve.

Lincoln, McClellan, And Stimulus – Krugman - There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs. Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market.

Why are corporations saving so much? - There has been much recent discussion of the topic and I apologize (to RA, among others) for being late to the party.  Here is one piece by Yves Smith in the NYT and here is an Economist symposium on the topic, with many first-rate contributors.  Overall I am puzzled at the nature of the worry here.  Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses.  They are investing in financial assets. Take a financially conservative corporation, which holds its surplus in the form of T-Bills.  If it bought the T-Bills fresh at auction, that's lending money out to the government and the capital is still deployed.  Isn't that some circles...stimulus?   It's trickier if the corporation buys the T-Bill on the secondary market, but still a) someone else has the money now, and b) this resale opportunity encourages other investors to buy freshly created T-Bills, thus putting capital in the hands of the government.  Of course you might think the government is not spending this money well, but that's the problem of the government, not the corporate surpluses

Two Ways of Thinking - It would be nice if I had evidence to counter this argument with more than Words, but I am sadly not doing research at this point. It is true that companies are hoarding much Cash, whether it equals $1.8 trillion cannot be proven by myself. David Leonhardt continues the tradition of treating Corporations with kid gloves. He wants further persecution of Labor, free Trade, remove Risk for Corporate decisions, higher Tax giveaways to Corporations, and suppression of any profitability in labor Savings by elimination of equitable long-term Interest rates. I do not think this is an Answer to anything, as Corporations are hoarding Cash simply because they spot no sincere Consumer Demand out there for a higher level of Product. The supposition must be that Corporations have become a sinkhole where funds go in, but nothing comes out.

Companies’ cash piles: Show us the money | The Economist - IF THE private sector continues to save hard even as governments try to borrow less, the risks of a double-dip recession rise. A long period of high household saving seems assured in rich countries whose consumers lived off credit and have heavy debt burdens to show for it. But much of the recent increase in private-sector savings comes not from consumers but from businesses. Profits have been more than enough to cover corporate spending in many parts of the rich world, leaving an excess of funds for firms to squirrel away. A lot depends on whether this continues. If cautious firms pile up more savings, the prospects for recovery are poor. Economies will be stuck in the current—and odd—configuration where corporate surpluses fund government deficits. If firms loosen their purse-strings to hire workers and to invest, that will allow governments to scale back their borrowing.

Lack of Business and Consumer Spending Could Stifle Growth and Halt the Recovery - The  Wall Street Journal reported somewhat breathlessly on June 10 that nonfinancial businesses in the U.S. are sitting on $1.84 trillion in liquid assets, or 12.6 percent of the gross domestic product (GDP). The implication is that this money could immediately be mobilized to invest and create jobs. This isn’t quite so, but excessive cash holdings by households, businesses and banks are symptomatic of a fundamental problem plaguing the economy: the low level of monetary velocity.It’s difficult to say what would be a normal percentage for liquid assets, but it’s doubtful that businesses are sitting on much more than $150 billion or so of precautionary liquid assets . If they were to spend these funds on hiring or investment or even dividend payments to shareholders,  it would help the economic situation, but not by all that much. However, to the extent that businesses and households are hoarding cash it reduces the rate of turnover of money in the economy—the number of times dollars are spent in the aggregate—which economists call velocity. In the simplest terms, velocity is the ratio of the money supply to GDP in nominal (money) terms.

Saving and Identities - Let us walk through some accounting identities involving saving. 1. National saving = trade surplus. This, like all accounting identities, is true always, by definition. It is true whether or not saving is a good thing. It is true whether the economy is strong or weak. The principle of blaming the savers would tell you that countries running trade surpluses have sinister motives. Hence, Paul Krugman's view of China and Germany. Next, take the trade surplus as given. For any given level of national saving, we have:2. Net private saving = government deficit.  Net private saving is private saving minus private investment. The principle of blaming the savers would tell you that the private sector is behaving badly when its saving is high. The government only needs to run a deficit because the private sector is being stingy with spending. Next, take both the trade surplus and the government deficit as given. For any given level of net private saving, we have:  3. Net corporate saving = net household investment

Why Isn't Investment Higher? - Truly, we live in a time of mass delusion — or maybe make that elite delusion — where there are lots of things that everyone believes, without a shred of evidence to back that belief. Here’s one more: everywhere you go, you encounter the claim that businesses aren’t investing, they’re just sitting on piles of cash, because they’re worried about future government policies.There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?So is there anything in the data suggesting that we need to invoke fear of government to explain low investment? Not a bit. In the figure below, I show two series. The red line (left scale) is nonresidential fixed investment spending – basically, business investment — as a percentage of GDP, from the BEA. The blue line (right scale) is the output gap — the percentage difference between real GDP and the CBO’s estimate of potential real GDP.

If Anti-Business Attitude Is Hurting Investment, Explain How - In his column this morning, Paul Krugman takes issue with the claim that the Obama administration's anti-business attitude is responsible for the economy's weak investment. Krugman makes the obvious point that, given the sharp falloff in output, investment is not especially weak. However, it would be fair to turn the tables on the people making this argument, where is the evidence that Obama's regulations have hurt investment? Some firms are affected by new regulations more than others, if his regulations are hurting investment then we should see the weakest performance in the firms that are most affected.For example, the health care bill (the most-often cited "job-killer") imposes new requirements on business. This is true and it gives us what in principle would be a testable hypothesis. Are the businesses that are going to be subject to new requirements (mid size firms) performing worse relative to firms that already overwhelming met these requirements (large firms that overwhelming provided coverage) or firms that are not going to be subject to requirements (fewer than 50 workers). None of the "Obama is killing investment crowd" have even tried to sketch this one out. A similar analysis could be constructed with regards to most other regulations.

More evidence on "hoarding cash" - Kathleen Kahle, a professor at the University of Georgia's business school, offers another reason: the growth of high-tech companies, which tend to hold lots of cash. Younger, riskier firms have more difficulty raising money when credit is tight, so they keep more cash on hand, she says. "At the same time, they have a lot of growth opportunities and want to make sure that they have the funds necessary to invest in good projects," she adds. At the end of the second quarter, the 54 biggest information-technology firms held $280 billion -- or 27% of their assets -- in cash, according to the Journal's analysis, a higher percentage than any other industry group. Cash balances grew further in the third quarter for the 34 companies in that group that have reported results. Consider Google. The search giant's cash and short-term investments rose 53% to $22 billion in the third quarter from a year earlier, accounting for 58% of its total assets.The cash provides "operating and strategic flexibility," Google Chief Executive Eric Schmidt told analysts last month. "We're very happy to have it sit in our bank account and earn a modest interest rate." Here is moreApple is also hoarding cash.  This report suggests that hospitals are hoarding cash, as does this report.  Are these sectors weak in aggregate demand and expected aggregate demand?  No, quite the contrary.

Pity the Poor C.E.O.’s, by Paul Krugman, Commentary, NY Times: Job creation has been disappointing, but first-quarter corporate profits were up 44 percent from a year earlier. Consumers are nervous, but the Dow, which was below 8,000 on the day President Obama was inaugurated, is now over 10,000. In a rational universe, American business would be very happy with Mr. Obama. But no. All the buzz lately is that the Obama administration is “antibusiness.” And there are widespread claims that fears about taxes, regulation and budget deficits are holding down business spending and blocking economic recovery.  How much truth is there to these claims? None. Business spending is indeed low, but no lower than one would have expected given widespread overcapacity and weak consumer spending.  After all, why should businesses expand ... when they’re not selling enough to use the capacity they already have? And in case you haven’t noticed, we still have a deeply depressed economy.

Some Economists Pin Growth Hopes on Business Spending - Some economists are purposely avoiding the debate over whether the U.S. is facing a double-dip recession or minimal growth, sticking with forecasts of better-than-3% economic growth in the second half.This is despite the recent run of weak data, including Tuesday’s report from the nonmanufacturing sector, which support the notion that real gross domestic product is slowing from its 3% or so pace of the first half. While I think recent data point to GDP growth slipping closer to 2%, the underlying assumptions of the 3%-plus optimists aren’t off the wall. Their projections, as well as those of some Federal Reserve officials, rely significantly on the business sector to step up as a growth leader, which will require company executives to look beyond the current uncertainty and start spending some of their accumulated cash.

Moody's Downgrades $4 Billion Of RMBS On Worsening Subprime Loans - Moody's Investors Service downgraded $4 billion of securities backed by residential loans issued by Securitized Asset Backed Receivables LLC, as the performance of the underlying subprime mortgages continues to worsen. Moody's has downgraded hundreds of billions of dollars worth of residential mortgage-backed securities in recent months as credit raters have steadily cut ratings on the securities. They have revised the amount of losses expected as their credit quality sours on falling home prices, high unemployment and the slow economy.  The ratings agency said Thursday it downgraded 53 tranches and confirmed the rating of 14 tranches from the 20 RMBS transactions in question.

Wells Fargo ends non-prime mortgage business – Wells Fargo & Co, the fourth-largest U.S. bank by assets, said on Wednesday it is closing more than 600 Wells Fargo Financial offices and will no longer originate non-prime mortgages.The bank said the Wells Fargo Financial offices are no longer necessary after its 2008 acquisition of Wachovia Corp and it will offer mortgage services through its other banking locations. The bank, which is one of the largest mortgage originators in the United States, said it will incur charges of about US$185 million in total related to the closures. About US$137-million, or 2 cents a share, will be reported in second-quarter earnings on July 21 as severance costs, according to the bank’s statement.

To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Some banks have a special technique for dealing with business borrowers who can't repay loans coming due: Give them more time, hoping things improve and they can repay later. Banks call it a wise strategy. Skeptics call it "extend and pretend."A big push by banks in recent months to modify [commercial real-estate] loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks' capital, by keeping some dicey loans classified as "performing" and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier

Bank Extend and Pretend Common in Commercial Real Estate Loans - Yves Smith -The Wall Street Journal today has solid piece of reporting on how banks are avoiding writing down commercial real estate loans. And the article even invoked “extend and pretend” near the top of the piece. The Journal also provides a critical factoid: regulators unwittingly enabled this practice. I had been wondering why we hadn’t seen more reports of CRE related losses. Banking experts like Chris Whalen and Josh Rosner have been talking for some time about the time bombs sitting on the books of medium sized and smaller banks (well big banks too, but CRE is is usually a bigger % of equity at smaller banks). Most of it is construction lending, and construction lending is close to Ponzi finance: interest on the loan is simply paid out of proceeds. Cash is going out the door all through the building process, and builders usually can sign up tenants only when the project is fairly far along. Even worse, CRE projects that go bad often deliver loss severities in excess of 100%. Not only does the lender lose his principal, but he usually has to pay to demolish the project in order to sell the land.

U.S. Commercial Property Sales Trail Six-Year Average - U.S. commercial real estate sales in the first half totaled about a quarter of the average of the previous six years as owners kept properties off the market, impeding investors with record funds for purchases. Buyers and sellers completed $34.2 billion of deals through June, or 26 percent of the average first-half dollar volume since 2004, according to preliminary figures from Real Capital Analytics. The total was about 12 percent of the 2007 peak, when $277.7 billion of properties changed hands in the same period, data from the New York-based real estate research firm show.Sales climbed 58 percent from last year’s first half, when purchases dried up after the U.S. credit crisis and recession sent values tumbling. A dearth of available properties has sparked demand for the few deals being offered, “People are frustrated that not a lot has been trading,”

Commercial Mortgage Backed Security Delinquency Rate Rising Fast - Delinquencies in commercial mortgage -backed securities (CMBS) in the US reached 7.2% in May from 6.9% in April, and more than triple the rate a year ago, according to the analytics firm Realpoint.Realpoint tracks delinquency data on nearly $800bn of CMBS pools for the monthly reports. In May, the total delinquent unpaid balance for these loans reached $57.3bn, a $2.9bn increase from the previous month.The overall delinquency rate of 7.2% is more than three times the 2.2% reported a year ago, in May 2009 and more than 25 times more than the lowest point recorded by Realpoint, the 0.2% delinquency rate in June 2007. By the end of 2010, the total amount of unpaid principal balance could grow between $80bn and $90bn, Realpoint forecasted, and the delinquency rate could reach as high as 12%.

Office Vacancies Keep Climbing - Vacant office space continued to accumulate in the second quarter, the latest indication that businesses aren't planning significant hiring in the near future. Office buildings across the U.S. lost 1.8 million square feet of occupied space in the quarter, pushing the national office vacancy rate to 17.4%, the highest level since 1993, according to New York-based research firm Reis Inc. While the drop in occupied space was much smaller than in previous quarters, analysts said companies' continued reduction of office space meant they still lacked confidence in economic recovery. "The fate of office properties will depend largely on how well the U.S. economy and labor markets fare amid what appears to be a recovery that comes in fits and starts,"

Reis: U.S. Office Vacancy Rate at 17 year high - This graph shows the office vacancy rate starting 1991. Reis is reporting the vacancy rate rose to 17.4% in Q1 2010, up from a revised 17.3% in Q1 (revised up from 17.2%), and up from 16.0% in Q2 2009. The peak following the previous recession was 16.9%. From Bloomberg Office Vacancy Rate in U.S. Climbs to 17-Year High, Reis Says The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis.It appears the rate of increases has slowed.

Shopping centers struggle with vacancy - Vacancies and lease rates at U.S. shopping centers continued to worsen in the second quarter, but the slowing pace of the deterioration hints at a recovery starting in the coming quarters. Vacancies at large malls in the top 80 U.S. markets rose to 9% in the second quarter, up from 8.9% during the first quarter, according to real-estate research company Reis Inc. Mall vacancies have increased steadily for nearly four years as consumers reined in their spending and retailers closed stores and curtailed expansions.

U.S. Shopping Center Vacancies Approach Record High, Reis Says(Bloomberg) -- Vacancies at U.S. neighborhood and community shopping centers moved closer to the highest on record in the second quarter amid signs the economic recovery is losing steam and consumer confidence remains subdued, Reis Inc. said. The vacancy rate at shopping centers rose to 10.9 percent from 10 percent a year earlier and 10.8 percent in the first quarter, the New York-based real estate research firm said in a report today. It was the highest since 1991’s 11 percent. The record for shopping center vacancies since Reis began tracking the data 30 years ago was 11.1 percent in 1990.

CMBS Delinquency Rate Triples From a Year Ago, Passes 7%: Realpoint - Delinquencies in commercial mortgage-backed securities (CMBS) in the US reached 7.2% in May from 6.9% in April, and more than triple the rate a year ago, according to the analytics firm Realpoint.Realpoint tracks delinquency data on nearly $800bn of CMBS pools for the monthly reports. In May, the total delinquent unpaid balance for these loans reached $57.3bn, a $2.9bn increase from the previous month.The overall delinquency rate of 7.2% is more than three times the 2.2% reported a year ago, in May 2009 and more than 25 times more than the lowest point recorded by Realpoint, the 0.2% delinquency rate in June 2007. By the end of 2010, the total amount of unpaid principal balance could grow between $80bn and $90bn, Realpoint forecasted, and the delinquency rate could reach as high as 12%.

Reis: Apartment Vacancy Rates decline slightly -From the WSJ: Apartment Vacancies Fell in Quarter -The national apartment vacancy rate stood at 7.8% at the end of June, according to Reis Inc., a New York real-estate research firm. That was down from the 8% vacancy rate during the first quarter, which was the highest vacancy rate in 30 years. ... Rents gained by 0.7% during the seasonally strong April-to-June period, the biggest quarterly gain in two years. This is still near the record vacancy rate set last quarter. This decline fits with the recent survey from the NMHC that showed lower apartment vacancies.Note: the Reis numbers are for cities. The overall vacancy rate from the Census Bureau was at a near record 10.6% in Q1 2010.

Average Homeowner In Obama Foreclosure Program Deeply Underwater, Drawing Calls From GOP To Cut Off Help - The average beneficiary of the Obama administration's flagship homeowner-assistance program owes their mortgage lender more than $1.50 for every dollar their home is worth, which means they fall into the stratum of homeowners most likely to simply walk away from their mortgages, recent government data show. Citing government data collected through mid-April, the report found that even homeowners who receive lower monthly payments through the administration's Home Affordable Modification Program are still struggling "under water," meaning they owe more on their mortgages than their homes are worth. Moreover, borrowers who are deeply underwater -- like those in HAMP, who average negative 50 percent home equity -- are far more likely to default willingly; that is, to give up on trying to overcome their growing mountains of debt, and just stop paying at all. This revelation underscores the problems with the path taken by the Treasury Department to help homeowners, who merited federal attention only after the government gifted Wall Street banks with hundreds of billions of taxpayer dollars.

Finding gold in them thar foreclosures - At the top of the boom, speculators swarmed cities like Phoenix, buying up houses largely with borrowed cash. Those who didn't sell in time were stung when the market collapsed. Now investors - many buying with their own cash - are back. Since last year, the share of homes bought by investors at daily auctions has multiplied more than fivefold. I know of an individual investor (through a close friend) in the Phoenix area who has bought almost 100 homes over the last 18 months. The investor has shared with me his portfolio. He has only bought single family homes, no condos. His average purchase price was under $35,000 and most of the homes are 3 br / 2 ba.He is renting the homes, many by the room. Yeah, they sound like flophouses! The investor is starting to have a vacancy problem that he attributes to the new Arizona immigration law that takes effect on July 29th.He paid in the low $20,000s for a home he bought last summer that sold for over $180,000 in 2006! That is almost 90% off the peak price (the house sold for $62,000 in 2004, so I'm guessing fraud in 2006 - and maybe in 2004 too).

Law & Order: Mortgage Victims Unit (Starring Fred Thompson) For six years, former presidential hopeful Fred Thompson played Arthur Branch, the gruff, straight-shooting district attorney in the television series Law and Order. Thompson's character had an unflinching commitment to the letter of the law. The same can't be said for a firm that Thompson has been pitching for lately in TV ads: a mortgage company that's landed in hot water in a half-dozen states for allegedly preying on elderly Americans and, in some cases, violating state law. Thompson signed on to serve as the national spokesman for American Advisors Group (AAG). In an ad for the company, Thompson stands in front of a charming white house with an American flag flying out front and sings the praises of a lesser-known mortgage product called a reverse mortgage: "Join hundreds of thousands of other Americans who have used a reverse mortgage as a safe, effective financial tool," he implores viewers.

Bankers Group Reports Fewer Loan Delinquencies - An American Bankers Association report released Wednesday showed fewer U.S. consumers were delinquent on loans, an indication of modest improvements as the economy forges a long haul toward sustained growth. According to the report, bank credit-card delinquencies dropped below 4% — for the first time in about eight years — to 3.88% in the first quarter of this year. Bank card delinquencies were 4.39% in the fourth quarter. In the first three months of the year, the balances on those delinquent bank-issued credit cards dropped 0.92 percentage points to 3.09% from 4.01% in the previous quarter. “People are borrowing less, saving more and building wealth,”

New Loan Delinquencies on the Rise Again - CNBC - Just when you thought things might be turning around, the mortgage crisis takes yet another little dip to the downside. Lender Processing Services just put out its May "Mortgage Monitor," and some promising trends aren't so promising anymore, specifically new delinquencies and cure rates.  While the total delinquency rate rose 2.3 percent, which is not surprising given how much is in the pipeline, the 30-day delinquent bucket jumped 10 percent. That is surprising because the that number had been coming down of late. The LPS data report says that's because the "seasonal improvement period has expired," but I'm not sure normal seasonal patterns really apply to this market anymore.  More likely is that home prices are not rebounding at the expected/hoped for pace, prompting more borrowers who are underwater on their loans to choose not to pay. And the delinquency rate nationwide now stands at 9.2 percent from this particular data set, and with the rise in new delinquencies, it won't be coming down any time soon. How do I know this? Because the report also finds that the "cure rate," which is the rate at which bad loans actually get better, i.e. the borrowers start to pay again, is getting worse.

LPS: Mortgage Delinquencies and Foreclosures increase to 12.38% in May - From Lender Processing Services: LPS' May Mortgage Monitor Report: Increase in Rate of New Delinquencies; Decline in Number of Delinquent Loans Becoming Current The May Mortgage Monitor report released today by Lender Processing Services, Inc. ... shows a 2.3 percent month-over-month increase in the nation's home loan delinquency rate to 9.2 percent in May 2010, and that early-stage delinquencies are increasing as normal seasonal improvements taper off. The report also shows that the average number of days for a loan to move from 30-days delinquent to foreclosure sale continues to increase, and is now at an all-time high of 449 days, resulting in an increase in "shadow" foreclosure inventory. LPS shows 9.2% delinquent and another 3.18% in foreclosure for a total of 12.38%. I'm not sure about the days to foreclosure numbers (other sources show fewer), but they have steadily increased. For delinquency rates I usually use the quarterly report from the MBA.

US Housing Crash; If It Bleeds, It’s Buried; Congress Fiddles While the Economy Burns - Rumours of an economic recovery in the US seem to be greatly exaggerated. The mainstream media, Wall Street, and Washington have expanded their policy of 'extend and pretend' to 'if it bleeds, it's buried. h/t to Michael David White's Housing Story for the charts and the tag line.

30 Year Mortgage Rates fall to Record Low - From Freddie Mac: 30-Year Fixed Rate Mortgage Drops Slightly to Create Another New Low Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.57 percent with an average 0.7 point for the week ending July 8, 2010, down from last week when it averaged 4.58 percent. Last year at this time, the 30-year FRM averaged 5.20 percent. This rate is yet another all-time low in Freddie Mac’s 39-year survey. This graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. The red line is a quarterly estimate from the BEA of the effective rate of interest on all outstanding mortgages (Owner- and Tenant-occupied residential housing).The effective rate on outstanding mortgages is at a series low of just under 6%, but the rate is moving down slowly since so many borrowers can't refinance because they do not qualify (either because the property value is too low or their incomes are insufficient).

MBA: Mortgage Purchase Applications Decrease, Refis increase - The MBA reports: Mortgage Refinance Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 9.2 percent from the previous week and is the highest Refinance Index observed in the survey since the week ending May 15, 2009. The seasonally adjusted Purchase Index decreased 2.0 percent from one week earlier. The Purchase Index has decreased eight of the last nine weeks. “Mortgage rates remained near record lows last week, as incoming data on the job and housing markets were weaker than anticipated. As more homeowners locked in to these low rates, the level of refinance applications increased to a new 13-month high,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “For the month of June, purchase applications declined almost 15 percent relative to the prior month, and were down more than 30 percent compared to April...This graph shows the MBA Purchase Index and four week moving average since 1990.

Falling Mortgage Rates and Refi Mini-Boom - The Mortgage Bankers Association reported this morning that refinance activity increased again:  The Refinance Index increased 9.2 percent from the previous week and is the highest Refinance Index observed in the survey since the week ending May 15, 2009...The refinance share of mortgage activity increased to 78.7 percent of total applications from 76.8 percent the previous week, which is the highest refinance share observed in the survey since April 2009. This graph shows the monthly MBA refinance index (Blue) and mortgage rates from the Freddie Mac Primary Mortgage Market Survey - and the Fed Funds target rate since Jan 1990. Even with the recent decline in mortgage rates, refinance activity is still well below the peak in 2009. The reason is the 30 year mortgage rate is only slightly below the rates of April and May 2010 (4.6% now compared to just over 4.8% in 2009), so for those who refinanced last year there isn't much incentive to refinance now Of course many homeowners can't refinance because they owe more than their homes are worth, or their incomes have declined and they can't qualify.

Walking Away From Million-Dollar Mortgages - NYTimes - The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley. Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic. By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent. Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment. “The rich are different: they are more ruthless,”

Rich Defaulting on Mortgages At Highest Rate - Yves Smith - One has to be cautious in invoking cultural stereotypes. However, when the subject of defaults or mortgage mods comes up here and in other forums, almost inevitably some readers will start off on a bit of a rant: “I pay my mortgage/rent, why should these people get a break?” And these discussions often take a personal tone, as in they resent neighbors getting a break, or they claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down.The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

Yves Smith on the Default of the Rich - She writes about this morning's story in the New York Times: Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low. She slips in an important sentence--that refinanced mortgages lose their non-recourse status.

The Top 1% Stick It To The Banks - The rich are less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest.One in seven homeowners with loan over $1M are in default. That compares to 1 in 12 loans below the $1M mark. This is putting a huge amount of stress on the financial system as 23% of all luxury homes bought as investments are now 90 days or more overdue compared to just 9% of the smaller homes. Don’t think of this as a 1:1 relationship either as the cut-off of $1M means that a single $10M unpaid mortgage above the line is worth 100 $100,000 loans (the national average) that are unpaid below the line so the distortion from a cash basis is close to a level of 100:1, which just so happens to be the difference in the income level between the top 1% and the bottom 99% as well!

Affluent Deadbeats – Krugman - Great piece by David Streitfeld: Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. But it must not be true — everyone in Chicago knows that the housing crisis is the fault of Barney Frank and his do-gooder policies (which he was mysteriously able to impose even though Republicans controlled Congress): 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.

Real Estate Sign of the Times: "Price Reduced" - From the Boston Herald: Boston sellers cut prices - There’s a silver lining for would-be home buyers who missed the April 30 deadline for the $8,000 federal tax credit: Sellers are dropping prices. The average price reduction for a single-family home or condominium in the Bay State last month was 8 percent, or $38,883 off the original asking price, according to real estate search engine In Suffolk County, which includes the cities of Boston, Chelsea, Revere and Winthrop, the price reduction was $43,288, or 7 percent off the listing price.  Also these price reductions are one of the key reasons why a number of deals didn't close by June 30th - the deals just wouldn't appraise at the agreed upon price because identical units are now being offered for less.

Why we must halt the land cycle - Those who do not learn from history are condemned to repeat it. This applies not least to the immense financial and economic crisis into which the world has fallen. So what lay behind it? The answer is the credit-fuelled property cycle. The people of the US, UK, Spain and Ireland became feverish speculators in land. Today, the toxic waste poisons the entire world economy.In 1984, I bought my London house. I estimate that the land on which it sits was worth £100,000 in today’s prices. Today, the value is perhaps ten times as great. So I am a land speculator  In the long upswing (the most recent one lasted 11 years in the UK), they all become rich together, as credit and debt explode upwards. Then, when the collapse comes, recent borrowers, the financial institutions and taxpayers suffer huge losses. This is no more than a giant pyramid selling scheme and one whose dire consequences we have seen again and again. It is ultimately, as Mr Harrison argues, a ruinous way of running our affairs.

