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

Saturday, July 24, 2010

week ending July 24th

US Fed's balance sheet down in latest week‎ (Reuters) - The U.S. Federal Reserve's balance sheet decreased in the latest week, Fed data released on Thursday showed.The balance sheet was $2.315 trillion on July 21 versus $2.324 trillion a week before.It remains near its record high of $2.334 trillion hit in May. After declining early last year, the balance sheet started accumulating mass amid the U.S. central bank's asset-buying program.The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) totaled $1.125 trillion on July 21 versus $1.129 trillion on July 14.The U.S. central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was $159.38 billion versus $162.11 billion. Primary credit via the Fed's discount window averaged $25 million per day in the latest week, down from $86 million per day in the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 22, 2010

The Fed's Balance Sheet: a Problem or an Opportunity? - (Click on figure to enlarge. Source: Cleveland Fed)  Is the Fed's expanded balance sheet a problem or an opportunity? It has grown from approximately $860  billion in early 2007 to about $2.3 trillion today.  That is an increase of over 250%. This enlargement of the Fed's balance sheet implies a corresponding increase in the monetary base.  Obviously, this large of an increase in the monetary base, if multiplied into increases in broader monetary aggregates like M1 or M2, has the potential to fuel spending and become highly inflationary.  But it hasn't happened as most of  the new monetary base is sitting in banks as excess reserves.  It is not being lent out and is far from living up to its reputation as  "high-powered money". Moreover, the market expects this to be the norm for years as inflation expectations across all horizons are falling.  The Fed's balance sheet, then, currently appears to be anything but a problem with regards to inflation.  Now someday it could be a problem, but right now it is not and that indicates the Fed is failing in its efforts to stabilize spending--the one thing the Fed can and should be doing.

Mortgage Securities It Holds Pose Sticky Problem for Fed - The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners. Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy. \ While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell.  Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy.

More on the Fed's Power - James Hamilton adds to the growing chorus of observers who are arguing the Fed can do more if it really wanted to do so.  He makes the same argument made here and in other places that the Fed still has the ability to (1) enlarge and alter its balance sheet and (2) change expectations:  The claim that a central bank could become completely unable to debase the currency if it wanted has always seemed odd to me. Even if reserves and T-bills become equivalent assets (and at the moment they surely are), reserves are not equivalent to any number of other assets. Nothing prevents the Fed from buying longer-term assets, continuing to create reserves at will for the purpose until the yields on those assets adjust... Or for that matter, the Fed could start buying goods directly, or equivalently, let the Treasury buy the goods and have the Fed simply buy up all of the debt that the Treasury cares to issue. That the price of goods would be unaffected regardless of the quantity purchased seems quite implausible.

Look out below - TOMORROW and Wednesday, Fed chair Ben Bernanke will be testifying in front of the Senate Banking Committee and House Financial Services Committee, respectively. If I were on one of those committees, I'd be asking him about this: And asking him about it, and asking him about it, until I clearly understood why the Fed was failing to satisfy either of its principal mandates: full employment AND price stability.

Monetary Policy Testimony Q&A Preview: Suggested Questions for the Chairman - Any news about changes in the Chairman’s message delivered in the opening statement of the semiannual monetary policy testimony is deservedly a central focus of the markets. Still, the most amusing part of the testimony and, occasionally, even more informative than the prepared remarks, is the Q&A. Perhaps it is just wishful thinking on our part, but we thought we might try to tilt the odds towards more monetary policy questions this time around by suggesting a list of questions that members of the oversight committees should ask the Chairman. Our views on the Chairman's answers to these questions were outlined in the original commentary. Let's go straight to our suggested list of questions:

Bernanke Downplays Need For New Policy Moves - Ambiguity still rides shotgun on the outlook for Federal Reserve monetary policy. Testimony by Federal Reserve Chairman Ben Bernanke on Wednesday showed a central bank at the crossroads. While the institution believes the economy will continue to recover, policy makers are nevertheless mulling their options should they need to provide additional support if growth again falters.The Fed doesn’t think it will have to provide that additional support. Bernanke reaffirmed that the current policy of zero-percent interest rates is likely to remain in place for an “extended period,” noting that even in its current stance the Fed is doing an awful lot to support the economy.

Bernanke Says Fed Can Do More, if Needed - Fed’s Bernanke calls the outlook “unusually uncertain” and notes the central bank is prepared to take additional action if needed. His economic outlook sees lower than expected inflation and at best a slow pace of falling unemployment levels. He notes financial conditions are hindering growth and expects interest rates to stay low for “extended period.”He also says the Fed is continuing to think of ways to shrink its portfolio, and any asset sales will come gradually.Bernanke’s comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn’t suggest much central bank appetite to provide additional stimulus to a troubled economy. Bernanke says the economy needs continued government stimulus now, but says it’s also important to form plan to bring longer run deficits back in line. He says of stimulus now “I would be reluctant to withdraw support too precipitously,” given the economy’s current challenges.

Bernanke says Fed to act if U.S. recovery stalls (Reuters) - The Federal Reserve stands ready to ease monetary policy further if the budding U.S. economic recovery withers, Fed Chairman Ben Bernanke said on Wednesday, describing the outlook as "unusually uncertain." Pressed on what the Fed could do to ease monetary policy further, Bernanke said it could reinvest mortgage bonds that are rolling off its balance sheet or engage in further debt purchases. It could also lower the rate it pays banks to park their excess reserves at the Fed, he said. "If the recovery seems to be faltering, then we at least need to review our options. We have not fully done that review," he said.

Testimony Highlights: Bernanke on the Hill - WSJ - Federal Reserve Chairman Ben Bernanke presents the central bank’s semiannual Monetary Policy Report to the Senate today. In his prepared testimony, he didn’t offer any new steps to support the economy but said that with an uncertain economic outlook, Fed officials “remain prepared to take further policy actions as needed.” Key points from the prepared remarks:

FRB: Testimony--Bernanke, Semiannual Monetary Policy Report to the Congress Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. July 21, 2010

The Vague Fed - This story says, Sen. Shelby asks Bernanke what everyone wants to know: what more can the Fed do for the economy, if needed. Bernanke replies that the Fed has options from lowering the interest on reserves rate, to language changes in the FOMC outlook, to balance sheet tweaks. Pointer from Mark Thoma, who elsewhere clarifies the issue.  What comes across is a Fed Chairman saying, in effect, "We could save the economy, but we won't." I think that he should be obliged to disclose his thinking in precise terms. What is his forecast of the economy if the Fed executes policy X? What is his forecast if it executes policy Y? Everyone is acting as if in order to maintain the Fed's independence, the Fed must be allowed to be vague about its targets, vague about how it might achieve those targets, secretive about how it thinks its actions influence those targets, and ad hoc in its approach to deciding when to take action. I would suggest re-examining such assumptions.

Monetary Policy Testimony: A Bit Out of Touch - The Chairman's prepared remarks did not deviate much from the tone of the minutes of the June FOMC meeting, not even to acknowledge the further softening in the data since that meeting. We believe that the Chairman tried hard to represent the views of the FOMC, as reflected in the minutes, but, in the process, he sounded a bit out of touch with the data released since the June meeting. On policy, his discussion seemed even less balanced than that of the minutes. It was as if he was a bit out with touch of the Committee too! The oversight committee once again mostly passed on the opportunity to pose probing questions on the conduct of monetary policy. Sadly, only 14 percent of the questions were on monetary policy. If the Chairman seemed a bit out of touch with the data, the oversight committee definitely seemed out of touch with monetary policy!

Why the Fed’s options are still under review - In his testimony today Ben Bernanke said that the Fed has not yet decided on its leading option in the event that it has to ease policy further. Mark Thoma asks, why? After all this time, and after all the calls for the Fed to do more, they don’t even know what the leading options are? I don’t think that’s fair. I think the Fed knows exactly what it would do if there was a sudden disruption in financial markets tomorrow: liquidity programs like those we saw during the crisis and then probably asset purchases if they didn’t work. I think the Fed is still pondering for a few reasons. First, the best response would depend on the conditions at the time, e.g. asset purchases will deliver better results if markets are stressed and the effect of communications will depend on the yield curve.Second, the FOMC is quite split about the effectiveness of asset purchases, how much they distort markets, and the risks to the Fed’s credibility. Third, I think the Fed is keen to keep revisiting all possible options, including those it has decided against in the past. That seems healthy enough to me

No we can’t - I’m so depressed I just want to give up on this pointless crusade, but I suppose I’d better say something about Bernanke’s “pep talk” today in front of Congress.  In the Q&A he argued that “no one” can dispute the aggressive nature of monetary policy today: I guess that makes me “no one.”  In the 1930s everyone seemed to think Fed policy was expansionary.  They cut rates close to zero, they dramatically increased the monetary base, they encouraged banks to hold on to more reserves.  Hoover set up a fund to help the banking system.  I’m not disputing that the Fed has done more this time.  But Bernanke himself admitted that we now know Fed policy was actually contractionary during the 1930s.  By what benchmark can the economics profession say it was contractionary then, but is highly expansionary now?  I’ve asked the question 100 times of my fellow economists and still haven’t received an answer.

Time for a Monetary Boost - In his testimony to the Congress this week, Fed Chairman Ben Bernanke left the door open to further monetary stimulus but made it clear that such action is not imminent.This reluctance to act may seem puzzling given the widespread view that the economic recovery is too weak.  The Federal Reserve's own forecast shows that it will take at least three or four years for employment to return to its long-run sustainable level. This extended period of high unemployment represents a massive waste of productive labor and untold personal suffering of unemployed workers. The Fed should be aiming to get us back on track within two years. And the urgency of Fed action is all the more important because Congress has refused to provide more stimulus. In addition, it is now apparent that deflation is a more serious risk for the US economy than inflation. The latest data show overall declines in consumer and producer prices. Even after excluding the volatile food and energy components, core inflation has trended well below the 2-percent level that central banks view as optimal Clearly, the case for monetary stimulus is strong. But what form should it take? . Three actions, in particular, would be helpful at this time.

More unconventional easing from the Fed?: A toxic toolkit… Asked Wednesday what he’d do if the economy needed more stimulus, Ben Bernanke was noncommittal: “We are going to continue to monitor the economy closely and continue to evaluate the alternatives that we have.”Mark Thoma (here and here) is dismayed that Mr Bernanke, given the time the Fed has had to study this, doesn’t seem to know what he’ll do. Robin Harding says Mark is unfair: what Bernanke does will depend on what happens, and then on developing a consensus with his colleagues. Robin is right that what the Fed would do differs depending on whether it faces a liquidity crisis or a shortfall in aggregate demand and rising threat of deflation. Yet Mark is also right that this does not exonerate Mr Bernanke. To echo Mark, the question is, how will you deal wth the plausible forecast of inadequate demand, disturbingly high unemployment and low inflation bordering on deflation? That the Fed has a plan for when another fire breaks out on its drilling rig is fine, but where's the plan for capping the well that's already spewing oil into the ocean? 

Bernanke: Lowering Interest on Excess Reserves Could Threaten Markets -Ben Bernanke told lawmakers during his two-day semiannual testimony that the central bank is evaluating three options for boosting the economy further if necessary:  Each of those options carries drawbacks, he told a Senate committee Wednesday. Testifying before the House Financial Services Committee today, he elaborated on the risks of doing one of them: Lowering the interest rate it pays on excess reserves — now at 0.25% — could create trouble in money markets, he said.“The rationale for not going all the way to zero has been that we want the short-term money markets, like the federal funds market, to continue to function in a reasonable way,” he said.“Because if rates go to zero, there will be no incentive for buying and selling federal funds — overnight money in the banking system — and if that market shuts down … it’ll be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.”

Further from El-Erian on Bernanke and sliding stock markets - Bernanke’s full written testimony is now available. So here’s an update from Mohamed El-Erian, the PIMCO chief executive, adding to his earlier preview on FT Alphaville. Chairman’s Bernanke’s written statement has just been released. It is as expected in the earlier FT Alphaville post.  Importantly, the Chairman refrains from saying anything new on policy measures. Instead, he repeats what has been done (and said) before and notes that the Fed stands ready to do more as needed. When it comes to the discussion on policies, Chairman Bernanke prefers to return to the issue of “exit” (from unconventional policies) rather than be specific of additional policy steps. In addition to these general comments, three (more detailed) factors warrant mention:

Ending Interest on Reserves Won’t Help - Financial markets are abuzz with chatter that in a bid to stimulate the economy, the Federal Reserve would suspend paying interest on the reserves banks have parked on its balance sheet.  Right now, banks hold some $1 trillion in reserves at the Fed. The reasons for doing that are many, but a key motivation is the 0.25% return they can collect. Not much, but something when the federal-funds rate is essentially at 0%. For quite a while, the Fed was quite happy to have that money on its books. Indeed, the power to pay interest on reserves was considered a key tool to keep control over all the liquidity the Fed pumped into the system during the financial crisis. But as worries about the outlook have risen, the game has changed. Some see a move to drive all those reserves into the economy as a key way to produce better economic growth. Economists, however, think ending the interest on reserves policy would be a bad idea.

Economists = Idiots? - It was their idea, so it's no surprise they like paying interest on reserves, even excess reserves: Markets got to thinking Fed Chairman Ben Bernanke would indicate this as a possible path when he testifies before the Senate Wednesday and the House of Representatives Thursday on the economic and monetary policy outlook. Economists, however, think ending the interest on reserves policy would be a bad idea. Right, because the $2,534,722.22 a year paid in interest on $1 Billion in excess reserves is a drop in the bucket for the U.S. Federal deficit. And because the risk-free rate of return that features in so many economic models should be different for intermediaries (financial institutions) than wealth-creators (businesses).And because "excess reserves" are money issued by the government which is inflationary because of the multiplier effect of money—which, of course, assumes the money is being invested. And, of course, because that $1 Billion that is not being used in the economy would only produce about $5-8 Billion in GDP, which is roughly, what, 50,000 to 80,000 new jobs?

The Fedfail Index - Paul Krugman - Ben Bernanke’s testimony today, as expected, lacked all sense of urgency. Hey, the economy’s a bit disappointing, and maybe someday we might think about doing something about it … In my view, the Fed is too optimistic. Bernanke says that  Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010, and roughly 3-1/2 to 4-1/2 percent in 2011 and 2012. — but haven’t those forecasts already been overtaken by events? Less than 3 percent growth in the 1st quarter; probably only around 2 in the 2nd; to make more than 3 we’d have to see accelerating growth from here on, and all signs point the other way. Not to mention the fact that stimulus is going into reverse. But forecasts aside, we really have to bear in mind that the Fed is failing in fulfilling its dual mandate, price stability and full employment. I thought it might be convenient to have a simple measure of just how big the failure is; let’s call it the Fedfail Index. It’s related to the Taylor rule, but instead of offering a rule of thumb for the Fed funds rate, it measures how far unemployment and inflation are from their presumed targets.

Here It Comes: Bernanke Says Fed Could Introduce "Some Special Lending Programs" In Case Of European Debt Crisis Spillover - Actually, the quote was in the "unlikley" case of spillover from European debt crisis. Even the Chairmesiter has a sense of humor. But the meaning is clear. We are on the verge: a few more negative data points (guaranteed), and/or just a month before all of PIIGSy Europe gets back from vacation (around August 15), realizes it still has no pensions, bonuses and 14th monthly salary, and proceeds to storm various parliaments, and the Fed will be back, baby.

Fed Watch: Bernanke Post Mortem - Federal Reserve Chairman Ben Bernanke's Congressional testimony should leave little doubt about the stance of monetary policymakers. Swift reaction came from Mark Thoma, Paul Krugman, Scott Sumner, and Joe Gagnon. Simply put, an incipient second half slowdown and fears of an outright double dip are insufficient to prod additional action on the part of the Federal Reserve. Policymakers are comfortable with the idea that neither objective of the dual mandate will be met in the foreseeable future. And even should the economy deteriorate such that they are forced into additional action, the likely policy candidates are woefully insufficient to meaningfully change the path of economic activity. For all intents and purposes, the Fed is done. To be sure, the Fed would roll out its new set of lending facilities in response to another financial crisis. But setting the possibility of crisis aside, it is not clear what data flow short of a significant drop in activity would prompt a change of heart at the Fed.

Time for New Thinking on Stimulus - For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough.* With fiscal policy effectively off the table, the burden of further stimulus necessarily falls on the Fed, which still has freedom of action. This may be a blessing in disguise because I have believed all along that monetary policy is at the root of our economic problem. We are essentially suffering from a deflationary recession identical to the Great Depression except about one-third the size.

Bruce Bartlett on What the Fed Can Do - Bruce Bartlett has been discussing what the Fed can do to help stabilize aggregate demand.  In this piece he  joins the growing chorus of observers calling for the Fed to abolish paying interest on banks' excess reserves:   [M]any economists believe that the Fed has unwittingly encouraged banks to sit on their cash and not lend it by paying interest on reserves. Eliminating interest on reserves would therefore encourage lending. The Fed needs to think outside the box and be more innovative and aggressive about getting money to circulate, getting banks to lend, and raising inflationary expectations. Ending payments to banks on money they aren’t lending would be a step in the right direction. I agree and have been making this same point since October 2008 when the Fed first started this policy. At this juncture, though, the Fed should also add some explicit nominal target--my favorite would be a nominal GDP target--to stabilize nominal expectations and shore up velocity.  As I have said before--and contrary to what Bruce Bartlett claims in his other Fed piece--there is a lot monetary policy can do now to stabilize aggregate demand if it wanted to do so.

The View From Bernanke's Perch at the Fed - Until recently, attacking Federal Reserve Chairman Ben Bernanke for being too passive sounded out of touch with reality. Indeed, he has been assailed for doing too much to bail out Wall Street and for risking the Fed's independence. Yet the question lurking is why the central bank isn't doing more now to rescue an economy that is losing momentum. After all, the Fed's forecast is for inflation below its informal target and persistently high unemployment for the next couple of years.The distressing economic outlook has deteriorated since the Fed's June 22-23 meeting. Mr. Bernanke would cut short-term interest rates if he could. But he can't; rates are already near zero. So the question is whether to pursue more-unconventional monetary policy. The Fed, perhaps prematurely, ended its purchases of mortgages earlier this year. As the minutes of the June meeting note, Fed officials are at least talking about what would justify reopening the spigot.

Joe Gagnon Is Right - Paul Krugman - He calls on the Fed to implement a plan based on the ideas of someone the central bank seems to have been ignoring — a macroeconomist by the name of Ben Bernanke. We don’t know how well the Gagnon plan would actually work — but there’s no harm in trying, and large potential benefits. The only possible reason for the Fed not to be more aggressive now is fear of embarrassment, of not getting big results. And that’s no reason to sit still while the Fedfail Index keeps deteriorating.

Fed Targets - What do we want a central bank to do? The initial mandate given to the Fed, in the Federal Reserve Act of 1913, was to "furnish an elastic currency." What the framers of the Act appeared to have had in mind was intervention by the central bank to smooth the effects of predictable seasonal fluctuations in the demand for currency, and to prevent the banking panic episodes that had occurred during the National Banking era after the Civil War.The Employment Act was amended in 1978, in the form of the Full Employment and Balanced Growth (or Humphrey-Hawkins) Act, with language that referred specifically to the Fed. The Chairman of the Board of Governors was required to testify to Congress on a regular basis, and was required by the Act to maintain long-run growth, minimize inflation, and promote price stability. The 1978 Act was somewhat more explicit than its precursor in setting goals for the federal government and the Fed, but it also has no teeth.

A brand new Fed?? - Ezra Klein gives us one view of financial regulation. Is it the correct view?–your guess is as good as mine! My first generative concept is that the entire matrix of the Federal Reserve could be wrong. I would support a prohibition of the Fed from lending to financial institutions, or buying Government securities. I would allow the Fed to sell Government securities to aid the Treasury, but no purchase by themselves. I further would turn the Fed into a holding corporation, allowing them to only purchase Stock in private financial institutions. I would insist any such purchase must be of Voting Stock, granting the Fed capacity to intercede in lending and other bank practices. It quickly becomes a situation where the independence of the private financial institutions is restrained by national economic policy, if they desire to possess the funds for the expansion they crave. It also separate financial practice from Government public funding, forcing the Treasury to themselves enter the financial markets as a competitive player.

A Marriage Made in Heaven or Hell: Monetary and Financial Stability - Monetary stability seems almost a given today, even taken for granted. It wasn’t always like that. Not so long ago, high and volatile inflation routinely raised its ugly head and threatened living standards. Some of us even remember those days! It wasn’t pleasant. But since then, an effective antidote has pretty much wiped out rampant price instability. Over the past three decades, better monetary frameworks have caused the level and volatility of inflation to fall sharply. These frameworks enshrined price stability as the main monetary policy objective, and provided independence and constrained discretion in the pursuit of this objective, often set out through formal inflation targets. As I said, it worked out well. Or did it? In reality, there was a gaping hole in the system. While monetary policy frameworks fortified the castle against inflation at the front, they didn’t pay much attention to back door vulnerabilities. I’m talking about financial stability

Who Should Safeguard Financial Stability? - Robert Shiller - Central bankers around the world failed to see the current financial crisis coming before its beginnings in 2007. Martin Čihák of the International Monetary Fund reported in July 2007 that, of 47 central banks found to publish financial stability reports (FSRs), “virtually all” gave a “positive overall assessment of their domestic financial system” in their most recent reports.And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis. That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [], a think tank of 15 academic financial economists to which I belong, reached in our recently published report, Fixing the Financial System.Macro-prudential regulators (government officials who focus not on the soundness of individual financial institutions, but rather on the stability of the whole financial system) are sorely needed, and central bankers are the logical people to fill this role. Other regulators did no better in predicting this crisis, and are even less suited to prevent the next.

