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

Saturday, July 17, 2010

week ending July 17th

US Fed's balance sheet grows on mortgage bonds (Reuters) - The U.S. Federal Reserve's balance sheet rose in the latest week on an increase of its holdings of mortgage-backed securities, Fed data released on Thursday showed. The balance sheet rose to $2.324 trillion in the week ended July 14 from $2.314 trillion the previous week. They reached a record $2.333 trillion on May 19 on rising ownership of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae). The central bank's holding of housing agency MBS grew to 1.129 trillion on Wednesday, up from $1.118 trillion a week earlier. The Fed had committed to buy up $1.25 trillion in MBS and $175 billion in bonds issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System.

Fed's Balance Sheet Grows; Money Supply Falls - The U.S. Federal Reserve's balance sheet rose in the latest week on an increase of its holdings of mortgage-backed securities, Fed data released on Thursday showed.  Also Thursday, the Fed reported that U.S. M-2 money supply fell by $33.9 billion in the July 5 week to $8,588.9 billion.  The four-week moving average of M-2 was $8,602.2 billion vs. $8,610.7 billion in the previous week, the Fed reported.  On mortgage bonds, the central bank's holding of housing agency MBS grew to 1.129 trillion on Wednesday, up from $1.118 trillion a week earlier.

Fed Watch: Ahead of a Busy Week - Policymakers are increasingly stuck between a rock and a hard place. It is likely the recovery remains intact, but at a pace that will fall short of policymakers expectations. Just how far short? That is the key question. In the absence of a fresh financial crisis, in my mind the most likely outcome is that the US economy limps along not unlike the path in the wake of the 2001 recession. Recall that what ultimately pulled the economy off its feet earlier this decade was the housing bubble. There is likely no bubble to pull us out this time.And an economy that just limps along will put both monetary and fiscal policymakers in a tight position. With interest rates already at rock bottom, monetary policy options of any significance are limited unless the Fed is ready to pump up the money supply via either a commitment to higher inflation or the targeting of long term interest rates. And on the fiscal side, policy is limited by deficit fears. Lacking a clear downward turn in the economy, there is no willpower for large scale stimulus. Which means this: An economy that limps along is on a certain path to a lost decade if policymakers remain incapable of decisive action.

FRB: FOMC Minutes, June 22-23, 2010

July FOMC Minutes: Interesting Observations - Interesting comments in the so-called "Minutes" (which are really more filtered notes that only say what they want, intentionally omitting anything "contrary", as we now know) In his presentation to the Committee, the Manager noted that "fails to deliver" in the mortgage-backed securities (MBS) market had reached very high levels in recent months. Under these conditions, dealers had experienced difficulty in arranging delivery of a small amount--including about $9 billion of securities with 5.5 percent coupons issued by Fannie Mae--of the $1.25 trillion of MBS that the Desk at the Federal Reserve Bank of New York had purchased between January 2009 and March 2010 Wait a second - two months later these securities that were "sold" were not really sold - that is, they were shorted NAKED by the seller to THE FED? Now is $9 billion material?  It sure as hell is.  It may be a small percentage of securities, but it's still $9 billion that the seller to The Fed did not have and still, two months later, could not acquire!

The view from the Fed – Economist -THE minutes from the Federal Reserve's June meetings have been released, and there are few surprises. The Federal Open Market Committee continues to see recovery proceeding at a moderate pace, though financial markets have become "somewhat less supportive" of economic growth in recent months. On inflation, we get this: A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower. The latest readings on core inflation--which excludes the relatively volatile prices of food and energy--had slowed, and other measures of the underlying trajectory of inflation, such as median and trimmed-mean measures, also had moved down this year...You'd think that there would be some sense that data citations are appropriate in the context of this debate. For instance, "a broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower", supporting the view that downside risks to inflation are the bigger threat. On the other side of the debate, we have "the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve's balance sheet could boost inflation expectations and actual inflation over time." Emphasis mine. That's a lot of qualifiers! But no supporting data, alas

Fed Minutes Flashing Caution - The Federal Reserve just released the minutes from a June 22-23 meeting and an early May conference call. The Fed as an institution is always careful in its delivery, but in reading through their tea leaves this afternoon I sense concern on the Fed’s part of a real  slowing, if not a double dip, in our economy. A summary of the Fed minutes includes the following highlights: …participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period. Participants also revised down a little their projections for inflation over the forecast period. I read these minutes as: Growth is slowing. Job prospects remain dismal. Disinflation and outright deflation are the primary concerns.

Weak economy for extended period, Fed says - The Federal Open Market Committee released its economic forecast on Wednesday, and it was dismal. It could take five to six years before the U.S. economy is fully healed from the Great Recession of 2008, officials at the Federal Reserve said Wednesday. More years of high unemployment. More years of skirting with deflation. More years of ultra-low interest rates, and more years of deleveraging. While the officials are relatively upbeat about growth, they don't see the unemployment rate falling very quickly, nor do they think inflation is going to be a problem any time soon. See full story on the FOMC minutes.

Return to Normal Will Be Painfully Long Trek - Five or six years. That’s how long Federal Reserve officials expect it will take to get the economy back to where it was before subprime mortgages, Bernie Madoff and TARP entered into our daily conversations. What’s worse is that five or six years might be optimistic, with unsettling implications for the medium-run outlook. According to the minutes of the June 22-23 Federal Open Market Committee meeting, officials thought it would take “some time” for the economy to return to the rates of output growth, unemployment, and inflation consistent with the Fed’s policy goal. “Most expected the convergence process to take no more than five to six years,” the minutes said. Whoa. With the recovery probably one year old, the implication is the economy won’t return to “normal” until 2014 or 2015. It’s an indication of how deep a hole we dug ourselves into: the Congressional Budget Office estimates the economy was functioning 5.8% below its potential in the first quarter.

Fed leaders: Economic recovery slower than expected -Federal Reserve leaders marked down their expectations for growth and inflation last month, concluding that the economic recovery is proceeding more slowly than they had thought in the spring but that the slowdown did not warrant new policy actions.But Fed leaders did agree to explore options for supporting the economy further in case conditions worsen."The changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place," said minutes of the Fed's June 22-23 policy meeting, released along with revised economic forecasts. "However, members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy might become appropriate if the outlook were to worsen appreciably."

US Fed weighs new measures as recovery falters - The Federal Reserve revealed it was weighing new measures to keep the faltering US recovery on track on Wednesday, warning jobs and growth will be tougher to regain than expected.  Facing a stubborn recession, the US central bank warned growth will slow to 3.0 to 3.5 percent this year, down from the 3.2 to 3.7 predicted just months ago. The warning - contained in the minutes of the Fed's June meeting - fuelled concerns that the United States faces tough times for years to come.  "The committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," the minutes said.  But with interest rates at all-time lows, experts say the Fed has few tools at its disposal.

US Recovery on Track: Fed's Hoenig - A top Federal Reserve official said on Tuesday that the U.S. economic recovery is on track despite some setbacks and the central bank could take no additional actions to encourage economic growth.  "I have not seen any recoveries that are perfectly straight lined," Kansas City Federal Reserve Bank President Thomas Hoenig told Reuters. "When you look at the long-run trend lines, I think the most likely outcome is for continued growth, and that's what we should act on."  Hoenig is one of the Fed's most vigilant anti-inflation hawks.  In an interview with the Wall Street Journal, Boston Fed President Eric Rosengren, a noted dove, said he is more worried about deflation.

Fed Watch: A Deepening Divide? - Last week the Washington Post raised expectations that the Fed was seriously considering additional policy action: Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth. Today nonvoter Richmond Fed President Jeffrey Lacker pushed back hard on those expectations: Federal Reserve Bank of Richmond President Jeffrey Lacker said any consideration of further monetary easing by U.S. central bankers “is very far away.” “It would take a very substantial, unanticipated adverse shock” for further steps at stimulus to be appropriate, Lacker told reporters today in Richmond. “Consideration of further easing steps is very far away.” And note this morning I concluded with:My concern is that policymakers will view a retrenchment in growth as a natural "pause," simply a delay on the path the strong rebounds that have traditionally followed deep recessions.

Fed Watch: The Dance Continues - The Fed dance continued today with the release of the minutes. In most ways, the content of the minutes was largely expected, as reported by Free Exchange. Forecasts for growth and inflation were knocked down, while the forecast for unemployment was edged up. Overall, the Fed concluded that: The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside. Nonetheless, all saw the economic expansion as likely to be strong enough to continue raising resource utilization, albeit more slowly than they had previously anticipated. In addition, they saw inflation as likely to stabilize near recent low readings in coming quarters and then gradually rise toward more desirable levels. In sum, the changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place. They did inject some uncertainty over the path of policy: Still, the minutes read as if additional policy stimulus is a remote chance. As has been reported, recent Fedspeak has been decidedly more mixed.

Fed: We Aim to Fail - Much wailing and gnashing of teeth about the blogosphere over the Fed’s June minutes. Paul Krugman says it succinctly: I have no idea why Fed presidents expect core inflation to rise over the next two years. Historically, high unemployment has been associated with falling, not rising inflation. In fact, my bet is that we will be near or into deflation by 2012. But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act. Well, Paul unless I am misremembering how the Fed constructs these forecasts its actually worse than that. These are forecasts are generated assuming optimal monetary policy. So the Fed is saying even if it acts in the best possible way it still expects to miss it targets well into 2012.  That’s ignoring the fact that its 2010 – to late to influence – inflation numbers still look a bit rosy to me. The Fed is literally planning to fail. This is not good. Not good at all.

Why won't the Fed come to the rescue? -On July 7, the Washington Post published a story in which several Federal Reserve Bank officials acknowledged that the central bank still had tools at its disposal that it could use to spur a "faltering" economy recovery. But since the Fed delays release of the minutes detailing its own internal deliberations for several weeks, the news July 14 is that in late June, the Fed decided that the time was not yet ripe for any additional action -- even though the consensus opinion of the Fed Board of Governors is that economic growth in the next couple of years will be slower, and unemployment higher,  than it had previously projected. Which leaves us where? Did economic indicators deteriorate enough between the Fed's June meeting and last week to inject new urgency into the hearts of the central bankers? Or are those who are hopeful that the Fed will come to the rescue, in the clear absence of any additional action from the White House or Congress, fatally misjudging just how severe matters must get before Ben Bernanke and company decide to bestir themselves again?

Steve Liesman and the Fed’s Balance Sheet - When Steve Liesman gave his Friday tutorial on CNBC, he summarized the various views within the Fed by quoting some of the members of the Federal Open Market Committee (FOMC). Essentially, there are three views. Some FOMC members may be ready to add new programs in order to stimulate the economy and avoid a “double-dip” recession. Others (the majority) would do nothing now and wait to see if the economy needs more stimulation. A few, known as the “hawks,” want to shrink the Fed’s balance sheet now, or allow it to shrink naturally as $200 billion in mortgage holdings mature this year. Steve may want to consider a second chapter in his tutorial. He may want to look at the liability side of the Fed’s balance sheet.

What the Federal Reserve won't be doing - I wrote last week about what actions the Fed would consider taking if the economic recovery continues losing steam. In reporting that story, I also vetted some other actions the central bank might take to try to support growth -- but concluded they are not viewed within the Fed as desirable options, for a variety of reasons. So here are the things the Fed probably won't be doing to try to strengthen the economy, and why. Endorse more fiscal stimulus. Chairman Ben Bernanke gave crucial momentum to fiscal stimulus actions in early 2008 and early 2009 with his backing. He could put his credibility to use and prod Congress toward taking more action to boost growth. He even has a high-profile venue at which to do it with his semiannual monetary policy testimony next week.  But don't hold your breath. Bernanke, to the degree he wades into fiscal policy at all, has been urging Congress to work to reduce the long-term budget deficit in recent months

What Is The Fed Thinking? - Paul Krugman - OK, so the June Fed minutes are out.  When reading this, in addition to looking at the projections for 2010, 2011, and 2012, you want to look at the long run projections for unemployment and inflation. In past releases, the Fed has been clear that the long-run unemployment projection represents Fed views on the NAIRU, the unemployment rate consistent with stable inflation, and that the long-run inflation projection should be viewed as a target. Also, the Fed generally looks at core inflation rather than the headline number.With that in mind, here’s what the Fed expects: unemployment far above normal, core inflation well below target, for years to come.  I’d quarrel with those projections, a bit: I have no idea why Fed presidents expect core inflation to rise over the next two years. But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act.

Nobody Understands The Liquidity Trap (Wonkish) Krugman - In an otherwise useful article about divisions in the Fed, Jon Hilsenrath says this: The Fed is better equipped to solve some economic problems than others. As Mr. Bernanke noted in a now-famous 2002 speech, the Fed has the power to fight deflation—or falling wages and prices—by printing money. But the bank’s tools aren’t perfectly suited to reducing unemployment, which is influenced by a range of factors including fiscal policy, regulation and global demand. Sorry, but that’s totally wrong. The question is whether, at the zero bound, the Fed has the ability to increase aggregate demand — full stop. If it can increase aggregate demand, it can fight both deflation and unemployment; if not, not. In a way, the problem with Bernanke’s speech was that he made increasing demand and fighting deflation sound too easy. The Fed can print money, if you increase the supply of something its price will fall, end of story. But as I tried to point out a long time ago, this simple story breaks down when short-term interest rates are near zero.

Will a helicopter drop of money stimulate aggregate demand? - I am happy to see Paul Krugman address the question.  He writes: So why not forget about open-market operations, and just drop the stuff from helicopters? Well, remember that at this point cash and short-term bonds are equivalent. So a helicopter drop is just like a temporary lump-sum tax cut. And we would expect people to save much or most of such a tax cut — all of it, if you believe in full Ricardian equivalence. I hold a different opinion for two reasons.  First, cash and short-term bonds may be near-substitutes but they are not literally, strictly equivalent.  The nominal rate on T-bills is not exactly zero and furthermore you can't use a T-bill for every retail purchase.  The demand curve for real cash need slope down only slightly for a quantity theory result to hold.  After everyone spends the new cash balances, and prices rise, people end up with the quantity of real balances which they initially desired.  These equilibria have "knife-edge" properties, where "identical to T-Bills" and "nearly identical to T-Bills" do not bring the same results.

Helicopter drops are a really, really, really, really bad idea - Krugman’s right that a helicopter drop is not necessarily inflationary.  Suppose the government dropped 50 $100 bills for every US citizen out of an airplane.  If the public expected the government to institute a $5,000 per capita tax in the very near future, and retire all that cash from circulation, it would have no effect.  But of course that would be a really, really stupid thing to do.  Taxes have deadweight losses, so the net effect of the money drop plus tax would be simply the destruction of wealth, that is all.  It would be like me shooting off my foot to convince my wife that I wouldn’t play golf, but then putting on a peg leg and going out golfing anyway.  Sure that’s theoretically possible, but why would I do it?  If the government behaves like a bunch of reckless lunatics hell-bent on hyperinflation, it is a good bet that they are a bunch of reckless lunatics hell-bent on hyperinflation.

What is the Fed Thinking? – Kling - Read Tyler Cowen, Paul Krugman, Brad DeLong, and Scott Sumner to catch up. Basically, all of them support having the Fed try to undertake expansionary monetary policy, although Krugman thinks it might not work. As you know, I believe in monetarism even less than Krugman, but I still would make a Pascal's Wager case for trying a monetary expansion, my skepticism notwithstanding. Here are two cynical explanations for the Fed's actions. 1. The Fed does not think that we are in a recession. The banks are still standing, aren't they? I know that when I was at the Fed in the 1980's there would have been folks, particularly at the New York Fed, who really were in this mindset. 2. If the Fed were to make a dramatic change, it would have to explain what it is doing. This is always a problem for the Fed, where part of the mystique comes from its vague communication about policy. Even worse, it probably would have to be specific about the target that it is aiming for, such as future nominal GDP or inflation

What is the Fed Thinking, 2? -Yesterday, I offered two ungenerous interpretations of the Fed's unwillingness to take steps to boost the economy. If the Fed believed in textbook macro, then I would think that, if nothing else, they would stop paying interest on reserves. Today, let me offer a model of the economy that would justify the Fed's thinking. In this model, it is not possible to set an inflation dial to a precise number. Instead, there are two regimes. In one regime, inflation is low and stable. In the other regime, inflation is high and variable.  The high-inflation regime is quite costly (see the 1970's), because in it people are spending a lot of real resources trying to conserve on the use of money and trying to extract information from prices that are less reliable signals of relative value. So the Fed is understandably wary of moving to that regime.

Still Jackasses - Monetary theory gives me a headache. In 1968, Paul Samuelson wrote an article for the Canadian Journal of Economics called "What Classical and Neoclassical Monetary Theory Really Was." The article drips with scorn. He starts out by talking about a farmer, who, having lost his jackass, tries to find the animal by asking himself, "If I were a jackass, where would I go?" Samuelson uses that farmer as a metaphor for the modern economist trying to understand classical and neoclassical monetary theory.  I am having an equally hard time understanding modern monetary theory. I can only get it if I start from the assumption that The Fed is Very, Very, Important and then proceed to the conclusion that when the Fed goes into the market and exchanges one type of asset for another this is a Very Big Deal. So, if the Fed were to scoop up nickels by exchanging them for dimes, that has to create a dire shortage of nickels, causing all sorts of havoc. Or, if the Fed exchanges Treasury bills for mortgage-backed securities, that does all sorts of magical things. And that is mainstream, standard thinking. I am the oddball here.

The Fed Is Fractured - There is much debate these days about the powers of the Fed and what they can do to strengthen the economy (if anything).  Regular readers are familiar with my position – monetary policy matters little in times of a balance sheet recession.   It is not the supply of money that matters, but the demand of money when the private sector is experiencing a period of deleveraging.  This renders the Fed largely powerless. I’ve been beating this dead horse since long before Ben Bernanke initiated his outrageous trickle down bank bailout policies, but it’s only just now becoming evident to the mainstream media that this might be the case.   The bank bailout and the gross ballooning of the Fed’s balance sheet has done practically nothing for Main Street.  If that isn’t clear by now then people need to pull their heads out of the sand.  Despite this, we continue to hang on every word out of this powerless Federal Reserve.  We are all waiting for Ben Bernanke to save us from economic downturn.   Why?

Federal Reserve Worry List Gets Longer (Reuters) - The U.S. Federal Reserve's list of worries may be getting longer.A fading recovery, persistently high unemployment, Europe's debt troubles and commercial real estate losses have garnered most of the attention. But some Fed officials have begun talking more about another trouble zone -- recession-hit U.S. state and local government finances.The problem is that they have to balance their budgets, unlike the federal government, which is running a deficit equal to more than 10 percent of total economic output."They have no choice but to cut spending or raise taxes -- or they get some more help from Washington," said Harm Bandholz, an economist with Unicredit in New York. He thinks state and local government finances represent the most important domestic risk factor in the U.S. economy. Yet they received only two brief mentions in 19 pages of minutes from the Fed's April policy-setting meeting.

Losing One's Faith Because of the Liquidity Trap - Just a few days after getting all religious about monetary policy, Paul Krugman now seems to be losing his faith as he wallows in liquidity trap-driven doubt: [w]hen you have bought so much debt and created so much money that rates are near zero, the public is saturated with liquidity; from that point on, they’re holding money simply as a store of value, which makes it no different from bonds — and hence a perfect substitute for bonds. And at that point further open-market operations do nothing — they just swap one zero-interest asset for another, with no effect on anything.  Wow, someone is really in a liquidity-trap funk. Luckily for Krugman and other depressed doubters, the righteous reverend of monetary policy efficacy, Tyler Cowen, is here to restore the faith: First, cash and short-term bonds may be near-substitutes but they are not literally, strictly equivalent. Second, after a helicopter drop no one need expect future taxes to be raised to retire the money....In short, the liquidity trap is a much overrated idea so don't get all worked up over it. Monetary policy can still be highly effective in the current economic environment.

Can the Fed Jumpstart Growth? -From the start of the economic crisis some economists have argued that the Fed and only the Fed was the key to restoring growth. They believe all that was necessary to restore growth was for it to expand the money supply sufficiently. Fiscal stimulus was not just unnecessary but counterproductive, they argued, because the increase in debt was destabilizing and portended higher taxes in the future. This is usually called the monetarist perspective. The alternative view, endorsed by most mainstream economists and those in the Obama administration, is that monetary policy is ineffective unless complimented by an expansive fiscal policy. Without fiscal policy there is no practical way of getting money out into the economy where it will be spent or invested and hence raise growth. This is usually called the Keynesian view. I think the weight of evidence supports the Keynesian view because the money supply has in fact expanded enormously, but without counteracting the deflationary forces that are at the root of the economy's problem.

More powerful than you think - THERE is more evidence that central banks are not helpless when short-term rates reach zero. A new paper from the Bank of England out this week found that £200 billion in quantitative easing by the BoE lowered yields by about 100 basis points. In another paper from the Saint Louis Fed, Christopher Neely shows that the Fed's large-scale quantitative easing in 2008-09 reduced long-term American bond yields. That's not surprising. But Neely goes on to argue that the Fed's intervention also noticeably reduced long-term foreign bond yields and the spot value of the dollar.The mechanism for the international transmission is explained via a simple portfolio model and the uncovered interest parity for exchange rates. Specifically,when the Fed announced its intention to buy large portions of long-term Treasuries, which are in limited supply (in theory), the price of the bonds increased and their yields decreased.

Further Evidence on the Fed's Power - Menzie Chinn directs us to a paper by Christopher Neely that shows (1) the Fed is far from powerless when it policy rate is at the zero bound and (2) the Fed is a monetary superpowerThe Federal Reserve’s large scale asset purchases (LSAP) of agency debt, MBS and long-term U.S. Treasuries not only reduced long-term U.S. bond yields but also significantly reduced long-term foreign bond yields and the spot value of the dollar. These changes were much too large to have been generated by chance and they closely followed LSAP announcement times. These changes in U.S. and foreign bond yields are roughly consistent with a simple portfolio choice model. Likewise, the exchange rate responses to LSAP announcements are roughly consistent with a UIP-PPP based model. The success of the LSAP in reducing longterm interest rates and the value of the dollar shows that central banks are not toothless when short rates hit the zero bound.

Stimulating the Economy By Dropping Money Out of Helicopters - The minutes of the June Federal Reserve Open Market Committee meeting are now out and the results are totally baffling. The FOMC decided that conditions were worse than they’d previously projected they would be, and revised downward their forward-looking forecasts for growth, inflation, and employment but decided that the appropriate response is . . . nothing.  Ezra Klein surveys some of the thinking behind this inaction but I think he underplays how crazy this is. The Fed does these projections because the projections are relevant to policy. When the projections change, policy is supposed to change. Otherwise why are they doing this in the first place? If the price level was above trend, and the inflation rate was above target, and then inflation expectations rose does anyone doubt that the Fed would be moving to tighten? ...  Meanwhile, I think Paul Krugman, Brad DeLong (and again), and Tyler Cowen are really all saying the same thing about the prospects for re-inflating the economy by printing money and dropping it from helicopters.

Point and counterpoint - REMEMBER that within the Federal Open Market Committee a debate is raging over whether inflation or disinflation (or deflation) is the greater threat: Well, here is your latest datapoint: The Producer Price Index for Finished Goods fell 0.5 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This decrease followed declines of 0.3 percent in May and 0.1 percent in April. At the earlier stages of processing, prices received by producers of intermediate goods moved down 0.9 percent in June and the crude goods index dropped 2.4 percent. Like most recent data releases, this would appear to support the arguments of those fearing downside risks most.

Trade Data Lead to Cut in Second Quarter GDP Forecasts - U.S. trade data for May presented yet more unfortunate news for the U.S. economy, prompting a number of economists to again cut growth estimates for the second quarter. The latest trimming of GDP forecasts leaves unresolved whether the U.S. economy is suffering from a temporary cool off after a decent move out of recession, or whether the recent lull represents something more ominous. On Tuesday, the government reported that the U.S.’s trade gap with the rest of the world jumped to an 18-month high in May, standing at $42.27 billion, from $40.32 billion in April. A number of economists reacted by cutting growth forecasts. Barclays Capital had expected a robust 4.5% second quarter GDP; it now sees a still decent 3.5%. Credit Suisse said its 3.8% second quarter estimate is facing a “downside risk” which will be clarified in the wake of retail spending and business inventory data over coming days. J.P. Morgan knocked down its second quarter GDP call to a 2.5% annual rate, from the previous estimate of 3.2%.

Jim Grant Is Confident QE 2.0 Is Just Around The Corner - Jim Grant, one of the most respected voices in the financial industry, joins Zero Hedge and others, who see that the only choice the Federal Reserve has now that the temporary and shallow reprieve from the clutches of the deflationary depression is over, is to print more money in the form of another iteration of QE. Whether this will be another $2.5 trillion, like last time, which was the price of an 18 month delay of the inevitable, or a $5 trillion concerted global effort, as Ambrose Evans-Pritchard believes, is irrelevant: the only option the central printers, pardon, bankers, have left is to flood the market with yet more worthless paper  In an interview with Bloomberg TV, Grant says that the first order of business tomorrow when the Fed's new additions officially join their new groupthink perpetuating employer will be "to try once more to print enough dollars to make something happen in the U.S. economy.”

Defying Gravity One Round Of QE At A Time- We have long warned and acknowledged the rollover of Economic activity (curiously following closely the expiry of stimulus programs, quantitative easing, and therefore liquidity injection). However I want to draw your attention toward our global liquidity chart which shows that after allowing liquidity to subside forces in power have addressed the problem and world liquidity is flying towards new highs. There is European QE involved, talks of additional stimulus in Japan, research stating that due to securitization Chinese loans in H1 2010 were 30% higher than officially acknowledged, and yesterday the minutes indicating that the Federal Reserve's board is cosily discussing further securities purchase if warranted. So while the tone was around the end of Q1 that of austerity, letting liquidity facilities expire, and withdrawing "exceptional" accomodation, it appears political will has lasted about as long as my latest experiment with dieting.

Helicopter Money - I sent an email to Brad DeLong. He gives me more credit than I deserve - Mark Thoma snarks:  When you trade money for bonds, it simply changes the composition of what people have in savings. Before it was bonds, now its cash. No effect on real activity. You need actual demand, or the prospect of it, to create expected inflation.  When you drop money from helicopters, the people who need it most scramble for it, and then rush to spend it before everyone else spends their money and drives up prices (expected inflation) or causes stock-outs. It has real effects. And I don’t think the people willing to fight for $100 bucks when the helicopter comes each day give a damn about future taxes.But instead of simply dropping it, why not buy something on the first step? Print money, buy labor (the labor then spends the “found”, i.e. earned, money). Print money, buy goods and services. Because this is too slow. Deciding what labor should do, hiring, etc. takes way too much time and political effort, as does figuring out what to buy.

Legal Question – Krugman - Does the Fed have the right to do a helicopter drop, i.e., just hand out cash? My guess is not: it’s empowered to buy assets, which is what it does in an open-market operation, but not just to give stuff away. So to do the equivalent of a helicopter drop, the Fed would have to work with the Treasury: it would have to buy government debt, and the Treasury would then hand out the money. But the Treasury can’t do this without enabling legislation. And enabling legislation can’t pass without Ben Nelson. I think we have a problem here. There’s a hole in the bucket. However, the Fed can change its inflation target any time it likes.

Helicopter Tactics: Negative Consumer Credit Rates - Despite my dismay at the Feds unwillingness to take dramatic action I really do think we have a variety of quasi-conventional means at our disposable to create monetary stimulus. As always an explicit price level target would be a good start.However, it doesn’t end there. The Fed can buy up all sorts of government debt, including the debts of Fannie Mae and Freddie Mac. And, and in the end there is always the helicopter option – that is just tossing money from a helicopter. Paul Krugman worries that the helicopter option wouldn’t be strictly “legal” as they say. The Fed has no authority to just hand out cash. Matt Yglesias says the Fed can just issue $1000 loans with a pair of socks as collateral. If people are “happen” to default on the loan the Fed will just refuse to return their socks.However, its really even easier than that. The Fed can purchase bonds backed by consumer credit. In the same way that Wall Street takes your mortgage and bundles it into a set of bonds, firms also take your credit card payments and bundle them into bonds.

Bernanke Urges Lending to Small Business - “Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges,” Bernanke said in prepared remarks to the Fed’s forum on restoring credit to small businesses. Declaring small businesses as “central” to tackling unemployment, the Fed chief said not enough is being done to ensure that financially sound companies can obtain loans. Fed officials have become increasingly worried about the stubbornly high unemployment. The jobless rate edged down to 9.5% in June from 9.7% the previous month. But the economy shed jobs for the first time this year, with nonfarm payrolls falling 125,000 last month.

Restoring the Flow of Credit to Small Businesses - FRB: Speech--Bernanke

Yellen: Job Creation Is Main Focus of Monetary Policy Right Now - The woman named by the Obama administration to the Federal Reserve’s vice-chairmanship said Thursday the central bank’s main priority right now is helping the economy generate jobs. In an statement to be given to the Senate Committee on Banking, Housing and Urban Affairs, Federal Reserve Bank of San Francisco President Janet Yellen said “with unemployment still painfully high, job creation must be a high priority of monetary policy.” Yellen has been in charge of the San Francisco Fed since 2004. The official worked in Washington for the Fed before, serving as a governor between 1994 and 1997. The official is seeking to replace outgoing Federal Reserve vice-chairman Donald Kohn.

Senate Hearing: Useless - I, personally, learned next to nothing about the monetary policy stance of the nominees to the Federal Reserve Board of Governors at today’s Senate hearing. Janet Yellen, Peter Diamond, and Sarah Bloom-Raskin all seemingly showed up to the wrong hearing! The hearing that I saw was almost solely about financial regulation. This is what I tweeted to Chris Dodd: @chrisdodd PLEASE ask them: “Do you believe that the Fed can stimulate aggregate demand at the zero lower bound?” #frbhearing Here is the closest I have to go on from Janet Yellen: (Bloomberg) — Federal Reserve Bank of San Francisco President Janet Yellen said the prospect that policy makers will leave the benchmark U.S. interest rate near zero for the next several years is “not outside the realm of possibility.” Given the recession’s severity, “we should want to do more. If we were not at zero, we would be lowering the funds rate.”These are not very inspiring statements.

The Feckless Fed, by Paul Krugman - NY Times: Back in 2002, a professor turned Federal Reserve official by the name of Ben Bernanke gave a widely quoted speech titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Like other economists, myself included, Mr. Bernanke was deeply disturbed by Japan’s stubborn, seemingly incurable deflation, which in turn was “associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems.” This sort of thing wasn’t supposed to happen to an advanced nation with sophisticated policy makers. Could something similar happen to the United States? Not to worry, said Mr. Bernanke: the Fed had the tools required to head off an American version of the Japan syndrome, and it would use them if necessary.  Today, Mr. Bernanke is the Fed’s chairman — and his 2002 speech reads like famous last words. We aren’t literally suffering deflation (yet). But inflation is ... trending steadily lower; it’s a good bet that by some measures we’ll be seeing deflation by sometime next year.

Why Bernanke won’t ease further - Paul Krugman’s column today is devoted to telling off the Fed for not being aggressive enough about deflation: In a blog entry, Krugman explains why he’s so convinced that deflation is a real and immediate problem: monthly price inflation has been falling steadily since January 2008, and has now reached the point at which it’s sometimes negative.Krugman’s argument is certainly defensible. But I do wonder whether he isn’t essentially asking Ben Bernanke to step up and provide the stimulus that Summers and Geithner have rejected: This is the point at which I remind myself that Bernanke is a Republican. He’s not a party-political hack, but he never evinced any substantive disagreement with Alan Greenspan when the two of them were on the FOMC together...

The Meaning of Credibility - Krugman - In response to today’s column, a number of people have suggested that the Fed essentially defines credibility purely in terms of hitting its inflation target. Guys, you’re giving the Fed too much credit. It is now consistently missing its inflation target. The Fed has been fairly clear in recent years that its key inflation measure is the core PCE deflator, and that its target range for core PCE inflation is 1.7 to 2 percent. Here’s what has actually been happening: Some wiggles there, which make me distrust the measure — I prefer the various trimmed-mean and median measures out there, which seem less bouncy — but inflation is pretty clearly below target, and given the huge excess capacity, clearly trending down. So even if the Fed only cares about inflation, it’s falling short. Why? Partly because there are some Fed types — both regional bank presidents and members of the board — who are constantly predicting inflation, no matter what. If you look at the minutes from the April FOMC meeting (pdf), you see that two bank presidents predicted above-target core inflation next year, presumably because they still think that deficits and money creation must be inflationary, even with persistent high unemployment.

Krugman is Finally Beating the Right Drum - After year or so of beating his fiscal stimulus drum, Paul Krugman is finally starting to pound on his monetary policy drum. It is about time. There is reason to believe that had influential observers like Krugman been making the case sooner for unconventional monetary policy that aims to shape expectations--versus Ben Bernanke's narrow focus on "credit easing"--we would not be currently discussing the imminent threat of deflation. As I mentioned in my previous post, the one time unconventionally monetary policy was truly tried it was very effective. Krugman himself admitted last year that the first-best option for a situation like ours today is not fiscal policy but unconventional monetary policy: In short, Krugman settled for a second-best economic solution because he thought it was a first-best political solution.

For a one-handed Fed - PAUL KRUGMAN'S latest column on the inactivity of the Fed in the face of persistent high unemployment touched off another round of hand-wringing over why the Fed is standing pat, particularly since Ben Bernanke is a noted scholar of the Great Depression who has written extensively on the ways monetary authorities can fight recessions. What gives? Some imagine that Mr Bernanke has changed his mind on the economics while others believe that as a Republican he's happy to provide help to the opposition ahead of November elections.The simpler and more likely explanation, in my view, is that the FOMC consists of more people than Mr Bernanke, and it is difficult to build a consensus within that group. Yesterday, for example, Bloomberg cited Fed Governor Elizabeth Duke saying that no policy changes were needed at present, and the Wall Street Journal quoted Richmond Fed President Jeffrey Lacker waxing sanguine on the American economy:

Fed’s ‘Body Language’ Isn’t Helping - Naked capitalism blogger Yves Smith wonders if the Fed is actually pleased with the “crappy economy” that consists of high unemployment and weak job growth. She notes recent commentary from some Fed officials suggests a certain level of comfort with the pace of recovery. That’s not a good sign, especially as the unemployment rate remains stubbornly high at 9.5% and the U-6, the broader unemployment rate, stands near 17%. “There will be no recovery without jobs, and there will be no net job creation if small businesses, especially startups, do not lead the way,” Michael Shedlock writes over at his blog. But back to Smith’s point, a complacent Fed at the stage of the game isn’t a good sign. She’s no advocate of quantitative easing, and thinks monetary measures won’t have much impact if 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,” Smith says.

What's the Biggest Problem Facing Our Economy? - No it's not the budget deficit. Nor is it the chance of sliding back into recession. What's holding us back is a policy deficit. At a time when the economy is stuck in a deep and unusual malaise--corporations are hoarding cash, unemployment is stubbornly high, credit is tight, and most of us can't figure out how to make ends meet each month--we need a bold plan of action. Yet our policymakers are acting as if everything is okay and the economy requires a few minor adjustments. Instead of big thinkers running the show, we have fine tuners. In his column in the New York Times, Paul Krugman criticized Federal Reserve chairman Ben Bernanke for not taking aggressive action to stimulate employment and avert a possible deflationary spiral. But the Fed's approach is simply more of the same. It's yet another example of the policy vacuum we have been living through since the financial panic erupted in 2008.

What Have We Learned? - Krugman - Sometimes it’s useful to step back slightly from the current fray and ask what we’ve really learned about macroeconomics over, say, the past year and a half. Here’s how I see it: in early 2009 there was a broad divide between two policy factions. One, of which I was part, declared that we were in a liquidity trap, which meant that some of the usual rules no longer applied: the expansion of the Fed’s balance sheet wouldn’t be inflationary — in fact the danger was a slide toward deflation; the government’s borrowing would not lead to a spike in interest rates. The other side declared that we were in imminent danger of runaway inflation, and that federal borrowing would lead to very high interest rates. What actually happened?  (The dip and rise in the interest rate represents the rise and fall of oh-god-we’re-all-gonna-die fears).

The stickiest price -“Sticky prices” are the foundation of “Great Moderation” monetary policy, the core justification for why we have inflation stabilizing central banks. As the bedtime story (or DSGE model) goes, if only prices were perfectly flexible, markets would always clear and the great equilibrium in the sky would prevail and all would be right and well in the world. Hooray!  Unfortunately there are… rigidities. Shocks happen (economists are bashful about that other s-word), and prices fail to adjust instantaneously. Disequilibrium persists or oscillates and all kinds of complex dynamics occur, because the system, once outta whack, doesn’t get back in whack very quickly. Disequilibrium is followed by its terrible twin distortion, which shrieks through the night, ravaging the villagers with suboptimal resource utilization, most especially suboptimal utilization of the villagers themselves who are let to starve because their wage expectations are too damned sticky. If my tone betrays a certain disdain for this account, that is because, in my view, central bankers have used it to harm people and blame the victims.

Should You be Worried about Inflation? What about Deflation? -I want to explain why I am relatively unconcerned about an outbreak of inflation when it comes time for the Fed to unwind its stimulus efforts, efforts that involved pumping large amounts of new reserves into the banking system, and also say a few words about more immediate worries about deflation. Inflation and deflation are related to quantity of money supply circulating in the economy, so we can learn about inflationary and deflationary pressures by looking at how the money supply is determined. The equation that determines the money supply can be written: Ms = (multiplier)(Monetary Base) To control the money supply, the Fed takes the multiplier as given, and then sets the MB at a level that gives it the Ms it desires (the Fed estimates the multiplier daily). The Fed can control the monetary base, MB, fairly well, though not perfectly. This is because the MB consists of two parts, currency and bank reserves. The Fed can control currency precisely enough, and it adjusts the currency supply to meet public needs.

Let Inflation Run Wild? Some Say Bring It On - Most central bankers doubt that deflation looms. But in forecasts released this week, the Federal Reserve said its central tendency forecast sees core prices staying low for a long time. It’s only in 2012 when policy makers project core prices rising between 1% to 1.5%, still a modest performance by any reckoning. The Federal Reserve itself seems to have little ability to create inflation. A massive wave of asset buying and over a year and a half of near-0% interest rates may have kept prices from falling outright, but that’s about it. As a result, policy makers are in a pickle. Some would prefer to have short-term interest rates at higher levels if only to give them more flexibility for future contingencies. But even with both an overall balance sheet and bank reserves at near historic high levels, money supply growth is tepid. There is scant evidence inflation is fixing to break higher. The result is a rare environment in which a breakout in inflation would actually be welcome as a sign the economy is generating some heat again. It would also allow the Fed to get rates back toward a more traditional stance.

Inflation expectations are jointly falling? -  Rebecca Wilder - As a global economic slowdown is very likely underway, inflation expectations are being watched closely. David Beckworth comments on inflation expectations in the US using the Treasury Inflation-Protected Securities (TIPS) market (he commented previously on an alternate measure of inflation expectations at the Federal Reserve Bank of Cleveland). He argues that the aggregate demand effect is the dominant factor dragging US inflation expectations. However, inflation expectations are falling globally.The chart above illustrates the 10-yr break-even expected inflation rates for the UK, Germany, Canada, Italy, and the US using their respective inflation-indexed bond markets (TIPS in the US). Notably, declining inflation expectations is not specific to the US.

It's Gone Global - Rebecca Wilder alerts us to the fact that the drop in inflation expectations is not limited to the United States:  [I]nflation expectations are falling globally. The chart [below] illustrates the 10-yr break-even expected inflation rates for the UK, Germany, Canada, Italy, and the US using their respective inflation-indexed bond markets (TIPS in the US). Notably, declining inflation expectations is not specific to the US. Here is her chart: What this chart says to me is that not only is the Fed allowing U.S. aggregate demand to slip, but it is also allowing global aggregate demand to falter. How so? It all goes back to the Fed's role as a monetary hegemon. As I noted earlier: [T]he Fed is a global monetary hegemon. It holds the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. Thus, its monetary policy is exported across the globe. This means that the other two monetary powers, the ECB and Japan, are mindful of U.S. monetary policy lest their currencies becomes too expensive

Inflation Still Below Trend - If the price level was above the long-term trend, and the inflation rate was above the Fed’s 2 percent target, the Fed would make money tighter. That’s its job. Instead: “The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June on a seasonally adjusted basis [...] index for all items less food and energy rose 0.2 percent in June after increasing 0.1 percent in May.”  I think it’s important not to get too hung up on whether or not to characterize this as inflation or about whether or not the Fed should fear deflation. The Fed should try to hit its price stability target. It’s been undershooting the target for a while now. That means we need looser money, aimed at the goal of restoring the price level to its trend trajectory

Trending Toward Deflation – Krugman- Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing John Makin’s combusting coiffure, his prediction that we might see deflation this year.  Here’s the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that’s a lagging indicator — if prices have been falling for the past few months, but were rising before that, inflation over the past year will still be positive. On the other hand, monthly data are noisy. So what to do? Well, a crude approach would be simply to fit a trend line through those noisy monthly numbers. Here’s what happens when you do this for the Cleveland Fed’s median consumer price inflation number. On the vertical axis is the monthly inflation at an annual rate, on the horizontal axis months with Jan. 2008=0: What I take from this is that deflation isn’t some distant possibility — it’s already here by some measures, not far off by others.

It is time to face down the threat of deflation - “When inflation is already low and the fundamentals of the economy suddenly deteriorate, a central bank should act more pre-emptively and more aggressively than usual in cutting rates.” Ben Bernanke, the chairman of the Federal Reserve, would be well advised to heed his own advice from 2002. The current environment is more unnerving than the one he described then as a governor of the US central bank. Cutting rates is no longer an option. Inflation is now low and falling in the US and Europe (year-over-year core inflation at 0.9 and 0.8 per cent) and has firmly taken hold in Japan at minus 1.6 per cent year-on-year.  There are sound economic reasons for the persistence of disinflation and the appearance of outright deflation in the aftermath of the 2008 financial crisis. Financial crises are ultimately deflationary because they create a rise in the demand for cash that depresses aggregate demand at a time when substantial excess capacity exists. The excess capacity is created in the run-up to the crisis, when underpricing of risk expedites a substantial build-up in the capital stock.

Deflation, Recession and a Simple Cure - In his speech to the National Economists Club in November, 2002, Ben Bernanke said  "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted." Unfortunately, despite widespread concerns about inflation, it looks like we may now be trending toward deflation. Paul Krugman summarized data from the Cleveland Fed showing the downward trend in inflation for each month since January, 2008.  Similarly, Menzie Chinn looks at a set of other metrics and also sees a downward trend:Ben Bernanke has studied this situation, and in that same 2002 speech noted that we have the policy tools to cure deflation and stimulate the economy: A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. … A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.For instance, in the current situation, a $5,000 tax cut or credit for every U.S. household could be financed by the Fed printing money.

'The rising threat of deflation' - The incessant deflation warnings from the likes of liberal economist Paul Krugman are an argument for another huge round of federal stimulus spending.That has sparked attacks by conservative critics who believe that the deflation talk is baloney, and is merely aimed at justifying more government intervention in the economy.But Krugman is getting support from an unlikely source: the conservative American Enterprise Institute. Or at least, the AEI allowed visiting scholar and economist John Makin to effectively come to Krugman’s aid under the institute’s letterhead.In a paper headlined "The Rising Threat of Deflation," Makin last week noted that inflation has been a no-show despite the massive monetary and fiscal stimulus programs undertaken since 2008 in the U.S., Europe and Japan

Fun With Disinflation - Krugman points out that disinflationary trends are pointing to the conclusion that we’ll shortly be in the negative range by at least some measures. And I wouldn’t personally get too excited about the significance of the number zero in this context. The point is that inflation has been running below the Fed’s target rate for a while now so what we ought to be doing is running above the target rate for a while until we catch-up with where the price level ought to be. Instead, things are moving in the other direction. Meanwhile, the White House is meekly giving up on any kind of non-trivial fiscal stimulus. So it really does all rest with the Federal Reserve now. I know that many people are skeptical that the Fed can substantially boost growth, but academic work by Krugman and by Ben Bernanke says otherwise. Indeed, besides Bernanke at least one regional Fed President concedes “there’s plenty more we could do”, the Open Market Committee just isn’t doing it.