Consumer Borrowing Dropped Again in May - Borrowing by U.S. consumers dropped for a fourth straight time during May, as Americans shored up finances amid a tepid economic recovery. Consumer credit outstanding decreased at a seasonally adjusted annual rate of 4.5%, down $9.1 billion to $2.415 trillion, a Federal Reserve report said Thursday. Economists surveyed by Dow Jones Newswires had forecast a $2.0 billion decline. It was the fourth time in a row that borrowing fell. Credit during April was revised to a decline of $14.9 billion from an increase of $954.8 million.The Fed data Thursday said revolving credit, or credit-card use, fell a 20th straight time in May, down $7.3 billion, or 10.5%, to $830.83 billion. Nonrevolving credit fell 1.4%. The category includes loans for cars, tuition, and vacations, among other things. The consumer-credit report doesn’t include numbers on home mortgages and other real estate-secured loans.

Consumer Credit declines sharply in May - The Federal Reserve reports: Consumer credit decreased at an annual rate of 4-1/2 percent in May 2010. Revolving credit decreased at an annual rate of 10-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent. This graph shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 3.9% over the last 12 months. Revolving credit (credit card debt) is off 14.9% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.5% from the peak. Note: Consumer credit does not include real estate debt.Still working down the debt ... also the previously reported slight increase in April was revised to a $14.9 billion decrease in credit.

Consumer Credit: Barf - Nothing good to see here. Consumer credit decreased at an annual rate of 4-1/2 percent in May 2010.  Revolving credit decreased at an annual rate of 10-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent. So non-revolving is now declining again, and the decrease in the revolving credit continues apace. There's absolutely nothing encouraging about these numbers from a standpoint of "recovery".  Remember, all money is debt (that is, is backed by debt issuance) and so is credit; ergo, if credit is contracting then the economy must follow.

Consumer Credit Freefall - EconomPic Data - BusinessWeek details: Consumer borrowing in the U.S. dropped in May more than forecast, a sign Americans are less willing to take on debt without an improvement in the labor market.  Borrowing that’s increased twice since the end of 2008 shows consumer spending, which accounts for about 70 percent of the economy, will be restrained as Americans pay down debt. Banks also continue to restrict lending following the collapse of the housing market, Fed officials said after their policy meeting last month. “The trend in consumer deleveraging is clear as credit has declined 11 of the last 13 months,”. The key in the chart below is the blue line (total). Notice that besides a blip in the early 90's overall levels of consumer debt went one direction for 60+ years and we have never seen both revolving (i.e. credit cards) and non-revolving debt decrease (let alone crash) simultaneously.

Debt collectors sock it to consumers – CNN - Debt collectors are getting desperate and dirty. Harassing phone calls, abusive language and physical violence are becoming a bigger part of business as debt collectors struggle to round up money from people who don't have it. "The American consumer is really hurting and collectors are having to fight harder to get money," said Robert Andrews, a senior analyst specializing in the debt industry at research firm IBISWorld. Complaints of harassment by debt collectors surged 50% to 67,550 in 2009, according to the Federal Trade Commission. And they are on track to jump 13% this year, based on the number of FTC complaints filed in the first six months.The No. 1 complaint is repeated calls, and it is not uncommon for collectors to bombard consumers with back-to-back calls for days, weeks, months and even years. When debt collectors finally get someone on the other end of the phone, they are more likely to use nastier language.

Delinquent loans: Americans missing fewer loan payments, banking group says –A leading bank trade group said Americans are making headway in cleaning up their finances, with borrowers missing fewer payments on credit cards and other consumer loans in the first three months of the year — the third straight quarterly decline. Delinquency rates also fell for home equity loans and credit lines in the first quarter, according to an analysis released Wednesday by the American Bankers Assn. It was the first quarter that home equity loan delinquencies had fallen in two years, an encouraging sign, said James Chessen, chief economist for the banking trade group.

U.S. Love Affair With Credit Cards Cools Off - America’s torrid love affair with credit cards continues to cool off, but it’s still unclear which side — banks or consumers — has decided to take it slow. From 1968, when the Federal Reserve started tracking the data, to its peak in September 2008 the amount of revolving, or credit-card, debt outstanding for U.S. consumers posted a near-uninterrupted rise.  The amount of revolving credit outstanding is 15% lower than the peak level and has posted a monthly decline in each of the last 20 months.On Thursday, the Fed reported that revolving credit declined by $7.32 billion to $830.83 billion in May. The question is: why has it dropped? One explanation could be consumers constrained by the weakest job market in a generation is leading more people to default on their debt. Delinquencies jumped after the onset of the credit crisis at the same time as revolving credit began its contraction. But in recent months the delinquency rate has improved substantially, and yet borrowing continues to decline.

Consumers in U.S. Get Out From Under Debt Burden: Chart of the Day - American consumers have reduced their debt load so much that their reluctance to spend is mainly the result of a lack of confidence, according to Thomas J. Lee, chief U.S. equity strategist at JPMorgan Chase & Co. As the CHART OF THE DAY shows, a ratio of household financial obligations to disposable income fell in the first quarter to the lowest level in almost a decade, according to data compiled by the Federal Reserve. This indicator reflects payments on mortgages, home rentals, auto leases and consumer debt, homeowners’ insurance and property taxes. “Consumers are far less constrained today” than they were during the past few years, Lee wrote yesterday in a report. The first-quarter ratio was 17.4 percent, and he estimated that last quarter’s figure dropped to 17.1 percent.

The Truth About the Consumer - The Federal Reserve reported consumer credit yesterday afternoon. The amount of consumer debt fell for the 15th time in the last 16 months. The dingbats on CNBC use their dire voices to conclude that the American consumer has taken austerity seriously. They are truly cutting back on their credit card spending. . Why is it that supposedly the best financial minds on TV and Wall Street are so stupid they can’t even look at a basic chart, use a calculator and realize that the consumers have not cut one dime of spending? Are they lying on purpose or are they so clueless a 3rd grader could do better analysis? Below is a chart showing the dramatic decrease in the change of consumer debt. Now let’s get real. Consumer debt outstanding peaked in 2008 at $2.56 trillion. One and a half years later it has PLUNGED to $2.42 trillion. The American consumer has ADDED $200 billion of debt in the last 18 months. Yeah the consumer sure has buckled down. \

ISM Non-Manufacturing Index in U.S. Fell to 53.8 in Jun… Service industries in the U.S. expanded in June at a slower pace than forecast, indicating the economy was beginning to cool entering the second half. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, fell to a four-month low of 53.8 from 55.4 in May. The June figure was less than the median forecast of 55 in a Bloomberg News survey. Readings above 50 signal expansion. Orders slowed for a third month and employment declined. Companies such as Bed Bath & Beyond Inc. may find it harder to boost sales without faster job growth as government stimulus wanes. Private hiring last month rose less than forecast, consumer confidence plunged and home purchases fell, indicating the recovery from the worst recession since the 1930s is vulnerable.

Jobs outlook for small businesses may be getting bleaker Intuit Inc., which provides payroll services for small employers, says the nation's tiniest companies had fewer new hires last month than any time since October. To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees. Intuit's data show that small businesses hired just 18,000 additional workers last month. That's still positive territory, but it's less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June.

Obama Shifts to Export-Led Jobs Push - WSJ - Mr. Obama laid out the administration's thinking Wednesday while naming a group of corporate chieftains to a new export-promotion council. The President's Export Council is co-chaired by Boeing Chief Executive James McNerney and Xerox CEO Ursula Burns. Its 20 members include the chiefs of Pfizer, Ford and UPS. "The progress we've made to date isn't nearly enough to undo the damage that the recession visited on people and communities across our country," Mr. Obama said in a speech at the White House Wednesday.  "Ninety-five percent of the world's customers and fastest-growing markets are beyond our borders. So if we want to find new growth streams, if we want to find new markets and new opportunity, we've got to compete for those new customers."

June Employment Report - The good news isn't so good - according to the BLS, the unemployment rate ticked down to 9.5% (from 9.7 in May), but that is an artifact of 652,000 people leaving the labor force. According to the household survey (from which the unemployment rate is calculated), the number of people employed fell by 301,000, and the labor force participation rate declined to 64.7%. That suggests that people may be so discouraged about their employment prospects that they are giving up (to be counted in the labor force, people must either be working or looking for work)..One would hope this would put an end to all the new austerity talk (discussed here by Paul Krugman) and create a sense of urgency about extending unemployment benefits and increasing aid to state and local governments. As David Leonhardt explained in his column last week, we are in danger of repeating the mistakes of 1937

Labour Without Force: Unemployment In America the Economist -THE best that can be said about the June jobs report is that it doesn't signal a return to recession. Total employment fell 125,000, but this was because of an end to some temporary jobs conducting the federal census. Private payrolls rose by 83,000. That's soft, and less than expected, though better than May's revised increase of 33,000.Unfortunately, the guts of the report aren't much more uplifting. The private work week, after rising to 34.2 hours in May, fell back to 34.1 in June. In terms of the amount of labour being used throughout the economy, that's the same as a drop of 300,000 in payrolls. Average hourly earnings actually fell, by 0.1%. That may fan fears of deflation given the already low readings on inflation. I think that's premature. Hourly earnings have been generally rising, albeit sluggishly, and the June drop could be a one-time move. Finally, while the unemployment rate did drop, to 9.5%, an 11-month low from 9.7%, it dropped for the wrong reason: a lot of people stopped looking for work.

Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.In June 2010, the number of unemployed for 27 weeks or more declined slightly to 6.751 million (seasonally adjusted) from a record 6.763 million in May. Because the civilian labor force declined sharply, the percent of long term unemployed set a new record in June (4.39% of civilian labor force). It is possible that the number of long term unemployed might has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue.All categories of unemployment duration increased in June as a percent of civilian unemployment.

The Dismal Science Really Is - Warning: remove sharp objects from the vicinity and pour yourself your favorite adult beverage. This does not make for fun reading.  First, last month’s dismal (there’s that word again) private job-creation number was revised down from 41,000 to 33,000. So in two months, total private job creation is 116,000 jobs. We need 125,000 jobs per month just to keep up with population growth. But it is worse than that. The headline number we look at is from the Establishment Survey. That means they call up existing businesses they know about and ask them how many people are working for them, etc. One of the first things I do when the employment numbers come out is look at the birth/death assessment on the BLS (Bureau of Labor Statistics) web site. Using the birth/death model, the BLS assumes that 362,000 jobs were created somewhere. That is three times the number of jobs in the headlines we read. Those extra jobs were added into the total because that is what the model told them to do. And over a complete business and employment cycle, those numbers will average out to be pretty close to right. But as I said, they can also be misleading in the short term. Let’s look closer at some of the details..

Why Aren’t Businesses Hiring? - Friday's employment report was the second disappointing employment report in a row. It stated the private sector only create 83,000 jobs. This leads to the question -- why aren't more jobs being created? There are four reasons:Capacity Utilization - In other words, the chart of capacity utilization tells us there is a tremendous amount of slack in the economy. Businesses can simply tap some of this unused capacity rather than hire more employees. The number of hours worked dropped during the recession. Companies can simply increase the hours worked by their existing work force before hiring new people.Productivity is still increasing. This means businesses are still getting more and more out of their existing workforce. Because of high unemployment, there is the added benefit of lower wages/salaries. From a business owner's perspective, this is a win/win scenario. Uncertainty: there has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what that means for their bottom line. Until there are firm answers, they will freeze hiring.

Small business sidelined in slow economic recovery - In every recession over the last three decades, it has been America's small businesses — those Lilliputian companies with fewer than 100 employees — that stepped forward, began hiring and pulled the country out of the mire. Not this time.Small firms are on the sidelines, and it's not just because of tight credit from the financial meltdown, as the Obama administration and others have been saying. Rather, a host of factors — some well-recognized and others seemingly unnoticed in the national debate over economic policy — are converging to restrain small-business owners from hiring. Among them:Near-stagnant demand for goods and services as a result of consumers' reluctance to return to their free-spending ways. A disturbing falloff in the creation of new small businesses. The devastation of the real estate market. Uncertainty about the economic outlook at home and abroad.

Insufficient Jobs Set the Stage for Slowdown in U.S. Recovery – (Bloomberg) -- The U.S. recovery is poised to slow in the second half of 2010 after smaller-than-forecast growth in private payrolls for June capped a month of data indicating weakness in industries from housing to manufacturing.Employment fell by 125,000 workers, the first drop this year, reflecting government census cutbacks, while companies added 83,000 to payrolls, Labor Department figures in Washington showed yesterday. Reports last month showed a plunge in home sales, a slump in consumer confidence, cooler manufacturing and less growth in the first quarter. The lack of jobs will curtail consumer spending, which accounts for about 70 percent of the world’s largest economy, and restrain sales at retailers including Barnes & Noble Inc. The rebound from the worst recession since the 1930s faces risks from the European debt crisis and slower growth in China at the same time that fiscal stimulus measures fade.

Nearly 8 million jobs lost, many forever - The recession killed off 7.9 million jobs. It's increasingly likely that many will never come back. The government jobs report issued Friday shows that businesses have slowed their pace of hiring to a relative trickle. "The job losses during the Great Recession were so off the chart, that even though we've gained about 600,000 private sector jobs back, we've got nearly 8 million jobs to go," said Lakshman Achuthan, managing director of Economic Cycle Research Institute. Excluding temporary Census workers, the economy has added fewer than 100,000 jobs a month this year -- a much faster and stronger jobs recovery than occurred following the last two recessions in 2001 and 1991. But even if that pace of hiring were to double immediately, it would take until 2013 to recapture the lost jobs. And the labor market very likely doesn't have years before it gets hit with the shock of the inevitable next economic downturn. "It's virtually certain that the next recession will come before the job market has healed from the last recession,"

A “Temporary” Gap? Let’s Hope So. The “temp jobs lead employment” line (a truism, to be sure) has been floated since that series began to turn up about ten months ago.  And, in fact, we have seen almost a year’s worth of growth out of the temp services series which, admittedly, could go on for a while (if, say, we get a repeat of what we saw in the 90s). But here’s the thing:  Temp jobs are now up 19.6% year over year, a record for the series going back to 1990 (when BLS began tracking it).  Private sector jobs less temp jobs are still down 0.7% year over year.  Historically — and I’ll admit going back only to 1990 isn’t a particularly robust data set — when temp jobs are up over 10% year over year, private sector jobs (less temp jobs) are running in the range, on average, of +2.4% YoY,  not -0.7%.  In the 20 year history of the series, never has the year over year gain been 10% or more while the private sector (ex-temp) has been negative. 

Andy Grove: How America Can Create Jobs - The underlying problem isn't simply lower Asian costs. It's our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called "Start-Ups, Not Bailouts." His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.  Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.  The scaling process is no longer happening in the U.S.

Andy Grove on the Need for US Job Creation and Industrial Policy - - Yves Smith -Andy Grove, who lead Intel to dominance of an extremely competitive, risky industry, has a very important opinion piece at Bloomberg. He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there, no doubt fed by media stories that draw misleading inferences from appealing-seeming case studies (see this New York Times story and Richard Kline’s able shredding in comments yesterday here and here for an example) Only some of Grove’s stature could poke such a stick in the eye of visibly floundering conventional wisdom that nevertheless remains firmly entrenched because it serves those at the top of the food chain very well (it doesn’t hurt that his piece is exceptionally well argued).

Innovation, Scaling, and the Industrial Commons, by Rajiv Sethi: ..Yves Smith ... directed her readers to an article by Andy Grove calling for drastic changes in American policy towards innovation, scaling, and job creation in manufacturing. The piece is long, detailed and worth reading in full, but the central point is this: an economy that innovates prolifically but consistently exports its jobs to lower cost overseas locations will eventually lose not only its capacity for mass production, but eventually also its capacity for innovation:  Bay Area unemployment is even higher than the... national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs... Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The Vanishing American Consumer and the Coming Trade War - Robert Reich - Remember the trade gap? Americans used to be the world’s biggest and most reliable customers – sucking in high-tech gadgets assembled in China, car parts from Japan, shirts and shoes from Southeast Asia, and precision instruments from Germany.With American consumers pulling back, these other economies have also been slowing down. Their unemployment is rising.Last week I attended a conference with global business executives. When I asked them where they expected to find new customers to replace Americans who are pulling back, they all said China and India and quoted me the same number: 800 million new middle-class consumers from these and other fast-developing countries over the next decade.Yes, but. As of now China and India are still relying on net exports to fuel their growth. Even if you think their middle classes will eventually become so big and rich they can buy everything these nations will be able to produce, that doesn’t mean they’ll also buy what the rest of the world produces.

A trade war is worse than “not convincing” - This article by Andy Grove calling for industrial policy to revitalize our economy has been making the rounds in the econ blogs. I am surprised that so many bloggers haven’t taken their kid gloves off with this article. Here’s Rajiv Sethi:I am not entirely convinced myself, and suspect that he may be underestimating the likelihood (and consequences) of cascading retaliatory actions and a collapse in international trade. But the argument must be taken seriously, and anyone opposed to his proposals really ought to come up with some alternatives of their own, And here’s Mark Thoma:I am not convinced either, but the problem of where good jobs will come from in the future is an important concern. If the new jobs that are created are not as good, on average, as the jobs being lost, anything could happen.These are extremely mild semi-rebukes, and ideas like Groves has offered deserve stronger denunciation than that.

Why is the American Jobs Machine Broken?, by Tim Duy: Only one word describes the American labor market outcome of the last decade - abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources - including labor - released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor's share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980's. Why has the American jobs machine failed so spectacularly? This should be the most pressing issue facing economists and policymakers. Are either up to the task?

America needs to make its bad jobs better, by Richard Florida - A growing chorus of commentators argue that the US economy can no longer create meaningful numbers of high-paying jobs, especially for less skilled workers who lack college or more advanced degrees.  There is no question that millions of high-paying jobs have been eliminated and private sector job creation has been anemic. Periods of crisis such as the current one are when new categories of jobs are created as old categories of jobs are destroyed. The key to a sustained recovery is to turn as many of these – as well as existing lower-paying jobs – into better, family-supporting jobs. It has happened before..., the blue-collar jobs we pine for were not always good jobs: we made them good jobs. ... Some of this was due to the power of unions. Most of it was because of the enormous improvements in productivity wrought by improved technologies and management techniques.

Can America improve its bad jobs? - The problem of falling wages for people without a high-school diploma is well presented by Richard Florida, in an op-ed headlined “America needs to make its bad jobs better”: The problem is that on average, service workers earn only half of what factory workers make – and only a third of what professional, technical and knowledge workers are paid. The key is to upgrade these jobs and turn them into adequate replacements for the higher-paying blue-collar jobs that have been destroyed. I’m less impressed with Florida’s proposed solutions, such as they are. He first points to a handful of companies which pay more than average for hourly workers, although they don’t pay anything like the sort of money that blue-collar factory workers can command. But it’s simply a statistical certainty that some companies will pay high wages and be successful, just as others (like Wal-Mart or most hotels) will pay low wages and be successful. Demanding that the entire service sector should gravitate to one particular quadrant is, I think, unhelpful and unrealistic.

Older, more educated workers, have highest length of unemployment - Ann (retired lawyer with economics degree) has obtained some publicly available raw data on the long term unemployed from the BLS Current Population Survey. Ann was able to break down the long term unemployed into two age cohorts, 1) 25 to 45, and 2) 45+.She also broke down the data by four levels of education: 1) no high school degree, 2) high school only, 3) some college or Associates degree, and 4) BA degree or higher.The following table summarizes the data (click on link to see table - it doesn't fit here): Table Long Term Unemployed Generally the more education an individual has, the higher the average length of unemployment.  For the long term unemployed, it is better to be younger - and have less education.

Shrinking Labor Force Masks Deepening Jobless Crisis - Much of the coverage of the June labor market report released on Friday focused on the drop in the unemployment rate, from 9.7 to 9.5 percent, or the 83,000 private-sector jobs created. But the headline numbers hid the reason for the dip in unemployment: not more jobs, but fewer workers. Walker, like 652,000 others across the country, is jobless and has not looked for a position during the past four weeks — and therefore has officially been reclassified as a “discouraged” worker, a person “marginally attached to the labor force,” rather than an unemployed one.“I’ll start looking again when things turn up,” she says. “And my husband is still looking. Both of us are willing to do just about any job at this point.”These discouraged workers are part of a broad, and troubling, phenomenon. During the first four months of the year, 1.7 million workers flooded the job market, heartened by good economic news. But in the past two months, as the recovery has faltered, nearly a million workers have fallen back out.

The Real Tragedy of Persistent Unemployment - Mohamed El-Erian - Almost half of unemployed Americans have been without a job for over six months. The average duration of unemployment, which hit a post-World War II record many months ago, continues to go up. Last month it clocked in at 35 weeks. Unemployment is particularly severe among the young: A quarter of Americans between 16 and 19 years old in the labor market are without a job. . In addition to considering the welfare cost of substantial joblessness, policy makers should keep in mind the following four facts:  First, persistently high unemployment erodes the skills of any labor force, especially when joblessness is a big problem among the young. This reduces future productivity and growth potential.  Second, a high rate of joblessness puts pressure on inadequate social safety nets like the unemployment benefit system. It also exacerbates the strain on government budgets already stretched at both the federal and state levels. Third, stubbornly high unemployment makes those who are employed more cautious. By spending less, they aggravate the economic slowdown. And finally, high unemployment has historically induced companies and countries to become more inwardly oriented.

When policy solutions don't work, America turns to foreign investment and homegrown ingenuity.- The Federal Reserve, so imaginative when it came to saving the financial system, seems to have run out of ideas for dealing with higher unemployment. More than half the stimulus, about $417 billion, has already been spent. Congress adjourned in July without passing an extension of unemployment benefits. And with midterm elections four months away, a new jobs bill seems unlikely. Even as economic momentum flags, headwinds are gathering strength. In January 2011, most of the Bush-era tax cuts are slated to expire; soon after, the Fed is expected to start raising the rates it controls. The combination of higher interest rates and higher taxes is likely to tamp down consumer spending. Thanks to Washington's inaction, writes former Clinton labor secretary Robert Reich on his blog, "we are now slouching toward a tepid recovery that could just as well fall into a double-dip recession, while a large portion of our population suffers immensely."

The Government Pay Bonus - Pay cuts, layoffs and the highest unemployment rates in decades have reignited a debate over the relative treatment of public and private workers. USA Today reported in March that federal workers earn substantially higher wages than private sector employees who work the same types of jobs.White House budget chief Peter Orszag responded that these pay differences merely reflect the superior skills of federal workers, not government largess. Adjusting for education and experience, he said, federal workers make about the same salaries as private workers. Mr. Orszag also correctly pointed out that public and private job categories aren't directly comparable, so we shouldn't necessarily expect them to have the same pay. Nevertheless, salaries are only one part of total compensation. Government employees may also receive more generous health and pension benefits than Americans working for private enterprise. So are federal employees overpaid? Data from the March Current Population Survey (CPS) suggest they are.

Are there jobs but no workers? - I'm trying to make sense out of today's New York Times piece about factories having difficulty hiring the right kind of workers, but I'm having trouble. The basic story we've been hearing for the past few years makes sense: broad sectoral shifts in hiring mean that firms with job openings can't always find good candidates even though the recession has provided them with millions of unemployed workers to choose from. But that's not quite the story the Times is telling. This is a little fuzzy, but at first it sounds as if Ben Venue isn't willing to pay enough to get skilled workers, who typically earn $15-20 per hour. "The problem appears to be that manufacturers don't want to pay the market wage for the skills that they need," says Dean Baker.  But then there's the next paragraph, which sounds like Ben Venue is indeed looking merely for entry level workers who have ninth-grade math abilities. But they can't find them.

How to Make Service Sector Jobs Better - The Financial Times had a forward-thinking comment by Richard Florida, director of the Martin Prosperity Institute at the University of Toronto’s Rotman School of Management. It argues that investment in technology and better management can turn many now low end service sector jobs into better paid and higher quality work.  One key aspect, which the piece glosses over a bit, is that though the 1970s, the benefits of productivity gains were shared among workers, management, and investors. Increasingly, from the 1980s onward, they have increasingly been diverted to upper management and investors/financiers. For Florida’s suggestions to have their intended effect, we need a shift in practice on how profits resulting from productivity gains are whacked up. From the Financial Times:

Attacking unemployment - Unemployment is tragically, stubbornly high — and that’s going to prove devastating not only for the millions of long-term unemployed but also for the USA as a whole, if it continues indefinitely. And it’s not just the Americans without jobs who need a way out: it’s the ones in bad, underpaid service-industry jobs as well. I wrote about that problem on Wednesday and got some fantastic comments in response. And a lot of other people are making similar points these days. Mark Thoma picked up on the same Richard Florida piece that I did and noted that improving productivity is not certain to help: since the early 1980s, productivity has fed through into improved pay only once, briefly, during the dot-com boom. There’s a real risk that American companies will thrive on foreign labor, leaving their home nation to slowly devolve into a land of chronic unemployment and widespread lack of skills.

Can stronger unions and minimum wage laws fix unemployment? - Felix Salmon has a rundown of the proposals to help lower unemployment, and he finds them mostly unsatisfactory. So he has a proposal of his own; increase minimum wage and strengthen unions:Without unions and minimum-wage laws, corporations compete on who can pay the least. With them, they compete on who has the best employees and they invest significantly in those employees. Which is exactly what we want, especially since raising the minimum wage is unlikely in and of itself to increase unemployment visibly.I think this is a bad idea. First, increasing the price you pay for a worker does not on it’s own increase the marginal productivity of that worker or the marginal return of investing in their human capital. The only way this happens is if increasing wages lures higher skilled workers into the labor pool and pushes lower skilled workers out. This is not, I’m sure, what Felix has in mind.

Washington Post Pushes Myths on the Economy - In its article on the June job numbers the Washington Post told readers that: the chances of a strong, self-sustaining expansion that can significantly improve the job market -- which seemed a real possibility during the spring -- are now slim .. It is not clear who saw a "strong, self-sustaining expansion that can significantly improve the job market" as a real possibility in the spring. Certainly the Obama administration did not, nor did the Congressional budget office. The article then asserts, with absolutely zero evidence, that ambiguity about the economic situation is responsible for the gridlock in Congress over further stimulus, which implies that if the data showed a weaker economy that the Republicans and Blue Dog Democrats, who are currently blocking stimulus spending, would somehow be more supportive of it. The article includes no statements from any of these members of Congress or anyone connected with them in any way that would support the claim that their votes on stimulus would change if the economy was weaker. ...