The low-interest-rate trap -There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates. Should the crisis spur central banks to change how they conduct monetary policy? This column argues that strict inflation targeting, which ignores financial fragility, can produce interest rates that push the economy into a “low-interest-rate trap” and increase the likelihood of a financial crisis.

Remote Control - Krugman - This AP story on Bernanke’s testimony contains editorializing disguised as reporting:  Even though the prospects of deflation — a widespread and prolonged drop in prices for goods, the value of stocks and homes and in wages — is remote, some Fed officials are worried about it. Keeping rates low would help prevent deflationary forces from taking hold. How does the AP know that the prospects for deflation are remote (and note the implicit suggestion that worried Fed officials are a bit strange)? Here’s what has happened so far: In the face of high unemployment over the past two years, core inflation has fallen from more than 2 percent to less than 1 percent. All mainstream forecasts call for unemployment staying high for at least two more years, and probably more than that. Maybe that won’t lead to deflation — but it’s surely not outlandish to say that it will.

Cowen Digs Himself In Deeper... Tyler Cowen must be one of the smartest, best informed conservatives around. Yet, in persisting in arguing against Paul Krugman that the German case in the early 90s, when Germany was nowhere near a liquidity trap, tells us anything about today, when we are in a liquidity trap, leaves me scratching my head.  Krugman wrote: "Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound."Simple enough and true.Cowen writes: "the zero bound is not required to drive the main arguments that fiscal policy is effective with unemployed resources. So historical examples with a non-zero bound and ineffective fiscal policy do count against fiscal policy." Except, they don't say anything about the effectiveness of fiscal policy in a liquidity trap, which is the only time fiscal policy should be used. So, they don't count against fiscal policy. They say fiscal policy shouldn't be used in normal times, which is what we all agree. Now we're constrained at the lower bound, so the usual logic is reversed.

Federal Reserve looks to battle deflation - -- Battling inflation has historically been a major aim of the Federal Reserve. But central bank policymakers now have an even bigger worry: deflation.Prices have been slowing for three months. And members of the Federal Reserve openly voiced concerns about deflation at their last meeting. The Fed now expects inflation of 1% or less this year and next, not including food and energy prices.While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices.Businesses respond to declines in prices by cutting output and jobs. Why invest in making something to sell if the price you'll get for it will drop? Consumers hold back on buying for the same reason. The result is a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case.

Gauging the inflation expectations of business - Atlanta Fed macroblog - Last Friday, the U.S. Bureau of Labor Statistics (BLS) reported that the consumer price index (CPI) declined in June for the third consecutive month. And although core inflation edged up a bit, the entire increase can be accounted for by the BLS's seasonal adjustment factor. In an environment of "business-not-as-usual" like today, data driven by seasonal adjustment are certainly suspect. So overall, the June CPI news seems largely in line with the downward inflation trend we've been seeing for a while. Does recent disinflation imply deflation? Well, that wouldn't be the consensus coming out of the June 22–23, 2010, FOMC meeting minutes:"A broad set of indicators suggested that underlying inflation remained subdued and was, on net, trending lower,… However, inflation expectations were seen by most participants as well anchored, which would tend to curb any tendency for actual inflation to decline." A similar sentiment was expressed recently by European Central Bank (ECB) President Jean-Claude Trichet in describing the ECB's view on inflation expectations

Money and Inflation - One of the ideas that stuck in my head as an undergrad was the proposition that "inflation is always an everywhere a monetary phenomenon." Alright then, let's consider the following data, which plots the evolution of base money (money created by the central bank only) since 2005. No, this is not is the United States. Since the fall of 2008, the Federal Reserve has more than doubled the supply of base money. Yikes! Is it time to buy gold and guns? Well, maybe. Or maybe not (not yet, anyway). As the next figure shows, there is something conspicuously missing from the QTM story...where the heck is all that predicted inflation? As Ron Paul is fond of stressing (ad nauseam) , the Fed creates (base) money out of thin air! It's a puzzle that intrinsically useless fiat can possess market value in the first place. But given that it does, it is even more puzzling that doubling its supply does not halve its value (double the price level). What's going on here?

No clear signal on deflation risk - Federal Reserve officials are clearly divided on the inflation outlook.The hawks still believe a spike in inflation poses the greatest risk to the US economy, given the easy monetary policy that is in place. Meanwhile, the doves, emboldened by recent poor economic data, are increasingly concerned that the US has entered a disinflationary dynamic that could ultimately result in damaging deflation.The release of the labor department’s consumer price index for the month of June, unfortunately offers something to nibble on for both camps, but no clear direction on who is right. In fact, while the year-on-year increase in the core CPI - which strips out volatile food and energy costs - is still stuck at historic lows of 0.9 per cent, the monthly increase of 0.2 per cent was more than expected by economists, suggesting that disinflation may be bottoming out.

Cleveland Fed Estimates of Inflation Expectations -- The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.69 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. The Cleveland Fed’s estimate of inflation expectations is based on a model that combines information from a number of sources to address the shortcomings of other, commonly used measures, such as the "break-even" rate derived from Treasury inflation protected securities (TIPS) or survey-based estimates. The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium. For more detail, see the links in the See Also box at right. Estimates are updated once a month, on the release date of the CPI.

Choosing Deflation - So if you were the Fed Chairman, and you've previously announced and demonstrated that you have the ability to create inflation in the U.S. economy, or at least could act to lessen the effects of deflation, why might you choose to not act? Especially as the economy is now trending strongly toward deflation with some pretty notable economists screaming out their Keynesian-based fears of the potential impact? We think the answer lies with the balancing act the Federal Reserve has to perform with the U.S. federal government. Here, since the current majority of politicians in Congress and the President are committing to ever more grandiose government spending projects and power grabs over large segments of the private sector of the U.S. economy, the government is growing increasingly reliant upon borrowing money to fund its operations, as well as to continue extending programs targeted at the jobless, such as unemployment compensation. All without having to cut into any pork-barrel spending that many politicians are counting upon to either get re-elected or to help pad their forced retirement if they lose their elections this November. To facilitate the government's seemingly insatiable demand for borrowing, U.S. treasuries must be made more attractive with respect to those of other nations as well as other kinds of investments. And one way to do that in the short term is to tolerate a deflationary trend in the U.S. economy, which increases the real yield to investors for U.S. debt.

June 2010 inflation analysis - The inflation index has dropped for three consecutive months, from 217.729 in March, to 217.579 in April, to 217.224 in May and to 216.929 in June. These deflationary results have resulted in increasing real interest rates.  Based upon the equation of (10 Year Bond Rate) minus (12 month inflation), real interest rates are on the rise: What is concerning about this hat-trick of cpi decreases is that "three in a row" has only occurred four other times since 1954:The 2001 and 2008 results occurred during/around a recession.The June spread between the 10YBR and Federal Funds Rate is 302 basis points, which is the lowest since 2009-04-01 when the spread was 278 and rising. Any reduction in this spread is indicative of contractionary monetary conditions and negative results (whereby the Federal Funds Rate exceeds the Ten Year Bond Rate) are usually accompanied by a recession at some point (it was negative between 2006-07-01 and 2008-01-01, with the recession officially starting in 2007-12-01):

Inflation Or Deflation? - The jury is out: I have been in the deflation camp personally for the last 2 years, but I hear the arguments for Zimbabwean hyperinflation, or the case of the oscillation in no man's land as governments and central banks stop us on our way to the deflationary Kondratieff winter at each market collapse with a new round of monetization. Maybe this last cynic remake of the Japanese lost decades is the most obvious way to bet on the demagogy of our modern "capitalist" system where government are helpless against deflation and will therefore sacrifice our future and the planet if they have to in order to save whatever face they have left.

The Expected Inflation Curve - As a follow up to my recent post on the Cleveland Fed's update on its expected inflation series, I have graphed below the expected inflation curve.  This curve plots the average expected inflation rate at various yearly horizons using the Cleveland Fed data. This figure makes clear that inflation expectations are headed down across all horizons. (Click on figure to enlarge):

Fighting deflation - The Bureau of Labor Statistics reported Friday that the seasonally adjusted consumer price index declined in June to the lowest level since November. When we start to talk about the level of the CPI rather than its rate of change, you know that deflation could once again become a key concern. In normal times, the Fed faces a trade-off. It would like to stimulate the economy to help bring about faster output growth, but worries that the result might be too much inflation. But once we get into a regime of falling prices, those negative inflation rates can be damaging in and of themselves. With the price level currently falling and the unemployment rate alarmingly high and persistent, if there ever was a time when the Fed wanted to push down the gas pedal, now would be it. So why doesn't it? The traditional tool by which the Fed stimulates the economy is to increase the reserves it supplies to the banking system in order to bring down the fed funds rate, which is an interest rate on overnight loans between banks. But with that interest rate now effectively at zero and banks holding excess reserves over a trillion dollars, that traditional tool has become completely irrelevant.

Deflation camp gets powerful new ally - He is Jeremy Grantham, chief investment strategist at Boston-based GMO, a money management firm. His quarterly letters to clients are "must reads" on Wall Street, in much the same way that Warren Buffett's annual letters to shareholders are endlessly dissected and analyzed. In his just-released letter, Grantham wrote: "Well, I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future at least, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, which seems quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor." To be sure, Grantham up until now hasn't been a die-hard inflationist. But, by his own admission, he previously had been "mesmerized by the potential for money supply to increase dramatically, given the floods of government debt used in the bailout."

Dimon: Deflation? Not Betting On it - Asked about the risk of deflation in an earnings call recently, J.P. Morgan Chase’s Jamie Dimon said: “I’m not sitting here terrified over deflation to tell you the truth. And what we see in the economy is that maybe growth slowed down a little bit in June, but you still have fairly good underlying numbers in manufacturing and services confidence, China, India, and so (on)….We looking at exposure to..all the fat tails. So that’s one of the fat tails that I think we worry about, but we are not going to run the business guessing that there might be deflation.”

Deflation Watch - Tech Ticker quotes Euro Pacific Capital's Peter Schiff:  "I don't know where anyone thinks prices are falling," Schiff says, citing rising prices for food, healthcare and energy. "I don't know where most people do their shopping but I don't see falling prices. To me, prices are rising." And from Reuters: Safeway executives said the strength of that push on pricing caught them by surprise."Deflation continues in price per item and is not expected to significantly improve until the fourth quarter," said Chief Executive Steve Burd, who oversees supermarkets including Safeway, Vons and Dominick's. Burd acknowledged that retail deflation was much greater than expected in the second quarter and drove a decline in identical-store sales. Maybe Schiff should shop at Safeway

Grantham: Deflation has won on points - Well, I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future at least, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, which seems quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor. Even three months ago, I was studiously trying to stay neutral on the “flation” issue, as my colleague Ben Inker calls it. I, like many, was mesmerized by the potential for money supply to increase dramatically, given the floods of government debt used in the bailout. But now, better late than never, I am willing to take sides: with weak loan supply and fairly weak loan demand, the velocity of money has slowed, and inflation seems a distant prospect. Suddenly (for me), it is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future.

Don't Take the Bait - Breaking News: Philly Fed Survey at 5.1, Showing that Growth Is Firming at a Slower Pace  This was an item that appeared on CNBC MobileWeb on Thursday. Read that headline again. Growth is firming. At a slower pace. Talk about "spin." You can't make this stuff up.  Important metrics of economic activity are slowing rapidly. Notably, the ECRI weekly leading index slipped last week to a growth rate of -9.8%. While the index itself was reported as unchanged, this was because of a downward revision to the prior week's reading to 120.6 from the originally reported 121.5. The previous week's WLI growth rate was revised to -9.1% from the originally reported -8.3% rate. Meanwhile, the Philadelphia Fed Survey dropped to 5.1 from 8.0 in June, while the Empire State Manufacturing Index slipped to 5.1 from 20.1. The Conference Board reported that spending plans for autos, homes, and major appliances within the next six months all dropped sharply. These figures are now at or below the worst levels of the recent economic downturn, and are two standard deviations below their respective norms - something you don't observe during economic expansions.

ECRI Leading Indicator Breaches Critical -10 Threshold, Hits -10.5 - If in addition to 85% of the economic data releases in the past month coming below expectations was not enough, the ECRI leading indicator has just came below the critical threshold of -10%, which according to Rosenberg has virtually assured recessions based on data from the past 50 or so years, hitting an annualized rate of -10.5%. And since even the index creators (and Ivy League tenured professors) are openly refuting the adverse implications of their own index (when they, and everyone were praising it when it topped out at 27.80 a year ago), one can be sure this is a rather dramatic data point.

Double Dip Discussion - The frequency of "double dip" searches keeps increasing, see Google Trends ...Paul Krugman writes: De Facto Double Dips 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. I've been focused on a technical double dip (see Recession Dating and a "Double Dip"), but I agree with Krugman that a further slowdown - following the below trend first half of 2010 - will definitely feel like a recession - and it will probably lead to an unemployment rate "double dip".And from Nouriel Roubini: Double-Dip Days 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. Fasten your seat belts for a very bumpy ride.The 2nd half slowdown is here. I still think we will avoid a technical double-dip recession, but it will probably feel like one.

Double-dip blues - There's a new drum beat running through the market jungle: ''double-dip, double-dip, will we have a double dip?  The US Federal Reserve chairman will do what he can to soothe nerves today when he delivers his twice-yearly testimony to US legislators. If you're only talking about the short term, the good news is that there's quite a lot Ben Bernanke can do to keep the US recovery on track. But for those that are worried about the long-term sustainability of the US and global recovery, there isn't much that he can say to help them relax.  People have been talking about the risk of a double-dip, almost since the recovery began - even though the pace of upturn, in most countries, has been on a par with recoveries in the past. That's because we are coming out of a major financial crisis, and the evidence of past such crises is that growth afterwards tends to disappoint.

We’re In A One-and-a-half Dip Recession - Robert Reich - We’re not in a double-dip recession yet. We’re in a one and a half dip recession. Consumer confidence is down. Retail sales are down. Home sales are down. Permits for single-family starts are down. The average work week is down. The only things not down are inventories – unsold stuff is piling up in warehouses and inventories of unsold homes are rising – and defaults on loans. The 1.5 dip recession should be causing alarm bells to ring all over official Washington. It should cause deficit hawks to stop squawking about future debt, blue-dog Democrats to stop acting like Republicans, and mainstream Democrats to get some backbone. The 1.5 dip recession should cause the President to demand a large-scale national jobs program including a new WPA that gets millions of Americans back to work even if government has to pay their wages directly. Included would be zero-interest loans to strapped states and locales, so they didn’t have to cut vital services and raise taxes. The national jobs program would also include a one-year payroll tax holiday on the first $20,000 of income.

Why I Worry - Krugman - From Goldman Sachs research: By our estimates, (federal) fiscal policy has contributed +2½ percentage points (annualized) to real GDP growth from early 2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼ percentage point—i.e. 2¾ percentage points less than before—even under our baseline assumptions of extended unemployment benefits, more aid to state governments, and at least a temporary extension of the bulk of the 2001-2003 tax cuts. We need a lot of improvement in private sector activity to offset this swing, and at the moment it unfortunately doesn’t look like we’re getting it.There’s a lot of “who could have known” going on about the weakening recovery. But everything that’s happening now was baked in by policy choices made in early 2009. It would have taken some positive X-factor to produce an ongoing, vigorous recovery; it was never explained what that X-factor was, or why we should count on it.

Anomalous Capacity Shrinkage - In this week's Congressional testimony, Federal Reserve Chairman Ben Bernanke notes: Both U.S. exports and U.S. imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the U.S. manufacturing sector.Typical of policymakers, Bernanke ignores the negative impact of rising imports on US growth. In reality, as global trade has recovered, the external accounts have weighed on US GDP growth. Putting that aside for a second, officials are also quick to point out that the export recovery is aiding manufacturers. It is worth considering how far they can continue to push that argument given the path of manufacturing capacity this decade. To illustrate the anomalous pattern of manufacturing capacity growth, I focus on the path of capacity for thirty months after the peak of each business cycle, scaling capacity to 100 at each peak:

Second Half Slowdown - Goldman analysis w/charts - scribd

Has the Dollar Crisis Become Even More Likely? - To many observers it is increasingly clear that the US economy is now heading into a dreaded “double-dip”. But it should come as no surprise that, as the various forms of fiscal and monetary stimulus implemented in 2008-09 fade, economic activity is weakening again. After all, the recovery never showed signs of being self-sustaining in the first place, as business investment and job creation remained relatively anaemic when compared to previous post-recession periods. For those espousing stimulus-based neo-Keynesian policies, this situation presents a sort of economic double-horror-show: First, it appears that the stimulus, although unprecedented in scale and scope, has not worked. Second, the US and many other countries now find themselves saddled with significantly larger debt burdens than before, which threatens to constrain government borrowing in future. If that happens, then you can kiss any further hope of additional government stimulus goodbye

The latest Big Mac index suggests the euro is still overvalued - The index is a lighthearted attempt to gauge how far currencies are from their fair value. It is based on the theory of purchasing-power parity (PPP), which argues that in the long run exchange rates should move to equalise the price of an identical basket of goods between two countries. Our basket consists of a single item, a Big Mac hamburger, produced in nearly 120 countries. The fair-value benchmark is the exchange rate that leaves burgers costing the same in America as elsewhere. Asia remains the cheapest place to enjoy a burger. China’s recent decision to increase the “flexibility” of the yuan has not made much difference yet. A Big Mac costs $1.95 in China at current exchange rates, against $3.73 in America. Our index suggests that a fair-value rate would be 3.54 yuan to the dollar, compared with the current rate of 6.78. In other words the yuan is undervalued by 48%.

China: The U.S. Is "Insolvent And Faces Bankruptcy" - The common thought amongst even reasonably educated and economically literate Americans is that China is 'stuck with US Treasuries' and has no choice, so it must perform within the status quo and do as the US wishes, or face a ruinous decline in their reserve holdings of US Treasuries. And with real short term US Treasury interest rates decidedly negative, meaning that it is costing you money to hold dollars, there is a case to be made that there are a lot of 'price takers' out there in this world. It would most certainly be a nuclear option to outright dump Treasuries outright, and would raise the ire of what is still a formidable military power. But it is the Western mind that is so incapable of seeing the many shades of gray in every situation, the subtle gradations in a range of choices that I believe China not only sees but is already actively pursuing.

Bank of Japan to Consider Action at 85-Yen Level - WSJ - The Bank of Japan may consider taking additional easing steps to prevent the economy from worsening if the yen rises to around 85 to the U.S. dollar and stays there for a month or two, a person familiar with BOJ thinking said.  In recent weeks, with Europe's sovereign-debt troubles still unsettling financial markets and concern growing that the global recovery is stalling, the yen has gained from about 89 against the dollar. On Friday the dollar briefly dropped to a seven-month low of 86.27 yen, and stayed around 86.65 yen on Monday.

The answer is the domestic private sector - Rebecca Wilder - Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.” I thought that the analysis was curious and too "partial". If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury's liabilities. A simple example illustrates my point.

What's the critical debt-gdp ratio? - Krugman (here), Rogoff, DeLong, and others all have recent writings on this topic.��My general view on these matters is the following:1. There is nothing sacred about "90 percent" as a cut-off ratio and in any case such structural quantitative estimates are not stable over time.  The accompanying expectations matter too.2. The United States today (and in many other times) can manage a ratio higher than that; how much higher we do not know and what is the correct "stopping rule" we do not know.  I suppose we will find out. 3. Major wars aside, if the United States approached or exceeded the 90 percent figure, it would be a sign of a dysfunctional politics and an irresponsible citizenry.  7. At some sufficiently high debt-gdp ratio, it becomes a foreign policy issue and a big one.

Very Simple Debt Dynamics - Consider a first problem, adjustment. This arises when a deficit country (this refers to a CA deficit) is no longer sustainable. A crisis could take the form of a run on foreign exchange, or a sudden stop in external lending. A deficit country, by virtue of the budget identity, is a net borrower: its households, firms and government borrow more than domestic savers can finance. This exposes the country to the risk that external capital markets will shut down or become too expensive to access. Adjustment means that a country must do two things, which according to the identity are actually one thing: rapidly reduce the sum of public and private borrowing and reduce the current account deficit. Surplus countries don’t have to adjust; they are net lenders. They face default risk, but that can’t be remedied by changes in their own policies, at least not to a first approximation. (At a detailed level it depends on how large and connected they are.) Adjustment is what Greece and Hungary are going through right now, and what the other peripheral European countries are staring at.

PIMCO ups US govt debt weighting - PIMCO's $US234 billion Total Return Fund, the world's biggest bond fund, raised its market value weighting in US government debt to 63 per cent at the end of June from 51 per cent at the end of May, data on the company's website showed. PIMCO, the world's biggest bond investment manager, overseeing over $US1 trillion in assets, also steeply raised the fund's weighting to government-related debt in May. In mid-June, Mohamed El-Erian, who shares the title of PIMCO's co-chief investment officer with Bill Gross, told Reuters Insider television that PIMCO has been a buyer of Treasuries and government-related debt as a "short-term trade."