Frogs, Boiling Water, And Central Banks - Like others, I’ve been warning that policy makers in the United States are defining normalcy down — accepting high unemployment and below-target inflation as just the way things are. It’s not just an obsession with inflation risks; it’s an abdication of responsibility for the economy, even if prices are falling rather than rising. The passivity of the Bank of Japan offers an object lesson. The BOJ is now under political pressure? Why? Because it still sees no reason to act after fifteen years of deflation. Is this a glimpse of the Fed’s future? That’s what I’m afraid of. Oh, and yes, I know that real frogs will in fact jump out of the pot.

Daniel Gross on the Types of Deflation  Amidst all the chatter about deflation, Daniel Gross over at Newsweek reminds us that deflation can emerge for two very different reasons: (1) a collapse in aggregate demand or (2) a surge in aggregate supply. This distinction is an important one that is often overlooked when it comes to conduct of monetary policy. Before getting into the policy implications, though, let's look at how these two forms of deflation are different. Here is how Gross describes deflation coming from a collapse in aggregate demand: Bad deflation is the kind we had in the Great Depression. "This deflation was driven by a decline in output, demand, and credit—too little money and wages chasing too many goods and workers. The Depression-era cratering of wages and prices was disastrous because it rendered companies and consumers less able to pay their debts. There is no question this is type of deflationary pressures we experienced during the first half of 2009 and now face again in late 2010. The key to preventing such deflation is to stabilize aggregate demand via monetary policy. Lately, it appears the Fed has been failing to do just this.

ECRI Plunges At 9.8% Rate, Double Dip Recession Virtually Assured - The ECRI Leading Economic Index just dropped to a fresh reading of 120.6 (flat from a previously revised 121.5 as the Columbia profs scramble to create at least a neutral inflection point): this is now a -9.8 drop, and based on empirical evidence presented previously by David Rosenberg, and also confirming all the macro economic data seen in the past two months, virtually assures that the US economy is now fully in a double dip recession scenario."It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)." We are there.

Friday Data Dump: Disappointing, Deflationary, Double Dip? - On Thursday we got Industrial Production (IP) and Capacity Utilization (Cap-U) for June, along with Philly Fed Business Conditions and Empire State manufacturing surveys for July. The Empire State survey dropped to around 5 from near 20 in June, and Philly Fed dropped to 5.1 from 8, both of these well below expectations. Although IP and Cap-U have been steadily improving during the prior year, both stalled in June. Given the correlation between IP and the Philly Fed survey, shown below with Industrial Production lagged 6 months, we expect headwinds for the manufacturing-led recovery in coming months. This morning, consumer price data was released. The Consumer Price Index is rolling over, falling for 3 months in a row, and is now at roughly the same level as it was two years ago. The year-over-year growth rate looks to be heading back towards zero

How to Cure an Economic Depression - "As recently as two years ago, anyone predicting the current state of affairs (not only is unemployment disastrously high, but most forecasts say that it will stay very high for years) would have been dismissed as a crazy alarmist." That was Paul Krugman in today's newspaper. It is amazing that anyone takes Krugman seriously. It is obvious now that he - and his fellow interventionists - had no idea what was going on two years ago. Now, at least he sees the drift of events more clearly; we are headed towards a Japan-style deflationary slump. "It's a good bet that by some measures we'll be seeing deflation by sometime next year," he writes. So you see, dear reader, even a Nobel Prize-winning dog can learn a new trick. Now, he sees through a glass darkly... Soon, he will be face to face with deflation. Of course, the poor man still completely misunderstands what is really going on. But what do you expect? His career depends on not understanding it.

The Techno-Sponge -  In the US, not only was the Fed Funds rate lowered to nearly zero (for now 18 months and counting), but an additional $1 Trillion was injected in.   However, now that a depression has been averted, and the recession has ended, we were supposed to experience inflation even amidst high unemployment, just like we did in the 1970s, to minimize debt burdens.  But alas, there is still no inflation, despite a yield curve with more than 3% steepness, and a near-0% FF rate for so long.  How could this be?  What is absorbing all the liquidity?    In The Impact of Computing, I discussed how 1.5% of World GDP today comprises of products where the same functionality can be purchased for a price that halves every 18 months.  'Moore's Law' applies to semiconductors, but storage, software, and some biotech are also on a similar exponential curve.  This force makes productivity gains higher, and inflation lower, than traditional 20th century economics would anticipate.

The odds of a double-dip - EARLIER this morning, David Gatten tweeted the following:David Rosenberg: #doubledip risks rose to 55% from 52% a week ago. "The odds of another recession are higher than generally perceived."David Rosenberg has long been extremely bearish on the American economy, so this view isn't too surprising. But it caught my attention as I've been trying to put a number on this probability myself. Last week, I was asked if I could do a media appearance with an organisation looking for double-dip believer. I turned them down (I was on holiday), but also began to wonder if I could have agreed to the appearance or not.. At the moment, I do not think that the American economy is on a double-dip trajectory. What's more, I agree with Scott Sumner that the Fed is now open to excuses to move policy in an easier direction.

The next downturn - EZRA KLEIN calls this "the scariest jobs graph you've seen yet":  That comes from Brookings, and what it illustrates is the expected recovery time for the American labour market given various rates of monthly job creation. And at the rates generally experienced over the past two decades, full employment would seem to be somewhere between 5 years and more than 10 years away. Meanwhile, Real Time Economics has this: According to the minutes of the June 22-23 Federal Open Market Committee meeting, officials thought it would take “some time” for the economy to return to the rates of output growth, unemployment, and inflation consistent with the Fed’s policy goal. “Most expected the convergence process to take no more than five to six years,” the minutes said. Again, that's the middle of this decade or later. And that's true for other variables as well; by some estimates it could be 5 to 8 years before banks sell off their entire stock of foreclosed upon housing inventory.

10 Reasons Why We Are Heading Into Recession - We have entered another period similar to late 2007 and 2008, when the economic establishment had a rosy view of the economy, but a number of indicators were flashing warning signs that a major downturn was coming. Neither the Federal Reserve, the IMF, nor Wall Street correctly predicted a recession would begin in December 2007. None of these august bodies even realized the greatest economic downturn since the Depression was taking place even months after it had begun. Bullishness once again reigns supreme among the economic elites as one indicator after another is signaling trouble ahead.  Here are 10 reasons to think that a there will be a recession soon:

Double-Dip Days - Noriel Roubini - The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes. Worse yet, the fundamental excesses that fueled the crisis – too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) – have not been addressed.Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment. At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less.

Double-Dippers Are All Wet Ignoring Yield Curve - There have been whispers, or maybe it’s just wishful thinking, that the Federal Reserve might buy more long-term bonds, lowering interest rates and making housing more affordable. If you think lowering long-term rates and reducing the spread between short and long rates will stimulate the economy, think again. The steep yield curve is the most powerful thing the economy has going for it right now. Not that there’s anything magical about two points and a line connecting them. It’s just that the yield curve, or what it represents, is possibly the best leading indicator of the business cycle. By holding the short rate at zero, which is not without its share of risks, the Fed is doing everything it can to avoid another recession.  How so? There’s “absolutely no possibility” of the nominal yield curve inverting with short rates at zero, says Arturo Estrella, professor of economics and department head at Rensselaer Polytechnic Institute in Troy, New York. Investors aren’t going to pay the government to hold their cash for 10 years.

De Facto Double Dips - Krugman - From Ed McKelvey at Goldman Sachs, which has been very good at calling recent economic trends (no link): Real GDP growth appears to have dropped below its 2½%-3% long-term potential range last quarter, judging from the latest data on retail sales and foreign trade. We have cut our estimate for second-quarter growth from 3% to 2% (annual rate). This slowdown is occurring just ahead of the loss of growth support from fiscal stimulus and the inventory cycle that we have been anticipating would occur at midyear. With the various headwinds to private-sector growth still firmly in place, we reaffirm our view that real GDP will grow at only a 1½% rate during the second half of 2010, and we worry that reacceleration in 2011 will not occur as now projected. Despite these growing downside risks, US authorities do not exhibit much urgency to apply more policy stimulus.  Let’s be clear: a recovery that involves growth so slow that unemployment and excess capacity rise, not fall, isn’t really a recovery. If we have only have 1 1/2 percent growth, that will amount to a double dip in all the senses that matter.

Is the economy headed down again? - Henry Blodget has a quick primer on this topic, with some graphs and charts of interest.  My view is simple.  I see two major risks: 1. The currency-area-formerly-known-as-the-eurozone unwinds and Europe spirals into a major recession, taking down much of the world with it. 2. China implodes economically, taking down much of the world with it. If neither of those two events happens, we should continue to see a recovery, with fits and starts, but a slow one in the labor market. In other words, I'm still not an economic optimist, but I do have a rosier view of the default course than do many other commentators.  I just don't think the shocks have finished arriving

What a drag - MARK ZANDI recently presented detailed testimony on the state of the American economy to Congress. It's a very nice summary of the progression of the recovery so far and of potential threats to growth, and I encourage you to click through. But here are a couple of charts worth focusing on. First, federal stimulus: Stimulus' contribution to growth is essentially finished. And here's the state budget picture:  Meanwhile, the Fed (for the moment at least) is more likely to tighten in the next year than loosen policy. Government policy is turning contractionary. That would be all for the best if a sustainable recovery were underway, but that doesn't appear to be what we're observing. Labour markets are only a little stronger than they were at their worst. Businesses aren't investing, housing markets are weakening again, and so on. The picture is not particularly pretty.

Macroeconomics: A Watershed Quarter - Mark Zandi says: the ARRA is no longer boosting the rate of economic growth.  From now on, the net effect of Obama administratration macroeconomic policy is to slow growth, not to accelerate it. If you think that our current economic growth rate is too fast, that is probably hunky-dory with you. If not, not.

Slower days ahead? - THIS week, we have asked our guest network of economists whether the financial crisis and recession are likely to reduce the global economy's potential rate of growth. The discussion has been quite interesting as both answers and explanations have shown a real divergence of opinion. Paul Seabright and Gilles Saint-Paul both argue that growth will be lower, but largely because it was artifically inflated before the crisis. Michael Bordo makes the point that historically growth trends to snap back to trend. Others, Stephen King and Daron Acemoglu among them, suggest that slower growth will primarily be a short-term problem. I find it fascinating the extent to which the above entries focus on confidence—in the sustainability of growth, in the allocation of capital, and in financial institutions. Several contributors, including Stephen Roach, point out that slower growth is likely to afflict developed nations, and potential global growth will largely come down to the extent that emerging markets can pick up the slack (both he and Michael Pettis agree that China isn't ready to drive global growth just yet). Brad DeLong says that slower growth will be due, in part, to changes in central bank behaviour

Anemic and Deflationary Recovery - Buried in this post by Invictus over at the Big Picture, is the above amazing graph, showing final sales of domestic product following various economic peaks immediately prior to recessions.  This is in real (ie inflation adjusted) terms, and I double-checked a couple of the curves myself from the raw data since I was having a little trouble believing it.  Obviously, one thing going on here is that US economic growth has generally not been as strong in the last couple of decades as it used to be back in the 50s and 60s. But the larger issue is that basically there is no real recovery following the great recession. Paul Krugman also has a very interesting post looking at what the inflation data looks like if you don't use the year-over-year changes normally used (which are a lagging indicator during turning points), but instead look at the month-over-month changes (annualized), and just fit a trend-line to them to cancel out noise.  For one particular inflation measurement,he gets this. Not a pretty sight.  So this is deleveraging at work.  And of course deflation is the worst possible thing to happen when you are trying to deleverage, as it makes the real value of debt steadily greater over time, making it even more  difficult to repay.

The Eta-Recovery - Economic experts have used letters like U, V, W, etc. when speaking about the current recession. The letters should represent graphically the course of the recession. Which of these scenarios – U, V, or W – is the most likely? Unfortunately, none of these is likely. It rather looks like we are in for a ride on a Greek letter which no-one wants to know or talk about. To understand it, one needs to grasp the so-called “hidden flows” beneath economy. We usually read about many things in the newspapers, but most of the reality is completely different and hidden. However, secrets do sometimes come to the fore, like the current crisis in Greece. Now it is all over the newspapers. Still, a year or two ago, everyone knew how much money they had borrowed, but no one was talking about it.

Country Risk: Building a New American Political Economy - A political position, like one's view of the economy or the orbiting planets, is very much a matter of perspective. One of the things that troubles us about where the U.S. economy is headed is that opinion leaders such as Krugman cannot seem to accept, much less articulate, the fact that the global economic equation has changed and that U.S. economic assumptions must also be adjusted in response. We talk about a double dip in the economy, for instance, as though we all are going to miraculously return to "normal" after the latest economic slowdown is past. But these promises of a return to normalcy seem out of line with the economic reality that every American can see before them. As the COO of one of the largest hedge funds in the world asked recently: "Are we in a typical business cycle or does the crisis of 2008 represent a reset for the global economy?" We believe it is the latter.

Krugman Tells Seniors (and Businesses) To Die - Yes, Senior Citizens, wake up: Paul Krugman, along with the other sycophants echoing his views, are trying to kill you. Is that too strong a charge?No.Listen to Paul opine: But the message of Mr. Bernanke’s 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake. The Fed has done pretty much all but the last.  It bought government debt.  It bought private (Fannie and Freddie are not government "agencies" as the law defines them) debt.  It announced that it would leave short rates at 0-0.25% for "an extended period." But now Krugman crosses a particular line in asking that The Fed explicitly raise an inflation target - that is, intentionally seek to destroy the savings and investments of all Americans.

We Might Be Dead In The Long-Run, But What Do We Leave Our Children? - I have often said the beauty of Capitalism is its ability to handle instability.  There is creative destruction as some economic concepts are no longer as useful as they once were — e.g. fixed-line telephones, newspapers, buggy-whips, everyone should own a home, residential real estate is an easy road to riches, etc.It is dangerous to try to stabilize that instability, to create a great moderation of volatility, to keep marginal concepts from failing, whether through fiscal means (tax incentives and subsidies), or monetary policy (lower the policy rate or some banks will fail).It’s good to see bad economic concepts fail, along with those who finance them, particularly when a society is not so dependent on debt finance that the failures will not cause a cascade of more failures.  Failures allow resources to be redeployed to more productive uses, and keeps capital focused on the best opportunities.  Unemployment stays cyclical. But when failures are quickly bailed out through overly easy monetary policy, as well as a fiscal policy that favors debt over equity, debt grows like crazy, because there is little to restrain it. 

Debt is Still the Major Problem and Deflation is the Painful Solution - 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. We have been predicting for over 3 years that the government debt (including public, gross, and state and local governments) will increase substantially, while the private debt (all forms) will roll over and decline substantially.   In round numbers total credit market debt is $55 trillion and government debt is $15 trillion, leaving private debt at approximately $40 trillion.  We have drawn debt cones (see 2nd chart-debt cones) to illustrate the concept.  We believe the government debt will rise towards the $30 trillion level while the private debt will drop towards the $20 trillion level.  This coincides with the Cycle of Deflation (next chart) which we authored years ago.

Fed's Lacker wary over U.S. debt, bank reform -- Federal Reserve Bank of Richmond President Jeffrey Lacker said Thursday that the U.S. is at risk over its sovereign-debt levels and that the newly passed bank-reform legislation could pose challenges for some lenders. In a speech in Norfolk, Va., Lacker reiterated fears that U.S. fiscal policy is unsustainable and that "the well-being of future generations is at stake." "Granted, the fiscal situation is even worse in some other countries, but I don't think we want to find out how close we can get to a full-blown fiscal crisis before taking corrective actions," he said, according to prepared comments issued by the Richmond Fed

Niall Ferguson: A U.S. Debt Crisis Is On Its Way - Ignore the uber-low yields on U.S. government debt. It's only a matter of time before markets lose confidence in the U.S. government argues Harvard professor Niall Ferguson.Right now Washington is benefiting from global worries, such as those being seen in Europe, but that won't last for long. If you want to look for a pivotal moment: Watch for when debt interest payments begin to eclipse defense payments. In fact, this will happen inevitably, even if there's no imminent spike in Treasury yields.  It's inevitable, until and unless, lawmakers show the political will to put the country on a "credible path" of fiscal responsibility, Ferguson says. But beyond the fiscal crisis, Ferguson is particularly dismayed at the actions of Ben Bernanke, who once seemed to genuinely get the dangers of deflation. Yet right now Bernanke is doing nothing, even in the face of deflation and a contraction of the money supply. This represents a grave danger, and it's shocking that Bernanke hasn't already re-begun more aggressive quantitative easing.

A Little Monetization of the Debt May Be Good Thing - My title is tongue-in-cheek but my policy suggestion is serious. The Federal Reserve must take dramatic actions to change market expectations. It needs to strike a little fear of hyperinflation into the hearts of financial markets. Though 80 years old, memories of the hyperinflation of the Weimer Republic are fresh in the minds of pundits and policymakers alike.  Images of citizens in an industrialized Western democracy reduced to barter and using money for fuel are likely haunt Central Bankers for eternity. In response to the current crisis more extreme policy suggestions have been floated: quantitative easing, qualitative easing through long term bond purchases, third or fourth rounds of fiscal stimulus, etc. Each time, concerns are raised that the Treasury and the Federal Reserve are putting their credibility at risk; that the government may be giving in to the temptation to support the state on the back of money creation. Those fears have encouraged policy makers to pull back, to do less than they otherwise would. However, is that the correct response?

The greatest con since 1776 - Bruce Krasting has noticed that the Fed has moved $4.4 trillion of Fannie and Freddie "assets" onto their respective balance sheets. While the two GSE's have not, so far. What's that rumble I hear in the distance? Yes, the Republicans have called for all these "assets" to be put on the government's balance sheet, and they're right of course, that's where they belong. Bank of America has just confessed that they’ve pulled the same Repo 105 stunts that Lehman had, and the SEC is "going after them". Fine, good, though far too late, but what moral standing does a government have that pulls its own versions, and on a massive scale, of Repo 105s? Buying and selling broke government agencies can only be profitable if the taxpayer gets stuck with the difference, as far as I can make out.

Is The Fed Funding The Treasury Through The Banks? - Recently I decided to take another look at the Fed's balance sheet, and while I am none too surprised, I must report that the Fed has printed approximately $200B from April 7th 2010 to June 30th 2010. What is interesting is *how* they went about doing it. Here is the graph which shows this. The blue line represents the total increase in the size of the Fed balance sheet since September 10th 2008. The red line represents the marginal increase in the Fed balance sheet, net of 'Excess Reserves' held at banks but not yet loaned out, and net of Treasury sterilization:Note that from November 2008 through April 2010, "Real Economy" printing was essentially the same. Sometimes it grew, but inevitably those periods were reversed. The Fed was clearly targeting that figure. Well, something changed as of April 7th 2010.

Who's buying all that debt? - The Federal Reserve publishes flow of funds accounts that include estimates of who has been holding the debt issued by the U.S. Treasury at different points in time. Here's a pie chart showing the breakdown as of the end of 2007. At that time, almost half of the U.S. Treasury debt was owed to people or institutions outside the United States. The Federal Reserve and state and local governments held another quarter. Pension funds (combined private and federal, state and local government), mutual funds, and money market funds held another 15%. U.S. households played a very minor role in lending to the U.S. government, with holdings of only about 5% of the total debt. In the two years since then, U.S. Treasury debt has increased more than 50%. The chart below summarizes who bought all that new debt. Foreigners bought more than half of the net new debt issuance. But the Federal Reserve and state and local governments have barely increased their holdings of Treasury debt at all, meaning that other sectors significantly increased their share.

Jim Hamilton's Sobering Thought - A sobering thought from Jim Hamilton: So I can see who bought the $2.7 trillion in net new Treasury debt issued between 2007 and 2009. What I'm having more trouble seeing is who is going to buy the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.Hamilton notes that over half of the new debt between 2007 and 2009 went to foreigners. Can the rest of the world continue to absorb this large of a share of the projected $8 trillion shortfall? The only way I see this happening is that the rest of the world has rapid economic growth over the next decade and during this time there is no alternative treasury or other safe asset market that emerges to compete with the U.S. treasury market. What do you think?

Chinese Treasury Dump Brings Its Total Holdings To One Year Low, As "UK" Continues Exponential Accumulation Of US Bonds - We are a rather surprised that this morning's stunning Treasury International Capital report has not gotten far more prominent attention. The reason: in it we read that in May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation. It is time someone in the mainstream media asked just who is doing all this "UK-based" buying? It is not hedge funds, which operate out of Caribbean Banking Centers, and which saw an increase in holdings from $151.8 billion to $165.5 billion as risk went completely off in the month of May courtesy of the Flash Crash, Greece, and the general insolvency of Europe. It is also not China due to a diverging pattern in Bills accumulation versus disposition. Additionally, May saw a dramatic decline in total foreign purchases of total US assets, dropping from $110.3 billion to just $33 billion, with Corporate Bonds and Corporate Stocks seeing a rare monthly sell off ($9 billion and $432 million).

The capital tsunami is a bigger threat than the nuclear option - Since this is another long posting, it might make sense to summarize briefly its two parts.  In the first part, expanding on an OpEd piece of mine published by the Wall Street Journal on Monday, I argue that China’s “nuclear option”, which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite – a tsunami of capital flooding into the country.  I try to discuss the economic implications and perhaps the implications for asset prices. In the second part of this posting I discuss the slowing of the Chinese economy within the context of what I believe to be its stop-go approach to economic policymaking.  The one-minute take: I think policymakers will soon be stomping again on the accelerator, although there seems to be a real debate going on about whether this would be the proper policy response.

Dumping The Dollar: Why It’s Time To Diversify - Imagine a world without the almighty greenback as the main reserve currency. It's not an easy thought. The U.S. dollar has long been the global currency of choice. As much as 64% of the world's currency reserves are held in greenbacks, according to the International Monetary Fund. But given the manic ups and downs of the dollar in recent years, it may finally be time to diversify the world's reserves. And that's exactly what some central bankers around the globe are now doing. This comes as a growing number of economists and policymakers are calling to move away from the greenback as the world's dominant currency. A recent United Nations report says the dollar's movements have been too erratic to hold value and the U.N. urges central banks to replace it with anything but a single currency or even multiple-national currencies.

US is not AAA in new Chinese-made ratings - A CHINESE firm that aims to compete with Western rating agencies declared the United States a worse credit risk than China in its first report on government debt yesterday.Dagong International Credit Rating Co's verdict was a break with Moody's, Standard & Poors and Fitch, which say US government debt is the world's safest.Dagong said it rated the US below China and 11 other countries, including Switzerland and Australia, because of high debt and slow growth. It warned that the US is among countries that might face rising borrowing costs and risks of default.The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs - a criticism echoed by some foreign analysts. At June's G20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Treasury Two-Year Yields Drop to Record Low as Economy Weakens - (Bloomberg) -- Treasury two-year note yields fell to a record low as reports showed that consumer confidence plunged to the lowest level in a year and retail sales declined, heightening concern the economic recovery is stalling.Yields on 10-year notes traded near a 14-month low this week after minutes of the Federal Reserve’s June meeting showed policy makers noted that risks to the recovery increased. Housing starts and sales of existing homes declined last month, reports next week are forecast to show. “The economic data just keeps coming in softer,” said James Combias, New York-based head of Treasury trading at Mizuho Financial Group Inc., one of the 18 primary dealers that trade with the central bank. “The bond market is pricing in the real possibility of slower growth.”

Conventional Madness, Revisited-  Krugman - In late May I had a, um, negative reaction to the latest OECD Economic Outlook. Not only did the report call for immediate fiscal austerity; it called for a sharp rise in US interest rates over the next year and a half, even though its own forecasts projected very high unemployment and below-target inflation at the end of 2011. The only justification given for this monetary tightening was the fact that “some long-term measures of inflation expectations have increased.” This was a reference to the TIPS spread, the difference between the interest rate on ordinary government bonds and bonds indexed to inflation. So how’s the TIPS spread doing? So yes, the spread widened for a while; then it plunged.  I eagerly await the OECD’s retraction of its previous policy advice.

Martin Wolf: Demand shortfall casts doubt on early austerity - Fiscal default is nigh, insist the doomsayers: repent and retrench before it is too late. The arguments for a dramatic short-term fiscal contraction, however, are weak. Yes, we are enjoying a recovery. But economies are still far below peak levels of activity and also below almost any plausible estimate of the long-term trend (see chart). This is particularly true in the US, where unemployment rates have shot up by far more than in other advanced countries. Unless the US has suddenly become continental European, why should equilibrium unemployment have jumped by as much as that? My conclusion, then, is that the advanced countries remain highly short of demand. In this environment, rapid cuts in fiscal support make sense if, and only if, monetary policy can be effective on its own and expanding the interest-elastic parts of the economy is the best way to climb out of the hole. There is reason to doubt both ideas.

Obama's Debt Commission Warns Of Fiscal 'Cancer' -The co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked by tough action in Washington.  The two leaders -- former Republican senator Alan Simpson of Wyoming and Erskine Bowles, White House chief of staff under President Bill Clinton -- sought to build support for the work of the commission, whose recommendations due later this year are likely to spark a fierce debate in Congress.  "There are many who hope we fail," Simpson said at the closing session of the National Governors Association annual meeting. He called the 18-member commission "good people with deep, deep differences" who know the odds of success "are rather harrowing."  (Graphic: President Obama's proposed 2011 budget explained)

Debt Commission Leaders Paint Gloomy Picture (AP) -- The heads of President Barack Obama's national debt commission painted a gloomy picture Sunday as the United States struggles to get its spending under control. Republican Alan Simpson and Democrat Erskine Bowles told a meeting of the National Governors Association that everything needs to be considered -- including curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage. The nation's total federal debt next year is expected to exceed $14 trillion -- about $47,000 for every U.S. resident."This debt is like a cancer," Bowles said in a sober presentation nonetheless lightened by humorous asides between him and Simpson. "It is truly going to destroy the country from within."Simpson said the entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs."The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans, the whole rest of the discretionary budget, is being financed by China and other countries," said Simpson. China alone currently holds $920 billion in U.S. IOUs.

Deficit commission almost done deciding to slash Social Security - We must do something about the deficit, and the debt! Unless we act right away, America is doomed. This is why Obama set up a bipartisan commission to make some recommendations about what to do about the deficit that Congress will eventually not vote on if they contain any tax increases. Every Serious Person in Washington believes that The Deficit is as much of a threat to our nation's security as Saddam Hussein's nuclear and biological weapons were. Serious People also agree that we cannot "raise money" with "taxes" to solve this problem.The commission's report is not yet finished, but it is a foregone conclusion that what to do about the deficit will probably turn out to be "severely scale back the social safety net." Take it away, commission chairman Erskine Bowles:

Erskine Bowles Goes Off the Deep End - When the co-chairman of President Obama's deficit commission gets his deficit numbers off by 100 percent, you would think this would be worth a little media attention. But apparently this is not the case.Therefore when Erskine Bowles warned the National Governors' Association that the country would be spending $2 trillion a year in interest on the debt in 2020, virtually no reporters thought it was worth mentioning that he had exaggerated the interest burden by a factor of more than 2 the Congressional Budget Office's "alternative scenario" (Table 1-2).  It is difficult to believe that if Speaker Pelosi or some other prominent Democrat argued for a stimulus package because the unemployment rate is 19.0 percent that the media would ignore their disconnect with reality. It is hard to understand why neither Mr. Bowles nor his co-chair, former Wyoming Senator Alan Simpson, are not held to comparable standards of accuracy.

Delusions About Debt Dynamics - Krugman - Dean Baker catches Erskine Bowles vastly overstating future federal interest payments. This reminded me of Dan Senor’s similar blooper regarding Japanese interest payments. And I think they have a common cause. Both Bowles and Senor want to scare us about the short-run deficit (as opposed to longer-run budget concerns). And both are turning to an argument that sounds compelling: debt dynamics. The story goes like this: the more the government borrows, the more interest it has to pay, which requires even more borrowing, and before you know it the debt explodes. Sounds terrible, until you think about it a bit harder and look at the numbers.

Hey, Catfood Commission: 86% of Americans Would Not Reduce Social Security - In a poll just released today, Time provides results that show Americans staunchly opposed to cuts in Social Security, Medicare or healthcare, but in favor of cutting spending on the wars in Afghanistan and Iraq. With Alan Simpson and the Catfood Commission so determined to cut Social Security and Medicare, we can now state that they are going directly against over 80% of citizens in this effort.The question posed was “If Congress and the President had to reduce spending, which of these areas would you reduce spending?”  The areas included were Social Security, Medicare, wars in Afghanistan and Iraq, education, unemployment compensation for people out of work and looking for jobs, healthcare, Medicaid (which provides health care for low income families)  and defense spending other than the wars in Iraq and Afghanistan.  Here are the results

Department of Awful Statistics: How Much of the Government's Revenue Goes to a Few Programs? - I was intrigued by this line in the Washington Post story on the budget commission:   The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. "The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans -- the whole rest of the discretionary budget is being financed by China and other countries," Simpson said. I am intrigued because as far as I know, it isn't true.  It isn't true according to the CBO's YTD revenue estimates, which place revenues at around $1.5 trillion and outlays on those programs at about $850 billion.  It also isn't true according to their annual estimates, where those three programs absorb about 10.5% of GDP, while revenues are around 15% of GDP. Eventually, it will be true, but not any time soon.  I don't know who got this mangled, the reporter or the heads of the budget commission.  But I sure hope it's the former, because if it's the latter . . . well, we're in even bigger trouble than I thought.

Who Scores the Deficit Commission: CBO or OACT? - The two main sources of Social Security scoring are the Annual Reports of the Trustees of Social Security, normally released on March 31st and available here, and CBOs Long Term Projection for Social Security, normally released in August and available here. This five month gap normally results in SSA numbers being internalized in the MSM, with few reporters or columnists noting the difference, with a major exception of Dean Baker, who for a variety of reasons tends to go with CBO numbers. Well a funny thing happened this year, the Social Security Report did not come out on March 31st, it didn't even come out on the semi-official revised date of June 30th, and Treasury refuses to commit to a firm date even now, with the best guesses on Capitol Hill suggesting sometime in August. Now there is no reason to suggest that CBO will experience a similar delay they came out with their Long Term Budget Outlook (which has a Social Security component) on time and also released a scoring of thirty different Social Security Policy Options on July 1st. So best available information as of this minute is that we will have two dueling Reports coming out head to head right in time to inform the decision making of the Deficit Commission.

Dear Candidate - What Will You Do if Growth Is Over? - To me, one of the most surreal phenomena one encounters these days is that no country, no established economic research institute (that I'm aware of), and no international organization (such as the IMF) publicly discusses scenarios that don't plan for a return to stable economic (GDP) growth. Even Greece's government, after 2012, expects growth, which would allow the country to slowly reduce its monster debt load. Similarly, the U.S. government forecasts annual average (real) growth rates of 4.4% for the years 2012-2014, and 2.4% thereafter until 2020. This theme is globally ubiquitous. The above graph is one organization's view of the general magnitude of risks facing societies. Whether or not you agree with their projections is secondary to their ranking in mainstream discussions. On a long term horizon, clearly the health of our environment is of upmost importance. And, along with climate change and other potential externalities, resource depletion issues of various stripes pose large risks to the system as we know it.

This Situation Is Different (Wonkish) - Krugman - One thing I’ve argued many times on this blog is that when assessing the record of fiscal policy, you have to make allowance for the fact that things are different when you’re in a liquidity trap.* Estimating the average effect of fiscal shocks in all regimes, as opposed to those rare occasions when you’re in a liquidity trap, tells you little about how things work now. That’s why I really liked the Almunia et al work on fiscal policy in the 1930s, which tried to focus on a period resembling where we are now. So here’s another entry: Corsetti et al (pdf) use more modern data, but they try to distinguish periods with financial crises from other episodes, which at least partially gets at the difference in conditions. And sure enough, the multiplier is much bigger: private spending, including investment, rises with government spending rather than being crowded out.

I Love You, You’re Perfect, Now Change - A very interesting column by Joe Keohane in the Boston Globe has my Concord Coalition colleagues depressed about what it suggests is the futility of our mission in reaching out and educating the public about fiscal responsibility: Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.

Federal deficit through June tops $1 trillion with 3 months left in budget year -- The federal deficit has topped $1 trillion with three months still to go in the budget year, showing the lasting impact of the recession on the government's finances. In its monthly budget report, the Treasury Department said Tuesday that through the first nine months of this budget year, the deficit totals $1 trillion. That's down 7.6 percent from the $1.09 trillion deficit run up during the same period a year ago. Worries about the size of the deficit have created political problems for the Obama administration. Congressional Republicans and moderate Democrats have blocked more spending on job creation and other efforts. Republicans also have held up legislation to extend unemployment benefits for the long-term jobless because of its effect on the deficit. Another failed effort would have provided cash-starved states with money to help avoid layoff of public employees and finance the Medicaid program for the poor and disabled.

So far this fiscal year, the federal government is $1 trillion in the red. Why this is good news. - On Tuesday, the Treasury reported the federal government's receipts and expenses for June. The upshot: Through the first nine months of fiscal 2010 (which started last fall), the federal government has run a $1 trillion deficit. Deficits hawks will doubtless highlight these numbers as yet another reason why the National Debt Commission must move swiftly to cut social insurance and impose new regressive taxes. I take the opposite view. The fiscal 2010 deficit—$1 trillion and counting—is an encouraging sign.Let me explain. Federal tax revenues are highly leveraged to economic growth and to the performance of markets, corporations, and rich people. This means they can be volatile. When markets and profits boom, capital gains taxes, payroll and income taxes, and corporate income taxes flow like a mighty stream. As a result, it's not uncommon for tax receipts to rise 6 percent or 7 percent in a year when the economy grows by 3 percent. This volatility works to the downside, too. When the economy contracts and markets crash, capital gains and corporate income tax revenues dry up.

In Dodging a Budget Vote, Dems Take Reconciliation Off The Table - On Tuesday, the Treasury Department announced that the country’s deficit had hit the $1 trillion mark just nine months into the fiscal year. Fear of the deficit had already led Congress to kill or delay an administration-backed jobs bill, a federal extension of unemployment benefits, a war funding bill and federal funding for Medicaid. Now, the 13-digit monster has claimed its latest victim: a full budget for the coming fiscal year. Recognizing that Democrats would be reluctant to record “yes” votes for a budget that would augment the deficit, the House leadership opted to deem as passed a “budget enforcement resolution” instead, just before the July 4 recess. While the distinction between an enforcement resolution and a full budget is largely technical, there is one crucial difference: Under the enforcement resolution, Democrats can no longer use a parliamentary tactic known as budget reconciliation next year — a process Democrats had hoped might allow them to pass key pieces of legislation, such as a jobs bill, with 51 votes in the Senate, as opposed to the usual 60 needed to overcome a filibuster.

It Is Too the Economy! - Sean Trende at Real Clear Politics has a nice post up critiquing the notion that the perilous state that the Democrats and President Obama now find themselves in has entirely to do with the economy; instead, he thinks unpopular domestic initiatives like health care and cap-and-trade deserve a significant share of the blame. You should go read Sean's article in full if you haven't yet; I'm entirely agreed with him that it's a bit too simple-minded to say "Economy, stupid!" and leave it at that. The relationships between the electorate and its Presidents are more complicated than that; so for that matter are the relationships between economic variables and measures like Presidential approval in the statistical record. But I think Trende is being somewhat too literal-minded in his counter-critique.

It's always the economy, stupid - With merely five months before the election and the outlook grim for Democrats, we're starting to hear rumblings of a fight within the White House. The political side, we're told, wants to focus on the swelling deficit, which it believes is contributing mightily to the public's sense that the economy isn't being effectively managed. Karl Rove, who's been on the political side of a White House himself, agrees with them: "People's concern about the spending and the deficits and the debt and the out-of-control government have been growing and growing and growing," he said on Fox News. "And it's one of the key drivers in the 2010 election." The economists disagree: They see a weak economy that still needs government support. And if the government fails, and the economy worsens, the midterms will be a massacre. Richard Trumka, president of the AFL-CIO, joins them in this view: "The jobs hole -- and the decades-long stagnation in real wages -- are the source of the anger that echoes across our political landscape."

Government Policies Pushing Towards Depression - While there can be no doubt that an increase in government spending will result in a boost to GDP figures, the evidence of history shows that such growth is short-lived. Unfortunately as leaders around the world look to tighten the reins on out of control spending, President Obama and his Democratic supporters in Congress believe that their stimulus actions have succeeded and should be redoubled. Armed with nothing more than faith in government and a belief that spending is both a means and an end, it appears that the US stimulus policy will continue. The net result of these efforts will not be a more vibrant economy, but the perpetuation of fear and confusion in the business community and the continuing expansion of deficits that will lead inevitably to higher taxes.

Little ‘appetite’ for new stimulus, Obama adviser says – The Obama administration wants to boost the staggering U.S. economy by boosting exports and offering small-business tax credits, but the prospects for additional stimulus spending are weak, the president's top political adviser conceded Sunday. "Everybody agrees we have to do more," David Axelrod told CNN's "State of the Union." He said the administration has boosted the economy with its first stimulus package, which it pushed through Congress shortly after taking office in 2009, and Obama has pledged to double U.S. exports in five years, but, "We have to accelerate that." But with members of Congress expressing increasing concern about the budget deficit, which already tops $1 trillion for a budget year that ends in September, Axelrod admitted there's "not a great desire" for additional government spending.Axelrod said the administration still can push for tax relief and expanded lending for small businesses, which he called "an engine of economic growth," and said Congress "ought to extend undemployment insurance" for the long-term jobless.

A Good Time to Measure - The tax cuts and public spending increases from the American Recovery and Reinvestment Act of 2009 are coming to an end, and economists and politicians disagree as to whether the federal government’s “stimulus” should continue. But the conclusion of the act offers a unique opportunity to measure the impact of fiscal stimulus.The Obama administration and its supporters promised that the fiscal stimulus law would create or save more than three million jobs by now. But instead of adding jobs since the law was passed in February 2009, our economy has reduced employment by more than two million. Some of us think that the fiscal stimulus made a bad situation worse, and that employment would have grown, or fallen less, if the stimulus law had not been passed.  The Obama administration contends that, apart from the stimulus law, the economy is worse than anyone expected, and that the law kept the drop in unemployment to two  million, rather than more than five million.

Fiscal adjustment: fast or slow? - As growth slowly comes back governments in advanced economies are facing the question of when they should start reducing their deficit and address the growing debt problems. While there is no question about the need for an adjustment, there is a debate about its timing and speed. These are the two sides of the debate: 1. Go slow: given that growth is still not strong enough and unemployment remains high, adjustment should be postponed as much as possible. A cut in government spending or a reduction in taxes will decrease aggregate demand and growth. The costs of keeping the debt high are small compared to the costs of high unemployment. 2. Governments need to act fast because their high level of deficits and debt are creating too much uncertainty and fear of a crisis. In some cases this is showing up as higher interest rates (which can harm growth). In others, interest rates remain low but the fear of an unsustainable path for fiscal policy can lead to low investment and growth. Both sides of the argument have merits and it is not a question of which one is right and which one is wrong

I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)- Krugman -It’s really not relevant to current policy debates, but there’s an issue that’s been nagging at me, so I thought I’d write it up. Right now, the real policy debate is whether we need fiscal austerity even with the economy deeply depressed. Obviously, I’m very much opposed — my view is that running deficits now is entirely appropriate.  But here’s the thing: there’s a school of thought which says that deficits are never a problem, as long as a country can issue its own currency. The most prominent advocate of this view is probably Jamie Galbraith, but he’s not alone. Now, Jamie and I are, I think, in complete agreement about what we should be doing now. So we’re talking theory, not practice. But I can’t go along with his view that So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.  OK, I don’t think that’s right. To spend, the government must persuade the private sector to release real resources.

No time for hawks - It’s becoming fashionable for some politicians to portray themselves as "deficit hawks." This sounds nice: getting tough on excessive indebtedness, like getting tough on crime. And as we get closer to the midterm elections, more and more candidates may try to wrap themselves in the attractive packaging of hawkishness. That’s where good journalists need to step in.As Gov. Rendell of Pennsylvania pointed out on the PBS NewsHour, if the public is properly informed it will see how wrong this is. Cutting government spending during a recession is no way to create or save the jobs needed to pull us out of that recession. For example, unemployment insurance payments immediately stimulate the economy because they are spent quickly, and that helps create or save jobs. And Rendell feels it is possible to do two things at the same time: spend more to create jobs and also work on a long-term plan for deficit reduction.

Fiscal Fibs and Follies, by Barry Eichengreen, Project Syndicate: Across the globe, the debate over fiscal consolidation has the distinct sound of two sides talking past one another.  On one side are those who insist that governments must move now, at all cost, to rein in budget deficits. Putting public finances on a sustainable footing, they argue, is essential to reassure financial markets. ... And if confidence is bolstered, consumption and investment will rise. In this view, cutting deficits will be expansionary. ...On the other side are those who insist that additional public spending is still needed to support demand. Private spending remains weak, not least where continued high unemployment has led consumers, concerned about future prospects, to pocket their wallets. So who is right? Consider the following image: consumers and investors as passengers in a car hurtling directly toward a brick wall. In this case, the driver stepping on the brake will give the passengers more confidence.

Financial markets: What the market wants | The Economist - DANI RODRIK writes in a much lauded column: If economic logic were clear-cut, governments wouldn’t have to justify what they do on the basis of market confidence. It would be evident which policies work and which do not, and pursuing the “right” policies would be the surest way to restore confidence. The pursuit of market confidence would be superfluous. Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it. Few can predict which way market sentiment will move, least of all market participants themselves. Ezra Klein adds: I'd just note, as Paul Krugman does, that in the United States, we're not steering the economy by the dictates of the market. We're steering the economy by the dictates of what some people think the market might want at some point in the future. Listening to the market is one thing. Trying to predict its future demands is another. I think that something is being missed in this conversation.

Deficits of Mass Destruction - First, the facts. Nearly the entire deficit for this year and those projected into the near and medium terms are the result of three things: the ongoing wars in Afghanistan and Iraq, the Bush tax cuts and the recession. The solution to our fiscal situation is: end the wars, allow the tax cuts to expire and restore robust growth. Our long-term structural deficits will require us to control healthcare inflation the way countries with single-payer systems do.But right now we face a joblessness crisis that threatens to pitch us into a long, ugly period of low growth, the kind of lost decade that will cause tremendous misery, degrade the nation's human capital, undermine an entire cohort of young workers for years and blow a hole in the government's bank sheet. The best chance we have to stave off this scenario is more government spending to nurse the economy back to health. The economy may be alive, but that doesn't mean it's healthy. There's a reason you keep taking antibiotics even after you start to feel better.

Voters Say To Hell With Deficit Reduction, Help The Unemployed - Two national polls released Tuesday revealed that registered voters think it's more important to help the unemployed than to reduce the deficit. Voters are generally wary of government spending to boost the economy, but they nevertheless told ABC News and CBS News that the deficit is no reason not to help the unemployed. Fifty-two percent of voters told CBS that Congress should extend unemployment benefits "even if it means increasing the budget deficit," including 35 percent of Republicans. Sixty-two percent of registered voters told ABC Congress should extend benefits despite concerns that doing so "adds too much to the federal budget deficit."  In a Bloomberg survey, 70 percent of voters said reducing unemployment is more important than reducing the deficit. But only 47 percent said Congress should reauthorize extended benefits, which in some states provided the unemployed with up to 99 weeks of checks.

Republicans don’t give a damn about the deficit - "You do need to offset the cost of increased spending, and that's what Republicans object to," Kyl said. "But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans." In short, he claimed budget shortfalls resulting from tax cuts don't need to be offset, but spending provisions do. If you thought this was a slip-up or a lone viewpoint you'd be wrong. "That's been the majority Republican view for some time," McConnell told Talking Points Memo's Brian Beutler, trotting out the verifiably false claim that the 2001 Bush tax cuts didn't decrease tax revenues. "I think what Senator Kyl was expressing was the view of virtually every Republican on that subject." (As well as Democrat Ben Nelson.) Ponder that for a minute. The official Republican stance is that taxes aren't relevant to budget problems, but spending is. In this case, $35bn for the jobless (during the worst economic crisis since the great depression) is unacceptable to them because it would bust the budget, but $678bn in breaks for the wealthiest is fine.