Unemployment: An odd response to the job report - AS MY colleague mentions below, Free Exchange has a closer look at today's jobs report itself. Let's take a closer look at the White House's messaging on the report. Christina Romer, the chair of the Council of Economic Advisors, introduces the numbers as "signs of a gradual labor market recovery." Ezra Klein assesses as follows: Romer's blog post and recent statements from and meetings with administration officials suggest that the White House's broad approach on the economy is to emphasize how much improvement there is, rather than how much needs to be done. That does seem to be the strategy, but I think it's goofy. The average voter is most likely to have job opportunities as a ready heuristic about the state of the economy, not the manufacturing production index. For the White House to frame a fairly depressing report about people's lived experiences as a sign of "continued healing" strikes one of those dissonant notes that we thought Barack Obama, the great communicator, would avoid as president.

Please Don't Talk To Me Like I'm Stupid - The White House this morning: In a month where one might easily be confused by the official jobs numbers... I am not confused. I know how to read. Christina Romer this morning: Today’s employment report shows continued signs of gradual labor market recovery. No, today's employment report shows continued signs of gradual labor market stabilization. This is a point Ezra Klein makes today, and it's well-illustrated by Brad DeLong with a couple of graphs.  We're treading water, not "recovering." But the worst was this graph that showed up in my Facebook feed from the Democratic Party: This is a familiar graph. We've been seeing it for a while, and it illustrates something stark and true about the basis for the current crisis. But 18 months into a Democratic Presidency, with Democrats in control of the House and Senate, I don't want you showing me a graph talking about how bad Bush was. I know how bad Bush was. We all know.

In Part-Time Jobs, Women Out-Earn Men - When it comes to part-time work, the gender wage gap goes the other way: Women generally out-earn men. In the last week, we’ve been plucking choice items from the Labor Department’s latest report on women’s earnings, including one post on the evolving gap between pay for women and men.The numbers in that post were for weekly wages for full-time workers. But some readers questioned whether it was fair to treat all full-time workers as equivalent. Different workers choose to allocate more or less time to their “full-time” careers, decisions driven in part by other commitments like family responsibilities (which still fall primarily, though not entirely, to women). One person might work 60 hours a week and another 35; all things being equal, surely we should expect the former to earn more.Thankfully the Labor Department also reports statistics on typical weekly pay broken down by hours worked, for workweeks ranging from just a handful of hours to over 60 hours. Let’s take a look at the pay gap by these workweek lengths:

Do You Earn More Than Your Parents Did? - The chart above, adapted from a recent Bureau of Labor Statistics report, shows the difference in weekly pay between people with a given education level today and their counterparts from a generation ago. As you can see, most men today earn less than equally educated men in 1979, with the exception of the most highly educated.  The opposite is true for women: Most women today earn more than their equally educated counterparts from 1979, with the exception of the least educated. There are a few forces behind these trends.

The Canary in the U.S. Job Market - We follow the teen jobs scene for one major reason: teens are the most marginal of workers in the U.S. economy. By that, we mean that compared to all older workers, teens are the least educated, least skilled and the most inexperienced members of the U.S. workforce. And unlike older workers, teens can easily disappear from the U.S. workforce, as they often have the option of being full time students while living in their parents' home if their employment prospects aren't good.  Being the most marginal members of the U.S. workforce then, teens are the first in line to be affected by any good or bad developments in the U.S. job market. So much so that what happens in the job market for teens can be taken as a leading indicator for what will happen about a year later in the U.S. economy.  Which brings us to the Bureau of Labor Statistics' June 2010 Employment Situation report, which suggests that things will be taking a rather dramatic turn for the worst in the latter half of 2011. The charts below show what we found when we dug into the report to uncover the teen job situation.

Duration of Unemployment June 2010

The Perilous Problem of the Persistantly Jobless - Rick Stengel has been asking the question: Why won't unemployment stay at around 10%. That is to say, even after the economy pulls out of the recession how do we know that unemployment won't remain where it is today. Perhaps 10% is the new 5%, when it comes to unemployment. We have afterall outsourced many of our manufacturing jobs and some of our service jobs to China, India and elsewhere. My response a year ago or so ago when Stengel started to ask the question was because it can't. I majored in Economics and know from my classes that the long-run frictionless rate of unemployment in the economy is about 5%. Once the economy got a kick-start, that's where the jobs numbers would be headed again rather quickly.We are probably six months or more into the economic recovery and the rate of unemployment has remained stubbornly high. And now others are starting to ask the same question Stengel was asking a year ago

Washington's Odd Jobs Attitude: Why high unemployment is terrible for the economy -Last week, I argued that the Federal Reserve doesn't seem to care much about high unemployment. Apparently, very few other people in Washington do, either. That's one way of interpreting the events of the last week. Congress is adjourning without extending unemployment benefits, in large measure due to repeated Republican filibusters. On Thursday, President Obama gave a major address about … immigration reform. All this on the eve of a jobs report that showed the economy lost jobs in June, due largely to the loss of temporary census jobs. The economy is now presenting a strange dichotomy. Without a healthy jobs market, the recession-shocked consumer won't spend. And yet Washington's response seems to be a collective throwing-up of hands.

Unemployment Benefits Are Getting An Undeserved “Mugging” - Hey, let’s get real: extended unemployment benefits are an effective form of stimulus spending, and although they do add to the short-term deficit, they are not part of the longer-term deficit problem. Nowhere in CBO’s report on the long-term budget outlook will you find different assumptions about unemployment benefits.  No fiscal falcon with a proper balance of economic and fiscal priorities is going to fault you for supporting that extended aid. “As a deficit hawk, I wouldn’t worry about extending unemployment benefits,’’ said Bob Bixby, president of the Concord Coalition. “It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.

Punishing the Jobless, by Paul Krugman - There was a time when everyone took it for granted that unemployment insurance, which normally terminates after 26 weeks, would be extended in times of persistent joblessness. It was, most people agreed, the decent thing to do. Today, American workers face the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks. Yet the Senate went home for the holiday weekend without extending benefits. How was that possible? The answer is that we’re facing a coalition of the heartless, the clueless and the confused. ...By the heartless, I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do — including, or perhaps especially, anything that might alleviate the nation’s economic pain — improves their chances in the midterm elections. Don’t pretend to be shocked: you know they’re out there, and make up a large share of the G.O.P. caucus.

Unemployment Insurance - Why is unemployment insurance (UI) provided by the government, and not by the private sector? To my knowledge, and perhaps surprisingly, economists who analyze UI systems typically don't answer this question. I think the answer is closely related to why a well-designed government-run health insurance program works well. In the UI business, standard problems of moral hazard (behavior of the insured affects the chances of suffering an insured loss) and adverse selection (the insurer has a hard time differentiating bad insurance risks from good ones) are severe. The insurer of unemployment cannot observe how much effort the unemployed put into searching for work, and cannot determine whether the unemployed are excessively choosy in terms of the jobs they will accept. As well, as with private health insurance, a market in private unemployment insurance would likely degenerate, by way of the adverse selection problem, to a state of affairs where only high-risk (for unemployment) workers buy insurance policies, and the high prices of the insurance keep the low-risk workers out of the insurance pool. This argument is far from airtight, though, as we now have to ask why the private market seems to work in terms of auto insurance and homeowners' insurance, but not for health and unemployment. However, let's go on.

Unemployment Insurance, 1: Raj Chetty’s research presented at EPI - Allright, this goes out to the financial engineers in the audience.  How many of you caused a ton of damages in the financial economy because you never really got a solid handle on modeling liquidity in your theories and work?  Don’t feel too bad, because certain academics, economists and government ideologues are going to cause a ton of damages in the real economy by arguing against unemployment insurance without also having a decent theory of liquidity.   People are worried about the bad incentives of unemployment insurance in the abstract, but they are confusing bad work incentives with the effects of “cash-on-hand” (liquidity). So let’s look at some evidence. Here’s two presentations from Raj Chetty at a recent Economic Policy Institute event on the long-term unemployed. He presented his research about where unemployment insurance stands not in a liquidity trap, not in a major recession, not when there are 5+ job seekers per job opening, but in normal times and through the efficiency lens of an economist:

Extending unemployment insurance - There are negative supply-side effects from providing unemployment insurance (UI) benefits.  The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits.  I will start by using the bottom end of that range (0.5). I use 5.0% to represent full employment.  We are 4.5 percentage points above that.  If we did not have expanded UI we would be 4.0 percentage points above full employment.  That means for every 9 people out of work, one is being discouraged from taking a new job because of the expanded benefits (0.5 / 4.5).  Said another way, eight people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a new job.  We have to make a tradeoff between our desire to help those who want a job but cannot find one and those who would choose to stay unemployed while they have extra benefits.

Unemployment Extension Could Boost Jobless Rate - Extending jobless benefits could inflate the official unemployment rate — even though more people aren’t out of work. The government’s unemployment rate counts only workers who say they’re looking for work. To qualify for benefits, a person has to say he or she is looking for work. When benefits were less generous – or simply unavailable – more jobless workers indicated that they had given up looking, and thus weren’t officially counted as unemployed. Michael Feroli, a J.P. Morgan Chase Bank economist, says this phenomenon may have boosted the reported unemployment rate by 1.5 percentage points. Internal Federal Reserve estimates suggest the boost is as much as one percentage point, sparking a debate inside the Fed over whether the official unemployment rate actually overstates the amount of slack in the economy compared to past recessions. But there is no consensus

Unemployment Extension Standoff, Day 37: Mugged By Deficit Hawks - Congress has not reauthorized unemployment insurance for the long-term jobless because Senate Republicans (and Nebraska Democrat Ben Nelson) say the federal budget deficit can't bear another $33 billion. Outside of Congress, fiscal conservatives actually aren't unanimous that holding unemployment benefits ransom is a smart way to reduce the deficit. Take it from Robert Bixby, president of the Concord Coalition, which exists solely to raise the alarm about big bad deficits: "As a deficit hawk, I wouldn't worry about extending unemployment benefits,'' Bixby told Boston Globe columnist Scot Lehigh. "It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.'' The mugging started at the end of May, & ultimately wound up one vote short before Congress adjourned for its July 4 recess.

Automatic for the People - NYTimes -ONE of the saddest lessons of this recession is that the United States has no adequate response for rising long-term unemployment. Contrast this with our policy for combating inflation: the Federal Reserve can always reduce the money supply, no Congressional approval required. There isn’t a comparable mechanism to create jobs or to protect the long unemployed, no contingency plan that kicks in whenever job losses continue to mount.  During this recession, the Fed has tried to fight unemployment by cutting interest rates, but cheap money that no one wants to borrow is not an employment policy. After all, few businesses want to expand and hire new employees, given weak consumer demand. And though priming the pump with government money is the best way to increase demand, Congress has been reluctant to spend enough to set the economy on the right course.  Then there’s the problem of unemployment benefits: Congress must vote on every extension. It wasn’t always this way.

 Don’t expect a full labor-market recovery - Labor market statistics for June 2010 were widely received with disappointment. But it is no surprise that some workers whose jobs ended in this recession will never work again.It has always been clear that there would eventually be some kind of recovery from the 2008-9 recession. After all, falling housing prices and underwater mortgages were not going to last forever. Our population continues to grow, and eventually that population will demand more space in which to live. And worker productivity remains strong.Consumers apparently agreed with this assessment, because they reduced their spending from previous trends much less than employers cut jobs. The chart below shows seasonally adjusted indexes of consumer spending (adjusted for inflation and productivity growth before the recession) and hours worked (adjusted for population growth). For example, a value of 96 for consumer spending means that inflation-adjusted consumer spending was 4 percent below its trend before the recession, and a value of 90 for aggregate hours means that hours worked per American were 10 percent below what they were when the recession began.

Rethinking the geography of American poverty - For decades, suburban living has been synonymous with America’s upper middle class, a stereotype that emerged from the "Leave it to Beaver" era and morphed into today’s gated communities, mega-malls, and million-dollar mansions. But even before the recession, Elizabeth Kneebone says that idyllic American Dream was only one side of the suburban coin. “People have this idea that poverty is this ultra-urban or ultra-rural phenomenon,” says Kneebone, a senior research analyst at the Brookings Institution’s Metropolitan Policy Program. “They think of inner cities or Appalachia, but in reality American poverty is increasingly suburban.” Kneebone, citing a paper she published earlier this year... describes how major metropolitan suburbs saw their poor populations increase by 25 percent over the last decade. That’s almost five times more than America’s largest cities, making them the largest and fastest-growing poverty demographic area in the country. By 2008, large American suburbs were home to 1.5 million more poor people than their primary cities and housed almost a third of the entire nation’s poor

Blacks’ Optimism About Their Standards of Living Tops Whites’ – Gallup - Blacks' ratings on Gallup's Standard of Living Index continue to exceed those for whites, a pattern that has persisted since early 2009. Gallup tracks its Standard of Living Index daily, based on how respondents rate their satisfaction with their standards of living and their assessments of whether they are getting better or getting worse. These Index scores -- reported as monthly averages here -- are usually positive because Americans tend to rate their standards of living more positively than negatively on both counts. Both blacks' and whites' evaluations of their standards of living declined during the financial crisis in 2008, and the Index score for blacks dipped into negative territory in October 2008. Whites' scores remained higher than blacks' throughout 2008.But blacks' evaluations of their standards of living recovered more rapidly than whites', and by February 2009, the score for blacks overtook that for whites and has remained higher ever since. The improvement in blacks' ratings of their standards of living is evident in both items that make up Gallup's Index.

Expect lots of government layoffs at state, local level - Here's another headwind for a sputtering job market: State and local governments plan many more layoffs to close wide budget gaps. Up to 400,000 workers could lose jobs in the next year as states, counties and cities grapple with lower revenue and less federal funding, says Mark Zandi, chief economist for Moody's Layoffs by state and local governments moderated in June, with 10,000 jobs trimmed. That was down from 85,000 job losses the first five months of the year and about 190,000 since June 2009. But the pain is likely to worsen. States face a cumulative $140 billion budget gap in fiscal 2011, which began July 1 for most, says the Center on Budget and Policy Priorities.

How your excise taxes compare to mine - As you may have noticed, most states are finding themselves in fiscal straights. States took in $87 billion less in tax revenue between October 2008 and September 2009 than they did in the prior 12 months, according to the Center on Budget and Policy Priorities. That has led to all sorts of service cuts and tax hikes. This weekend I noticed a big one in New York state: as of July 1, cigarettes cost $1.60 more a pack. No, I wasn't buying cigarettes—they kill you, people—but there was a big sign at my local drug store explaining the change, ostensibly to prevent customers from getting mad at the drug store itself. If I were a smoker, I'm sure I would have already been aware of this change, since cigarettes are now more expensive in New York than anywhere else in the U.S., costing up to $11 a pack. That, along with a conversation I had with John, made me wonder how New York stacks up on other excise taxes—those levied on things like gasoline and beer. Here are some state-by-state comparisons, which, depending on where you live, might make you feel better about how much you're paying in taxes.

Players fear rising risk of US regional government defaults - Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some EuroZone countries. The yield attached to some forms of infrastructure municipal bonds has risen relative to US T-Bonds because of fears that cash strapped local governments in the US will struggle to repay these loans.Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the EuroZone could now infect the US. US states faced budget deficits of US$89B for fiscal Y2011, which began for most of them on July 1, according to the National Conference of State Legislatures. That is after shortfalls of more than US$300B since 2008.

Blaming the Victim Won’t Solve State Fiscal Crisis - Those who are blaming states for their severe budget shortfalls and arguing that Congress shouldn’t provide much-needed assistance until states “clean up their act” (here’s a recent example) are wrong on both counts.The huge gap between what states need and what they have overwhelmingly reflects how badly state income, sales, and corporate tax revenues have collapsed in the recession. In fact, state tax revenues have fallen more in this recession than at any time in at least the past 45 years (the relevant data only go back to 1965).States entered the recession with their largest budget reserves in history, totaling $69 billion or 10.5 percent of their general fund budgets at the end of fiscal year 2007. But the length and severity of the recession has depleted those reserves. In 2012 alone, state budget shortfalls are expected to be $120 billion.

Let Treasury Rescue the States - NYTimes - The lack of coordination within the United States — and, equally important, the failure to recognize the states as macroeconomic players — helps explain our sluggish recovery.  To make matters worse, several states have country-sized G.D.P.’s, but none has the macroeconomic tools of an independent country. Every state except Vermont has some sort of balanced budget requirement that prevents it from weathering a recession by running up big deficits to keep teachers employed, students in college, welfare payments flowing and construction humming. Nor can New York and California stimulate their economies by, say, printing more currency. Instead, states are managing huge budget crises with the only tools they have, cutting spending and raising taxes — both of which undermine the federal stimulus.  That’s why the best booster shot for this recovery and the next would be to allow states to borrow from the Treasury during recessions. We did this for Wall Street and Detroit, fending off disaster. It’s even more important for states.

State Leaders Brace for Bleak Budget Forecasts (PBS News Hour video) JIM LEHRER: The nation's governors are gathering in Boston today for their annual conference. And their major agenda item is the bleak budget forecasts they face...With unemployment still hovering just below 10 percent, most states are being hit with a higher demand for services and lower-than-expected tax revenues. That's led to predictions of a combined states' budget shortfall of as much as $140 billion this fiscal year, and state spending cuts that could cost up to 900,000 public and private sector jobs. To make matters worse, Congress has stalled action on bills worth about $40 billion to help states pay for Medicaid programs and to retain teachers. And the state aid from last year's $787 billion stimulus package is due to run out at the end of this fiscal year.

California tax revenue dips as budget standoff continues - California’s cash balance is “stable today, but could be short-lived,” after dipping $54.6 million — or 0.5 percent — in June, compared to the governor’s May revision. Larger-than-anticipated declines in corporate taxes and sales-tax revenue offset the $333 million, or 6.1 percent, increase in person income tax revenue, State Controller John Chiang said in a news release Friday. Corporate taxes declined $156 million, while sales-tax revenue fell $153 million, or down 7.5 percent and 5.7 percent, respectively. “The governor and Legislature’s lack of urgency in adopting an honest budget could pave the way to a completely avoidable cash crisis later this year,” Chiang said

Are state leaders stalling on budget? (video) The state legislature, technically, still has not approved a final state budget. Both the Assembly and Senate have approved spending bills, but Senate approval of a bill outlining the sources of revenue is still pending. A Syracuse State Senator says even if lawmakers can reach some agreement and put the finishing touches on budget measures soon, there are more battles pending. "The governor's probably going to call everybody back for a new deficit reduction cycle, because the money isn't coming in from the federal government. So this process is going to be ongoing. And what I believe is that the can is being kicked down the street until after November,"

Nevada employers face higher unemployment taxes next year-- Nevada employers could be hit with automatic increases next year in the taxes they pay to provide unemployment benefits for their laid-off workers.Cindy Jones, administrator of the Employment Security Division, said the state now owes more than $450 million to the U.S. Department of Labor and employers could be required by a federal law to pay additional taxes to start paying off the loan. "If a state has loans outstanding for two consecutive years, federal unemployment taxes are increased to employers toward paying back the loans," Jones said Thursday. "It is very likely that Nevada employers will experience an increase in federal unemployment taxes as it appears to be highly unlikely that the loans will be paid back in time to avoid this tax increase."

Kentucky state workers to be furloughed for 6 days-- In a move to help balance the budget, roughly 36,000 state employees will be furloughed for six days this fiscal year, saving taxpayers $24 million, the governor's office announced Friday.It marks the first time in modern Kentucky history that a statewide furlough plan has been required. The six furlough days will include three common days during which state offices will be closed: the Fridays before Labor Day weekend (Sept. 3), Veterans Day weekend (Nov. 12) and Memorial Day weekend (May 27, 2011), the governor's office said. In addition, employees will be furloughed for one day in October, March and June, the last month of the current fiscal year. A news release said agencies will schedule those days to minimize the impact on the public.

Illinois Governor Pat Quinn Gave Raises Averaging 11.4% to 35 Staff Members. - Illinois Gov. Pat Quinn has handed out raises -- some of more than 20 percent -- to his staff while proclaiming a message of "shared sacrifice" and planning spending cuts of $1.4 billion because the state is awash in debt. The Democrat has given 43 salary increases averaging 11.4 percent to 35 staffers in the past 15 months, according to an Associated Press analysis of records obtained under the Freedom of Information Act.
They include a $24,000-a-year bump for the man promoted to shepherd the state through the fiscal storm. Budget Director David Vaught got a 20 percent raise to bring his pay to $144,000 in October when he moved to his new position from Quinn's staff, where he was a senior adviser.Lawmakers, whom Quinn has asked to raise income taxes and borrow billions to meet its obligations for employee pensions reacted with skepticism and anger.

40,000 Illinois State Workers To Get 14% Pay Raises -More than 40,000 unionized state workers got a pay raise last Thursday, bringing to 7 percent the amount they're gotten since last year. These same state employees are in line for another 7 percent by next July 1, all at a cost of a half-billion tax dollars a year. It's more than the virtually bankrupt state can afford, and some Republican lawmakers say the raises need to be rolled back. "I'm outraged," said State Senate Minority Leader Christine Radogno. "It's very difficult to buy this rhetoric that, 'We need to borrow, we need increased revenue,' when these kind of poor management decisions are going on."

"Cash In Advance": Illinois - It is simply unbelievable that the clown-car brigade known as Ill-Noise is still able to find credit for so much as a pencil at the State Capitol:... at the end of June, the backlog of unpaid bills and fund transfers in the illinois office of the Comptroller (ioC) stood at $4.712 billion. The state is broke.  This is about 15% of the entire revenue picture, which is roughly $30 billion.  Note that revenues only declined about 1.2 billion from FY09 to FT10, but the shortfall is four times that amount. If this was a corporation and you were a creditor you'd be in bankruptcy court with an involuntary petition. Nobody in their right mind should be extending one penny of credit to the state.  If you do, and fail as a consequence, including physicians and hospitals, you deserve what you get. You've been told in blunt facts and figures that the state is insolvent.  Anyone with a brain demands cash

Illinois Readies $900M Debt Sale Amid Worst Fiscal Woes Ever --Illinois is expected to sell $900 million in Build America Bonds next week, not long after its comptroller said the state finished its fiscal year in the worst cash position in its nearly 200-year history. The state is scheduled to sell the debt on July 14, having moved the date back a few weeks to let potential investors absorb the state's approved general-fund budget for fiscal 2011. Build America Bonds pay more than traditional municipal bonds, but unlike munis the returns on BABs are taxable. The $24.9 billion state budget, which Gov. Pat Quinn signed on July 1, includes about $1.4 billion in cuts. It relies in part on borrowing to help cover what Comptroller Daniel Hynes estimates to be as much as $6 billion in unpaid bills from the just-finished fiscal year. Illinois will also shuffle funds among departments to whittle down outstanding bills.

Wyoming threatens to sell prime Grand Teton land - For Sale: Two square miles of Grand Teton National Park. Majestic views of the Teton Range. Prime location for luxury resort, home development. Pristine habitat for moose, elk, wolves, grizzlies.Price: $125 million. Call: Gov. Dave Freudenthal.Wyoming is trying to force the Interior Department to trade land, minerals or mineral royalties for 1,366 acres it owns within the majestic park. If the foot-dragging feds don't agree to a deal - soon - Freudenthal threatens to put a For Sale sign on the property.Wyoming has owned the land since statehood in 1890, when the federal government set aside land in new Western states to be mined, logged or leased to raise money for public education. Wyoming kept its so-called "school sections" after Grand Teton National Park was established in 1950.

Build America Bond Sales Decline With Yield Premium at Record  (Bloomberg) -- Scheduled weekly Build America Bond sales fell to the lowest this year as the yield premium demanded by investors in the taxable debt reached a record high.Investors sought 2 percentage points in extra yield for the federally subsidized securities June 30 and July 6, the highest since the Wells Fargo Build America Bond Index started in August. The so-called spread over 30-year U.S. Treasuries has widened 37 percent since touching a 2010 low of 1.42 percentage points on May 6, according to data compiled by Bloomberg. “Investors have had general concerns about muni bonds” that contributed to wider yield spreads,

AP Analysis: Economic stress is easing more slowly -Two-thirds of U.S. counties became economically healthier in May, thanks to more manufacturing jobs in the Midwest and fewer home foreclosures in the Sun Belt, according to The Associated Press' monthly analysis of conditions around the country.Yet the improvement appeared to slow in May compared with April, the AP's Economic Stress Index shows. And concerns are arising that the nation's recovery is losing momentum.Economic stress declined month to month in 33 states in May, aided by lower unemployment. In April, by contrast, stress had eased in every state except two — and in 90 percent of the nation's 3,141 counties.Bankruptcy rates around the nation also inched up in May.The AP's Economic Stress Index calculates a score for each county and state from 1 to 100 based on unemployment, foreclosure and bankruptcy rates. A higher score indicates more economic stress. Under a rough rule of thumb, a county is considered stressed when its score exceeds 11.

US counties confront shortfalls with cuts  (Reuters) - Most U.S. counties are having to cut back on spending on safety and infrastructure in the face of monstrous revenue shortfalls, the National Association of Counties said on Friday. Counties are freezing pay, delaying infrastructure repairs and resorting to layoffs and furloughs due to the cash crunch, the association found in a survey of 800 counties. "Counties large and small are experiencing their worst budget and revenue crisis since the early 1990s," An economic recession that began in 2007 continues to whittle away at county revenues, with more than half of those surveyed saying a drop in sales tax receipts contributed to their current budget shortfalls.

State Deficit for Next Two-Year Budget Swells to $2.5 Billion - Madison — The state's yawning budget hole has swelled to $2.5 billion, underscoring the massive challenge that awaits the next governor and Legislature, a new report shows. The projections by the Legislature's non-partisan budget office show the expected shortfall for the 2011-2013 budget has grown by $462 million from the just over $2 billion that was expected a year ago. It is one of the biggest expected shortfalls over the past decade, nearly as large as the $2.9 billion shortfall that Gov. Jim Doyle faced in his first budget in 2003.