Fiscal Drag - Krugman - From Alec Phillips at Goldman Sachs (no link): Congress looks increasingly unlikely to extend any more fiscal aid to state governments, despite ongoing shortfalls in state revenues, and they have already let several other items lapse. We are therefore removing from our estimates an assumption of further fiscal stimulus beyond the policies in law (including this week’s unemployment extension), though we continue to expect extension of most of the expiring 2001/2003 tax cuts. This adds almost a full percentage point to the drag on growth from Q4 2010 to Q4 2011 to what we had already estimated.

Monetary And Fiscal Policy: A Clarification - Krugman - I believe that given the grim economic situation, all players in the game should be trying to do whatever they can. There are other things the Fed can do; they would help; uncertainty about how much they would help shouldn’t be a reason not to try. But it would be a big mistake to count on monetary policy alone. The zero lower bound on short rates really does matter, even if longer-term rates are positive. The Fed can control short-term interest rates, it can influence long rates — there’s a world of difference between those two statements. So it’s not safe to assume that the Fed can, for example, hit any target for nominal GDP that it chooses.What that means is that while the Fed should be doing more, so should other actors: unconventional monetary policy should go along with fiscal stimulus. The Fed deserves to be chastised for not doing more; that’s not the same as saying that the Fed should be the only target of criticism.

Bernanke To Congress: The Economy Needs You To Keep Spending - Federal Reserve Chairman Ben Bernanke reiterated Wednesday his belief that Congress should continue to prop up the sputtering economy, casting aside concerns that the federal budget deficit should trump the economy's need for additional stimulus. In other words, Congress should spend now and worry about deficits later.  "At the current moment the large deficits, as unattractive as they are, are important for supporting economic activity," the nation's central banker told a Senate panel, citing "weak" private spending and a "great deal of excess capacity."

Smoking Guns of US Treasury Monetization - A significant feature of fiat money systems is the privilege for the custodian to commit fraud, big fraud, gargantuan fraud, even counterfeit. Fannie Mae might function as the clearinghouse for numerous massive role programs with $trillion fraud behind each, hidden from view, especially since it was conveniently nationalized. Follow some other fraud schemes, right out in the open. Surely such recount only touches the surface, but these shenanigans are advanced forms of fraud. They are smoking guns of USTreasury fraud and counterfeit, with strong whiffs of monetization. Much more monetization is to come, fully endorsed and sanctioned. Other clever techniques are being used, given the Quantitative Easing has officially been halted. A close look reveals that Excess Cash Reserves at the USFed are being drawn down, which are thus funding the USGovt deficits in the last couple months. Ironically, such reserves held by big banks at the US Federal Reserve were the only thing preventing vast insolvency. Now that cash is being used. The data is right before us. Bring the trails and tallies to the table, and it looks like a grand racket worthy of any sophisticated syndicate.

Robert H. Frank, Economist, on Deficit Spending & the Recession…The deficit hawks are killing us. No, wait! I’m a deficit hawk. So let me rephrase that: Some of the deficit hawks are killing us. Like other deficit hawks, I believe we need to start paying down the mountain of debt the federal government has been running up. But not now, not as we continue to struggle to emerge from the deepest downturn since the Great Depression. Cutting spending now is the very last thing we should do. The only reason we’re in a downturn is that there’s not nearly enough total spending to put everyone to work. The $787 billion economic stimulus bill passed in 2009, which many economists at the time warned was too small, is running out. Its effects are being offset increasingly by massive cutbacks in state and local government spending. And now many deficit hawks want us to cut spending further.

Looking Beyond The Latest (And Last) Fiscal Stimulus For The Unemployed - Those collecting unemployment checks can rest easy - the Senate has just extended unemployment benefits through November 30 in another attempt to round up a few straggling votes for the mid-term elections. The fact that instead of creating jobs, the administration is still stuck with perpetuating the sugar high that achieves nothing but merely adds tens of billions more to the US debt, is just as appalling as the fact that this little sham is supposed to incite populist support for the president. Yet even as Europe is just starting out on its farstatic voyage, ours is slowly coming to its end: this latest fiscal stimulus could well be the last one. Here are the thought's of Goldman's Alec Phillips on just how great of an economic deterioration and slow down we should expect as a result of the eventual elimination of various fiscal stimuli.

More Stimulus Despair - Krugman - I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound. That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.  Here’s the latest, from Tyler Cowen:

McConnell: Jobless Benefits Must Be Offset With Spending Cuts - Senate Minority Leader Mitch McConnell (R., Ky.) on Sunday insisted that any extension of unemployment benefits be offset with spending cuts. Remaining defiant after President Barack Obama accused the Republican leadership Saturday of obstructionism, McConnell told CNN’s “State of the Nation” that the administration needed to end its “incredible spending spree.”“We’re all for extending unemployment insurance,” McConnell said.  “The question is, when are we going to get serious” about the surging federal deficit. Democratic senators are expected to try again on Tuesday to extend unemployment benefits that expired in May, following a failure to overcome Republican opposition last month. Republicans have called for the $34 billion cost of the legislation to be paid for by spending cuts.

Obama's Fiscal Priorities Are Right‎ - A serious debate over fiscal policy is now raging. On one side, you find the deficit hawks, Democrats and Republicans, who have steadfastly opposed any "second stimulus"—partly on the grounds that the federal budget deficit is already too large, and partly on the grounds that the first stimulus failed. I argued on this page last month that the latter is not remotely close to true, but never mind. The hawks have even dug in their heels against extending unemployment insurance benefits at a time when the unemployment rate is 9.5%, or helping states and localities avoid laying off teachers in September. That's pretty anti-Keynesian thinking. Apparently unbothered by the consistency hobgoblin, some of the Republican deficit hawks also want to make the 2001-2003 Bush tax cuts permanent, rather than letting them expire on schedule at the end of this year. Yet their major argument is classic Keynesian thinking: Letting tax cuts expire is tantamount to raising taxes—which is the opposite of what you want to do when the economy is weak.

Summers: America’s sensible stance on recovery: Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that has obscured rather than clarified the policy choices.... Critics have complained that the continued commitment by the administration of President Barack Obama to support recovery in the short term and also to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable....[I]n normal times, the scale of government budget deficits affects the composition but not the level of output.... A range of other considerations – including the crowding out of investment; reliance on foreign creditors; misallocation of resources into inefficient public projects; and reduced confidence in long-run profitability of investments – all make a case in normal times for fiscal prudence and reduced budget deficits. And there are numerous examples, notably the US in the 1990s, where reducing budget deficits contributed to enhanced economic performance.

The Summer(s) of Our Discontent » Virtually every profile on Larry Summers tells us that he is one of the most brilliant economists of his generation, celebrated for having allegedly helped to create the boom of the 1990s.  But after reading his latest defense of President Obama’s fiscal policy in Monday’s Financial Times - “America’s Sensible Stance on Recovery” - one wonders.   Only Robert Rubin and Alan Greenspan played a more important role than Summers in promoting the deregulation and lax oversight that laid the foundations for the current crisis. Certainly the plethora of innocent frauds that the Director of the National Economic Council peddles in Monday’s Financial Times calls his economic perspective into question.  In addition to the usual apologia of the Clinton Administration’s budget policies, the latest FT defense reflects Summers’s fundamental lack of understanding of modern money. Contrary to his view, the late 90s surpluses was not the reason for that period’s prosperity. The surpluses are what ended the prosperity. And until the public understands this, we should expect no fundamental improvement in economic policymaking from the Obama Administration.

The great austerity debate - Over the next week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy.This page allows you to see the highlights from each contribution and join the discussion in the comment box at the end of this page. You can also click through to read each piece as a whole and comment on that specific contribution.Keep reading Martin Wolf, Why the battle is joined over tightening.  Keep reading Lawrence Summers, America’s sensible stance on the recovery.  Next in the series: Niall Ferguson and Brad DeLong.

Why the battle is joined over tightening - Over this week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy . . ..Readers must make up their own minds on the merits of the arguments this week. My own strong sympathies are with the postponers. But of one thing everybody agrees: this debate matters. We cannot be sure who is right. But we can be sure that if policy-makers get it wrong, the results may well be dire.

Today’s Keynesians have learnt nothing - It was said of the Bourbons that they forgot nothing and learned nothing. The same could easily be said of some of today’s latter-day Keynesians. They cannot and never will forget the policy errors made in the US in the 1930s. But they appear to have learned nothing from all that has happened in economic theory since the publication of their bible, John Maynard Keynes’s The General Theory of Employment, Interest and Money, in 1936. In its caricature form, the debate goes like this. The Keynesians, haunted by the spectre of Herbert Hoover, warn that the US in still teetering on the brink of another Depression. Nothing is more likely to bring this about, they argue, than a premature tightening of fiscal policy. This was the mistake Franklin Roosevelt made after the 1936 election. Instead, we need further fiscal stimulus.

Can't Anybody Here Play This Game? Fiscal Policy Edition - Niall Ferguson writes: Today’s Keynesians have learnt nothing: When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden [in the United States] rose only slightly – from 40 to 45 per cent of GDP –. Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn't rise? Debt more than doubled from $22.5 billion to $49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to $127 billion in 1941. And could we please have some acknowledgement that our 9.4% of GDP deficit in fiscal 2010 pales in comparison to the 30.8% of GDP deficit of 1943, or the 23.3% and 22.0% deficits of 1944 and 1945? Niall Ferguson should not do this. The Financial Times should not enable Niall Ferguson to do this.

Krugman versus Ferguson: Round Two - Not since Ken Rogoff’s famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling. Professors Paul Krugman and Niall Ferguson, of course, have form; they’ve been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn, and today they return to the fray. The occassion was another piece that Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly – or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity – he mentions Krugman by name. “Those economists, like New York Times columnist Paul Krugman”, he writes, “who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key”. Quick as flash, Krugman has risen to the bait.

Jeff Sachs' Amazing Takedown of US Stimulus - Despite the evident need for a rise in national saving after 2008, President Barack Obama tried to prolong the consumption binge by aggressively promoting home and car sales to already exhausted consumers, and by cutting taxes despite an unsustainable budget deficit. The approach has been hyper short term, driven by America’s two-year election cycle. It has stalled because US consumers are taking a longer-term view than the politicians. By contrast, the administration’s interest in boosting investment has been haphazard. Mr Obama has shown a strange inability to articulate an operational and forward-looking policy framework in signature areas such as healthcare, energy, climate change, and long-term fiscal policy. At a time when China is building hundreds of miles of subway lines, tens of thousands of miles of highways, a couple of dozen nuclear power plants, and a network of tens of thousands of miles of high-speed intercity rail lines, the US struggles to launch a single substantial project. China saves and invests; the US talks, consumes, borrows, and talks some more.

'Ten Commandments for Fiscal Adjustment' Revisited...The Financial Times has been running a pretty lengthy debate on post-crisis response AKA stimulus versus austerity. To me, the matter hinges on (1) whether meaningful additional economic activity is spurred in present value terms than what is spent on stimulus, and (2) whether current fiscal conditions warrant caution lest markets become wary of overspending. As both of these are quite hard to ascertain, we're left dealing with many-handed economists and the odd historian thrown in. You can follow the various, alternatively fascinating and repulsing scribblings of Martin Wolf (neutral over the long-term, perhaps in 'golden rule' fashion); Brad DeLong and Larry Summers (pro-stimulus, duh); and my erstwhile LSE IDEAS colleague Niall Ferguson (anti-stimulus). Yes, the latter is a historian and not an economist, but in this day and age, that may actually be beneficial.

Soros Says US Shouldn't Cut Stimulus as Inflation Contained  (Bloomberg) -- Billionaire investor George Soros said U.S. lawmakers should refrain from withdrawing stimulus measures because the economy hasn’t strengthened enough.“I think the timing is wrong with withdrawing the stimulus,” Soros said at the Hamptons Institute in East Hampton, New York on July 16. “Cutting employment benefits, cutting aid to states that are losing tax revenue, these are counterproductive because you can only grow your way out” of the financial crisis, said Soros, who turns 80 next month. Soros noted that there are no signs of inflation in the U.S., where 10-year Treasury notes are now trading below 3 percent, the lowest level so far this year. Soros, who is the chairman of New York-based Soros Fund Management LLC, has made similar comments about Europe and the need for Germany to refrain from cutting back its own deficit spending. The result will send Europe into a deflationary cycle, he said.

Stimulus Now: A Manifesto by Harry Evans, Joseph Stiglitz, Alan Blinder, Other Leaders - Fourteen million out of work! Sixteen notable economists and historians have joined in a consensus statement for The Daily Beast demanding urgent action on unemployment and the faltering recovery. Joseph Stiglitz, Alan Blinder, Robert Reich, Richard Parker, Derek Shearer, Laura Tyson, Sir Harold Evans, and other thought leaders have produced a manifesto calling for more government stimulus and tax credits to put America back to work. Fourteen million unemployed represents a gigantic waste of human capital, an irrecoverable loss of wealth and spending power, and an affront to the ideals of America. Some 6.8 million have been out of work for 27 weeks or more. Members of Congress went home to celebrate July 4 having failed to extend unemployment benefits.

Direction - I love Paul Krugman’s work, precisely because it is correct, simply corrupted by his education. He was taught that more Cash during a downturn was the Answer for everything–a.k.a. Keynes–and that there was no limit to the potential largesse. He fails to understand that there are limits to the amounts which can be paid for production materials and labor, and that Stimulus over a set amount will only artificially hide Production declines by claimed business Profits. Less Product is produced, less Product is planned for, and less Product is delivered; but business proclaims record Profits. I hate to reveal this to Paul, but it does not make the economy better for the expenditure. I know that this is a hard Concept to accept, and even more hated; but Stimulus must be driven from the ground up. This means that the Cash has to be delivered to the Consumers.

Deficits and debt: The case for caution | The Economist - THE FT is running a series about the debate between the deficit-cutters and the stimulus-advocators. Today's piece from Kenneth Rogoff happens to summarise my view very eloquently. First, he views the low level of bond yields in America with caution, pointing out that the evidence generally suggests the response of interest rates to debt is highly non-linear. Thus, an apparently benign market environment can darken quite suddenly as a country approaches its debt-ceiling. Even the US is likely to face a relatively sudden fiscal adjustment at some point if it does not put its fiscal house in order. He also argues that the stimulus benefits of massive fiscal deficits are not nearly so certain as proponents of a new surge of spending maintain. The academic evidence on Keynesian grwoth effects of fiscal deficits is thoroughly inconclusive. Professor Rogoff does not really deal with the generational issue of leaving debt for one's children. As highlighted in our debt survey, this is a Ponzi scheme depending on new participants to service the debt. But the demographics, particularly in Europe, mean that the number of new taxpayers will fall, not rise.

Are deficits EVER a problem? - Paul Krugman and James K. Galbraith agree that this is a time for fiscal stimulus, not austerity. But they differ on a larger question: do government deficits ever matter? Or is the government so special–by virtue of its ability to create money out of thin air–that its spending can exceed income forever, by any amount? In an interesting blog post (warning: not safe for the equation-challenged), the New York Times columnist and Nobel laureate Krugman argues that, carried to extremes, deficit spending by government can lead to runaway inflation. But, he adds, “we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.” Krugman wrote this in response to testimony by Galbraith, a Levy senior scholar, to the federal Commission on Deficit Reduction. Galbraith responds in the comments by asserting that Krugman’s conclusion is the result of a modeling error. Randall Wray, also a Levy senior scholar, weighs in

More On Deficit Limits- Krugman - Jamie Galbraith responded to this post in comments; what he said, and my counter-response, below the fold: First, Jamie: Paul’s argument is that *infinite* inflation is a theoretical possibility. Well, yes. It happened in Germany in 1923. There is no reason to cut Social Security benefits or Medicare now, with effect in the future, in order to avoid the theoretical possibility that some combination of policies might at some time in the future give us the economic conditions of post World War I Germany. Those conditions were desperately resource-constrained. In the actual world we live in, government does not have to “persuade the private sector to release real resources.” In the actual world, the private sector has already released those resources by the tens of millions of people. All the government has to do, in the actual world, is mobilize those resources, which it does by issuing checks, preferably to pay people to do useful things....My response: there’s no question that right now there is no problem: if the Fed issues money, it will in fact just sit there. That’s what happens when you’re in a liquidity trap. And there’s also no question that right now, the proposition that the government can “create wealth by printing money”, which some other commenters call absurd, is the simple truth: deficit-financed government spending, paid for with either debt or newly created cash, will put resources that would otherwise be idle to work....

Galbraith versus Krugman on Deficit Spending  In a recent post, Paul Krugman has criticised James K. Galbraith’s view of deficit spending. The latter is obviously influenced by Modern Monetary Theory. For the relevant documents, see here: Paul Krugman, “I Would Do Anything For Stimulus, But I Won’t Do That,” James K. Galbraith, Statement to the Commission on Deficit Reduction, Krugman’s complaint is as follows: 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.Krugman is undoubtedly referring to Modern Monetary Theory However, he is wrong to accuse neo-Chartalists of thinking that “deficits are never a problem.” In fact, Modern Monetary Theory says that, even though deficits are not “financially” constrained, they face real constraints in available resources, capacity utilization, the unemployment level, the exchange rate, the external balance, and inflation rate.

Misunderstanding Modern Monetary Theory - Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won’t Do That (Wonkish)." The gist of Krugman’s post was to refute Modern Monetary Theory’s view on money and deficits. Krugman writes: 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. Krugman goes on to use a model with strongly monetarist/neoclassical embedded assumptions to make his points. Jamie Galbraith responded in the comments and I am posting his comments here.  But, first, a few words.I agree that deficits matter. But I take a more Austrian/austerian view in general – so of course I would say that.  However, as I understand MMT, Krugman’s post mischaracterizes both MMT and Galbraith’s statement. There are two separate issues here that should be disaggregated and treated in isolation. The first issue is about money and government’s source of funding. A separate but related issue is deficits

Update on Krugman Post - I am making a very quick post, as James Galbraith has responded to my last post on the Seeking Alpha version of the post. I have copied the response below: On the matter of my beliefs. Krugman's quote from me was this: "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." Read it again with the *very next sentence* included: "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. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar."

Deficits Do Matter, But Not the Way You Think - Budget deficits and government spending are necessary to end today’s crisis. There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

Consolidators versus Stimulators -All intellectual systems rely on assumptions that do not need to be spelled out because all members of that particular intellectual community accept them. These “deep” axioms are implicit in economics as well, but, if left unscrutinized, they can steer policymakers into a blind alley. That is what is happening in today’s effort, in country after country, to slash spending and bring down budget deficits. Today, despite the Keynesian revolution, the same question demands an answer. What do people who demand rapid “fiscal consolidation” amid heavy unemployment need to believe about the economy to make their policy coherent?This question is not trivial, because the fiscal hair shirt has become the favored article of policy clothing among those who now dictate economic affairs. Prestigious bodies like the G-20, the IMF, and the OECD join the “markets” and economic columnists in demanding that governments liquidate their deficits. Any other course, they say, spells disaster; balancing budgets as soon as possible is the only way back to prosperity.

In Search of Effective Stimulus - Dylan Matthews at the Washington Post has asked what we might be able to do for the economy if we repealed the Bush tax cuts for the wealthy and spent the money on something else.  The result is a nice post full of graphs, but the answer seems to be "not much"--the very best estimate is that we get about $75 billion in added economic activity, or about $25 for every person in the country.That, mind you, requires some pretty big assumptions.  For starters, it assumes that the rather optimistic estimates of Mark Zandi about the size of the stimulus multiplier are correct.  Estimating stimulus multipliers is incredibly difficult when you try to do it at the macro level (how much spending equals how much extra GDP), and even more difficult when you try to figure out whether food stamps are better than a jobs program--the examples are fewer, and the amounts are smaller, making it hard to pick up direct effects.

Recession and politics (long, tedious, wonkish and titillating) - Whether you're from a left or right perspective, you can probably agree that policymaking played some role in the Great Depression. The cornerstones of the literature are Peter Temin's Lessons from the Great Depression (Cambridge MA, 1989) and Barry Eichengreen's Golden Fetters (Oxford, 1992). The latter in particular is an exhaustive treatment of the dynamics leading up to, and then transmitting globally, the 1929-33 depression. These two authors co-wrote a 2000 paper on the policymaking mentality sustaining (what they, and I, see as) bad choices (pdf). That article came to mind as I read Paul Krugman's recent post about the Fed not doing enough to sustain the recovery. He used the frog-in-boiling-water analogy: if policymakers aren't careful, they will wind up inadvertently presiding over a decade of stagnation. How should we read that in today's environment?

Starving the Beast or Free Lunch? - The best way to cut government spending is to cut revenues.This idea, colloquially known since the days of Ronald Reagan as “starve the beast,” seems at first glance to make perfect sense. After all, if you want to stop someone from spending, take away their checkbook. It worked great. Until the invention of credit cards.Unfortunately, those who bought this theory never counted on a Congress whose insatiable desire to spend was encouraged, not curbed, by tax cuts. It hardly mattered whether Democrats or Republicans were in charge. In fact, for much of the past 30 years it turned out that Republicans were more enthusiastic about spending than Democrats. And delinking spending from taxes made all those new programs appear free, thus encouraging more of them.