Which Would You Rather Cut: Social Security, or Interest for Foreign Governments and Rich Bondholders? - Alan Simpson and Erskine Bowles, the Co-Chairs of “the National Commission on Fiscal Responsibility and Reform,” would have us believe that a deficit and debt crisis threatening the fiscal future of the United States is upon us, that "This debt is like a cancer,” and that unless we begin to make across the board cuts in expenditures, and also raise taxes in a way that distributes the pain across all segments of the population, there is no way we will return to fiscal sustainability. This view is false and also alarmist for many reasons. One is that Bowles’s view that: "We could have decades of double-digit growth and not grow our way out of this enormous debt problem”, is ridiculous, even if one thinks there is “a debt problem.” I’ve shown elsewhere, that all the US needs to do to “grow our way out of the problem” is to return to the historical average decade-long growth rate we experienced between 1940 and 2000 to begin producing surpluses by 2017 and bring the public debt-to-GDP ratio down to 37% by 2020

The effect of expected future taxes on current investment: how big? - If the government runs a fiscal deficit now, that may mean that future taxes increase. The expectation of those future taxes may reduce the expected after-tax marginal return to current investment. That may reduce current investment, and may offset some of the effects of the fiscal deficit on aggregate demand. This mechanism for crowding out is distinct from any Ricardian effects on consumption, and distinct from any effect of fiscal deficits on interest rates or monetary policy. Brad De Long says that Greg Mankiw should have done a back-of-the-envelope calculation to get a sense of how big these effects might be. Brad does his own b-o-t-e calculation, and argues they are very small. I don't like Brad's calculation, and have decided to do my own.

GOP has no problem extending tax cuts for the rich - SENATE REPUBLICANS, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans. On Fox News Sunday, Chris Wallace asked Republican Whip Jon Kyl (R-Ariz.) about this contradiction. Mr. Kyl's response is worth examining because of what it says about the GOP's refusal to practice the fiscal responsibility it preaches.  Mr. Kyl's first line of defense was to dismiss Mr. Wallace's query as "a loaded question" because "the Bush tax cuts applied to every single American." Mr. Wallace pointed out that he was only referring to the top tax brackets, but Mr. Kyl persisted in his refusal to answer

More Starve the Beast Nonsense - Over the weekend, Sen. John Kyl, R-Ariz., asserted that despite the large budget deficit, tax cuts must never be offset, budgetarily. This view is consistent with a philosophy long held in Republican circles that tax cuts without any offsetting spending cuts are the epitome of fiscal responsibility because they will somehow automatically “starve the beast.” Starve the beast theory has been the subject of much recent academic research, all of it showing that there is no truth to it whatsoever. Indeed, the literature shows that the effect is actually perverse; leading to higher spending because the tax-cost is reduced by tax cuts. I provide links to a number of recent academic studies on this point in my Fiscal Times post today.

Tax Gouging the Poor and the Middle Class - In 2003, Congress enacted across-the-board cuts in the tax rates paid by all income earners in the U.S. that are set to expire at the end of 2010. Many have been expecting that the current Congress would act to keep tax rates where they were set for those at the lowest end of the income spectrum, while letting rates go back to their pre-2003 levels for those at the highest end. What if they're wrong and the current Congress chooses not to act? After all, it's not like they're going to get around to passing a budget in 2010, so why not also take another pass on the opportunity to keep tax rates low?...That's the possibility we're looking at today in considering what the raw impact would be if, rather than reining in excessive spending, the 111th United States Congress instead opts to attempt to reduce the annual federal government budget deficit by doing nothing to stop all the 2003 tax rate cuts from expiring.

Tax cuts and Republican leaders - CBS News reports: Wallace asked Kyl on "Fox News Sunday": "At a time Republicans are saying that they can't extend unemployment benefits unless you pay for them, tell me, how are you going to pay that $678 billion to keep those Bush tax cuts for the wealthy?"  Responded the Arizona senator: "[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to -- if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that's what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans." And just when you think it was simply a rash statement, along comes the back up: "That's been the majority Republican view for some time," Senate Republican Leader Mitch McConnell told TPMDC.

Tax Cut Delusions -   Krugman - It looks like delusion Wednesday. I have at least two posts to put up about widespread economic delusions. So here’s post #1, about tax cuts. A number of people have reacted to Mitch McConnell’s defense of Jon Kyl, with his remarkable claim that the Bush tax cuts paid for themselves. In a rational world, the failure of the economy to do anything special after those tax cuts, following a boom period after the Clinton tax hike, would have cast strong doubt on any claims about the favorable impacts of tax cuts on the economy, let alone on the claim that these effects are so strong as to generate more revenue than the losses from the cuts. As this nice chart shows, the actual path of revenue was pretty much what you would have expected if the Bush cuts had no supply-side effect at all. But judging from the reaction both to my post and to Menzie Chinn’s, there are a lot of people who can’t handle the truth. Put up a simple chart of revenues or growth over time, and they start screaming that you’re cherry-picking data; that you’re a liar for not mentioning Jimmy Carter, or something; or, the all-purpose response, 9/11! 9/11! 9/11!

What's the fiscal impact of estate tax cuts vs. unemployment insurance?: The unemployment extension proposal that Harry Reid is trying to pass has a one-time cost of $33 billion. That's for one year, and then the additional cost vs. the baseline is zero thereafter. So let's compare that temporary bump up in the deficit with four proposals (PDF) for reforming the estate tax. The first is outright repeal. The second, proposed by John McCain in the presidential election, would reduce the tax rate to 15 percent and exempt the first $5 million of an estate. The third, Jon Kyl's initial proposal, also has a $5 million exemption, with a 20 percent rate on estates up to $25 million and a second 30 percent bracket for larger estates. The fourth, Barack Obama's proposal during the presidential election, has a lower exemption of $3.5 million and a 45 percent tax rate. Not only do estate tax cut proposals add much, much more to the deficit in the medium-term than unemployment benefits do, they continue to grow more expensive over time, at least for as long as we have estimates.

The Tax Cut Diet and Exercise Program Doesn’t Work - The first problem with the distinction Republicans are making between the need to offset the cost of extended unemployment benefits (they say “yes”) versus the need to offset the cost of tax cuts for the rich (they say “no”) is that they are mixing up the short-term fiscal policy goal of stimulating aggregate demand with the longer-term fiscal policy goal of encouraging aggregate supply. But then there’s the issue of how great these tax cuts for the rich actually are (I mean, besides for the rich), even for encouraging aggregate supply over the longer run.  Today Bruce Bartlett reminds us that there’s a wealth of evidence that tax cuts don’t work well as a “diet” to “starve the beast” of government spending.  And the literature also shows that they don’t work that well as an “exercise” program to build up those major “supply-side” muscles in our economy:  labor supply and saving– especially not when deficit financing acts as the public sector’s counter-drag on national saving. 

Tax Cuts for High-Income Americans Depend on Democrats Blinking - While Democrats and Republicans alike want to keep the 2001 and 2003 tax reductions for families earning up to $250,000, President Barack Obama and congressional Democrats want to end the break for those who earn more. Republicans, contending a recovery from recession is no time to raise taxes, insist on continuing the Bush-era cuts for high-income people as well. As Congress returns this week, the looming fight over one of the biggest battles of the session will play out in a midterm election season that will determine who controls Congress and ultimately who makes long-term decisions over taxes.  For the Democrats, reluctant to break Obama's promises, the pressure may be strongest to blink in this standoff and let the tax cuts stand another year. All of the cuts will expire Dec. 31 if Congress fails to act, an outcome neither party can afford.

Should The Bush Tax Cuts Be Extended? - I have argued very strongly that we need to give the economy more help, so it would be inconsistent of me to say it's OK for taxes to go up. What I would do, and this is along the lines of what has been proposed, is to keep the tax cuts for anyone below some income threshold. My threshold would be lower than the proposed $250,000, but I can live with that. So taxes would go up for higher income households. But, even though I don't think raising taxes on higher income individuals would have all that much effect on economic activity, why take chances? So I'd take the revenue generated from the increase in taxes on upper income households and transfer them to lower income households. That way there won't be any decline in aggregate demand due to the increase in taxes, and since the transfer is from high savers to low savers, it could even provide a bit of additional stimulus. But the important thing is that aggregate demand won't go down since on net taxes have not been raised

Just Say No to Extending the Bush Tax Cuts - I'm rather surprised to find Ezra Klein and myself on opposite sides of the temporary tax cut debate.  He supports a temporary extension of the Bush tax cuts for those under $250,000 in income: I think that would make sense, actually. You want to extend the bulk of the tax cuts until the labor market rebounds, and then you want to take a more skeptical look at them in a time of economic normalcy. You don't want, as a consequence of the recession, to extend them for 10 years when we'll need to turn our attention to deficits in two or three years. The more options we have for reducing the deficit by not doing anything and just allowing current law to take effect (and time-limited tax cuts to expire), the better off we are. Given the deficits we have, until we find and enact actual offsetting spending cuts (no, I don't want to hear any more about starving the beast), those tax cuts have to go.  And a temporary extension is simply going to make it harder to let them expire next year, for the same reasons that the AMT keeps getting "fixed" on an annual "temporary" basis.

Alan Greenspan Opposes Extending ALL Of The Bush Tax Cuts!!! - Pardon my incredulity!  Alan Greenspan just taped an interview with Judy Woodruff for broadcast tomorrow and over the weekend.  This Bloomberg News story quotes him saying, "They should follow the law and let them [the Bush tax cuts] lapse."   He believes it is more important at this point to cut burgeoning deficits than to funnel more money to taxpayers.   In a telephone interview after the taping, Greenspan acknowledged that this "probably will" slow growth.

Redo That Voodoo, by Paul Krugman, NY Times: Republicans are feeling good about the midterms — so good that they’ve started saying what they really think. This week the party’s Senate leadership stopped pretending that it cares about deficits, stating explicitly that while we can’t afford to aid the unemployed or prevent mass layoffs of schoolteachers, cost is literally no object when it comes to tax cuts for the affluent.  Monday Jon Kyl of Arizona, the second-ranking Republican in the Senate, was asked the obvious question: if deficits are so worrisome, what about the budgetary cost of extending the Bush tax cuts for the wealth...? What should replace $650 billion or more in lost revenue over the next decade?  His answer was breathtaking: “You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans.” So $30 billion in aid to the unemployed is unaffordable, but 20 times that much in tax cuts for the rich doesn’t count.

Extending the Bush Tax Cuts - What should Congress do about the Bush tax cuts that are set to expire at the end of the year? That question is going to absorb much of Washington’s attention through the fall and—if present hyper-partisan trends continue—perhaps even beyond. On Wednesday, the Senate Finance Committee kicked off the coming drama by bringing in a group of tax experts to set the stage.The Tax Policy Center was represented by our current director, Donald Marron, and by one of our founders, Len Burman. Donald estimated the revenue effects of extending some or all of the 2001 and 2003 tax cuts, and described who would benefit from continuing these tax breaks. Len argued that while a permanent extension of all the tax cuts would be a fiscal catastrophe, Congress should temporarily continue those provisions aimed at low- and middle-income households who would most likely spend the money and boost the still-struggling economy.

Tax extenders legislation - Obama campaigned (somewhat foolishly, from my perspective) on retaining the tax cuts for those in the lower four quintiles, but letting the cuts lapse as scheduled for the wealthiest Americans ($250,000 or more in income). The fact is that we have huge revenue demands from the banking crisis/recession and the ongoing wars, and we cannot afford to continue a foolish fiscal policy by extending the tax cuts permanently.  One of the obvious items that should be allowed to lapse is the treatment of dividends as net capital gains subject to the preferential rate. GOP Senators, like Chuck Grassley from Iowa, are arguing that all of the tax cuts must be extended, even for the rich. See Heflin, Senate GOP: Small Businesses Would Suffer if Tax Cuts Expire, July 13, 2010. They claim that we shouldn't tax the rich, because the rich will put their money into small businesses and that will be good for business: taxing the rich would mean that it would "dry up the funds of small-business owners and make it harder for them to expand their operations."

Congress to extend middle-class tax cuts (Reuters) - Congress will likely act to extend tax cuts for the middle class to avoid choking off the fragile economic recovery, key congressional Democrats said on Tuesday. House Democratic Leader Steny Hoyer said he expected the House of Representatives to push to extend middle class tax cuts before they expire at year end, but suggested cutting taxes for the wealthy is less urgent. "What you want to do is stimulate at this point in time, so you certainly do not want to increase taxes on the middle class, middle-income working Americans," Hoyer told reporters. President Barack Obama and his Democratic allies in Congress have vowed not to raise taxes on individuals earning less than $200,000 or couples making less than $250,000.

Older Taxpayers Earn Lion's Share of Capital Gains Income - Yesterday, we reported on some new IRS data showing the distribution of dividend income by age group. Today, we have a similar set of data on capital gains income by age group. As is the case with dividend income, it is clear that older taxpayers earn the lion's share of capital gains income and that allowing the current 15 percent tax rate on capital gains income to rise to as high as 39.6 percent will disproportionately hurt older Americans. As the table below shows, while 6 percent of all tax returns reported some capital gains income, 13 percent of taxpayers over age 65 reported capital gains income. Indeed, one-third of all taxpayers reporting capital gains income are over age 65 and they earn 30 percent of all capital gains income. Capital gains income comprises 12 percent of their total adjusted gross income.

Carter, Reagan, Revenue – Krugman - One common reaction of conservatives, when you point out that the experience of the last 20 years offers zero support for the idea that tax cuts pay for themselves, is to start shouting “Jimmy Carter! Reagan! Supply side roolz!” So I thought it might be worth presenting a bit of evidence from an earlier 20-year stretch. Here’s real federal revenue, in 2005 dollars, from 1970 to 1990. I’ve plotted the log, because it’s easier to look at trends:First, the Carter years, contrary to legend, were not a period of economic stagnation and falling revenue because high tax rates were strangling the economy; there was a nasty recession starting in 1979, largely thanks to an oil shock, but overall growth was respectable and revenue growth reasonably high. Second, the revenue track under Reagan looks a lot like the track under Bush: a drop in revenues, then a resumption of growth, but no return to the previous trend.

Taxes and Economic Growth - As the United States tries to dig itself out of the lingering recession – which might well have been a deep depression – we shall hear a lot about two barriers to a speedier recovery: a proposed increase in the long-term capital-gains tax rate and the high corporate tax rate. Capital-Gains Taxes: A major problem with the tax preference embedded in the taxation of capital gains is that the preference is so scattershot, rewarding both behavior that leads to economic growth and behavior that does not. Corporate Taxes: Currently, American corporations pay federal taxes of 35 percent on taxable profit – close to 40 percent if state taxes are included. This tax yields about 12 percent of total federal revenues, far below the individual income tax (45 percent) and payroll taxes (36 percent). Yet the tax engages legions of smart accountants and tax lawyers playing a zero-sum game.

Taxophobia - I think this Greg Mankiw post against stimulus and Brad DeLong’s riposte are worth reading. Then it’s worth considering that I think writers in the Krugman/DeLong/Thoma vein are all being a bit too literal in their disagreements with the center-of-center economists of the world. What I take Mankiw et al to be saying is that taxes are really, really, really bad. And taxes on high-income people are really, really, really, really, really, really, really bad. They think that the electorate is joined by leftwing economists in massively underestimating the scale of the badness. And they look at population aging and growing health care costs and see that it’s likely that taxes will go up in the future. And they think this is an incredibly bad outcome, with massive negative long-term consequences. Consequences that are far more dire than any transient, years-long period of unemployment. Ergo, it’s really important to do the best one can to weather the 111th Congress—the most leftwing congress in decades, and the most leftwing congress we’re likely to see in quite some time—while minimizing increases in the spending level. Really, really, really important.

Too Rich to Live? - It has come to this: Congress, quite by accident, is incentivizing death. When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit. Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011. Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.  The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

Melting Conservative Opposition to a VAT? - My Fiscal Times post for today picks up on a Wall Street Journal report on Monday suggesting a pickup in support for the value-added tax. I provide links to recent commentaries by conservatives such as Greg Mankiw, Richard Posner, Casey Mulligan and Tyler Cowen that treat the idea as something less than unmitigated evil, which has been the standard right-wing line for the last 25 years. (Before that conservatives like Norman Ture and Murray Weidenbaum considered the VAT to be the epitome of conservative tax policy.) When one's opponents start taking an idea seriously instead of rejecting it out of hand it's a sign of progress.

New Podcast: Dr. Randall Holcombe on Why a VAT is Too Costly for the U.S. - The Wall Street Journal's John McKinnon recently evaluated the political appetite for implementing a VAT in the United States: Advocates say a VAT creates less incentive for avoidance compared to a sales tax, while limiting economic damage compared to income taxes. But conservative critics worry it's just another faucet for government to tap. And many business owners regard it with apprehension, in part because of its administrative complexity.He concludes that there's enough opposition to keep a value added tax at bay in the near-term, but that it might not be that far off in the future, especially if it's paired with a large enough reduction in the corporate income tax (which could soon be the highest corporate income tax in the world). He highlights an important criticism of a VAT -- or rather, of Washington -- namely, that a broad-based, low-rate VAT would eventually see its rate jacked up and many exemptions carved out of the base as special interests flock to Capitol Hill. And there's no guarantee that any corporate income tax reduction would be permanent:

How Changes in State & Local Tax Burdens Affect Growth in Per Capita Income - I’ve had a number of posts recently looking at the effect of reductions in the tax burden during Presidential administrations or during (or just following) recessions and how those affected subsequent growth. In each case, cutting the tax burden did not lead to faster growth. In fact, the data shows that, contrary to theory, real economic growth tends to be slower following cuts in the tax burden than following hikes in the tax burden. As noted in my last post , one common criticism, that there aren’t enough observations, is mooted by the fact that state and local level data seems to show the same thing. But it occurs to me that I haven’t done this sort of an analysis at the state and local data in a while, so that’s what I’m going to do in this post. The data I’m going to use in this post comes from the Tax Foundation.

Gun Control as Economic Stimulus - Federal tax revenue on the sales of firearms and ammunition rose 45 percent in the last fiscal year. That is the highest annual increase on record, according to a new report from the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau. By comparison, the annual average increase for fiscal years 1993 to 2008 was 6 percent. Here’s a chart millions of dollars of firearms and ammunition excise taxes collected at the federal level over the last decade:  Federal sin taxes had a good year last year in general. The bureau’s annual report also noted that federal excise taxes on tobacco rose dramatically, mostly  because Congress raised the tax rate on tobacco in February 2009 when it enacted the Children’s Health Insurance Program Reauthorization Act.

Paul Volcker Pushes for Reform, and Regrets His Past Silence - NYTimes - He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression.  A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus. “  For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.

The Kanjorski Surprise – Now It Gets Interesting -The bank lobbyists, it turns out, missed one.  They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry. But, as I point out in a Bloomberg column today, they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment.  This Amendment was originally proposed by Congressman Paul Kanjorski Against the odds, it survived in the final House bill and now – probably because it has stayed mostly below the radar – remains in the reconciled legislation.Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.The Federal Reserve is in the hot seat on this issue – and it needs 7 out of the 10 members of the new systemic risk council to agree to any action.  But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.

A Roosevelt Moment for America’s Megabanks?, by Simon Johnson - Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed? The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century. The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors.Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

What is Simon Johnson Smoking? - Yves Smith - Simon Johnson deserves tons of kudos for pointing out that the US is in the hands of financial oligarchs, via his celebrated Atlantic article, “The Quiet Coup.” But having recognized a clear and present danger, he seems peculiarly willing to confuse non-solutions with meaningful measures. In an article at Project Syndicate, he incorrectly celebrates a toothless provision in the Dodd-Frank bill as being tantamount to an anti-trust act for too big to fail banks: Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability. Yves here. Citbank, JP Morgan, Bank of America, Wells, Goldman, and Morgan Stanley NOW constitute “a grave risk to financial stability.”  If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero.

Dodd-Frank Bill closer to passage as Republicans Sign On - Perhaps the weakest part of the bill is its failure to definitively wean big banks from the risky (but lucrative, as long as the US picks up their losses) derivatives business and investments in hedge funds and similar entities. Naked credit default swaps, the critical derivatives that permitted banks to become interconnected casinos gambling on ups and downs in companies without owning a cent of their equity or bonds (an insurance product without insurance regulation to prevent moral hazard), are essentially unregulated in the conference report agreement. The Fed will have the power to regulate them, but the Fed has long been in bed with the banks and has insufficient independence to recognize the depth of the problem. Moving most derivatives into subsidiaries is not the same as spinning them off entirely into separate entities. The banks won on this one, and this was the most important stake in the bundle.

Financial Reform Roundup - Today, the Senate votes to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act, sending the landmark legislation to President Obama's desk for signature next week. The bill is not perfect, but it will bring greater security to American consumers, investors and Main Street businesses. Most importantly, it turns the page on an era of misguided deregulation that has cost Americans 8 million jobs and trillions in lost household wealth. Demos has contributed to the reform effort with policy analysis and advocacy on three major issues:

Congress passes financial reform bill - Congress gave final approval Thursday to the most ambitious overhaul of financial regulation in generations, ending more than a year of wrangling over the shape of the new rules and shifting the government's focus to the monumental task of implementing them.  The massive bill establishes an independent consumer bureau within the Federal Reserve to protect borrowers against abuses in mortgage, credit card and some other types of lending. The legislation also gives the government new power to seize and shut down large, troubled financial companies -- like the failed investment bank Lehman Brothers -- and sets up a council of federal regulators to watch for threats to the financial system. Under the new rules, the vast market for derivatives, complex financial instruments that helped fuel the crisis, will be subject to government oversight. Shareholders, meanwhile, will gain more say on how corporate executives are paid.

Senate passes HR 4173 finance reform conference report - On a 60-39 vote, the US Senate passed the Dodd-Frank H.R. 4173 financial reform conference report today. While the bill imposes some new restrictions and creates a consumer protection agency, most of the impact will come (if it comes) through regulation as the new systemic risk council oversees bank issues and decides whether activities of banks pose sufficient risk to be regulated or eliminated. Capital requirements and leverage requirements, for example, are not directly set in the bill. The US is likely to settle with the capital and leverage standards set by Basle III, the discussions going on now at the Bank for International Settlements regarding updating of the 2004 standards. In those talks, thje banks lobbying are making inroads on the fairly tough standards originally proposed in December, as officials yield to fears (cited by the banks) that tough capital and leverage requirements will dampen the economic revival

Ezra Klein - FinReg vs. Wall Street reform - Matt Yglesias calls it "the underrated FinReg bill," and I take that headline as a personal victory of sorts.  But he's right about the legislation. The desire for a bill that does more has obscured a clear picture of a bill that does a lot. "We’ve tended to focus much more on what’s not in the bill than on what is in the bill," Yglesias says. "What is in the bill is a consumer protection setup that would be considered a major progressive win as a standalone item. What is in the bill is a 'resolution authority' that will let future regulators avoid the bailout-or-crisis dynamic that plagued us in 2008. What is in the bill are regulatory tools that even Simon Johnson likes. The bill clarifies lines of regulatory authority and responsibility and should cut down on abusive 'competitive regulation.' " I'd add a few more major wins. Bringing derivatives onto exchanges and into clearinghouses is a huge victory. In 2007, the over-the-counter -- and almost entirely unregulated -- derivatives market was worth about $700 trillion in notional value, and regulators had no idea what went where and few firms had serious capital or margin requirements. Those days are over.

The Dodd-Frank List of Topics, My High-Level Impressions - I’ve written so much about the Dodd-Frank Bill that I’m kind of exhausted with it. But Mark Thoma and Noah Millman, using the same list, write out their thoughts on the financial reform bill. I’m a fan of Noah writing about finance and both are worth reading. I’m going to add a few high-level thoughts to what they wrote using their framework.

Financial Reform: The Long March Ends - The bill’s two biggest accomplishments, I think, are the creation of a consumer financial-protection agency and the institution of a resolution authority that will give the government the power to take over a failing bank holding company or investment bank (the F.D.I.C. already has this power when it comes to smaller banks, but until now the government didn’t actually have the legal authority to take over the country’s biggest financial institutions). The consumer financial-protection agency—which I wrote about almost exactly a year ago—has the potential to become the equivalent of an F.D.A. for financial products, and is a solution to one of the system’s biggest problems, which is that we’ve relied on bank regulators (who are worried about the financial well-being of banks) to also look after the interests of consumers (whose interests are sometimes opposed to those of banks). We needed a separate agency that could work to make financial products more transparent and less confusing (particularly since, as I wrote about a few weeks ago, so many Americans are financially illiterate), and now, thanks in large part to Elizabeth Warren, we’ve got one.

Financial Reform: A Brief Take - It also greatly raises the status of regulators, despite their strong culpability in the errors leading up to the crisis. In fact, despite the bill's length, most of the regulations have yet to be written. Inevitably, those rules be written to the specifications of the largest banks, because the large-bank mindset will be the only one present in the room. My first prediction is that the biggest long-term consequence of this legislation will be a significant increase in concentration in the U.S. financial industry. My second prediction is that the financial consumer protection agency will turn out to be the financial incumbent protection agency. It will be captured by legacy financial firms, who will use it to outlaw new competing products as unsafe. On the most important issue of "too big to fail," the legislation does exactly the wrong thing. It gives regulators discretion to use resolution authority to break up at-risk institutions. But the regulators already had that. What they need are hard and fast rules that require them to use resolution authority under well-specified conditions. On a case-by-case basis, it is always is safer to do a bailout, just as on a case-by-case basis it always seems easier to just pay ransom to the kidnapper. Resolution authority that is discretionary is resolution authority that will never be used. And the big banks know it.

Financial re-regulation: did we reach a middle ground? - Financial re-regulation: check! Here's a great graphic summarizing what wound up in the final bill. For each category of re-regulation, Jon Hilsenrath explains what problems existed, the solutions Congress came up with and the chances that those solutions will work. It's a great compilation, one worth checking out. As I've been digging into the details of the final bill, I've been struck by how middle-of-the-road it seems. Yes, some people are claiming that the new legislation goes way too far and will devastate the availability of credit, and others are saying that it went nowhere near far enough and will do little to prevent the next crisis. Increasingly, though, I think that the truth might lie  pretty much in the middle—that for all the political posturing, we wound up with a decent bill that strikes a legitimate compromise between making the financial system safer and preserving its ability to innovate.

Timothy Geithner's Realm Grows With Passage Of Financial Regulatory Reform - Treasury Secretary Timothy F. Geithner stands to inherit vast power to shape bank regulations, oversee financial markets and create a consumer protection agency. Few Treasury secretaries have had such sweeping influence over such a wide realm as Geithner will wield once President Obama signs the new financial overhaul legislation passed this week by Congress.  The effort to dramatically expand financial regulation bears the stamp of no one more than Geithner. The bill not only hews closely to the initial draft he released last summer but also anoints him -- as long as he remains Treasury secretary -- as the chief of a new council of senior regulators.

Warren Says Consumer Agency Will Have `Teeth' to Fix Credit…Elizabeth Warren, the Harvard University professor credited with conceiving the consumer financial-protection regulator, said the agency included in the Wall Street rules overhaul will have “a lot of teeth.” The agency, which will combine consumer watchdogs from several regulators into a central bureau at the Treasury Department, may change the way credit cards, mortgages and other debt are sold, Warren said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.”  “It has a lot of capacity to reshape the consumer credit market in a way that just works, becomes a real functioning market again, a market where consumers can see the products and say, ‘Oh, that’s how much it costs that’s how much risk is associated with it,’ and make comparisons,” she said

Elizabeth Warren To Head Consumer Protection Bureau? - Regardless of the regulator Obama picks to run OCC, banks will be losing one of their best friends. John Dugan consistently fought to protect banks from regulation, compiling a record of fealty to Wall Street impressive even by Bush-era standards. His term expires in August.  At the CFPB, Wall Street and the GOP have been working to prevent Elizabeth Warren from assuming the helm long before the body had been created. An amendment pushed by House Republicans in the Financial Services Committee was intended specifically to eliminate the possibility of her leading the agency.  It failed and Warren has the strong backing of committee chairman Barney Frank (D-Mass.), as well as Rep. Brad Miller (D-N.C.), who led the push in the House for tighter consumer protections in the mortgage lending industry. Many consumer advocates would view any appointment other than Warren as a disappointment.

Warren ideal candidate to lead CFPA - With Congress on the verge of establishing a new Consumer Financial Protection Bureau (CFPB), Elizabeth Warren, Harvard law professor and chair of the TARP Congressional Oversight Panel (COP), stands out as the right candidate for the bureau’s first director. Families deserve someone with Warren’s intellect, charm, vision, credibility, independence and energy to be their cop on the consumer finance beat. Warren originated the idea for a consumer agency that could fix the broken consumer finance market by leveling the playing field between consumers and financial institutions, making it easier for consumers to compare credit products by getting rid of the complex fine print, and streamlining unaccountable, bloated government.

Geithner Opposes Warren To Lead New Consumer Agency - Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views. The financial reform bill passed by the Senate on Thursday mandates the creation of a new federal entity charged with protecting consumers from predatory lenders. But if Geithner has his way, the most prominent advocate for creating the agency may not be picked to lead it.

Elizabeth Warren in Treasury Crosshairs Again, Geithner Opposes Her as Head of Consumer Financial Services Protection Agency - Yves Smith - To say there is no love lost between Treasury and Elizabeth Warren is probably putting it mildly. Treasury was gunning for her ouster in early 2009; I heard multiple accounts both of how concerted the Administration opposition to her was (recall she was actually chosen as head of the Congressional Oversight Panel before the regime change), with the clear objective of forcing her out. Eventually, after firm pushback from some very influential individuals (I’ve heard variants of the story, but there isn’t any dispute as to who the key actors were), the pressure receded, but only after Warren was semi-neutralized. As I noted in “On Pelosi’s Duplicity and Apparent Sandbagging of Elizabeth Warren“: So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel. Under the TARP rules, the House Majority leader selects one of the oversight panel members, so this choice was completely under her control. Nieman is the New York Superintendent of Banks. He helped Goldman set up its bank holding company.

Treasury Makes A Mistake – Claiming They Are Not Blocking Elizabeth Warren – Simon Johnson - It’s one thing to block Elizabeth Warren from heading the new Consumer Financial Protection Bureau. It’s quite another thing to deny in public, for the record, that any such blocking is going on (e.g., see this report; Michael Barr apparently said something quite similar today). This can now go only one of two ways.

  1. Elizabeth Warren gets the job.  Bridges are mended and the White House regains some political capital.  Secretary Geithner is weakened slightly but he’ll recover.
  2. Someone else gets the job, despite Treasury’s claims that Elizabeth Warren was not blocked.  The deception in this scenario would be nauseating – and completely blatant.  “Everyone was considered on their merits” and “the best candidate won” will convince who exactly?

For Elizabeth Warren - Krugman - I don’t have any idea what’s really going on with regard to the new head of the Consumer Financial Protection Board. But Matt Yglesias is right: there’s a strong prima facie case for appointing Elizabeth Warren, who was instrumental in getting the institution created. As Matt says, such an appointment would raise the agency’s profile, and help attract first-rate staff. There’s also a political aspect. The Obama administration suffers from the perception that it’s been too much in the pocket of Wall Street — partly because there’s at least a grain of truth to the accusation. Appointing a prominent pro-consumer crusader would have to help repair the image, while appointing somebody unknown to the public, especially when expectations are running high, would hurt.

When checking fees replace overdraft fees - The NYT has a look at the new sources of revenue that banks are turning to now that the financial reform bill has killed off (or will kill off) many of their old cash cows. From a consumer perspective, the new old thing is fees on checking accounts: Free checking, a banking mainstay of the last decade, could soon go the way of free toasters for new account holders. Banks are already moving to make up the revenue they will lose on lower overdraft and debit card transaction charges by raising fees on other services. Banks like Wells Fargo, Regions Financial of Alabama and Fifth Third of Ohio, for instance, recently began charging new customers a monthly maintenance fee of $2 to $15 a month — as much as $180 a year — on the most basic accounts. Even TCF Financial of Minnesota, whose marketing mantra championed “totally free checking,” started imposing fees this year in anticipation of the new rules.

Government gets a jump on preparing for regulatory overhaul - Administration officials and federal regulators quietly began laying the groundwork to implement the far-reaching measures in the 2,300-page regulatory overhaul legislation weeks ago, even though the bill has not yet cleared Congress.  The Senate moved to hold a vote on Thursday, and the bill, with support from three Republicans, now seems all but certain to become law. The House already approved the package, meaning that within days the focus will shift to the mountain of work needed to transform thousands of pages of legislative text into regulatory reality.  "It's like taking the elephants over the Alps -- it's on that order of magnitude in terms of the task in front of all the regulators," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a Washington research firm. Even disregarding the ongoing debate about whether the bill will rein in the recklessness and regulatory failures that led to the financial crisis, she said, "the immutable fact is that a lot has got to change."

An Anti-Redlining Law Gets a Makeover - But lost in the torrent of news coverage was a significant move to change the way key information on borrowers and mortgage loans is collected and made public. Those changes, to the Home Mortgage Disclosure Act (HMDA) represent a benchmark in the long fight against lending discrimination. They could become an invaluable tool for consumer activists, regulators, and researchers trying to identify egregious lenders and their loans. They could transform the predatory-lending debate from arguments over anecdotes to conclusions based on hard evidence. Or maybe not. In the crucial rule-making to follow final passage of a financial-reform bill, the HMDA changes could also potentially get lost in the weeds, watered down by industry lobbyists and made public in a format that's difficult to access and hard to use.

Finance Overhaul Casts Shadow on Plains - WSJ.—Farmer Jim Kreutz uses derivatives to soften the blow should the price of feed corn drop before harvest. His brother-in-law, feedlot owner Jon Reeson, turns to them to hedge the price of his steer. The local farmers' co-op uses derivatives to finance fixed-price diesel for truckers who carry cattle to slaughter. And the packing plant employs derivatives to stabilize costs from natural gas to foreign currencies. Far from Wall Street, President Barack Obama's financial regulatory overhaul, which may pass Congress as early as Thursday, will leave tracks across the wide-open landscape of American industry.Designed to fix problems that helped cause the financial crisis, the bill will touch storefront check cashiers, city governments, small manufacturers, home buyers and credit bureaus, attesting to the sweeping nature of the legislation, the broadest revamp of finance rules since the 1930s.

FinReg and the Farmers - I do not feel quite as strongly as Edmund Andrews, but I have to say, I was underimpressed by this article in the Wall Street Journal today, touting the effects of financial reform on farmers.  I've seen no indication that farm futures are going to be harmed by derivatives regulation, and the rest of it consists of saying, basically, "Some people are worried that they might not be able to get loans."  By that logic, plane tickets to Vegas are an equally big problem for farmers.It's not that I don't worry that FinReg will have harmful effects on the credit markets.  But I think an article needs a little more than random fretting.  On the other hand, I think Andrews is far too quick to deduce editorial bias, especially based on a headline that was probably written by some rushed assistant.  It's a slow news month and FinReg seems to be moving forward in geologic time.  Maybe both editors and reporters were just desperate for something to fill the front page.

Wall Street Fix Seen Ineffectual by Four out of Five in U.S. - Americans harbor doubts that a financial-regulation bill about to be passed by Congress will do what President Barack Obama says it will: help avoid another crisis and make their finances safer. Almost four out of five Americans surveyed in a Bloomberg National Poll this month say they have just a little or no confidence that the measure being championed by congressional Democrats will prevent or significantly soften a future crisis. More than three-quarters say they don’t have much or any confidence the proposal will make their savings and financial assets more secure. A plurality -- 47 percent -- says the bill will do more to protect the financial industry than consumers; 38 percent say consumers would benefit more.

How Washington Lobbyists Shaped the Financial Reform Bill…Capitol Tax Partners, for example, is one of 1,900 firms that house more than 11,000 lobbyists registered to operate in Washington. Last year, according to the Center for Responsive Politics (CRP), firms like Capitol Tax were paid a total of $3.49 billion for unraveling the mysteries of the tax code for a variety of businesses. According to Capitol Tax co-founder Lindsay Hooper, his firm provided "input and technical advice on various tax matters" to such clients as Morgan Stanley, 3M, Goldman Sachs, Chanel, Ford and the Private Equity Council, which is a trade group trying to head off a plan to increase taxes on what's called carried interest, a form of income enjoyed by the heavy hitters who run venture-capital and other types of private-equity funds. With other groups lobbying on the same issue, the overall spending to protect the favorable carried-interest tax treatment was maybe $15 million. Which seems like a lot — except that this is a debate over how some $100 billion will be taxed, or not, over the next 10 years.

Government for Sale: 2009 Lobbying $3.49 Billion - In line with this morning’s early post (Four out of Five Americans See Financial Reforms as Ineffectual), I discovered, quite by accident, a horrifying little article in the July 12 Time magazine. The online version is pretty skimpy, which is probably why I didn’t see it until now. But the details are quite horrific. The article’s subhed tells you all you need to know: “Why Lobbying Is Washington’s Best Bargain; Lobbyists say for just a few million, they can make clients billions:” “The print edition specifically cites Derivative trading banks and Auto Dealers as examples of ROI. Derivatives trading banks spent $28 million, and got to avoid allocating $5 billion to $7 billion to back their trades. The gain in annual profits is about $3 billion — with the risk remaining on the taxpayers.  A pretty nifty return on lobbying investment

Finance Reform Sham, CFPA Sham, SEC/Goldman Sham - I’ve written more than enough on the sham finance bill and didn’t see the need for another piece on it . (My most recent.) But I thought this post mortem was true and typical. The ink is not even dry on the new rules for Wall Street, and already, the bankers are a step ahead of everyone else. In ways large and small, the broad overhaul of the nation’s financial regulatory system that was approved by Congress on Thursday will eat into the profits of the nation’s banks. So after spending many millions of dollars to lobby against the legislation, bankers are now turning to Plan B: Adapting to the rules and turning them to their advantage. Even when it comes to what is perhaps the biggest new rule — barring banks from making bets with their own money — banks have found what they think is a solution: allowing some traders to continue making those wagers, as long as they also work with clients.

Financial Reform, R.I.P. - Forbes - So long Glass-Steagall. Hello Dodd-Frank--the most comprehensive rewrite of financial rules since 1933. This 2,319-page colossus--10 times the length of Glass-Steagall--took 1.5 years to produce and will cost $30 billion and many more years to implement. Will all this time and treasure make Wall Street safe for Main Street?  No.  Dodd-Frank is a full-employment act for regulators that addresses everything but the root causes of the financial collapse. It serves up a dog's breakfast covering proprietary trading, consumer financial protection, derivatives trading, executive pay, credit card fees, whistle-blowers, minority inclusion and Congolese minerals. Dodd-Frank also mandates 68 new studies of carbon markets, Chinese drywalls, and person-to-person lending, and many other irrelevancies.

2,319 Page Dodd-Frank Bill aka The “Lawyers’ and Consultants’ Full Employment Act of 2010" - Now that Congress has passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” it might be a good time to compare the 2,319-page financial reform bill (245 pages longer than the healthcare bill) to the previous bills listed below (and see graph above) that are considered among the most consequential legislative acts for banking and finance.
1. Federal Reserve Act (1913) - 31 pages.
2. Glass-Steagall Act (1933) – 37 pages.
3. Interstate Banking Efficiency Act (1994) – 61 pages.
4. Gramm-Leach-Bliley Act (1999) – 145 pages.
5. Sarbanes-Oxley Act (2002) – 66 pages.

Boehner: Wall Street Reform Should Be Repealed - They're not campaigning on it in earnest -- at least not yet -- but Republican leaders say that, given the power, they would like to do away with Wall Street reform much like they have already discussed repealing health care reform. "I think it ought to be repealed," said House Minority Leader John Boehner, in response to a question from TPMDC, at his weekly press conference this morning. One of his top lieutenants, Republican Conference Chair Mike Pence agrees. "We hope [the Senate vote] falters so we can start over," Pence told TPMDC yesterday. "I think the reason you're not hearing talk about efforts to repeal the permanent bailout authority is because the bill hasn't passed yet."

Quelle Surprise! Financial Regulatory Reforms Being Diluted -- Yves Smith - When I was in the UK earlier this year, I saw a very senior financial regulator speak. In the Q&A session, someone asked him to comment on US financial reform. His reply was tantamount to “Wake me when it’s over,” and it was clear his expectations were low.One source of frustration is that the legislative battle over reform, which went through elephantine labor to produce, at best, a mouse, has gotten most of the media attention, while important fights on the regulatory front are largely hidden from view. By happenstance, two ongoing battles got a wee bit of attention tonight, and both appear to be suffering the same fate as the financial reform bill: measures that were not strong enough to begin with are being beaten back by the industry. The Financial Times discusses tonight about how dealers are pushing to water down a key SEC securitization reform. The SEC proposed eliminating the rule that allowed issuers to sell asset backed securities to “sophisticated investors” privately, subject to much lower disclosure requirements, a move we’ve advocated.

How a cap on big-bank leverage was watered down - A measure introduced by Democratic congresswoman Jackie Speier setting out a specific cap on big-bank leverage succeeded at being included in sweeping bank-reform legislation approved by the House in December.  However, as with many provisions seeking to set specific restrictions on leverage and capital, the California Democrat's measure was later watered down. Speier's measure would have capped big firms' borrowing, called leverage, at a ratio of 15-to-1. Her leverage ratio would have restricted the amount of debt a company could take on. With her provision, a firm had $1 billion in publicly held stock, it could have debt -- or be leveraged -- up to $15 billion under the 15-to-1 limitation. However, instead, Senate and House lawmakers agreed to allow a newly formed Financial Stability Oversight Council to require that the Federal Reserve set up a 15-to-1 debt-to-equity limit on a firm only if it poses a "grave threat" to systemwide financial stability.

What Real Financial Reform Might Look Like - I recently received my copy of Laurence Kotlikoff's new book Jimmy Stewart is Dead. In this book Kotlikoff calls for limited purpose banking. I was initially skeptical of the idea, but I am warming up to it as I read more. My initial fear was that that limited purpose banking would turn the banking system into nothing more than a vault and therefore reduce financial intermediation. However, this is not the case with this approach as banks would still provide financial intermediation through mutual funds. Checking accounts, however, would be fully backed by cash or t-bills. Interestingly, this would eliminate the money multiplier and thus give the Fed more control over the money supply. I still have some questions on this approach, but can see how it could bring greater financial stability. I would love to hear your thoughts on this approach. Below the fold is an long excerpt from one of Kotlikoff's articles on limited purpose banking.

*Jimmy Stewart is dead* - So says Larry Kotlikoff, in his new book, entitled Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking.  It's lively and polemic, and suddenly it lurches into a proposal to reform financial intermediation: Under limited purposes banking the banks are themselves simply financial intermediaries, while their mutual funds represents mini-banks, if you like, all of which are subject to 100 percent capital requirements.Explained another way, you hold liquid securities directly and cut out the middleman of the lending bank.  It's like expanding the idea of a checkable money market mutual fund to cover the retail banking sector.  Here is his short Op-Ed on the idea, here is a Business Week article, and here are numerous endorsements for the book.  See also Bob Litan on "narrow banking."  I used to advocate a version of this idea myself, but I no longer think it is a good reform proposal, for a few reasons: 

Reporting and lobbying in Basel III - The WSJ has its own Basel III update today, which recapitulates most of what we learned yesterday. But there’s one new twist  When it comes to proposed liquidity requirements, says the accompanying graphic, “the proposal could cause huge funding shortfalls for banks world-wide.” And the article elaborates: Something called the “net stable funding ratio,” is another sticking point. That formula would require banks to hold more long-term funding in an effort to make them less susceptible to freezes in the funding markets. Some analysts say that the requirement alone could cost banks trillions of dollars in new funds, and officials could postpone or shelve the idea, people familiar with the matter said. It would be really helpful to know who the anonymous “analysts” are here: are they part of the IIF-based lobbying to downsize Basel III as much as possible, or are they genuinely independent? And what exactly is meant by “new funds”? Remember that we’re not talking about capital requirements here: the liquidity requirements talk about what form capital should take, rather than how much of it there should be.