Newark, New Jersey's Booker Says Mayors Face Wrenching Choices  (Bloomberg) -- Newark Mayor Cory Booker, who runs New Jersey’s largest municipality, said U.S. cities will be forced to make “gut-wrenching” decisions to cut as much as 20 percent of their spending in the next year. In Newark, that led Booker to propose firing “hundreds” of city workers last month and to seek concessions from unionized employees to help close a $180 million budget deficit.“Government has to start shifting into this new era that we’re in and dealing with the realities of this,” the mayor said yesterday in a Bloomberg Television interview. He spoke in Sun Valley, Idaho, where he appeared on a media-industry conference panel about the business of running a city. “This is a story not just for the state of New Jersey,” he said. “You’re seeing it in Sacramento. You’re seeing it happen in Albany and you’re seeing it happen all over the U.S.”

City and State Budget Cuts Leave Tall Grass, Weeds - Budget woes are cutting down the ability of states and cities to tend to tall grass and causing safety concerns along roadways across the USA. In some states, cities have been forced to take over mowing that used to be handled state agencies. In Virginia, volunteers are mowing along some roadways. John Townsend, spokesman for AAA Mid-Atlantic, says the organization has been receiving complaints about the tall grass and is concerned for motorists. "When you have overgrown grass that's up to waist-high, that's a safety issue," he says. "In some states it may be years before patches of grass are cut so that will create more dangers at ramps and intersections the institution charged with supervising the money-center banks headquartered in New York.

San Jose considering privatizing its municipal water system - Like a cash-strapped home- owner planning a garage sale to help pay the bills, San Jose city leaders are studying a plan to sell off or lease the city's municipal water system to a private company.The plan, although still in the early stages, could mean a windfall of $50 million or more for the city, although it almost certainly would result in higher water bills for some San Jose residents. "I'm trying to be creative about balancing the budget. This is an obvious potential source of money, and I have to look at it seriously," said San Jose Mayor Chuck Reed on Friday. "I'd like to put it up on eBay and see what we can get," he added, half-joking. "Anybody who is interested, we'll have an open process."

Colorado Springs experimenting with loss of local services - The buses stop running at 6:15 p.m. now, and most streetlights stay dark throughout the night. Three city pools have shut down, and turf is withering in more than 100 parks. What's a city to do when its museums are struggling to stay open and there aren't enough police officers to investigate crimes? Colorado Springs residents have met their city's attempts to get by with less on their own terms. For some, there is anger and lost jobs. For others, there are weary shrugs and mild complaints. And for some, there is a realization that if they want things done, they'll just have to do it themselves.

Budget cuts take food off school tables, but Vacaville still serving at 2 sites - Leaders of the California Association of Food Banks and the California Food Policy Advocates are troubled by the number of children who take part in the Summer Nutrition Programs, often administered by local school districts. According to a recent report by the Food Research and Action Center, almost 80,000 fewer children took part in the program in July 2009 compared to July 2008, a 13 percent decline. The report, "Hunger Doesn't Take a Vacation," said the significant drop-off in summer meal program participation means many low-income children in the state were going without enough nutritious food. It attributed much of the drop-off to cutbacks in state funding for programs -- like summer schools -- that also provide meals. The Summer Nutrition Programs, administered by the U.S. Department of Agriculture, provide meals to children who rely on free and reduced-price school meals during the school year. Summer meals are offered at participating sites, such as public and private schools, city- or county-run children's summer programs or nonprofit programs, with federal funding provided to offset the costs.

State Budget Committee meets to talk cutbacks to health insurance at Indiana schools, colleges - The State Budget Committee will meet Wednesday to discuss a new report outlining possible cost savings if Indiana schools and public universities would join the state's public employee health insurance plan. Senate Appropriation Chairman Luke Kenley chairs the committee and says lawmakers are looking for all ways to stretch tax dollars given the prolonged recession. Kenley says he believes the report will show opportunities for significant savings as lawmakers begin the early stages of creating the state's next two-year budget. Legislation passed in 2009 ordered the independent analysis of health insurance benefits.

Drop-out nation - The GED has grown in popularity since its introduction nearly 70 years ago. It now makes up about 12% of high-school certifications. But the GED is not really a high-school equivalent. The performance of GED takers on a scholastic achievement test may be similar to someone who finished high school. But according to a new paper, GED recipients do not earn more than drop-outs who don't take the exam. The GED takers do have higher rates of college matriculation, but most drop out after only one semester. The problem is high school drop-outs tend to have less self-discipline, are more impulsive and have lower self-esteem and self-efficacy than people who finish high school. A high-school equivalency exam does not fix these non-cognitive deficits.

Fewer Low-Income Students Going to College - Enrollment in four-year colleges was 40% in 2004 for low-income students, down from 54% in 1992, and 53% in 2004 for moderate-income students, down from 59% over the same period, according to a report recently submitted to Congress by the Advisory Committee on Student Financial Assistance. If that trend has continued, low- and moderate-income students who don’t move on to college face an even darker outlook. The unemployment rate for 16- to 19-year olds averaged 17% in 2004, the jobless rate for people over age 25 with just a high school diploma averaged 5% the same year. So far this year, those figures have jumped to 25.8% and 10.6%, respectively. College expenses and financial aid have become increasingly larger considerations for parents and students, driving more qualified students away from enrolling in four-year colleges.

Public Universities Face 'Dramatic' Funding Cuts, Moody's Says (Bloomberg) -- Many public universities face “dramatic declines” in funding and possible ratings downgrades as states cut and delay annual appropriations, Moody’s Investors Service said.States are reducing funding to public universities by as much as 6 percent this fiscal year compared with last, Moody’s analysts led by Dennis Gephardt wrote in a report dated today. Institutions rated A2 and A3, five and six steps below the top grade, face the greatest risk of downgrade, New York-based Moody’s said. “Many U.S. public universities face dramatic declines in state funding on a scale that surpasses past experience,” the analysts wrote. States spent a combined $90 billion on public universities in fiscal 2009, which amounted to about 30 percent of the revenue at the institutions, down from 50 percent two decades ago, according to Moody’s.

Share of College Spending for Recreation Is Rising - American colleges are spending a smaller share of their budgets on instruction, and more on recreational facilities for students and on administration, according to a new study of college costs. The report, based on government data, documents a growing stratification of wealth across America’s system of higher education. At the top of the pyramid are private colleges and universities, which educate a small portion of the nation’s students, while public universities and community colleges serve greater numbers, have fewer resources and are seeing tuitions rise most rapidly. The study of trends in revenues and spending by American institutions of higher education from 1998 through 2008 traces how the patterns at elite private institutions like Harvard University and Amherst College differed from sprawling public universities like Ohio State and community colleges like Alabama Southern.

Private Universities Spend Twice as Much as Publics on Teaching - Private research universities in the U.S. spent twice as much as their public counterparts to teach each student in the 2007-2008 school year, widening a cost gap that can make private colleges unaffordable to students without financial aid. The private institutions, on average, laid out $19,520 for each student for instruction that year, a 22 percent increase from a decade earlier, the Delta Project on Postsecondary Education Costs, Productivity & Accountability, a Washington- based nonprofit research group, said today. Public universities spent $9,732 for each student, up 10 percent in the decade, according to the report. The spending rate in 2008 “may turn out to be a high point in funding for higher education,” the Delta Project said in its report. The recession that began in December 2007 forced colleges to cut budgets, beginning in the second half of 2008, as endowment income fell and states cut subsidies

How Does Online Instruction Compare To “Real” Education? Researchers Can Tell Us… Apparently virtual instruction isn’t as much of an educational armageddon as some people seem to believe…researchers David Figlio, Mark Rush and Lu Yin performed an experiment at the university level and found very modest (and not always statistically significant) effects for in-person versus online instruction. I am trying to be careful to not overgeneralize the results of this study, but I do think that as the world sees more and more that virtual instruction *can* be on par with traditional models, we are likely to see significant change in the education industry. I talk more about this over at The Huffington Post: First it was music. Then it was theater. Now it’s…education? Technology has enabled inexpensive reproduction of a wide variety of media, which has in turn radically transformed the structures of a number of industries. Economists refer to these sorts of industries as “winner-take-all” markets since their key feature is that a few “superstars” serve a large portion of the market

CalSTRS OKs investment plan, warns of liabilities - CalSTRS' investment committee on Friday approved a 10-year investment plan with a goal of returning 60 basis points each year above the system's custom benchmark. Investment committee members questioned whether the goal was realistic given the turbulent economic climate. Christopher Ailman, chief investment officer of the $132.1 billion California State Teachers' Retirement System, West Sacramento, called on consultant Allan Emkin to explain to the board the rationale for the 60 basis points. “It's an aspiration, not an expectation,” Mr. Emkin, managing director of Pension Consulting Alliance, told the board

CalPERS loses big on BP stock - After dropping a quarter of the value of its $200-billion portfolio during the recession of 2008 and 2009, the country's largest public pension fund is posting more big paper losses because of the massive 2-month-old BP oil spill in the Gulf of Mexico.Since April 20, the 58 million BP shares owned by the California Public Employees' Retirement System have plunged in value by $285 million, dropping from $586 million to $301 million, according to an analysis by Bloomberg News.

Pensions weigh options from BP spill (AP) - The exasperation with BP felt by residents of the Gulf states is spreading to shareholders - and some are taking the oil giant to court. Since the Deepwater Horizon drilling rig disaster on April 20, BP shares have lost about $85 billion in value. The toll for institutional investors who hold 79 percent of the company - including public and private pension plans - is around $67 billion. BP's suspension of its quarterly dividend has only exacerbated the damage. At least five individual investor suits have been filed, BP employees are suing over the slide in value of company stock in their 401(k) plans and the New York state comptroller intends to sue over losses to his state's public employee pension fund

NJ Pensions Underfunded $175 billion - A new George Mason University study on public pension systems across the USA says New Jersey’s system will go broke between three and nine years from now without massive reform.“New Jersey’s defined pension systems are underfunded by more than $170 billion, an amount equivalent to 44 percent of gross state product and 328 percent of the state’s explicit government debt,” said George Mason University researchers who used private sector accounting methods instead of the overly optimistic government calculations

States May Face Pension Pressure as New GASB Rules Widen Funding Deficits (Bloomberg) -- States may face increased retirement- fund deficits and pressure to stop skipping pension contributions under proposals being reviewed by the Governmental Accounting Standards Board.Pension-forecasting proposals from the rule-making organization, released June 16, would revise methods for projecting liabilities and investment returns. The changes mean estimated investment income likely will be reduced from current assumptions and unfunded liabilities will increase, Moody’s Investors Service said July 6 in a report. " "Estimates of the gap between the value of U.S. public- pension plans and the amount needed to cover promised benefits range from $500 billion to $3 trillion."

Watch the State of the States - When states created pension plans, there was a path of expected benefit payments associated with them.  The path of funding the payments was more level than the rising curve of the payments, but states paid in less than the funding path, partly because the markets had done so well.  That led them to assume that the markets would continue to do so well, so their path of funding was reduced in the present, but higher in the future.  It also led them to bias negotiations in favor of offering higher future benefits, and less in current wages.This worked well so long as the markets were doing really well, up through 2000.  But once that ceased to be true, the path of expected benefit payments was much higher then before, and steeper going into the future. That is why it will be difficult for the states to get ahead of their funding path shortfalls.  In an era of low interest rates and low market returns, taxes must be raised to now pay real money into the plans, and an increasing amount each year.  So watch the states.  The true picture of the nation is there; they don’t have a lot of wiggle room, and will have a difficult next two decades as the demographics catch up with the underfunding of employee benefit plans.

Republicans And Democrats Lining Up Behind Major Changes To Social Security - Is there a new, bipartisan consensus forming on Capitol Hill about whether (and how) to scale back Social Security benefits? A surprising number of signs point to "yes" -- and that has many progressives looking ahead a few months to what they believe could become a serious fight.Several of the most powerful members of the House -- Republicans and Democrats -- have recently voiced real support for the idea of raising the retirement age for people middle-aged and younger as part of a larger plan to reduce long-term deficits, inching closer to what not too long ago was the third rail of American politics.  The strongest backer of this plan is House Minority Leader John Boehner, who recently told a Pennsylvania newspaper, "I think raising the retirement age going out 20 years so you're not affecting anyone close to retirement, and eventually getting the retirement age to 70 is a step that needs to be taken."

An Increased Retirement Age Solves Nothing Without Real Reform - Many taxpaying Americans are understandably concerned about a congressional leader's trial balloon proposal to hike the normal Social Security retirement age to 70. Millions of Americans over age 55 cannot find suitable full-time work. A higher retirement age may mean more years of trying to get by on marginal employment. Furthermore, working Americans stand to get a smaller return on paid-in FICA taxes if the normal and early retirement ages are raised faster than currently scheduled. That said, Americans are living longer and putting a serious strain on the Social Security system. A failure to make Social Security financially sound could not only break the program but contribute to the economic downfall of the country. 

If a Social Security Annual Report Vanishes into the Forest--I started reading the Annual Report of the Trustees of Social Security in 1997 and awaited its typical March 31st release date each year since with eager anticipation. Well flash forward to 2010. Well a helpful informant advised me that the word was that it would be delayed until April, and then on April 5th it was announced widely that Report Release would be June 30th. Oddly none of this was official, the news just got out in typical Beltway fashion. Come mid June I started referencing the new, new updated release date only to be notified by three different knowledgeable sources that word was out that Report Release would be delayed yet again, perhaps until August.  I find this odd in the extreme, particularly since Social Security is front and center in the news with the ongoing meetings of the Catfood Commission with their strong suggestions that cuts to Social Security are definitely on the table. You would think that repeated delays in the release of this key Report would at least require SOME explanation and that someone in the media might be asking questions.

LA Medicaid providers faces rate cuts (AP) - As the state's Medicaid rolls continue to climb, Louisiana's health agency will have $280 million less in this new budget year to cover the cost of care for patients. Louisiana's health chief says that spells trouble. The Medicaid budget for the fiscal year that began last week stands at $6.5 billion down from $6.78 billion for the fiscal year that ended June 30th. The budget requires reduced payments to physicians, hospitals and other providers of health care for the 1.28 million residents enrolled in Medicaid. State Department of Health and Hospitals Secretary Alan Levine says the rate reductions go into effect August 1st. Levine tells The Advocate that his staff is focusing on how the lower payments may affect the willingness of providers to care for Medicaid patients.

Backfire at “America Speaks” Propaganda Campaign vs. Social Security and Medicare - Yves Smith - For those who did not catch wind of it, the Peterson Foundation, which has long had Social Security and Medicare in its crosshairs, held a bizarre set of 19 faux town hall meetings over the previous weekend to scare participants into compliance and then collect the resulting distorted survey data, presumably to use in a wider PR campaign. It’s important to keep tabs on this propaganda effort, since its big budget (the Foundation has a billion dollars to its name), means it will keep hammering away on this topic. But it appears that they overestimated how much public opinion expensively produced and stage-managed presentations can buy. Several Web accounts by participants have discussed the format of the meetings and the various ways the Peterson crowd tried to stack the deck : David Dayen at FireDogLake, Lambert Strether (here, here, here, and here), and Suzie Madrak. But the most serious salvo came from Benjamin Page and Lawrence Jacobs, who produced a working paper discussing the considerable shortcomings of “deliberative forums” like AmericaSpeaks.

Raising the Retirement Age -- Via Ezra Klein, Here's a chart from Larry Mishel that's pretty astonishing. It shows that since 1972 the life expectancy of men with low incomes has increased by two years while life expectancy for men with high incomes has increased by more than six years. That fact that the haves are healthier than the have-nots doesn't surprise me, but the magnitude of the difference is pretty stunning.The context here, unsurprisingly, is Social Security and whether we should raise the retirement age. Obviously, increasing the retirement age to, say, 70, is a much bigger deal for someone likely to live to 79 than it is for someone likely to live to 85. In my book, this is yet another reason not to try to balance Social Security's books by changing the retirement age dramatically.And we probably don't have to. There are plenty of other ways we could do it instead. And if we do do it, this chart suggests a couple of things: (a) the change should be modest (maybe going from 67 to 68) and (b) it should be accompanied by an explicit acknowledgement that disability retirements will be routinely available at the same age as now to workers who perform body-draining physical labor.

Retirement Age Follies - As I’ve said before, if we’re going to cut spending on retirement programs then it makes much more sense to reduce Medicare outlays by $1 than to reduce Social Security benefits by $1. Social Security benefits can be used to buy health care, and reducing Medicare spending could reduce system-wide health care costs. What’s more, if we’re going to cut spending on retirement programs then such cuts should be broadly shared and not exclusively inflicted on younger people. Such moves are both fairer and more credible. Last, if you want to cut Social Security benefits you should just cut Social Security benefits. Reducing outlays via the mechanism of a higher retirement age is going to mean that the incidence of the cuts falls most heavily on people with physically taxing—or simply boring and annoying—jobs. It’s one of the most regressive possible ways of trimming spending. -, a new online portal where anyone can go to find insurance options in their state, went live. It's a very handy resource for information that used to be difficult to find. It's available to help millions who need insurance find it, and as a resource for those who want to shop around for new options or find out their new benefits under the new law.. States are starting to create new insurance pools for hundreds of thousands of people with serious medical conditions who had previously been unable to get insurance. Federal grants to help with setup are on their way to states right now.  In June, 80,000 checks were mailed to seniors to help with prescription drug costs not covered by Medicare.

New RNs find job market tight - Even as a national nursing shortage looms, many newly graduated registered nurses can't find jobs because the recession has delayed retirement of experienced nurses, regulators and health care associations say.Those who find work often can't get the better-paying hospital positions they'd hoped for and instead are turning to nursing homes, home health care or other settings, says Carylin Holsey, president of the National Student Nurses' Association. An advisory for new grads published by the association warns that the market is "flooded" with experienced RNs who have come out of retirement, delayed retirement or gone from part-time to full-time employment because of the recession.

Big Pharma Research Cost Defense of High Drug Prices Debunked in Study - Yves Smith - A new and interesting line of attack has been opened against Big Pharma’s defense of its high US prices and its ongoing attacks on Europe and other countries that negotiate discounts. US drugmakers have contended that the rest of the world is effectively free-riding on US research, and that its inability to charge higher prices outside the US limits funding of R&D (ahem, have we forgotten the fact that most really big ailments already have treatments of some sort, making it much less likely that anyone will find a new blockbuster drug?).But a more granular look at drug pricing within the US shows that drugmakers offer enough discounts here to undermine their attacks on non-US health schemes. And the foreign drug regimes at least assure that everyone in the population is on the same footing, while here, the highest prices fall on those either outside health care plans or in ones without favorable drug pricing, so the burden of higher prices falls disproportionately on lower income people. From the Financial Times:

How Medical Suppliers Block Innovation, Elevate Costs - A well-intentioned move by Congress in 1986, followed by another one in 1996 converted Group Purchases Organizations (non-profit collectives formed by medical facilities that hoped to keep a lid on prices by banding together to make bulk purchases of supplies and devices at a discount) in for profit quasi-monopolies that now has a near total stranglehold on the medical device market in the USA.Needless to say that all the negative consequences of such a state of affairs (stifling of innovation, reduced competition, impossibility to access the hospital markets for smaller players, excessive prices paid by…us!, avoidable pain and mortality) has happened and is still happening, despite congressional inquiries and court cases. It is a long, but very illuminating article about the inner workings of an oligopoly that is out there to stick it to all of us, make health care costs even more egregious than they are now, and harm patients by choking life-saving innovations. Of course, the fuckheads in Congress cannot be bothered to reverse their mistakes, since there is money for them too, in the form of this legalized bribery called campaign contributions.

U.S. Chamber of Commerce: Markets in Everything: Political Deniability Edition -The Washington Monthly’s piece on the US Chamber of Commerce has a killer quote. It also established a branch of a front group, the Campaign for Responsible Health Reform, and hired a Little Rock Republican strategist to run it. The strategist, Bill Vickery, told me that his activities were “backed solely” by the Chamber. In other words, a large part of what the Chamber sells is political cover. For multibillion-dollar insurers, drug makers, and medical device manufacturers who are too smart and image conscious to make public attacks of their own, the Chamber of Commerce is a friend who will do the dirty work. “I want to give them all the deniability they need,” says [US Chamber of Commerce President and CEO] Donohue. That deniability is evidently worth a lot. According to a January article in the National Journal, six insurers alone—Aetna, Cigna, Humana, Kaiser Foundation Health Plans, UnitedHealth Group, and Wellpoint—pumped up to $20 million into the Chamber last year.

There's Probably More Than One Road to Serfdom -Maxine Udall - It seemed reasonable to assume that all smokers were fully informed about the contents and risks of the product they were consuming. The link to lung cancer had been pretty well established since the mid 1950's (see here and here, for example). Then I read David Kessler's book, A Question of Intent: A Great American Battle with a Deadly Industry .  I discovered that tobacco manufacturers had lied about the risks of smoking, deliberately attempted to cast doubt on consistent scientific findings of those risks, added substances to cigarettes that were designed to increase nicotine delivery and thereby addiction, understood that they were marketing an addictive substance, and were deliberately attempting to recruit younger people to smoke.(For a good review of tobacco industry documents pertaining to marketing and pricing strategies, see this article.) Issues of consumer sovereignty and "personal freedom" become more difficult when information provided by a manufacturer about the potential harms associated with consumption of a good is intentionally distorted or when the good is addictive. Marketing an addictive substance to youth (who are notoriously myopic when it comes to evaluating potential future (bad) states of the world) surely deserves a special place in hell, yes? 

The Business Cycle and Health Behaviors - In this paper, we take a structural approach to investigate the effects of wages and working hours on health behaviors of low-educated persons using variation in wages and hours caused by changes in economic activity. We find that increases in hours are associated with an increase in cigarette smoking, a reduction in physical activity, and fewer visits to physicians. More importantly, we find that most of the effects associated with changes in hours can be attributed to the changes in the extensive margin of employment. Increases in wages are associated with greater consumption of cigarettes.

Mens sana in corpore sano - Disease and intelligence - the Economist - Places that harbour a lot of parasites and pathogens not only suffer the debilitating effects of disease on their workforces, but also have their human capital eroded, child by child, from birth. Christopher Eppig and his colleagues make their suggestion in the Proceedings of the Royal Society. They note that the brains of newly born children require 87% of those children’s metabolic energy. In five-year-olds the figure is still 44% and even in adults the brain—a mere 2% of the body’s weight—consumes about a quarter of the body’s energy. Any competition for this energy is likely to damage the brain’s development, and parasites and pathogens compete for it in several ways. Some feed on the host’s tissue directly, or hijack its molecular machinery to reproduce. Some, particularly those that live in the gut, stop their host absorbing food. And all provoke the host’s immune system into activity, which diverts resources from other things.

Unconscious Will Sways Actions, Desires, Say Researchers – TIME - Studies have found that upon entering an office, people behave more competitively when they see a sharp leather briefcase on the desk, they talk more softly when there is a picture of a library on the wall, and they keep their desk tidier when there is a vague scent of cleaning agent in the air. But none of them are consciously aware of the influence of their environment. There may be few things more fundamental to human identity than the belief that people are rational individuals whose behavior is determined by conscious choices. But recently psychologists have compiled an impressive body of research that shows how deeply our decisions and behavior are influenced by unconscious thought, and how greatly those thoughts are swayed by stimuli beyond our immediate comprehension.

Now scientists read your mind better than you can (Reuters) - Brain scans may be able to predict what you will do better than you can yourself, and might offer a powerful tool for advertisers or health officials seeking to motivate consumers, researchers said on Tuesday.They found a way to interpret "real time" brain images to show whether people who viewed messages about using sunscreen would actually use sunscreen during the following week. The scans were more accurate than the volunteers were, Emily Falk and colleagues at the University of California Los Angeles reported in the Journal of Neuroscience."We are trying to figure out whether there is hidden wisdom that the brain contains," Falk said in a telephone interview. "Many people 'decide' to do things, but then don't do them," But with functional magnetic resonance imaging or fMRI, Falk and colleagues were able to go beyond good intentions to predict actual behavior.

Looks Great, Less Nutritious? - Eating all your vegetables was a lot better for you in the '50s. Store-bought veggies weren't as pretty back then, but according to USDA data, they were packed with a lot more nutrients than their modern counterparts. The likely reason for the nutritional drop is that hybrid crops are often bred for size and color, not nutrients. Below, the stats for a few crops that have gone to seed.

"How Goldman Gambled on Starvation" - This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.  It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."Most of the explanations we were given at the time have turned out to be false. It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent.

Europe Seeks to Ban Food From Clones The European Parliament asked on Wednesday for a ban on the sale of foods from cloned animals and their offspring, the latest sign of deepening concern in the European Union about the safety and ethics of new food technologies.The chamber, meeting in Strasbourg, France, also called for a temporary suspension of the sale of food containing ingredients derived from nanotechnology, which involves engineering substances down to very small sizes. Members were voting on legislation that would have regulated the sale of foods based on new production processes, including cloning. That legislation would have required companies to ask permission to market food derived from cloned animals.

'Business as usual' crop development won't satisfy future demand -Although global grain production must double by 2050 to address rising population and demand, new data from the University of Illinois suggests crop yields will suffer unless new approaches to adapt crop plants to climate change are adopted. Improved agronomic traits responsible for the remarkable increases in yield accomplished during the past 50 years have reached their ceiling for some of the world's most important crops.  "Global change is happening so quickly that its impact on agriculture is taking the world by surprise," said Don Ort, U of I professor of crop sciences and USDA/ARS scientist. "Until recently, we haven't understood the urgency of addressing global change in agriculture." The need for new technologies to conduct global change research on crops in an open-field environment is holding the commercial sector back from studying issues such as maximizing the elevated carbon dioxide advantage or studying the effects of ozone pollution on crops.

Study: If California legalizes marijuana, prices could drop up to 80 pct - A study released Thursday by the Rand Corporation claims that marijuana prices in a post-legalization California could drop by up to 80 percent, placing some of the most delicately cultivated buds in the world at less than $40 an ounce.An initiative that would legalize California's most valuable cash crop will be on the state's Nov. 2010 ballot. Should it pass, individual counties and municipalities would be able to opt in or out of the legalized system; those which opt in would be given additional tax and enforcement options, and residents would be allowed to transport up to one ounce and grow plants in a five-foot-by-five-foot area. Similarly, State Assemblyman Tom Ammiano (D-San Francisco) has been pushing forward with a bill that would legalize marijuana state-wide and place a $50-per-ounce tax on all sales. He estimated tax revenues on sales alone would come to $1.5 billion in the first year. Rand researchers estimated a tax boon ranging from $650 million to $1.49 billion.