OMB Just Estimated A $1.416 Trillion FY11 Deficit, $150 billion Higher Than In February. Because of the bad news about the FY11 deficit, OMB withheld the Mid-Session Review 8 days beyond its statutory deadline until 3 p.m. this afternoon.  Technical reestimates of individual income tax and Social Security taxes were the primary reason for the deterioration along with somewhat weaker wage growth.  Usually that means taxpayers fell into lower tax brackets and claimed more deductions and credits than estimated.  The FY10 deficit was reestimated $79 billion lower than in February because of lower outlays for unemployment compensation, FDIC deposit insurance, and a broad range of discretionary spending.  The real GDP forecast was raised to 3.2% for CY10 from 2.7% in February and was lowered to 3.6% for CY11 from 3.8%.  This is confirmation of my long held expectation that we're going to see deficits of at least $1 trillion for years to come.

Shhhh… The Midsession Review Came Out Today - The Obama Administration’s Midsession Review for Fiscal Year 2011 came out this (Friday) afternoon around 3 pm, but it might as well have come out in the dead of night during August recess, as silently as it was presented.  No press conference, no press release, no blog post from OMB director Peter Orszag.  Only the pdf file posted on the OMB website, if you knew to look for it there. Of course, the news wasn’t good, but it wasn’t unexpectedly bad either.  (I guess it just wasn’t much news all around.)  Deficits are now expected to be higher over the next few years (although slightly lower for the current year) than the Administration projected back in February, largely due to lower revenue estimates.  What was a 3.9 percent of GDP deficit for fiscal year 2015 is now a 4.0 percent of GDP deficit, so the President’s deficit-reduction commission is still expected to come up with an extra around-1-percent of GDP in policies to reduce the deficit.

Ezra Klein: Sen. Kent Conrad: 'The immediate threat is not the debt. It’s weak aggregate demand.' - Sen. Kent Conrad (D-N.D.) is chairman of the Senate Budget Committee and a well-known deficit hawk. So I called to ask him what could be done to stimulate the economy without increasing the deficit. A lightly edited transcript of our conversation follows.

Pentagon Faces Growing Pressures to Trim Budget After nearly a decade of rapid increases in military spending, the Pentagon is facing intensifying political and economic pressures to restrain its budget, setting up the first serious debate since the terrorist attacks of 2001 about the size and cost of the armed services. “We’re going to have to take a hard look at defense if we are going to be serious about deficit reduction,” said Erskine B. Bowles, a chief of staff to President Bill Clinton who is a co-chairman of the deficit commission. Senator Judd Gregg, a Republican from New Hampshire who is also on the debt commission, said that if the panel pushes for cuts in discretionary spending, “defense should be looked at,” perhaps through another base-closing commission.

America's Unquenchable Defense Spending - -- If there's one issue that seems to unite an increasingly divided and fractured capital, it is the ever-expanding federal budget deficit. Everyone seems wants to curb Washington's appetite for spending.Except one area of the federal budget is seemingly off limits: the $692 billion elephant in the room -- America's defense budget.The calls from Republicans and Democrats for belt-tightening rarely, if ever, seem to extend to the military. Deficit hawks in the House have even demanded that an amendment to the $37 billion Afghanistan spending bill that would allocate $10 billion to prevent teacher layoffs next school year be paid for with offsetting spending cuts. No such demands have been made about war spending, which since 9/11 tops more than $1 trillion. When it comes to paying for America's wars, Washington's attitude has seemingly been, "Put it on the credit card ... preferably the Chinese one."

Senate Approves $60B for Afghanistan Surge - In a take-it-or-leave-it gesture, the Senate voted Thursday night to reject more than $20 billion in domestic spending the House had tacked on to its $60 billion bill to fund President Barack Obama's troop surge in Afghanistan. Instead, the Senate returned to the House a measure limited chiefly to war funding, foreign aid, medical care for Vietnam War veterans exposed to Agent Orange, and replenishing almost empty disaster aid accounts.  The moves repel a long-shot bid by House Democrats earlier this month to resurrect their faltering jobs agenda with $10 billion in grants to school districts to avoid teacher layoffs, $5 billion for Pell Grants to low-income college students, $1 billion for a summer jobs program and $700 million to improve security along the U.S.-Mexico border.

Obama to Sign Law Limiting $110 Billion in Erroneous Government Payments - President Barack Obama will sign legislation today to limit erroneous payments by the government and announce a new goal of reducing improper payments by $50 billion before 2012, a White House official said. The Improper Payments Elimination and Recovery Act will help limit improper payments to individuals, organizations and contractors, according to the administration official. The White House said that in 2009 a record of almost $110 billion was paid by the government to the wrong person, in the wrong amount or for the wrong reasons.  In the past three years the government paid benefits totaling more than $180 million to approximately 20,000 Americans who had died, according to the statement. More than $230 million in benefits were paid to about 14,000 fugitives or people in jail who were ineligible for them, the release said.

The Bush Deficit Bamboozle –Krugman - OK, even by contemporary standards, this is rich: the official Republican stance is now apparently that Bush left behind a budget that was in pretty good shape. Mitch McConnell: The last year of the Bush administration, the deficit as a percentage of gross domestic product was 3.2 percent, well within the range of what most economists think is manageable. A year and a half later, it’s almost 10 percent. They really do think that we’re idiots. So. Can we agree that the deficit in the first quarter of 2009 — Obama didn’t even take office until Jan. 20, the ARRA wasn’t even passed until Feb. 17, and essentially no stimulus funds had been spent — had nothing to do with Obama’s polices, and was entirely a Bush legacy? Yet the deficit had already surged to almost 9 percent of GDP. Even in 2009 II, Obama’s policies had barely begun to take effect, and the deficit was already over 10 percent of GDP.

Republicans Plan To Increase Deficits By Repealing Health Care Reform - Republicans are at pains these days to present themselves as the party of fiscal austerity. They're also at pains to advertise themselves as the party that will repeal (or repeal and replace) the Democrats' new health care law. The problem for them is that those two platforms are basically mutually exclusive. If Republicans attempt to repeal the health care bill, they'll run headlong into the Congressional Budget Office, which found that the health care bill reduces deficits by over $100 billion over its first 10 years. Repeal that, and Republicans will have to raise taxes or cut spending to keep from driving up the deficit they decry. Or they could simply ignore Congressional scorekeepers -- which is what top Republicans seem intent on doing. "We all know that it's going to increase the deficit," said Senate Minority Leader Mitch McConnell.

Demagogues, Deficits and Healthcare - The party of fiscal responsibility, of low taxes and small government, of controlled spending and personal responsibility - that party - seems to have rediscovered its roots of late, with strident calls for fiscal restraint, an end to wasteful government spending and strict adherence to pay-as-you-go guidelines.This from the party that added over $9 trillion to the deficit the last time they passed a health care bill. Let's return, for just a moment, to the early and mid oughts, the halcyon days of the Bush Administration, when the entire government was under the firm control of the fiscally prudent. Here's what those wise stewards of the nation's wealth did.Point One Pass Medicare Part D with no funding - short term, long term, any term. Hell, they would've been more fiscally prudent if they'd included a few hundred million to bet on the horses. At least that would have shown some desire to pay for the thing.

Kick the Old and the Disabled to Show We're Serious About Deficits? - In the deficit hysteria now sweeping Washington, Social Security has emerged in the bull's eye as a target for cuts. Republican House Minority leader, the perpetually tanned John Boehner, called for hiking the retirement age to 70. Democratic House Majority whip, wrong-way Steny Hoyer argued for hiking it to 69. Various proposals float to change the cost of living adjustments to lower benefits substantially over time.  And kicking the old, the disabled, the widowed now is elevated into a machismo measure of credibility on reducing the debt. In a Times column on tension between Obama and the business community, former Clintonista Roger Altman, a Democratic financier argues that Obama must overcome business "skepticism" about his "commitment to reducing the huge and dangerous budget deficits" by "undertaking the difficult task of trying to fix Social Security."

Can We Help the Economy (Right Now) Without Growing the Deficit? - Ezra Klein says “yes.” How so? [A]t this point, [deficit-neutral emergency spending is] worth trying. It’s best to do jobs legislation using deficit dollars. That way you’re not taking money out of one part of the economy to put it into another. But as Dylan Matthews wrote yesterday, money spent in different places does provide different levels of stimulus. It’s plausible that you could move cash from, say, tax cuts for the wealthy, which tend to get saved, and use it instead for a payroll tax holiday, or infrastructure projects, or a tier of unemployment benefits for people in states with unemployment rates above 9 percent and who’ve been out of a job for more than 99 weeks. This is pretty close to what I wrote in a comment to my own post on Greenspan’s apparent reversal on the Bush tax cuts. And later in his same blog post, Ezra mentions “stimulus” as another “bad word.” I agree, not just for the knee-jerk, visceral reactions it might incite from people who don’t like typical “stimulus” policies, but because it’s somewhat inaccurate and pretty insufficient in describing short-term countercyclical fiscal policy even among economists who support such policies.

The 'Tax Expenditure' Solution for Our National Debt -  Feldstein - When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will raise the federal deficit by about $1 trillion... If Congress is serious about cutting government spending, it has to go after many of them. ...Neither party has focused on controlling this kind of spending. Democrats are reluctant to cut such programs... Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a "tax increase"—even though the increased revenue is really the effect of a de facto spending cut.

Marty Feldstein is (Mostly) Right About Tax Expenditures - Kudos to Marty Feldstein, who this morning called for scaling back tax expenditures. These are highly-targeted tax breaks that are often little more than spending programs in mufti. Lawmakers of both parties love them, which is why they will reduce federal revenues this year by nearly $1 trillion, equal to almost the entire federal deficit.I’ve got some quibbles with Feldstein, who was a top economic adviser to President Reagan. But overall, he got it right when he wrote in today’s Wall Street JournalThese tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures… If Congress is serious about cutting government spending, it has to go after many of them. Unfortunately, in his column, Marty barks up a few wrong trees. He targets many of those refundable credits which allow government to deliver cash assistance to people in need.

Does this make Sense? - One has to ask if there is anytime where it is okay to balance the budget. Mark comments that there are no easy Solutions for reducing the national debt, but there are! Martin Feldstein would concentrate on tax expenditures; a concept which would immerse all discussion into minutiae, a Hall of Mirrors from which no exit will be found. Mark states that the real problem is the Spending on Social Security and Medicare. The first Statement must say that Social Security is not really a problem at all, and requires only minor tweaks to put it on a sustainable path. The real problem is Health Care, and here the approach is all wrong! We must discuss the real factors prior to a resort to legislation, or else We only get printed Words whose enactment mean only further confusion. We need a simple, canopy Tax law which supercedes all previous legislation.

So What Kind of Tax Hikes Are Needed to Erase a $1.5 Trillion Deficit? - We are often asked what kind of tax increases would be needed to raise enough money to erase this year's estimated $1.5 trillion deficit. Earlier this year, we used our Federal Individual Income Tax Simulation Model to determine that - assuming no behavioral effects - we would have to increase every individual income tax rate by 242% (in other words the bottom rate would go from 10% to 24% and the top rate would have to go from 35% to 84%) to raise enough revenue to cover the deficit. So for fun, we've been putting pencil to back of envelope to see how else lawmakers could raise revenues to erase the deficit using tax increases alone. The results (and these are very much back of the envelope) are truly frightening.

Republican Tax Nonsense - On July 13, Senate Minority Leader Mitch McConnell, R-Kentucky, asserted that there was no net revenue loss from any of the Bush tax cuts, in defense of an earlier comment by Senator John Kyl, R-Arizona, that all spending increases must be offset so as not to increase the deficit but tax cuts must never be offset. Said McConnell: “There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.” Bush administration economists, however, never made any such claim. Following are a few of their statements regarding the revenue feedback of the Bush tax cuts.

Did The Bush Tax Cuts Reduce Federal Tax Revenue ? - Both Mitch McConnell and Jon Kyl have recently said that the Bush tax cuts did not reduce overall federal tax revenue and thus could not be said to have contributed to the federal budget deficit. Are they right ?Bruce Bartlett, a former Domestic Policy adviser to President Reagan who became a strident critic of the Bush Administration’s economic policies, says that they’re absolutely wrong and that the actual data shows that revenue did go down after the tax cuts went into effect:Now, it’s not necessarily a bad thing that tax revenues went down. However, considering the fact that, during this same period of time, the Bush Administration and Congress were pursuing policies that were increasing spending, it would seem that this was precisely the wrong thing to do.

The Senate May Extend The Bush Tax Cuts In August - Senate Democrats have suddenly shifted into high gear to pass the Bush tax cuts for those under $250,000 before they go out for their August recess. Democratic staff will meet at 12:30 p.m. tomorrow, and Democratic senators will caucus at 4:30 p.m.  There's still a lot of work to do to bridge the big gaps within the caucus on the estate tax and on the top rates for capital gains and dividends.  Senate Democratic leaders want to put Republican senators on the spot defending tax cuts for the rich before the election.  The Statutory PAYGO Act of last February exempts most of these tax cuts, except for keeping the dividends rate below 39.6%, but that too may be set at 20% or even 15% I'm told.  It's none to soon for the stock market, which has had this as one of its concerns lately.

Extending or Ending Tax Cuts Laden with Political, Fiscal Risks - Before the year is out, the expiring personal income tax cuts of 2001 and 2003 will likely be extended — except for those with high incomes.President Obama set the terms in his presidential campaign: no tax increases except for couples filing returns with taxable incomes of more than $250,000, and singles above $200,000. For couples with incomes above about $375,000 a year, the top tax rate would go from 35 percent to 39.6 percent, as it was back in 2000.Republicans want all the Bush tax cuts made permanent, even for the wealthiest Americans. But they will have to think twice before blocking legislation that excludes the wealthiest from the tax cut extension. For one thing, the Treasury stands to collect close to $1 trillion in tax revenues over the coming decade if upper-income Americans (with incomes above $200,000) are excluded from the tax cut — an important chunk of change in these times of towering deficits. Second, Republicans risk invoking the ire of most taxpayers if they block an extension of the tax cuts to protest higher taxes on upper income earners.

Number of the Week: Ending Tax Cuts Makes Only Small Dent in Debt - 0.26%: Added revenue, as a percentage of annual economic output, generated by raising tax rates on top earners The Obama administration has set the stage for a political battle by signaling that it plans to allow Bush-era tax cuts for top earners to expire at the end of this year. In the context of the U.S.’s long-term fiscal problems, the politicians will be squabbling over chump change.By allowing marginal tax rates on the top couple percent of earners to revert to their pre-cut levels of 36% and 39.6%, the government will gain an added $479 billion in revenue over the next ten years, according to calculations done by Alan Auerbach of the University of California, Berkeley and William Gale of the Brookings Institution.

How Would the Expiration of the 2001 and 2003 Tax Cuts Affect Individual Taxpayers? - With just a week left before Congress leaves town for the August recess, the fate of the 2001 and 2003 tax cuts is up in the air. Treasury Secretary Timothy Geithner yesterday rejected calls by some Democrats -- such as U.S. Sen. Kent Conrad (D-N.D.) -- to extend the tax cuts for high-income taxpayers.The Tax Foundation has launched a calculator at, which allows taxpayers to compare their 2011 federal income tax liabilities under the three possible scenarios: Taxpayers can type in basic information -- such as filing status, wage income and number of dependents -- along with optional more detailed information -- such as capital gains and dividend income, state and local taxes paid and other itemized deductions -- and determine what their federal income tax burden would be in 2011. Here is a video explaining how the Bush tax cuts calculator works:

No To Oligarchy - Senator Bernie Sanders - Today, not content with huge tax breaks on their income; not content with massive corporate tax loopholes; not content with trade laws enabling them to outsource the jobs of millions of American workers to low-wage countries and not content with tax havens around the world, the ruling elite and their lobbyists are working feverishly to either eliminate the estate tax or substantially lower it. If they are successful at wiping out the estate tax, as they came close to doing in 2006 with every Republican but two voting to do, it would increase the national debt by over $1 trillion during a ten-year period. At a time when we already have a $13 trillion debt, enormous unmet needs and the highest level of wealth inequality in the industrialized world, it is simply obscene to provide more tax breaks to multi-millionaires and billionaires.

Restore the Estate Tax! - So, a Treasury secretary, a labor union leader, a hedge-fund billionaire, and an heiress walk into a conference call.  It's not a Catskills joke. It was the teleconference staged Wednesday morning by United for a Fair Economy's Responsible Wealth Project to discuss the need to reinstate the estate tax. The situation surrounding the estate tax is truly bizarre. The excellent book Death by a Thousand Cuts, by Michael Graetz and Ian Shapiro, describes how a tax that falls on the slimmest minority of Americans was set on the path to extinction in 2001. Legislation called for the tax to decline to the point at which it disappears entirely in 2010. Then it would bounce back to its pre-2001 level in 2011. The Republican advocates of the legislation assumed that Congress would act in the interim to permanently abolish the tax. But they didn't, in large measure because—shocker!— Republicans in 2009 refused to cooperate on a compromise. And so 2010 is turning into an excellent time for rich people to die.

Rubin, Robertson, Disney Urge Congress to Resurrect Estate Tax… Former Treasury Secretary Robert Rubin, Tiger Management LLC Founder Julian Robertson and an heir of Walt Disney urged Congress to reinstate a tax on multimillion-dollar estates, possibly retroactively. The three were joined by AFL-CIO President Richard Trumka today to support efforts by a Boston-based advocacy group, United for a Fair Economy, pressing lawmakers to act before Congress adjourns for a month-long recess in August. The deaths of New York Yankees owner George Steinbrenner and at least three other billionaires this year has focused attention on the absence of the levy, which lapsed Jan. 1. Had they died in 2009, they would have paid as much as 45 percent on much of their estate, depending on how their wills were structured.

Financial Reform: Why We Need It, and Why It Might Not Work - The Dodd-Frank financial reform act makes fundamental changes in the way the US financial industry will be regulated. It sets up a new oversight mechanism to spot early warnings of systemic risk, creates new resolution authority for complex financial firms, creates a new consumer protection agency, and introduces restrictions on several specific kinds of risky activity, including use of derivatives, proprietary trading, and ownership of hedge funds. We can judge the likelihood that the Dodd-Frank Act will have its intended outcome by viewing the financial system in terms of the interaction of a risk-return frontier, shaped by market conditions and the regulatory regime, and the risk-return preferences of financial managers and regulators. The intended consequence of Dodd-Frank is to move the financial system downward along the risk-return frontier from management's preferred point to that of regulators.

Master's Forum on the Dodd-Frank Financial Reform Bill -This is mostly to let those of you who might be interested know about the Conglomerate Blog's Master's Forum on the Dodd-Fran financial reform bill. Here are a few examples taken from recent posts in the long series of posts on this topic. (These are lawyers, so much of it is from a legal perspective. Also, I don't necessarily agree with everything that is said in the examples below or in the discussions more generally): Dodd-Frank Forum: I Give It a B, by Brett McDonnell: By contrast: Dodd-Frank Forum: “I’ll Have the Meatless Entrée, Please”, by Kim Krawiec: Here's another example: Dodd-Frank: Only You Can Prevent Ponzi Schemes, by Christine Hurt:

Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173) 

Financial Overhaul is Law, Now Comes Battle Over its Rules - President Barack Obama signed the most sweeping set of financial rules since the Great Depression today, kicking off an election-year fight to define how the law will be put into effect. With his signature, Obama capped a year-long legislative struggle to draft and pass the measure spurred by the 2008 financial crisis that triggered the collapse of Lehman Brothers Holdings Inc. and dragged down Wall Street and the U.S. economy. The law, named after its principal authors, Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank, gives the government new authority to unwind failing financial firms that may threaten the entire system, imposes new rules on derivatives markets and creates a consumer-protection agency at the Federal Reserve to monitor everything from home loans to credit cards.

Obama's Innovation Gaffe - Kalpa -  Historically, financial innovation contributes to banking and financial crises. New and "innovative" products are too often meant to confuse the consumer due to intentional complexity and non-transparency. When appropriately regulated, some, but not all, may be worthwhile, but the greed in human nature leads the innovators to prefer keeping such new products unregulated. Derivatives devised by quants serve as a good case-in-point during this past decade. This morning, President Obama used the term "innovation" when he signed the historic financial reform bill as follows: The fact is, the financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. There are a lot of banks that understand and fulfill this vital role, and there are a whole lot of bankers who want to do right -- and do right -- by their customers. This reform will help foster innovation, not hamper it.  The above paragraph from Obama's speech was a poor choice of words and ideas to announce this historic financial reform bill  A reform bill that fosters innovation by bankers is hardly what we need right now, let alone a president who crows about it. How bizarre.

A piece-by-piece guide to financial overhaul law -(AP) -- Two years after the global financial system nearly collapsed, a vast revamping of regulation has been signed into law. The measure targets the risky banking and oversight failures that led to the last crisis. The goal is to make another crisis less likely -- and, if it does happen, less costly for taxpayers. Most of the new rules won't take effect right away. The Obama administration has a full year, for example, to empower a Bureau of Consumer Financial Protection that is being created. Regulators will take months to study dozens of issues in the 2,300-page law before drafting rules. Among them: Should the government limit the size of banks? How should stockbrokers be held accountable for advice they give to clients? How can credit ratings be made more reliable? All of that means the real-world impact of the law will depend on how it's interpreted by regulators -- the same regulators who were blamed for failing to head off the financial crisis.