Congress approves Basel III before it even exists - Assistant Treasury secretary Mike Barr celebrated the passage of the financial reform bill today by phoning me up for a chat. So of course I asked him how much has really been achieved, and how much the really important stuff has been left to the Basel III negotiation process.Barr said that the reforms passed today “were absolutely essential to the process,” and added something I didn’t know before — which is that they include Congressional authority for regulators to adopt all the Basel III standards. In other words, there’s no risk of Basel III getting caught up in Congressional opposition, as Basel II did. Once it’s agreed in Switzerland, US regulators are free to implement it immediately. “We got all the authority that we needed in this legislation that just passed,” Barr said. “The regulatory community will be ready to implement it in the US.” As for timing, Barr was still hopeful that Basel III will be done this year; I’ll believe it when I see it.

Basel III: The incomplete capital buffer proposal - The Basel Committee has started producing pretty detailed documents: today it released what it calls a “a fully fleshed out countercyclical capital buffer proposal“. The idea of countercyclical capital buffers is a really good one. When credit is expanding faster than GDP, bank regulators slowly increase their capital requirements, signaling those requirements clearly one year in advance. The higher capital requirements serve three main purposes: they help to slow down credit bubbles, they make an economy’s banks stronger, and they offer a way out of the paradox of capital. The paradox of capital is pretty simple: let’s say that a bank has a minimum capital requirement, and then suffers a series of write-downs. Because the write-downs come straight out of capital, the bank is left below the minimum. So it is forced to raise new capital right at the worst possible time to do so, or else fail. The minimum capital requirements, which were meant to make banks safer, end up making the entire system more precarious.

Banks Gain in Rules Debate – WSJ - Bowing in part to fears that tougher requirements would diminish the credit needed to revive a sluggish global economy, officials gathered in Basel, Switzerland, are trying to strike a compromise over a set of new international banking standards initially proposed in December. The final accord will have a more global reach, and thus in some respects a more potent impact, on banks and borrowers than the financial regulatory bill likely to pass the U.S. Congress Thursday. The new Basel rules, as they are called, would still be stiffer than existing standards. Industry officials fear the changes could shrink bank profit margins and make credit tighter and more costly for consumers and businesses. Alterations under discussion this week would ease key requirements that have been under discussion for months. Advocates for a tougher line have argued that excessive concessions could leave the financial system vulnerable to problems the entire process is intended to address.

What Happens in Basel Doesn’t Stay in Basel - Kevin Drum’s been trying to get us to pay more attention to the ongoing Basel III negotiations where a lot of the regulatory details for the financial system are being worked out in practice. Nobody much is paying attention to this, because there are about a million times more reporters in Washington DC than there are in Basel. But the Wall Street Journal has a good account which highlights that the main problem isn’t so much politicians who are too in hock to “the banks” or “Wall Street” as it is that politicians are too in hock to specific national champions: The French are demanding changes that would allow their three largest banks—Societe Generale SA, Credit Agricole SA and BNP Paribas SA— to continue owning insurance subsidiaries without facing steep penalties. The Germans and French want banks’ minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital

A CFPB Story, Geithner, Preemption - So Household Finance has to pay the largest consumer fraud fines in history. I bet you think that the investment community and elite financial institutions wouldn’t look twice at it. Well, you’d be wrong. One month later Household was acquired by HSBC, the London financial giant, for $16.4 billion. The New York Times columnist Floyd Norris called this “the deal that fueled subprime.” This story is one of many told in Gary Rivlin’s Broke, USA, which is a must-read on this topic. Notice what happened: Instead of driving out fraud, the market realized, correctly, that there is a ton of money in consumer fraud, and it rewards it handsomely. I don’t know why conservatives, who love thinking criminality is just around the corner, won’t just say this. Perhaps they like the idea of shifting risks from corporations to consumers with a “buyer beware” mentality. A government reaction in the form of a CFPB is needed to protect the sanctity of making contracts – the market’s desire is to drive it in the complete opposite direction.

Preventing 2006  - It was stupid. We were profoundly stupid. We mismanaged resources catastrophically, idiotically. We substantially oriented our economy around residential and retail development that was foreseeably excessive and poorly conceived. We encouraged ordinary consumers, rather than entrepreneurs, to take on debt, and let the credit thus created serve as the kitty in a gigantic casino of egoism. We saw the best minds of a generation destroyed by madness, glutted hysterical in suits, dragging themselves through the Street at dawn, looking for an angry bonus. We accelerated the unraveling of physical, social, and intellectual infrastructure that took a century to build and that we will desperately need some day, perhaps quite soon. We celebrated our stupidity. Based on some back-of-the-napkin theorizing, we turned virtues like planning and prudence into cost centers, and eliminated them. We idolized “the market” while at the same time reorganizing it so it would tell us exactly some privileged groups found convenient to hear.

Out of the shadows - ONE of the failures leading up to the crisis was the inability of regulators to understand the scale of the shadow banking system or its interconnectedness with the overall financial system. The Federal Reserve's emergency liquidity funding helped shine some light into the activity of these non-bank banks. But with the expiry of these facilities, the system is once again operating in the margins. Now a new paper by the New York Fed offers a detailed look into evolution and role of the shadow banking system and is recommended reading for anyone trying to understand exactly how these banks work. Their analysis throws up some interesting findings. First, as the graph below shows (figures in trillions of dollars), the volume of credit intermediated by the shadow banking system is larger than that of the regular banks. Prior to the crisis, shadow banks had liabilities of $20 trillion compared with $11 trillion for regular banks. Today, the figures are $16 and $13 trillion, respectively.

In Finance We Distrust -  Around the world,, the debate about financial regulation is coming to a head. ... It now seems universally accepted (often implicitly) that government should establish the structure and rules for the financial system, with participants then pursuing their self-interest within that framework. If the framework is right, the system will perform well. The rules bear the burden of ensuring the collective social interest in the system’s stability, efficiency, and fairness.But in a complex system in which expertise, insight, and real-time information are not concentrated in one place, and certainly not in government and regulatory circles, reliance on such a framework seems deficient and unwise. Moreover, it ignores the importance of trust. A better starting point, I believe, is the notion of shared responsibility for the stability of the system and its social benefits – shared, that is, by participants and regulators.

Economics behaving badly - IT seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs. Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. Behavioral economics helps to explain why, for example, people under-save for retirement, why they eat too much and exercise too little and why they buy energy-inefficient light bulbs and appliances. And, by understanding the causes of these problems, behavioral economics has spawned a number of creative interventions to deal with them. But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address..

The Uses and Abuses of Economic Ideology - John Maynard Keynes famously wrote that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” But I suspect that a greater danger lies elsewhere, with the practical men and women employed in the policymaking functions of central banks, regulatory agencies, governments, and financial institutions’ risk-management departments tending to gravitate to simplified versions of the dominant beliefs of economists who are, in fact, very much alive.

A Mountain of Legislative Paper, a Molehill of Reform - Robert Reich - Thursday the President pronounced that “because of this [financial reform] bill the American people will never again be asked to foot the bill for Wall Street’s mistakes.”As if to prove him wrong, Goldman Sachs simultaneously announced it had struck a deal with federal prosecutors to pay $550 million to settle federal claims it misled investor — a sum representing a mere 15 days profit for the firm based on its 2009 earnings. Goldman’s share price immediately jumped 4.3 percent, and the Street proclaimed its chair and CEO, Lloyd (“Goldman is doing God’s work”) Blankfein, a winner. Financial analysts rushed to affirm a glowing outlook for Goldman stock. Blankfein, you may recall, was at the meeting in late 2008 when Tim Geithner and Hank Paulson decided to bail out AIG, and thereby deliver through AIG a $13 billion no-strings-attached taxpayer windfall to Goldman. In a world where money is the measure of everything, Blankfein’s power and influence have grown. Presumably, Goldman can expect more windfalls in future years.

Goldman Abacus Settlement: $550M in Hush Money - The SEC settled with Goldman Sachs for $550M over Goldman's lack of disclosure in the Abacus 2007-AC1 CDO.  While this is a record settlement for the SEC, I think the settlement is a real disservice to the public because it means that we will never have the opportunity to really learn just what was going on in the bowels of Wall Street in the run up to the financial crisis.  The real value of the Abacus litigation was it was a chance to shine some sunlight on the inner workings of Wall Street.  The complaint and hearings gave us a taste, but if this litigation went further, we would likely have learned much, much more.  Instead, Goldman paid the SEC $550 in hush money and will succeed in keeping further details of its operations under wraps.  The SEC's Abacus litigation seemed to hold the promise of becoming a modern Pecora commission, delving into the origins of the crisis.  Sure, we have the Financial Crisis Inquiry Commission, but the FCIC will never manage to get to the level of detail that emerges as a by-product of litigation.  For $550M, we will all continue to remain ignorant.

Goldman agrees to carry on as usual - My favorite part of the SEC settlement with Goldman Sachs is the bit where Goldman agrees to “a permanent injunction from violations of Section 17(a) of the Securities Act of 1933″. Well, that’s reassuring, knowing that from now on Goldman has promised not to break the law. Goldman has also consented to an agreement that when it puts together new mortgage securities, it’ll run any prospectuses or term sheets by its legal or compliance departments. As if it wasn’t doing that already. And there’s lots more like that: people on the mortgage desk have to attend training seminars on disclosure! Goldman “shall provide for appropriate record keeping”! And so on and so forth.

Is the SEC Settlement Really a Win for Goldman? - Conventional wisdom in the financial media is that the settlement announced by the SEC over its lawsuit on a Goldman 2007 Abacus CDO is a home run for Goldman. But a closer reading suggests that Goldman’s victory is qualified, and the enthusiastic press response is in large measure due to the firm’s skillful manipulation of perceptions. Goldman wins because they managed expectations effectively (it was only $550 million, not $1 or $2 billion bandied about) and because the SEC didn’t hit them with something more severe, such as a multi-year ban from the sector. However, Goldman’s settlement appears to be a loss for CDO banks and issuers and a potential gain for investors and plaintiffs in future actions. In fact, it is hard to see how anything in the settlement, if affirmed, would be negative for private parties considering lawsuits against sellers of CDOs.

Fraud settlement datapoints of the day - Announcing the SEC settlement with Goldman Sachs yesterday, Robert Khuzami started waxing hyperbolic: “Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. This really isn’t true. For one thing, as Dan Gross points out, Mike Milken paid more money, in inflation-adjusted terms, back in 1990. But you don’t need to go back that far: AIG paid the SEC $800 million as part of a $1.6 billion settlement in 2006. I think it’s reasonable to consider AIG a financial-services firm, no? And that wasn’t the end of big settlements for AIG: today, it agreed to cough up another $725 million to settle a long-running class-action fraud case brought by Ohio’s attorney general.

A.I.G. to Pay $725 Million in Ohio Case - The American International Group, once the nation’s largest insurance group before it nearly collapsed in 2008, has agreed to pay $725 million to three Ohio pension funds to settle six-year-old claims of accounting fraud, stock manipulation and bid-rigging. Taken together with earlier settlements, A.I.G. will ladle out more than $1 billion to Ohio investors, money that will go to firefighters, teachers, librarians and other pensioners. The state’s attorney general, Richard Cordray, said Friday, that it was the 10th largest securities class-action settlement in United States history.  “No privileged few are entitled to play by different rules than the rest of us,” Mr. Cordray said during a news conference. “Ohio is determined to send a strong message to the marketplace that companies who don’t play by the rules will pay a steep price.”

How can Benmosche be tamed? - Robert Benmosche is probably the highest-paid public-sector employee in America: his $10.5 million salary means that he takes home Barack Obama’s $400,000 annual pay every two weeks. And yes, Obama is his ultimate boss. Along with his outsize remuneration, Benmosche gets lots of other privileges normally denied to civil servants, especially in this administration. He’s allowed to throw regular diva fits, he’s allowed to bully his own board into submission, and he’s even, it seems, allowed to fire his boss against the board’s wishes. In other words, AIG is not controlled by its 80% shareholder: instead, it’s the Benmosche show, with the rest of us just spectators. This is, needless to say, a novel way of running a state-owned company.

Richmond Fed chief opposes bail-outs - US regulators must let a large institution collapse without bailing out its creditors to convince markets that no bank is too big to fail, the president of the Federal Reserve Bank of Richmond said. Jeffrey Lacker told the Financial Times that markets must have clear expectations about how short-term creditors would be treated in a bank failure. “Ambiguity about that was just deadly over the past few years coming into this crisis,” he said  A new authority to resolve failed institutions is part of the sweeping financial regulation bill that is likely to pass the Senate this week. Regulators must then turn the complex law into a set of practical rules and Mr Lacker’s comments, as part of the FT’s View from DC video series, are some of the first shots in that debate. Mr Lacker said that it would probably take a demonstration to convince markets that regulators would not come to the rescue. “They have to let a big institution fail in a way that short-term creditors aren’t supported or buffered against losses,” he said

Bail-in’ will save the taxpayer from the bail-out - On Thursday, the US finalised its mammoth regulatory overhaul, the Senate approving it in a long-awaited final vote.  But, even as the end looms, new evidence has emerged that voters are uneasy. A Bloomberg poll for example, shows half the US public question whether this bill will improve finance; instead, many fear the reforms will end up protecting Wall Street at the expense of Main Street. But what is still unclear, even amid all the legislation, is whether this system will be robust enough to really prevent more big bank failures. Hence the lingering suspicion that taxpayers could soon end up back on the hook; and hence all that simmering anger.  Is there any solution? One fascinating idea now provoking a chorus of behind-the-scenes debate among regulators and central banks is the concept of a so-called “bail-in”. This idea, mooted by Credit Suisse in an essay this year, argues that in essence the best way to handle a crisis at a large, systemically important bank is to force creditors – not taxpayers – to swallow losses if disaster strikes; and, more importantly, to do this while the bank is still operating as a going concern, so it does not collapse – and cause Lehman-style havoc

Congress: Little evidence TARP helped small banks -- There is little evidence that capital injections provided at the height of the financial crisis to smaller banks helped strengthen that sector, a congressional oversight panel reported Wednesday.  "As the small banking sector continues to struggle, the number of small banks that were once deemed healthy but that cannot make their dividend payments and repay their Troubled Asset Relief Program obligations may grow," the Congressional Oversight Panel said in a report.  "So long as small banks remain weak, their lending to customers -- especially to small businesses -- will remain constricted and will have a dampening effect on any economic recovery," it said.

Watchdog: Small banks struggling despite bailouts To the list of economic woes squeezing small banks, add another one: government bailouts. The Treasury Department's bailout program was designed with Wall Street megabanks in mind, according to a new report from a congressional watchdog. The "one-size-fits-all" program may actually be hurting small banks that are struggling to repay the money or even deliver quarterly dividend payments, the report says.The main bank bailout program anticipated banks springing back from the crisis and raising fresh funds to repay the government, the report says.That's exactly what happened to most of the big banks that took the most bailout money. Yet small banks continue to struggle, dragged down by souring loans for commercial real estate and high unemployment. Hundreds more small banks are expected to fail by the end of next year.

New thinking on executive compensation: Pay CEOs with debt - Recovering US insurance giant AIG recently announced that 80% of their executives’ bonuses will depend on the price of their firm’s bonds and only 20% will depend on the price of their equity. This column argues that such moves will better align CEO fortunes with those of all investors – both shareholders and bondholders – and help prevent future financial crises.

Wall Street Hiring in Anticipation of an Economic Recovery - While much of the country remains fixated on the bleak employment picture, hiring is beginning to pick up in the place that led the economy into recession — Wall Street. The shift underscores the remarkable recovery of the biggest banks and brokerage firms since Washington rescued them in the fall of 2008, and follows the huge rebound in profits for members of the New York Stock Exchange, which totaled $61.4 billion in 2009, the most ever. Since employment bottomed out in February, New York securities firms have added nearly 2,000 jobs, a trend that is also playing out nationwide at financial companies, commodity contract traders and investment firms.  Though the figures are small in comparison to overall Wall Street employment, executives, economists and headhunters say they expect the growth to pick up steam in the coming months.

Bank mortgage securities desks in hiring spree - Investment banks are once again hiring bankers to sell and trade mortgage-backed securities, the packages of loans that were at the heart of the financial crisis, reflecting a belief that the worst is over in the US housing market. Foreign banks have been particularly aggressive in hiring salesmen and traders of mortgage-backed securities to better compete with American rivals. UBS and Nomura, two banks that pulled out of the mortgage-backed securities market after suffering losses during the financial meltdown, have started to reassemble their US-based mortgage desks. Royal Bank of Scotland and BNP Paribas also are adding a significant number of employees to their mortgage teams

Bank Profits Depend on Debt-Writedown ‘Abomination’ in Forecast (Bloomberg) -- Bank of America Corp. and Wall Street firms that notched perfect trading records in the first quarter are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results.Bank of America, the biggest U.S. bank by assets, may record a $1 billion second-quarter gain from writing down its debts to their market value, Citigroup Inc. analyst Keith Horowitz estimated in a June 23 report. The boost to earnings, stemming from an accounting rule that allows banks to book profits when the value of their own bonds falls, probably represented a fifth of pretax income, Horowitz wrote."

Bank of America Says $10.7 Billion of Trades Wrongly Classified - Bank of America Corp., the largest U.S. bank by assets, said it wrongly classified as much as $10.7 billion of short-term repurchase and lending transactions as sales from 2007 to 2009 to reduce its end-of-quarter assets. Bank of America said the inaccuracies aren’t material and “don’t stem from any intentional misstatement of the Corporation’s financial statements and was not related to any fraud or deliberate error,” according to a May 13 letter released yesterday from the U.S. Securities and Exchange Commission.  “A $10.7 billion accounting error would be a material event for about 99.9 percent” of U.S. banks, said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law. “It’s hard to see how the SEC can accept BofA’s rejoinder as being sufficient.”

Bank of America comes clean – well sort of … Bank of America has finally admitted that it understated the quarter end assets and liabilities for the years 2007 to 2009.  It does not (yet) admit that similar transactions took place in many other years and it does not spell out the effect of these transactions on BofA’s need to carry capital.  To quote BofA’s local paperBank of America Corp. has told securities regulators that it made six quarter-end transactions from 2007 to 2009 that were not in "strict compliance" with accounting rules. In correspondence with the Securities and Exchange Commission, the Charlotte bank said the so-called "dollar roll" transactions were designed to meet internal balance sheet limits. The bank said it does not believe the transactions had a material impact on its financial statements, according to a May 13 letter posted by the SEC late Friday. I wrote a post stating that BofA had long been reducing its quarter-end balances in March this year so this should not surprise regular readers.

Corporate profits have recovered, but job market still depressed - As corporations begin reporting second quarter earnings this week, they will paint a picture of robust recovery that starkly contrasts with the stalled job market. Indeed, corporate profits had already made up all of the ground lost in the recession, and then some, by the first quarter of this year. The country’s labor market, however, still has far fewer jobs than it did at the start of the recession in December 2007. The Chart shows trends in both corporate profits (both privately and publicly-owned) and employment since the start of the recession. The chart indexes both to 100 at the start of the recession so the lines indicate how far profits and employment have recovered. Although corporate profits suffered in the early part of the recession, they have been steadily growing for more than a year and are now 5.7% greater than they were at the start of the recession.

Companies pile up cash but remain hesitant to add jobs - Corporate America is hoarding a massive pile of cash. It just doesn't want to spend it hiring anyone. Nonfinancial companies are sitting on $1.8 trillion in cash, roughly one-quarter more than at the beginning of the recession. And as several major firms report impressive earnings this week, the money continues to flow into firms' coffers.  Yet all the good news from big business hasn't translated into much promise for jobless Americans, leading many to wonder: If corporations are sitting on so much money, why aren't they hiring more workers?  The answer to that question has become a political flash point between the White House and big business groups such as the U.S. Chamber of Commerce, which held a jobs summit Wednesday and accused the Obama administration of dumping onerous regulations on businesses. That has created an environment of "uncertainty," which is causing firms to hold back on hiring as the unemployment rate has hovered near 10 percent, the Chamber said.

Corporate America’s Pile-O-Cash - In his Washington Post column last week, Fareed Zakaria laid out the argument that Obama is anti-business (Obama’s CEO problem — and ours):“The Federal Reserve recently reported that America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets . . . And yet, most corporations are not spending this money on new plants, equipment, or workers . . . The key to a sustainable recovery and robust economic growth is to get companies to start investing in America.  For starters, I disagree with Mr. Zakaria’s notion of what the key is to a sustainable recovery.  Since we know that Personal Consumption Expenditures comprise 70 percent of GDP, I’m not sure why “getting companies to start investing” would be considered the key.  The demand problem we have on our hands is what is keeping companies’ spigots closed.Further, I would rebut Mr. Zakaria’s findings as follows:1) Capacity Utilization is still lingering near all-time lows, having just bounced off a record-setting low:

Corporate America’s $2 Tn Cash Pile–Let’s Kick Some Corporate Ass - $2,000,000,000,000 is a lot of cash. That’s about how much America’s 500 largest NON-FINANCIAL companies have on their books.  This is up about $500,000,000,000 from last year as 2010 has been very, very good for corporate profits, which are growing at a 36% pace this year and we’ll get a better insight into that this earnings season. Right now, our biggest problem is a lack of faith in the economy. As we noted last week, temp hiring is near records but real hiring is not there at all – companies are using what turnaround there is to save up for the next rainy day.

Corporate cash hoarding as long-term trend - Via Ezra Klein, Barry Ritholz reports: The average cash-to-assets ratio for corporations more than doubled from 1980 to 2004. The increase was from 10.5% to 24% over that 24 year period. That was the findings of a 2006 study by professors Thomas W. Bates and Kathleen M. Kahle (University of Arizona) and René M. Stulz (Ohio State). When looking for an explanation, the professors found that the biggest was an increase in risk.Indeed, the phenomena of corporate cash piling up has been going on for a long long time. You can date it back to the beginning of the great bull market in 1982 to 86, went sideways til the end of the 1990 recession. It has been straight up since then, peaking with the Real Estate market in 2006. The financial crisis caused a major drop in the amount of accumulated cash, but it has since resumed its upwards climb.There is more at the link.  As I've been saying, there is less to this issue than meets the eye.

Poor little CEOs: The government's giving them everything they want, yet still they whine. - After an eight-year slumber, the Environmental Protection Agency is again issuing regulations. Two years after an appalling financial debacle, Congress has finally moved to regulate Wall Street. But to hear our nation's corporate chieftains tell it, it's enough to plunge us back into recession. "We have to become an industrial powerhouse again, but you don't do this when government and entrepreneurs are not in sync," lamented GE CEO Jeff Immelt in a recent speech. On July 12, the U.S. Chamber of Commerce, the Business Roundtable, and National Federation of Independent Business held a "Jobs for America" summit. While President Obama met with CEOs at the White House, the summiteers called for—wait for it!—cutting taxes for companies, extending tax cuts for the wealthy, and opening up federal areas for resource exploration. The notion of these guys holding a jobs summit is a little like BP holding a deepwater-drilling safety summit.

The uncertainty excuse needs to come to an end, by Barbara Kiviat: Health care reform passed. Now it looks like financial re-regulation will, too. For a long time, businesses have been complaining that they can't hire and they can't invest because of all the uncertainty the Obama Administration has injected into the system. Who can make plans when no one knows what the American health care system will look like or how various prongs of our financial system will be forced to change? Well, increasingly, we have answers to those questions. So maybe it's time to stop blaming the government for the state of the economy and job creation. Maybe, instead, it's time for business leaders to—ahem—lead and make some decisions about the futures of their companies. Jeffrey Immelt, the CEO of General Electric, said as much yesterday on CNBC.

58% of Real Income Growth Since 1976 Went to Top 1% (and Why That Matters) - Yves Smith - If you have any doubts about how easy it is for someone who works hard in the US to get ahead, consider this factoid from Martin Wolf’s latest comment in the Financial Times, on Raghuram Rajan’s new book (see Satyajit Das’ review here:Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. It isn’t merely stunning, it’s destructive.  Rajan isn’t the first to put together the story line recounted by Wolf, but it is likely that his book does it in a more comprehensive fashion. We noted that Thomas Palley (along with others) was writing about the change in economic policy and the drivers of growth in 2007. . A host of others, such as Steve Waldman in 2008, described the dangers: Wolf’s comment is forceful, yet it contains enough econ-speak that its sense of urgency might be missed by generalist readers.

America Builds an Aristocracy - NY Times: Americans have always assumed that wealth comes and goes. A poor person can work hard, become rich and pass his money on to his children and grandchildren. But then, if those descendants do not manage it wisely, they may lose it. “Shirtsleeves to shirtsleeves in three generations,” the saying goes, and it conforms to our preference for meritocracy over aristocracy.  This assumption is now being undermined, however, through the increasing use of so-called dynasty trusts. These estate-planning instruments enable affluent people to provide their heirs with money and property largely free from taxes and immune to the claims of creditors ... for generations in perpetuity — truly creating an American aristocracy. ...This type of trust is new because until very recently most states had a “rule against perpetuities,” which limited the term of any family trust to about 90 years... In the mid-1990s, however, many states repealed the perpetuities rule. What caused state legislatures to abandon a rule that had existed since the late 1600s?

Paying executives in debt - Alex Edmans makes a very good point today: it makes a great deal of sense, especially in leveraged companies, to pay CEOs in debt rather than equity. What’s more, such compensation is already quite widespread: if a company has promised an executive a defined-benefit pension upon retirement, that’s essentially unsecured debt of the company, and can be substantial. Edmans is right that there’s the germ of something possibly quite powerful here. If companies started institutionalizing payment-with-debt, rather than having it simply be a necessary byproduct of making promises to pay out money in the future, that could go a good way towards reducing incentives for executives to take on excessive amounts of risk: The problem, of course, is getting companies to sign up to such a scheme. Compensation committees are created by the board of directors, which is elected by shareholders, not bondholders. So it’s only natural that those compensation committees will structure things in the benefit of shareholders, with bondholders bearing the brunt.

Did Wall Street get rich while starving poor people? - This story was originally covered by PRI's Here and Now. For more, listen to the audio above.  The real price of wheat has steadily declined over the past 100 years or so. In 2005, however, the price of wheat started going up. Way up. The price doubled for kind of wheat called hard red spring, which is used to make much of the world's bread. Then it doubled again. Eventually, the price of food got so high that food riots broke out in 30 countries. Some 49 million Americans weren't getting enough to eat and 1 in 5 children were going to soup kitchens for meals. The reason why people couldn't get enough to eat can be traced back to decisions made by banks like Goldman Sachs, reporter Frederick Kaufman told PRI's Here and Now. In a "bizarre, strange and subversive" financial move, which Kaufman detailed in Harper's magazine, Goldman Sachs did their best to divorce wheat from the actual product and turn it into a virtual investment.

Sovereign debt fears hit tribal casinos - The Mashantucket Pequot Tribal Nation, the native American tribe that owns one of the largest casinos in the US, on Tuesday faces the repayment of a $700m loan as it negotiates with creditors to restructure more than $2bn of debt in a case that taps into recent concerns over sovereign default. Banks, bondholders and the tribe have been negotiating under waivers and forbearance agreements since late last year. Insiders describe a difficult stalemate because the tribe, which has defaulted on some payments, has little to offer its creditors to compensate for agreeing to take a loss on what they are owed. Federally recognised tribes, such as the Pequots, operate as sovereign nations, which have their own governments, within the US. That means they cannot file for bankruptcy under US laws, although this assumption has never been tested

Citing oil spill, Florida banking leaders ask regulators for mercy - Federal regulators should hold off on their enforcement blitz against the state’s banks because of the impact from BP PLC’s oil spill, according to a letter by Florida Bankers Association President Alex Sanchez.The loss of jobs and the damage to the economy in Florida has made it hard for banks here to raise capital and determine the value of properties, Sanchez wrote in his letter to the heads of the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.Sanchez asked for a 12-month suspension of higher capital requirements that regulators have placed on Florida banks. Many South Florida banks have been ordered by regulators to meet higher-than-normal capital requirements

The Last Bubble: The Problem of Unresolved Debt in the US Financial System - Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications. (Chart fromA Blistering Ride Through Hell by Michael David White.)I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again: "That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333." Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

U.S. Queries 64 Issuers of Mortgage Securities, Others - A federal regulator said it sent 64 subpoenas to issuers of mortgage-backed securities and other entities in an effort to probe whether the firms misled Fannie Mae and Freddie Mac, two of the biggest investors in privately issued bonds.  The subpoenas, issued on Monday by the Federal Housing Finance Agency, which oversees the government-backed mortgage titans, could lead the government to recoup some of the billions of dollars that Fannie Mae and Freddie Mac lost when they scooped up mortgage-backed securities issued by Wall Street banks during the housing boom. The FHFA didn't disclose its targets. But the top private issuers of mortgage securities included Bear Stearns Cos. and Washington Mutual Inc., which were taken over by J.P. Morgan Chase & Co., as well as Countrywide Home Loans and Merrill Lynch, which were taken over by Bank of America Inc. Deutsche Bank AG and Morgan Stanley were also among the top issuers. All the banks declined to comment.

FHFA attempting to recoup some losses of Fannie and Freddie - From the Federal Housing Finance Agency: FHFA Issues Subpoenas for PLS Documents FHFA, as Conservator of Fannie Mae and Freddie Mac (the Enterprises), has issued 64 subpoenas to various entities, seeking documents related to private-label mortgage-backed securities (PLS) in which the two Enterprises invested. The documents will enable the FHFA to determine whether PLS issuers and others are liable to the Enterprises for certain losses they have suffered on PLS. If so, the Conservator expects to recoup funds, which would be used to offset payments made to the Enterprises by the U.S. Treasury.

Are Fannie and Freddie Going to Sue Wall Street? - Are there some dark legal clouds beginning to hover over the Wall Street landscape? How so? The threats of impending lawsuits are never a forecast any individual, entity, or industry care to entertain. Like it or not, Wall Street is beginning to get some ground cover in the forms of pending legal actions.While a large mortgage investor, Cambridge Place Investment Management, recently filed a complaint against virtually every firm on Wall Street in the Massachusetts courts, today we see none other than our ‘wards of the state’ Fannie Mae and Freddie Mac preparing the initial steps to bring suit against Wall Street. Could it be possible that Fannie and Freddie would sue Wall Street? Is a potential lawsuit political cover for Uncle Sam? Who knows?  Either way, the propsects of subpoenas and litigation are never very appetizing. The Wall Street Journal sheds further details on this story in writing, U.S. Seeks to Recoup Fannie, Freddie Losses:

Get Ready For More Bank Threats - Be prepared for a new round of "tanks in the streets if you don't cut that crap out!"The Federal Housing Finance Agency on Monday said it had issued 64 subpoenas to unnamed firms in an effort to uncover misleading statements that Wall Street banks and others may have made when they bought and packaged risky mortgages into securities. Fannie and Freddie were two of the largest investors in those securities. And why would the FHFA have to issue subpoenas?  I mean, couldn't Fannie and Freddie just ask for the data they wanted? The FHFA said that it had opted to issue the subpoenas after being rebuffed in earlier efforts to collect loan files. Oh, I see.  The banks were asked, and replied:...Well now why would they do something like that?  You don't think there might be something to hide, do you? 

HUD’s plan to transform rental assistance requires some transforming - Today, 4.5 million Americans depend on the federal government to pay their rent, either in public housing or in private subsidized housing.  But every year for more than a decade, the United States has lost 10,000 units of affordable housing to deterioration and demolition. Currently, waiting lists are long, conditions in many places are declining, and the Department of Housing and Urban Development estimates that the nation's public housing faces a backlog of $20 billion to $30 billion in capital needs.  The Obama administration's proposed solution, the Preservation, Enhancement, and Transformation of Rental Assistance Act, or PETRA, seeks to address these problems through a smorgasbord of changes.

Commercial and Industrial Lending Remains Distressed - A graph today from David Rosenberg, Chief Economist for Gluskin Sheff (Toronto), shows one of the severe headwinds the recovery is battling.  C&I (commercial and industrial) lending remains at historically depressed levels.  May of 2010 is at levels 16% below May, 2009, which, in turn, was about 10% below May, 2008. Rosenberg points out the following: One-quarter of bank credit available for businesses has totally vanished during this intense debt deleveraging cycle (and nobody, including the Fed, knows why this credit contraction is ongoing — see Small-Business Lending is Down, But Reasons Still Elude the Experts on page B3 of the NYT; although in the article, Mr. Dunkelberg is quoted as saying:  “Credit’s not the issue, customers are the issue” in reference to the view that with capex plans near a 35-year low, the demand for loans is unusually low

Commercial Real Estate Deleveraging Update July 2010 - Kalpa - Since Fed's Dennis Lockhart puts the CRE GDP contribution level at 4%, and it is falling and stagnant as its characteristically short term loans come due in rapid succession over these next couple of years, this will affect not only our nation's small and mid-sized bank survival rates, but the GDP itself. This is further amplified by the effect that the CRE failures have upon bank lending. It stifles regional loans to small businesses which is one of the major current concerns as it is an obstacle to growing our way out of this recession. To follow, I have compiled a series of quotes and graphs gleaned from various sources and individuals to tell the story of where we stand in this unwinding of our commercial real estate bubble as of July 2010. (Please note that their is some data variation depending upon the source.)

Commercial real estate development stalled until 2012 - With vacancies still on the rise in commercial properties in most parts of the U.S., construction of new buildings is expected to be rare this year and next, the American Institute of Architects said Wednesday. Even with modest improvements in the economy, construction spending on hotels, office buildings, warehouses and malls is expected to decrease by more than 20% in 2010, followed by a marginal increase of about 3% in 2011, the architecture trade group said.

Commercial real estate prices reaching one third 2007 rates - Las Vegas industrial broker Brian Riffel is seeing property come back onto the market at one-third the price it was sold three years earlier, a perfect illustration of how the commercial real estate market is taking a hit like housing.Industrial property values have retreated to levels from the 1990s, the senior vice president for Colliers International industrial division said Monday.It's part of an overall scenario in which industrial buildings sold during the real estate boom are now "underwater," or worth less than their purchase cost, with owners in danger of losing their buildings.

Moody's Downgrades $16.7B Of Morgan Stanley's Subprime RMBS - Moody's Investors Service downgraded another $16.7 billion of securities backed by subprime residential mortgages as the loans' performance continues to worsen. It has downgraded hundreds of billions of dollars worth of residential mortgage-backed securities in recent months as credit raters have steadily increased loss expectations on them amid low home prices, high unemployment and a slow recovery still not felt by many homeowners. Moody's said Thursday it downgraded 251 tranches from 52 RMBS transactions issued by Morgan Stanley (MS) from 2005 to 2007. It upgraded five tranches.

The role of non-owner-occupied homes in the current housing and foreclosure cycle - Richmond Fed - Non-occupant homeowners differ from owner occupants in that they tend to have lower-risk credit characteristics, such as higher credit scores, but may also have weaker incentives to maintain mortgage payments when housing values fall. During the recent housing boom, the share of mortgage borrowing by non-occupant owners was relatively high in states where home values appreciated relatively rapidly. After the housing boom, foreclosures on non-occupant mortgages in several Midwestern and Northeastern states reflected primarily a high rate of foreclosure per mortgage, not a high volume of mortgages to non-occupants. The reverse held true in some coastal and mountain states. Nevada and Florida have experienced the greatest impact overall, because they have both a high volume of mortgages to non-occupant owners and a high rate of foreclosure on those mortgages.

Reality Bites - I'm sort of over caring about people sneering at stoopid liberal bloggers, but I think there's a giant issue that political reporters, though not other reporters, have completely ignored, and that's the complete failure of the HAMP program. Here was a program which was supposed to help people. It in theory might have helped some, but for many more it either didn't help or prolonged the agony. They had an interaction with a "government program" which was poorly designed, complicated, and ultimately unhelpful.

Bankruptcy and 2nd Liens - From the NY Post: Liening on banks Underwater homeowners are jumping onto an unexpected financial life raft that lets them escape crippling second mortgage debts and keep their homes -- Chapter 13 bankruptcy. ...How it works is this: If the home is appraised at less than the value of the first mortgage, the owner can apply for permission in bankruptcy court to reclassify the second mortgage debt. That changes it from a secured debt, which must be repaid, into an unsecured debt, which does not have to be paid in full. The homeowner can then focus on paying off the first mortgage.  For many borrowers, this makes a Chapter 13 bankruptcy a better choice than a foreclosure. With a foreclosure, the borrower loses the house - and the 2nd lien holder might still pursue the borrower (unless they release the lien for some compensation, like under HAFA).With a bankruptcy - under certain circumstances - the borrower keeps the house, and the 2nd lien is converted to unsecured debt and does not have to be paid in full. This is probably part of the reason for sharp increase in bankruptcy filings.

CoreLogic: House Prices increase 0.9% in May - From CoreLogic (formerly First American LoanPerformance): CoreLogic® Home Price Index Shows Continued Increases in Home Prices for both Year-Over-Year and Month-Over-Month Figures In May National home prices in the U.S. increased in May, the fourth-consecutive month showing a year-over-year increase. According to the CoreLogic HPI, national home prices, including distressed sales, increased by 2.9 percent in May 2010 compared to May 2009 and increased by 3.5 percent in April 2010 compared to April 2009. Excluding distressed sales, year-over-year prices only increased by 0.9 percent in May, and April’s non-distressed HPI increased by 0.4 percent. On a month-over-month basis, May’s HPI was 0.9 percent higher than the April 2010 HPI, but the rate of increase was lower than the 1.3 percent gain from March 2010 to April 2010. This graph shows the national LoanPerformance data since 1976. January 2000 = 100. The index is up 2.9% over the last year, and off 28.5% from the peak.  CoreLogic expects prices to "moderate and possibly decline". I expect that we will see lower prices on this index later this year.

MBA: Mortgage Purchase Applications lowest since December 1996 - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey  The Refinance Index decreased 2.9 percent from the previous week and the seasonally adjusted Purchase Index decreased 3.1 percent from one week earlier. This was the lowest Purchase Index observed in the survey since December 1996. This graph shows the MBA Purchase Index and four week moving average since 1990. Mortgage applications have fallen off a cliff. The weekly applications index is at the lowest level since December 1996, and and the four week average is at the lowest level since September 1995 - almost 15 years ago. The four week average is off 35% since the mini-peak in April (the weekly index is off 44% since the end of April). This collapse in the mortgage application index has already shown up as a decline in new home sales, and will show up in the July existing home sales report (counted at close of escrow).

Mortgage Applications Sink To 13 Year Low - The attempt to reflate housing seems to be officially dead. The Mortgage Brokers' Association reported that demand for loans to purchase U.S. homes sunk to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates. As Reuters noted, "requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the industry group said....Rock-bottom borrowing costs are helping borrowers with pristine credit to buy and those who still have equity in their homes to refinance." Also, from the MBA release, "the average contract interest rate for 30-year fixed-rate mortgages increased to 4.69 percent from 4.68 percent, with points increasing to 0.96 from 0.86 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. The effective rate increased from last week."

AIA Forecast: Nonresidential Construction Spending to fall 20% in 2010 - From Reuters: US nonresidential building seen down 20 pct in '10 Spending on U.S. nonresidential construction is likely to fall more than 20 percent this year before recovering slightly in 2011, according to a semiannual survey by an architects' trade group. Construction spending on hotels will drop more than 43 percent this year, construction of office buildings will decline almost 30 percent, and retail and industrial categories will be down more than 20 percent,Nonresidential construction investment has been a drag on GDP for six consecutive quarters (through Q1 2010), and will remain a drag throughout 2010 and probably into 2011. Here is a repeat of a graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

US home foreclosures reach record high in second quarter - The number of U.S. homes taken back by banks through foreclosure hit a record high in the second quarter, even as lenders delayed more homes from entering the process through short sales and loan modification efforts, according to data to be released Thursday. This growing supply of lender-owned properties could set back the nation's housing recovery but probably won't sink it completely if the nation's employment situation doesn't deteriorate further and the economy begins to pick up steam, experts said. Sales of homes have faltered nationally in recent months with the expiration of government tax incentives for buyers

Homes lost to foreclosure on track for 1M in 2010  More than 1 million American households are likely to lose their homes to foreclosure this year, as lenders work their way through a huge backlog of borrowers who have fallen behind on their loans. Nearly 528,000 homes were taken over by lenders in the first six months of the year, a rate that is on track to eclipse the more than 900,000 homes repossessed in 2009, according to data released Thursday by RealtyTrac Inc., a foreclosure listing service. "That would be unprecedented," said Rick Sharga, a senior vice president at RealtyTrac. By comparison, lenders have historically taken over about 100,000 homes a year, Sharga said.

U.S. homes repossessed by banks set to hit record 1 million this year - The number of American homes repossessed by banks hit a record high in the second quarter of the year, putting the number of foreclosures on track to hit a record 1 million by the end of 2010. Bank repossessions increased 5 percent from the previous quarter and 38 percent from the second quarter of 2009 to 268,962, according to data released early Thursday by RealtyTrac, an Irvine, Calif., firm that tracks the foreclosure market.But while the number of homes in the final stage of the foreclosure process increased, the number of new filings fell. Both default and auction notices were down on a month-over-month and year-over-year basis.  Over the past few months, lenders have been clearing out a backlog of homes that had been temporarily saved from foreclosure thanks to prevention efforts in 2009. And at the same time, they have been delaying foreclosure proceedings on homeowners with delinquent payments and instead trying to work with more aggressive loan modification strategies or to accept a short sale.

Banks repossess homes at record pace: RealtyTrac - Banks repossessed a record number of U.S. homes in the second quarter, but slowed new foreclosure notices to manage distressed properties on the market, real estate data company RealtyTrac said on Thursday. The root problems of job losses and wage cuts persist, making a sustained U.S. housing recovery elusive. Banks took control of 269,962 properties in the second quarter, up 5 percent from the prior quarter and a 38 percent spike from the second quarter of last year, RealtyTrac said in its midyear 2010 foreclosure report. Repossessions will likely top 1 million this year. "The underlying conditions haven't improved," RealtyTrac senior vice president Rick Sharga said in an interview.

Midway into 2010, 1.65M Properties Have Received Foreclosure Filings - RealtyTrac released its Midyear 2010 Foreclosure Report Thursday, which shows that 1,654,634 U.S. properties received a foreclosure filing during the first half of this year.  That figure means that one in every 78 homes received at least one foreclosure filing between January and the end of June. The midyear total represents a 5 percent decrease from the previous six months but an 8 percent increase from the first six months of 2009.  “The midyear numbers put us on pace to exceed 3 million properties with foreclosure filings by the end of the year, and more than 1 million bank repossessions,”

Shadow Housing Inventory: Two Houses for Every One for Sale -- Yves Smith - RealtyTrac, as reported on Housing Wire, gave a gloomy update on the US housing market. RealtyTrac does granular collection of data on foreclosures, capturing every filing. One of the shortcomings of this approach is that processes vary by state (as in some state require more court filings over the course of a foreclosure than others). In addition, homes can go in and out of foreclosure (an owner gets the first notice, contacts the servicer and works out a catch-up plan, and later falls behind again). So the commentary of RealtyTrac and other market participants is essential in interpreting the data. The key takeaway: James Saccacio, CEO of RealtyTrac, said at the current pace, more than 3m properties will receive a foreclosure filing by the end of the year, and lenders will repossess more than 1m of them. According to a report from the Toronto-based Capital Economics, the weight of the shadow inventory may contribute to a double dip in the housing market. The report found that for every home currently on the market, two homes are waiting to be sold.

Are the Rich More Likely to Default on Their Mortgages? - The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments. I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment. Here's what I wish the story had pointed out:Only a small fraction of mortgages are for over $1M.  There's likely a California effect biasing the results.   The difference in the default rates might also be partially explained by mortgage product type.