How plants get by when pollinators vanish - Bodbyl-Roels planted 1600 monkey flower plants in a field and the same number in a greenhouse where they would be isolated from their normal pollinator, the Bombus bumblebee. She then let the plants grow undisturbed for five generations. Those that had been forced to self-fertilise looked quite distinct from pollinated plants, with smaller flowers in which the female and male organs were much closer together, Bodbyl-Roels told the conference. She says she has identified regions of DNA that are linked to these physical changes. Crucially, when she looked at how much seed the plants produced – a measure of their ability to reproduce and therefore survive – she found that although seed production in isolated plants crashed for the first three generations, it then increased again. By the fifth generation it was close to the same level as in pollinated plants.

Tuna's End - What was in the water that day was a congregation of Atlantic bluefin tuna, a fish that when prepared as sushi is one of the most valuable forms of seafood in the world. It’s also a fish that regularly journeys between America and Europe and whose two populations, or “stocks,” have both been catastrophically overexploited. The BP oil spill in the Gulf of Mexico, one of only two known Atlantic bluefin spawning grounds, has only intensified the crisis. By some estimates, there may be only 9,000 of the most ecologically vital megabreeders left in the fish’s North American stock, enough for the entire population of New York to have a final bite (or two) of high-grade otoro sushi. The Mediterranean stock of bluefin, historically a larger population than the North American one, has declined drastically as well. Indeed, most Mediterranean bluefin fishing consists of netting or “seining” young wild fish for “outgrowing” on tuna “ranches.”

Oil Spills Raise Arsenic Levels in the Ocean -  Oil spills can increase levels of toxic arsenic in the ocean, creating an additional long-term threat to the marine ecosystem, according to research published July 2 in the journal Water Research. Arsenic is a poisonous chemical element found in minerals and it is present in oil. High levels of arsenic in seawater can enable the toxin to enter the food chain. It can disrupt the photosynthesis process in marine plants and increase the chances of genetic alterations that can cause birth defects and behavioural changes in aquatic life. It can also kill animals such as birds that feed on sea creatures affected by arsenic.

Replenishment of fish populations is threatened by ocean acidification - There is increasing concern that ocean acidification, caused by the uptake of additional CO2 at the ocean surface, could affect the functioning of marine ecosystems; however, the mechanisms by which population declines will occur have not been identified, especially for noncalcifying species such as fishes. Here, we use a combination of laboratory and field-based experiments to show that levels of dissolved CO2 predicted to occur in the ocean this century alter the behavior of larval fish and dramatically decrease their survival during recruitment to adult populations. Altered behavior of larvae was detected at 700 ppm CO2, with many individuals becoming attracted to the smell of predators. At 850 ppm CO2, the ability to sense predators was completely impaired. Larvae exposed to elevated CO2 were more active and exhibited riskier behavior in natural coral-reef habitat. As a result, they had 5–9 times higher mortality from predation than current-day controls, with mortality increasing with CO2 concentration. Our results show that additional CO2 absorbed into the ocean will reduce recruitment success and have far-reaching consequences for the sustainability of fish populations.

Oceans facing 'irreversible' deterioration, report says - A sobering new report warns that oceans face a "fundamental and irreversible ecological transformation" not seen in millions of years as greenhouse gases and climate change affect temperature, acidity, sea and oxygen levels, the food chain and possibly major currents that could alter global weather. The report in Science magazine doesn't break a lot of new ground, but it brings together dozens of studies that paint a dismal picture of deteriorating ocean health.  "This is further evidence we are well on our way to the next great extinction event," said Ove Hoegh-Guldberg, director of the Global Change Institute at the University of Queensland in Australia and an author of the report

Is Climate Change Worth Tackling? A Reply To Jim Manzi -  Jim Manzi has written a long riposte to Al Gore on the subject of climate policy. It's a thoughtful essay that's very much worth reading in full, but if you're pressed for time, here's Manzi's conclusion: "[A] massive carbon tax or a cap-and-trade rationing system would likely cost more than the damages it would prevent." Not surprisingly, I disagree with this and want to make a few points in response.  Manzi bases his argument on his reading of the IPCC's 2007 Fourth Assessment Report. According to the IPCC's own estimates, he points out, a temperature rise of 4°C can be expected to reduce global GDP by about 3 percent in 2100. And on the flip side, the IPCC pegs the cost of keeping carbon concentrations in the atmosphere below a "safe" level of 450 parts per million at around 6 percent of GDP. And so, Manzi concludes, mitigation probably isn't worth it. (To be fair, he has elsewhere expressed interest in a small carbon price to fund clean-technology research, so he's not in the "do-nothing" camp.)

John Kerry: Why I won’t back down on climate change - "Climate instability and our oil addiction present immediate, direct threats to America's national security." -  A carbon-pricing plan will decrease our dependence on foreign oil, create American jobs, lower energy bills, and protect our environment. This will be the measure of a real bill, and I’m prepared to fight to get this done, following the strategy Winston Churchill laid out at the outbreak of World War II: “Never give in, never give in — never, never, never, never.”

CBO boosts climate bill - Senate backers of a long-shot bid to pass legislation with greenhouse gas caps got some fresh help Wednesday when the Congressional Budget Office reported that one high-profile proposal would help curb the federal deficit by about $19 billion over the next decade.  The CBO analysis of the American Power Act, championed by Sens. John Kerry (D-Mass.) and Joe Lieberman (I-Conn.) found that government revenues would grow by about $751 billion from 2011 to 2020 if the bill became law. By contrast, the legislation would create direct spending of $732 billion over the same 10-year period. Authors of the proposal called the CBO report a “powerful message” ahead of a floor debate next month. They are still searching for a formulation that will draw 60 votes.

Obama May Back Down on Carbon Regulation Deadline to Court Republicans - How much is President Obama willing to compromise with Republicans in order to produce an energy bill this month? A GOP senator present at Obama’s Cabinet Room meeting to discuss energy on Tuesday said that Obama appeared prepared to postpone one of his most serious threats to the country’s top emitters of greenhouse gases in order to bring a handful of Republicans on board. Alaska Senator Lisa Murkowski, one of seven Republicans who attended the meeting, said that after several senators explained their concerns about the Environmental Protection Agency’s plan to begin regulating top emitters in January, Obama appeared to concede that the deadline could be flexible. “Well, we may have to push EPA back a little bit,” he told the group, according to Murkowski, suggesting that the president may be willing to appease key Republicans in return for their votes on the climate bill.

On climate change, let cool heads prevail - We also know, thanks to the National Oceanic and Atmospheric Administration, that "the combined global land and ocean surface temperature" in May was the warmest on record. In fact, NOAA reported, the whole period from January through May, on average, was the warmest since recordkeeping began in 1880. There really isn't much disagreement among scientists about whether the climate is warming. For the past 100 years or so, we have precise temperature records to compare with today's measurements. For previous centuries, we have indirect but compelling evidence that the world is getting hotter. Scientists understand how molecules of carbon dioxide act to trap heat. They know -- not through inference but from direct measurement of air bubbles trapped long ago in Arctic and Antarctic ice -- that there is more carbon dioxide in the atmosphere now than at any time in the last half-million years, perhaps the last million years. The simplest and most logical explanation of why there's suddenly so much carbon in the air is that humans have put it there by burning fossil fuels.

New clean air rule to help tame coal plant monster - Yesterday, the Obama administration proposed a sweeping plan to reduce power plant emissions that cross state lines and kill tens of thousands of Americans every year. The proposed Clean Air Transport Rule replaces the Bush administration’s so-called “clean air interstate rule” (CAIR) that was shot down by the courts because it permitted so much interstate emission trading that even some power companies filed suit. A federal court ordered EPA to fix the shaky legal grounds of the Bush plan. Power industry pollution remains so pervasive — and so often blows from one state to another — that it basically handcuffs state efforts to reduce pollution within a state’s borders.

Even without interstate trading ...... the benefits of the transport rule are way higher than costs. From the Transport Rule factsheet [pdf]: The proposed rule would yield more than $120 to $290 billion in annual health and welfare benefits in 2014, including the value of avoiding 14,000 to 36,000 premature deaths. This far outweighs the estimated annual costs of $2.8 billion. Specifically: The emissions reductions from this proposed rule would lead to significant annual health benefits. In 2014, this rule would protect public health by avoiding:

  • 14,000 to 36,000 premature deaths,• 21,000 cases of acute bronchitis,
  • 23,000 nonfatal heart attacks,
  • 26,000 hospital and emergency room visits,
  • 1.9 million days when people miss work or school,
  • 240,000 cases of aggravated asthma, and
  • 440,000 cases of upper and lower respiratory symptoms

It's like smaller hot dogs at lower prices - When Sen. Lindsey Graham recently declared cap and trade “dead” he may have been more right than he realized. He was referring to the political prospects for carbon pricing in this Congress, but cap and trade has been the tool of choice for limiting emissions of other pollutants—like sulfur dioxide and nitrous oxides—for almost 20 years. The EPA proposed a rule yesterday that could sharply limit the role of trading in markets for those pollutants. The proposed “transport rule” would replace the existing Clean Air Interstate Rule (CAIR). Both are aimed at reducing emissions that affect air quality not locally, but in downwind area. The Transport Rule released yesterday is the agency’s attempt to do this. The rule is massive—1,300 pages—and reads like a long-form response to the court’s opinion. So what does this have to do with cap and trade?

RealClimate: A simple recipe for GHE - According to some recent reports (e.g. PlanetArk; The Guardian), the public concern about global warming may be declining. It’s not clear whether this is actually true: a poll conducted by researchers at Stanford suggests otherwise. In any case, the science behind climate change has not changed (also see America’s Climate Choices), but there certainly remains a problem in communicating the science to the public.This makes me think that perhaps a new simple mental picture of the situation is needed. We can look at climate models, and they tell us what we can expect, but it is also useful to have an idea of why increased greenhouse gas concentrations result in higher surface temperatures. The saying “Everything should be made as simple as possible, but not simpler” has been attributed to Albert Einstein, which also makes me wonder if we – the scientists – need to reiterate the story of climate change in a different way. Gavin has already discussed this (also see here and here), but it may be necessary to tell story over again, with a slightly different slant. So how can we explain how the greenhouse effect (GHE) work in both simple terms and with a new angle? I also want to explain why the middle atmosphere cools with increasing greenhouse gas concentrations associated with an increased GHE. Here I will try to present a conceptual and comprehensive picture of GHE, explaining both the warming in the lower part of the atmosphere as well as the cooling aloft, and where only the most central features are included.

Science Explained: Greenhouse effect in a bottle -Interesting video: “Scientist Dr Maggie Aderin-Pocock from EADS Astrium visits the Royal Institution’s new Young Scientist Centre to carry out a simple experiment that shows how CO2 traps heat. ”Of course, the BBC can’t help itself in bending over backwards to the point of breaking in its absurd scientific impartiality: CO2, along with a range of other greenhouse gases, is often implicated in global warming. But what is its role in the greenhouse effect? Yes, “CO2, along with a range of other greenhouse gases, is also implicated in global warming” — by the laws of physics!

Climate Scientist: Even Without ‘Very Likely’ Feedback Loops, Warming Will Be ‘Substantial And Critical’ - The United Nations has named the 831 scientists who will author the fifth Intergovernmental Panel on Climate Change report, to be published in 2013 with new model runs and observations of the ongoing destruction of our habitable environment. They do this work despite the endless assault from the fossil-fueled right wing, weathering death threats and media and politicians who ignore, downplay, distort, or lie about the science. In yet another instance of this criminal deception, they quoted Max Planck scientist Markus Reichstein saying, “Particularly alarmist scenarios for the feedback between global warming and ecosystem respiration (CO2 production) thus prove to be unrealistic.”In fact, Reichstein told the Wonk Room that “positive carbon-climate feedback is still very likely.” This is indeed a very bad report about our research, strongly misinterpreted and with a unnecessarily sensational tone."

Energy and Global Warming News for July 8: Heat waves could be commonplace in the US by 2039; Methane releases in Arctic Seas could wreack havoc - By 2039, most of the US could experience at least four seasons equally as intense as the hottest season ever recorded from 1951-1999, according to Stanford University climate scientists. In most of Utah, Colorado, Arizona and New Mexico, the number of extremely hot seasons could be as high as seven. (see map)

Heat waves could be commonplace in the US by 2039, Stanford study findsExceptionally long heat waves and other hot events could become commonplace in the United States in the next 30 years, according to a new study by Stanford University climate scientists.“Using a large suite of climate model experiments, we see a clear emergence of much more intense, hot conditions in the U.S. within the next three decades,” said Noah Diffenbaugh, an assistant professor of environmental Earth system science at Stanford and the lead author of the study.Writing in the journal Geophysical Research Letters (GRL), Diffenbaugh concluded that hot temperature extremes could become frequent events in the U.S. by 2039, posing serious risks to agriculture and human health. “In the next 30 years, we could see an increase in heat waves like the one now occurring in the eastern United States or the kind that swept across Europe in 2003 that caused tens of thousands of fatalities,” said Diffenbaugh, a center fellow at Stanford’s Woods Institute for the Environment. “Those kinds of severe heat events also put enormous stress on major crops like corn, soybean, cotton and wine grapes, causing a significant reduction in yields.”

Methane Releases in Arctic Seas Could Wreak Devastation - Massive releases of methane from arctic seafloors could create oxygen-poor dead zones, acidify the seas and disrupt ecosystems in broad parts of the northern oceans, new preliminary analyses suggest. Such a cascade of geochemical and ecological ills could result if global warming triggers a widespread release of methane from deep below the Arctic seas, scientists propose in the June 28 Geophysical Research Letters.Worldwide, particularly in deeply buried permafrost and in high-latitude ocean sediments where pressures are high and temperatures are below freezing, icy deposits called hydrates hold immense amounts of methane (SN: 6/25/05, p. 410). Studies indicate that seafloor sediments beneath the Kara, Barents and East Siberian seas in the Arctic Ocean, as well as the Sea of Okhotsk and the Barents Sea in the North Pacific, have large reservoirs of the planet-warming greenhouse gas, says study coauthor Scott M. Elliott, a marine biogeochemist at Los Alamos National Laboratory in New Mexico

Per-Capita Emissions Rising in China - Carbon dioxide emissions per person in China reached the same level as those in France last year, the Netherlands Environmental Assessment Agency said Thursday. The Dutch agency said that per capita emissions were 6.1 tons in China in 2009, up from only 2.2 tons in 1990. Among the French, emissions were 6 tons per person last year, said Jos Olivier, a senior scientist at the Dutch agency. Per capita emissions in France tend to be lower than in some other industrialized countries because of the country’s heavy reliance on nuclear plants to generate electricity rather than fossil fuels. Per capita emissions in 15 nations of the European Union were 7.9 tons in 2009, down from 9.1 tons in 1990, the study said. In the United States, the figure was 17.2 tons in 2009, down from 19.5 tons in 1990. Over all the Dutch agency found that global emissions of carbon dioxide, the leading greenhouse gas, were unchanged last year. That came as a surprise: Because of the onset of the worst economic crisis in decades, other bodies like the International Energy Agency had predicted a significant decline in 2009, the report said.

China's Growth is Making the Carbon Fat Tail Fatter - China's Carbon Footprint keeps growing. This news will not surprise Auffhammer and Carson (see their JEEM paper ). But, maybe it will surprise Tom Friedman? Rising CO2 levels means that some very low probability disastrous events become more likely.  China represents a very nice test case of the "amazing race" between scale, composition and technique effects. Environmental economists argue that these three factors determine whether economic growth leads to more or less pollution. In the case of China and greenhouse gas emissions, there are 1.3 billion people getting richer in China and manufacturing (composition) is a big part of the story and this sector is quite energy intensive. The Beijing Central Government is pushing a major technique effect (CO2 per RMB declining) but according to the latest news ; scale is winning the race against technique. To mitigate GHG emissions, we need GHG intensity to decline faster than GNP grows in China. Without a carbon incentive, this sounds tough.

China Fears Warming Effects of Consumer Wants - Premier Wen Jiabao has promised to use an “iron hand” this summer to make his nation more energy efficient. The central government has ordered cities to close inefficient factories by September, like the vast Guangzhou Steel mill here, where most of the 6,000 workers will be laid off or pushed into early retirement.  Already, in the last three years, China has shut down more than a thousand older coal-fired power plants that used technology of the sort still common in the United States. China has also surpassed the rest of the world as the biggest investor in wind turbines and other clean energy technology. And it has dictated tough new energy standards for lighting and gas mileage for cars. But even as Beijing imposes the world’s most rigorous national energy campaign, the effort is being overwhelmed by the billionfold demands of Chinese consumers.  Chinese and Western energy experts worry that China’s energy challenge could become the world’s problem — possibly dooming any international efforts to place meaningful limits on global warming.

BP slated to claim $600 million in ethanol tax credits this year - Yesterady, I  pointed to a Stateline report about state government struggling to cut wasteful tax subsidies for corporations, even when they are faced with billions in budget shortfalls. And the federal government has a similar problem with promulgating tax credits that go to either mature industries that don’t need the help or wind up benefiting parties other than those intended. For instance, paper companies will receive $6.6 billion this year in credits meant to discourage use of fossil fuels. But to qualify for this boondoggle, these companies will actually add diesel fuel to a fuel mix that is already carbon-free, “following the letter of the law while violating its spirit.” In that vein, BP, the oil company responsible for the ongoing gusher in the Gulf of Mexico, is slated to be one of the largest beneficiaries of tax credits meant to encourage ethanol use:

Thousands of Old Wells Possibly Leaking in Gulf of Mexico? - More than 27,000 abandoned oil and gas wells lurk in the hard rock beneath the Gulf of Mexico, an environmental minefield that has been ignored for decades. No one – not industry, not government – is checking to see if they are leaking, an Associated Press investigation shows. The oldest of these wells were abandoned in the late 1940s, raising the prospect that many deteriorating sealing jobs are already failing. The AP investigation uncovered particular concern with 3,500 of the neglected wells – those characterized in federal government records as “temporarily abandoned.” Regulations for temporarily abandoned wells require oil companies to present plans to reuse or permanently plug such wells within a year, but the AP found that the rule is routinely circumvented, and that more than 1,000 wells have lingered in that unfinished condition for more than a decade. About three-quarters of temporarily abandoned wells have been left in that status for more than a year, and many since the 1950s and 1960s – even though sealing procedures for temporary abandonment are not as stringent as those for permanent closures.

Guest Post: Macondo History Before The Blowout - This history of the Macondo well blowout has been assembled using information from the Oil & Gas Journal and the Houston Chronicle, two of the more reliable sources of information on the oil and gas industry. The information released to the public on the cause of the blowout has been insufficient. BP is unwilling to release information due to the liability issues. The federal government has much information that it is not releasing. I have assembled as much reliable information as I could and tried to make a reasonable guess as to the cause of the blowout. My opinion on the cause differs from the views of the popular press.

U.S. taxpayers paid BP to lease Deepwater Horizon rig — which was incorporated in a foreign country for the purpose of avoiding the U.S. corporate tax - BP's tax deduction was "more than $225,000 a day" - Transocean, the company that owns the failed Deepwater Horizon rig that caused the Gulf oil spill, used well-known tax havens in the Cayman Islands and Switzerland to lower its U.S. corporate tax rate by almost 15 points. And, as TP reports, due to a break in the U.S. tax code, BP was also allowed to write off the rent it paid to Transocean on its own tax bill, saving it hundreds of thousands of dollars per day: So, essentially, the U.S. taxpayer paid BP to lease a rig that was incorporated in a foreign country for the purpose of avoiding the U.S. corporate tax. And the U.S. tax code is actually riddled with breaks for the oil industry, despite that industry’s record profits in recent years. Center for American Progress Senior Policy Analyst Sima Gandhi has counted nine different subsidies that the U.S. government gives to the oil industry, including refunds for drilling costs and refunds to cover the cost of searching for oil.

July Fourth Outrage: British Gov’t Elevates Disgraced BP Boss - The British government appointed Lord Browne, the former CEO of BP, as a new “super-director” to cut waste and increase the efficiency of the British government machine in Whitehall. The announcement of Browne’s appointment was delayed while officials weighed the consequences of inevitable controversy. Browne is widely blamed for the drastic cuts of BP’s safety and maintenance program of its oil installations in the U.S. while he was BP’s CEO between 1998 and 2007. The consequence of those cuts were three major accidents in the U.S.—an explosion at the Texas City refinery in 2005, two oil spills in Alaska in 2006; and the current catastrophe in the Gulf of Mexico. Adamantly, Browne has refused to discuss his responsibility for the Gulf crisis. He is undoubtedly relieved that the British government decided to ignore the allegations about his culpability and promote him to a senior position. Ever since he was forced to abruptly retire from BP after signing an untruthful court statement about his gay relationship with a young Canadian, he has struggled to restore his reputation as the “Sun King.”

BP brushes off calls to keep away from ecologically risky areas - BP plans to proceed with drilling operations in environmentally sensitive areas such as Canada's tar sands and further deep water exploration despite pressure to stop from green groups and some investors. The moves were confirmed following demands from the Coop – one of its shareholders – to concentrate in future on lower risk areas following the calamities in the Gulf of Mexico. "When the leak is plugged and we return to normal we will be carrying out an assessment of where the new BP goes from here. We will – like the rest of the industry – be working out how we can do things differently in terms of safety but not where we do them," said a BP spokesman in London. "The position is the same now as it was at the strategy update earlier in the year. We are committed to three core areas of deep water oil, unconventional gas and enhanced recovery on super-sized fields. The world needs oil to meet growing demand and total risk aversion would just drive up prices."

Why Is the Gulf Cleanup So Slow? - The press and Internet are full of straightforward suggestions for easy ways of improving the cleanup, but the federal government is resisting these remedies.First, the Environmental Protection Agency can relax restrictions on the amount of oil in discharged water, currently limited to 15 parts per million. In normal times, this rule sensibly controls the amount of pollution that can be added to relatively clean ocean water. But this is not a normal time. Various skimmers and tankers (some of them very large) are available that could eliminate most of the oil from seawater, discharging the mostly clean water while storing the oil onboard. While this would clean vast amounts of water efficiently, the EPA is unwilling to grant a temporary waiver of its regulations. Next, the Obama administration can waive the Jones Act, which restricts foreign ships from operating in U.S. coastal waters. Many foreign countries (such as the Netherlands and Belgium) have ships and technologies that would greatly advance the cleanup. So far, the U.S. has refused to waive the restrictions of this law and allow these ships to participate in the effort.

Unified Command for the BP Oil Spill - Coast Guard establishes 20-meter safety zone around all Deepwater Horizon protective boom; operations  - The Captains of the Port for Morgan City, La., New Orleans, La., and Mobile, Ala. , under the authority of the Ports and Waterways Safety Act, has established a 20- meter safety zone surrounding all Deepwater Horizon booming operations and oil response efforts taking place in Southeast Louisiana. Vessels must not come within 20 meters of booming operations, boom, or oil spill response operations under penalty of law. Violation of a safety zone can result in up to a $40,000 civil penalty. Willful violations may result in a class D felony.

Is BP Rejecting Skimmers to Save Costs? - Readers may recall that we harped on BP’s refusal to try to contain oil around the site of the leak, and later, its failure to do proper booming to contain and remove oil and so reduce the amount that came ashore (note that the US also failed abjectly as a second line of defense; the Coast Guard did cosmetic, ineffective booming and the US turned down advice and assistance from the Netherlands, which has world class expertise).  Per McClatchy, now appears to have put in place a slow, bureaucratic process as a way to cover for the fact that it isn’t very keen about hiring skimmers (boats outfitted to collect oil offshore) since it’s cheaper for them to remediate onshore, even though the damage is greater. BP may well be betting on the fact that, in contrast to its slow environmental response, it has been lightening fast on the legal front, and already locked up experts plaintiffs would typically hire to sue BP.

Truth and lies in oil-skimming statistics - Kimberly Kindy has an excellent and very sobering report on the monstrous discrepancies between the various numbers being bandied around when it comes to the amount of oil that BP is able to skim off the Gulf of Mexico every day. BP only got the permits to start drilling at the Deepwater Horizon site in the first place because the Minerals Management Service believed their statement that they “could recover 197 percent of the daily discharge from an uncontrolled blowout of 250,000 barrels per day”: a March report from BP said that it had the capacity to skim and remove 491,721 barrels of oil per day. Even after the explosion, BP was still insisting that it had “skimming capacity of more than 171,000 barrels per day, with more available if needed.” So far, it has managed to skim less than 900 barrels per day. Add burn-offs, and you get to just over 300,000 barrels in total, over 77 days — that’s less than 4,000 barrels per day. BP’s reaction to being massively wrong, by a factor of over 100, is to grab onto the biggest numbers it can find — to try, in other words, to deal with the optics, rather than the reality. Take the much-vaunted super-skimmer, for instance. Some reports say that it “can collect up to half a million barrels of oil a day”, but it’s much more accurate to say that it can theoretically collect that many barrels of contaminated water, which is only about 10% oil. And, as Kindy drily notes, “thus far, it has been unable to produce those results in the gulf.”

National Socialism to End the Political Debate - And that was the signal for the great Gulf Oil Eruption, which continues to destroy the Gulf of Mexico and all its economies as we speak, with the globe-girdling seas its only limits.We can only speculate in suspense over the magnitude of the horror, as Obama, in direct defiance of the Constitution and all law, has imposed an actual police state lockdown on the entire eruption zone. Neither journalists nor independent scientists can get in. He has done this at the behest of the anti-sovereign criminal organization BP. He’s now openly declared himself a mere hired thug for a glorified street gang. This government has abdicated all sovereignty and therefore all legitimacy. America has no authority, only a vacuum filled by gutter power. So if that was the horror portended by the announcement that the “tired debate” over offshore drilling was over, what must be the significance of this announcement, that a “false political debate” is ending?

Six-Foot Waves May Force BP to Delay Oil-Collection Effort in Mexican Gulf - Waves as high as six feet (1.8 meters) may persist for most of this week off the Louisiana coast, forcing BP Plc to postpone already-delayed efforts to double the amount of oil being captured from a leaking Gulf of Mexico well.  Wave heights in the area of the Gulf that includes BP’s Macondo well are expected to average from 3 feet to 6 feet through July 8, the National Weather Service said yesterday on its website.  The Helix Producer I, a floating platform that can gather 25,000 barrels of crude a day, can’t hook into subsurface equipment connected to the well on the sea floor until wave heights decline to 3 feet or less, said Bryan Ferguson, a spokesman for London-based BP. High waves kicked up by Hurricane Alex last week, followed by a 6-foot chop during the weekend, made it impossible to make the link, he said.