“Masses of Worthless Paper” - Where to open a critique is as much a problem as where to close it. So, this will start and end at the source: the Federal Reserve. In a single sentence, the Journal captured the most compelling reason to heave the proposed legislation into the BP oil spill: "The Federal Reserve would emerge as the pre-eminent regulator, with responsibility for the most complex financial companies."The Federal Reserve has less understanding of banking than Bonnie and Clyde. Fed Chairman Ben S. Bernanke is unable to comprehend there was cause-and-effect between the boom the 1920s and the Great Depression of the 1930s. His ineptitude gave then-Federal Reserve Chairman Alan Greenspan the academic cover to reduce the fed funds rate to one percent in 2003. The most egregious credit bubble in the history of the world followed. Learning nothing, Simple Ben has now cut the funds rate to zero, creating an even greater credit bubble than the behemoth that collapsed in 2007

The Volcker Rule  Volcker believes that commercial banks, such as Citigroup and Wells Fargo, are worthy of receiving government assistance—and even, in extremis, taxpayer bailouts—because firms and consumers depend upon them for credit. In return for these enterprises being sheltered, they should refrain from risky activities such as proprietary trading and sponsoring hedge funds. “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff,”“If you are doing this stuff, you shouldn’t be a commercial bank.”The financial industry was lobbying vigorously to weaken the Volcker rule. Shortly before dinnertime on Wednesday, a Capitol Hill staffer called Volcker’s chief of staff, Anthony Dowd, a former investment banker, to let him know that Senator Christopher Dodd, the head of the Banking Committee, had released a new compromise proposal. The Democratic leadership needed the vote of Scott Brown, the freshman senator from Massachusetts, who had demanded changes that would please the big financial firms, several of which are based in his state.

The Trouble with Tim’s Treasury - More depressing news from the “change” President.  The Washington Post has reported that one of the major impacts of the FinReg bill passed last week by Congress is the accretion of new power to Obama’s Treasury Secretary.  According to the Post, Tim Geithner stands to inherit vast power to shape bank regulations, oversee financial markets and create a consumer protection agency.Make no mistake:  this is Timmy’s bill, plain and simple, as the Post makes clear: “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.” The Geithner Treasury repeatedly pushed back against many sensible legislative proposals that would have made significant structural changes to practices that brought about the current economic crisis.

The littlest guy - JAMES SUROWIECKI has written a nice column on one of the big weaknesses of the otherwise decent financial reform bill: its new oversight rules do not apply to auto dealers. Despite playing a major role in the provision of one of the most common types of household credit—car loans—dealers managed to win themselves an exemption from new regulation, largely because Congress was able to sell the giveaway as help for "Main Street" businesses, rather than big Wall Street banks. In a good closing paragraph, Mr Surowiecki writes: One could say, of course, that this is just the way interest-group democracy is supposed to work—enabling little guys to band together into effective lobbies. The problem is that the system does nothing for the littlest guy of all—the consumer. In giving the dealers their exemption, Congress may have said that it was helping Main Street over Wall Street. But what it was actually doing was putting the dealers’ interest in no oversight ahead of the public’s interest in a fair marketplace.  It’s like creating the F.D.A. and then denying it authority over pain relievers

Another Senate Charade - Matt Taibbi -Bernie Sanders had put forth a proposal in the Senate to put a 15 percent cap on credit-card interest. Who isn't in favor of this kind of legislation? The only difference between credit card companies and loan sharks at this point is that you can choose to not patronize a loan shark. As an adult professional in this country one has to have a credit card - it's impossible to rent a car, buy a hotel room, shop online or do countless other things without one. Almost everyone has horror stories about consumer credit and my guess is that if put to a national referendum, something like the Sanders 15% cap would pass pretty easily. In Washington, of course, it's another story. Finance/Credit companies spent well over $30 million in lobbying in each of the last two years. If you take a look at contributions to Banking Committee members, you always find Finance and Credit companies at or near the top of the list. The credit card companies' dominance of congress was never more apparent than in the Bankruptcy Bill back in 2005, which essentially made it impossible for people with credit card debt to file for bankruptcy to keep their houses.

Obama Admin Praises Elizabeth Warren But States 'There Are Other Candidates As Well' To Lead CFPB - Top Obama administration officials rushed to praise leading consumer advocate and bailout watchdog Elizabeth Warren on Friday as being "exceptionally well-qualified" to lead a new consumer protection office. But a senior adviser to Obama left open the possibility that she would not be chosen while administration officials did not deny a report that Treasury Secretary Timothy Geithner opposes her nomination. The Huffington Post reported Thursday that Geithner opposes Warren getting the nod to lead the new agency. Designed to protect borrowers from abusive lenders, the creation of the agency has typically been listed by the administration as the top accomplishment of the recently-passed financial reform bill, ahead of other more systemic issues like reforming the derivatives market, ending the perception that some firms are Too Big To Fail, and ensuring that banks keep adequate capital to protect against destabilizing losses. Key to that effort is picking the head of this new entity. A weak chief will render it ineffective; a strong leader will ensure that lenders can no longer abuse consumers with impunity.

The Real Reason Geithner Is Afraid of Elizabeth Warren - As reported on HuffPost last week, 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.  One can assume that Geithner, being very close to the nation's biggest banks, is concerned that Warren, if chosen, will exercise her new policing and enforcement powers to restrict those abusive practices at our commercial banks that have been harmful to consumers and depositors. Certainly, Warren is not the commercial banking industry's first pick to serve in this new role.  The reason is simple. The bill has been written to put a great deal of power as to how strongly it is implemented in the hands of its regulators, some of which remain to be chosen. The bank lobby will work incredibly hard to see that Warren, the person most responsible for initiating and fighting for the idea of a consumer financial protection group, is denied the opportunity to head it.

Of Innovation and Confidence Tricks - Maxine Udall - Are all entrepreneurs and innovators outright or borderline con artists? Not by a long shot, but financial products seem to offer more opportunities for destructive innovation. As financial products get more complex you can't always rely on customers to know the difference between a product that is akin to a confidence trick and a product that is truly beneficial.  So now you know why lately I've been thinking more about my distant businessmen relatives. And you understand the dismay I feel when I read that Tim Geithner (and maybe Larry Summers) are opposed to Elizabeth Warren as head of the new Consumer Financial Protection Board . Yves Smith reports that Warren is not opposed by Treasury after all, but I'm not reassured.We need someone who is clearly, unequivocally on the consumer's side, not the side of the firms that create and sell such products. At present, I suspect the average US resident would agree, regardless of political ideology, that the current administration appears to be altogether too much on the side of and sympathetic to the creators of financial "innovation." Paul Krugman, blogging about Elizabeth Warren as a potential candidate to head the CFPB, said it best

Starting consumer protection right - My worry isn't that the Obama administration will pass over Elizabeth Warren at the Consumer Financial Protection Bureau and appoint "some banker" instead. My worry is that it will pass over Warren, a renowned Harvard law professor and consumer advocate, and choose some gray bureaucrat or friendly ex-congressman instead. A crusty banker who hates a lot of his former colleagues and has the cutthroat, ruthless personality of lots of bankers might be able to attract other ex-Wall Street types and create an interesting agency. Some former bureaucrat can't. When you're creating a new institution, if you get good people in the first place, you'll keep getting good people after that. The argument for Warren is that the best young lawyers and consumer advocates revere her and would walk across broken glass for the opportunity to work with her. There's no second choice with anything close to that allure.

Dodd Casts Doubt on Warren for Consumer Agency -Many liberal groups and Democrats want Warren for the job, in part because she first came up with the idea for the agency in 2007. But bankers and many Republicans oppose her, saying she could be too tough on banks and lead to a contraction of credit. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) cast doubt Monday over whether Warren could win Senate support if she’s nominated. “The question is, ‘Is she confirmable?” Dodd said in response to a question on NPR’s the Diane Rehm Show. “There’s a serious question about it.”Earlier on the program, Treasury Department Deputy Secretary Neal Wolin tried to dispel reports that Treasury Secretary Timothy Geithner had been working to keep the White House from nominating Warren.

Elizabeth Warren Could Head CFPB Without Senate Confirmation - During a radio interview Monday, Senate Banking Committee Chairman Christopher Dodd said there's a "serious question" over whether she, as Obama's nominee, could be confirmed by the Senate. The administration, though, could bypass the Senate entirely -- without engendering the ill-will that would result from a recess appointment. According to the bill's language, the Treasury Secretary has sole authority to build the new agency before it's ultimately transferred to the Federal Reserve. That includes anointing a person to head the effort on his behalf, and under his authority. The interim head would serve until the President's nominee is confirmed by the Senate. That person could be Elizabeth Warren

Elizabeth Warren’s nomination - The question of who will be Barack Obama’s nominee to head the Consumer Financial Protection Bureau has now been clearly framed: either it’s going to be Elizabeth Warren, or it isn’t. That’s how Damian Paletta sees it, that’s how Simon Johnson sees it, and that’s certainly how the Progressive Change Committee sees it: they’re up to 138,485 people and counting on their petition to put Warren in charge.This is by far the most high-profile appointment that will come out of the Dodd-Frank bill: you can hardly imagine thousands of signatures for or against Daniel Tarullo as the Fed vice-chairman in charge of regulatory issues. (Given that he literally wrote the book on such things, he’s probably a shoo-in.) As such, my feeling is that Shahien Nasiripour’s bright idea that she could simply be appointed — hired “on a contract basis”, without being nominated — is a non-starter. And in any case it’s not obvious that such deviousness is necessary: there’s a good chance that Warren would indeed get confirmed by the Senate.

The case against Elizabeth Warren - Since Tim Geithner won’t, I want to try and provide a case against Elizabeth Warren as head of the Consumer Financial Protection Bureau. I should start by saying that in theory, and maybe in reality, I think the Consumer Financial Protection Bureau is a good idea. Obama’s high-level description is certainly something I can sign off on: He said the new agency would promote “clear and concise information” for consumers to make financial decisions, crack down on abusive and deceptive practices and rein in unscrupulous credit card issuers and student loan companies. My concern is that the agency will go for restrictions that liberals tend to like but that limit credit for those who need it most, like usury laws. A good place to look to see what kind of agenda she would have as head of the agency is articles and papers in where she argued for the existence of such a regulator. In both places I found her praise of usury laws troubling.

The Talents and Hazards of Elizabeth Warren - Judging from the newspapers these last few days, liberal activists seem to have made some progress in their quest to turn to President Obama's choice to run the Consumer Financial Protection Agency (CFPA) into a proxy for whether or not the transform-Washington, candidate-of-hope-and-change is a just talk or the real deal. Obama will pass the test, in liberal eyes, if he appoints Harvard Professor Elizabeth Warren to the head the agency. He will fail otherwise.The marks in Warren's favor are fairly obvious. The entire idea of the CFPA, after all, was her's, based on years of scholarship about what she calls the "tricks and traps" of the financial industry. (To read her 2007 Democracy article describing the need here for a new regulatory body, click here.) She is indisputably at the top of her field of study. She was a key adviser to the White House during the financial reform fight. She has also shown, as chair of the TARP Congressional Oversight Panel, an ability to adapt her academic talents to the confines of government setting. Say what you will about the oversight panel, but it has certainly been productive, releasing 22 reports since December of 2008.

She’s a candidate for a job she devised - Can Mary and Elizabeth remake the financial world for consumers? They just might, if Elizabeth can get the job. Mary is Mary Schapiro, the chairwoman of the Securities and Exchange Commission, which this week moved to open up more price competition in the selling of mutual funds, and soon will deal with the issue of just how much responsibility a stock broker has to act in a client’s best interests. Elizabeth is Elizabeth Warren, the Harvard law professor who dreamed up the idea for the Bureau of Consumer Financial Protection, which became law when President Obama signed the Dodd-Frank law this week. Whether or not she is named to run the bureau may depend on how willing the president is to anger the banks yet again, and whether he is willing to risk a big confirmation battle in the Senate. There may be people less popular in bank boardrooms than Ms. Warren, but none come immediately to mind.

Ezra Klein: The case against Elizabeth Warren - My colleague Neil Irwin has a post this morning throwing some cold water on the heated advocacy for Elizabeth Warren to lead the Consumer Financial Protection Bureau. I'd group the objections into two buckets -- innovation and administration -- and both are fair. Irwin's first concern is that an overzealous consumer regulator could, in his or her enthusiasm for ridding the market of trickery, also rid it of products that make credit available to the working class. Does keeping a small number of people from getting into serious debt justify keeping a large number of people from accessing credit instruments they could use effectively? Irwin's second concern actually worries me less. It's hard to predict who will and won't be good at building an agency. It's a task that's not quite like any other, and fairly few people have much of a track record at it. It's also not a task that's solely dependent on the director. Deputy directors and other high-level managers have a lot of influence over hiring and administering and creating a workplace culture. But only the person at the top can set the agency's vision and sensibility and appeal.

Elizabeth Warren and the Definition of “Controversial” - Over the last few days, Connecticut Senator Chris Dodd and Treasury Secretary Tim Geithner have made the case that Harvard professor and Congressional Oversight Panel chairwoman Elizabeth Warren is essentially too controversial (potentially not "confirmable," in Dodd-speak) a figure to head the new Consumer Financial Protection Bureau (CFPB). This, then, raises the revealing question of how Washington defines "controversial?"  Recall that the charge of "too controversial" was not made by Senate Democrats (or at least not at the volume they are being made against Warren) against Gary Gensler, the former Goldman Sachs executive appointed by President Obama to head the Commodity Futures Trading Commission. It was not made by most Senate Democrats against Larry Summers, a hedge fund executive subsequently appointed to a top economic position in the administration. It was not made against Citigroup executive Jack Lew when last week he was appointed to head the Office of Management and Budget. And it wasn't made against Tim Geithner, who orchestrated massive taxpayer giveaways to major banks during his time at the New York Fed.

Elizabeth Warren and the CFPB - Rather than get into a full-fledged consideration of the nomination, I am just going to comment on the bizarre concern (here) and (here) that has been raised about Professor Warren's alleged lack of administrative experience. For starters, I'm not sure why that would matter. Past administrative experience is hardly something that's traditionally been required for government posts in part because agency heads don't handle administration single-handedly. Indeed, we have a President whose sole administrative experience was running the Harvard Law Review. And no one would ever question the lack of administrative experience if a member of Congress were proposed for an agency post. As it happens, Professor Warren has proven administrative experience running a newly-created government agency: the Congressional Oversight Panel.

Two Thoughts on the Warren Nomination for the CFPB - The latest catnip for the 24-hour news cycle seems to be speculation on whether President Obama will nominate Elizabeth Warren to head the new Consumer Financial Protection Bureau. Like Adam, I was resistant to say anything on Credit Slips because I figured few would care or be surprised to learn that she has the unequivocal and strong support of a co-author, collaborator, and friend posting on a site where she used to be a regular blogger. As I have read the media reports, it has struck me that the debate is becoming about the caricature of a person I know rather than the actual person. Along those lines, here are two thoughts.

Where's the Beef? Elizabeth Warren Edition - Here's what's striking about all the criticism of Elizabeth Warren: there's no smoking gun. No one has been able to point to anything radical in Elizabeth Warren's extensive body of writing. Where's the beef?  As far as I can tell, the objections to her are a perception that she doesn't like banks (neither does Congress or anyone else these days, it seems), that she "doesn't understand the logic of consumer finance" or that she is someone who "fundamentally objects to the wayour financial markets are organized," and that she would overregulate and restrict the availability of some financial products. Where's the evidence for this?  The only attempt I have seen to peg Elizabeth Warren to a specific regulatory proposal, rather than kvetch about her gestalt is an uninformed suggestion that she might bring back usury restrictions. For starters, section 1027(o) of Dodd-Frank explicitly restricts CFPB's authority to enact a usury limit. Irrespective, I am not aware of any occasion when Professor Warren has ever called for a usury law.

SEIU, Labor Directly Lobby Geithner On Elizabeth Warren's Behalf - The labor community is going to lend its considerable political clout to the effort to get Elizabeth Warren confirmed as the first head of the newly-created Consumer Protection Agency, going directly to the White House official who may stand in her way. On Tuesday, SEIU President Mary Kay Henry will "raise the point that Elizabeth Warren would be an excellent head of the newly created Consumer Protection Agency" in private talks with Treasury Secretary Timothy Geithner, according to a senior source with the union. The tete-a-tete adds an element of intrigue into the debate over who should head the new but important agency and could set up a now-familiar scenario in which the labor community finds itself butting heads with the White House's economic team.

Why Obama will nominate Warren The nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau seems to be a foregone conclusion at this point. Warren and the large team of Warren enthusiasts have been pushing her nomination aggressively, to the point at which no one in the Obama administration is going to want to face the political firestorm associated with not nominating her. This is no horserace: Warren’s running only against a vague conception of not-Warren, rather than against a flesh-and-blood Michael Barr or anybody else. Here’s Charlie Rose, for instance, questioning Tim Geithner on the subject in the very first direct question of his interview:

Regulators Are Human, Too - Once upon a time, economists and political scientists could accept the assumption that humanity was more or less rational and that we made relatively good decisions in the marketplace and in the voting booth. Over the last 35 years, the plausibility of that assumption has been shattered by laboratory evidence, like the work that earned Daniel Kahneman his Nobel Prize in 2002, and by market-shattering events like the dot-com and housing bubbles. Humans are not hyper-rational automatons. We make all sorts of mistakes, both when we are buying a house and when we are electing a senator.But should people’s propensity to err make big government more or less appealing? Are we better off with an active state that will lean against our private excesses? Or will big government be subject to so many of humanity’s flaws that we’re better off without it? This question, which I asked five years ago in an essay on paternalism and psychology, seems particularly relevant as the Obama administration works to develop the Bureau of Consumer Financial Protection.

Gov’t Economic Policies Seen as Boon for Banks and Big Business, Not Middle Class or Poor - The public sees clear winners and losers from the economic policies the government has implemented since the recession of 2008. Most Americans say these policies have helped large banks, large corporations and the wealthy, while providing little or no help for the poor, the middle class or small businesses.Fully 74% say that government policies over the past two years have done a great deal (53%) or a fair amount (21%) to help large banks and financial institutions. Majorities also say that large corporations (70% great deal/fair amount) and wealthy people (57% great deal/fair amount) have been helped.By contrast, 68% say government policies have helped small businesses not at all (29%) or not too much (39%); 68% also say middle-class people have received little or no help from these policies. And about the same percentage (64%) says poor people have not been helped.

Why the financial reform bill won’t prevent another crisis -- Financial regulators, white-collar criminologists, and economists all agree that perverse incentive structures cause crises and they agree that the finance industry's incentive structures have long been perverse. The Obama administration asserts that the financial reform bill the President will sign into law this week will prevent future crises. In fact, it will fail to do so because it does not effectively address those perverse incentives. Indeed, it increases the likelihood of the accounting scams that are the very reason why perverse incentives pay.

5 places to look for the next financial crisis - Financial reform has passed. The sprawling legislation is meant to be an air bag protecting us from the next major crash, which of course raises the question: Will it work? The legislation ushers derivatives out of the darkness and onto exchanges and clearinghouses; gives regulators the power to oversee shadow banks and dismantle failing firms; convenes a council of super-regulators to watch the mega-firms that pose a risk to the financial system; and much more.  That's not the same, however, as averting crises in the first place. It might make them less likely, but think of the difference between public health and medicine: The bill is medicine -- it's primarily about helping the doctors who figure out when you're sick and how to make you better. It doesn't dramatically change the conditions that made you sick in the first place.

Wall Street Reform: Five Key Fights After the Bill Is Signed - Today, President Barack Obama signed into law the first serious effort to regulate Wall Street in decades. The bill has much to be said for it, but the unfortunate truth is that it ducks several of the most critical reforms needed to protect our economy from banker abuse. As regulators work to implement the legislation, reformers must turn up the heat on Congress to adopt further reforms, and recognize political opportunities to further economic progress. Five policy fights stand out as particularly pressing. Many of these policies can be implemented this year, while others will probably have to wait until the next Congress. All of them are critical to ensuring that our financial sector works to support a healthy economy, instead of a reckless bonus machine.

Banking Under the Dodd-Frank Act - Those pushing for more effective regulation of the financial system are looking for progress along three potential dimensions.  The first two – raising capital standards and appointing new regulators – are the most discussed, but powerful interests are blocking real change.  The third – tougher and smarter congressional oversight – holds great promise.First, on key issues – such as capital standards – there could theoretically be a breakthrough in the so-called Basel Process of international negotiations, e.g., in the run-up to the November G20 summit in Seoul.  Some senior US administration officials continue to make bullish off-the-record remarks, but Sheila Bair is sounding a much more cautionary note.  And European participants continue to emphasize that Germany does not want a significant increase in capital for its banks. The baseline view here must be that the “lowest common denominator” approach will prevail.  This was the consensus at last week’s Future of Finance meeting in London – not at all encouraging.

With Banking, Question Everything - Simon Johnson - President Obama’s signing of the financial reform bill on Wednesday does not end our intense debates over banking. Rather, it just moves them to a new sphere. Instead of arguments about legislation in Congress, the next arena is the action (and perhaps inaction) of regulators. Those pushing for more effective regulation of the financial system are looking for progress in three areas. The first two — raising capital standards and appointing new regulators — are the most discussed, but powerful interests are blocking real change. The third — tougher and smarter Congressional oversight — holds great promise.

White House Pick on Bank Regulator Nearing - There’s been a tremendous amount of buzz over who the White House is going to pick to run the new consumer financial protection regulator, but the Obama administration has another difficult decision to make in the next few weeks: a nominee to run the Office of the Comptroller of the Currency.The OCC is a division of the Treasury that regulates national banks and plays a major role in setting financial policy for the U.S. government.The current comptroller, John Dugan, is leaving on Aug. 14, and the administration has said plans to name their nominee by then. The nominee would need Senate approval. The job would likely be an attractive one, as the person would be a member of the new council of regulators, and have a seat on the Federal Deposit Insurance Corp.’s board of directors, and control a large agency with a wide range or examiners and banking experts. For weeks, people have speculated that possible nominees could be Superintendent of Banks for the State of New York Richard Neiman, Treasury Department assistant secretary Michael Barr, or Federal Reserve governor Daniel Tarullo.