The class war we need - NYTimes - The rich are different from you and me. They know how to game the system. That’s one interpretation, at least, of last week’s news that Americans with million-dollar mortgages are defaulting at almost twice the rate of the typical homeowner. It suggests an infuriating scenario in which the average American slaves away to keep Wells Fargo or Bank of America off his back, while fat cats and high fliers cut their losses and sail off to the next investment opportunity.  That isn’t exactly what’s happening, most likely. Just because you have a million-dollar mortgage doesn’t make you a millionaire, and a lot of the fat-cat defaulters probably aren’t that fat anymore. Still, watching the Giudices sashay through their onyx-encrusted mansion, and knowing that thousands of similarly profligate homeowners are simply walking away from their debts, it’s easy to succumb to a little class-warrior fantasizing. (Pitchforks, tar, feathers ... that sort of thing.)

Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can - Of America’s 11 million homeowners with negative equity, a majority live in the four sand states where the real estate bubble was concentrated--California, Florida, Arizona and Nevada. Over three million live in California and Arizona, where a borrower can hand over the keys to the lender and walk away. These are two antideficiency states, where the lender has no recourse beyond the collateral property.  So of course it makes sense that wealthy homeowners would default on their mortgage loans. They live where in places home prices were the highest and the fell the steepest, and where the consequences of default are the least onerous. The New York Times overlooked the “where” and “why” of the story. The wealthy are also less dependent on consumer credit. They can buy cars for cash; and charge expenses on their debit cards. So for them, it’s easy to make a fresh start. But the mortgage debt doesn’t go away. It’s simply pushed off to the banks insured by the Federal government. The rest of us pick up the pieces.

Strategic Defaulters as the New Welfare Queens - A well placed Washington contact wrote: I was in a discussion with the staff at one of the Federal agencies involved in housing to ask them about the new policies on strategic defaults. It became clear almost immediately that regulators obviously have no idea how to identify strategic defaulters except by asking big banks.  In other words, the agencies and regulators are simply taking the word of Bank of America and Citigroup that people are strategic defaulters rather than the victims of predatory loans or abusive service. But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, ‘back when people used to actually PAY their mortgages and follow through on their promises.’

One fix for the US mortgage default problem - VoxEU -Foreclosure is often seen as a lose-lose situation. This column describes a new incentive scheme aimed at reducing strategic defaults. The Responsible Homeowner Reward, a debt-like security that only pays off if the lender is repaid in full, is being implemented in the US.

Foreclosures, Debt Will Weigh on State Housing, Moody's Says (Bloomberg) -- Foreclosures, unemployment and the amount of floating-rated debt are among the most critical factors in determining credit ratings for state-housing finance agencies, Moody’s Investors Service said in a report.The report, published today, is the first of three grading “roadmaps” for U.S. municipal bond issuers. Housing agencies still face challenges even though the U.S. Treasury implemented two programs last year allowing them to offer mortgages at rates competitive with private loans and lower the cost of supporting floating-rate bonds, the report said. Moody’s is maintaining a “negative” outlook on the area.“This year we’re much more concerned about the loan performance of the state HFA single-family loans because we’ve seen an increase in delinquencies,”

Lawler: Update on the California Home Buyer Tax Credit - The State of California Franchise Tax Board reported that it estimates it has received first-time home buyer tax credit applications above the $100 million cap. However, it is still taking applications, as it believes it has received significant amounts of duplicate, revised, or invalid applications. Here are the stats the CFTB has reported on its estimates of applications for the first-time tax credit, as well as the paragraph highlighting that they are estimates only. Amazingly, the CFTB – which handled a similar tax credit last year, notes the following on its website:  “We have not processed any applications yet as our computer system is still being developed. Once our computer system is completed, we will provide weekly updates on the number of certificates that have been mailed and the amount of credits that have been allocated."

Automated Debt-Collection Lawsuits Engulf Courts - As millions of Americans have fallen behind on paying their bills, debt collection law firms have been clogging courtrooms with lawsuits seeking repayment.  Few have been as prolific as Cohen & Slamowitz, a Woodbury, N.Y., firm that has specialized in debt collection for nearly two decades. The firm has been filing roughly 80,000 lawsuits a year. With just 14 lawyers on staff, that works out to more than 5,700 cases per lawyer. How is that possible? The answer to that question is at the heart of a growing debate over the increasing use of the nation’s legal system to collect on bad debts. Like many other firms, Cohen & Slamowitz relies on computer software to help prepare its cases. While many of the cases represent legitimate claims, critics say the lawsuits are too often based on inaccurate or incomplete information about the debtor or the amount owed.

A New Breed of Debt Collectors - The last decade or so has given rise to a new version of an old phenomenon:  the bottom feeding debt buyer.  It's often thought of as being linked to the bad economy, and perhaps it is, a little bit--businesses in trouble are probably more willing to look to their old collections as a source of revenue. But it's also a result of increasing improvements in computer technology.  It's easier to aggregate very small amounts--say, hundreds of unpaid co-pays from a doctor's office.  Those debts can be unloaded at pennies on the dollar to firms which then use the interwebs to find their victims debtors and dun them for cash. Often these firms don't bother with the abusive high-pressure tactics that are used for large sums--the hourly wage on collecting $29.99 just isn't a good use of resources.  But that's small comfort, because instead, they file blizzards of lawsuits against people who they can't find, resulting in default judgements against someone who may not owe the money, or may not realize they owe.  And those hundreds of aggregated small debts hit the credit reports of people who probably didn't intend to skip out on a $15.87 termination fee when they canceled some utility, but now can't get a car loan because there's a black mark on their credit.

More Americans' credit scores sink to new lows - Figures provided by FICO Inc. show that 25.5 percent of consumers -- nearly 43.4 million people -- now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use. Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.FICO's latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO's 300-to-850 scale weren't as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on

Retail sales are up, and credit card debt is down. Why is that bad news? - Last week, pessimists seized on two pieces of bad news about the consumer sector of the economy. On July 8, the Federal Reserve reported that consumer credit, having shrunk 4.4 percent in 2009, fell at an annual rate of 4.5 percent in May. Revolving debt (i.e., credit cards and the like), which shrunk 9.6 percent in 2009, plummeted at a 10.5 percent annual rate in May. The same day, word came that June retail sales were disappointing. A 28-retailer index tracked by Thomson Reuters "shows sales at stores open a year rose only 3.1% in June," the Wall Street Journal reported. "While that compares with a 4.9% drop last year, it wasn't as solid as hoped."  I find it hard to get agitated about this pair of bad-news items. Retail sales are higher than they were a year ago, despite the fact that revolving credit, which fuels such spending, is down significantly. The fact that people are buying more—but doing it with more cash and savings rather than debt—should be regarded as a sign of strength, not weakness.

Rockefeller Institute Confirms Rising Retail Sales a Mirage - Last Friday, in Did Retail Sales Rise or Did Tax Rates Go Up?, I stated that retail sales have not risen year-over-year as most people think, rather, collections are up because states have increased sales taxes. Today, the Rockefeller Institute confirms that analysis in a very detailed report, After Disastrous 2009, States Report Modest Revenue Growth in Early 2010. The growth in state tax revenues is not an indication of broad state fiscal recovery, but is mostly driven by legislated changes in two states — California and New York. State tax revenues are still below the prerecession levels, showing a decline of 9.3 percent in the first quarter of 2010 compared to the same period two years earlier.

When Cash Spending is Not Cash Spending - I have just seen a commentary which reminded me of an analysis I made long ago in another post. In the analysis, I pointed out that, even when a consumer went to pay for something with cash taken from their income, they were still spending borrowed money. In other words, even the financially responsible, spending only from their income, were in reality spending borrowed money. I am aware that this is a difficult idea to grasp, but it is nevertheless the case. The first way in which the individual is spending borrowed money is that they are not actually paying the correct level of taxes to support government expenditure. In simple terms, if the government was not borrowing, but still providing the same services, the tax rate would be far higher. As it is, the government borrowing is the borrowing of the individual, as that individual will, at some future point in time, have to pay higher taxes than they would otherwise have done. This means that, as they make each purchase, a proportion of that purchase is paid for by money the individual is indirectly borrowing through too low taxation.

Small Businesses Face Record Spreads, SBA Lending Cliff Dives in June, Boding Ill for Employment - Distressing news continues to accumulate on the small business front. . In this contraction, small businesses have had it even worse than usual. Not only have the cutbacks to in business loans been ever more severe than normal, but other sources have been strangled off as well. For instance, companies too small to qualify for loans against the business often rely on business credit card products targeted to them, where borrowings might cost, say, 9% to 14% annually. Some players like American Express have canceled entire categories of small business products; many other banks have slashed credit lines, even to borrowers with pristine records who made little use of them.  This pattern bodes ill for the economy. Small businesses not only employ roughly half the workers in the US, but they created 60% to 80% of net new jobs each year in the past decade. Their owners have not been feeling terribly optimistic, and their confidence ratcheted down in June. The Wall Street Journal reported on the latest survey by Discover, which highlighted a rise in financial stresses:

US small businesses lose out over loan rate - US small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank. The data suggest that small businesses – which form the backbone of the US economy – are not receiving the full benefit from the ultra-low rates that are supporting some larger employers. Securing capital for small businesses – which account for the bulk of job creation – has been a priority for the Obama administration, which has proposed a $30bn fund to help community and neighbourhood banks increase their lending.The Fed’s data show that in early May interest rates on small commercial and industrial loans, on average worth about $500,000, were 3½ per cent higher than the federal funds rate, the widest gap since the series began in 1986

Small Businesses Get More Pessimistic - Small businesses continue to feel highly pessimistic about the U.S. economic outlook, according to a report Tuesday that showed a monthly indicator of their sentiment turning weaker in June. The National Federation of Independent Businesses said its Small Business Optimism Index dropped 3.2 points to 89.0 last month, more than erasing the modest 1.6-point gain it saw in May. The report, which was compiled by NFIB Chief Economist William Dunkelberg, described the decline as “a very disappointing outcome.”In past periods following a recession, the NFIB index typically has risen back above 100 within a quarter or two of the trough in economic activity as measured by the National Bureau of Economic Research. That hasn’t been the case during this recovery. The index hasn’t broken above 93 in any month since January 2008 when the economy was in the early stages of recession, even though the NBER is expected to eventually date the beginning of the recovery in the third quarter of last year.

Small business optimism dwindles, as Fed and Congress press for solutions - The National Federation of Independent Business, the small-business lobbying group, announced Tuesday morning that its index of optimism among small business owners slid down in June. “Seventy percent of the decline this month resulted from deterioration in the outlook for business conditions and expected real sales gains. Owners have no confidence that economic policies will fix the economy,” NFIB said. Small businesses have been suffering from low confidence and a constellation of other problems throughout the recession. And the government is actually contributing to the crisis of confidence, the NFIB said. Small businesses are not just suffering from lackluster sales, due to high rates of unemployment and poor consumer confidence. They are concerned that Washington is not doing enough — not extending unemployment benefits, not pushing through big jobs programs, not committing to additional stimulus, not reassuring the markets.

University Of Michigan Consumer Sentiment Plunges To One Year Low Of 66.5, Versus Expectation Of 74.5, Previous 76 - The UMichigan consumer confidence index dropped from from 76, the best number since January 2008, to 66.5, the lowest since August 2009, on expectation of 74.5. The expectations component came in at 60.6 versus expectations of 68.5, the lowest since March 2009, while the conditions index showed a reading of 75.5 versus expectations of 84.0, lowest since November 2009. The 1 Year inflation expectation rose modestly from 2.8 to 2.9. Altogether another economic data disaster. 

Reuters University of Michigan's Consumer Sentiment drops sharply in July - From Reuters: Consumer Sentiment Sinks To Lowest in 11 Months The survey's preliminary July reading on the overall index on consumer sentiment plummeted to 66.5 from 76.0 in June.  The figure was below the median forecast of 74.5 among economists polled by Reuters.Consumer sentiment is a coincident indicator - and this is further evidence of an economic slowdown. Interesting - the survey's one-year inflation expectations increased to 2.9% even as measured inflation has been falling.

More than 7 out of 10 Americans say the economy is mired in recession (Bloomberg) -- More than 7 out of 10 Americans say the economy is mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit, according to a Bloomberg National Poll.  Just like the experts, Americans are torn about whether the federal government should focus on curbing spending or creating jobs, the poll conducted July 9-12 shows. Seven of 10 Americans say reducing unemployment is the priority. At the same time, the public is skeptical of the Obama administration's stimulus program and wary of more spending, with more than half saying the deficit is "dangerously out of control."  This concern over spending extends to aid for the jobless. With unemployment at a near-record high of 9.5 percent in June, the public is closely split on whether another extension of jobless benefits, which is stalled in Congress, is worth the $34 billion cost.

Consumer Price Index declines 0.1% in June - From the BLS report on the Consumer Price Index this morning:  The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 1.1 percent before seasonal adjustment. The index for all items less food and energy rose 0.2 percent in June after increasing 0.1 percent in May. ... The 12-month change in the index for all items less food and energy remained at 0.9 percent for the third month in a row. The index for owners' equivalent rent also rose 0.1 percent, its first increase since August 2009 ... Even with the slight monthly increase, Owners' equivalent rent (OER) is down year-over-year.The general disinflationary trend continues - CPI is unchanged over the last 8 months - and with all the slack in the system (especially the 9.5% unemployment rate), CPI will probably stay low or even fall further.

Today in things that are falling - TODAY brings us a few new economic datapoints, and they're nicely synchronised in a downward direction. Take consumer sentiment: Economists had forecast a move downward, but not one of this magnitude. Then there's the latest on consumer prices. In June, the headline figure on consumer prices fell slightly while the core number rose slightly. Here's the 12-month percentage change in core inflation: Downward! Markets have decided to get in on the action; last week's nice little rally has undergone some significant erosion this week, including a drop of over 2% today.

The New Doom: A Second Wave of Economic Pessimism Spreading Outside Wonkdom - Before the financial crisis, furious pessimism about the national economy started with a small and mostly scholarly group of doomsayers, like N.Y.U.'s Nouriel Roubini and Yale's Robert Shiller. But that pessimism has now gone mainstream, spreading from wonks in finance to the city's daily conversation as last year's rebound drifts further away. Growth is slow; unemployment is enormous; the world feels sludgy. It won't help if banks post withered profits later this week, as they're expected to. Part of what makes this second wave of gloom different is the sense that the rot isn't going anywhere. You read through The Times and worry that the country will sink into a third depression-Paul Krugman said a few weeks ago that it already has-unless the U.S. government does something serious. But then you think about where money for another stimulus would come from, and what will happen if trillion-dollar deficits get worse.

What to do with the unemployed? - FOR some time now, a debate has simmered over the extent to which unemployment benefits have encouraged workers who could find jobs to stay out of work, thereby unnecessarily exacerbating America's labour market problems. Most studies of the question estimate that benefits probably aren't responsible for most of the rise in the unemployment rate, and a recent bit of research from the San Francisco Fed pegged the increase in the unemployment rate attributable to benefits at about 0.4 percentage points. Still Republicans (with an assist from Democratic Senator Ben Nelson) have seized on the question and on deficit politics as an excuse to end additional extensions to unemployment benefits. Several million unemployed Americans have or will soon lose their benefits as a result.

The Unemployment Benefits Stalemate: Our Broken Politics on Full Display - As the Huffington Post's Arthur Delaney points out, by the end of this week, Congress' failure to act will bring the total number of long-term unemployed prematurely cut off from aid to 2.5 million. According to the Bureau of Labor Statistics' June 2010 numbers, the unemployment rate is currently 9.5 percent. Almost half of those out of work have been looking for a job for over six months. What's more, the only reason the unemployment rate went down .2 percent in June is because over 650,000 people had become so discouraged they left the workforce altogether and are no longer being counted. It's a terrible calamity that those in charge never should have allowed to happened, it's doing incalculable damage that will last for generations, and even as the destruction continues to spread, the government seems powerless to stop it. It speaks volumes about our country and our deeply dysfunctional political system that not only have we been unable to bring the unemployment rate down, we can't even pass a bill extending unemployment benefits.

The Economic Case for Extending Unemployment Insurance -Lawrence Summers - The lapse in extended unemployment insurance benefits at the end of May has resulted in 2.5 million jobless Americans exhausting their assistance. If we do not reinstate benefits by the end of the month, this number will grow to 3.2 million. These losses are exacting an enormous human toll on families who count on these benefits as they continue to search for jobs. As the president recently remarked: "Lasting unemployment takes a toll on families, takes a toll on marriages, takes a toll on children. It saps the vitality of communities, especially in places that have seen factories and other anchoring businesses shut their doors. And being unable to find work - being able to provide for your family - that doesn't just affect your economic security, that affects your heart and your soul. It beats you up. It's hard."

Extension of unemployment pay should be Congress' priority…Congress is back from its July 4 recess, and an estimated 2 million Americans have run out of unemployment benefits. The reason is that the Senate failed to agree, before leaving for the holiday, on renewing a program that provides extended jobless benefits -- for a total as long as 99 weeks -- during the economic downturn. Lawmakers of both parties say they want to restore the benefits but could not agree on whether the $35 billion cost should be financed by adding to the deficit or redirecting previously allocated -- although at this point unspecified -- stimulus funds. This is an unnecessary argument that is inflicting real damage on Americans who find themselves without work through no fault of their own.  Drawing the deficit line at additional unemployment benefits is shortsighted, because, if anything, the economy could benefit from more stimulus spending, not less. Unemployment benefits, which are most apt to be immediately plowed back into the economy, are about the most stimulative form of spending. Extending them is both fiscally sensible and morally decent.

Extend Unemployment Benefits - I’m sympathetic to the notion that we need to constrain government spending.  But this seems a particularly cruel bill on which to make that stand.  And, aside from the “but Republicans support tax cuts for the rich while railing against deficits” canard, there are all manner of more expensive, wasteful programs to cut. I’m also sympathetic to the philosophical objections.  There’s simply no question, as Daniel Hamermesh points out that we have “huge amounts of research showing that extending the potential duration of unemployment benefits creates an incentive for the unemployed to search less and remain unemployed longer.”  How could it not? But, as he points out, “most of the research describes behavior in average economic times, not when the unemployment rate is 9.5%.  What little research is available suggests smaller effects when there are fewer job vacancies.”  And, needless to say, there are fewer job vacancies right now.  The world economy has been in the toilet for two years now and there are strong signs things will get worse before they get better.

How Bad is the Job Situation, Really? -When it comes to economic conditions, I'm generally a glass-three-quarters-full kind of guy. So as I've been following the debate about unemployment insurance and whether it actually worsens the unemployment rate, I've actually been open to the idea that being able to receive benefits for up to two years might create perverse incentives.   In particular, the idea that there were 5 people looking for work for every job opening struck me as sounding overly alarmist.  So I started looking into the numbers to determine whether I thought they were reliable.  When I graphed the two Conference Board series against the number of unemployed, and then the JOLT series against the unemployed, here's what I found:I'll just say I was shocked and that I am much more sympathetic to extension of unemployment insurance than I was yesterday.

A Chart That Screams, 'Extend Unemployment Benefits!' - At the end of May there were 3.2 million job openings, according to a new report from the Bureau of Labor Statistics. In the face of nearly 15 million unemployed, that's obviously not enough. And if you add in those other Americans not working because they're discouraged or marginally attached ("U-5"), then that number jumps to almost 17 million. Here's a picture of how the labor market changed since 2007: This chart shows a serious problem. That giant gap consists of Americans who are unemployed, and couldn't get a job even if they wanted to. This emphasizes the need for Congress to extend unemployment benefits. It's pretty clear that millions of Americans remain unemployed because the jobs aren't there -- not becuase they aren't trying hard enough to find them. In fact, it's not even close.

Ezra Klein's straw man argument. Rep Shuler's 500 jobs and only 3 apply. Coburn on Washington Journal - On Washington Journal, Tom Coburn was on to talk about the economy and unemployment.  At 2 minutes into the interview, Greta Brawner presents Ezra Klein's take from this article:  "And we're just going to leave them without incomes and without job opportunities and without money to spend in their wrecked local economies -- thus making it harder for those economies to generate new jobs? That's the economic theory this country is going to embrace amid terrible joblessness?" Mr Coburns setup to his full response response: Well, all that is, is a straw man argument.   At 3:09 minutes Coburn states that he lives with congressman Heath Shuler. Just yesterday Mr. Shuler told him that he had a job fair. Mr. Shuler worked hard to set up this jobs fair. Over 500 jobs, every major employer represented. "3 people showed up. 3 people showed up for 500 jobs in an area of unemployment above 10 %."  According to Mr. Coburn, Mr. Shuler's explanation for the lack of attendance: "they are not going to do it until the benefits lessen. And that may not be an exact interpretation of what his words were but... "

Sense and Nonsense on Unemployment Insurance - McConnell's statements overshadow the sensible points that Republicans should be making at this point.  Senate Minority Whip John Kyl came close, quoting here from the TPMDC post that quoted McConnell above: "CBO's been wrong before," Kyl said. "It's not a stimulus for the economy, to try to help people through tough times. It's a necessary evil, in a sense. We'd like not to have to raise revenue in order to pay people for not working--or not to pay them for not working, but because they can't get work."Kyl concluded:To me you shouldn't look at it as an economic matter, it's a humanitarian matter. You got people who are out of work, who can't find work, you want to help 'em out. Families need help. That's why you provide it. You don't do it because it's going to stimulate the economy. You have to borrow the money in order to pay the folks. That borrowing has huge costs. They are adverse economics costs. So it's not a good thing for the economy. It's a bad thing for the economy but it's still the right thing to do for other reasons.

Number of the Week: Unemployment Extension Delay - 2,502,000: The number of jobless people who have lost access to unemployment benefits since June 2. The Senate is expected next week to vote to extend unemployment benefits, but the delay has caused a lapse in benefits for some 2.5 million of the nation’s jobless.  Earlier this year, Congress approved up to 99 weeks of unemployment benefits backed by the federal government — an addition of 73 weeks to the traditional 26 offered by the states. The duration of benefits varies from state-to-state, and pending legislation doesn’t extend the maximum beyond 99 weeks. It would have allowed those unemployed beyond 26 weeks to continue accessing the current program through the remainder of 2010. The previous extension expired on June 2. A recent analysis by Goldman Sachs economist Alec Phillips showed that reducing unemployment benefits now would be the earliest a federal extension was cut off. In earlier recessions, the government extended benefits an average of 23 months after the peak unemployment rate was hit. The peak jobless rate in the current downturn was 10.1% in October, just eight months ago.

Fighting Unemployment With a Stick - As the U.S. struggles with the problem of persistent long-term unemployment, a study of incentives in the Netherlands suggests a stick is more effective than a carrot. In their paper “Carrot and Stick: How Reemployment Bonuses and Benefit Sanctions Affect Job Finding Rates,” Bas van der Klaauw of VU University Amsterdam and Jan C. van Ours of Tilburg University, Netherlands, examine the effects of both positive and negative financial incentives on the long-term jobless in Rotterdam. In the early 2000s the city ran a program that provided reemployment bonuses for job seekers who were able to find a job and hold it for at least six months. At the same time, benefit recipients who didn’t actively look for work, or otherwise failed to comply with eligibility requirements, would be subject to a temporary reduction in their benefits.“Our main findings are that reemployment bonuses don’t seem to have worked, while benefit sanctions increased the job finding rate significantly,” the economists write.

Have We Reached the Limit to the Welfare State? - Today, Harris released an extraordinarily interesting poll on attitudes toward taxes, spending and deficits in several European countries and the US. In this post I am going to just discuss the US data, but the European data are in many ways more interesting; more than any other research I have ever seen they show the limit of the welfare state has been reached. When asked whether large budget deficits require a re-examination of the welfare state in Europe, the following percentages of people agreed: France and Italy, 68 percent; Spain, 70 percent; Germany, 73 percent; and in both the US and UK, 77 percent.

The Root of Economic Fragility and Political Anger - Robert Reich - Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent.  In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages. Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks. We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground

It’s More Than Just Birth-Death - Last week, I wrote about the Birth/Death Adjustment in the Bureau of Labor Statistics monthly employment numbers. Jeff Miller took me to task in his blog for not noting that the B/D numbers are not seasonally adjusted (which I know) and a few other items. I did some research on his work on employment numbers and came away with a few new thoughts that I think are worth sharing. Miller (a former professor and a nice guy) and I spent several hours on the phone talking about the BLS data and what he sees as an unusual divergence in the data, which I agree is far more interesting than the B/D Assessment. To get to the interesting part, I am going to risk boring you with a few wonkish background paragraphs.

Persistent unemployment - Greg Mankiw looks at unemployment and sees something scary. I agree: He observes:“This recession looks very different, and much more troubling, than those in the recent past.”What is different? Lots of things certainly, but look at employment in the construction industry:From the mid-1990s through 2006, construction employment accelerated and grew much more quickly than the previous trend. You can see previous recessions in the construction employment data–it takes anywhere from 2-3 years for construction employment to bottom out and start recovering. That has yet to happen in this recession and it’s been about four years of declining employment in the construction sector.Wonder why? Look at this graph of housing starts–housing under construction. I’ve narrowed it to starts of single units–houses rather than apartment buildings:You can see two of the last three downturns in these data (though not the mild recession of 2001.) In each case, housing starts rebounded in less than three years. The current recession has seen four years of decline in housing starts of new single-unit homes. Why? Two reasons.

End of Census, and for Many, End of a Job - NYTimes - When the Census Bureau hired upward of 700,000 Americans over the last two years — most in the last six months — it landed more experienced workers with more sophisticated skills than any time in recent memory. This was the unintended upside of the nastiest recession of the last 70 years.  Now, its decennial work largely done, the Census Bureau is shedding hundreds of thousands of workers — about 225,000 in just the last few weeks, enough to account for a jot or two in the unemployment rate, say federal economists. Most of those remaining will be gone by August; a few will last into September.

Checking In on the Job Creation Tax Credit - It’s still too early to know whether the job creation tax credit signed into law last March is having any effect, Treasury Department officials said on Monday. This tax program, part of the Hire Act of 2010,  is intended to encourage businesses to add workers who have been out of a job for at least 60 days by making it cheaper to employ them. Usually, the federal government collects Social Security payroll taxes on salaries, amounting to 12.4 percent of every employee’s wages (up to $106,800; any wages over that amount are not subject to Social Security taxes). Half of this payroll tax, or 6.2 percent, comes from the employee, and the other half, or another 6.2 percent, is collected from the employer. Under the Hire Act,  businesses that hire the long-term unemployed do not have to pay this 6.2 percent tax on each worker for the remainder of 2010. Additionally, if these new employees stay on  for a year, the employer  gets another tax credit of $1,000.

Fighting long-term unemployment with a tax break - One of the biggest concerns at the Federal Reserve and within the Obama administration is the spike in long-term unemployment, which is at its highest levels in the post-second world war period.  And there is a vigorous debate over what tools policymakers can and should use to fight it.Today, the Treasury department issued a potentially encouraging report on the HIRE act, a new law passed in March which gives a payroll tax exemption to companies hiring workers who have been unemployed for more than two months. Alan Krueger, chief economist at the Treasury, said that his research, based on the labor department’s current population survey, found that from February through May about 4.5m hires were eligible for the tax break, which is undoubtedly an impressive figure. But is there a catch?At the time the legislation was enacted a few months ago, Mark Zandi of Moody’s suggested the legislation would create about 250,000 new jobs - a much smaller figure. So what is closer to the truth ?

BLS: Low Labor Turnover in May - From the BLS: Job Openings and Labor Turnover Summary There were 3.2 million job openings on the last business day of May 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.4 percent. Thehires rate (3.4 percent) was little changed and the separations rate (3.1 percent) was unchanged.[T]he number of job openings has risen by 868,000 (37 percent) since the most recent trough of 2.3 million in July 2009. Even with the gains since July 2009, the number of job openings in May 2010 remained below those in place at the start of the recession in every industry except government, and in each region except the Northeast. The following graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS. Notice that hires (blue) and separations (red) are pretty close each month. In May, about 4.1 million people lost (or left) their jobs, and 4.5 million were hired (this is the labor turnover in the economy).

Job seekers still face intolerable odds - This morning, the Bureau of Labor Statistics released the May report from the Job Openings and Labor Turnover Survey (JOLTS), showing that job openings declined 96,000 to 3.2 million in May.  From the Current Population Survey, we know that the number of unemployed workers in May was 15.0 million.  This means that the ratio of unemployed workers to job openings was 4.7-to-one in May, a slight increase from the revised April ratio of 4.6-to-one. As with all labor market data in recent months, it is important to examine underlying trends excluding temporary hiring for the 2010 Decennial Census. Importantly, there was a large upward revision to the April job openings data of 238,000 federal job openings, presumably temporary Census job openings.  In the last six months of 2009, the federal government averaged 73,000 job openings per month, while in April and May of this year, the federal government averaged 370,000 job openings.  If those additional roughly 300,000 federal job openings are excluded from the calculation, the ratio of job seekers to job openings would have been 5.1-to-one in April and 5.2-to-one in May.

A curious unemployment picture gets more curious – Atlanta Fed blog - At first blush, the second quarter statistics from the Job Openings and Labor Turnover Survey (commonly referred to as JOLTS and released Tuesday by the U.S. Bureau of Labor Statistics) suggest little has changed recently in U.S. labor markets: "There were 3.2 million job openings on the last business day of May 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.4 percent. The hires rate (3.4 percent) was little changed and the separations rate (3.1 percent) was unchanged." Despite a slight step backward in May, the overall trend in job openings has been positive—Calculated Risk has the picture—but in a sense this fact has just deepened the puzzle of why the unemployment rate is so darn high. As we wrote in the first quarter issue of the Atlanta Fed's EconSouth: "The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve, which is a graphical representation of the relationship between unemployment (from the BLS';s household survey) and job vacancies, reflected here through the JOLTS."

The speed of labor market adjustment - Ezra Klein reports: Notice that adding new jobs at a rate of 200,000 a month would take us 150 months -- or 12.5 years -- to get back to normalcy. So far, only April has seen more than 200,000 in non-census jobs growth -- and even then, just barely.  This in my view is a puzzle for all theories of labor market adjustment.  Why does it take so long?  This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force.  Nor is the United States a country where employers cannot fire recalcitrant workers. If monetary velocity fell by eleven percent, is it the view of the Keynesians that the required nominal wage adjustment takes so many years?  Hysteresis means that unemployment gets "baked in" to some extent, but if anything you might expect that to speed up shorter-term adjustment in the work force, to avoid such a fate. Does the required "recalculation" take so long?  I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

Median Duration of Unemployment - This recession looks very different, and much more troubling, than those in the recent past.  I wonder how this dramatic change in the nature of unemployment will alter traditional macroeconomic relationships, such as Okun's Law and the Phillips curve. Some research suggests that the long-term unemployed put less downward pressure on inflation.  If that is indeed the case, then the increase in long-term unemployment may mean that we will see less deflationary pressure than we might have expected from the high rate of unemployment.  In other words, the NAIRU may have risen, perhaps quite substantially.  This is mostly conjecture, however.  It seems likely we will see more work on this topic in the coming years.

Op-Ed - Outside the Casino - NYTimes - Hiring is beginning to pick up in the very sector that led the country to the edge of a depression. An article on the front page of The Times on Sunday noted that this turnaround “underscores the remarkable recovery of the biggest banks and brokerage firms since Washington rescued them in the fall of 2008, and follows the huge rebound in profits for members of the New York Stock Exchange, which totaled $61.4 billion in 2009, the most ever.” The fattest of the fat cats live in a perpetual heads-I-win, tails-you-lose environment. But if you step outside the Wall Street casino, you’ll notice that things aren’t going too well in the rest of the country. More than 14 million Americans are out of work, and nearly half of them have been jobless for six months or longer. The unemployment rate for black Americans is 15.4 percent.

The Wall Street Journal Editorial Page, Encapsulated - Here’s just about all you need to know (or quite a bit, anyway) about the Wall Street Journal editorial page, summed up in one unfortunate headline and subhed: The Real Tragedy of Persistent Unemployment - It erodes the skills of the labor force and reduces future productivity. -  The real tragedy of the little people being out of work for long periods, you see, is that Serious Men of Industry can’t get as much use out of their wage slaves. Serious Men of Finance won’t be able to skim as much out of the economy, either, if these people are out of work too long. Meanwhile, all that stuff about people going homeless, kids suffering, depression, divorce, abuse—hey, all that’s the Fake Tragedy.

The Real Causes Of Our 'Jobless Recovery' - There is a lot of untapped potential for addressing the nation’s crumbling infrastructure when 9 million Americans are picking up June unemployment checks. So what’s missing? When the financial crisis hit in 2008, Wall Street’s biggest concern was a survival plan for Wall Street bettors, not Main Street jobs. Inscrutably, when the Obama administration took power it veered toward the financial intelligentsia’s “recovery” plans, not a technologically robust infrastructure overhaul vision. Corporate balance sheets now bulge with record cash — $837 billion for S&P 500 nonfinancial companies. Nevertheless, as observed by Moneycentral’s Jim Jubak, financial trickle down theory has revealed its limits when it comes to jobs (“Biggest Problem Now: Job Creation”). The real problem, according to Jubak, is that the U.S. has lost the ability to match job growth with population growth.

Why you're not making more money than a decade ago - Losing a job is a scary prospect for families during a recession, but there's a less-noticed problem that also hurts workers: stagnating wages. Median weekly wages, when adjusted for inflation, fell slightly for both high school and college graduates from 2000 to 2009, according to a recent analysis by the Economic Policy Institute, a Washington think tank. For high school graduates, median inflation-adjusted wages were $626 per week in 2009, compared with $629 in 2000, according to EPI. If you assume a worker gets paid for a full year, that adds up to $32,552 in 2009, down from $32,708 in 2000.  For college graduates, weekly wages were $1,025 in 2009, compared with $1,030 in 2000, according to EPI. Over one year, that works out to $53,300 last year, down from $53,560 in 2000.

The Gender Pay Gap, by State - The gender pay gap for full-time workers is smallest in the nation’s capital, according to data from the Bureau of Labor Statistics.For all full-time wage and salary workers across the country, women’s median weekly wages were 80.2 percent of men’s last year. But there is considerable variation among the states.  The interactive map above shows median usual weekly earnings for women as a percent of those for men, for all full-time wage and salary workers in 2009.As you can see, in the District of Columbia, the median weekly wage of full-time women workers is 96.5 percent of that for their male counterparts, far and away the most parity in the country. Coming in second is California, where women who work full-time earn 88.7 percent of what men make. At the other end is Louisiana, where, among full-time workers, women earn 65 percent of what men bring in.

Seniors Outnumber Teenagers in Job Force - Thanks in part to the recession, for the first time on record there are more seniors than teenagers in the American labor force. The orange line in the chart above refers to the number of teenagers — workers aged 16-19 — who are in the labor force, meaning they either have jobs or are actively looking for jobs. The blue line shows the number of workers over age 65 who are in the labor force. (The chart shows a 12-month moving average, to control for typical seasonal movements.) As you can see, starting last fall the number of older workers surpassed the number of teenage workers for the first time since at least 1948, when the Labor Department first began collecting statistics. If you look at just the employment of older workers versus teenagers — that is, how many workers actually have jobs — you will also find that older people surpassed teenagers for the first time recently, in mid-2008.

The Unemployment Rate Race - Among developed countries, the United States still has an above-average unemployment rate, according to data released today by the Organization for Economic Cooperation and Development. The chart above shows the standardized unemployment rate across organization countries for May, though for a few countries (including the United States) more recent data are available.In May, the average unemployment rate among industrialized countries was about 8.6 percent; it was lowest in South Korea, at 3.2 percent, and highest in Spain, at 19.9 percent. In the United States, the rate was 9.7 percent in May, and fell to 9.5 percent in June.

Cities and the Offshoring of Work - Traditionally, the United States has worried about the offshoring of manufacturing jobs. But concern is mounting that as the rest of the world becomes increasingly well-educated and competitive, the desirable and high-paying service jobs previously considered immune to moving overseas are becoming increasingly vulnerable. In a widely cited 2007 study, economist Alan Blinder estimated that between 22 and 29 percent of U.S. jobs were vulnerable to offshoring as of 2004. In a sobering Wall Street Journal op-ed published earlier this month (via Economist's View), economists Martin Neal Bailey, Matthew Slaughter, and Laura Tyson provide evidence that the global competition for jobs is heating up considerably. They note that multinationals have long been among the most important economic drivers of the U.S. economy, accounting for an estimated 19 percent of all private jobs, 25 percent of all private wages, and 41 percent of the increase in private labor productivity since 1990.

Why We Can't Rely on Foreign Consumers... - Robert Reich - Fred Hochberg, president of the Export-Import Bank of the U.S., thinks I’m wrong to worry about a trade war, and that the President’s goal for doubling U.S. exports over the next five years is on track. Writing in the Huffington Post, Hochberg says: According to data released yesterday by the Department of Commerce, U.S. exports of goods and services increased by 17.7 percent during the first five months of 2010, compared to the same period last year. If this trend continues, the President will meet his goal of doubling exports in five years. The key: targeting export markets strategically. At the Export-Import Bank, we’re focused on countries that have weathered the global recession and want to grow in areas where U.S. companies have a comparative advantage…. Commerce’s May data illustrate the potential of an export strategy tailored to countries and sectors that suit our strengths. With due respect, Mr. Hochberg is being misleading.

Can infrastructure-led growth save the economy? - If neither foreign private demand nor foreign public demand can compensate for the loss of American private domestic demand, then the only possible source of increased demand for American goods and services that remains is public domestic demand. American government at all levels may need to provide much of the missing demand for American businesses and labor, for the decade or longer that is needed for private sector deleveraging in the aftermath of America's asset bubble.To avoid competing with private enterprise, the government should produce public goods that increase overall productivity and that the private sector has no incentive to provide, in good times or bad, such as infrastructure and social services like policing, health care, education and care for the young and old. In addition to mobilizing idle resources and labor directly, both infrastructure and public service spending could help business in general by boosting the purchasing power of Americans who are now unemployed.

The Engine Of Job Creation Is Full of Sand - I give the NFIB credit for their analysis, but not for their "education"  during the last bubble - and this collapse.  Indeed, their newest report is rather interesting: The prime problem with small business is slow or declining sales, and is worse today (by six points) than last year, which was the so-called "formal" bottom of the recession.  Access to credit is the prime problem in only 8% of small businesses. 38% of small businesses are using credit cards as a funding mechanism (!!!)  At today's pricing this is suicidal.  If this number indicates those small business who have effectively been forced into this use of credit (and I suspect it is) we're in deep kimchee - nearly 4 in 10 small businesses are likely to fail in the next two to three years as a consequence of this. Far too many (11%) small business owners are collateralizing real estate as a means of funding operations.  If I'm reading this report right, these are businesses where the owner has pledged his or her personal residence as security.

America needs a growth strategy, by Michael Spence, Financial Times: America’s economy shows worrying signs of weakness. Worse, and in common with other developed countries, it also lacks a credible strategy for longer-term growth. The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove.  He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.  There is little doubt that America’s social contract is starting to break. Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully.

Manufacturing and Trade Inventory-to-Sales Ratio - The Manufacturing and Trade Inventories and Sales report from the Census Bureau today showed that the inventory adjustment is over:  Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,355.7 billion, up 0.1 percent (±0.1%)* from April 2010, but down 1.5 percent (±0.3%) from May 2009.This graph shows the inventory to sales ratio. This increased slightly in May to 1.24 (SA), after declining sharply from the peak of 1.48 back in Jan 2009. This could decline further - the trend is definitely down over time - but clearly the inventory adjustment is over. This is important because the change in inventory added significantly to Q4 GDP growth and some to Q1 GDP. See BEA line 13: the contribution to GDP in Q4 2009 from 'Change in private inventories' was 3.79 of the 5.9 percent annualized increase in Q4 GDP. In Q1 2010. the 'change in private inventories' was 1.88 of the 2.7 percent annualized increase.

Would American Industrial Policy Create Jobs? - Andy Grove, the former CEO of semiconductor giant Intel, has written a much-remarked article in BusinessWeek on how the US can fix its economy and create jobs by emulating the example of Asian tigers that have deployed industrial policy to dramatic effect--as well as China which has followed in their wake to shake the world. Other bloggers have covered this article in some detail. While it is well worth reading, here are the key parts before I dive into another article which contradicts Grove. Maybe we shouldn't criticize Grove too much as he even manages to quote the LSE's very own Robert Wade (see my recent post on how Wade advises LDCs on adopting industrial policy post-economic crisis): How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing—-the idea that as long as "knowledge work" stays in the U.S., it doesn't matter what happens to factory jobs. It's not just newspaper commentators who spread this idea.

Industrial Policy - Dani Rodrik v. Josh Lerner, Economist. The debate starts July 12.

Industrial Policy – Not - On the final day of The Economist‘s published debate on industrial policy, moderator Tamzin Booth summarized industrial-policy enthusiast Dani Rodrick’s case for such state direction of the economy: “for Mr Rodrick, the fact that every single prosperous country in history has used industrial-policy tools at some point proves that they must work.” How ironic that the same e-mail from The Economist that brought me the final words on this debate also featured this report on what The Economist describe as Hong Kong’s “staggering” economic success – a report that notes that Hong Kong’s government explicitly “rejected subsidies for start-ups… cheap land for strategic businesses… and most of all, industrial policy.”

Creating not just jobs, but good jobs - Richard Florida's recent piece in the FT, "America needs to make its bad jobs better," presents a pretty interesting argument, one that a nation so focused on job creation might want to keep in mind. Florida points out, as plenty of others have before, that the sorts of service-sector jobs the U.S. is on track to create the most of in coming years—for home health aides, customer service workers, food preparers, retail sales clerks—don't necessarily pay all that well, and certainly not as well as the manufacturing jobs they are replacing. Florida then argues that low pay isn't necessarily inherent in these sorts of jobs, and that it is fully within our control to make them better: Since Florida's opinion piece, a number of econobloggers, including Felix Salmon and Mark Thoma, have pointed out that even if the service-sector were to see a big boost in productivity, that wouldn't necessarily translate into higher wages (or better benefits, etc). Historically, one has led to the other in the U.S., but that relationship started to break down in the early 1980s. Nowadays, gains from productivity are just as likely to feed an increase in manager or shareholder wealth.

“Manufacturing” - One particular post that grabbed a lot of attention was this, by Tim Duy, whose work on monetary policy I typically find to be sharp and insightful. In it, he makes some reasonable points about the state of the economy and the labor market, then sketches some eye-balled correlations and draws unwarranted conclusions about the state of the manufacturing sector and broader economic growth. I found it to be a fairly thin piece of argumentation, but it resonated with others despite this, and so I tweeted that, Something about the word ‘manufacturing’ makes people lose their analytical senses. Matt Yglesias picked up on this and wrote a post that got at a lot of what I was thinking, namely, that there’s nothing special about manufacturing. I saw Felix Salmon respond via twitter that he was unconvinced, and as best I could tell, the matter finished there. Let me just add a few thoughts.

Global imbalances: Don't worry about manufacturing - The Economist - TIM DUY'S writing on all things monetary policy is quite good, but he recent posts, on global imbalances has been fairly poorly reasoned. Mr Duy seems to be arguing that American manufacturing is in sharp decline, that it's all China's fault, and that some sort of protectionism is needed to save the American economy. His latest post extends the argument, but the logic is wanting. He presents this chart:  As far as I can tell, Mr Duy seems to want to embrace a crash programme of protectionism against China. I don't know how this is supposed to boost America's long-term economic fortunes or what evidence he can present that it will. I don't know why Mr Duy is convinced that another spurt of manufacturing capacity growth, similar to that observed in the 1990s, isn't a possibility. And I have no idea why he is so confident that a return to the manufacturing economy observed in the immediate postwar decades—a time when technologies were vastly different, when the global economy was vastly different, and when a much larger share of the world's population lived in dire poverty—is a good idea.

Push Back, by Tim Duy: Free Exchange pushes back on my concerns about the widening trade deficit and the declines in manufacturing capacity. I appreciate that - I am well aware that I am taking an unpopular position. Not quite so sure it is "lazy," but definitely unpopular. Regarding my disbelief that higher paid grocery clerks are the answer to declining manufacturing capacity, Avent writes: This is a lazy and unpersuasive assessment of what's involved in service sector activity. Obviously there is much more to service employment, including work in financial, information, education, and health services, much of which is (and will increasingly be) tradable. True enough, I oversimplified service sector jobs. Maybe. Yes and no. To begin with, it is not exactly clear that the expansion of the financial sector has yielded a good outcome, unless you believe that greater financial volatility and widening income inequality is good. More importantly, Avent is arguing that service jobs are just as tradable as manufacturing jobs, and therefore a job is a job. .