BP oil spill clean-up delayed by high winds and choppy seas - A whale of an oil skimmer is being put through its paces tested in the Gulf of Mexico, but high wind and choppy seas due to the hurricane season means it may be longer than first hoped before officials know if it can work full-time sucking crude from the sea.The Taiwanese vessel, named "A Whale" went through basic tests in a 25-mile-square area north of the site where the explosion on April 20 explosion on the Deepwater Horizon oil rig killed 11 workers and caused the worst oil spill in Gulf history.TMT, the shipping firm that owns the vessel, had hoped to test a containment boom system designed to direct greater volumes of oily water into the 12 vents or "jaws" the ship uses to suck it in, said spokesman Bob Grantham. But choppy seas have made that impossible, and have also prevented a flotilla of smaller skimmers from working offshore along the coasts of Alabama, Mississippi and Florida. "As was the case yesterday, the sea state, with waves at times in excess of 10 feet, is not permitting optimal testing conditions,"

Oil's  fingers reach into Louisiana's inland waters - An oil spill that was previously a problem for coastal Louisiana was trickling deeper inland Tuesday and toward the shores of New Orleans. Oil sheen and tar balls from the Deepwater Horizon gusher have been spotted in Lake Pontchartrain, the huge lake forming the northern boundary of the city that was rescued in the 1990s from rampant pollution."Our universe is getting very small," said Pete Gerica, the 57-year-old president of the Lake Pontchartrain Fishermen's Association. He has fished in the lake his entire life. "It's shrinking daily." The oil's spread deeper into Louisiana came the same day that tar balls from the spill were confirmed on a beach in Texas. There's a question of whether five gallons of the stuff came naturally on the currents or was dragged by a passing ship from elsewhere, but crews combed the beach and pledged to collect the damages from BP.

Unstoppable Oil Dispirits Gulf Coast - Along major parts of the northern shore of the Gulf of Mexico, the battle against oil is being lost. Entire communities are in mourning. BP has rightly promised to cover all damages, but that is no excuse for state and local governments to watch from the sidelines. BP doesn't own the coast, and it clearly has inadequate equipment to clean up the mess it made.For two and a half months crude oil has gushed from the Deepwater Horizon well, about 130 miles southwest of the Pensacola beaches. The video of crude violently spewing from the accident has been a uniquely depressing reminder that the worst of the disaster is yet to hit home.  A tour of affected beaches gives the impression that the full resources of the state and nation are not being mobilized. The politics of oil-drilling aside, the Legislature should meet in special session to hear creative ideas of how to rally all assets, including volunteers, to fight back against what is becoming a disaster of historic magnitude.

BP Dumping Oil Waste in Mississippi Landfill Despite Objections of County Leaders (News Video)

First Oil, Now Bombs: All Sorts Of Cool Stuff Washing Up On Alabama Beaches - Nothing like a little explosive WW2 diversion washing up to take away the attention from the latest outpouring of tarball love courtesy of British Petroleum. WKRG reports that a bomb was found on Orange Beach in Alabama. "The device is disk-shaped and about 3 feet wide and appears to weigh about 500 lbs. It was found in the surfline. Crews have cordoned off about 30 yards of beach with construction fence. Authorities believe it might be an old World War II shell of some sort."

Oil reported on Bolivar beaches - Southeast Texans living in Crystal Beach on the Bolivar Peninsula got news late Saturday afternoon that they had rather not have received. Following Hurricane Alex sending excessively high tides, having the only road into Bolivar closed due to flooding and debris filling SH 87, and many businesses closed last week, vacationeers and residents alike reported oil residues on Crystal Beach.  Earlier this afternoon Joni Harding returned to her new home after being in the Gulf, and walking along the edge of the shore near Sea Spray. As Harding walked up her stairs, she noticed unusually dark footprints on her new stairs. Reaching down to touch one of the footprints, she realized it was oil. Harding then took off her shoes and found the bottoms and sides covered with oil.  Washing her feet, hands, and ultimately her shoes with a dish detergent, she was able to get some of the residue off, but not nearly all.

Tar balls in Texas mean oil hits all 5 Gulf states - More than two months after oil from BP's blown-out seafloor well first reached Louisiana, a bucket's worth of tar balls that washed onto a Texas beach means the crude has arrived in every Gulf state.Oil is still on the move, but the fleet of skimmers tapped to clean the worst-hit areas of the Gulf of Mexico is not. A string of storms has made the water too choppy for the boats to operate for more than a week off Florida, Alabama and Mississippi, even though the gusher continues. The number of tar balls discovered in Texas is tiny compared to what has coated beaches in other Gulf states. Still, it provoked the quick dispatch of cleaning crews and a vow that BP PLC will pay for the trouble. The oil's arrival in Texas was predicted Friday by an analysis from the National Oceanic and Atmospheric Administration, which gave a 40 percent chance of crude reaching the area.

OIL ON EAST COAST!!! Tar Balls Wash Ashore At Cocoa Beach (news video)

Climate photo of the week: BP oil spill - The BP oil spill is now into its third month with no end in sight. On July 3 Gary Braasch and Joan Rothlein flew to the site of the doomed Deepwater Horizon well with Southwings pilot Tom Hutchings. For miles the Gulf is shiny with oil, with long streamers of thicker red oil. The drill location, which pilots and others now call "The Source," gives the jarring impression of a naval battle, with the two huge flames of gas and crude and all the attendant vessels. With strong east winds and currents, the oil that is not being just burned off by the Q4000 (on left with flames) or captured and separated from methane by the Discoverer Enterprise (burning methane on right) wells up and is carried toward the coast

Oil leak’s spread predicted by simulation - Detailed simulations of the Gulf of Mexico oil leak show that crude is likely to start spreading into the Atlantic Ocean soon.Once oil becomes caught in the Gulf of Mexico's fast moving Loop Current, it could be carried thousands of miles, around Florida, up the Atlantic coast of the US, and then out into the open ocean. An animation by the US National Center for Atmospheric Research (NCAR) suggests that concentrations of oil in the water south of Florida will start to become detectable around 70 to 90 days after a leak starts. The Deepwater Horizon rig sank on the 22nd April. The animation, given to the BBC World Service's Science in Action programme, is based on a computer model of ocean currents and eddies, and assumes that conditions will be similar to those found in a typical year.

Oil slick map - % probability after 90 days @ 33,000 BPD (july 6 interactive)

Miami faces 80% chance of being hit by BP oil spill - Bloomberg reports that Miami, Ft. Lauderdale, Palm Beach and Florida Keys face a 61-80 percent chance of BP’s tar balls reaching their popular beaches and precious real estate.  They face a greater probability of being affected because the black oil has entered the Gulf’s Loop Current, which snakes eastward and around the tip of Florida.  If the nasty tar balls arrive on the billion-dollar beaches of Miami, Palm Beach and Ft. Lauderdale, the real estate market and coastal Florida economy could face a catastrophe. The real estate market in many places along the Gulf and Florida coast has already seen up to a 32% devaluation, according to Moody's, and things may even get worse as buyers, developers and vacationers look for investment alternatives.  There are over 4,000 operational oil wells in the Gulf and investors are wisely questioning why they should risk their financial futures to the potential of this kind of multi-decade, environmental disaster.

Florida legislature to consider oil drilling ban (Reuters) - Florida Governor Charlie Crist on Thursday called for a special session of the state legislature to consider a constitutional amendment to strengthen the ban on oil drilling off Florida's coast. Drilling in state waters is already prohibited by statute but putting the ban in the state's constitution would make it much more difficult to overturn, Crist said. He said he would call lawmakers into session on July 20 for four days to craft an amendment that would require approval by the three-fifths of the state's House of Representatives and Senate by August 4. If it passed that hurdle, the proposal would go before voters in the November 2 general election."I think it's important that we put this into our constitution," Crist told reporters at hastily scheduled news conference. "Certainly, I think it's important that we give the people of Florida the opportunity to make this call."

Toxicologists: Corexit “Ruptures Red Blood Cells, Causes Internal Bleeding”, "Allows Crude Oil To Penetrate “Into The Cells” and “Every Organ System" - As I have previously noted, Corexit is toxic, is less effective than other dispersants, and is actually worsening the damage caused by the oil spill. Now, two toxicologists are saying that Corexit is much more harmful to human health and marine life than we've been told. Specifically Gulf toxicologist Dr. Susan Shaw - Founder and Director of the Marine Environmental Research Institute - dove into the oil spill to examine the chemicals present. Dr. Shaw told CNN: If I can tell you what happens — because I was in the oil — to people…  Shrimpers throwing their nets into water… [then] water from the nets splashed on his skin. …[He experienced a] headache that lasted 3 weeks… heart palpitations… muscle spasms… bleeding from the rectum… And that’s what that Corexit does, it ruptures red blood cells, causes internal bleeding, and liver and kidney damage. …(see videos)

Debate grows over impact of dispersed oil - For years, Robert Twilley has worked to bridge the traditional academic divides between oceanography and coastal science. They really are not two separate systems," says Twilley, a coastal scientist from Louisiana State University in Baton Rouge. "Whatever you do offshore certainly has implications to the shoreline and bay estuary environments."Now, Twilley is watching this lesson unfold before his eyes. As BP continues to pour vast quantities of dispersants into the Gulf of Mexico, Twilley and many other scientists are growing increasingly concerned about the chemical soup that may be creeping onshore, as well as the poorly understood effects of dispersant in the water column at sea. So far, more than 6.6 million litres of dispersant have been applied: more than 4 million litres offshore and more than 2.5 million litres at the site of the leak. On the surface, dispersants are sprayed from planes over the surface of the oil. To reach oil at depth, dispersant is pumped from a vessel at the surface down to a wand pointed into the oil flowing from the broken wellhead, some 1.5 kilometres deep. Before the Deepwater Horizon spill, dispersants had only been used to treat surface oil.

The Relief Wells Are Ahead of Schedule … But Will They Work? - By all reports, BP is ahead of schedule in drilling the relief wells. In fact, BP will likely complete the first relief well this month.The team leader for BP’s relief wells – Boots and Coots – is 40 for 40 in successfully stopping oil spills using relief wells (around 6:10 into video). Many oil drilling experts are hopeful that BP’s relief wells will succeed on the first try. I hope and pray that they do. But the relief wells are not a slam dunk, especially at such extreme depths. Indeed: “If it was shallow water, it wouldn’t be anything serious,” said Don Van Nieuwenhuise, director of Petroleum Geoscience Programs at the University of Houston. CBS News states:  two things could go wrong. The cut could miss the broken wellbore, and BP would just try again, or engineers could drill into hidden gas pockets. “When you are drilling into that you have to be careful of a kick, a blowout in the relief well,”

BP Sets New Spill Target - WSJ - BP PLC is pushing to fix its runaway Gulf oil well by July 27, possibly weeks before the deadline the company is discussing publicly, in a bid to show investors it has capped its ballooning financial liabilities, according to company officials. At the same time, BP is readying a series of backup plans in case its current operations go awry. These include connecting the rogue well to existing pipelines in two nearby underwater gas and oil fields, according to company and administration officials. Much of the additional planning has been pushed by the U.S. government, which has urged BP to develop what one official called the "backup to the backup plan." Both BP and the federal government are concentrating on their next steps, particularly because of uncertainty caused by the imminent hurricane season and the protracted political and financial damage caused by the endless spill.

BP's Deepwater Oil Spill - Adding Mud to the Well - Admiral Allen held another briefing yesterday in which he elaborated a little more about the procedures to be followed when the two wells, the relief (RW) and the original (WW) are joined. He also promised that in a briefing tomorrow, he will bring together the different numbers that have been used for well positioning - the measured depth and the true vertical depth – so that everyone can start talking from the same page. However, in discussing the connection between the two wells he broke down the process into four parts, and to illustrate these I am going back to the figure that I used yesterday, and making a couple of modifications to it so that the process might be better understood. I am also going to revisit my gripe about the “band of brilliant minds” which Secretary Chu put together, but who seem unable, in a timely fashion, to decide whether to allow BP to change the cap on the well, or not. So to begin with let me start with the illustration from yesterday

BP to Remove Well Cap to Install System That May Capture All Leaking Oil - BP Plc plans to start removing the cap collecting some of the oil leaking from the Macondo well in the Gulf of Mexico today, as part of the effort to replace it with a more efficient containment system.  London-based BP expects to collect all the oil spewing from the gusher four to seven days from today, after underwater robots install the new, purpose-built sealed cap, spokesman Mark Proegler said by phone today. In the meantime, the company will try to capture the unrestricted oil flow with surface vessels.  “We’re getting ready for it when the oil rate increases,” Proegler said. “We have 22 large skimmers up there.”

Russian sub ‘could stop oil leak’ - Russian-owned submersibles would be able to cap the oil leak in the Gulf of Mexico, the captain of one of the vessels has said. The skipper was speaking as two of the subs - which can dive to 6,000m - started a campaign of exploration at the bottom of Lake Baikal in Siberia. He added that there was still time for the subs to help BP with the disaster. The subs are searching for gas hydrates - a potential alternative fuel source - on the bed of Baikal. Yevgenii Chernyaev told BBC News that the problem had to be addressed at the highest level.

Myths from the right about the disaster in the gulf - A new narrative reverberating in right-wing political circles blames the Deepwater Horizon disaster on a favorite scapegoat: the federal government.But this narrative does not feature the Minerals Management Service, the Interior Department agency whose compromised oversight of the industry may have permitted BP to take excessive risks in deepwater drilling, Rather, government environmental restrictions on drilling onshore and in shallow water allegedly forced the oil industry to move into deepwater, and it was none other than President Bill Clinton who gave Big Oil the fiscal incentives to turn this move into a headlong rush.

The Gulf Oil Leak and Optimal Safety Precautions-Becker - Whether BP paid enough attention to the chances of and damages from a serious leak on its Deepwater Horizon rig in the Gulf of Mexico is at the heart of any evaluation of whether BP was negligent in its safety approaches to this well. The chief executive of BP, Tony Hayward, claimed that an accident of the magnitude of this one had “a one in a million” chance. It is ironic that when Hayward became chief executive, he vowed to focus “like a laser” on safety and reliable operations.  Suppose that his estimate is correct, in the sense that the probability of an accident of this magnitude in any year was one in a million. If the accident ends up causing a $100 billion worth of damages to fish, beaches, loss of lives, and in other ways, the discounted value (at a 5% interest rate) of this expected cost over time would then be approximately 20 times $100 billion divided by one million, or $2 million. A risk neutral BP would rationally not want to spend more than that amount to prevent such a leak from happening.

The Gulf Oil Leak—Posner -The Minerals Management Service in the Department of Interior does seem to have been asleep at the switch, but Obama unlike his immediate predecessor cannot be criticized as being hostile to regulation—if anything, he has too much faith in it. MMS is a small and obscure agency far below the horizon of a president’s supervision. No president can eliminate all pockets of incompetence in the vast federal government. It is possible that the number of recent disasters has created a public sense that something is wrong with government: that it ought to be able to prevent all disasters. But this is an unrealistic expectation. Everything conspires against a government’s being able to protect its people against disasters, whether natural or man-made. A factor that retards prevention of man-made disasters is the rapid and relentless advance of technology. Regulation lags innovation. The Federal Reserve, Treasury Department, and SEC were no more able to keep abreast of advances in financial engineering than MMS was to keep abreast of advances in drilling for oil at very great depths under water. Slack regulation encourages private companies to adopt a high-risk business model. Risk and return tend to be positively correlated, in finance because risky loans command higher interest rates and in underwater drilling because risk abatement is costly. 

BP wasted no time preparing for oil spill lawsuits - In the immediate aftermath of the Deepwater Horizon disaster, BP publicly touted its expert oil clean-up response, but it quietly girded for a legal fight that could soon embroil hundreds of attorneys, span five states and last more than a decade. BP swiftly signed up experts who otherwise would work for plaintiffs. It shopped for top-notch legal teams. It presented volunteers, fishermen and potential workers with waivers, hoping they would sign away some of their right to sue.  Recently, BP announced it would create a $20 billion victim-assistance fund, which could reduce court challenges.  Robert J. McKee, an attorney with the Fort Lauderdale firm of Krupnick Campbell Malone, was surprised by how quickly BP hired scientists and laboratories specializing in the collection and analysis of air, sea, marsh and beach samples — evidence that's crucial to proving damages in pollution cases.

As Oil Industry Fights a Tax, It Reaps Billions From Subsidies - When the Deepwater Horizon drilling platform set off the worst oil spill at sea in American history, it was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes.  The owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.  At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began. With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.

Moratorium to cut U.S. oil output 82,000 bpd: EIA  (Reuters) - The U.S. offshore oil drilling ban will reduce crude output by an average of 82,000 barrels per day next year, more than previously estimated, the government's top energy forecaster said on Wednesday.The Energy Information Administration had said last month that the moratorium, which the government put on exploration rigs in response to the BP Plc oil spill, would reduce next year's U.S. crude output by an average of 70,000 bpd. In May, Interior Secretary Ken Salazar put a six month moratorium on deep water exploration rigs. The moratorium will delay deep water projects, the effect of which will speed up late in 2011, the EIA said

Key U.S. lawmaker opposes Canadian oil sands pipeline (Reuters) – A key U.S. lawmaker has called on the government to block a TransCanada pipeline designed to supply U.S. refineries with Canada's oil sands crude, arguing the "dirtiest" fuel undermined efforts to battle global warming.Henry Waxman, chairman of the House Energy and Commerce committee, urged the State Department to block TransCanada's planned Keystone XL pipeline. "This pipeline is a multibillion-dollar investment to expand our reliance on the dirtiest source of transportation fuel currently available," Waxman said in a letter to the department. Canada's oil sands, the largest source of crude outside the Middle East, are developed using open pit mines and processing plants that spew carbon. Since Waxman heads an influential committee, the Obama administration must pay attention to his stance.

Gas taxes give us a break at the pump - Holiday drivers paid less than ever at the pump for upkeep of the nation's roads — just $19 in gas taxes for every 1,000 miles driven, a USA TODAY analysis finds. That's a new low in inflation-adjusted dollars, half what drivers paid in 1975. Another measure of the trend: Americans spent just 46 cents on gas taxes for every $100 of income in the first quarter of 2010. That's the lowest rate since the government began keeping track in 1929. By comparison, Americans spent $1.18 in 1970 on gas taxes out of every $100 earned. Although the federal gas tax — 18.4 cents per gallon — hasn't changed since 1993, tax collections are down because today's vehicles go farther on a gallon of gas, cutting tax collections while increasing wear and tear on highways. Inflation since 1993 has eroded the value of the tax to maintain roads.

United-States-Energy-Expenditures-as-a-Percent-of-GDP-1999-2008 (bar graph)

The Future of Oil - Mike Konczal notes the startling news that U.S. investment in resource extraction (primarily oil and gas exploration) has now overtaken investment in manufacturing. But the primary shape of this story is pretty obvious. When oil prices skyrocketed following the OPEC embargoes of the 70s, investment in oil exploration went up. When oil prices crashed in the 80s, investment went down. When they skyrocketed again in the aughts, investment went up. Bush/Cheney policies obviously helped, but this is mostly a pretty simple market reaction to high prices. And the future? I'd count on that blue line continuing to rise. It will certainly have rattles and bumps along the way, but the era of cheap oil is over, and permanently high prices make even expensive investment in hard-to-extract oil worthwhile. The final fate of American manufacturing is still unclear, but I doubt that it will ever match resource extraction again

U.S. Royalty Plan to Give Windfall to Oil Companies - The federal government is on the verge of one of the biggest giveaways of oil and gas in American history, worth an estimated $7 billion over five years. New projections, buried in the Interior Department's just-published budget plan, anticipate that the government will let companies pump about $65 billion worth of oil and natural gas from federal territory over the next five years without paying any royalties to the government.Based on the administration figures, the government will give up more than $7 billion in payments between now and 2011. The companies are expected to get the largess, known as royalty relief, even though the administration assumes that oil prices will remain above $50 a barrel throughout that period

195 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.

'Super-Giant' Oilfields Redraw Energy Map - The map of the world's main energy suppliers is about to change as Iraq's forecast oil output quadruples over the next 10 years. Iraq will eventually displace Saudi Arabia as the world's biggest exporter, experts predict, giving Baghdad crucial influence over the future price of oil. The rush to exploit Iraq's "super-giant" oilfields, of which it has the largest concentration in the world, has gathered impetus with unexpected speed in the wake of BP's disaster in the Gulf of Mexico which has raised fears over deep-sea drilling. Iraq's oil has the advantage of being both onshore and cheap to develop.

Saudi King: Halt To Oil Exploration To Save Wealth --Saudi Arabia's King Abdullah has ordered a halt to oil exploration operations to save the hydrocarbon wealth in the world's top crude exporting nation for future generations, the official Saudi Press Agency, or SPA, reported late Saturday.  "I was heading a cabinet meeting and told them to pray to God the Almighty to give it a long life," King Abdullah told Saudi scholars studying in Washington, according to SPA.  "I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing," he said.  A senior oil ministry official, who declined to be named, told Zawya Dow Jones the king's order wasn't an outright ban but rather meant future exploration activities should be carried out wisely. Saudi Arabia, the largest member of the Organization of Petroleum Exporting Countries, pumped oil unchanged at 8.26 million barrels a day in June, a survey by Dow Jones Newswires showed Thursday. The kingdom is pumping about 209,000 barrels above its target.

Canada: The Saudi Arabia of the North? - Canada's road to becoming a petro-state is lined with lies, greed, and pollution. Canada now suffers from an advanced state of “petromania,” a condition of rank moral dishonesty compounded by visions of oily grandeur. When a nation becomes the number one supplier of petroleum to the United States as well as a gleeful addict of its associated trade revenue ($40 billion), it can’t do so without carbonizing its political and economic character.According to Stanford political scientist Terry Karl any country that relies on “an unsustainable development trajectory” for oil routinely degenerates into a petro-state defined by cancerous networks of complicity between public sector and private oil companies. We’re now living that peril with the tar sands.The resource curse, a topic verboten in the national media, probably explains why Canada’s Environment Minister Jim Prentice and the Alberta government, a northern Saudi kingdom, have become gleeful marketing representatives for the world’s riskiest energy project.

Peak oil and public transportation - Mr. Lind recently published an article at Salon regarding the future of transportation—fixed/high-speed rail, specifically—that I take issue with. I do so not so much because his information might be incorrect (and I don’t dispute his knowledge and information on the subject), but I disagree because he offers up an attitude regarding our approach to transportation and automobiles that can only cause us more problems as we confront Peak Oil. It’s an all-too-familiar refrain Peak Oil proponents encounter, and is one we find especially distressing in light of the challenges Peak Oil is going to impose upon all of us. Lind begins his article advocating more government spending on infrastructure—a position with which I wholeheartedly agree. Despite his advocacy for this essential governmental strategy, Lind criticizes support for high speed rail.

What is Peak Oil – Everything you should know - Oil is created deep under the earth from dead animal life (mostly plankton) dating from the dinosaur age. The dinosaurs, depicted so well in Jurassic Park, would, under ideal circumstances, be in our gas tanks now. Oil isn’t something that can be created instantly, or even in an average lifetime – it takes millions of years. Oil itself is made of long chains of carbon atoms, with a lot of hydrogen attached. When it’s burned, it produces heat (which is what makes it useful), carbon dioxide (believed by many to be responsible for climate change and global warming), and water vapour. There are two critical concepts about oil (natural gas, coal, etc.): There is only so much oil in the world, and what we use will never be created again. We have been using oil as an energy source, at an ever increasing rate, for about 150 years. Every year we use more than we did the year before.

Peak oil means expensive food -There will still be oil, but it won't be cheap as producers are increasingly resorting to expensive oil (the hard-to-get unconventional stuff). Yes, there are alternative energies, but they and their prerequisite infrastructures won't be ready in time for cheap oil's decline, preparations needing to have been started 20 years ago. What will be the impacts of oil's decline? We've already felt the first impacts when oil prices spiked in the spring of 2008. The world sank into recession. (Most recessions in the past 60 years have been related to expensive energy.) Whichever comes next, another spike or a permanent, irreversible yearly decline in production, the result will be a deeper recession and finally a depression on a par with the Great Depression of 1929.  Every sector of the economy will be affected, but the initial lack will be felt in terms of food

Could a new “Manhattan Project” produce radically new energy sources? - A November 2007 post discussed the last and perhaps foundational source of American’s confidence that peak oil will prove manageable despite our feckless lack of preparedness: An urban legend to comfort America: crash programs will solve Peak Oil. This does not mean that we have adequately funded energy research. For example, the Navy (not DOE) funds development of the Polywell at only a few million dollars per year (see here; for more about the Polywell see here and here).But there are dozens of potential new energy sources, from algae-fuel to satellite-based solar power generators (see here for research about some of these). If we throw vast sums at every likely candidate, what breakthroughs might result? If we start soon, perhaps a substitute for oil can be developed and implemented in time.

Protests Over Fuel Costs Idle Much of India - Protests against a recent increase in fuel prices shut down markets, schools, airports and businesses across India on Monday, and thousands of people were arrested as violence flared in some cities.  The effect of the demonstrations — led by political parties that oppose the governing coalition led by the Indian National Congress — far exceeded expectations, although no official estimates of crowds were available. Some people affected by the one-day strike said the sizable opposition would force the government to address protesters’ concerns. As it moved to eliminate subsidies on petroleum products, the Congress government said late last month that it would raise the price of gasoline by 3.5 rupees a liter, or almost 30 cents a gallon. Diesel and kerosene prices are also being increased.

How Fast will China's Oil Demand Grow? - In my last post, we looked at the supply of oil in the US Energy Information Administration's (EIA's) recently released International Energy Outlook (IEO), which many consider the EIA's definitive annual forecast. This time, we look at the demand side, specifically China. Since the IEO is a government report, many business organizations rely on its forecasts. Oil demand does not grow linearly with GDP. Rather, the bulk of oil demand growth occurs in the two decades during which societies typically acquire motor vehicles, after which per capita oil demand flattens. For example, per capita oil consumption in the United States is today lower than it was in 1979, even though per capita income has increased substantially since.Demand levels attained in emerging economies are relatively comparable regionally. For example, per capita consumption in both Korea and Japan peaked at 1.9 U.S. gallons per day. Korean levels are unchanged; Japanese consumption has declined to 1.4 U.S. gal per person in the last decade. (For purposes of comparison, US consumption will be about 2.5 gal / day per capita in 2010, down from 2.9 gal in 2005.)