ICE Trust and CDS swaps - Created in its current form in 2009, this institution has become the central clearinghouse for CDS swaps.  Just about everyone has favored the clearinghouse reform, but the more I read the more I find the course of affairs to be slightly unsettling:1. The major banks play a strong role in ownership and governance of ICE Trust.  There's nothing necessarily wrong with that, but does the clearinghouse have the incentive to check excess risk-taking behavior and demand adequate collateral? 2. As of the spring, ICE had a market capitalization of $9 billion; relative to the size of the outstanding exposures in the CDS market, is that a lot or a little?  Remember that the A.I.G. bailout had an upfront cost of about $70 billion. 5. ICE's parent institution is located in the Cayman Islands. 6. The Fed was regulating ICE but in the new FinReg bill the SEC and CFTC have joint authority over the institution, with overall the CFTC having the lead role for what is currently, or has been, OTC derivatives.

Will Financial Reform Melt the ICE Trust Monopoly? - One of the more heralded provisions of the financial reform bill requires banks to trade credit default swap (CDS) contracts and other derivatives through a third-party clearinghouse so regulators can evaluate the trades and monitor the market for systemic risks. Banks have lobbied furiously against increased scrutiny, and it’s a sure bet that they will keep up the pressure on regulators who must write specific the rules once the bill is signed into law by President Barack Obama. Last year, however, without much fanfare, many of those same banks teamed up with Atlanta-based Intercontinental Exchange, Inc. to launch ICE Trust, a clearinghouse for CDS trades that stands to be a prime beneficiary of new regulations.

Caught napping, sorry folks…A surprise for the ratings agencies, the bond market, and me, too – this has to be a late change in the Financial Reform bill, and it’s a corker. From the WSJ: The nation’s three dominant credit-ratings providers have made an urgent new request of their clients: Please don’t use our credit ratings. And it already is creating havoc in the bond markets, parts of which are shutting down in response to the request.Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Update: a few more details here and here. Monster update: I can’t find the final text, and nothing but broken links to older versions, so it will have to be the House press release. The big sticking point for the ratings agencies is evidently the liability clause here: Liability: Investors can bring private rights of action against ratings agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source. NRSROs will now be subject to “expert liability” with the nullification of Rule 436(g) which provides an exemption for credit ratings provided by NRSROs from being considered a part of the registration statement.

Ratings Agencies: Don't Use Our Ratings - Parts of the bond market are shutting down this week as ratings agencies try to figure out how they'll be affected by a last-minute provision in the finance bill, the WSJ reports. President Obama will sign bill into law this morning, and this may be the first unintended consequence.  Bonds are loans. The agencies — including Moody's and S&P — were criticized in the housing bust for assigning high ratings to lots of loans that went bad. Under the new law, ratings agencies can be sued for making bad ratings decisions, if the ratings are included in formal documents that companies file with the SEC when they issue bonds.

Did The Credit Agencies Just Go Extinct? - The recently passed Donk (Dodd-Frank) Finreg abomination, which nobody has yet read is finally starting to disclose some of the interesting side effects of its harried passage. Such as that the rating agencies may have suddenly become extinct. As the WSJ's Anusha Shrivastava discloses: "The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings." The Moodies of the world suddenly have good reason to not want their name appearing next to those three A letters (at least in Goldman CDO and bankrupt sovereign cases) out there: "The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately." In other words, "advice by the services will be considered "expert" if used in formal documents filed with the Securities and Exchange Commission. That definition would make them legally liable for their work, meaning that it will be easier to sue an firm if a bond doesn't perform up to the stated rating."

The Effects of the Credit Card Act - Credit card issuers have stopped many of the “deceptive” or “unfair” practices outlawed by the Credit Card Act, but they are still engaging in others, according to a report released Thursday by the Pew Charitable Trusts’ Safe Credit Card Project. Its findings are in its latest of a series of reports on the subject, “Two Steps Forward: After the Credit CARD Act, Credit Cards Are Safer.” According to the latest report, credit card issuers have eliminated arbitrary interest rate increases on existing balances; over the limit fees without consent from the customer; the allocation of payments first to balances with the lowest interest rate; and disproportionate charges for minor account violations like penalty interest rates after one late payment or a second late payment in 12 months.

New Mega Banks Pressure Smaller Players – The financial-overhaul bill that will be signed into law by President Barack Obama on Wednesday won't address one of the most far-reaching consequences of the recent crisis: Market power is concentrating in the hands of the nation's largest banks. Fortified by infusions of taxpayer capital and takeovers of other large institutions killed or wounded in the crisis, a handful of hulking banks is emerging from the mess to dominate everything from mortgages to checking accounts to small-business loans. The financial-regulation law will bring new shackles and oversight, likely to cost the big banks billions in revenue. But their growing supremacy will help them absorb the blow.Bank of America, J.P. Morgan and Wells Fargo now have 33% of all U.S. deposits, up from 21% in mid-2007—the fastest shift of such a large chunk of deposits in U.S. history. Much of the gain came from their acquisitions of Countrywide Financial Corp., Washington Mutual Inc. and Wachovia Corp., respectively.

Congress should take up $90 billion bank tax, Frank says - U.S. Representative Barney Frank, an architect of the financial-overhaul bill lawmakers sent to President Barack Obama yesterday, said he wants Congress this year to take up the White House plan for a $90 billion bank tax to recoup government bailout funds. Frank said Treasury Secretary Timothy F. Geithner had urged him not to look for bank fees, which Frank had sought to help pay for the legislation, because the administration plans a major push for a broader tax. “I don’t understand how members can say they’re for reducing the deficit and then let Goldman Sachs and JPMorgan Chase off the hook entirely. They were the major beneficiaries of the intervention,”

Fed’s Tarullo Concerned About Europe’s Approach to Regulating Compensation - Speaking before a panel of the Senate Banking Committee on Tuesday, Tarullo said the U.S. and Europe still don’t agree on the best approach to regulating compensation structures that don’t encourage banking employees to take undue financial risks.Since the financial crisis, regulators have been looking at compensation practices at financial firms amid concern that pay structures prompted traders to take excessive risks. Last month, the Fed and other banking regulators released guidance on how banks should set up incentive compensation. Tarullo described the U.S. guidance as a flexible, “principles-based” approach designed to take into account “the substantial variation in the actual incentives and risks associated with the thousands of executives” at financial firms.

Fed Agrees on Reducing Credit Protection Provided for TALF - The U.S. Federal Reserve has agreed on reducing protection provided for a loan program created to help ease the financial crisis. The Fed on Tuesday announced it had agreed with the Treasury Department that it was appropriate for Treasury to reduce to $4.3 billion from $20 billion the credit protection for the Term Asset-Backed Securities Loan Facility.The protection had been provided under the Treasury’s Troubled Asset Relief Program.TALF began operation in March 2009 to add liquidity to the shaken financial system. The program closed last month. The Fed had authorized up to $200 billion in TALF loans, but when the program closed June 30, there were $43 billion in loans outstanding.

Wall Street is Laundering Drug Money and Getting Away With It - Too-big-to-fail is a much bigger problem than you thought. We've all read damning accounts of the government saving banks from their risky subprime bets, but it turns out that the Wall Street privilege problem is far more deeply ingrained in the U.S. legal system than the simple bailouts witnessed in 2008. America's largest banks can engage in flagrantly criminal activity on a massive scale and emerge almost completely unscathed. The latest sickening example comes from Wachovia Bank: Accused of laundering $380 billion in Mexican drug cartel money, the financial behemoth is expected to emerge with nothing more than a slap on the wrist thanks to an official government policy which protects megabanks from criminal charges.

Feinberg Says Bonuses Paid by Troubled Banks Were Unmerited…  In a report to be released on Friday, Kenneth R. Feinberg, the Obama administration’s special master for executive compensation, is expected to name 17 financial companies that made questionable payouts totaling $1.58 billion immediately after accepting billions of dollars of taxpayer aid, according to two government officials with knowledge of his findings who requested anonymity because of the sensitivity of the report. The group includes Wall Street giants like Goldman Sachs, JPMorgan Chase and the American International Group as well as small lenders like Boston Private Financial Holdings. Mr. Feinberg’s report points to companies that he says paid eye-popping amounts or used haphazard criteria for awarding bonuses, the people with knowledge of his findings said, and he has singled out Citigroup as the biggest offender.

Goldman's Settlement with the SEC - Now, in my view naked credit default swaps should be illegal. They are nothing but an insurance contract when the protected insurance buyer has no insurable interest in the reference property. As many have observed, such a situation presents a dangerous moral hazard-- it is like letting an arson take out an insurance contract on the most expensive house in the neighborhood and then reap the benefit of the payout after he burns the house down. Nonetheless, the financial lobby is extraordinarily powerful, and Congress did not yet bite the bullet to ban naked credit default swaps in the financial reform package. (I say "yet" because I am convinced that we must dampen the use of such derivatives or stand by to witness destruction of both financial system and economy through continuing crises fueled by rampant speculation.)But even if naked credit default swaps aren't illegal (which is the current situation), that doesn't mean that a bank should be able to cater to one client to create a financial product stacked with the worst of the worst subprime mortgages and neglect to tell another client about that critical fact.

A.I.G. Failure Would Have Cost Goldman Sachs - NYTimes - Since the United States government stepped in to rescue the American International Group in the fall of 2008, Goldman Sachs has maintained that it would have faced few if any losses had the insurer failed. Though it was the insurer’s biggest trading partner, Goldman contended that it had bought credit insurance from financial institutions that would have protected it, but it declined to identify the institutions. A Congressional document released late Friday lists those institutions and shows that Goldman was exposed to losses in an A.I.G. default because some of the investment bank’s trading partners, such as Citibank and Lehman Brothers, were financially unstable and might have been unable to make good on large claims from Goldman.

S.E.C. Pursuing More Cases Tied to Financial Crisis -— Days after the Securities and Exchange Commission secured a $550 million settlement from Goldman Sachs, the agency’s chairwoman said on Tuesday that the commission was pursuing several other investigations related to the 2008 financial crisis. The chairwoman, Mary L. Schapiro, told reporters after a Congressional hearing that the S.E.C. had “a number of cases coming out of the financial crisis related to C.D.O.’s and other products” and involving Wall Street firms, banks and other financial institutions.  Ms. Schapiro’s comments are the most direct signal yet that the S.E.C. is continuing to press for accountability and restitution for the upheaval in financial and housing markets in 2007 and 2008, which led to the sweeping regulatory bill that President Obama is scheduled to sign on Wednesday.

Watch Banks Pull Rabbits Out of Hats, Ably Assisted by Their Auditors - Do you own stock in a large money center bank?  Work for one?  Count on one to lend you money for a small business?  Expect them to stimulate the economy via commercial loans and lending again for residential or commercial real estate?You’ve been deluded by the illusion of their self-serving public relations – rah-rah intended to help you forget financial reform that barely is and no safety net for anyone but the elite.The global money center banks are masters at managing financial reporting. Regulators repeatedly feign surprise at balance sheet sleight of hand, prestidigitation at the expert level intended to buy time until the banks can grow out of the black hole that bubble lending put them in. They announce their quarterly results, with all the details – they don’t even try to hide them anymore – and they’re ignored or the con is traded on for short term profits.

Unofficial Problem Bank List at 796 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for July 16, 2010. Changes and comments from surferdude808:  The Unofficial Problem Bank List underwent several changes this week as the FDIC resumed shuttering banks and the OCC release their actions through the middle of June. There were nine additions and nine deletions, which leaves the total number of institutions on the Unofficial Problem Bank List unchanged at 796.

FDIC sends insurance payouts to 9,500 people - The maximum the FDIC would insure in any single deposit account was raised from $100,000 to $250,000 at the height of the financial crisis in October 2008, as part of the $700 billion rescue package.  The law President Barack Obama signed Wednesday makes the higher cap permanent, retroactive to Jan. 1, 2008.  Pushing the effective date back to the beginning of 2008 gives about 9,500 customers of six banks that failed between Jan. 1 and Oct. 3, 2008, whose accounts held between $100,000 and $250,000 more money than they would have received. The FDIC said about 500 remaining customers' accounts held more than $250,000 per depositor, and they still aren't covered for that excess money.

GM Buys Subprime Lender for $3.5B (Some Companies Just Never Learn) - Just when I thought General Motors was on solid footing and heading in the right direction after shedding a large portion of its liabilities in bankruptcy, they seem to have forgotten what has happened over the last several years in the world of credit. One of the big reasons GM’s losses were compounded during the recession was because they funded a lot of subprime loans for their vehicles through GMAC. When those loans went sour, the losses not only negated the razor thin margins they had on the vehicle sales themselves, but resulted in a company that lost money on most of their cars. Hence, SUVs (with their fat profit margins) became a focus for the company, even in the face of rising gas prices, which aided their competitors in stealing market share.

Bankrupt GM uses $3.5 billion of taxpayers’ money to buy subprime auto lender AmeriCredit and signal a return to the good old days for Wall Street - One obvious consequence of “sweeping” legislation is that nothing gets done while we wait for it to pass and go into effect. Doubtless there will be further evidence of “unintended consequences” too.Anyhow, a second big piece of post Dodd-Frank Act news (after the boycott by the rating agencies) is that GM is back – making deals and (umm, once that boycott by the ratings agencies is worked around, negotiated away, or whatever) securitizing.GM, still currently in bankruptcy, is spending $3.5 billion of money it presumably doesn’t have to buy a subprime lender, AmeriCredit .AmeriCredit is a subprime auto lender dependent entirely on the securitization market for its existence;  it’s flirted with bankruptcy a few times itself, over the years (hat tip: anonymous). At the moment it finances almost exclusively secondhand cars, any make. GM needs a subprime lender so they can get someone to make loans to their potential buyers, otherwise GM won’t be able to sell so many cars, which would spoil GM’s planned IPO. Surely AmeriCredit will be a captive lender very soon after the merger is done.

US financial system support up $700 bln in past year-watchdog (Reuters) - Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion, a government watchdog said on Wednesday. The Special Inspector General for the Troubled Asset Relief Program said the increase was due largely to the government's pledges to supply capital to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) and to guarantee more mortgages to the support the housing market. Increased guarantees for loans backed by the Federal Housing Administration, the Government National Mortgage Association and the Veterans administration increased the government's commitments by $512.4 billion alone in the year to June 30, according to the report. "Indeed, the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases,"

Pay czar: 17 bailed-out banks overpaid executives - The Obama administration's pay czar said Friday that he did not try to recoup $1.6 billion in lavish compensation to top executives at bailed-out banks because he thought shaming the banks was punishment enough.Kenneth Feinberg said 17 banks receiving taxpayer money from the $700 billion financial bailout made "ill-advised" payments to their executives. But he stopped short of calling them "contrary to the public interest" — language that would have signaled a fight to get the money back.Feinberg couldn't force the banks to repay the money. But the law instructed him to negotiate with banks to return money if he determined that allowing them to keep it was not in the public interest. He said such a fight could have exposed banks to lawsuits from shareholders trying to recapture the executives' money.

Overpaying CEOs - Here's the abstract of  "When Executives Rake in Millions: Meanness in Organizations": The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem. Trends in this country are ominous...

Gallup: Americans Losing Faith in Congress, Not Happy With Banks or Big Business - Gallup is out with the results of its always-intriguing annual survey of Americans’ views on our national institutions — and it looks particularly bad for Congress, and not too good for banks or big business either.Asked to gauge their confidence in 16 institutions, only 11% of those  they have  “a great deal” or “quite a lot” of confidence in 16 institutions, only 11%  Congress, down from 17% in 2009 and a percentage point lower than the previous low for Congress, recorded in 2008. The military (76% down from 82% last year) and small business (66% vs. 67%) top the list, as usual.  But only 19% (up from 16% last year, the lowest level since Gallup first started asking in 1973) said they have a great deal or a quite a lot of confidence in big business . And 23% (up from 22%)said the same about banks, well below the 49% recorded just five years ago.  Newspapers, by the way, held steady at 25%.

Cleveland Fed Goes Che: Advocates Debt Forgiveness Over Bankruptcy For Corporate Debtors - The Cleveland Fed has spent another boatload of taxpayer money analyzing a topic so simplistic even a 5 year old would know the answer in advance, to wit: "Is debt overhang causing firms to underinvest?" Let's see here... Uh yeah. And you can keep the $1,000,000 "research" cost. While the paper is sufficiently entertaining courtesy of a few graphs, flow charts and general widgets, the conclusion is startlingly absurd. In essence the authors conclude (in less than definitive terms) that debt forgiveness may be the best outcome for highly leveraged companies: "The debt-overhang problem may be so severe that creditors can actually benefit from forgiving a portion of the debt. With excessively high levels of debt, the risk of default is large and the market value of debt is well below its face value. If the creditors forgive part of the debt in this situation, the lower debt burden helps realign the interests of the equity holders and the creditors. 

The New Doom - "Life is such a fucking disaster," a prominent New York hedge fund manager said recently. "We all live in some kind of world we create for ourselves. And I think that what happened is that built into that world were very enlarged expectations about what life was going to be. There's been this sensation of excessive expectation that, frankly, became unsustainable."He had just returned from his ranch in the wilderness of central Idaho. "I just like it because it's massively low human density. It would be a place you could hole up in. But, gosh, I hope that doesn't happen." Last week, not very far from the hedge fund manager's ranch, the billionaire John Malone gave a little-noticed interview to The Wall Street Journal from Allen & Co.'s annual Sun Valley conference. Asked about the biggest risks to Liberty, his media conglomerate, Mr. Malone said his concern was this country's survival. "We have a retreat that's right on the Quebec border. We own 18 miles on the border, so we can cross. Anytime we want to, we can get away."

An Outspoken Fund Manager With Contrarian Views - With a sharp wit and a sharper tongue, Mr. Hendry, a plain-spoken Scot, has positioned himself as the public contrarian thinker of this city’s very private hedge fund community. The euro? It’s finished, Mr. Hendry proclaims. China? Headed for a fall.  President Obama? “If there was a way to short Obama, I would,” Mr. Hendry said.  Mr. Hendry runs the successful hedge fund firm Eclectica Asset Management. It is an old-school macroeconomic fund company with a big-think, globe-straddling style more akin to the Quantum Fund, of George Soros fame, than to the high-tech razzle-dazzle of Wall Street’s math-loving quant analysts.  Last May, on British television, he verbally sparred with Jeffrey D. Sachs, director of the Earth Institute at Columbia and perhaps the best-known economist writing on developmental issues.  Before that, he took on Joseph E. Stiglitz, the Nobel laureate, about the future of the euro. “Hello, can I tell you about the real world?” Mr. Hendry interjected at one point. Video of the encounter was a huge hit on YouTube.

Commercial Property Sales Fall to One-Quarter of Prevailing Six-Year Average - Bloomberg - Businessweek reports: According to Real Capital Analytics, the volume of commercial property sales for the first six months of 2010 totaled $34.2 billion. This represented 26 percent of the average first-half total for the past six years (since 2004), and just 12 percent of 2007’s first-half total. Compared to the inertia of 2009, however, this year’s $34.2 billion was 58 percent higher than the total volume for the same period last year.  Contrary to intuition, the slow recovery in commercial sales is not due to a lack of capital or demand on part of investors. In particular, private equity funds and REITs amassed large pools of equity over the second half of 2009 in preparation for foreclosure fire sales that were predicted to come en masse in 2010.

Office vacancies rise, rents drop in Southland again - Southern California office landlords faced more bad news in the second quarter as occupancy and rents in their buildings fell again. The persistently soft market has created opportunities for tenant businesses to sign some of the cheapest leases available in several years. The pace of deals has picked up a bit, brokers said, but many companies are still carefully husbanding their finances and avoiding long-term rental commitments. Commercial real estate is a lagging indicator of the economy, and the drop in California employment that started in 2007 has helped shrink the amount of space businesses need to house their employees.

Office Vacancy, Lease Rates and New Investment - Voit Real Estate released their Q2 quarterly reports today for CRE in Las Vegas, Phoenix, San Diego, Orange County and several other southwest cities. These two graphs from the O.C. office report really tell a story ...The first graph shows the vacancy rate and amount of new construction. Notice that new construction has fallen to almost zero this year, and the vacancy rate in Q2 was 18.34%, slightly above the Q1 rate of 18.21%. Look back at the early '90s when the vacancy rate was at about the same level (in '93 and '94), there was very little building for the next three years even with the vacancy rate falling.  These is so much excess capacity that there is no need for new investment for some time.The second graph shows the average full-service monthly lease rate per sq ft. This is just asking rates, but it looks like rents are off about 25% to 30%, and are back to 1999 levels. This is just one area, but something similar is happening in most cities around the country.

Shadow Office Space "Leased but Empty" Haunts Commercial Real Estate - Shadow housing supply, foreclosed but not on the market as well as sellers who want out but cannot get out is one of the factors weighing on residential real estate. Similar supply issues weigh heavily on commercial real estate.Office vacancies are widely reported, but few gave factored in the shadow supply, downsized companies with more leased space than they need, holding on to it hoping thing get better, or stuck in long-term leases with more space than they want or need. Minneapolis StarTribune article Shadow space haunts office market takes a good look at this very issue.That section of empty cubicles, the conference rooms collecting cast-off office furniture ... for employees, they're dreary reminders of layoffs, consolidations and shelved expansion plans.To real estate professionals, it's "shadow" office space -- space that's leased or owned but largely empty and not officially listed anywhere as vacant.