Should America fear offshoring? - TIM DUY has responded to my post on the state of American manufacturing, and I, in turn, would like to push back. The post is a long one, which I will put below the fold. From the top: Free Exchange pushes back on my concerns about the widening trade deficit and the declines in manufacturing capacity. I am well aware that I am taking an unpopular position. Not quite so sure it is "lazy," but definitely unpopular. Among economists, Mr Duy's position may be unpopular, but it's certainly a popular one among wider audiences. I have found that criticism of the call to save manufacturing generates quite the angry response. Meanwhile, what I felt was lazy was his dismissal of service sector jobs as consisting of little more than burger flipping.

The Myth of Offshoreable Jobs - In a debate on free trade with Ryan Avent, Tim Duy brings us a quote from Alan Blinder, who provides a scary number:In some recent research, I estimated that 30 million to 40 million U.S. jobs are potentially offshorable. Duy takes the 40 million estimate at face value and concludes that America may be on the verge of having no competitive advantage. This 40 million number is a few years old, and if you read the paper Blinder wrote rather than the op-ed Duy linked to you’ll get a much different sense of the severity of this number.As a little antidote to all of this doom and gloom it’s worth taking a closer look at one of these “very vulnerable jobs”. The quintessential offshored job is customer service. Most of this takes place over the phone, and if you believe scare mongers, most of these jobs will be done in India in the near future, in fact most have probably been offshored already. But according to the BLS, there are currently 2.3 million customer service representatives in the U.S. in 2008, most of which work in call centers. In addition, the number of these jobs is expected to grow faster than average, or 18 percent from 2008 to 2018.

The Myth of Structural Unemployment - In a lot ways it makes sense. Big problems should have big causes. The social and political context that we live in should be far more important than a few simple equations. And, certainly the deep cultural roots of America’s current woes make for better cocktail conversations and better blog posts, for that matter, than discussions of the money supply. The MSM is just never going to find MZM that interesting. It is, however, wrong. Our problems are cyclical not structural. The simple fact of the matter is that the structure of the American economy hasn’t changed that much in that last 24 months. We were building houses at an unsustainable rate, sure. But, at its peak the US employed about 7.7 million construction workers. It now employees about 5.8 million. That’s a difference of a little less than 2 million workers or about 1.5% of the American workforce.

Teen employment levels plunge - Frustrated area teens are facing a historically horrendous summer job market -- a situation setting the stage for potentially devastating long-term consequences.The teen unemployment rate was 25.7 percent in June, more than double the nation's 9.5 overall jobless rate. "This could end up being the worst teen summer job market in employment records going back to 1948," said John Challenger, CEO of Chicago outplacement firm Challenger, Gray & Christmas.

Lasting Inequality -A new paper by Colgate economist Michael R. Haines uses infant and childhood mortality rates to trace inequality in the U.S. in the 20th century. Haines reaches an interesting conclusion: “The evidence shows that, although there have been large absolute reductions in the level of infant and child mortality rates and also a reduction in the absolute levels of differences across socioeconomic groups, relative inequality has not diminished over the 20th century.”

Upper-Income Americans See Living Standards Improving - Despite the generally disappointing economic data of the past month, 55% of upper-income Americans in June said their standards of living were "getting better"-- the highest since March 2008. Similarly, 48% of lower- and middle-income Americans said their standards of living were getting better, matching the 2010 high of the past two months, and the highest since March 2008. Over the past 15 months, upper-income Americans have become comparatively more likely than other Americans to say their standards of living are getting better, restoring this group to its customary, more optimistic position in comparison with lower- and middle-income Americans. For all income groups, optimism about living standards has rebounded from the more depressed assessments seen during late 2008 and early 2009 as the financial crisis worsened. At one point, upper-income Americans' optimism declined to the point that it matched the optimism of their lower- and middle-income counterparts.

Closing the Wealth Gap - A new study by researchers at Brandeis University shows that the wealth gap has been growing steadily, leaving African-American families with increasingly fewer resources than white families to cope with serious economic problems such as many families face today. The Brandeis study found that, in the quarter-century from 1984 to 2007, the African-American and white wealth gap more than quadrupled, from $20,000 to $95,000. Middle-income white households had $74,000 in financial assets by 2007. That was far higher than even the average high income African-American family, which had only $18,000 in assets. At least 25 percent of the black families had no assets at all - no wealth, that is.Lacking sufficient assets, African-Americans, in general, have had no choice but to rely heavily on expensive credit. The total amount of their debt just about doubled between 1984 and 2007 to at least $3,600 each.

Cities' Woes Will Linger, Thousands Of Jobs Will Go - Even as the economy makes what appears to be tentative recovery, local revenues are continuing to drop. The reason is that property taxes — the main source of local tax dollars — are typically readjusted over several years. That means assessments are just starting to reflect diminished home values, which have come down by 30 percent on average nationwide since the housing market’s peak in 2006."There isn't any way that this drop in values won't lead to significant property tax revenue losses," says Ethan Pollack, a senior fiscal analyst at the Economic Policy Institute, a labor-backed think tank."We don’t see evidence on hand right now that cities’ budget are bottoming out,"

Unemployment fund needs $3 billion  - Pennsylvania now owes a $3 billion debt on the state fund that provides unemployment benefits, thus adding to the deficit woes facing the next governor. The Unemployment Compensation Fund debt, along with a projected $4 billion spike in public pension costs and $475 million revenue hole in the transportation budget, add to the fiscal pressures facing a state hammered by a deep recession.The unemployment compensation fund debt started to climb in early 2009 as the recession tightened its grip and reached $1.8 billion by November. Because of a growing number of jobless claims, the fund pays out more in weekly benefits than it takes in from payroll taxes paid by employers and taxes paid by employees.

State Budget Woes ‘Just as Tough’ in 2011,  Fed Economist Says (Bloomberg) -- Tepid economic growth and demands for aid from ailing U.S. cities and towns will combine to make next year “just as tough” for state budget makers, according to Yolanda Kodrzycki, an economist at the Federal Reserve Bank of Boston. States have closed budget deficits totaling about $169 billion since July 2008 and still face a combined $127 billion gap through fiscal 2012, according to a report last month by the National Governors Association and the National Association of State Budget Officers.Fiscal recovery will be weighed down by “lackluster” economic growth of about 3 percent a year and the need to help local governments confronting falling property tax collections, Kodrzycki told governors gathered today in Boston.“Next year is going to be just as tough” for balancing state budgets, Kodrzycki said

U.S. States Show First Tax Revenue Jump Since 2008, Report Says(Bloomberg) -- California and New York helped push U.S. states’ tax revenue to the first quarterly gain since 2008, the Nelson A. Rockefeller Institute of Government said. Overall tax receipts increased 2.5 percent to $164.5 billion during the January-to-March period, compared with the same three months in 2009, the Albany, New York-based institute said in a report today. It was the first year-over-year jump since the third quarter of 2008. Thirty-three states recorded a decline in collections, down from 40 states in the fourth quarter of 2009. Personal-income and sales-tax increases in California, the most-populous state, and New York, the third-biggest, were the primary drivers of the gain and lifted net revenue by about $5.8 billion. Excluding those states, collections fell 1.5 percent.

Struggling states seeking more aid from Washington - Governors hamstrung by the sluggish economic rebound in their states and bound to balance their own budgets are pressing anew for Washington to step up with more help, some say even if it means adding to the nation's red ink. Republicans and Democrats alike wrestled with how to capitalize on a fledgling rebound as they talked dollars and sense at their summer meeting just days into a new state budget year and as the economy shapes dozens of gubernatorial races across the country. "All states still are facing tough fiscal situations even though I do believe we're in recovery," said West Virginia Gov. Joe Manchin,  Gov. Jim Douglas, R-Vt., the outgoing chairman: "Governors have done what is necessary to get through this" — repeatedly cutting budgets, restructuring government, laying off workers and draining rainy day funds. But both men said states can't continue to climb out of the recession alone, and the NGA renewed its bipartisan appeal for Congress to pass stalled jobs legislation that includes billions of dollars in aid to states.

States Can't Count on Federal Bailout, Obama Appointees Say -  (Bloomberg) -- States can’t count on the federal government for more budget bailouts, the heads of President Barack Obama’s debt commission told governors yesterday.States that are expecting Congress to authorize more bailout money are “going to be left with a very large hole to fill,” said Erskine Bowles, co-chairman of the National Commission on Fiscal Responsibility and Reform. “I don’t think we can count on the federal government again,” “They just do not have the financial resources.” States including New York and California have urged Congress to extend stimulus spending authorized to combat the recession, including extra Medicaid funding and money to pay public school teachers. While the economy has been expanding, states have yet to recover from the longest recession since the Great Depression. The economic rout cut into tax collections and led them to raise taxes and slash spending on schools, social services and other expenses.

States Dodge Defaults as California May Cut Worker Pay - Illinois let $5 billion of bills go unpaid. Washington closed state offices. California may cut 200,000 workers’ pay to the minimum wage. Minnesota is delaying tax refunds for a second year.  As fiscal 2011 budgets took effect July 1, state and local governments coping with revenue declines from an economic slowdown are fulfilling legal obligations to balance their books by shaving costs and raising taxes to protect a key constituency: owners of $2.8 trillion of municipal bonds.  “States have taken all measures so far to make sure they keep capital markets open by honoring their debt payments,” States cut spending by $74 billion since 2008 and more than half raised taxes and fees in 2009, the National Association of State Budget Officers said. That’s as the worst economy since the 1930s sent May unemployment as high as 14 percent in Nevada

California judge denies Schwarzenegger's minimum wage order - Sacramento County Superior Court Judge Patrick Marlette today denied Gov. Arnold Schwarzenegger's request to immediately compel State Controller John Chiang to pay state employees minimum wage.  The denial means there will be a hearing on the issues on July 26, with a full hearing sometime in August, but Marlette's ruling is a boost for about 200,000 state workers, who were facing paychecks for $7.25 an hour for the July pay period. Chiang has said he would issue full pay unless the legal process went against him before July 22, the cutoff to send payroll to the check printer.

California's stimulus funding starts to run dry - Facing a dismal budget crisis last year, California relied on a federal lifeline of stimulus dollars. The cash infusion staved off the bleakest of cuts to Medi-Cal patients, welfare recipients and students. But that money is beginning to run dry, leaving California grappling with whether to replace it by raising taxes or institute the severe cuts the state avoided last year. The state already has exhausted some pots of stimulus money, such as one for higher education. Others will expire in the next year. The federal government last year authorized an $862 billion stimulus package that included $85 billion for California. The money accounted for about $8.7 billion of direct state budget relief in last year's plan to bridge a $60 billion deficit over 17 months

California Voters to Consider Legalizing and Taxing Marijuana - On November 2, California voters will consider Proposition 19, which would repeal state laws prohibiting the possession of up to one ounce of marijuana by individuals over the age of 21, the use of marijuana in a non-public place, growing of marijuana in a private space up to 25 square feet in size, the sale of marijuana by stores subject to local government hours and location regulations, and the transportation of marijuana within the state. The proposal would also permit the taxation of marijuana by state and local governments. A similar proposal from State Rep. Tom Ammiano (D) proposed a $50 per ounce excise tax on marijuana, that he estimated would bring in $1.3-$1.5 billion per year. A very recent Rand Corporation study estimated that the making marijuana legal would reduce its cost, since suppliers would no longer have to take the risks (and charge the risk-premiums) associated with operating in the black market. Rand, looking at comparable experience in the Netherlands and parts of Australia, estimated that the current price of $300-$450 per ounce could drop to around $38 per ounce. Rand figured tax revenues could be between $650 million and $1.49 billion. They also estimated reduced state expenses on enforcing marijuana laws of around $300 million.

Illinois paying for its big debt -  While Illinois continues its biggest borrowing spree in recent years, it is paying a steep premium for loans because of its failure to significantly address its financial crisis, observers say. In peddling another $900 million in Build America capital projects bonds on Wednesday, Illinois could face interest costs of about $9 million a year more than if the state were in better financial shape. The extra costs would total about $225 million over the life of the bonds. The annual hit may not seem like a huge sum compared with the state's $25 billion budget. But it's more than Gov. Pat Quinn's $8 million in cuts to the Department of Natural Resources, for example, or his $8 million in cuts for veterans programs.

Illinois Spent $650,000 on 950 "Putting America Back to Work" Signs -  The fiscally and morally bankrupt state of Illinois leads the way in taxpayer-sponsored paid political announcements for president Obama's American Reinvestment and Recovery Act "Please, Please, Please Elect Democrats" midterm campaign. I live in Illinois and the signs are everywhere I go. The most galling thing here is we are paving roads that are perfectly fine as is. Results vary. Some states spent nothing on signs. ABC News reports Some Call it Transparency, Others Another Example of Government Waste.As the midterm election season approaches, new road signs are popping up everywhere – millions of dollars worth of signs touting "The American Reinvestment and Recovery Act" and reminding passers-by that the program is "Putting America Back to Work." On the road leading to Dulles Airport outside Washington, DC there's a 10' x 11' road sign touting a runway improvement project funded by the federal stimulus. [The cost of the sign, $10,000]. ABC News has reached out to a number of states about spending on stimulus signs and learned the state of Illinois has spent $650,000 on about 950 signs and Pennsylvania has spent $157,000 on 70 signs.

Texas Budget Mess Now as Bad as California's - It’s come to this: The Texas budget outlook has become so bleak that we’re comparing rather favorably to the one state where balanced budgeting goes to die. People, our budget deficit is now as bad as California’s.  Yes, the over-spending, over-regulated capital of hippiedom now has a state fiscal outlook on par with the Lone Star State.That fact may not sit well with some people—especially in the governor’s office, which loves to bash California and never misses an opportunity to point out how Texas’ low-tax, business-friendly model has led to a more robust economy and sound state finances. When California faced a $60 billion deficit last year—a shortfall that was bigger than the entire budget of most states—you could almost hear the chortling from the Texas governor’s office. It seemed a handy example of what happens when you put big-spending liberals in charge.

Audit Shows Changes Needed for Colorado's Unemployment System -  State auditors say Colorado needs to overhaul the way it funds unemployment benefits if it wants to avoid repeated shortfalls. The unemployment insurance trust has borrowed roughly $188 million dollars from the federal government after becoming insolvent in January. Lawmakers held a hearing on the audit yesterday. Don Mares is the Executive Director of the Colorado Department of Labor and Employment:Mares says a number of factors make Colorado's unemployment fund vulnerable to running out of money at times, including low base rates that haven't changed since the late 1980s. Mares points out that Colorado is not the only state whose unemployment fund has become insolvent in the past year... "We're one of 33, 34 states that are borrowing. This is an issue for a lot of us in this country and how we're dealing with this kind of problem. So, we're not unique."

How much money does Missouri need to pay all of its obligations? - Each taxpayer across Missouri would need to shell out $5,000, compiling a total of $9.1 billion, to help the state pay all of its obligations, according to research by the Institute for Truth in Accounting. Even though Missouri cannot seek financial relief in a bankruptcy court, the state meets the definition of bankrupt — a lack of assets to pay its bills when they come due — reports the Chicago-based non-profit that promotes accurate and transparent accounting.Missouri had obligations of $14.1 billion as of June 30, 2009, but only $5 billion available to pay the bills when they come due, IFTA notes. The organization used the June 2009 data because it is the date of the latest financial report issued by Missouri. “The state is going further into debt and the public just doesn’t know about that debt,”

Comptroller: Budget contains 7.6 percent spending increase — Despite New York’s fiscal woes, the projected state budget increases spending 7.6 percent over the 2009-10 budget year, or $9.6 billion, according to a report released Thursday by state Comptroller Thomas DiNapoli. DiNapoli panned attempts by lawmakers and Gov. David Paterson to close a $9.2 billion deficit, saying they still may be leaving a $4.8 billion hole because of risky revenue projections. When adjusted for payments that were delayed from 2009-10, including more than $2 billion in education aid, projected spending will be $5.4 billion higher this year, a 4.2 percent increase and more than twice the rate of inflation, which is running about 2 percent, the report said

Video: ‘Detroit was the fastest-growing city in the world. And the fastest to dissapear’ - Spurred by a crisis in the auto industry, around a third of Detroit has fallen into ruin. Now community groups are taking over derelict lots for use as community gardens and small-holdings

Detroit gets growing | Environment | The Observer - Strolling around his inner-city Detroit neighbourhood, Mark Covington pauses to take in the view. The houses and shops that existed when he was a child are gone, replaced by empty lots, the buildings either burned down or demolished. In their place is wilderness. Tall grass, wild flowers and trees. "Just look at that," he says. "It could be a country road." Such views are increasingly common all over Detroit, the forlorn former capital of America's car industry and now a by-word for calamitous urban decline.  The shells of dilapidated factories look out over an urban landscape that has been likened to New Orleans after Hurricane Katrina – except Detroit's disaster was man-made and took decades to unfold. Now the seeds of a remarkable rebirth are being planted – literally. Across Detroit, land is being turned over to agriculture. Furrows are being tilled, soil fertilised and crops planted and harvested. Like in no other city in the world, urban farming has taken root in Detroit, not just as a hobby or a sideline but as part of a model for a wholesale revitalisation of a major city.

World's Largest Urban Farm Slated for Detroit - With over 30,000 acres of vacant land, it’s hard to drive down a Detroit street without seeing overgrown lots and abandoned, sometimes decomposing, buildings. Arson and crime are a continuing problem, and unemployment is at more than 25 percent, well over the nation’s average of about 10 percent.  Unlike in most big American cities where land is an asset, in Detroit it can be a liability. There are opportunities to buy a foreclosed house for as little as $1 in Detroit. A few years ago, Hantz decided it was time to invest in his city of 20 years. He hatched a plan to use $30 million of his own money to buy up a large quantity of Detroit’s cheap land and farm it for everything its worth—an unprecedented feat.

Roads to Ruin: Towns Rip Up the Pavement - WSJ - Paved roads, historical emblems of American achievement, are being torn up across rural America and replaced with gravel or other rough surfaces as counties struggle with tight budgets and dwindling state and federal revenue. State money for local roads was cut in many places amid budget shortfalls. In Michigan, at least 38 of the 83 counties have converted some asphalt roads to gravel in recent years. Last year, South Dakota turned at least 100 miles of asphalt road surfaces to gravel. Counties in Alabama and Pennsylvania have begun downgrading asphalt roads to cheaper chip-and-seal road, also known as "poor man's pavement." Some counties in Ohio are simply letting roads erode to gravel.

New Study: 23,808 Now Homeless In Iowa - A new study released by The Iowa Institute for Community Alliances shows the number of homeless in Iowa climbed 38.7 percent in just one year. The statistics mean that more than 23,000 Iowans have no place to call home. The study shows 14,000 of the homeless are families. Researchers said even they were shocked by the new numbers. They said they are struggling to understand the dramatic change in the numbers. Visit an area Des Moines homeless shelter and you will see the problem right before your eyes. "Got laid off from a job in Omaha," said Jeff Peterson, a homeless man. "Every night every bed is taken."

NYC Man Fined $2,000 For Taking Discarded Garbage -"As far as I knew it was a piece of garbage sitting on the curb," Paul Lawrence said.  But what Lawrence didn't know when he decided to pick up a discarded air conditioner sitting on the sidewalk in Middle Village, Queens is that once trash hits the curb, it's technically city property. And he was breaking the law. "There was a lady here. I asked the lady can I take the air conditioner. She said go ahead take it. It's garbage," Lawrence said.  But not only was he fined $2,000 by a sanitation officer who watched him do it, the car he was driving was impounded.  And its owner -- Lawrence's Aunt, 73-year-old Margaret Colavita, was also slapped with a $2,000 fine.  "I said what is this and she said well we have to serve you with this. You're the owner of the car and it says I gave him permission," Colavita said.

Lunch and schools - Tom Colicchio comments on HR5504 - Improving nutrition for America's Children using a personal example to illustrate his point that obesity can be symptom of poverty. More recently, my wife started mentoring a young girl from Brooklyn and she would come to the house and she would eat and then she’d say “Oh, I’m full. Can I bring this home?” And we realized what she was doing; she was bringing it home for her siblings.When food stamps run out halfway through the month, these kids are hungry. And they’re fed sweetened juice water, just to put something in their stomach; it’s not nice. …We had a Major General who testified that forty percent of new recruits going into the service fail out because they’re obese. It’s not from overfeeding. This is what people don’t understand: obesity is a symptom of poverty. It’s not a lifestyle choice where people are just eating and not exercising. It’s because kids – and this is the problem with school lunch right now – are getting sugar, fat, empty calories – lots of calories – but no nutrition.…And they’re hungry, they’re eating more cheap food.

School matters (and so does school spending) - The Harlem Children’s Zone is an organization bent on addressing all the problems of poor families in its Manhattan catchment area.  The project involves many government and nonprofit programs and services that aim to improve the environment for disadvantaged kids outside of school. Established in 1997, it also includes a network of charter schools called, collectively, Promise Academy. Doctoral candidate Will Dobbie and economist Roland G. Fryer Jr., both of Harvard, recently published a careful study of the Zone’s  impact on student achievement. They’ve shown that high quality schools—with or without community investments in health, parenting, and early childhood program—boost student achievement, while community investments without high quality schooling have little effect. They’ve shown, to oversimplify, that schools matter.

Many campuses shortening calendar because of state budget crisis - Despite findings by education experts that increased classroom time helps improve student performance, Los Angeles Unified and more than a dozen other districts in California are shortening the school year because of the ongoing budget crisis.  A survey of the state's 30 largest school districts found that 16 plan to reduce the number of days in the upcoming academic year. The change will affect an estimated 1.4 million students, roughly half of them enrolled in LAUSD. A little more than a decade ago, California increased the number of instructional days to 180, bringing the calendar on par with most other states. Two years ago - with the state's economy plummeting - districts were allowed to reduce their calendar to 175 days, although few exercised the option

Survey: Teachers Retirement System Underfunded  (AP) -- A survey that examined the Oklahoma Teachers Retirement System says its pension fund is among the most underfunded of its type in the nation. The Public Fund Survey, using information from the 2008 fiscal year, ranked the state's teachers retirement system as having the fourth-lowest funding ratio among the 126 state pension plans it reviewed. At the time of the review, the system had a funding ratio of 50.5 percent. As of June 30 of this year, the pension fund had about $8.3 billion. During the last fiscal year, it was funded to 49.8 percent. Experts prefer that ratio to be about 80 percent.

With end of stimulus, tough times ahead for public colleges  — Most state governments depend on federal stimulus money to keep public colleges and universities afloat, a new report says. But these funds may be drying up as the new fiscal year begins. Thirty-nine states used stimulus money to support higher education in the past year, compared to only 14 states the year before, according to the report by the National Conference of State Legislatures. To receive federal funds, states were required to keep higher education funding at or above 2006 levels. As a result, public funding for higher education increased an average 2.3% last year. Without stimulus money, it would have fallen 2.5%, according to the report. Public funding for colleges and universities still fell in 23 states, despite the overall increase. Hawaii made the most drastic cuts, at 26%, and Michigan and Louisiana each reported reductions of over 5%.

Many More Students Are Defaulting Than Official Tallies Show…The share of borrowers who default on their student loans is bigger than the federal government's short-term data suggest, with thousands more facing damaged credit histories and millions more tax dollars being lost in the long run. According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions. They also show that the government's official "cohort-default rate," which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse.

Tuition increases in response to lower state funding - A public university education in North Carolina just got considerably more expensive. UNC system President Erskine Bowles said Tuesday he has approved tuition increases for the coming academic year, an attempt to mitigate budget cuts recently imposed by the General Assembly. For example, students at UNC Chapel Hill and N.C. State University will pay $750 more in tuition in 2010-11. At UNC Charlotte, students will pay an extra $425, and at Appalachian State University, $468.

The Case For And Against College - An article in the Chronicle of Higher Education that was forwarded to me (and which requires a subscription, so I won't link it) prompted me to finally complete this Ticker, which I've been working on for a while. The question that is facing a bunch of 18 and 19 year olds right now, and will be facing 17 and 18 year olds coming into their Senior Year, is, quite simply: Where do I go to college? Let's back up and change the question, because frankly, put as stated up above, the answer might be "nowhere!" Let's first run some numbers so as to put in perspective exactly what the choice to go on to a post-secondary education costs you.

The economics of a college degree - BusinessWeek has a big feature on the value of a college degree, and naturally has presented it in the format of a ranking. College rankings are profoundly silly things, and this one is no exception; it purports to calculate the extra amount of money that graduates of certain universities earn, compared to the amount that they would earn if they hadn’t gone to college, thereby coming up with some kind of dollar figure for value-for-money. It then ranks “30-year net return on investment”, which ranges from $1.69 million at MIT to just $998 at Black Hills State University in Spearfish, South Dakota. There’s a lot to dislike here, and the BW story twists itself into knots listing one disclaimer after another. For one thing, the survey doesn’t look at how much people actually spend on college tuition: it just looks at the headline rack rates, failing to take into account any kind of grants or student aid. It also uses a 30-year-long dataset, which includes a lot of years when women were chronically underpaid. That penalizes women’s colleges.

City scrambles to cut pension bloat - The Bloomberg administration is reviewing the city's costly pension system to determine if there's a way to rein in exploding payouts unilaterally or whether "legal changes" are necessary, officials disclosed yesterday.  "We are starting to focus on all our expenses; clearly pensions are right near the top," Mayor Bloomberg said after being asked at a City Hall press conference if the Fire Department Pension Fund needs to more closely scrutinize the disability pensions granted to three-quarters of retiring firefighters.  The Post reported last week that FDNY Lt. John McLaughlin retired in November 2001 with a three-quarters disability pension worth $86,000 a year and is now regularly competing in marathons and triathlons.

Bankruptcy judge expresses concerns about Prichard's ability to 'stay afloat' - MOBILE, Ala. -- Agreeing that Prichard's pension system is a "classic pyramid scheme," the judge presiding over city's bankruptcy expressed worries today about whether it can pay its bills if it makes even the meager payments to retirees that it has proposed.  "I'm concerned, based on what you've given me, whether the city is even going to able to stay afloat," U.S. Bankruptcy Judge William Shulman told Prichard bankruptcy attorney Scott Williams.  What to do about Prichard's troubled pension fund has been the major issue in the city's second bankruptcy case in a decade and again dominated proceedings at today's hearing. To the rage of retired city employees, Prichard has proposed dividing $190,000 among 150-some retirees on a pro rata basis and then making monthly payments of no more than $200 for 10 years. Williams, said the pension plan was unsustainable from the start and that the city simply has no ability to meet its obligations.

Kentucky Retirees May Soon Outnumber Pension Contributors - Just four years ago, there were 51,027 state workers contributing toward the pension fund and 34,120 retirees drawing benefits from it. By 2009, the number of workers slipped to 50,394 while the number of retirees leapt 19 percent to 40,531. (In a separate fund for Kentucky State Police workers, there already are 239 more retirees getting pensions than active troopers on duty. County governments, served by a third fund, had 93,481 workers and 45,564 retirees.) At the same time, benefits got a little richer for workers who left under the "incentive windows" the legislature created in recent years to encourage retirement and reduce the payroll. One such incentive let workers base their pensions on their best three years of salaries rather than their best five years. These incentives cause headaches at the Kentucky Retirement Systems because they send droves of workers for the exit years earlier than expected, Burnside said. That produces more people taking money from the funds, fewer people giving money and less money to invest for gains, he said.

Funding Status of U.S. Pensions Falls to 74.0 Percent in June, According to BNY Mellon Asset Management -A combination of U.S. stock market declines and lower interest rates in June resulted in the lowest-funded status for the typical U.S. corporate pension plan since February 2009, according to monthly statistics published by BNY Mellon Asset Management.   The funded status in June declined 6.0 percentage points to 74.0 percent.  Through the end of June, the funded status of the typical U.S. corporate plan is down 9.5 percentage points for the year.  The falling stock markets resulted in a decline of 2.3 percent in assets at the typical U.S. corporate plan, while liabilities sharply increased in June, rising 5.6 percent, as reported by the BNY Mellon Pension Summary Report for June 2010.  Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Lower yields on these bonds result in higher liabilities.

Deficits in US pension plans approach record high - The deficit in pension plans sponsored by S&P1500 companies reached $451 billion at the end of June, just $1 billion short of the previous record high set in mid-January 2009, according to new figures from Mercer . "Mercer’s figures also show that the increase in the deficit of $115 billion during June, caused by concurrently falling interest rates and equity values, was the third largest increase of the past decade .  The end of June deficit corresponds to a funded status of 73% compared to 78% at the end of May. The 2009 year-end deficit was $247 billion, corresponding to a funded status of 84

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.

Intergenerational Real Benefits in Social Security (Rosser Equation Illustrated) - In 2003 CBO published an Issue Brief illustrating the relative contribution of Aging and Real Benefit Growth to future Social Security spending called The Future Growth of Social Security: It’s Not Just Society’s Aging with results graphed above:. Discussion under the fold. Approximately 55 percent of the higher spending is due to an expected increase in the number of beneficiaries, as the number of new claimants grows and as life expectancy rises. The Social Security trustees estimate that the population age 65 or older will increase from 37 million today to 75 million in 2035 and to 95 million in 2075.  Life expectancy for people currently age 65 is estimated to be 83 years. In 2035, it is estimated to be 85 years, and in 2075, 87 years.  The remaining 45 percent of the rise in spending is due to a projected increase in the real value of Social Security benefit checks. Under the trustees’ assumptions, the purchasing power of the average earner’s benefits at retirement is expected to nearly double between now and 2075.Source: Congressional Budget Office.

Miami Herald Invents a “Consensus Among Economists” to Push Social Security Cuts - The Miami Herald took first place in the contest to have the most inaccurate article on Social Security when it printed without challenge an assertion that: "For awhile, there's been a consensus among economists that raising the retirement age makes a lot of sense." This is obviously not true, since there is no shortage of economists who do not agree with this view and it is quite possible that a majority of economists do not agree with this position. Any reporter who had researched this topic at all would know that the assertion is not true and would not present it to readers as being true.  Instead the article presented almost exclusively the views of people calling for cuts in Social Security. Remarkably, the article included no discussion at all of the likely financial situation of the retirees who would see their benefits cuts as a result of an increase in the retirement age. These workers have seen most of their savings wiped out by the collapse of the housing bubble and the plunge in the stock market. No "adult discussion" [a term used in the article] of Social Security can occurr with assessing the situation of the people who would be affected by proposed benefit cuts.

Raising the Social Security Retirement Age - If Social Security reform is political dynamite, the battle over whether to raise the retirement age may be the fuse. I got a hint of the passion behind this issue at an Urban Institute panel I moderated yesterday on Capitol Hill. In recent weeks, both Steny Hoyer (D-MD), who is the number #2 House Democrat, and John Boehner (R-OH), the top House Republican, have put the idea on the table. Ah, you say, there is finally bipartisan support for something in Washington. Not so fast. Both are far out on a legislative limb with little public support from fellow lawmakers.   To review the bidding, for those retiring today the eligibility age for full benefits is 66 (slowly rising to 67 for future pensioners). Today’s retirees also may receive partial benefits at 62. Most economists who specialize in retirement issues would increase both eligibility ages.

The Attack of the Real Black Helicopter Gang: The IMF Is Coming for Your Social Security - Last week, the IMF told the United States that it needs to start getting its budget deficit down. It put cutting Social Security at the top of the steps that the country should take to achieve deficit reduction. This one is more than a bit outrageous for two reasons. First, the IMF deserves a substantial share of the blame for the economic crisis that gave us big deficits in the first place. The IMF is supposed to oversee the operations of the international financial system. According to standard economic theory, capital is supposed to flow from rich countries like the United States to poor countries to finance their development.However, the IMF messed up its management of financial crises so badly in the last 15 years that poor countries decided that they had to accumulate huge amounts of currency reserves in order to avoid ever being forced to deal with the IMF. This meant that capital was flowing in huge amounts in the wrong direction.

State Medicaid Programs Could Be $850M in Red - A potential revenue shortfall in Wisconsin’s Medicaid programs has grown to as much as $850 million.Health Services Secretary Karen Timberlake discussed the growing deficit Wednesday with the Legislature’s Joint Audit Committee. The panel ordered a state audit of Medicaid’s Family Care program, designed to keep the elderly and disabled in their own homes instead of nursing homes. It’s supposed to cost about $1 billion a year, but Republicans say those costs are running out of control as the program expands. It’s in 55 counties now, and it’s scheduled to be in all 72 counties by 2013.

Doctors Threaten to Pull Out of Texas Medicaid - Cuts to the reimbursements given to doctors who treat patients covered by the state's low-income health care program are raising fears that already declining physician participation will fall even further, according to a published report. The health care and insurance industries fear that a 1 percent cut in Medicaid fees scheduled to take effect Sept. 1 will be the first in a series of cuts as state agencies are asked to trim their two-year budgets by 10 percent to help cover an expected $18 billion revenue shortfall, The Dallas Morning News reported Sunday. About 3.3 million poor and disabled Texans depend on Medicaid for health care, but less than a third of the state's 48,700 practicing doctors accept patients covered by the federal program, according to Texas Health and Human Services Commission. And some doctors who do participate in the program limit the number and kind of patients they accept.

NJ towns to see 11.7 percent health insurance cost increase - Many New Jersey municipalities will likely pay 12 percent more for their employees' health insurance next year, an increase that's lower than last year and outside the new 2 percent cap on property tax increases. That means towns could raise property taxes above the 2 percent cap to cover the costs of the rate increases, without asking voters, because health insurance costs are one of several exceptions to the cap.  “It absolutely is possible,” said William Dressel, executive director of the New Jersey League of Municipalities. “This is a property tax driver. This is a poster child example of why an artificial spending limitation is not ... sensitive to the fiscal realities of the day.”

Mass. cities, towns want more health care control - Facing declining state aid and local tax revenues, municipal officials are clamoring for a new tool to cut costs: the ability to unilaterally change the health care plans they provide to employees, elected officials and retirees.Municipalities are pitching the idea as a way to reduce police, firefighter and teacher layoffs. Cities and towns could save $100 million in one year — and $2.5 billion in a decade — if they were allowed to adjust premiums and co-payments without union approval, said Geoffrey Beckwith, executive director of the Massachusetts Municipal Association.State officials already enjoy the power to raise health-plan premiums shares and co-payments. Cities and towns, which currently have to negotiate with each union to do so, are asking the state Legislature to pass a bill that would give them similar power. The unions say changes should be made only through negotiation

HEALTH CARE: Bureaucrats Gone Insane - Obama wants health care provider to invest in electronic medical records networked in electronic health records systems. President Obama put funds in the the stimulus bill to subsidize providers' large capital outlays. President Obama wanted "meaningful" EHR utilization, and only providers meeting the "meaningful use" definition will receive subsidies. Today the feds published the final "meaningful use" rules - all 864 pages. Tomorrow I write a piece for a national audience telling most of them to forget the program, and wait-and-see what develops next. This does not portend well for the rest of the health care program.

Obama’s Health Care Bill Is Enough to Make You Sick - A close reading of the new health care legislation, which will conveniently take effect in 2014 after the next presidential election, is deeply depressing. The legislation not only mocks the lofty promises made by President Barack Obama, exposing most as lies, but sadly reconfirms that our nation is hostage to unchecked corporate greed and abuse. The simple truth, that single-payer nonprofit health care for all Americans would dramatically reduce costs and save lives, that the for-profit health care system is the problem and must be destroyed, is censored out of the public debate by a media that relies on these corporations as major advertisers and sponsors, as well as a morally bankrupt Democratic Party that is as bought off by corporations as the Republicans.

Size Matters - Maxine Udall - Now that you understand small sailboats, I want you to read Mariah Blake's Washington Monthly article, Dirty Medicine. I want you to think about how large firms and large group purchasing organizations are blocking the financial "wind" that powers small start ups, innovation, and new jobs creation. I want you to think about all the "destructive destruction" that is occurring because small innovators and entrepreneurs are being hard hit by an economy-wide downturn and by larger firms blocking their "wind." And don't imagine that health is the only sector where wind is being blocked. It isn't just the small sailboats that are losing the race. We are all losing. Sensible, effective regulation of markets dominated by large sailboats, empowered by an informed electorate in a country with a government of, by and for the people, is the obvious next step if the necessary destruction engendered by a capitalist economy characterized by competitive commercial enterprise is to remain creative and a benefit to us all.

Dying Is Expensive - In case there were any doubts, a new study finds that dying is very expensive.The paper, by Samuel Marshall, Kathleen M. McGarry and Jonathan S. Skinner, looks at how much people spend on out-of-pocket health care costs in the last year of their lives. This last year of care is generally expected to be quite expensive (it is, after all, the year when people are so ill that they’re on the verge of death).The study estimated that out-of-pocket health care spending in the last year of life amounts to $11,618 on average, with the 90th percentile equal to $29,335, the 95th percentile $49,907, and the 99th equal to $94,310.Yes, you read that correctly: Health care spending in the last year of life by the top 1 percent of Americans is nearly twice the annual income of the typical American household.Spending in the last year of life varies by age of death, too. Here’s a look at total out-of-pocket expenditures by both wealth quintile and age at death:

The Health Care Delivery System: A Blueprint for Reform (124pp PDF)

Should you be allowed to know what's in your DNA? - “You can’t handle the truth!” That’s the federal government’s latest message to Americans seeking to learn the content of their own DNA. Recent advances in biotechnology have allowed private companies to offer affordable genetic testing directly to consumers, to help them determine their risks of developing problems such as diabetes, heart disease, and various forms of cancer. In response, the U.S. government has told these companies that their tests must be approved by FDA regulators before they can be sold because, in the government’s words, “consumers may make medical decisions in reliance on this information.” These restrictions thus represent a new level of government paternalism over the citizenry. In the name of “protecting” us, the government seeks to prevent willing consumers from learning medically useful information about their own bodies that could tell them which diseases they may develop — and help them make important treatment, prevention, and lifestyle decisions

Autism And Wealth - In general, it's sad but true that poor people suffer more diseases. Within a given country almost all physical and mental illnesses are more common amongst the poor, although this isn't always true between countries. So if a certain disease is more common in rich people within a country, that's big news because it suggests that something unusual is going on. Autism spectrum disorders (ASDs) have long been known to show this pattern, at least in some countries, but this has often been thought to be a product of diagnostic ascertainment bias. Maybe richer and better-educated parents are more likely to have access to services that can diagnose autism. This is a serious issue because autism often goes undiagnosed and diagnosis is rarely clear-cut. An important new PLoS paper from Wisconsin's Durkin et al suggests that, while ascertainment bias does happen, it doesn't explain the whole effect in the USA: richer American families really do have more autism than poorer ones. The authors made use of the ADDM Network which covers about 550,000 8 year old children from several sites across the USA.

West Nile Virus Found In New York City - The Health Department monitoring for disease-carrying mosquitoes in New York City has confirmed that the pesky little insects have tested positive for the dangerous virus in all the districts except Manhattan.This is the first reported activity of the virus in the city for the 2010 season.  Though no human cases have surfaced so far, health officials warn that more infected mosquitoes means a greater potential for the virus to spread to humans.

West Nile Virus Case Confirmed In East Baton Rouge Parish - State health officials have announced Louisiana's first West Nile virus case of 2010, with tests confirming that an East Baton Rouge Parish resident has the least serious form of the potentially deadly condition, despite displaying no symptoms. The Department of Health and Hospitals used the to warn Louisiana residents to elminate standing water where possible and take precautions to avoid mosquito bites, the manner in which humans contract the virus.

More than 1,000 exposed to dengue in Florida (Reuters) - Five percent of the population of Key West, Florida -- more than 1,000 people -- have been infected at some point with the dengue virus, government researchers reported on Tuesday. Most probably did not even know it, but the findings show the sometimes deadly infection is making its way north into the United States, the researchers said. "We're concerned that if dengue gains a foothold in Key West, it will travel to other southern cities where the mosquito that transmits dengue is present, like Miami," said Harold Margolis, chief of the dengue branch at the U.S. Centers for Disease Control and Prevention. "These cases represent the reemergence of dengue fever in Florida and elsewhere in the United States after 75 years," Margolis said in a statement.

Raids are increasing on farms and private food-supply clubs—here are 5 tips for surviving one - When the 20 agents arrived bearing a search warrant at her Ventura County farmhouse door at 7 a.m. on a Wednesday a couple weeks back, Sharon Palmer didn't know what to say. This was the third time she was being raided in 18 months, and she had thought she was on her way to resolving the problem over labeling of her goat cheese that prompted the other two raids. (In addition to producing goat's milk, she raises cattle, pigs, and chickens, and makes the meat available via a CSA.) But her 12-year-old daughter, Jasmine, wasn't the least bit tongue-tied. "She started back-talking to them," recalls Palmer. "She said, 'If you take my computer again, I can't do my homework.' This would be the third computer we will have lost. I still haven't gotten the computers back that they took in the previous two raids."

Who really benefits from agricultural subsidies? - I've mentioned this paper by Barrett Kirwan before on this blog.  Here's the title and abstract: The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates - Who benefits from agricultural subsidies is an open question. Economic theory predicts that the entire subsidy incidence should be on the farmland owners. Using a complementary set of policy quasi experiments, I find that farmers who rent the land they cultivate capture 75 percent of the subsidy, leaving just 25 percent for landowners. This finding contradicts the prediction from neoclassical models. The standard prediction may not hold because of less than perfect competition in the farmland rental market; the share captured by landowners increases with local measures of competitiveness in the farmland rental market.

Who benefits from ethanol subsidies - Well, of course, Iowa does. But so does Texas. National Journal has an interesting piece on the ethanol tax credit, which is due to expire at the end of this year. While the 45-cents-per-gallon credit acts as an incentive to blend ethanol, it is claimed by the fuel suppliers that blend it. That means it's a tax deduction for Exxon Mobil, Tesoro, Valero and other Texas-based refiners. National Journal estimates the credit could be worth up to $600 million a year to BP, the villain of the Gulf. National Journal quotes EIA data saying that Valero, ConocoPhillips, and Exxon blend even more ethanol than BP does.

The Problem with Biofuels - Some people who oppose Pigovian taxes, such as a gasoline tax, say we should reduce our gasoline consumption by subsidizing substitutes, such as biofuels.  A new CBO report estimates how expensive that is: The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol and $3.00 for cellulosic ethanol.Given the magnitude of that number, isn't it far better to tax gasoline and reduce income taxes than to subsidize biofuel, which in turn requires increasing taxes to pay for it?

Global population study launched by Royal Society -The UK's Royal Society is launching a major study into human population growth and how it may affect social and economic development in coming decades.The world's population has risen from two billion in 1930 to 6.8 billion now, with nine billion projected by 2050.The burgeoning human population is acknowledged as one of the underlying causes of environmental issues such as climate change, deforestation, depletion of water resources and loss of biodiversity.The working group includes experts on the environment, agriculture, economics, law and theology drawn from a mix of rich and poor countries including the UK, China, Brazil and the US.

Grow Green Jobs - Not enough jobs and too much heat; sagging payrolls and global warming.Why not address both problems with a major public program to directly put people to work saving energy? Plenty of green-job advocates have offered practical details, including my University of Massachusetts colleague, Robert Pollin. Yet no one in Congress or the White House seems willing to plant this garden.I’m trying to figure out why green job-creation proposals have gotten stuck in the mud. Maybe environmentalists as a group are viewed with suspicion because they make us all feel guilty. Certainly, we’ve seen a conservative backlash against promotion of green jobs, linked to skepticism about the threat of  global warming. Maybe expectations were set too high. Hopes that new tax credits in the American Recovery and Reinvestment Act would lead to a burgeoning of manufacturing jobs in renewable energy were dashed by disclosures that most new industrial capacity in these emerging technologies is now situated outside the United States — much of it in China.