Energy Needs of China’s Consumers Swamping Efficiency Gains – Keith Bradsher has filed an important story showing how the energy demands of China’s emerging consumer class are overwhelming the central government’s efforts to cut industrial energy waste and blunt growth in carbon dioxide emissions. The article provides a closeup view of the demographic and economic forces that are destined to make Asia the dominant influence on the planetary greenhouse for decades to come, by almost every analysis. Consider that India, while far down the list of greenhouse giants — with a fifth of China’s emissions, measured per-capita or gross — is poised for greatly expanded energy demand. If you dare, please track down and read the 2009 paper by Michael Sivak of the University of Michigan on projected air conditioning demand in big cities in hot places. A single finding is sufficient to make the point: “For example, the potential cooling demand in metropolitan Mumbai is about 24 percent of the demand for the entire United States.”

China Cuts Rare Earth Export Quota 72%, May Spark Trade Dispute With US (Bloomberg) -- China, the world’s largest rare- earths producer, cut export quotas for the minerals needed to make hybrid cars and televisions by 72 percent for the second half, raising the possibility of a trade dispute with the U.S. Shipments will be capped at 7,976 metric tons, down from 28,417 tons for the same period a year ago, according to data from the Ministry of Commerce yesterday. Rising production of hybrid cars and music players such as Toyota Motor Corp.’s Prius and Apple Inc.’s iPod have driven up demand for rare earths even as China cut the quotas to shore up prices and ensure domestic supplies. The U.S. is looking at building a trade case on the restrictions, industry representatives said last month. “The rare earths industry officials have realized that, after many years of continued growth in exports, the industry didn’t receive due profit returns,” They adjusted the policy to ensure that the resources are optimally utilized"

The food–energy–water nexus in China - China’s rapidly growing economy is very quickly testing the limits of its resource constraints. While China is home to a quarter of the world’s population, it is endowed with disproportionately less arable land, oil and water. Such natural resources are vital to any nation’s ability to be self-sufficient, but China’s predicament is especially dire not only because of its large population, but also its rapid urbanization and climate change, both of which will exert more intensive demands on food, energy and water supply. Yet, other than recognizing that water is essential for agriculture, the discussion of each resource constraint is often conducted in isolation, without paying heed to the inter-linkages of food, energy and water systems.

China on the cusp of real estate slump: Standard Chartered -- Real estate prices in major Chinese cities are set to decline significantly in the coming months as developers grapple with bloated inventories and skittish buyers, according to recent research.China's leading cities could see prices plummet 20% to 30% by year's end, while lesser-known cities could see declines of 10% to 20%, Standard Chartered Bank Ltd. said in a research note Tuesday.

Rogoff sees "Collapse" in China's Property Market - From Bloomberg: China Property Market Beginning Collapse That May Hit Banks, Rogoff Says (ht jb) “You’re starting to see that collapse in property and it’s going to hit the banking system,” [Kenneth Rogoff, Harvard University professor and former chief economist of the IMF] said today [in an interview with Bloomberg Television in Hong Kong]....He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.” It appears Rogoff is talking about a "collapse" in sales, but price frequently follows volume in real estate - so perhaps he is also talking about a steep decline in prices.

China Car Sales Growth Slows to 10.9%, Adding to Signs Economy Is Cooling - Passenger-car purchases rose 10.9 percent from a year earlier, down from May’s 25 percent gain, the China Automotive Technology & Research Center said today. The services-industry measure fell to 55.6 from 56.4, HSBC Holdings Plc and Markit Economics said in an e-mailed statement. Today’s data adds to weaker numbers in June for manufacturing indexes and a second measure of the services industry after the government cracked down on property speculation and as the effects of stimulus measures fade. A slowing economy could lead officials to delay returning to pre- crisis policies.

U.S. Declines to Label China a Currency Manipulator - WSJ - The U.S. opted against declaring China a currency manipulator Thursday, with U.S. Treasury Secretary Timothy Geithner instead shifting the focus forward on the yuan's future appreciation. "What matters is how far and how fast the renminbi appreciates," said Mr. Geithner in a statement, referring to the other name for China's currency. He pledged to "closely and regularly monitor" the currency's appreciation and consult with Congress in ongoing efforts to expand U.S. exports to China.  The Treasury's decision once again to decline to declare formally that China is manipulating its currency is certain to further anger members of Congress, who happen to be on recess this week.

U.S.: No Country Manipulates Currency, Yuan `Undervalued’ - The U.S. pledged to monitor China’s “undervalued” yuan in the next three months for signs that Asia’s fastest-growing market is living up to its commitments to help rebalance the global economy.  China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher, the Treasury Department said yesterday. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation. The Treasury promised another review in October.  “What matters is how far and how fast the renminbi appreciates,” Treasury Secretary Timothy F. Geithner said, using another name for China’s currency. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”

China Currency Gesture May Not Be Enough To Head Off Congress - Treasury released its Report to Congress on International Economic and Exchange Rate Policies.  Regarding China, it said:  "On June 19, 2010, China announced that it was returning to an exchange rate regime that would be more flexible and more market based, with the renminbi allowed to trade within a band of plus/minus 0.5 percent against the dollar on a daily basis.  China’s policy shift is a significant development and a welcome step forward in fostering stronger, more sustainable, and more balanced global growth. Just before Congress recessed for July 4th, Senate Chuck Schumer (D-NY) made it very clear he plans to push his China currency bill, S.3134, when Congress returns next weekHe was not impressed by China's June 19 announcement nor by its subsequent revaluation.  Senate Majority Leader Harry Reid (D-NV) hasn't said whether he will make time for Schumer's bill.  I expect President Obama and Treasury Secretary Geithner to urge Reid and Schumer to refrain from offering the bill.  Senator Baucus (D-MT) has a much weaker bill. S.1607, from the 110th Congress, which could pass as a compromise.  Stay posted for the outcome.

China’s Exports Explodes – 140% yearly increase in trade gap - Recall how the Obama administration refuses to label China a currency manipulator. Now recall the U.S. needs 10,600,000 jobs just to return to a 5% unemployment rate. Now recall the U.S. has lost 2.4 million jobs due to China from 2001-2008.  Now the news, China's trade gap increased 140% from one year ago. The trade gap rose 140 percent, to $20.02 billion, compared with a year earlier, the customs bureau said on its Web site on Saturday. That compares with the $15.6 billion median estimate of 24 economists surveyed by Bloomberg News. Exports surged 43.9 percent compared with a year earlier and import growth moderated for the third month, rising by 34.1 percent.  Notice how exports soared while imports, uh, not so much.

China’s June trade figures may give Congress new ammunition - One good deed begets another. After China announced in late June that it would abandon its currency peg against the US dollar, the Obama administration said last night that it would not label China as a “currency manipulator”, defusing a potentially destabilising political dispute between the two countries.China’s Congressional critics were not best pleased - there were several immediate calls to launch a complaint at the World Trade Organisation over China’s currency policy - and they might not have to wait too long for new ammunition.Beijing will release June trade figures over the weekend and many economists expect the upshot will be another eye-catching trade surplus, to go with the $19.5bn recorded in May. If that happens, many will argue that the recent dip in China’s external surplus was a temporary phenomenon that is now unwinding.

China's time to draw the line - In putting pressure on China to follow Japan's example to revalue the yuan, the American money doctors fail to point out that they are in effect asking China to take a loss, similar to those of Japan amounting to hundreds of billions of dollars, on her holdings of US Treasury paper.  China carries her books in yuan, not in US dollars. Therefore, every change in the yuan price of the dollar will have an immediate and predictable effect on the value of China's portfolio of US Treasury paper. In particular, a decrease in the yuan price of the dollar results in a loss in the yuan value of China's dollar balances.  The question arises: by what right does the US, a country with severe deficits and a history of reneging on its foreign debt - as on August 15, 1971 - demand that China write off a part of the American debt to China?

Can real exchange rate undervaluation boost exports? VoxEU -Current discussions over the value of China’s currency demonstrate the controversy that exchange-rate policy is capable of igniting. This column suggests that while a managed real undervaluation can enhance domestic competitiveness, it is difficult to sustain in the post-crisis environment – both economically and politically. It says that a real undervaluation works only for low-income countries, and only in the medium term.

China buys Japanese bonds at record pace - China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, more than doubling purchases for this year as it heads for the biggest annual increase since at least 2005.China's purchases of Japanese bonds exceeded sales by 1.28 trillion yen since January, after net sales of 78.7 billion yen for the whole of 2009, according to data released by Japan's Ministry of Finance. This year's purchases are nearly five times as much as for the whole of 2005, which was the biggest year for Chinese net bond buying between 2005 and 2009, the data show.The yield on Japan's benchmark 10-year bond plunged in the second quarter by the most since the final three months of 2008, reaching 1.055 percent on July 1, the lowest since August 2003. China may reconsider the make-up of the world's biggest foreign exchange reserves, which have so far focused on Treasuries, said Susumu Kato, chief economist in Tokyo at Credit Agricole CIB and CLSA, a unit of France's largest bank by branches.

Is Asia's recovery stalling? - The one word that has been used again and again to describe the global economic rebound is “fragile.” The G-20 featured it prominently in final declaration issued after its June Toronto summit. And recently, more and more signs have emerged that the recovery is even more fragile than many had anticipated just weeks ago.  Bad news also continues stream out of Europe. The persistent self-destructive cuts in fiscal spending pursued by some European governments will almost definitely drag on an already weak recovery, while unemployment in the Eurozone barely budged in May and stands at an awful 10%.Now it looks like Asia, the guiding light of the post-recession world, is hitting speed bumps as well. What does that mean for the world economy? It's just more evidence that the entire global recovery may be running out of steam

Asia and the IMF: A Closer Engagement - Asia’s leadership of the global recovery is undeniable, as I have said in earlier blogs. And the extensive reforms and improved macroeconomic policy frameworks that underpinned the region’s remarkable resilience to the global crisis will see Asia’s successes continue. In just two short decades, we expect it to become the largest economic region in the world.The Korea conference will be an opportunity to showcase Asia’s economic successes, and also highlight the importance of regional integration and cooperation, which has been growing rapidly in Asia. Underpinning all the conference sessions is a recognition of Asia’s role as an important global economic actor and its growing role in international policymaking. But each session will delve deeper into aspects of how Asian and international policymakers alike can benefit from Asia’s experiences

Let’s do a Doha deal - Originally scheduled to end in 2005, Doha negotiations have dragged into their ninth year. This column argues that, while many observers assign blame to the complexity of 153 members reaching a consensus, the heart of the matter is far simpler. It says that if the US and China come up with new offers, the momentum for a speedy agreement will be unstoppable.

Baltic Dry Drops Another 4%, Below 2000, Longest Decline On Record Enters 31st Day - The Baltic Dry, which contrary to what some may claim, actually is one of the best leading indicators on global trade and thus the health of the economy, continues to plunge, and is now below 2000, hitting fresh 14 month lows, at 1940. It is now at the levels last seen during the March 2009 "generational" low, and just after the Lehman bankruptcy.

Don’t panic, the Baltic dry is a rubbish indicator! -The Baltic Dry Index (BDI) — a measure of shipping costs for dry bulk goods — suffered its 29th consecutive daily decline on Wednesday, to record its longest losing streak in more than six years, according to Bloomberg. It’s news that David Rosenberg at Gluskin Sheff, amongst others, managed to get pretty excited about on Wednesday. He, for example, thought it’s the sort of story that should have made the front pages by now:The problem for the commodity complex in general is that the Baltic Dry Index, a usually reliable leading indicator, has plummeted by half since the end of May, is down now for 29 consecutive sessions and is at its lowest level in more than a year. Not to mention the fact that this is on nobody’s radar screen (page 21 news in the FT)! And while many economists still view the index as an extremely useful barometer of global productivity trends — it appears there are some growing concerns about its usefulness today versus its usefulness say two years ago. And it’s all down to shipping supply.

Emerging Economies Still Need to Worry About Too Much Money - International Monetary Fund chief economist Olivier Blanchard says emerging economies still need to worry about overflows of capital despite talk about double dips and European debt problems.Capital flows to emerging markets have taken a breather this spring as global investors pulled back from risky trades in places like China and Brazil. Mr. Blanchard says that’s temporary and that the challenges of handling too much money flowing into emerging economies will resurface.It’s the be-careful-what-you-ask-for-because-you-just-might-get-it side of economics. “Theses inflows present emerging market countries with a very difficult challenge, which is how to handle them,” Mr. Blanchard said Thursday in Hong Kong. Too much capital flowing into economies can inflate property prices and stock markets. If the money pulls all at once at the first sign of danger, everything unravels. You don’t need to look further than the IMF’s world economic outlook published today to see why investors will continue to direct money to emerging markets. That’s where the growth is.

Whatever Happened to the US-Korea FTA? - I almost forgot about this one. As you probably know, any number of bilateral free trade agreements have been held up under the Obama administration that were in various stages of completion during the second term of his predecessor. Bad economic times have soured the people's representatives on passing such agreements in fear that they may be perceived as "exporting US jobs" or suchlike neo-protectionist sentiments. Although the Democrats have tried to improve their populist credentials by saying labour and environmental standards will be considered with new trade deals, no one is quite sure of whether such standards merely represent backdoor protectionism.In addition to pending FTAs with Colombia and Peru, the United States has another with South Korea under the wraps. Early last year, Korean legislators thought it contentious enough to engage in fisticuffs over. However, the Obama administration entering office has seen a cooling down period on both sides. Now, though, the Obamanites indicate that they want to move on KORUSFTA (Korea-US Free Trade Agreement) before November when the G20 meets in Seoul, South Korea. Remember, South Korea is the current chair of the G20. However, it remains to be seen how contentious issues can be resolved without renegotiating the pact:

Smoot-Hawley is the economists’ Munich, isn’t it? - Our friends in the economics departments (except the economic historians, and only some of them) have a thing about free trade, but only when, via Thoma, I read this remark by Tim Duy, did I begin to understand how it works. And every right minded economist and policymaker knows unequivocally that free trade is good, and to even question that assumption makes one an ignorant heretic who has never heard of Smoot-Hawley. To the extent that this is an accurate representation of how “Smoot-Hawley” works among economists (except the economic historians, and only some of them) this is very similar to the neocon deployment of “Munich”; to wit, “Every tough-minded analysts knows unequivocally that appeasement is wrong, and to even question that assumption makes one an ignorant heretic who has never heard of Munich.” The obvious problem is that in fact not all tinpot dictators are worse than Hilter!!!!1!!!

Japan Vulnerable to Debt Crisis in 5-10 Years: Rogoff - Japan is vulnerable to a sovereign debt crisis in five to 10 years from now, warned Kenneth Rogoff, former chief economist at the International Monetary Fund.While the country's likely to manage funding its deficit in the short term because of the country's vast pool of domestic savings, that could change in the long run because of its rapidly aging population, he said."The end game in Japan is really unclear -- their population is declining, they don't have an obvious way to replenish their workforce," Rogoff, currently an economist professor at Harvard University, told CNBC Thursday.

Could Japan Collapse? - Since taking office last month, Prime Minister Naoto Kan has dramatically shifted the focus of political and economic debate in Japan to the nation’s shocking finances. Japan is in danger of financial collapse, Kan warned, as he called for a hike of the 5 percent consumption tax. Coming just before an important upper house election on Sunday, it was a bold move to touch a traditional ‘third rail’ of politics. And in doing so, he has turned the poll into something of a referendum on increasing the sales tax. Broaching the subject has suddenly become possible in part because of the Greek debt crisis and its repercussions in the Eurozone and beyond. Scenes of public unrest in Greece on TV news shows and the rapid escalation in the scale of the bailouts needed by Athens have made the Japanese public more aware of the potential consequences of national debt problems.

Recapitalise, or resisting the lure of liquidity - Presenting . . .. . . the European predicament in 500 words, by the liquidity-averse analysts at Morgan Stanley. And it’s worth reading given the current debate surrounding European bank stress tests . . . Passive QE… When the credit crisis led to the collapse of Lehman Brothers in autumn 2008 and bank funding markets dried up, the ECB and other central banks responded by giving banks virtually unlimited access to central bank loans. Yet, while the Fed and the Bank of England later (in spring 2009) switched to ‘active’ quantitative easing (QE) and started to buy public or private sector bonds in size, the ECB continued to focus on what we dubbed ‘passive’ QE, i.e., satisfying all of the banking system’s need for liquidity through money market operations with maturities of up to one year (from June 2009) . . .… created perverse incentives for banks…

EU Reveals Backup Plan for Troubled Banks - European Union countries that discover problem banks when they stress-test their lenders could turn to an existing EU state back-up scheme, the bloc's economy chief said on Monday.  EU Economy Commissioner Olli Rehn said that should any government exhaust national funds in helping a troubled lender, it could turn to "EU financial backstops ... in the second line of defense."  "In order to use these European financial stability mechanisms in the case of any country we would need to have a program ... focused in particular on the restructing of the banking sector and addressing the potential needs of a possible recapitalisation," Rehn told lawmakers in the European parliament. "That is the strategy."  It is the first time the European Commission or executive has spelt out that countries struggling to recapitalize stricken banks could tap a 500 billion euros scheme set up as a safety net should borrowing problems in Greece spread to Spain and beyond.

Europe: Austerity or "rigorous fiscal policies"? - A couple of quotes from the WSJ: Lagarde: Banks Will Pass Stress Tests "There is no choice between austerity and stimulus," [Finance Minister Christine Lagarde] said at an economic conference in Aix-en-Provence. "Our policy is a subtle mix between growth-friendly spending cuts and letting play out the remainder of our stimulus package," she said. "We are in a period when we have to manage budgets very cautiously. ... You may call that austerity if you want, I call this rigorous fiscal policies," [European Central Bank President Jean-Claude Trichet] told reporters on the sidelines of an economic conference in southern France.  "If you want sustainable growth, then you have to restore confidence and to do that you need to have balanced and sustainable fiscal policies in place," he added Paul Krugman disagrees: Plan XVII For Europe

Stress testing the stress tests - There are two reasons why one might want to conduct, and publish, stress tests: the first is to reduce market uncertainty about the banking system as a whole through a credible and transparent process. The second is to recapitalise the most vulnerable banks. For this work, the stress tests themselves must pass three stress tests: they must include realistic scenarios; they must be credible; and they must be backed up by a plausible re-capitalisation strategy.  First, by realistic stress I mean the inclusion of extreme, not probable, worst-case scenarios. Given the discussions about Greece in recent months, this must include the worst estimates of a haircut – a deduction suffered by bondholders – of about 50 per cent of the face value of Greek bonds. The stress tests will include a uniform haircut on sovereign bonds of 3 per cent, according to a news report in the Financial Times last week. This number is a joke. Some institutions will have a stronger exposure to Greece, Portugal, Ireland or Spain than others, and it is important that those banks are stressed on the assumption of significant haircuts of their sovereign risk portfolios.  Second, the tests must be published in full and simultaneously for all banks subject to a test. I am hearing that they are still fighting over this.

European stress tests: Send in the clowns –Political theater is so embedded in the financial crisis now that it would be unsporting to complain about it. It is still worth asking, however whether the elaborate staging will have its intended effect. The way that the European Central Bank is approaching upcoming bank stress tests right now, there's no way for investors to win. So it is worth asking if the European Central Bank's upcoming "stress tests" of European banks will accomplish their intention of putting the markets at ease about Europe's prospects. The ECB might want to take more pages from America's playbook on this. In 2009, shareholders and counterparties were terrified that the biggest U.S. banks, including Citigroup (C) and Bank of America (BAC), were so weak that they might be nationalized. The Federal Reserve stepped in, conducted "stress tests" and declared the banks relatively healthy; Each of the 19 major banks, then, miraculously passed; there was no other option.

European Banks’ Hidden Losses Threaten EU Stress Test (Bloomberg) -- The U.S. government’s bank stress tests a year ago helped financial stocks to rebound 36 percent over the next seven months. Europe’s plan to follow may not be as successful. Investors say they don’t know if some banks are hiding bad loans, whether they have enough capital to withstand a debt default by a European state and whether governments can afford to rescue them. The European Union still hasn’t disclosed the tests’ criteria, including if they contain a sovereign default. “There won’t be a rebound in European banks unless we have stress tests,” said Dirk Hoffmann-Becking, a senior research analyst at Sanford C. Bernstein in London who tracks European banks including Barclays Plc, Deutsche Bank AG and UBS AG. “But stress tests won’t resolve the sovereign debt crisis.”

Europe Stress Tests May Underestimate Probable Losses - European stress tests on 91 of the region’s biggest banks drew criticism from analysts who said regulators are underestimating probable losses on Greek and Spanish government bonds. The tests are designed to assess how banks will be able to absorb losses on loans and government bonds, the Committee of European Banking Supervisors said yesterday. Regulators have told lenders the tests may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the talks who declined to be identified because the details are private. “This isn’t a stress test,”  It’s “merely the current valuation of government bonds.”  Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

When is a stress test not a stress test? - When is a ’stress test’ not a ’stress test’? One analyst raised the point in responding to the unveiling on Wednesday evening by the Committee of European Banking Supervisors of its stress tests of 91 European banks (more detail in our earlier post).“This isn’t a stress test,” Jaap Meier, analyst at Evolution Securities, told Bloomberg. It’s “merely the current valuation of government bonds.” FT Alphaville noted in an earlier post that some analysts, such as Goldman Sachs, think the stress tests could succeed overall in boosting battered confidence in eurozone banks. Indeed, indications are that the sovereign debt outlook among eurozone peripherals has not improved a great deal from its earlier shaky period. As CreditWritedown’s Marc Chancler noted late on Wednesday, CDS markets – alongside analysts – seem to be pricing in odds of a larger haircut than the CEBS suggests:

Stress tests to include 80 banks - More details of the forthcoming stress tests are leaked: 80 banks will be included – which is less than previously assumed (will all 8 German Landesbanken be among them?); full details of the sovereign shock will be released; Credit Suisse has stress tested the French banks, and finds that two need more capital; Wolfgang Munchau says for the stress tests to be credible they, too, need to pass a stress test; Naked Capitalism says Europe is very likely to mess up the stress tests as well; the EFSF is in talks with ratings agency to seek a triple-A rating; George Soros says triple A unlikely; start of EFSF postponed due to Slovakia’s opposition; El Pais says Spain is already making good progress towards reduction of private-sector debt; European Commission proposes an increase in the retirement age; French economists call for a debt-finance industrial policy; Jurgen von Hagen, meanwhile, criticises Germany’s short-term working scheme as a beggar-thy-neighbour real devaluation.

The stress tests are finalised - 91 banks are to participate, accounting for some 65% of banking assets in the eurozone; There are 19 Spanish and 14 German banks included: Among the risk scenarios is a 3% haircut on Spanish bonds and a 17% haircut on Greek bonds; Germany’s banking regulator considers legal trick to force publication of stress tests; IMF revises growth forecast for Spain downwards to 0.6% less than half of government forecast; ECB reduces purchasing bonds steadily; Analysts wonder whether the ECB is to tolerate rising interbank interest rates; Irish finance minister says losses of the bad bank have to be covered by bank levy not the taxpayers; Nicolas Sarkozy and his pension reform project in trouble over party donation affair; new collective wage agreement in Greece could limit wage increases to EU average inflation rate; the Baltic Dry Index, meanwhile, seems not to be a good leading index for world production after all.

Oh No, There Won't Be EU Defaults? - Really?  Then what's this? The lenders being tested include 14 from Germany, six from Greece and four from the U.K., the Committee of European Banking Supervisors said in an e-mailed statement. EU banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.  Uh, a loss on government bonds held to maturity eh?   That would only happen in the event of a default by both governments! I have said repeatedly that there is no possibility that the previous trajectory on government spending could be maintained.  Various European officials, including Trichet, have repeatedly said there would be no "default" or "restructuring" of Greek debt.

The EU has once again lost credibility with the financial markets – this time over the stress tests - Market reaction decidedly negative on stress tests, as whitewash is expected; particular criticism over decision to use stress scenario for government bonds that are more optimistic than current market rates; all banks, but two, are expected to pass the tests with flying colours; FT Alphaville: When is a stress test not a stress test? FT Editorial: EU should revise those tests; Robert Peston makes the point that bond discounts are irrelevant if banks to do not book mark-to-market; IMF criticises ECB’s lacklustre bond purchase policies; Trichet says all eurozone-world cup final is evidence that one should not underestimate Europe ; Berlusconi faces strike action, and a backlash from the regions, over budget cuts; US consumer credit has declined sharply; in Brussels, meanwhile, an Italian MEP thinks the EU is insufficiently focused on UFOs.

The eurozone pain is mainly in Spain - In a previous post, I charted the employment losses for the G7 countries and noted that while the US was still bouncing along the trough of of a deep recession, the other countries were less badly-hit. But there was an important country missing from that graph - and it wouldn't have been included in a chart for the G20, either. It turns out that even though only 14% of the people who use the euro live in Spain, the fall in Spanish employment accounts for 41.5% of the total eurozone losses since the peak in 2008Q3: Here's a similar graph for the United States. I couldn't be bothered to do it for all 50 states, so I divided it up according to the 12 Federal Reserve districts. The data are not seasonally adjusted, so the employment losses are those between November 2007 and November 2009.

Greece fact of the day - Greece, with a population of just 11 million, is the largest importer of conventional weapons in Europe—and ranks fifth in the world behind China, India, the United Arab Emirates and South Korea. Its military spending is the highest in the European Union as a percentage of gross domestic product. Can you guess where much of the equipment comes from?The full story is here and I thank the ever-excellent The Browser for the pointer.

It’s No Secret: Greece Is Restructuring Debt - Greece has already started to restructure its state debts. Look at the site for the Hellenic Association of Pharmaceutical Companies (, and you will find a link to a joint press release by the Greek Ministry of Health and Social Welfare and the Ministry of Finance. On June 9, unnoticed by most in the financial world, they stated: “The [Greek state hospital system] debts of 2007, 2008, 2009 amounting to €5.36bn [£4.4bn, $6.7bn] will be settled with zero coupon bonds.” The hospital debts lingering from 2007 will be paid with two-year zeros, 2008 with three-year zeros, and 2009 with four-year zeros. “It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.” And, according to the release: “In case suppliers settle these bonds by January 2, 2011 . . . the above ‘discounts’ corresponds to a total percentage of about 19 per cent.”  Get that? That 19 per cent haircut is based on the Greek state’s own calculation of the present value of these obligations of its hospital system. Others would probably use a higher discount rate. This kind of reduction in principal value, which paid for a critical import, is not, I believe, incorporated in the much touted “stress test” for European banks.