Federal Housing Beat Now Has a Tough Cop - NYTimes -KUDOS to the Federal Housing Finance Agency, overseer of Fannie Mae and Freddie Mac, the crippled mortgage finance giants. While some in Washington have continued to coddle the big banks even after they drove our economy into the ditch, this agency seems serious about recovering money for taxpayers by holding bad financial actors to account. The agency announced last Monday that it had issued 64 subpoenas to a throng of unidentified financial services institutions, seeking documents related to mortgage securities that Fannie and Freddie bought from Wall Street during the boom years. The subpoenas are designed to tell the agency what many of us want to know: How did Wall Street package and sell private-label mortgage securities to investors, even though the nature and quality of some of the loans crammed inside those tidy little packages were, at best, suspect?

Fannie Subpoenas to Show $30 Billion Bad Mortgages (Bloomberg) -- Fannie Mae and Freddie Mac's regulator may identify as much as $30 billion of debt included in mortgage bonds that the companies can force sellers to repurchase, The Federal Housing Finance Agency this month said it issued 64 subpoenas seeking loan files and other documents related to so-called non-agency mortgage securities bought by the two government-supported companies. The U.S. is trying to determine whether misrepresentations might require issuers to repurchase debt, producing funds from firms that may include Wall Street's largest banks to help repay taxpayer money. Rosner's estimate of the amount of bad loans the FHFA might find doesn't equal how much Fannie Mae and Freddie Mac may recover because banks can argue some misstatements weren't “material,”  At the same time, the move bolsters other investors' efforts, he said.

Fannie Mae and Freddie Mac: Unfinished business - The Economist -THE hefty financial overhaul that Barack Obama signed into law on July 21st (pictured) left behind one big piece of unfinished business. In 2008 Fannie Mae and Freddie Mac, mortally wounded from losses on loans acquired during the bubble, were placed in “conservatorship”, a halfway house between bankruptcy and outright nationalisation. There they remain, their losses duly covered with new injections of capital by the Treasury—$145 billion so far. Tim Geithner, the treasury secretary, has promised to address the matter of Fannie and Freddie by early next year but so far he has no answers, only questions (literally so: in April he asked the public to comment on seven of them).The hesitancy is understandable. Millstones though they are, the two firms remain critical to the economy. In the first quarter they and Ginnie Mae guaranteed 96.5% of all newly originated mortgages.

America’s housing market: Unnecessary evils - The Economist - DIAGNOSIS is often much simpler than treatment. The failures of Fannie Mae and Freddie Mac, America’s housing-finance giants, are glaringly obvious. The two firms, which own or guarantee more than half of the country’s $10.7 trillion of mortgages, are awash in red ink. The Congressional Budget Office reckoned in August 2009 that the twosome’s cost to taxpayers could go as high as $400 billion. With housing showing renewed weakness, that number may rise. It is also easy to see why the firms got into such a mess. These “government-sponsored enterprises” (GSEs) occupied a grey area between state and private ownership, benefiting from an implicit government guarantee on their own debt at the same time as they sought to maximise profits for shareholders. That hybrid model granted the GSEs access to cheap funding and gave them the incentive to load their retained portfolios with subprime mortgages whilst maintaining capital levels scanty enough to make investment banks blush.

What should be done with Fannie Mae and Freddie Mac? - The Economist - ONE of the other big failures of the just-passed financial regulation reform bill is that the difficult question of what to do with Fannie Mae and Freddie Mac was not addressed.  These entities were turned into private companies during the administration of Lyndon Johnson, but their status remained unclear This maybe-guarantee allowed the GSEs to borrow heavily and cheaply, rolling in big profits, but as the mortgage market imploded it became clear that the firms were in serious trouble. Ultimately, in the summer of 2008, the government took the firms into conservatorship, where they continue to sit in limbo.And it's not clear what comes next. Big questions remain. Is there still some important role in housing markets that only Fannie and Freddie can play? If they must play that role, should they do it within the government or as private entities? And how should the continuing losses at the firms be handled? To address these difficult issues we turned to our network of guest economists and asked: What should be done with Fannie Mae and Freddie Mac?

What Should be Done with Fannie Mae and Freddie Mac? - The Economist asks: What should be done with Fannie Mae and Freddie Mac? Here's my response (additional responses from Laurence Kotlikoff, Phillip Swagel, Tom Gallagher, and John Makin, with others to follow, all responses): There are two potential justifications for the existence of institutions like Fannie and Freddie. One is to solve a significant market failure in the private sector mortgage market. If there is some reason why the mortgage market does not function properly on its own, perhaps due to lack of information on one side of transactions, inefficient risk management, adverse selection, the presence of moral hazard, etc., then government can step in and fix the problem.  The second justification is the role these institutions can play in stabilizing the macroeconomy. Contrary to what you may have having such institutions in place may allow a better response to a financial crisis than would otherwise be possible.

Global Housing Boom: [A]n email came in....Can you support your position, in a fast, easy way, why the US housing boom was NOT caused by Fannie and Freddie, or the CRA? I understand all the factors you laid out in the book — but I would like to see more evidence to support your view. Well, its difficult to prove a negative — supporters of the “FNM/FRE/CRA caused it” should have to prove their case, as I did in Bailout Nation. However, I have always found this chart to be quite compelling.... Pray tell what caused the same boom and bust in these other nations? And how could Fannie/Freddie or the CRA be responsible — that only applies to the US — when you have the same, global, coordinated rise in prices?  (And you can add Korea and New Zealand to the chart above).For those of you who still believe the political talking point that it was FNM/FRE/CRA’s fault, the question remains: What caused these other nations to boom the same time the USA did?

Bailout Watchdog Calls Mortgage Programs a Bust - CNBC - Government watchdogs are telling a Senate panel that the Obama administration's multibillion effort to help at-risk homeowners avoid foreclosure is not working and could put the economic recovery at risk.  Special inspector general for the financial bailouts Neil Barofsky said Wednesday that the program has not "put an appreciable dent in foreclosure filings," during a hearing on the $700 billion bank bailout before the Senate Finance Committee. He also said the Treasury Department has ignored earlier demands that it set clearer goals for the program.  Elizabeth Warren, who chairs a separate Congressional Oversight Panel on the bailouts, said Treasury's failure to act more quickly could be hurting the recovery.

HAMP data: Only 15,000 trial modifications started in June - From Treasury: HAMP Servicer Performance Report Through June 2010, About 389 thousand modifications are now "permanent" - up from 347 thousand last month - and 521 thousand trial modifications have been cancelled - up sharply from 430 thousand last month. According to HAMP, there are 364,077 "active trials", down from 467,672 last month. There is still a large number of borrowers in limbo since only 235 thousand trials were started over the last 5 months. I expect another large number of cancellations in July.The second graph shows the cumulative HAMP trial programs started.Notice that the pace of new trial modifications has slowed sharply from over 150,000 in September to just over 15,000 in June (down from 30,000 in April 2010). This is the slowest pace since the program started, probably because of two factors: 1) servicers are now pre-qualifying borrowers, and 2) servicers are running out of eligible borrowers. The program is winding down ...If we look at the HAMP program stats (see page 3), the median front end DTI (debt to income) before modification was 44.8% - the same as last month. And the back end DTI was an astounding 79.9 (up slightly from last month).

More Than 40% Leave Obama Mortgage-Aid Program - The number of borrowers dropping out of a government program to help struggling homeowners rework their mortgage grew in June at almost twice the pace of those getting a permanent modification, the Treasury Department said on Tuesday. The latest figures could signal a rise in foreclosures in the second half of the year at a time when the housing market is still fragile and analysts fear another housing slump could threaten the nascent recovery. About 91,000 borrowers dropped out of the program in June, putting the total number of dropouts at 530,000.

HAMP Update: Still Ineffective - Another HAMP data report is out.  Same old story--HAMP isn't doing very much for very many people. We're up to 346,816 permanent modifications. That's out of 1.7 million HAMP eligible mortgages and 5.7 million mortgages that are 60+ days delinquent. Drop in the bucket. The trial modification numbers are a bit better, at 1.4 million, but the number of new trials each month seems to be flattening out--just 30,000 new trials started in May.  That means new permanent modifications will also start to taper off in a few months. And there are an awful lot of failed trial modifications, as Felix Salmon has noted. Two particular items jump out at me. First are the dispositions of canceled trials that Felix commented on. Second, the HAMP compliance numbers are disturbing.

Helping homeowners – or the banks? - The passage of financial reform is a good time to ask how much money we should expect to hand to the banks through our efforts to "help" homeowners. The basic story is very straightforward to anyone with more common sense than a Washington policy wonk.The main homeowner helper story is of course President Obama's Home Affordability Modification Programme (Hamp). This programme involves payments from the government to mortgage servicers and investors in exchange for lowering mortgage interest rates, and occasionally, principal reductions.Unfortunately, in the vast majority of cases the homeowner does not end up keeping the home even after entering Hamp. In most cases they drop out of a trial modification because they are unable to meet their payments even after receiving a lower interest rate or principal write-down. This means that they do not get a permanent loan modification and end up losing their home

Loan-modification failure of the day - As of today, Treasury has started releasing a new set of datapoints with respect to its Making Home Affordable program. Look at page 5 of the monthly report on how the program is doing, and you’ll see a page detailing what they call the “disposition path” of the 194,056 trial mortgages which have been cancelled through April. Here’s the chart:  The first thing to note is that the enormous number of failed trials — to put the number in context, there were only 299,092 permanent modifications started through April — is not a sign of good news, where the borrowers have exited the trial by paying off their mortgage. That only happened 1.1% of the time. Instead, depressingly, by far the most common reason for abandoning the HAMP trial is “Alternative Modification” (48.9%). Cue desperate Treasury spinning, in a press release entitled “Impact of Administration Efforts Seen in Signs Of House Price Stabilization and Increased Affordability”:

When Denying Loan Mods, Loan Servicers Often Blame Investors—Wrongly – Federal officials, bank officers, housing counselors and investors themselves say that excuse is cited far more often than is justified. In fact, they say, few mortgage deals include such restrictions. Consider the case of the Baileys. Litton, a subsidiary of Goldman Sachs, services their loan, and Litton’s contract with investors has no clear language banning modifications. In fact, documents show that over 115 other mortgages [1] from the same investment pool have already been modified.Even the representative of investors in the Baileys’ mortgage says only the servicer can decide when to modify loans. While he couldn’t comment on an individual case, Bank of New York Mellon spokesman Kevin Heine says it’s “misinformation” to say that investors make these decisions.

Mortgage Prepayments and Changing Underwriting Standards - SanFran Fed - Despite historically low mortgage interest rates, borrower prepayments have been lower than expected over the past year. For example, a model based on prepayment data from 2000 through the beginning of 2009 predicts a prepayment rate for the first quarter of 2010 roughly twice as high as the observed rate. It can be conjectured that current low prepayment rates reflect the influence of factors specific to the housing bust, including a significant tightening of lending terms for certain borrowers, weak housing demand, and high foreclosure rates.

Bringing the housing down - AS I'VE said before, my understanding of the strategy behind the housing tax credit was that it would encourage a wave of buying that would sop up inventory and position housing markets for a sustainable recovery once the economy got growing in earnest. This never seemed like a very good idea, and now the foolishness of the strategy should be clear. And so the National Association of Home Builders reports: Builder confidence in the market for newly built, single-family homes declined for a second consecutive month in July to its lowest level since April of 2009, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. The HMI fell two points from a downwardly revised number in the previous month to 14 for July.

Housing outlook clouded by tax credit expiration -- For the first time in more than two years, the U.S. housing market is standing on its own, without extraordinary help from the government. It hasn't been pretty. Following the expiration of the home-buyers' tax credit, home building, home sales, and home prices have fallen. It could be months before a clear view of the housing market is revealed. In the coming week, four major housing indicators will be released. Although everyone expects the numbers in the medium-term to be consistent with a very weak housing market, economists are more uncertain than usual about which way the latest numbers will swing.

Housing Bubble Leaves $4 Trillion Hangover:  Chart of Day - The bursting of the U.S. housing bubble has left homeowners buried under about $4 trillion of excess mortgage debt, according to Dhaval Joshi, the chief strategist at RAB Capital. The CHART OF THE DAY compares the total amount of home loans outstanding with the value of residential real estate, as compiled by the Federal Reserve, for the past two decades. The latter is adjusted to reflect the average 40 percent debt-to- value ratio that prevailed from 1990 to 2005. Mortgage balances were $3.64 trillion higher than the adjusted figure as of March 31, as shown in the top panel. The actual ratio, which stood at 62 percent at the end of the first quarter, appears in the bottom panel. To eliminate the excess and bring down the ratio to its historical norm, either house prices would have to surge or home-loan repayments and defaults would have to accelerate

Is housing headed for a double dip? - We all knew housing would sputter after the expiration of the federal home buyers' tax credit. Of course, we also all hoped that the economy would be on steadier footing by then, and would itself provide some stability to the housing market. Well, unemployment is coming down—it's now at 9.5%, compared to 10% in December—but that's still pretty elevated, especially once you take into account people who are working fewer hours than they'd like to. So now the question is: Are we headed for a double dip in housing as a result? In recent days, a number of publications have hazarded a guess. Most, including the WSJ this morning, have concluded that the outlook isn't good: "In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans."

CountryWide goes Kafka – But when my wife checked the Sheriff’s site on-line, it turns out that, indeed, our home was slated to be auctioned off on October 1st. Multiple calls to the Sheriff’s office were not returned. As to CountryWide – who exactly do you call at CountryWide? There’s no “Press 4 if you have no relationship with CountryWide but we’re trying to seize your house anyway.” Ironically, if we did have a delinquent CountryWide mortgage, getting somewhere with them might have possible as any of their call center representatives would have been able to handle taking a payment. But the situation we were in, that they put us in, isn’t one of the options that their call center seems equipped to sort out. When it started to become obvious that a) this was deadly serious and b) there was a whole machine moving inexorably forward, my wife got nervous. She didn’t sleep at all that first night, and because she didn’t sleep, neither did I. And every roadblock we hit made us more exasperated at what was already a difficult time.

Seeking a Mortgage? Don’t Get Pregnant - NYTimes - Mortgage lenders are taking a harder look at prospective borrowers whose income has temporarily fallen while they are on leave, including new parents at home taking care of a baby. Even if a parent plans on returning to work within weeks, some lenders are balking at approving the loans. “If you are not back at work, it’s a huge problem,” said Rick Cason, owner of Integrity Mortgage, a mortgage firm in Orlando, Fla. “Banks only deal in guaranteed income these days. It makes sense, but the guidelines are sometimes actually harsher than they need to be.” Back in the slapdash days of easy credit, lenders were more likely to overlook the fact that a parent was out on maternity or paternity leave. But now that lenders have become more conservative, they are requiring new parents to jump through more hoops to prove their income will be enough to cover the mortgage.

30 Year Fixed Rate Mortgage Stuck At All Time Lows, Does Nothing To Stimulate Housing Demand - For a vivid example of how pointless QE1 was (and QE2 will be), look no further than the 30 Year FRM fixed: the mortgage rate is now at the lowest it has ever been, at 4.57%, for the second week in a row, and housing is unanimously double dipping. The problem is that the Fed has no more incremental mortgages to buy, so QE 2 will likely be all about other assets. Yet with USTs also at or near all time tights, there is little point for the Fed to bid up Treasuries. Which is why QE2 will be all about risky assets: the Fed will find a way to go all out and bid up stocks. Although, as today indicates, and as we first posted earlier, all the idiotic market needs is some totally groundless rumor of a reserve interest cut to go from down 1.5% to up in the span of an hour.

MBA: Mortgage Purchase Applications increase slightly last week - The MBA reports: Interest Rate Drops Spur Refinance Applications in Latest MBA Weekly Survey...The Refinance Index increased 8.6 percent from the previous week and was the highest Refinance Index observed in the survey since the week ending May 15, 2009.  The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.59 percent from 4.69 percent, with points increasing to 1.04 from 0.96 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This was the lowest 30-year contract rate ever recorded in the survey. This graph shows the MBA Purchase Index and four week moving average since 1990. Although the weekly applications index increased slightly, the four-week moving average is at a 15 year low (lowest since August 1995). 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 and August existing home sales reports

Housing Starts decline in June - Total housing starts were at 549 thousand (SAAR) in June, down 5% from the revised May rate of 578,000 (revised down from 593 thousand), and up 15% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Single-family starts declined 0.7% to 454,000 in June. This is 26% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over a year. Here is the Census Bureau report on housing Permits, Starts and Completions.

A New Low in Home Construction - Yesterday’s housing data were suitably glum, with single-family starts and permits both down (0.7% and 3.4%, respectively). And what about my favorite metric, the number of houses under construction? It fell a hefty 5.3%. Which puts the number of single-family homes under construction at its lowest level in decades:After the expiration of the new home buyer tax credit, only 286,000 single-family homes were under construction at the end of June. That’s down modestly from the 298,000 to 318,000 levels of the past year, when it looked construction was trying to put in a bottom. Just one more sign of continued weakness in housing markets.

Existing Homes: Months of Supply and House Prices - Earlier I mentioned that a normal housing market usually has under 6 months of supply. The NAR reported that months of supply was at 8.3 months in May, and the months of supply was probably be higher in June (to be reported tomorrow). A quick estimate: If sales are 5.3 million (SAAR) in June, and inventory stays the same at 3.9 million units, the months of supply will rise to 8.8 months in June. This is calculated as: 3.9 divided by 5.3 * 12 (months) = 8.8 months of supply. This graph show months of supply and the annualized change in the Case-Shiller Composite 20 house price index. Below 6 months of supply (blue line) house prices are typically rising (black line). Above 6 or 7 months of supply house prices are usually falling (although there were many programs to support house prices over the last year). The dashed red line is the estimate for months of supply in June and July

Existing Home Sales decline in June - The NAR reports: Existing-Home Sales Slow in June but Remain Above Year-Ago Levels Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 5.1 percent to a seasonally adjusted annual rate of 5.37 million units in June from 5.66 million in May, but are 9.8 percent higher than the 4.89 million-unit pace in June 2009. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in June 2010 (5.37 million SAAR) were 5.1% lower than last month, and were 9.8% higher than June 2009 (4.89 million SAAR). The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.99 million in June from 3.89 million in May. The all time record high was 4.58 million homes for sale in July 2008. The last graph shows the 'months of supply' metric. Months of supply increased to 8.9 months in June from 8.3 months in May. A normal market has under 6 months of supply, so this is already high - and probably excludes some substantial shadow inventory. And the months of supply will increase sharply next month when sales collapse.

Existing home sales still reflecting tax credit - June Existing Home Sales were a better than expected 5.37mm annualized vs the forecast of 5.1mm BUT remember, this reflects closings where the contracts were likely signed BEFORE the expiration of the home buying tax credit on Apr 30th and sales are down from 5.66mm in May. However, even with the better sales number, months supply rose to 8.9 from 8.3 to the highest since Aug ‘09 as the absolute number of homes for sale rose by 99k to 3.992mm homes. Sales fell in the West, South and Midwest but rose in the Northeast. Distressed sales made up 32% of the total and the median price rose 1% y/o/y. Bottom line, the data reflects the ‘old’ economics for 1st time home buyers and looking out to the rest of the year, “only when jobs are created at a sufficient pace will home sales return to sustainable healthy levels,”

Existing Home Sales: Still above historical median - It might be a little surprising, but existing home sales are still above the historical median level of the last 40 years as a percent of owner occupied units ...The first graph shows existing home sales on an annual basis, and end of year inventory. For 2010, sales are estimated at 5.0 million units and year end inventory at 3.4 million units (currently 4.0 million in June, but inventory will decline seasonally). The second graph shows the same information normalized by the number of owner occupied units. Because of the high number of low end foreclosures (investor buying), and various government programs (tax credit, etc.) the number of existing home sales have stayed fairly high.

Housing Market Stumbles - WSJ - In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market.On Tuesday, the U.S. Census Bureau said single-family housing starts in June fell by 0.7%, to a seasonally adjusted annual rate of 454,000. The U.S. started 1.47 million homes in 2006, before the housing bubble popped. Future construction looks even weaker. Permits for single-family starts fell 3% in June, following big declines in both May and April. "We're hovering at post-World War II lows," said Ivy Zelman, president of Zelman & Associates, a research firm.