Greener Pastures A quarter of the land area of Earth is turning into desert. Three quarters of the planet’s savannas and grasslands are degrading. And because the main activity on rangelands is grazing livestock, on which 70 percent of the world’s poorest people depend, grassland deterioration therefore causes widespread poverty. Enormous research efforts have been made to understand and reverse desertification, but until recently, and with one remarkable exception, to no avail. That exception, Operation Hope, has transformed 6,500 acres of of parched and degraded grasslands in Zimbabwe into lush pastures replete with ponds and flowing streams - even during periods of drought. Surprisingly, this was accomplished through a dramatic increase in the number of herd animals on the land. Behind Operation Hope is an approach called “holistic management,” which they apply to rangeland practice. Developed over the past 50 years by Operation Hope founder Allan Savory, a former wildlife biologist, farmer, and politician, it challenges the dominant theory that desertification is caused by overgrazing.

Wind Farms: Are All the Best Spots Taken? - The wind sector is suffering from its own success. In the last decade the industry has expanded from a handful of wind farm developers to a plethora. These companies have left hardly a stone unturned – or rather a breeze unmeasured – in their quest for prime, onshore wind power sites. As a result, it is no longer easy to find large pieces of land in advanced markets with all the right ingredients for a wind project: strong and steady winds, a welcoming community and easy access to transmission. Developers find themselves jostling for position, with four of five companies sometimes vying for the same sweet spot.'When I talk to developers, this is their biggest issue of concern at the moment. The best spots are taken', said Joanne Howard, vice consul (Energy) at UK Trade & Investment with the British Consulate-General in Houston, Texas.With the prime wind sites gone – or disappearing quickly – where does the wind industry go from here?

The End of Cap and Trade? - No, not for carbon. For sulfur dioxide. As noted by Mark Peters at the Wall Street Journal:The original U.S. cap-and-trade market, which succeeded in slashing the power-plant emissions that cause acid rain, is in disarray following the issuance of new federal pollution rules.The collapse in the pioneering market where power producers trade permits that allow them to emit sulfur dioxide and other pollutants that cause acid rain comes as policy makers seek to establish a similar market to curb the emissions of carbon, a cause of climate change.The SO2 market has been one of the great successes of economic engineering, using market forces to drive down the cost of cleaning the environment. After almost twenty years of trading, however, the market ran into what may be an insurmountable hurdle: increased regulatory concern about the location of SO2 emissions.

CO2 Is Green - More CO2 Results in a Greener Earth - CO2 is Green is a pending 501(C)(4) non-profit organization. Our mission is to support scientifically and economically sound public policy on environmental issues. Currently, we are especially concerned with federal proposals that would interfere with nature's dependence on carbon dioxide (C02).CO2 is not a pollutant. CO2 makes Earth green because it supports all plant life. It is Earth's greatest airborne fertilizer. Even man-made CO2 contributes to plant growth that in turn sustains humanity and ecosystems. CO2 Is Green is working to insure that all federal laws or regulations are founded upon science and not politics or scientific myths. No one wants the plant and animal kingdoms, including humanity, to be harmed if atmospheric CO2 is reduced. The current dialog in Washington needs to reflect these inalterable facts of nature. We cannot afford to make mistakes that would actually harm both the plant and animal kingdoms.

Carbon Emissions Threaten Fish Populations - Baby fish may become easy meat for predators as the world's oceans become more acidic due to CO2 fallout from human activity, an international team of researchers has discovered. In a series of experiments reported in a recent issue of the Proceedings of the National Academy of Science (PNAS), the team found that as carbon levels rise and ocean water acidifies, the behaviour of baby fish changes dramatically -- in ways that decrease their chances of survival by 50 to 80 per cent. "As CO2 increases in the atmosphere and dissolves into the oceans, the water becomes slightly more acidic. Eventually this reaches a point where it significantly changes the sense of smell and behaviour of larval fish," says team leader Professor Philip Munday of the Australian Research Council's Centre of Excellence for Coral Reef Studies

NOAA: June, April to June 2010, and Year-to-Date Global Temperatures are Warmest on Record - Last month’s combined global land and ocean surface temperature made it the warmest June on record and the warmest on record averaged for any April-June and January-June periods, according to NOAA. Worldwide average land surface temperature was the warmest on record for June and the April-June period, and the second warmest on record for the year-to-date (January-June) period, behind 2007. The monthly analysis from NOAA’s National Climatic Data Center, which is based on records going back to 1880, is part of the suite of climate services NOAA provides government, business and community leaders so they can make informed decisions. High resolution (Credit: NOAA)

NASA: First half of 2010 breaks the thermometer — despite “recent minimum of solar irradiance” - Following fast on the heels of the hottest Jan-May — and spring — in the temperature record, it’s also the hottest Jan-June on record in the NASA dataset [click on figure to enlarge]. It’s all the more powerful evidence of human-caused warming “because it occurs when the recent minimum of solar irradiance is having its maximum cooling effect,” as a recent NASA paper notes. Software engineer Timothy Chase put together a spreadsheet using the data from NASA’s Goddard Institute for Space Studies (click here).  In NASA’s dataset, the 12-month running average temperature record was actually just barely set in March — and then easily set in April and topped out in May. It still seems likely that 2010 will be the hottest year on record, but NOAA now predicts that “La Niña conditions are likely to develop during July – August 2010.”  If the La Niña comes fast and deep (as in 1998 and 2007), that could make it a close call in the NASA dataset

Everest photos ‘confirm ice loss’ -  Photos taken by a mountaineer on Everest from the same spot where similar pictures were taken in 1921 have revealed an "alarming" ice loss. The Asia Society (AS) arranged for the pictures to be taken in exactly the same place where British climber George Mallory took photos in 1921.  "The photographs reveal a startling truth: the ice of the Himalaya is disappearing," an AS statement said. "They reveal an alarming loss in ice mass over an 89-year period."The photos taken by Mallory from the north face of Everest reveal a powerful, white, S-shaped sweep of ice.Images taken from the same spot in 2010 by mountaineer David Breashears show that the main Rongbuk Glacier is shrunken and withered.

Himalayan Glaciers Melting Faster Than Anywhere Else in World; Impact Could Devastate Over 1 Billion People - We look at the impact of climate change in the Himalayas region in Asia, where scientists are warning glaciers are receding faster than anywhere else in the world, with the potential to devastate over a billion people. The Himalayan glaciers have been described as the water towers of Asias as they provide a key source of water to ten major Asian river systems. We speak to the prominent Indian scientist and glaciologist Syed Iqbal Hasnain

Soaring Arctic temperatures – a warning from history - With carbon dioxide levels close to our own, the Arctic of the Pliocene epoch may have warmed much more than previously thought – and the modern Arctic could go the same way. Ashley Ballantyne at the University of Colorado, Boulder, and colleagues analysed 4-million-year-old Pliocene peat samples from Ellesmere Island in the Arctic archipelago to find out what the climate was like when the peat formed. At that time, CO2 levels are thought to have been close to current levels – around 390 parts per million – but global temperatures were around 2 to 3 °C warmer than today. It was the last warm period before the onset of the Pleistocene glaciation, and is used by climate researchers as a model for our future climate.

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).Many oceanographic surveys have already discovered plumes of methane rising from the ocean floor, particularly in the Arctic, Elliott notes. The climate warming expected in coming decades will likely extend even into the deep sea, melting or destabilizing hydrates and releasing their trapped methane, he explains. Some scientists estimate that increased temperatures across some swaths of ocean floor between 300 and 600 meters deep — where methane hydrates are now stable but may not be in the future — could eventually release as much as 16,000 metric tons of methane each year.

Scientists Quantify Global Warming Health Threat - Scientific American -Extreme weather induced by climate change has dire public health consequences, as heat waves threaten the vulnerable, storm runoff overwhelms city sewage systems and hotter summer days bake more pollution into asthma-inducing smog, scientists say. The United States – to say nothing of the developed world – is unprepared for such conditions predicted by myriad climate models and already being seen today, warn climate researchers and public health officials. "Climate change as it's projected will impact almost every aspect of public health, both in the developed world and – more importantly – in the developing world," said Michael McGeehin, director of the Environmental Hazards and Health Effects division at the Centers for Disease Control and Prevention.

Through 2007 Energy Spending Rose 79%, but Use Increased Just 2.6% - Americans drove more and used more energy in 2007, and increased spending to pay for it. Energy expenditures nearly doubled between 2000 and 2007 to $4,093 per capita, up from $2,449, the U.S. Census Bureau said last week. Total energy consumption increased 2.6% over the same period, while total energy expenditures jumped 79% to more than $1.2 trillion. Average per-person energy expenditures in 2007 ranged from $3,179 in Arizona to $9,191 in Alaska. These changes are seen during the energy crisis of the last decade, as crude oil prices rose through the early and mid-2000s, peaking in 2008. But following the numbers available in the latest energy census report, prices tumbled by the end of 2008 as demand shrank with the onset of the recession. Selected source natural gas expenditures in 2007 were nearly $196.5 billion and retail electricity totaled $340.9 billion. Selected source motor gasoline expenditures topped $388.5 billion, and end-use sector transportation expenditures were more than $584.5 billion.

CBO: American Power Act will cut deficit by $19 billion By 2020 - This while creating jobs, cutting oil dependence, and slashing pollution - CAP’s Dan Weiss explained the ‘energy-only bill’ mirage: Why an energy bill could fail without pollution reduction measures or revenue.  Now, according to the Congressional Budget Office’s (CBO) recent analysis of the American Power Act, released July 7th, we know the APA would not only cut carbon emissions, but also the nation’s budget deficit: $19 billion by 2020.   If enacted, the APA, the comprehensive clean energy and climate bill co-sponsored by Senators John Kerry (D-MA) and Joe Lieberman (I-CT), would: Increase revenues by about $751 billion over the 2011-2020 period and direct spending by $732 billion over that 10-year period.  In total, CBO and JCT estimate that enacting the legislation would reduce future deficits by about $19 billion over the 2011-2020 period.

Climate Bill Would Reduce U.S. GDP by $452 Billion, Energy Department Says - Proposed Senate legislation to limit greenhouse gases from power plants, refineries and factories would cut U.S. gross domestic product by $452 billion, or 0.2 percent, between 2013 and 2035, the Energy Information Administration said today. A cap-and-trade program for greenhouse gases “increases the cost of using energy, which cuts real economic output, reduces purchasing power, and lowers aggregate demand for goods and services,” the agency said in a report on legislation released May 12 by Senators John Kerry and Joseph Lieberman. The legislation, which aims to cut the greenhouse gases scientists have linked to global warming 17 percent from the 2005 level by 2020, would cost the average household $206 a year, the EIA said in the report.

The New Economics of Climate Change - In the past, economists who worked on climate usually were interested in balancing the costs against the benefits. The economic debate centered on issues such as how to measure the macroeconomic impact of cap-and-trade or carbon taxes, how large is the potential for energy savings that would be profitable even without accounting for their environmental benefits, and measuring the effects of climate change on agriculture, recreational opportunities, land values, health care expenditures, electricity demand, and other specific sectors of the economy.  The scientists who study climate change have always been aware of the possibility that climate change might set off discontinuous or catastrophic changes in earth systems.  Collapse of the Antarctic or Greenland ice sheets, shutdown of the Atlantic ocean current that brings warm water to European latitudes, and the nightmare scenario of higher temperatures triggering massive release of the methane trapped in offshore seabed clathrates all are low probability events, but those probabilities are not zero.  A global temperature increase of 2º C or more might very well bring us closer to the tipping points that would make these or other irreversible catastrophes much more likely.

Mountaintop removal - Federal officials are considering whether to veto mountaintop mining above a little Appalachian valley called Pigeonroost Hollow, a step that could be a turning point for one of the country’s most contentious environmental disputes. The Army Corps of Engineers approved a permit in 2007 to blast 400 feet off the hilltops here to expose the rich coal seams, disposing of the debris in the upper reaches of six valleys, including Pigeonroost Hollow.But the Environmental Protection Agency under the Obama administration, in a break with President George W. Bush’s more coal-friendly approach, has threatened to halt or sharply scale back the project known as Spruce 1. The agency asserts that the project would irrevocably damage streams and wildlife and violate the Clean Water Act. Because it is one of the largest mountaintop mining projects ever and because it has been hotly disputed for a dozen years, Spruce 1 is seen as a bellwether by conservation groups and the coal industry.

Clean coal dream a costly nightmare - Sold on a promise of cheap, clean electricity, dozens of communities in Illinois and eight other Midwest states instead are facing more expensive utility bills after bankrolling a new coal-fired power plant that will be one of the nation's largest sources of climate-change pollution. As the Prairie State Energy Campus rises out of a Downstate field, its price tag already has more than doubled to $4.4 billion — costs that will largely be borne by municipalities including the suburbs of Naperville, Batavia, Geneva, St. Charles and Winnetka.The communities are locked into 28-year contracts that will require higher electricity rates to cover the construction overruns, documents and interviews show. Municipal officials told the Tribune they expect costs to soar even higher before the plant begins operating next year

‘The Marcellus Gas Shale Play: Information for an Informed Citizenry’ – a talk by Professor Ingraffea - NYRAD - Professor Anthony Ingraffea, Dwight C. Baum Professor of Civil and Environmental Engineering and Weiss Presidential Teaching Fellow at Cornell University, spoke on "The Marcellus Gas Shale Play: Information for an Informed Citizenry." Prof. Ingraffea talked about the technology, development and impact of horizontal natural gas drilling and slick water hydrofracking in the Marcellus Shale.Professor Ingraffea has been a principal investigator on R&D projects from the National Science Foundation, NASA, FAA, Kodak, IBM, Schlumberger, and the Gas Research Institute. His research concentrates on computer simulation and physical testing of complex fracturing processes. Watch all 3 parts of the video of Prof. Ingraffea's presentation, including questions and answers from the audience. Thanks to Essential Dissent , Binghamton, NY, for creating this video.

Historic oil spill fails to produce gains for U.S. environmentalists - Traditionally, American environmentalism wins its biggest victories after some important piece of American environment is poisoned, exterminated or set on fire. An oil spill and a burning river in 1969 led to new anti-pollution laws in the 1970s. The Exxon Valdez disaster helped create an Earth Day revival in 1990 and sparked a landmark clean-air law. But this year, the worst oil spill in U.S. history -- and, before that, the worst coal-mining disaster in 40 years -- haven't put the same kind of drive into the debate over climate change and fossil-fuel energy. The Senate is still gridlocked. Opinion polls haven't budged much. Gasoline demand is going up, not down. Environmentalists say they're trying to turn public outrage over oil-smeared pelicans into action against more abstract things, such as oil dependence and climate change. But historians say they're facing a political moment deadened by a bad economy, suspicious politics and lingering doubts after a scandal over climate scientists' e-mails.

Indonesia's Lusi mud volcano flows on, spewing 100,000 tons per day, after four years - For four long years, Reni Sualeha has lived in the shadow of a monster, a menacing chemical flow of fetid gray mud that belches unchecked from the bowels of the earth near her home.Each day, she watches as a series of fissures, marked by an ominous smoke plume, pump out 100,000 tons of mud. New chemical fires erupt from smaller, gas-seeping cracks in a vision from hell that has closed roads and demolished buildings, including one just down the road from Sualeha's tiny home. Known as the Lusi mud volcano, its spread is so relentless — burping noxious gas, swallowing communities, killing 14 people and forcing the evacuations of 60,000 — that some say it could star in its own sci-fi thriller. Those in the United States who are wondering just how long the ruptured oil well in the Gulf of Mexico could possibly keep gushing should listen to Sualeha's cautionary tale.

27,000 abandoned oil and gas wells in Gulf of Mexico ignored by government, industry - 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 -- eveb though sealing procedures for temporary abandonment are not as stringent as those for permanent closures.

Oil below the surface: UNH ocean mapping center tracks Gulf spill underwater - The focus was on what the academic community can bring to the table," said Dr. Larry Mayer, professor and director at the Center for Coastal and Ocean Mapping. "That's our job as a natural center of excellence. You hope they would call on us when these things happen." Mayer brought three slides with him to the Washington meeting that show the center's work in mapping the sea floor and a multi-beam sonar that detected a gas plume about 5,000 feet below the ocean's surface in Mendicino, Calif. Mayer proposed that same sonar could be used to detect the presence of oil below the surface of the water.

Gulf Oil Spill Hits Louisiana's Largest Pelican Nesting Area - Biologists say oil has smeared at least 300-400 pelicans and hundreds of terns in the largest seabird nesting area along the Louisiana coast – marking a sharp and sudden escalation in wildlife harmed by BP's Gulf of Mexico oil spill. The finding underscores that official tallies of birds impacted by the spill could be significantly underestimating the scope of damage. The government counts only oiled birds collected for rehabilitation or found dead, for use as evidence in the spill investigation. Oiled birds in the many nesting areas that dot the Gulf coast typically are left in place and not counted in official tallies. Researchers from the Cornell Lab of Ornithology said Wednesday that they had spotted the oiled pelicans on Raccoon Island over the past several days. The spit of land lines the Gulf outside the state's coastal marshes. An estimated 10,000 birds nest on the island in Terrebonne Parish.

Fishing embargo is within 30 miles of Texas - The federal government expanded the boundaries of the closed fishing area in the Gulf of Mexico on Monday, bringing the ban closer to Texas. The closed area is now within 30 miles of Texas for the first time since BP's ill-fated Macondo well began fouling the Gulf 83 days ago.The National Oceanic and Atmospheric Administration, citing public safety concerns, said the closure comprises 84,101 square miles, about 35 percent of federal waters in the Gulf. The ban stretches from Louisiana to Florida, but does not apply to state waters.

Crude from Gulf oil spill found on 2nd Texas beach - U.S. Coast Guard officials say test results have confirmed tar balls from the massive Gulf oil spill have been found on a second Texas beach. Chief Warrant Officer Lionel Bryant said Tuesday that tar balls found on a Galveston beach last week are from the ruptured BP-operated Deepwater Horizon oil well. Tar balls located July 5 on McFaddin Beach, a stretch of coast east of Bolivar Peninsula, were the first confirmation that crude from the massive BP oil spill had reached Texas shores.

Gulf Residents Fear Fund Will Fall Short - Gulf Coast businesses fear the $20 billion oil-spill claims fund won't fully cover the long-term damage to their livelihoods. Kenneth Feinberg, the government-appointed overseer who will take over the claims program from BP PLC next month, toured the region Thursday and tried to assure affected businesses they would be fairly compensated. He eventually plans to hand out final, lump-sum compensation to businesses based on estimates of their total losses over coming years. Firms will be asked to submit those estimates shortly after the spill is permanently resolved. But many businesses are concerned it will be difficult, if not impossible, to forecast the long-term recovery of the crab and shrimp populations, or how quickly U.S. consumers will re-embrace Gulf seafood, among other things.

Out in the Oil with Captain Dave -"I've never seen anything like it," says David Willman, who has nearly 15 years' experience captaining supply boats that support oil rigs and drilling platforms in the Gulf of Mexico. "We're seeing pods of whales and dolphins out in the oil and lots of dead things," he tells me. "Things I've never seen before coming up from the deep that look like sea cucumbers floating dead. Man o' wars floating dead with shriveled tentacles." Willman is captain of the Noonie G., an 111-foot supply boat owned by Guilbeau Marine, a company based in Cut Off, LA. He's been working out of Venice, Louisiana for about ten years ferrying fuel, water, and other supplies to offshore oil operations. He's not the only one seeing oiled and dead sea life: A research team from Texas A&M University out on the Gulf in June also reported what looked to be hundreds of dead sea cucumbers but were actually invertebrates in the tunicate family that are important to the marine food web. Other research teams have seen dead man o' war jellyfish as well.

Images BP Doesn't Want You to See - As a writer and photographer covering the oil spill in the Gulf, I've been frustrated by the well-documented efforts by BP and the U.S. Government to limit media access to the damage. The restrictions tightened last week, when the Coast Guard announced rules that prevent the public--including news photographers and reporters--from coming within 20 meters (about 65 feet) of any response vessels or booms on the water or beaches. Violate the "safety zone" rule and you can be slapped with a $40,000 fine and prosecuted under a Class D felony.  Coast Guard Admiral Allen spokesperson Megan Molney wrote in a July 4 email: "This distance is insignificant when gathering images." Perhaps Molney has never shot video or taken a photograph. But those of us working here know that the real impact--and, one fears, the real goal--of the so-called safety zone is to make it difficult to document the impact of the spill on the land and the wildlife.

Oil spews into Gulf during cap procedure - Oil was spewing largely unchecked into the Gulf of Mexico as BP crews claimed progress Sunday in the first stages of replacing a leaky cap with a new containment system they hope will finally catch all the crude from the busted well. There's no guarantee for such a delicate operation nearly a mile below the water's surface, officials said, and the permanent fix of plugging the well from the bottom remains slated for mid-August. "It's not just going to be, you put the cap on, it's done. It's not like putting a cap on a tube of toothpaste," Coast Guard spokesman Capt. James McPherson said. Robotic submarines removed the cap Saturday that had been placed on top of the leak in early June to catch the oil and send it to surface ships for collection or burning. BP aims to have the new, tighter cap in place as early as Monday and said that, as of Sunday morning, the work was going according to plan. BP hopes the capping operation will be done within three to six days.

BP Optimistic on New Oil Cap - Oil giant BP PLC's work on the latest stage of its effort to contain the crude gushing from a leak in the Gulf of Mexico continued on schedule for a second day Sunday, with undersea robots preparing the installation of a new, tight-fitting containment cap on the broken well.BP officials displayed an air of optimism at the new attempt to capture the leaking oil, but their efforts also meant that oil was flowing unimpeded from the well head until the new cap can be put in place. "We're in day two, so we should anticipate that this should take another three to five, six days," BP Senior Vice President Kent Wells said during a briefing Sunday. "But if everything goes extremely well, then we'll be on the shorter end of that [range]."

Is the Well Integrity Test Failing? - BP suspended the "top kill" operation for 16 hours - because, according to numerous experts, it was creating more damage to the well bore - without even telling the media, local officials or the public that it had delayed the effort until long afterwards. BP also admitted - many days after it stopped the top kill attempt - (1) that BP had to stop because mud was leaking out below the seafloor, and (2) that capping the well from the top could blow out the whole well. Similarly, it took more than 5 hours for BP to publicly announce the delay of the "well integrity test" after the decision to delay was made. So BP doesn't have a great track record of promptly informing us of what is happening. But now that the well integrity test (background here and here) is underway, can we somehow tell if it's working or not? (see videos)

BP Says Oil Flow Has Stopped as Cap Is Tested - BP said Thursday that it had capped its hemorrhaging well, at least temporarily, marking the first time in 86 days that oil was not gushing into the Gulf of Mexico.  Oil stopped flowing around 2:25 p.m. when the last of several valves was closed on a cap at the top of the well, said Kent Wells, a senior vice president for BP.  The announcement came after a series of failed attempts to cap or contain the runaway well that tested the nation’s patience. Mr. Wells emphasized that pressure tests were being conducted to determine the status of the well, which is now sealed like a soda bottle. BP and the government could decide to allow the oil to flow again and try to collect all of it; they could allow the oil to flow and, if tests show the well can withstand the pressure from the cap, close the well during hurricanes; or they could leave the well closed permanently.

Guest Post: Initial Results from Well Integrity Test Are Inconclusive - As Coast Guard admiral Thad Allen has explained, sustained pressure readings above 8,000 pounds per square inch (psi) would show that the wellbore is more or less intact, while pressures of 6,000 psi or less would mean there could be major problems:  The former director of Sandia National Laboratories says the pressure readings so far have been ambiguous. As the Washington Post points out: Hunter, who witnessed the test from BP’s war room in Houston, told The Washington Post that the pressure rose to about 6,700 psi and appeared likely to level out “closer to 7,000.” He said one possibility is that the reservoir has lost pressure as it has depleted itself the past three months.

BP's Deepwater Oil Spill - Results as the Testing Begins - The picture that everyone has long been waiting to see became available after 3:25 pm (Eastern) yesterday afternoon, when BP closed the choke lines on the 3-ram stack, and oil stopped flowing into the Gulf. The process started on Wednesday evening, after a delay during which the Admiral gave permission for the process to start, and held the press conference that I reported on yesterday. It was followed by the Kent Wells' conference, which had been delayed, in which he noted that the relief well had finished a gyro survey to locate its position, and prepared the site for the casing to be set this weekend. Then the drill pipe etc. was pulled back into the casing while the integrity test was run. It was left in the well so that, in case there was any passage created between the two wells during the test (they are only just over four feet apart), then heavy mud could be immediately pumped down the RW to kill the risk of any additional problems. (The drill has 30 ft to go to reach the casing point, but is at the desired 2 degree angle).

Oil Spill Capped for a Second Day, Offering Some Hope - The hemorrhaging well that has spilled millions of gallons of oil into the Gulf of Mexico remained capped for a second day Friday, providing some hope of a long-term solution to the environmental disaster.  Live video from the seabed Friday morning showed that all was quiet around the top of the well, suggesting the test assessing the integrity of the well was continuing. Earlier in the week, Kent Wells, a senior vice president for BP, had said that the longer the test continued the better, because it would indicate that the pressure inside the well was holding. The oil stopped flowing around 2:25 p.m. Thursday when the last of several valves was closed on a cap at the top of the well, Mr. Wells said.

For BP, Rising Pressure in Oil Well Seen as a Positive Sign - As the Gulf of Mexico entered a third day free of fresh oil from BP’s blown-out well, a company official said Saturday that there were still no signs of damage in the 13,000-foot-deep hole. He said that a test to assess the condition of the well was continuing, and that any decision to end it would be made by Thad W. Allen, the retired Coast Guard admiral who commands the spill response.  “The longer the test goes, the more confidence we have in it,” Mr. Wells said. “But we don’t want to jump ahead of the process we’ve laid out. Admiral Allen is the ultimate decision maker.”

Guest Post: Oil Pressure Stopping Short of Target … Does that Mean the Well Integrity Test Is Failing? - The well integrity test is arguably failing, as the pressures are not reaching the 8,000 psi minimum target. CBS News notes: The federal pointman for the BP oil spill says results are short of ideal in the new cap but the oil will stay shut in for another 6 hours at least.  BP states that the pressure in the well is only rising 2 pounds per square inch each hour. I will post a transcript of Allen’s report when it becomes available (here is an unofficial, rough transcript). There are actually at least four potential explanations for the low pressure readings:(1) There are substantial leaks in the well; (2) There is leakage in the sands deep under the seafloor. Oil industry professionals posting at the Oil Drum hypothesize: (3) A hypothesis proposed by Roger N. Anderson – professor of marine geology and geophysics at Columbia University – that the pressure could be rising slowly not because of a leak, but because of some kind of blockage in the well. or (4) The reservoir has been depleted more than engineers anticipated

How the ultimate BP Gulf disaster could kill millions - To make a statement that the BP Gulf oil spill could kill millions is in itself a bit loaded. Any type of disaster has that potential in the ultimate worst case scenario so long as the population in the area impacted supports that. With a disaster the nature of this spill however, the impact cannot be known, and will not be known until decades after the cleanup has stopped, meaning there is a legitimate chance the statement is correct. There are a few ways that a million - possibly millions - could die due to the spill. The first and potentially most damaging scenario that is gaining popular press is the interplay with a subterranean methane deposit. That is obviously significant because it is under extraordinarily high pressure by our standards of what would be considered safe to harvest of about 100,000psi. The problem, in the simplest terms, is that the initial BP disaster created fissures, or cracks, in areas of the ocean floor over and adjacent to that lake of methane. Since that time there has been some expansion to those cracks which was wholly expected.

Why Agencies Get Things Terribly Wrong -There has been a lot of criticism of regulatory agencies in the past couple of years, from the Office of Thrift Supervision and the Securities and Exchange Commission (Madoff who?) to the Minerals Management Service. But most of the people in these agencies are not evil; on the contrary, I believe (without a ton of evidence in support at the moment) that a majority are conscientious, hard-working, and civic-minded, and a significant minority are actually quite good at what they do. So why do they get things so wrong?A few days ago, Leslie Kaufman of The New York Times wrote an article describing how the Fish and Wildlife Service “signed off on the Minerals Management Service’s conclusion that deepwater drilling for oil in the Gulf of Mexico posed no significant risk to wildlife.” This sounds like classic incompetence, or corruption, or both. But the report itself, it seems, was not so far off, at least in its details. The report assessed spills of up to 15,000 barrels of oil.

Shell Video on "How to Drill a Well" Now Posted - I've mentioned a couple of times, here and here, that Shell oil officials recently gave a detailed comparison of the way they drill deepwater wells, vs. the way BP did it on the well that failed. The video is posted as of this evening at the Aspen Ideas Festival site, here, or embedded below. Take a look and see what you think. Really you see should the whole thing (50+ minutes) to draw conclusions, but the "how we drill" part starts at roughly time 13:00, and the "compare our well with theirs" part starts at around 18:00 and again in the post-speech Q-and-A. During the questions, you can listen too for the "would you hire an engineer from BP?" exchange.

BP, Shell and the Design of Deep Wells - This is a good time to review how the company, the country and the ecosystem of the Gulf of Mexico ended up in this situation. It’s already clear that BP made bad decisions at many junctures. One could well be the way it chose the basic design of the well — not just the infamous failed blowout preventer on the top, but the entire system from the seabed to the oil source deep below. To gauge this possibility, watch the video above of a presentation given last week by Joe Leimkuhler and John Hollowell, two Shell drilling specialists, in which they described in detail the differences between the two company’s approaches to deep-sea oil drilling. Make sure to pay close attention when they refer to the slides showing a side-by-side comparison of the designs favored by Shell and BP.

Editorial - Big Oil’s Good Deal - NYTimes - No industry enjoys the array of tax breaks and subsidies that the oil and gas industry does. No industry needs them less. For all the damage it has caused, the disastrous oil spill in the Gulf of Mexico may provide the political momentum to end this special treatment. President Obama’s 2011 budget, proposed before the spill, would eliminate $4 billion in annual tax breaks for oil and gas companies. Bills in both houses introduced after the spill would achieve many of the same results. Industry has spent $340 million on lobbying over the last two years to block these sorts of initiatives, and until recently Congress has been eager to do its bidding. This year could be different.  The White House has proposed eliminating nine tax breaks. Some are modest, all are complicated, but in toto they provide a range of cushy benefits — fast write-offs for upfront drilling expenses, generous depletion allowances, and the like — that are available at virtually every stage of the exploration and production process.

Government washes its hands of BP takeover -BP will not be able to rely on support from the British Government if it is the target of a takeover bid, it emerged yesterday, as rivals considered whether to take a tilt at the embattled oil company. A spokesman for the Department for Business, Innovation and Skills (DBIS) declined to comment on reports that the US oil major Exxon, has been in contact with the Obama administration over a possible bid for its beleaguered FTSE 100-listed rival. But a spokeswoman for the DBIS said: "Takeovers and mergers are commercial matters for companies."

Transocean Is a Driller That Tends to Test the Rules - Human rights advocates have called for an investigation into Transocean’s recent dealings in Myanmar. having ties to two men accused of laundering money for Myanmar’s repressive government, which is under United States trade sanctions.  Transocean has disclosed in Securities and Exchange Commission filings that its drilling equipment was shipped by a forwarder through Iran and that until last year it held a stake in a company that did business in Syria. In Norway, Transocean is the subject of a criminal investigation into possible tax fraud. The company has said in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. The filings also said that a final ruling against Transocean could have a “material impact” on the company, which has suffered a drop in its stock price of more than 40 percent since the Gulf of Mexico incident.  And in the United States, a federal bankruptcy judge recently found that one of Transocean’s merger partners had repeatedly abused the legal system to try to avoid potential liability in a pollution case in Louisiana. Transocean is also the target of tax inquiries in the United States and Brazil.

Treat reckless corporate behaviour like drink-driving -While BP has taken some heat over its spill in the Gulf, it is remarkable how limited the anger actually is. Many defenders of the company have made the obvious point: it was an accident. BP did not intend to have a massive spill that killed 11 people, devastated the Gulf ecosystem and threatens the livelihoods of hundreds of thousands of workers.Of course this is true, but it is also true that a drunk driver who runs into a school bus did not intend to be involved in a fatal collision. As a society, we have no problem holding the drunk driver responsible for a predictable outcome of their recklessness. This raises the question of why the public seems to accept that the top officials at BP, who cut corners and made risky gambles in their drilling plans, should be able to "get my life back," as BP chief executive Tony Hayward put it. The people who lost their livelihood as a result of BP's spill will not get their lives back, even if BP does pay compensation. Certainly the 11 workers killed in the original explosion will not get their lives back. Why should the people responsible for this carnage be able to resume their life of luxury?

Spill costs to cut BP tax bill by $10bn - Financial Times - BP is forecast to pay about $10bn (£6.7bn) less tax over the next four years as it meets the costs of its huge oil spill in the Gulf of Mexico, hitting the revenues of Britain and the US that receive hundreds of millions of dollars from the company each year.The shortfall, representing a drop of more than a quarter in BP’s tax payments, is a particular concern for the British government attempting to cut the country’s budget deficit. Money spent plugging the well, cleaning up the oil, and compensating people who have lost out because of the spill, can be written off against tax, the company believes, reducing the net cost to BP.

Bloomberg Reporter Totally Misinterprets Bloomberg Polling on Offshore Drilling - The beginning of this Bloomberg story is completely false:Most Americans oppose President Barack Obama’s ban on deepwater oil drilling in response to BP Plc’s Gulf of Mexico spill, even as they hold the company primarily responsible for the incident. Almost three-fourths, or 73 percent, say a ban is unnecessary, calling the worst oil spill in U.S. history a “freak accident,” according to a Bloomberg National Poll. Without looking at the poll’s toplines (PDF), you might not realize what is wrong with these two paragraphs. As it turns out, Bloomberg’s poll did not ask about President Obama’s temporary ban on deepwater drilling. Here is the question they actually asked. As you can see, they asked whether all offshore drilling should be banned in U.S. waters, without specifying a timeframe. President Obama’s moratorium, on the other hand, applies only to deepwater drilling (deepter than 1,000 feet) and only for six months.

Cairn Energy's Arctic Oil Drilling Plan Condemned As Irresponsible - A decision by a British oil company to start drilling wells in "iceberg alley" off Greenland has been described as "completely irresponsible" by environmental groups in the light of BP's problems in the Gulf of Mexico. Cairn Energy said it had begun the first of four exploration wells on the Alpha prospect in Arctic waters of up to 500m (1,600ft) having been given permission from the Greenland government.Greenpeace said the move was wrong, not least because Cairn was a relatively small company with no harsh-conditions drilling experience that had made its name discovering oil onshore in India."We think it is completely irresponsible for Cairn to proceed with these operations when the US, Canada and Norway have imposed tough new restrictions on deepwater drilling until lessons can be learned about what exactly went wrong in the Gulf,"

Global Crude Oil Supply Update - Global crude oil supply fell in April, after a surprising revision upwards to the March totals, of approximately 200 kbpd. Volatility in the data is currently coming out of the North Sea. This will continue as Norway is expected to see production falls when the next few months of data is reported. Globally, oil production stood at 73.552 mbpd in April. On an annual basis, through the first 4 months of 2010, global crude oil production is averaging 73.458 mbpd. The current peak year for global crude oil production remains 2005, at 73.719 mbpd.

Events force IEA to recalibrate oil assessment methods - The International Energy Agency says game changing events including sovereign debt issues, China’s oil demand and the BP Gulf of Mexico oil spill have forced it to revise the way it assesses oil markets. The International Energy Agency (IEA) has revealed in its Oil Market Monthly report that it is forced to revise the way it analyses oil market-related forecasts and risk assessments as “game changing” market issues and trends have overturned traditional drivers. “Unforeseen events and market trends repeatedly arise to recalibrate the way we look at the oil market,” says the Paris-based agency in its monthly report. “Conventional wisdom, assuming that market drivers will be the same in future as in the past, repeatedly gets overturned. The problem lies in distinguishing real ‘game‐changers’ from isolated, albeit momentous, events which may subsequently prove to have more limited impact.”

Further Reduction in Oil Supply in June - Last month, I was starting to wonder whether global oil supply was beginning to go down again (presumably in response to the slowing of the world economy).  The latest OPEC monthly report is now out, and it continues to look like oil supply is faltering.  This is now a more extended setback than at any time since the the oil supply recovery began in spring 2009. The graph is above (the black line and the right hand scale are the ones to look at). I hesitate to say it, but it's hard to look at that graph and not think about the possibility that the global economy is starting to actually contract again. Those mean bureaucrats at the IEA decided not to mention June's oil supply figure in their free summary, so we will have to wait until later in the month to know what it was (The full report comes out two weeks after publication for the crowd with 2000 euros to spend on getting the report in a timely way).  I'll update my full oil supply graph set then.

US Oil Imports: Why it is Difficult to "Fix" the Situation - Looking at a Few Graphs - With all of our problems in the Gulf of Mexico, we think about importing more from elsewhere. Let's look at some graphs of net imports of crude oil and refined products, and of some US production amounts, to see what is happening now. Perhaps this will give us insight as to what to expect going forward, and how many options we really have with respect to oil imports. As one can see, US net imports peaked in 2005, and have been declining ever since. The year 2005 was the year the world hit its production plateau. This is precisely the pattern one would expect, if world oil production is flat, while demand from oil exporters and China is growing. Part of the problem is of course that some of the countries we are importing oil from are declining in production, and can therefore send us less. Net oil imports from Mexico have declined by about half since reaching their peak.

OPEC Going Sideways: Not a Good Time for Oil Importers - OPEC tells us it has lots of spare capacity, but how much should we believe them? Even when prices were much higher than they are now, back in 2008, they did not make use of all of the spare capacity that they supposedly had. When one looks at a history of estimates of future productive capacity, we find too, that they have tended to decrease over time (up until the new 2010 report)--also raising questions about current estimates. The International Energy Agency (IEA) recently put out its Mid Term Oil and Gas Market Report 2010 (MTOMR 2010). Although the report talks about a 7.1 million barrel a day decline between now and 2015 when all of the anticipated new capacity is added, total capacity is expected to increase from 34.85 barrels per day to 35.78 barrels a day (page 82) in that time period.  According to this table, the Iraq is expected to have the largest increase in capacity (amounting to .97 million barrels a day). The second largest increase in capacity is Saudi Arabia, and the third largest increase in capacity is UAE. Iran is expected to have the largest decrease in capacity. The question is, "Will this large an increase in capacity really result in higher production?"

When oil becomes worthless. - There's a moment that every oil-exporting country will experience, sooner or later. The few select countries lucky enough to label themselves "oil exporter" know it — and have nightmares of the day their number is up. Why the fright? Because we live in a cutthroat, fossil fuel-driven world — a reality we have little chance of changing in our lifetime. Still think everything is right with the world's oil production?Let us take a lesson from a country that's been through the ropes...Collapsing under the weight of peak oil For Indonesia, the point of no return came in 2004. Up 'til then, the country's oil production stayed above 1.4 million barrels per day, peaking at approximately 1.6 million barrels per day. Unfortunately, Indonesia's demand for crude oil had more than doubled since the 1990s. The country was destined to become one of the bottom feeders, an energy-dependent slave to the same people they once called equals.

Barack's Peak Oil Confession - Shortly after being sworn in, the President of the United States is briefed on secrets of national security... secrets of our nation's frailty... secrets that aren't revealed to anyone except top government officials. But what Obama let slip — and what commentators on NBC, Fox, and MSNBC completely missed — could send the price of oil skyrocketing... and a nation into panic mode: Oil is a finite resource... We consume more than 20 percent of the world’s oil, but have less than 2 percent of the world’s oil reserves. And that’s part of the reason oil companies are drilling a mile beneath the surface of the ocean: because we’re running out of places to drill on land and in shallow water. Anyone with any doubt that cheap, easily-found oil is still out there is delusional. If there's still cheap, easy oil to be had... Then why would BP be drilling in miles-deep water?

Peaked: Oil demand growth rates - Even a growing world economy isn’t enough to keep oil demand rising at ever-increasing rates, it seems. The International Energy Agency, in its latest oil market report, predicts that the increase in oil demand will slow next year to a 1.3m barrel/day increase, from a 1.8m b/d rise in 2010. The agency, which warned several times last year of a “supply crunch” due to falling investment in upstream production, is much more sanguine these days on the supply-demand balance. Its new report notes some supply concerns, particularly around Iran, but says that investment in upstream production seems to be stable. “Whisper it quietly, but we might, just might, be in for some market stability for a while longer,” it says of its 2011 forecasts.

Peak oil vs supply crunch — or, both - Lloyds of London, the insurance market, is becoming rather worried indeed about the future of energy: “A supply crunch appears likely around 2013… given recent price experience, a spike in excess of $200 per barrel is not infeasible.” This is from Professor Paul Stevens at UK policy thinktank, Chatham House, in a paper published in conjunction with Lloyds. Most predictions of supply-side problems choose either the ’supply crunch’ or the ‘peak oil’ camp — often due to the sometimes arbitrary distinction between those of an economic and those of a geological bent. This paper, however, says that both are risks. The above quote talks about a crunch resulting from investment shortfall. But that doesn’t necessarily mean it will go away, as this stark juxtaposition shows: Of course there are all sorts of other factors — Iraq and unconventional liquids production to name a couple — but those alternatives have their own problems and uncertainties; and with conventional non-Opec oil production already beginning to decline, an imminent shortfall in Middle Eastern oil production and a quick jump to $200/barrel is not a happy thought, if one believes that oil prices are important to the world economy.

Lloyd's adds its voice to dire 'peak oil' warnings - One of the City's most respected institutions has warned of "catastrophic consequences" for businesses that fail to prepare for a world of increasing oil scarcity and a lower carbon economy. The Lloyd's insurance market and the highly regarded Institute of Strategic Studies (ISS, known as Chatham House) says Britain needs to be ready for "peak oil" and disrupted energy supplies at a time of soaring fuel demand in China and India, constraints on production caused by the BP oil spill and political moves to cut CO2 to halt global warming."Companies which are able to take advantage of this new energy reality will increase both their resilience and competitiveness. Failure to do so could lead to expensive and potentially catastrophic consequences," says the Lloyd's and ISS report "Sustainable energy security: strategic risks and opportunities for business".

Pakistan left with three-days Petrol; 11 days Diesel - ISLAMABAD: The country has been left with petrol reserves for just three days while diesel reserves can last 11 days with Pakistan State Oil (PSO) facing default unless Rs.60 billion is paid immediately. This was disclosed by Managing Director PSO, Irfan Qureshi while briefing the sub-committee of Public Accounts Committee which met here Wednesday under the chairmanship of MNA Zahid Hamid at the Parliament House.  Secretary of Petroleum and Natural Resources Kamran Lashari apprised the committee that the circular debt issue would not be addressed with temporary measures rather pragmatic steps must be taken to deal with it.

Planning For Europe's Energy Future - This document is a response to the Energy Consultation launched by the European Commission in the first half of 2010. This consultation is part of a process that shall take the Commission to a new Energy Policy Programme a few years from now.  After 6 years with energy prices much above the low levels that were the norm during the previous two decades, the European Union is finally taking into due consideration this crucial sector. It is now contemplating an Economy highly dependent on foreign energy, together with meagre and dwindling traditional sources of indigenous energy. As it stands, the Socio-Economic model the European Union is built on simply doesn't seem able to remain in existence using traditional sources of energy, especially fossil fuels.

EU agrees fusion shortfall funds - European Union member states have agreed the additional funds needed to construct Iter (the International Thermonuclear Experimental Reactor). Many now expect it to be in the region of 15bn euros; and the total cost of construction for the EU - a major partner in Iter - is put at no less than 7.2bn euros. The French-based machine will prove the concept of harvesting energy from the fusion of hydrogen nuclei - the same process at the heart of the Sun. Iter is a collaboration between the EU, the US, Russia, Japan, China, India and South Korea. It is the culmination of decades of research. Its fusion reactions will take place inside a 100-million-degree gas (plasma) suspended in an intense doughnut-shaped magnetic field.The reactor is designed to produce 500MW of fusion power during pulses of at least 400 seconds. Critically, Iter is expected to demonstrate the principle that it possible to get far more energy out of the process than is used to initiate it.

Paul Kedrosky: Energy Transitions, Then and Now - From a new-ish paper1 on energy transitions, some fascinating data on the share of primary energy consumption by technology in the U.K. from 1500-2000. You can see the slow transition from biomass/food to coal, and then the faster one from coal to oil/natgas, etc. The other thing that struck me was that wind was a larger percentage of primary energy generation in 1700 than it is today.