Hungary to ask for ‘precautionary’ €10bn–€20bn bailout from EU and IMF - Economy minister György Matolcsy said this morning that Hungary believes it needs to arrange a new credit line from the IMF and the EU in case the European economic situation deteriorates. Speaking to Reuters in Budapest, Matolcsy also said that Hungary will seek agreement to run a larger deficit than planned next year. Under its current plan agreed with the IMF, Hungary is committed to keeping its annual budget deficit to 3.8% in 2010, and then below 3% in 2011. Matolcsy now suggests that next year's target may need to be relaxed. "I think we should agree with our partners on a range of between 3% and 3.8% [for 2011], undertaking very deep serious structural reforms," he said. The prospect of Hungary defaulting on its debts alarmed the financial markets last month. This saw the euro hit a four-year low after a spokesman for the new Hungarian government said that the economic situation was much worse than expected, with a series of "skeletons in closets" causing alarm. These comments were quickly retracted, but analysts remain concerned that Hungary will not rein in its borrowing quickly enough.

Europe Economy: Roubini Sees Euro Zone '10 Growth "Closer to Zero" - Euro zone growth in 2010 could be "closer to zero" after a volatile second quarter threatens to dash previous estimates of 1 percent, U.S. economist Nouriel Roubini said on Sunday.The currency bloc does not face a double-dip recession, however, despite deteriorating financial-market confidence over economic growth in an age of fiscal austerity, Roubini told a conference in Aix-en-Provence.  "Given the shocks of the last few month s... by year-end, euro zone growth could be closer to zero percent," said Roubini, who has been nicknamed "Doctor Doom" for his pessimistic forecasts

Trichet Calls on EU Governments to Reduce Budget Deficits to Boost Growth. - European Central Bank President Jean- Claude Trichet pressed governments to trim their budget deficits, saying such action would boost economic growth by improving confidence of consumers and investors. “We are in a period where we have to manage budgets very tightly,” Trichet told journalists in Aix-en-Provence, France. “I have no problem with austerity, rigor. I call this good budgetary management.” Trichet said today that deficit reduction won’t choke growth and a failure to stem budget gaps would be equally risky for the recovery. “Confidence is key for growth, and if you cannot have confidence in the sustainability of the fiscal policies then you have no growth because you have no confidence,” he said. “The two things are complimentary.”

To Spend or Not to Spend - Angela Merkel, the German chancellor, has understandably positioned herself as the standard bearer of fiscal rectitude. The memory of those wheelbarrows of worthless cash (which I suspect that Mrs. Merkel was raised on, as I was) suggests the costs of fiscal imprudence. But it is also easy to understand why a different view — that belt-tightening is foolish as long as the world’s economy teeters on a precipice — has plenty of support among American economists both in and out of the Obama administration. I find it hard to come down unilaterally on one side or another. Austerity may be the right program for smaller countries facing lenders that may lose confidence in their debt. Stimulus may be the right policy for larger countries that are trusted to repay and that play a large role in maintaining the global economy. But if America does embrace another stimulus round, we should limit the government’s role to being the big borrower rather than the big spender.

Germany plans to cut new borrowing in savings drive - Germany plans to cut net new borrowing by some 80 billion euros ($100 billion) over five years, reducing supply of Europe's benchmark debt and adding pressure on other euro zone members to tighten their own public finances. The draft budget for 2011, which the cabinet plans to approve on Wednesday for ratification in parliament in November, will anchor a 34 billion euro reduction in new issuance over the next two years compared to earlier plans. The federal government also aims to cut spending to 307.4 billion euros next year, a 3.8-percent decrease from plans made before a "debt brake" law was passed in 2009, details of the draft made available to Reuters on Sunday showed. The budget is the latest chapter in Germany's drive to consolidate public finances, a move that has drawn criticism from some other large countries that say it is too early to withdraw support enacted during the financial crisis.

Merkel's Cabinet Backs $103 Billion German Budget-Cutting Plan (Bloomberg) -- German Chancellor Angela Merkel’s Cabinet approved a four-year package of budget cuts, stepping up pressure on fellow European governments to reduce debt that risks tearing apart the euro area.Merkel met with ministers in Berlin today to discuss spending cuts and revenue-raising measures worth 81.6 billion euros ($103 billion) from 2011 through 2014. Snubbing President Barack Obama’s calls to focus on economic growth, Merkel says the cuts, equivalent to about 2.7 percent of gross domestic product last year in Europe’s biggest economy, aren’t deep enough to threaten the recovery. “Germany feels the responsibility to signal that it will continue to push strongly for fiscal discipline within the euro area,”

German Factory Orders Unexpectedly Fell in May - German factory orders unexpectedly fell for the first time in five months in May as demand for goods made in Europe’s largest economy waned across the 16- nation euro region.Orders, adjusted for seasonal swings and inflation, declined 0.5 percent from April, when they rose a revised 3.2 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.3 percent gain for May, according to the median of 30 estimates in a Bloomberg News survey. From a year earlier, orders increased 24.8 percent. Europe’s sovereign debt crisis has pushed the euro down 17 percent against the dollar since late November, making exports to countries outside the currency bloc more competitive just as the global recovery gathered pace. With governments cutting spending to convince investors that budget deficits are under control, growth in the euro area, Germany’s biggest export market, may slow.

The Four Horsemen of the Acropolis: - In 1998, four renegade German professors tried to stop the introduction of the euro with a legal challenge in Germany's highest court.  With the exception of a small group of people, hardly anyone agreed with them. The four men argued that the euro could not remain stable, because the economies of the participating countries were too disparate and the control mechanisms too lax. This would jeopardize German price stability and affluence. Besides, they argued, a political union had to precede a monetary union. When the court in Karlsruhe dismissed their suit, they became the objects of malicious insults. Former Chancellor Helmut Schmidt, a member of the center-left Social Democratic Party (SPD), called them "idiot savants with no sense of history." Now, 12 years later, they are fighting against a German bailout for Greece -- and this time around, people are listening to them.

Legal noose tightens on Europe's monetary union - The plot continues to thicken at Germany’s constitutional court, a body with power of life or death over Europe’s monetary union. Contrary to general belief, Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, and since May 7 for banks exposed to debt from Spain, Portugal, and Ireland as well.Should they succeed, of course, the eurozone risks disintegration within days, and perhaps hours. I am not sure that investors in New York, London, Tokyo, Beijing, or indeed Frankfurt quite understand this. There are now four cases at the court – or Verfassungsgericht – arguing that these disguised bank bail-outs breach multiple clauses of EU treaty law, and therefore breach Germany’s supreme and sovereign Basic Law.

Turning east, Turkey asserts economic power - For decades, Turkey has been told it was not ready to join the European Union — that it was too backward economically to qualify for membership in the now 27-nation club. Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.  For many in aging and debt-weary Europe, which will be lucky to eke out a little more than 1 percent growth this year, Turkey’s economic renaissance — last week it reported a stunning 11.4 percent expansion for the first quarter, second only to China — poses a completely new question: who needs the other one more — Europe or Turkey?

Italy Is the Ticking Time Bomb: Economist - As Silvio Berlusconi’s government calls for a vote of confidence over his unpopular €25 billion ($31.45 billion) austerity package, Roger Bootle and his team over at Capital Economics are questioning whether the country holds great danger for the euro zone. “Perennially weak growth and a mountain of government debt mean that the Italian public finances are a potential time-bomb waiting to explode,” Bootle wrote in a research note.With much of the focus until now on the likes of Greece, Spain and Portugal, Bootle said Italy could soon be front and center on the sovereign debt story. “We think the size of the Government’s debts will eventually prompt the markets to turn their sights on Italy and a default is a distinct possibility," he wrote.

Austerity is not the only option: tax land - Michael Hudson has a useful article in the Financial Times, looking at Eastern Europe and outlining some alternative policies to those prompted by the recent terror of deficits. Most countries, he says, feel they have only two options: austerity, or currency devaluation. "Taxes in most post-Soviet eastern European economies, along with countries such as Greece, are regressive. They add to the price of labour and industry while under-taxing property. Latvia is an extreme example: its flat taxes fall almost entirely on employment, aning workers take home less than half of what employers pay. The good news is that these high taxes on labour leave open the option of shifting taxes on to other areas, in particular land. Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards. Raising taxes on property, meanwhile, would leave less value to be capitalised into bank loans, thus guarding against future indebtedness."

Is end of Europe’s debt crisis near? - Europe’s debt crisis sent investors spinning in the first half of 2010. Will it also dominate the headlines in the second half? If July’s first few days of trading are any indication, investors are off panic-mode but remain very much on edge. Take a look at how some key risk-o-meters in Europe have performed since the start of the month. Europe’s common currency, the euro, has been one of the biggest victims of Greece’s debt crisis and its fallout on other struggling Southern European economies. These days, however, analysts and investors are scratching their heads over the currency’s recent run against the U.S. dollar: The euro, which is down today, is nevertheless trading at $1.2574 compared with $1.2229 at the end of June. On May 4, one euro bought $1.1917. The euro’s bounce suggests Europe’s political leaders have made some headway in warding off worries about a break-up of the euro currency area.

Why Europe needs marriage counseling - One issue I keep beating on in my posts about Europe's debt crisis is the need for collective action to resolve the region's problems. The independent nations of Europe have gotten into bed together, with the common market as the blanket and the euro as the wedding ring, and they have to start behaving that way, as members of a union they want to see succeed. But while Europe's leaders vow they're committed to each other for richer or poorer, till-death-do-us-part, they seem intent on pushing the region towards the poorer and making that death-induced parting more likely. If the countries of Europe want to live happily ever after, they've got to finally put their swingin' singles days behind them. Whenever they do, good things happen. It was only a decisive display of devotion, in the form of an EU-sponsored $1 trillion rescue fund for troubled members, that eventually helped stem (or at least slow) the contagion that rampaged through European markets in the wake of the Greek debt crisis earlier this year.

Number of the Week: Euro Zone Debt Is Coming Due - $1.65 trillion: Euro zone bank debt coming due in 2010 and 2011.Throughout the recession and recovery, many European banks have sought to sweep their problems under the carpet in the hopes that they could solve them in a better and more profitable future. Now, though, they’re running out of time. As investors fret about European banks’ exposures to Greece and other financially troubled countries, those banks’ borrowing costs are rising sharply. That wouldn’t be a problem if they didn’t need to borrow, but as it happens they need to borrow quite a lot: This year and next, some $1.7 trillion in euro-area bank debt will come due, far more than among banks in the U.S., the U.K. or elsewhere.If banks are forced to renew those borrowings at high interest rates, the resulting debt-service costs will make it still more difficult for them to earn their way out of their troubles. If they choose not to refinance, they’ll have to sell assets and cut back on lending — anathema to European economies still struggling to recover.

European interest rates are about to go up - Today’s most interesting piece of eurozone related media content is from FT Alphaville on an interesting research note from Citibank. Due to the gradual reduction in excess liquidity following the roll-over of last year’s one year tender, pressure is on the Eonia to rise. Citibank expect the Eonia to go up from 0.33% a weak ago to 0.45% mid August, to 0.8% by October – which would be the equivalent of two rate hikes. As for policy options, Citibank discussed three possibilities: a repo rate cut (unlikely), full move towards QE (unlikely), and reverting to last year’s liquidity policies, i.e. another one year tender (most likely).  The FT reports that of rising risk premiums for US local governments amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits. The yield attached to some forms of infrastructure municipal bonds (Baps) has risen relative to US Treasury bonds by 228 bp, the costs for insuring against default have also risen. There are fears that investors switch attention from Europe to the US regions as some regions struggle to curb their deficits after years of low revenues and as the federal stimulus is tapering off.

Few big to fail - THE ECB has released a research report documenting rescue measures undertaken by central banks around the world since the beginning of the crisis. The paper doesn't contain any surprising findings, but it has lots of data that are a good resource to understand the scale and scope of government intervention.For instance, total government commitment to financial institutions since October 2008 has amounted to 28% of GDP in the euro area, 25% in the UK and 26% of GDP in the US. The report shows that governments broadly employed the same tools, namely guarantees for deposits, capital injections and asset protection. The graph below illustrates how the implementation of each scheme varied across the US and Europe. The authors found that the largest part of the financial support has been targeted to a relatively small number of institutions. Between 37 and 63 percent of the support extended under capital, guarantee and asset protection schemes has been absorbed by the largest three recipient institutions

Banks Too Big to Fail, Too Big to Bail Out: Roubini - European governments face the quandary of being unable to afford to bail out banks that are still considered too big to fail, while the global economy is heading for a slowdown in the second half of the year, economist Nouriel Roubini of Roubini Global Economics told CNBC Tuesday.Governments are running out of ways to counter a "massive slowdown" or the risk of a double-dip recession, Roubini said. "A year ago we had all these policy bullets," he said. "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system.""Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there," he said.

EU says member states may have to raise pension age - Countries in the European Union may have to increase the retirement age to prevent their social security systems from collapsing as life expectancy increases and birth rates fall, the EU executive said on Wednesday.Launching a debate on overhauling pension rules, the European Commission said pension systems would come under severe stress in coming decades."Unless people, as they live longer, also stay longer in employment, or start contributing to their pension earlier on in their working life, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure will occur," the Commission said in a report.

EU Suggests Raising Retirement Age To 70 - The European Union's executive says Europeans should not retire before 70 to save cash-strapped state pension funds.In a paper to be published Wednesday, the European Commission says four workers' contributions to state pensions currently help support two retirees. The growing number of older people would require the average retirement age to rise to 67 in 2040 and 70 by 2060 to maintain the current pension system, it says. Lower birth rates and longer life expectancy mean that retiring earlier will not be sustainable.

Increase retirement age as life expectancy rises,  says European commission - The European commission is proposing that retirement lengths in countries across the 27-nation bloc should rise automatically in line with rising life expectancy. As countries, including Britain, grapple with demographic changes that mean more old people compared with people in work, the commission says in the document setting out its proposal: "The situation is untenable."Unless people, as they live longer, also stay longer in employment, either pension adequacy is likely to suffer or an unsustainable rise in pension expenditure may occur."A commission official added: "We are just going to have to accept that every one of us, we're all going to have to work longer. All the member states know that this has to happen. They are all grappling with the same issue." Where currently there are four people of working age for every one over 65, this number will be cut in half by 2060, making state pensions harder and harder to afford, the commission paper notes.

BBC News – Ageing Europe warned of ‘unsustainable’ pensions - Europe's low birth rates and ageing population make it imperative for EU member states to overhaul their pension systems, the European Commission says. A Commission report advocates automatic adjustments to the retirement age as life expectancy increases. Some EU states have adopted such a mechanism."The current situation is simply not sustainable," said EU Employment Commissioner Laszlo Andor. France, Greece, Spain and the UK have plans to raise the retirement age. But the changes, brought in as governments seek to slash chronic budget deficits, have angered many workers. Thousands have protested in the streets.

Life expectancy around the world - In the least 30 years, the difference in life expectancy at birth across the globe has fallen dramatically. This column presents new data on life expectancy within and between countries for the period 1970 to 2000. Controlling for infant mortality, it finds that while within-country inequality in life expectancy fell, between-country inequality rose, leaving total inequality unchanged.

Soros on the Crisis and the Euro - The New York Times has an article by George Soros with his take on the challenges facing the Eurozone. It includes a good, high level recitation of the structural deficiencies in the Eurozone (in particular, its lack of a treasury), the evolution of recent stresses, and suggested remedies. While the initial discussion covers a fair bit of familiar territory, Soros offers some pointed observations. He argues that the Eurozone crisis is mainly a banking crisis, a failure to clean up financial firm balance sheets in the wake of the 2007-2008 meltdown. And he points a finger at Germany for making a difficult situation worse: The euro is a patently flawed construct, which its architects knew at the time of its creation. They expected its defects to be corrected, if and when they became acute, by the same process that brought the European Union into existence.

Euro Worst to Come for Top Analysts as TD Sees Parity (Bloomberg) -- The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy. Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters in anticipating a lower euro in the next two quarters.The euro weakened 15 percent against the dollar in the first half on speculation record budget deficits from Ireland to Portugal and Greece will force governments to cut spending and reduce economic growth. Bond yields among the euro-area’s so- called peripheral nations surged relative to German bunds even as European Union leaders crafted an almost $1 trillion aid package to avoid sovereign defaults.

Mapping the European Union's debt, jobs and growth worries - The interactive graphic above underlines some of the problems that the European economy faces. In 2009 only Poland of the 27 countries in the European Union managed to record positive growth. Although many countries have now returned to growth, it is generally anaemic. In many countries unemployment rates have not risen as much as you might expect given the depth of the crisis—there are times when making it hard to fire people has some advantages. But the flipside of labour-market rigidity is that the unemployment rate may be "sticky", because firms have less need to hire as recovery takes hold. That will keep demand growth subdued.

Part 2. How Often Have Sovereign Countries Defaulted in the Past? - Sovereign bonds have been defaulting for almost as long as there have been sovereign bonds. The problems go back many centuries. A good overview created for the IMF is “The Costs of Sovereign Default” by Eduardo Borensztein and Ugo Panizza. Some countries are “serial defaulters”, with a long history of sovereign defaults. Many have defaulted on sovereign debt five times or more.Here is a chart showing the number of countries defaulting each year from 1824 to 2003. The raw data comes from S&P. Charts were created by the Some Investor Guy. As you can see, there are some years with no defaults at all, and other years with many. Defaults tend to come in clusters, and the behavior of lenders often changes substantially after defaults. In the Volatility Machine, Michael Pettis asserts that sovereign default contagion follows predictable patterns, and that contagion is primarily due to investors in the first defaulting country also having investments in other countries which are vulnerable. This is especially the case with leveraged investors.

Either/Or: how volatile would a collapse of the Eurozone be? - I don't know and neither does anybody else.  Here is one set of recent estimates, as reported in The Guardian: Please don't fix those numbers in your mind, so here's the real point.  The new national currencies, of the poorer countries, would fall by some amount.  If that amount is small, that also provides reason to believe the current Eurozone can survive.  If that amount is large, it provides reason to believe the current Eurozone cannot survive.  (The poorer countries would now have to deflate a lot, and there would be a greater risk of a speculative attack on their banking systems.)You might think that the collapse of the current Eurozone, and the devaluations, are good in the longer run (I do), but in the short run the entire process would be a nasty, volatility-laden, solvency-revaluing shock to the entire global economy.

EMU break-up risks global deflation shock that would dwarf Lehman collapse, warns ING - A full-fledged disintegration of the eurozone would trigger the worst economic crisis in modern history, devastate every country in Europe including Germany, and inflict a deflationary shock on the US. There would be no winners, warns the Dutch bank ING in a new report "Quantifying the Unthinkable".  "Complete break-up would have effects that dwarf the post Lehman Brothers collapse. Governments would find themselves having to bail out banks again, worsening already fragile government finances. The risk of at least a temporary break-down in payments systems would be enormous, " said the report by Mark Cliffe, Maarten Leen, and Peter Vanden Houte.  "Initial trauma is sufficiently grave to give pause for thought to those who blithely propose EMU exit as a policy option," it said, a rebuke to those German politicians and economists who have talked openly of shaking out weaker members.

The future of Europe: Staring into the abyss | The Economist - Germany thinks the euro must be saved by stricter rules on borrowing, spending and competitiveness, backed by quasi-automatic sanctions for governments that stray. These might include threats to freeze EU funds for poorer regions and EU mega-projects, and even the suspension of a country’s voting rights in EU ministerial councils. It insists that economic co-ordination should involve all 27 members of the EU club, among whom there is a small majority for free-market liberalism and economic rigour; in the inner core alone, Germany fears, a small majority favour French dirigisme.A “southern” camp headed by France wants something different: “European economic government” within an inner core of euro-zone members. Translated, that means politicians meddling in monetary policy and a system of redistribution from richer to poorer members, via cheaper borrowing for governments through common Eurobonds or outright fiscal transfers

Chronicle of Currency Collapses: Re-Examining the Effects on Output - The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes.

The Breakup of the Ruble Area (1991-1993): Lessons for the Euro - Parallels have been drawn to the collapse of other fixed exchange-rate systems, ranging from the gold standard to the Argentine currency board. Less attention has been paid to what can be learned from the collapse of  the 15-nation ruble area of 1991-1993. The ruble area came into existence when the Soviet Union was dissolved at the end of 1991. The former republican branches of the Soviet state bank (Gosbank) became the central banks of the 15 newly independent states. Superficially, it looked a lot like the 17-nation euro area.Unlike the euro area, the ruble area suffered from its birth from high inflation. Starting with the exit of the three Baltic states in the summer of 1992, one member after another abandoned the ruble and introduced its own legal tender. Russia itself demonetized the Soviet ruble in 1993 and replaced it with a new Russian ruble. War-torn Tajikistan was the last to leave, in 1995. What relevance does the demise of the ruble area have for today's euro? There are two main lessons.

Research on global financial stability (BIS) Research on global financial stability: the use of BIS international financial statistics - One of the lessons of the global financial crisis which started in August 2007 is the crucial importance for policy makers and supervisors of having access to a wide range of reliable, timely and detailed financial statistics. The BIS has long been playing a pioneering role in collecting and providing, under the auspices of the Committee on the Global Financial System (CGFS), financial statistics which have been actively used to better understand the crisis and international financial trends and linkages. To take stock of how BIS international financial statistics have helped academic and central bank researchers to improve our understanding of global financial stability issues, the CGFS sponsored a second workshop on "Research on global financial stability: the use of BIS international financial statistics". The event was held in December 2008 in Basel and this volume contains papers presented at the workshop.  Full text (PDF 265 pages, 3960 kb)

IMF Says Sovereign, Banking Risks in Europe Threaten Stability  (Bloomberg) -- The International Monetary Fund urged European Union policy makers to take further “decisive” steps to combat a sovereign-debt crisis that it said poses a threat to the world financial system. “Recent global stability gains are threatened by a confluence of sovereign and banking risks in the euro area that, without continued and concert attention, could spill over to other regions,” the IMF said in an update released yesterday of its Global Financial Stability Report.The fund urged policy makers to reduce budget deficits, formulate plans to wind down or recapitalize weak banks, and make “fully operational” a rescue fund to backstop the euro. It also said the European Central Bank should step up purchases of government debt on the secondary market

Continuing Recovery But Clouds on the Horizon - The macroeconomic forecasts in the IMF’s latest  World Economic Outlook update reflect two opposing forces. Looking back, say over the first half of the year, numbers about economic activity have come in strong, indeed somewhat stronger than we had forecast. These would give reasons to be more optimistic than we were earlier.Looking forward, however, strong clouds have appeared on the horizon.  They present real dangers and serious policy challenges, and give reasons to be less optimistic than we were earlier.Assessing the balance of these two forces is a difficult exercise. Our forecast for world growth in 2010 is about 4½ %, a bit higher than our April forecast of around 4¼ %. This revision largely reflects the stronger activity during the first half of the year. Our forecast for 2011 is broadly unchanged, at about 4¼ %. As always, these world growth rates hide a large difference between and within advanced and emerging and developing

IMF wants bank levy triple the size of Osborne’s bailout tax - The International Monetary Fund is pressing for Britain's banks to pay an annual levy of up to £6bn, to protect against the impact of future crises and curb the more reckless behaviour of the industry, far higher than George Osborne's plan for a £2bn bailout tax on the sector. The IMF said the financial crisis had shown that the world's banking sector was under-taxed and should be subject to a co-ordinated levy by the G20 nations. In a report looking into the possibility of a global levy, it said a "financial activities tax" on profits and remuneration of financial institutions, "could raise significant revenue and be designed to serve a range of purposes."The recommendation was made as the European commission agreed proposals to limit bonuses to bank staff ahead of a vote by the European parliament this week. The proposals, which tie bonuses to profits, are expected to be welcomed by MEPs, who are also likely to sanction heavy restrictions on the activities of hedge funds and private equity firms.

Ministers Ordered To Find 40% Cuts As Treasury Axe Swings - Cabinet ministers have been ordered to plan for swingeing cuts to their day-to-day departmental budgets of up to 40 per cent – putting whole swathes of spending programmes and hundreds of thousands of jobs at risk.  The plans, spelt out in a letter from Danny Alexander, the Liberal Democrat Treasury chief secretary, go much further than proposals announced in last month's Budget aimed at cutting Britain's huge deficit.  Then, George Osborne, the Chancellor, said that Whitehall budgets faced cuts of about a quarter. The latest plans, if implemented in full, would see spending slashed to an extent rarely if ever attempted before in a Western democracy and would strike a massive blow at key areas such as the police, transport, energy, universities and business support.

Structural Change - The Necessary Pain - The economy of the UK is, it seems, about to undertake some significant structural change, and it is going to hurt. A lot. We still do not know the details of the forthcoming cuts, but analysts are already starting to pull out their calculators, and work out how they might impact upon jobs and businesses. The cuts were never just about reducing the number of civil servants, but about the knock on effects in the wider economy. This from the Telegraph, reporting the analysis of Begbies Traynor: "We are concerned that the levels of business distress will increase again, potentially from the first half of 2011, once the full effects of the coalition government's fiscal tightening measures impact the economy and particularly amongst those private sector businesses most dependant on public sector contracts," Those sectors most heavily dependent on public sector spending include construction, IT, recruitment, advertising and business services. The trouble is that this is an analysis which only goes so far.

Cost of civil servants' 'Ponzi' pension scheme threatens poverty for future generations The Public Sector Pensions Commission accuses successive governments of hiding the true cost of public sector pensions and raised fresh concerns about the state's £1 trillion of retirement promises. In a comprehensive report it calls for urgent reform of the civil servants' gold-plated benefits. According to its analysis, public sector employees must save more than 40pc of their salary each year to fund their benefits but the amount actually being set aside is just 20pc – of which employees are providing only 6pc themselves. The shortfall has left taxpayers with a growing bill to plug the gap. In 2008, the top-up was £2.29bn. By 2011, it is expected to be £4.6bn. Including employer contributions made by Government departments, the cost to taxpayers in 2011 is forecast to be £18bn– or £700 per household. However, the Commission claimed that "properly measured, the current service cost is actually over £35bn a year

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