The Chinese Coal Monster - Figure 1 Chinese coal consumption compared with the rest of the world. How long can this go on?  Data are taken from the 2010 BP statistical review of world energy - both a priceless but flawed resource. BP provide annual coal production figures in tonnes and tonnes oil equivalent (TOE) from 1981 and consumption figures in TOE only from 1965. Hence to make a production / consumption balance comparison it is necessary to use TOE. In China, 1 TOE is close to 2 tonnes coal - so simply double the TOE numbers to get at the approximate tonnages. Note that the energy content of coal varies by rank and from region to region and conversion factors to TOE vary from 1.5 to 3.Like everything else in China, coal production statistics are simply immense. China now consumes and produces close to 50% of all the coal in the world. Thus, changes in Chinese consumption and / or production may have a dramatic impact upon the global coal market

China and use of coal - Reader benamery 21 comments on US energy consumption from a previous post at Angry Bear on a better picture of what drives energy consumption in China. The NYT article used air conditioning and shopping malls as one metaphor for the good life that the Chinese are striving for, but he would advise caution for those wanting to Americanize our image of China at least in the short term (decades). Residential air conditioning is only 2.8% of U.S. energy consumption (including electrical system losses at 31.5% system efficiency), and the average occupied square feet is a LOT bigger than a Chinese apartment. A look at another lifting from comments by sparaxis at Oildrum from China Energy Group at Lawrence Berkeley National Laboratory. It's useful to look at how coal is used in China to assess what future demand may look like. Unlike the US, less than half of China's coal is used for power generation, so while important, electricity demand is not the sole driver of coal demand.

The China Energy Primer

China’s Coal: Demand, Constraints and Externalities

Energy Use in China: Sectoral Trends and Future Outlook

China Puts Up More Money to Build Solar Capacity - The government-owned China Development Bank has just made its third massive loan to one of the country’s solar energy makers, bringing its total commitment about $17 billion. The combined size of the loans is large enough to allow China to double the global manufacturing capability for solar wafers and cells. The latest recipient of the government’s largess is Yingli Green Energy Holding Co. Ltd. (NYSE:YGE), which today announced that had received an aggregate line of credit from the China Development Bank worth about $5.3 billion. In April, Suntech Power Holdings (NYSE:STP) and Trina Solar Ltd. (NYSE:TSL) received loans of $7.3 billion and $4.4 billion, respectively.

India Considers Banning Rare Earth Exports - The Indian government may stop all mining companies operating inside India from selling iron ore abroad. New Delhi already imposes export taxes on iron ore. Mr. Chaturvedi also told FT the government may go even farther, to the point of banning coal and oil exports as well. The news comes just days after neighbouring China announced a plan to cut rare earth export quotas by 72%, further deepening fears of a supply shortage among ore-importing countries. Protectionist measures are a growing trend in the region, whereby many national governments have begun imposing export restrictions on large commodity producers. China has been increasingly harbouring rare earth metals for some time now. Australia almost passed a heavy mining tax recently, and Russia introduced plans to increase its already-massive natural resource export tax two weeks ago.

Mugabe: Diamonds can revive Zim economy - Zimbabwe President Robert Mugabe said on Tuesday his nation will sell its massive reserves of diamonds despite not receiving authorisation from the world's diamond control body.  A defiant Mugabe told lawmakers that diamond sales have "huge potential" to revive the shattered economy. He said Zimbabwe can account for one-fourth of the world's diamond supply.

Baltic Dry Massacre Enters 34th Straight Dry As BDIY Plunges 4.5% Overnight - The record slaughter of shippers continues as the BDIY posts the largest overnight drop of 4.5% in the most recent 34-consecutive day trounce in dry bulk shipping rates. Short term Capsize and Panamax charters for Pacific delivery have hit $29k and $19k, respectively, both approximately 30% lower than comparable Atlantic delivery rates as the Chinese transit corridor is now massively oversupplied. At this point it is not a question of if but when the bulk of shipping companies, especially levered ones, start going bankrupt and flood the seas with yet more anchored rusting dry bulk hulls.

What the shipping market tells us about the air freight and export market -  An interesting contrast is shaping up in global trade, where some indicators of the movement of raw materials are crashing even as exports from China and air traffic continue to show outstanding strength. China said last week that export sales rose a stunning 43.9 percent in June from the year before, taking the trade surplus to $20 billion, its highest in eight months. Exports to the European Union and the U.S. both rose by 40 percent in the month, somewhat confounding concerns about Europe’s woes and the ongoing effects of a weak and jobless recovery in America. Exports to faster-growing emerging markets were even stronger: up 84 percent to Russia and 59 percent to India. You have to think that knowledge of how strong these numbers would be contributed to China’s decision to make a much ballyhooed move to end the peg of its yuan to the U.S. dollar.

Inland Empire: Increased Activity at Warehouses From Ports - Warehouses in the Inland Empire, which receives goods from the two largest ports in the country, reported a similar increase. To deal with the heavier load, many warehouses have taken on new employees. Temporary hiring agencies, such as York Employment Services and CitiStaff Solutions Inc., do a lot of the hiring for warehouses in the district, and say they have been finding more work for more people. Nancy Sidhu, chief economist at the Los Angeles Development Corp., said she thinks many temporary employees at the warehouses are being taken on as full-time. Most of the products warehouses store come in from overseas — a bulk of it made in China.

Trade Deficit increases in May - The Census Bureau reports: [T]otal May exports of $152.3 billion and imports of $194.5 billion resulted in a goods and services deficit of $42.3 billion, up from $40.3 billion in April, revised. May exports were $3.5 billion more than April exports of $148.7 billion. [May] imports were $5.5 billion more than April imports of $189.0 billion.The first graph shows the monthly U.S. exports and imports in dollars through May 2010.Clearly imports are increasing much faster than exports. On a year-over-year basis, exports are up 21% and imports are up 29%. This is an easy comparison because of the collapse in trade at the end of 2008 and into early 2009.  The second graph shows the U.S. trade deficit, with and without petroleum, through May.

Thinking about Trade and Trade Costs - One of the big issues facing policymakers around the world is the evolution of the pattern and volume of international trade flows. I recently participated in a very useful conference that included a number of papers that shed light on this important question. The conference, "Trade Costs and International Trade Integration -- Past, Present and Future," organized by Dennis Novy (Warwick University), David Jacks (Simon Fraser University), and Christopher Meissner (University of California, Davis), and sponsored by the UK's ESRC, and the University of Warwick's CAGE.The links to the papers are here. The program is below:

Hayek, Trade Restrictions, And The Great Depression - Krugman - Reading some of the reactions to this post, I realized that quite a few readers believe that protectionism played a major role in causing the Great Depression, and even believe that this is what all the experts believe. Not so. Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad! But did Smoot-Hawley and other trade restrictions cause the Depression? No. Bear in mind that what protectionism does, according to textbook economics, is to cause a misallocation of resources, reducing the economy’s efficiency. It does not cause mass unemployment of resources — which is what the Depression was about.

U.S. Trade Gap Widens on Rising Imports of Consumer Goods - The United States trade deficit grew in May to more than $42 billion, its widest gap in nearly two years, mostly because of a rise in imports of consumer goods, according to government figures. Imports rose to $194.51 billion in May, outstripping exports of $152.25 billion, the Commerce Department figures showed. The monthly report showed a trade imbalance of $42.26 billion, the largest since November 2008, when it stood at $43.8 billion. The deficit expansion exceeded the estimates of analysts, who suggested that companies rebuilding their inventories accounted for a large part of the increase in imports. Analysts said the outlook depended on whether consumer demand picked up in the months ahead — an uncertainty given the shaky jobs market — and how the economy fared after government stimulus expired.

Chinese foreign direct investment: What's happening behind the headlines? - While China is recognised as one of the world's leading destinations for inward foreign direct investment, outward investment by Chinese companies has also taken off in recent years. This column presents survey data suggesting that, similar to western firms, Chinese companies tend to invest in well-developed countries with a large market size and a favourable institutional environment.

The death of manufacturing… in China - The brightest economic story in the world these days is that China’s wages are rising so fast that low-end manufacturing is beginning to shift into other countries lower on the development ladder. A beautiful illustration comes from today’s NYT in an article on how jobs are shifting from China to Bangladesh. This is the progress of globalization that critics scoffed at: As costs have risen in China, long the world’s shop floor, it is slowly losing work to countries like Bangladesh, Vietnam and Cambodia — at least for cheaper, labor-intensive goods like casual clothes, toys and simple electronics that do not necessarily require literate workers and can tolerate unreliable transportation systems and electrical grids. Will proponents of protectionism for American manufacturing jobs against China agree that China should engage in more protectionism to protect its manufacturing jobs from Bangledesh? Clearly, they are at risk:

24 multinationals move HQ to Shanghai  - 24 multinational companies, have decided to move their regional headquarters to Shanghai, including 6 Fortune 500 companies such as Vale, Walt Disney and Kraft Foods. This will push the total number of companies with regional headquarters in Shanghai to nearly 300. Nearly 500 have regional research and development centers there. Shanghai has been China's top destination, for multinationals. Even during the world economic slump, the city's foreign direct investment still increased. Data shows Shanghai's foreign direct investment has already surpassed more than 5 billion US dollars in the first half of this year.

So Goes China, So Follows America - Here at Political Calculations, we use international trade data to diagnose the relative economic health of nations. And since the U.S. Census Bureau has released its international trade data through May 2010 earlier today, we thought we'd take a look at the recent trends to see how things are going.  Our first chart today shows the annualized growth rates of U.S.-China trade from January 1985 through May 2010. What we find is that U.S. exports to China continues to grow, but at a slower rate than we saw previously. After spiking in January 2010, the year-over-year change in the rate of growth of U.S. exports has tailed off, and is perhaps stalling out. Since a growing economy demands more imports, what this observation indicates is that China's economy has been growing, but at a much slower pace than we saw at the beginning of this year.  We also see that the rate of growth of China's exports to the U.S. is also growing, indicating that the U.S. economy is growing, although at a much slower pace.

China's Real Estate: Black-Hole Capital Trap - Chinese citizens have poured their life savings into speculative real estate. This is not just misallocation, it is an inescapable capital trap.  China's citizens have few options for investing their immense savings. Chinese households are prodigious savers: China boasts a savings rate of 38%, fully ten times that of the U.S. But Chinese savers have few choices on where to invest their money: they can either leave it in a savings account which draws 2.25%, less than the inflation rate of 3.1%, or invest in real estate or domestic stocks.  Chinese authorities' attempts to cool the housing market have so far yielded little result. With no other choice of where to put their savings other than domestic real estate and the volatile Chinese stock market (the Shanghai Stock Exchange Composite Index is down more than 21 percent this year), then there is little wonder why both the Chinese stock market and housing market have both experienced massive bubbles.

Beijing starts gating, locking lower-income migrant villages (AP) - The government calls it "sealed management." China's capital has started gating and locking some of its lower-income neighborhoods overnight, with police or security checking identification papers around the clock, in a throwback to an older style of control. It's Beijing's latest effort to reduce rising crime often blamed on the millions of rural Chinese migrating to cities for work. The capital's Communist Party secretary wants the approach promoted citywide. But some state media and experts say the move not only looks bad but imposes another layer of control on the already stigmatized, vulnerable migrants. So far, gates have sealed off 16 villages in the sprawling southern suburbs, where migrants are attracted to cheaper rents and in some villages outnumber permanent residents 10 to one.

China's local debts threaten crisis - China's local governments, which have increased spending under the central government's massive 2008 economic stimulus, have run up debts to levels that could pose a threat to the economy, according to some economists. Eighteen provincial, 16 city and 36 county-level governments that were audited had accumulated debts of 2.79 trillion yuan (US$412 billion) by the end of last year, according to the National Audit Office. About 9% of new debts in 2009 were invested in the central government's four trillion yuan stimulus package projects initiated from late 2008, and a considerable proportion of last year's loans were used to finance transport and other infrastructure facilities started before 2008, it said. The audit report said most of the 2.79 trillion of debt was used to fund infrastructure construction.

Is China a debt junkie? - There is a debate raging among China watchers over the potential consequences of last year's epic credit boom. Banks in China granted almost twice the number of loans in 2009 as they did the year before, an amount equivalent to nearly 30% of GDP. Any such expansion of credit has a powerful impact on growth. So what would happen to the Chinese economy if the credit spigot got turned off? That's exactly what's happening. Chinese policymakers have raised the amount of money banks have to keep in reserve and introduced other steps to rein in lending, and the policies are working. In June, the amount of new yuan loans was less than 40% the total of June 2009. That's a significant drop. And as a result, the economy is slowing down. How slow will China go? Well, that depends on your view of how important debt has been to China's recent growth.

Hard choices as China’s boom fades - Australia's export prices remain about as good as they have been in a century, but the peak is now behind us. What we have seen in the past few years is as good as it will get. Given that China bought 70 per cent of the world's iron ore exports last year, and Australia's iron ore exports this year will be worth about $US50 billion, it is not hard to see that the huge Chinese tail wind for Australia's national income is no longer blowing like it was.The underlying reason for Australia's once-in-a century resources boom was that China's heavy industry sector has been growing much faster than its overall economy. The boom was inflated by distortions in the economy linked to China's hybrid market-authoritarian form of government.

China’s growth slows to 10.3% -  World's third-largest economy slows from 11.9% as impact of stimulus eases and Beijing curbs credit boom.  China's rapid growth is slowing as the impact of its massive stimulus eases and Beijing clamps down on a credit boom. The world's third-largest economy expanded by 10.3% in the second quarter over a year earlier, down from the first quarter's explosive 11.9% growth, the National Bureau of Statistics said today. A Chinese slowdown could have global implications if it cuts demand for imported iron ore, industrial components and other foreign goods. Global companies are looking to China to drive demand amid weak sales elsewhere.

Does China need a second stimulus? - Yes, it sounds like a ridiculous question. Especially since we found out on Thursday that GDP grew 10.3% in the second quarter of 2010 from a year earlier. That's a significant deceleration from 11.9% in the first quarter, but hardly worthy of concern. The government, in fact, has been trying to slow the economy down, mainly by curtailing bank lending, after raging growth last year sparked fears the economy could overheat. But believe it or not, there's a bunch of talk among economists that China might well try to stimulate the economy again. That's because the concern about China's economy has suddenly shifted. Now the worry is a hard landing. How'd that happen? There is some feeling in financial markets that China might be slowing down too quickly.  Forecasters are predicting China's growth in the second half of 2010 will be slower than in the first.

Chinese rating agency strips Western nations of AAA status - China's leading credit rating agency has stripped America, Britain, Germany and France of their AAA ratings, accusing Anglo-Saxon competitors of ideological bias in favour of the West. Dagong Global Credit Rating Co used its first foray into sovereign debt to paint a revolutionary picture of creditworthiness around the world, giving much greater weight to "wealth creating capacity" and foreign reserves than Fitch, Standard & Poor's, or Moody's.  The US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia. Meanwhile, China rises to AA+ with Germany, the Netherlands and Canada, reflecting its €2.4 trillion (£2 trillion) reserves and a blistering growth rate of 8pc to 10pc a year.

S&P: DPJ Loss Could Be Indirectly Negative For Japan Ratings - A sovereign debt analyst at ratings service Standard & Poor's said Monday that the Democratic Party of Japan's losses in Sunday's elections may negatively affect the nation's sovereign ratings, which have already faced threats of downgrades."Under the current DPJ-led coalition government, it'll take time for important legislation to be passed. This could be indirectly negative for Japanese sovereign ratings," Takahira Ogawa, director for S&P's sovereign ratings, told Dow Jones Newswires. Prime Minister Naoto Kan's DPJ won less than 50 of the 54 seats it was contesting in Sunday's Upper House elections, and the coalition it dominates lost its majority in the chamber. The DPJ will remain the ruling party because of its hold on the more powerful Lower House, but legislation could grind to a halt as the DPJ will need the help of other parties in the upper chamber to pass any laws other than those regarding budgets.

The Trilemma of International Finance - NYTimes - AS the world economy struggles to recover from its various ailments, the international financial order is coming under increased scrutiny. Currencies and exchange rates, in particular, are getting a hard look. Various pundits and politicians, including President Obama himself, have complained that the Chinese renminbi is undervalued and impeding a global recovery. The problems in Greece have caused many people to wonder whether the euro is a failed experiment and whether Europe’s nations would have been better off maintaining their own currencies.  In thinking about these issues, the place to start is what economists call the fundamental trilemma of international finance. Yes, trilemma really is a word. It describes a situation in which someone faces a choice among three options, each of which comes with some inevitable problems.

Europe vs. U.S.: The Post-Recession Productivity Divide - New data from the ECB confirms the Great Recession took a major bite out of productivity in the currency bloc. The calculations, presented in the ECB’s latest monthly bulletin (pages 32-33), were based in part on quarterly hours-worked data that the EU statistics agency Eurostat started releasing in March. Productivity is defined as output per unit of labor. According to the ECB data, quarterly productivity fell at an average of 0.4%, from prior year levels, between the beginning of 2008 and the first quarter of 2010. In contrast, U.S. productivity expanded at an average of 3.2% over that period. The data confirm what’s long been suspected; that efforts in Europe to cushion the effect of the recession on employment hurt productivity, at least in the short run. In the U.S., employment fell much more sharply despite a more modest drop in output than in Europe.

The Eurozone crisis: what's it all about? - BBC -We know the eurozone crisis is important, but in the daily talk of "bank stress tests" and "special purpose vehicles", it's easy to lose sight of the big picture: why the crisis has happened, what we should be worried about, and what could happen next. This week Robert Peston and I will be trying to step back to answer some of those big questions, in a series of essays on the eurozone crisis for Radio 4's PM programme. Here's the first one, looking at some of the economic and political roots of the crisis. Robert will continue tomorrow with an essay on the funding challenges facing Europe's government borrowers.
you could drop out for 20 years - i did -  and when you get back its the same old shit...the names might change, but there's always the fuckwits controlling the dialog while the planet continue to race headlong into oblivion..

Finally, an Answer for "Who Speaks for Europe"? - About two months ago, Baroness Catherine Ashton, Baroness of Upholland, came to speak here at the LSE on "Economics and Politics post-Lisbon." I must sheepishly admit to dubbing her the "EuroPalin" after replacing the much-vaunted Peter Mandelson as EU trade commissioner after he was recalled home to shore up support during Gordon Brown's dying days as prime minister. Whereas Mandelson and Brown certainly need no introduction on the world stage as the architects of New Labour [RIP], Ashton was largely unknown outside of Labour ranks. Hence my initial reaction of a lady being picked from obscurity and with little experience for her role alike the aforementioned Palin. Perhaps it's Eurosclerosis still at work since her office is very new and she has yet to find her wings. There's also the considerable financial turmoil that's roiled the EU--much ado about nothing, I believe--leaving matters unsettled. However, it's with some interest that I note Ashton is a pretty good public speaker. Alike with the Rod Stewart lyrics quoted above, I must admit she comes across well despite deploying what are by now well-worn lines about herself and her job. I should know--she used them in her LSE presentation, and also in this latest "Lunch with the FT" entry.

Zapatero warns of more budget cuts - Zapatero says more budget cuts were needed to restore confidence in the Spanish economy, while opposition leader Mariano Rajoy calls for early elections; Wolfgang Schauble has difficulties securing majorities for Germany’s more extreme governance reform proposals, including an insolvency procedure, and a withdrawal of voting rights; but there may be agreement on automated; the euro managed to hang on to its international role during 2009, according to an ECB report; an Irish parliamentary committee criticised the governance reform proposals for the EU as insufficient; an FT editorial makes the case for a euro area exit clause; Calculated Risk has attempted a calculation on the total expected losses on sovereign risk; Michael Pettis, meanwhile, says the big instability danger is not China withdrawing capital from the US, but pouring more capital in.

Spain 'relying on short-term funding' as councils go bust - A third of Spain's city councils are in dire straits and may be forced to suspend payments by the end of the year, replicating the woes in the US, where many states are bearing the brunt of fiscal tightening The great majority of councils in Andalucia are already in deep crisis – either insolvent or muddling through from day to day. More than 400 of the 8,000 councils across the country have stopped paying electricity, water and telephone bills, according to Spanish newspaper El Economista. "I am deeply ashamed to know that I won't be able to pay our staff. They have got mortgages, children. What am I supposed to do?" said Jesus Manuel Ampero, mayor of Cenicientos, near Madrid. "We were not able to cover our payroll in June. Neither I nor our councillors have received anything for two years. I've had two heart attacks. My health is cracking. If we cannot solve this, I'm resigning."

Oh It’s All Gone Quiet Over In The Eurozone! ...Or has it? According to Anchalee Worrachate in Bloomberg: “A report from the Bank of Spain showed Spanish lenders borrowed a record 126.3 billion euros ($161 billion) from the ECB in June as investors shunned the nation’s banks. Spain’s banks increased borrowing 48 percent from 85.6 billion euros in May. That compares with a drop of 4 percent to 496.6 billion euros that the ECB provided lenders in the whole euro area. Spanish banks haven’t sold any bonds publicly in the past two months on concern the nation won’t be able to cut its deficit without hurting the economy.”

Spanish banks’ borrowing broke records in June – The Bank of Spain said yesterday that borrowing by Spanish banks from the European Central Bank last month broke records. The ECB said Spanish banks sought €126.3bn in funding from the ECB in June, up an unprecedented 48pc from €85.62bn in May. Spanish banks have been obliged to go to the ECB for credit because they have been facing difficulties in raising money on international markets due to fears over their solvency. The Spanish government insists its financial institutions are healthy and has said this will be demonstrated when the results of stress tests are made public before the end of the month.

Europe stress tests raise finance fears - Economic and financial concerns have heightened today on news from Europe, China and the United States. European leaders have revealed that stress testing of the European Union's banks due to be released this month will highlight "pockets of vulnerability". The Chinese government has squashed speculation it will relax curbs on lending designed to cool its property market, prompting concerns the pace of Chinese economic growth will be slower than expected. In the United States a member of the influential Business Cycle Dating Committee has warned that America's recession is not over.

European Bank Stress Test Results May Be Delayed - Top European finance officials said Tuesday that results of banking stress tests would be released on July 23, but that some national regulators could take longer to release more detailed information on certain national lenders.  The Committee of European Banking Supervisors, which is made up of national regulators from across the European Union, is carrying out the tests on the health of 91 banks. But national regulators will decide whether to publish additional information within two weeks after the July 23 release date.  ... national regulators will retain the leeway to choose whether to publish additional information about the nationally based subsidiaries of large banking groups within two weeks from July 23.

European Banks: Don't Flunk This One - WHEN America did public stress tests on its banks in 2009 they helped end the panic on Wall Street. The Federal Reserve opened banks’ books, imposed a consistent view about how bad losses might be and forced banks that lacked capital to raise more, with the taxpayer acting as a backstop investor. Europe will soon follow suit, with the results due on July 23rd. Yet whereas America’s tests were run in military style, Europe’s efforts have been chaotic—more akin to a rowdy negotiation about cod quotas than the recapitalisation of the world’s biggest banking system. With just days to go regulators must redouble their efforts to make the tests work.

The big problem with Europe’s stress tests - Can Europe’s bank stress tests do for banks over there what the US tests did on this side of the pond? Mohamed El-Erian is not optimistic: Last year’s stress test in the US applied to institutions that were the main cause of the financial instabilities, and the government had budgetary room to support the sector. Europe’s situation is different. The concern about banks is a derived concern, reflecting worries about sovereign debt in some countries and the overall economic situation; and there are greater limits today on budgetary resources. In other words, if bank solvency is the problem, then the government rescuing the banks — or forcing them to recapitalize — can be the solution. But if government finances are the problem, then it’s very unlikely that any kind of intervention in the banking sector can solve anything much. The one thing which no one was worried about during the financial crisis of 2008 was US banks’ exposure to the US government. But the one thing that everybody is worried about in 2010 is European banks’ exposure to European governments.

Slovakia abandons resistance to EFSF - Frankfurter Allgemeine reports that Slovakia has agreed to participate in the EFSF. Slovakia’s refusal to sign the agreement has delayed the start of the EFSF until the end of the month. It would have been possible to go ahead without Slovakia, but an opt-out would have been a damaging signal of disunity. The new Slovakian government remains uneasy about the process, and  said it would not participate in the loan to Greece. The decision came amid massive pressure from other euro member states, according to Frankfurter Allgemeine. The new prime minister, Iveta Radicová said she would only sign, because she did not to damage the EU. But her personal view had not changed. She said she still believes the protective umbrella is a mistake.

Stark hints at an end to ECB’s sovereign bond purchases - ECB board member says if situation continued to improve, there would be no need to continue the controversial programme; he says the eurozone’s economic recovery has not been fully appreciated; Germany and France press ahead with financial transactions tax; a mindboggling €1.65 trillion of bank debt is due in 2011 and 2012; bond market investors have been getting a tad more optimistic about the European debt crisis, as credit market indices improved; European banks are likely to tap the bond markets ahead of the stress tests; strong majority of Europeans support deficit cutting; Lex says the Spanish reform of the cajas is too little, too late; Silvio Berlusconi, meanwhile, had a bruising meeting with Italy’s regions over the extent of the spending cuts in the 2011 budget.

Editorial - Europe Curbs Its Bankers - NYTimes - Under the new rules, bankers will receive only 20 percent to 30 percent of their bonus in upfront cash. Banks must defer payment of 40 percent to 60 percent of bonuses for 3 to 5 years. And half of a banker’s upfront bonus must be paid in shares or “contingent capital” — bonds that convert into equity if the bank gets in trouble. The rules allow for banks to claw back bonuses paid to executives whose investments are initially profitable but go awry a few years down the road. Banks in Europe are already warning that if the United States does not impose similar restrictions on bonuses, American banks — wielding large rolls of cash — will poach many of their most creative and talented financiers. That is the sort of brain-drain we don’t want. And it is one more reason why the Obama administration needs to get serious about curbing bankers’ bonuses in the United States.

Euro Gains Damp Break-Up Talk as Merkel’s Jobs Show Strength - Just a month ago, BNP Paribas SA, Royal Bank of Scotland Group Plc and UBS AG said the euro was heading toward parity with the dollar as Europe’s sovereign debt crisis threatened to tear the European Union apart. “The negative sentiment was extreme,” said Mansoor Mohi- uddin, the Singapore-based head of foreign-exchange strategy at UBS, the world’s second-largest currency trader. “While we still see a lot of weakness in some euro zone bond markets, the outright pressure of the dissolution of the currency union has disappeared.” Germany is providing the engine for changing perceptions after the euro, which depreciated 14 percent against the dollar in the first five months of the year, helped drive up exports 11.4 percent to 80.8 billion euros ($102 billion) in the same period.

Euro Falls on Portugal Downgrade (Reuters) - The euro fell while Bund futures jumped on Tuesday as ratings firm Moody's cut Portugal's rating to A1 with a stable outlook.The euro fell around 40 ticks against the dollar to the day's low of $1.2523, while it also hit a session low against the pound at 83.51 pence."The downgrade is going to weigh on the euro in the short-term and doesn't bode well ahead of the bank stress tests due next Week," said David Tinsley, economist at National Australia Bank.

Ecofin edges towards compromise on financial regulation - European finance ministers decided to move a millimetre towards the European Parliament, by agreeing that the pan-European financial supervisory agency should be given decision powers during emergencies – but only if the member states is in flagrant breach of EU law. The European Parliament wanted much wider-ranging powers, including the powers by EU supervisors to take binding decisions during financial crises. This was rejected, among others, by Germany and the UK. The final legislation has to be worked out by an arbitration process between the Council and the Parliament, both of which have to approve the legislation. The FT quotes EU officials as saying that they hope a final deal could be ready by the end of this month. Uncontroversial is the European systematic risk board, while most of the controversy was about the three supervisory agencies – for banks, insurance, and financial markets. Parliament also wanted to move all of them of Frankfurt. The Council also accepted a proposal from the parliament, that the authorities should have the right to ban certain products and activities during emergencies.

Interview with Jean-Claude Trichet, President of the ECB, and Libération, conducted by Jean Quatremer - ECB website - Although there's some debate about the difference between a depression and a recession, history suggests the former tends to have a lasting impact on attitudes and behavior, while the effects of the latter are temporary.For the most part, the recessions that took place during the two decades or so prior to the downturn that began in December 2007 did not really alter the free-spending ways of the American consumer. Once the hardest times passed, Americans were quick to resume their old habits. However, as Robert Samuelson notes in a Newsweek commentary, "Insecurity Goes Upscale," the fallout this time has been dramatic and far-reaching. According to Samuelson, the key factors include a very large number of job losses, widespread pay cuts, and the substantial decline in housing and stock market wealth. That said, the pain has not been evenly felt.

Sarkozy pursues pension reform as scandal lingers (Reuters) - The French government adopted an unpopular bill on Tuesday to raise the retirement age, after a defiant President Nicolas Sarkozy failed to silence his critics over alleged illegal political donations. Labour Minister Eric Woerth, at the centre of the affair, said he would step down as treasurer of the ruling centre-right UMP party later on Tuesday, but he remains in charge of the bill to overhaul pensions which he presented to the cabinet.Sarkozy stressed in a television interview on Monday that he was determined to see through the plan to raise the retirement age to 62 from 60 and to make people work longer for a full pension despite expected protests in September.

Germans Deaf to U.S. `Nonsense' as Exports Power Growth - Hamburg, the port city that sends 1 million tons of goods to foreign markets each week, has a reply to those who say Germany’s economy is too reliant on exports.  “Nonsense, ”You cannot say Germany has to stop exports, it makes no sense. Germany was born out of this.”  Hamburg, Germany’s largest port and a crossroads in European trade since at least the 13th century, is the city with the most to lose from U.S.-led calls on Chancellor Angela Merkel to reduce the trade surplus in Europe’s biggest economy. As figures released today showed global demand for German goods surging, Merkel is torn between fostering the export boom and honoring a Group of 20 pledge to bolster domestic growth and rely less on foreign trade. Her Cabinet’s backing yesterday of a $100 billion domestic savings program suggests she’s ignoring calls by President Barack Obama to tackle what some say are German imbalances.

Why Germany should not listen to the US - Once again US economists and politicians, above all Nobel laureate Paul Krugman, are pressuring Germany to spend more money to support the international economy (Krugman 2010). They gave the same advice at the peak of the crisis in autumn 2008 (Krugman 2008). Back then, they were right that Keynesian deficit spending was called for to prevent a collapse of the world economy. The worst post-war recession required energetic measures to support demand – and in actual fact the worldwide economic stimulus packages totalling some €1 trillion brought the recession to an end as quickly as it had begun. The criticism aimed at Germany was not justified even then.

Deutschland über alles does not mean a trickledown recovery in EMU – Germany is sizzling, for now. Manufacturing output grew at an annual rate of 26pc from March to May. Mercedes, BMW, and Audi are ramping up overtime. Economic growth in the second quarter may top 5.2pc. Jean-Claude Trichet, head of the European Central Bank, last week cited this Wirtschaftswunder as evidence of durable recovery in Europe. It is no such thing. The OECD's leading indicators for June rolled over in Italy and France, as well as China and India. The IMF expects Spain's economy to contract by 0.4pc this year. It has lowered its forecast for the eurozone from 1.5pc to 1.3pc in 2011. "Downside risks to the recovery have risen sharply," it said.

One Size Fits One – Krugman - Reading these commentaries by Edward Chancellor and Wolfgang Munchau, it occurred to me that a lot of the issue can be captured by one picture. Here’s the total number of unemployed, in thousands, in Germany and Spain: Germany looks at this situation and says, where’s the problem? Unemployment never rose much, and it’s back to pre-crisis levels. Meanwhile, Spain suffers.But here’s the thing: European fiscal policy basically reflects Germany’s situation (with no allowance for the fact that this situation, too, is likely to worsen; see Munchau’s piece.) So does European monetary policy.When the euro was proposed, we worried about one-size-fits-all monetary policy. But the reality is worse: it’s one-size-fits-one.

The Market Confidence Bugaboo – Rodrik - A specter is haunting Europe – the specter of “market confidence.” ... Governments all over are being forced into premature fiscal retrenchment, even though unemployment remains very high and private demand shows few signs of life. Many are driven to undertake structural reforms that they don’t really believe in – just because it would look bad to markets to do otherwise. ...If you want to keep borrowing money, you need to convince your lender that you can repay. ... But in times of crisis, market confidence takes on a life of its own. It becomes an ethereal concept devoid of much real economic content. It turns into what philosophers call a “social construction” – something that is real only because we believe it to be. ...A government’s capacity and willingness to service its debt depend on an almost infinite number of present and future contingencies. . All of these are highly uncertain, and require many assumptions to reach some form of judgment about creditworthiness. Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it.

Paul Krugman: Dani Rodrik Is Insufficiently Radical - Dani has a nice piece decrying the obsession with market confidence. But even he misses a trick. He writes, Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it. Um, even that isn’t true. Britain embarked on austerity even though there was no hint that bond markets were actually worried about its solvency. American politicians are saying that we have to cut now now now or become Greece, even though interest rates on US debt are at near-record lows. As I’ve written repeatedly, we’re running scared of invisible bond vigilantes.The point is that policy makers aren’t responding to what financial markets demand — they’re responding to what they believe, thanks to some mystical source of knowledge to which I’m not privy, markets will demand one of these days.  This isn’t the tyranny of the bond market; it’s the tyranny of fiscal fantasies, of speculation about what the bond market might do.

The case against the optimists - Is pessimism about the eurozone overdone, as Jean-Claude Trichet, president of the European Central Bank, argued last week?  When trying to answer that question, one should distinguish between the short-to-medium-term economic outlook and the long-term sustainability of monetary union. So let us disentangle, and focus on, the first of these only. What kind of recovery, if any, are we going to get?  During the first half of 2010, the eurozone enjoyed nominal short-term interest rates of near zero, a big fall in the euro-dollar exchange rate and an expansive fiscal policy. Those three factors contributed to a recent increase in industrial orders in Germany, and resurgent optimism in that country’s business community.  As we enter the second half of the year, two of the three factors are changing. First, we are now seeing a policy-driven tightening in monetary policy. Mr Trichet is quite wrong to claim that the rise in interest rates has nothing to do with the ECB’s monetary stance. He cannot have it both ways.

Debunking Eurozone Optimism -- Yves Smith - I sometimes wonder whether Wolfgang Munchau of the Financial Times and Ambrose Evans-Pritchard of the Telegraph channel each other. Although they are both dubious of the eurozone’s ability to navigate its way out of its current mess, they also have an interesting habit of taking up similar issues on the same publication date.Today, both writers focus on last week’s spurt of optimism about the eurozone’s prospects, particularly stronger than expected economic results out of Germany. Both writers took it upon themselves to parse the optimists’ case and found it sorely wanting.Evans-Pritchard takes two thrusts: the good news for Germany is not anywhere as good as it appears for the rest of the eurozone, and the good German performance is also unlikely to be sustained at this level: (then)Wolfgang Munchau contends that robust-looking eurozone results are due to factors that are in large measure are about to go into reverse:

PIIGS may yet fly, but not while they're trapped in this rickety eurozone - Two of the eurozone's economic problems are dangerously inter-related. The first is enormous levels of government debt – about 120pc of GDP for Greece and Italy. The second is the loss of competitiveness of the eurozone's southern members, which also, generally speaking, are the ones with high budget deficits and/or ratios of government debt to GDP. Since 2000, Greek unit labour costs have risen by almost 40pc. Meanwhile, German unit labour costs have barely risen. This loss of competitiveness by the southern countries is central to their current poor economic performance and their lack of viable prospects for the future. If governments are obliged to cut back and consumers and/or companies are lumbered with excessive debts, it is to exports that these countries must look for salvation. For the eurozone as a whole to achieve prosperity and economic success, accompanied by stability and sustainability, will require the solution of both these problems. But are they simultaneously soluble within the current financial framework?

Eurozone break-up would boost Ireland’s economy – The break-up of the euro area would save the 16-nation region from years of economic stagnation by boosting weaker members' competitiveness, as well as domestic demand in Germany, to spark growth, leading economics consultancy Capital Economics said.  "The threatened break-up of the eurozone, which many see as a potential disaster, would actually open the door to renewed economic growth, not just for weaker members of the zone, but for Europe as a whole," the economists said in a report released at the weekend. Greece's debt crisis has driven down the euro and forced governments from Spain to Italy to embrace austerity measures and cut their deficits, clouding the outlook for recovery. On Thursday, the IMF Fund kept its forecast for 1pc growth this year in the region, which expanded 0.2pc in the first quarter.

Part 3. What are the Market Estimates of the Probabilities of Default? - Previous posts: Part 1: How Large is the Outstanding Value of Sovereign Bonds? Part 2. How Often Have Sovereign Countries Defaulted in the Past? Part 2B: More on Historic Sovereign Default Research There are a number of ways of looking at chances of default and/or expected losses, including: bond yields vs a low or no default bond in the same currency, credit default swap prices, bond ratings, and analysis of underlying financial factors. Bond ratings move more slowly than bond yields or CDS prices. Ratings often are lowered only after a major problem has been realized and is already incorporated into yields or CDS prices. While bond prices can be useful, there are an assortment of problems of trying to extract default probabilities.

Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default? - In Part 3, we showed that credit default swaps imply that 7.4% of sovereign debt will default over the next 5 years. However, the defaulted bonds probably would not lose all of their value.To estimate losses, in addition to the Probability of Default, we need to estimate Recovery Rates Given Default. Moody’s has studied sovereign default recoveries in the past several decades (Source: Sovereign Default and Recovery Rates, 1983-2008). Recovery rates have ranged from 18% (Russia, 1998) to 95% (Dominican Republic, 2005), when measured on all debt from a particular sovereign at the time of default. The average recovery rate was 50% when each country was weighted equally, but only 31% when weighted by the face value of all outstanding bonds from all defaulting issuers. Applying those recovery rates leads to expected losses of $1.3 to 1.8 trillion, or about 3.7 - 5.1% of outstanding sovereign debt at 12/31/09, and about $100 billion more at 6/30/10. We now have our baseline estimate of worldwide sovereign default losses.

The folly of common currencies - For the weaker economies of the eurozone, adopting the euro is comparable to the earlier unhappy dollarization experiment by Argentina, which should have served as a cautionary tale to all national economies linked to the European currency. Commenting at the onset of the sovereign debt crisis in Greece, Argentine President Cristina Fernandez characterized International Monetary Fund (IMF) "conditionalities" imposed on Greece as being "unfortunately condemned to failure". She spoke from experience, as Argentina was hit by one of the world's biggest sovereign debt defaults in 2001, from which the once prosperous nation still has not fully recovered from IMF "assistance".  Argentina is blessed with a rich economy by nature in terms of natural resources and by policy in terms of productivity from the high education level of its population. There is no compelling reason why Argentina should become an economic basket case with regard to its sovereign finance, except for falling under the malicious spell of neo-liberalism.

Chronicle of currency collapses: re-examining the effects on output -BIS -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.

Is There Global Economic Slowdown In The Works? - According to Ralph Atkins writing in the Financial Times last week, "the pace of Germany’s recovery is helping dispel fears of a “double dip” recession across the continent as a result of the crisis over public finances in southern European countries". Coincidentally, however, on the very same day, Alan Beattie writing from Washington informed us that the IMF feel "the risk of a slowdown in the global economic recovery has risen sharply". This left me asking myself which is it: is the global recovery a question of up up and away, or are we at the start of a renewed slowdown (whether or not you wish to term this a "double-dip")? So I thought I would take a look through some of the most recent data (both hard and soft) to see if I could make any sense of the situation. Well one place we could look for some sort of indication would be in the latest batch of PMI survey results.

“The G20 Plan for Prosperity – Rubber Bullets and Shredded Social Safety Net” - The Toronto G-20 summit sent a message to poor and working people in Europe and North America. “You will pay for the global financial crisis through cuts to your social safety nets. There will be no taxing of those who actually caused the crisis and made fortunes in the various bubbles over the last decades.”Of course not in so many words — what they said was they had committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. That means austerity plans, which was pretty much what was on the agenda before the countries got there.This was bad enough. But there was another message, too, sent through the Canadian police: “If you don’t like it, how about a rubber bullet?” It looks like G-20 countries will deal with opposition to their plans through martial law and police brutality.

And Speaking of The Stupidity of Austerity - The planned squeeze in U.K. government spending increases the chance of the economy slipping back into recession, said Geoffrey Dicks, who heads economic forecasting at Britain’s new fiscal watchdog. Responding to questions during a parliamentary hearing in London today, Dicks said measures proposed by Chancellor of the Exchequer George Osborne in the June 22 budget led his office to shave 0.5 percentage points from its growth forecast in the “near term,” increasing the chances the economy will shrink. “There are some budget measures which will have reduced demand,” Dicks told the Treasury Committee, which scrutinizes economic policy. “The near-term outlook for GDP is not as good as it was before the budget. I still don’t think that will mean a double dip, but logically the chances of that happening have increased.” And therein lies the rub. He's using logic. That's what throws people off.

Government cuts to cost 13000 jobs in Birmingham, consultants warn - More than 13,000 jobs will be lost in Birmingham because of Government cuts announced so far, an independent consultancy has warned. Almost one in nine public sectors posts in the city will be axed. The grim warning came from consultancy The Local Futures Group, which advises local councils and bodies such as the CBI and European Commission. It published a report warning: “We expect to see the highest job losses in the major metropolitan centres. Birmingham, Glasgow, Leeds and other conurbations will face the brunt of the cuts.”

UK debt is 'twice as much as we thought' - The true scale of the national debt is £2 trillion - more than twice the official figure, an alarming study shows. The black hole in the public accounts equates to £78,000 for every household in the country.The 'real' state of the national finances is exposed in a study published today by the Centre for Economics and Business Research, which warns of a series of mammoth debts that aren't revealed by the official figures.The national debt - forecast to reach £932m by next spring - does not include a number of expensive liabilities, such as the cost of civil service and town hall pensions and projects funded under the Public Finance Initiative.

UK pension deficit hits $152 billion - Pension deficits have ballooned to the £100 billion ($152.7 billion) landmark but the knock-on effects of the austerity measures announced in the Budget are likely to add to the woes of companies sponsoring final salary schemes over the next few years. However, in the long-term those measures will eventually start to erode the final salary debts of companies if the economy improves, according to Aon Consulting. The aggregate pension fund deficit shown in company accounts for the 200 largest UK privately sponsored pension schemes increased from £88 billion ($134.3 billion) in May to £100 billion at the end of June. “In the short term, the fiscal measures introduced in the Emergency Budget are likely to increase final salary pension scheme deficits,” Aon said.  “The reduced issuance of government securities (gilts) relative to previous expectations, combined with slower economic growth, are both likely to reduce the yields available on gilts and so increase the value placed on final salary scheme liabilities.

Can Mervyn King save the UK banking system? - Wanted: tough, non-nonsense regulators to cast a beady eye over Britain's banks. Apply to M King, Bank of England, Threadneedle Street. Unlike the rest of the public sector, the Bank is about to get bigger. It needs to recruit a cadre of officials to police the City following the decision by George Osborne to reform a regulatory system that contributed to the worst financial crisis since the 1930s.Emergency measures helped to prevent deep recession turning into a second Great Depression but – as the Bank for International Settlements noted last month – the running repair job has delayed necessary reforms to both the real economy and to the financial system. Nowhere is change more needed than in the UK, which during the bubble years became too dependent on the speculative activities of banks that were far too lightly regulated for the risks they were taking with the deposits of their retail customers.

Debt Woes May Damp $3 Trillion Refinancing in Europe, S&P Says (Bloomberg) -- Government debt concerns may hinder efforts by companies and banks in Europe to refinance more than $3 trillion of bonds through 2013, Standard & Poor’s said. Corporate borrowers may also be crowded out by sovereign fundraising in the region, while slowing economic growth may persuade banks to hoard cash rather than lend it on, S&P analysts led by Diane Vazza in New York wrote in a report published today. There’s also the risk that rising interest rates will hurt financial issuers, which account for 71 percent of bonds due in the next three years, according to S&P

Crisis Awaits World’s Banks as Trillions Come Due - The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years. The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is. Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth. “There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

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