PMI Slashes Home Sales Forecast by More Than 50% - Mortgage insurer PMI has cut its growth projections for 2010 home sales by more than half. The company’s analysts now expect sales of existing homes to rise a modest 2.9 percent for the year to 5.31 million units. That’s a sharp downgrade from a mere month ago, when they were predicting we’d see a 6.1 percent annual gain. The forecast for new home sales, too, has been slashed. Last month, PMI was forecasting a 19.9 percent jump for the year. But now, they’ve dropped it to 9.4 percent, representing total annual sales of 409,000 units for new homes.PMI says the falloff in sales numbers now that the tax credit is gone suggests homebuying activity has already reached its high-water mark for the year. Even record low mortgage rates and attractive pricing – both factors that should entice buyers to come off the sidelines – aren’t doing enough to elevate demand in today’s market

NAHB Builder Confidence falls to lowest level since April 2009 -Note: any number under 50 indicates that more builders view sales conditions as poor than good.This graph shows the builder confidence index from the National Association of Home Builders (NAHB). The housing market index (HMI) was at 14 in June. This is the lowest level since April 2009. The record low was 8 set in January 2009, but 14 is very low ...This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the July release for the HMI and the May data for starts (June starts will be released tomorrow). This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

Homebuilder Confidence in U.S. Falls to Lowest Level in a Year - (Bloomberg) -- Builders in the U.S. turned more pessimistic in July than forecast, a sign the expiration of a government tax credit will depress home construction. The National Association of Home Builders/Wells Fargo confidence index dropped to 14 this month, the lowest level since April 2009, from 16 in June, data from the Washington- based group showed today. Readings lower than 50 mean more respondents said conditions were poor. “The expiration of the tax credit has clearly hit the housing sector hard,” David Semmens, an economist at Standard Chartered Bank in New York, said before the report. “A persistent lack of improvement in the labor market will keep demand weak and homebuilder activity muted during the second half.”

Falling Home Prices Ignite Boom in Foreign Buyers - The number of American homes bought by foreign nationals has nearly doubled in the past year as falling property values and record numbers of distress sales encouraged immigrants and foreign investors to take advantage of affordable prices.  With home purchases by US citizens plummeting in the wake of the tax credit, foreigners are now poised to gain an even larger ownership share of the US residential market. Foreign purchases accounted for about four and a half percent of all USA sales between April 2009 and April 2010, according to a new study by the National Association of Realtors.  About half of foreign bought properties were purchased as primary residences, and the rest as vacation homes and investment properties.  Most bought properties in suburban locales and cities.  Only 14 percent of foreign buyers bought in resort areas. Florida typically attracts European, Canadian and South American buyers while the East Coast draws Europeans. The West Coast brings Asian buyers and the Southwest attracts Mexicans.

Why Are Banks Withholding Highend Repossessions Over $300,000 From the Market? - With the expiration of the first-time buyer tax credit on April 30, there are now two main props keeping the housing market afloat.  One is the growing percentage of home sales financed by Federal Housing Administration (FHA) loan guarantees.  The other is the refusal of banks to put on the market foreclosed homes over $300,000. In this article, we will take a look at the second factor.  A future report will examine the role of the FHA in keeping the market from collapsing

Paralyzed by Debt - Last month, my wife and I refinanced our mortgage. Though the rate was lower and we could have afforded more debt, we paid down a chunk of the balance. Suppose everybody did this? Well, it turns out, everybody has. Eschewing trips to the mall, Americans are paying off credit-card balances and home-equity lines. Despite low rates, mortgage demand has plummeted.  Some people have no choice but to pare their debts (indeed, some are being foreclosed on). For others, call it morning-after sobriety or late-blooming prudence. Losing income tends to bring on a case of the nerves, and half of American workers have suffered a job loss or a cut in hours or wages over the past 30 months. The economic term is “deleveraging”; it means that, as opposed to the normal state of affairs, in which, each quarter, people borrow more money and banks issue more loans, credit in the economy is shrinking.

I Hope He is Wrong... But I fear that Roger Lowenstein and his assessment on how long it will take the U.S. economy to return to normal may be right.  The crux of his analysis is that household balance sheets were decimated in this recession and to fix them will take years.  As part of this slow process households are deleveraging and saving more.  Though needed, these structural adjustments imply sluggish growth. And if this process takes years as indicated by Lowenstein then we are looking at sluggish growth for some time.  Here is Lowenstein:  Eschewing trips to the mall, Americans are paying off credit-card balances and home-equity lines. Despite low rates, mortgage demand has plummeted. Looking to the data, though, on household balance sheets does seem to lend itself to Lowenstein's dour assetment. Below is household net worth (i.e. assets minus liabilities) as a percent of disposable income up through 2010:Q1.  The data comes from the Flow of Funds table B.100.  (Click on figure to enlarge.)

Small & Large Business Employment - Several years ago the Small Business Administration and Census began an annual survey of employment by firm size. You can find the data here: ..Here is a table of what the joint survey of employment by firm size found. From 1988 to 2006 -- the most recent year published -- small firms (under 500 employees) share of total employment fell from 54.5% to 50.2% of private employment. Over the entire period employment by small firms grew 13.3% while large firms employment grew 21.8%. That sure does not look like small firms account for 70% of employment growth. Care to show us the data supporting the claim that small firms account for 70% of job growth.

Ezra Klein - Why businesses aren't hiring in two graphs - Chris Gaun notes that we don't have to theorize about what's scaring businesses. We can ask them instead. The National Federation of Independent Businesses -- a small-business trade association that is considered the most right wing of the major business groups -- continually polls its members and releases the results. Here's what they say is their single most important problem:As you can see, sales -- that is to say, demand for their products -- dominate the chart, while fear of taxes is lower than in the '90s. The concern over sales is understandable. Not only is the economy bad. But as the next chart shows, it keeps underperforming what the businesses assume will happen. So, if anything, businesses have been too optimistic over the past few years.

The Forgotten Employer « Everyone agrees the American job picture is a disaster. Unemployment estimates from June stretch from the official 9.5% to 16.5% to a sickening 22% by the most inclusive definition. Economists, politicians and pundits debate the reasons. You’re familiar with the arguments. What’s lost in these arguments about jobs, especially by those on the left, are the voices of the jobs’ creators themselves. Those would be the employers. Let me repeat: In a national debate about jobs and job creation, hardly anyone is talking to job creators about jobs! I understand the left's reluctance to talk to employers directly. Talking to employers about jobs, and lack thereof, would wreck the left's narrative. What do you hear when you listen to employers? You hear stories like this one, from the comments section of a recent Mort Zuckerman piece:

The Great Recession is just the beginning - You know those 15 million unemployed, and that sluggish growth, and the debt hangover and de-leveraging, and those soaring deficits? Well, these woes aren't our biggest economic problems.  The real test for the U.S. economy starts once we get past the fallout from the burst housing and banking bubbles that triggered the Great Recession. And when it comes to that challenge -- which involves preserving U.S. living standards in a world of global competition -- we either (1) don't know what to do, or (2) we do know but seem to have little intention of doing it.  A brief trot through history places this moment in context. After World War II, when the United States was the only economy left standing, we began an unprecedented economic run. "You had a 60-year period where every new industry of huge value-added or breakthrough innovation or high risk -- whether it was pharma, biotech, software, personal computing or semiconductors -- were all totally U.S.-based,"

Jobless Numbers Are Worse Than You Think - In terms of employment, how bad is this recession? Last month's unemployment rate was 9.5%, according to the Bureau of Labor Statistics (BLS). But the jobs picture is even worse than that rate suggests.The BLS defines the jobless rate as the number of unemployed as a fraction of the labor force. If one person in a labor force of 10 people is unemployed, the unemployment rate is 10%.The problem is how the BLS counts the jobless. It defines the unemployed as those who are "out of work but have been seeking and are available for work." Those out of work but not "seeking work" are not considered to be unemployed—and are thus not counted in the labor force.

Is There A Jobs Mystery? - Krugman - Brad DeLong wonders why John Harwood makes so much of the supposed excessive rise in unemployment, even given the slump in GDP. Brad argues that the old Okun’s Law — in which a one-point fall in GDP caused only about a half-point rise in unemployment — didn’t hold in the last two recessions, either. I agree; there’s only a big mystery here if you imagined that the Great Recession and its aftermath was going to look like a pre-1990 business cycle, rather than be another postmodern cycle like those of 1990 and 2001. It’s worth looking, in particular, at how productivity across the cycle has changed.

Latest Declines in Employment Population Ratio - One of the series I track with particular interest is the employment-population ratio for men aged 25-54.  See here for prior posts and discussion.  In general, I feel that it's a better long-term indicator of the trends in employment than the official unemployment rate. The depressing point to make in this post is that, when the series had barely just started recovering from the low of the recession in late 2009, it has now gone down slightly in the last two months of data (from 81.3% in April to 81.2% in May, and then 81.1% in June).  Whether that's a statistically significant decline I'm not sure, but it's certainly not a strong recovery.
The corresponding rate for women is here: It's not increasing either.

Leaving the labour force, bit by bit - REAL TIME ECONOMICS had an interesting post yesterday discussing the evolution of the Phillips curve in an environment of extended joblessness:  It's fairly easy to understand the dynamics here. The longer workers are out of a job, the less employable they become, for a variety of reasons: skills erode, motivation and expectations fall, and connections with the labour force sever. Ultimately, the long-term unemployed cease to influence wage bargaining because they're no longer "normal" workers. One way of looking at this is that the labour market has become tighter. Another way of looking at it, however, is that the failure of labour markets to quickly clear led to permanent, costly structural unemployment. In other words, the "careful" approach—proceed slowly lest inflation rear its head—may, by generating more structural unemployment, increase NAIRU and make eventual inflation more likely.

Pulling away the supports - IT APPEARS likely that the Senate will approve a new extension of emergency unemployment benefits this afternoon. The bill, worth about $34 billion, is deficit-funded, which means that it will likely be one of the last fiscally stimulative measures America will get this year. Last year's stimulus package has essentially run its course at this point. Paul Krugman quotes a Goldman Sachs analysis: By our estimates, (federal) fiscal policy has contributed +2½ percentage points (annualized) to real GDP growth from early 2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼ percentage point—i.e. 2¾ percentage points less than before—even under our baseline assumptions of extended unemployment benefits, more aid to state governments, and at least a temporary extension of the bulk of the 2001-2003 tax cuts. We need a lot of improvement in private sector activity to offset this swing, and at the moment it unfortunately doesn’t look like we’re getting it.

Alan Grayson To Republicans Blocking Unemployment: 'May God Have Mercy On Your Souls' (VIDEO) -Rep. Alan Grayson (D-Fla.) said on the House floor Monday that Republicans are blocking a reauthorization of unemployment benefits in order to resurrect the America of the 1930s."There was no unemployment insurance back then," Grayson said, in one of the more colorful speeches on the issue. "There was no State benefits back then. There was no help for the people who had no jobs. All they could do, like my grandfather, in desperate straits, supporting a family of seven, was to go to the dump and desperately try to find something he could sell."That, my friends, is the America that the Republicans are trying to revive. The America of desperate straits, and for them cheap labor. The America where people have nothing, hope for nothing, and are desperate to live to the next day. That is what the Republicans are trying to resurrect by blocking unemployment insurance day after day, week after week, and now month after month."

Unemployment: Jobless aid hits stronger head wind - But now, even as the Senate is poised this week to approve aid for more than 2.5 million out-of-work Americans whose benefits have run out, Bunning's insistence that aid not add to the national debt may have indelibly altered the debate. If approved, this may be the last package of jobless benefits that Congress can pass without making offsetting cuts. The reason: Lawmakers in both parties have grown squeamish about being seen as soft on deficit spending. Public outrage over Washington's rising debt runs higher now than when Bunning made his solo stand, and polls show many voters are not convinced that the unemployed should continue receiving aid if it means more debt.

Unemployment benefits: Read this shirt - The Economist - THE news is not yet official, but America’s recession probably ended in June last year. Americans could be forgiven for failing to notice. Nearly 15m remain out of work, close to the peak that followed the recession. This summer, Congress has been busy rubbing salt in their wounds. Some 2.5m unemployed lost access to their benefits when the Senate failed to extend the government’s programme of emergency unemployment assistance in early June. This week the swearing-in of a successor to Robert Byrd, the veteran senator who died last month, delivered to Democrats the extra vote they needed to break a Republican filibuster, and the extension passed at last. But the episode is a glaring reminder of the crisis in America’s labour markets. Congress had never before failed to extend benefits when unemployment remained above 7.2%, and this week’s action marked the seventh extension in this recession. But passage has become steadily more difficult. In February Senator Jim Bunning, Republican of Kentucky, held up an extension vote before giving ground under pressure from colleagues fearful of bad press

Jobless Benefits an Issue for Reid - Sen. Harry Reid (D., Nev.) forced a vote Tuesday that ended weeks of stalemate on the issue, and shut off a filibuster by GOP leaders that was holding up action on legislation renewing long-term unemployment benefits.In rounding up the 60 votes needed to end the Republican leadership’s stalling tactics, Reid received the support of the two GOP senators from Maine. He praised them, saying “the people of Maine should be proud of their senators today.”But Reid, who is up for re-election in Nevada where the unemployment rate stands at 14.2%, also lashed out at other Republicans for resisting the bill. “It shouldn’t take a supermajority to help families afford the bare necessities while unemployment is rising,” he said. “It shouldn’t take the slimmest of margins to do what is right.”

Unemployment Extension Fight Is Just Beginning - The battle over the extension of unemployment benefits in the Senate may be setting the stage for more bruising fights in the not-too-distant future.Lawmakers voted today to continue eligibility for extended unemployment benefits through late this year. But if history is any guide, there will likely be at least one more call for an extension. Meanwhile, the legislation allows job seekers to receive unemployment benefits for up to 99 weeks, depending on their state. In the coming months, the number of recipients who remain unemployed beyond 99 weeks could increase substantially. According to an analysis by Goldman Sachs economist Alec Phillips that we mentioned this weekend, unemployment benefits are extended an average of 23 months following the peak unemployment rate is hit. In the current downturn, the peak in the jobless rate — 10.1% — came in October 2009, just 8 months ago. To reach the average, unemployment benefits would need to be extended through September 2011, which would require another act of Congress.

Senate Gives Final Approval to Jobless Benefits - The Senate gave final approval Wednesday evening to legislation providing added unemployment benefits through November to millions of Americans who have been out of work for six months or more, ending a politically charged fight. After beating back a last round of Republican challenges, the Senate voted 59 to 39 to send the $34 billion unemployment measure to the House, where quick approval was expected as early as Thursday so the measure could be signed into law by President Obama. Democrats were harsh in their criticism of Republicans who held up the unemployment money by refusing to vote for it unless some way was found to keep the costs from being added to the deficit. They noted that Republicans have not applied that same standard to tax cuts for the most affluent Americans.

After Two Months, Senate Passes Unemployment Benefits Extension - Tonight, after waiting 30 hours for a cloture vote, the Senate reauthorized the federal extension of unemployment benefits — moving one step closer to restoring unemployment insurance to 2.6 million American workers. Tomorrow, the bill needs four or five hours of procedural time before a House vote. As soon as the House vote happens, President Obama can sign the bill into law. The legislation retroactively grants extended benefits — additional weeks of unemployment, tacked on to state benefits where the unemployment rate is higher than 8 percent, and maxing out at 99 weeks — to June 2. (States are overloaded dealing with the backlog of recipients, but expect benefit checks to start rolling out in two weeks or so.)  The extension lasts through Nov. 30. It does not create any new benefits, and does not extend the $25-a-week Federal Additional Compensation benefit.

Filibuster broken, jobless benefits may flow soon -(AP) -- Senate Democrats broke through a stubborn Republican filibuster Tuesday and pressed to restart jobless benefits for 2 1/2 million Americans still unable to find work in the frail national economic recovery. The Democrats were victorious by the single vote of a new senator sworn in only moments earlier. Senators voted 60-40 to move ahead on the bill, clearing the way for a final vote in the chamber on Wednesday. The recovery from the nation's long and deep recession has produced relatively few new jobs so far, and millions of people's unemployment benefits began running out seven weeks ago as Congress bogged down in an impasse over whether the $34 billion cost of a fresh extension of benefits should be paid for with budget cuts or be added to the $13 trillion national debt. Democrats emphasized the plight of the unemployed and argued that putting money in the pockets of jobless families would also boost economic revival.

Unemployment Extension Bill Clears Hurdle, Standoff Likely Over Until November - The Senate voted 60-40 on Tuesday to move forward with reauthorizing unemployment benefits for the long-term jobless, 2.5 million of whom have missed checks since the end of May as Republicans and conservative Democrats filibustered several bills to renew the aid. After a final Senate vote, the bill goes to the House, which will vote on Wednesday. Defeating the filibuster clears an easy path toward the president's desk this week. People who missed checks will be paid retroactively; people who exhausted all weeks of benefits available before the lapse will not get anything.  The great debate pitting deficit reduction against jobless aid is over -- until November, when it is certain to return. White House Press Secretary Robert Gibbs said Monday that the president will push for an additional extension of benefits when the current one expires shortly after the midterm congressional elections.

Job Training Struggles to Keep Pace in an Economy in Flux - It was February 2009, and the city work force center in Downtown Brooklyn was jammed with hundreds of people hungry for paychecks. His caseworker urged him to take advantage of classes financed by the federal government, which had increased money for job training. Upgrade your skills, she counseled. Then she could arrange job interviews. For six weeks, Mr. Valle, 49, absorbed instruction in spreadsheets and word processing. He tinkered with his résumé. But the interviews his caseworker eventually arranged were for low-wage jobs, and they were mobbed by desperate applicants. More than a year later, Mr. Valle remains among the record 6.8 million Americans who have been officially jobless for six months or longer. He recently applied for welfare benefits.  “Training was fruitless,” he said. “I’m not seeing the benefits. Training for what? No one’s hiring.”

Report Says Jobs Hole Could Persist For A Decade - The U.S. Senate's epic struggle just to reauthorize unemployment benefits for the long-term jobless suggests that policymakers in Washington fundamentally don't understand the jobs hole we're in, according to a team of trained economists. The progressive Center for Economic and Policy Research reports that it could take an entire decade for the national unemployment rate to come down to pre-recession levels."Between December 2007 -- the official first month of the recession -- and December 2009, the U.S. economy lost more than eight million jobs," write CEPR's John Schmitt and Tessa Conroy. "Even if the economy creates jobs from now on at a pace equal to the fastest four years of the early 2000s expansion, we will not return to the December 2007 level of employment until March 2014. "And, by the time we return to the number of jobs we had in December 2007, population growth will have increased the potential labor force by about 6.5 million jobs. If job growth matched the fastest four years in the most recent economic expansion, the economy would not catch up to the expanded labor force until April 2021." Here's a dramatic chart from CEPR showing the total number of jobs lost since the recession began:

US Economy Will Return To December 2007 Employment Levels... In 2021! - Even as Bernanke is receiving his last minute briefing on what to say (everything, EVERYTHING, is good) and what to play dumb on (explaining the price of gold for example), a new report by the Center for Economic and Policy Research concludes that digging ourselves out of the current unemployment hole which is 7.5 million less people having jobs than did in December 2007, will take at least 4 years, and not occur prior to March 2014. However, this assumes a flat working-age population, something the Fed would love to be the case. Alas, the country is growing: and if one incorporates the effects of labor force growth into the above analysis, as the CEPR authors have done using CBO projections, then we may have a much larger problem on our hands: the study concludes that taking into account the approximately 14 million new job seekers in the future, then the December 2007 unemployment rate will not be met until April 2021! Welcome to the new normal. Of course, both of these analyses assume that the economy will immediately commence growing and generating jobs at the recovery rate seen in the 2000s, when about 166,000 jobs per month were being added.

It’s the End of the World As We Know It - What are 308,367,109 Americans supposed to do? First of all, despite clamping down on immigration, our population grew by 2.6M people last year.  Unfortunately, not only did we not create jobs for those 2.6M new people but we lost about 4M jobs so what are these new people going to do?  Not only that, but nobody is talking about the another major job issue: People aren’t retiring!  They can’t afford to because the economy is bad – that means there are even less job openings…   The pimply faced kid can’t get a job delivering pizza because his grandpa’s doing it. There are some brilliant pundits who believe cutting retirement benefits will fix our economy.  How will that work exactly?  Pay old people less money, don’t cover their medical care and what happens?  Then they need money.  If they need money, they need to work and if they need to work they increase the supply of labor, which reduces wages and leaves all 308,367,109 of us with less money.  Oh sorry, not ALL 308,367,109 – just 308,337,109 – the top 30,000 (0.01%) own the business the other 308,337,109 work at and they will be raking it in

Zero marginal product workers - Matt Yglesias suggests the notion is implausible, but I am surprised to read those words.  Keep in mind, we have had a recovery in output, but not in employment.  That means a smaller number of laborers are working, but we are producing as much as before.  As a simple first cut, how should we measure the marginal product of those now laid-off workers?  I would start with the number zero.  If a restored level of output wouldn't count as evidence for the zero marginal product hypothesis, what would?  If I ran a business, fired ten people, and output didn't go down, might I start by asking whether those people produced anything useful?It is true that the ceteris are not paribus,  But the observed changes if anything favor the hypothesis of zero marginal product. There has been no major technological breakthrough in the meantime.  If anything, there has been bad monetary policy and a dose of regulatory uncertainty.  And yet again we can produce just as much without those workers.

Wages Fail to Keep Pace With Inflation - Weekly wages rose by just $6 in the past year, failing to keep up with the rise in inflation, according to a Labor Department report on second quarter earnings. Median weekly earnings increased slightly to $740 in the second quarter from $734 a year ago, a 0.8% increase. The consumer price index, meanwhile, rose 1.8% in the same period.Excess supply in the labor market — 14.6 million Americans were unemployed as of June — has helped keep wage growth in check. At a time when the value of a college degree has come under fire, those with the highest education levels still fared the best. Those workers 25-years and older with at least a bachelor’s degree earned $1,138 weekly compared to $629 for high school graduates and $440 for those without a high school degree.

Immigrants in the Labor Force - CBO Director's Blog - People born in other countries are a growing presence in the U.S. labor force. In 2009, more than 1 in 7 people in the U.S. labor force were born elsewhere; 15 years earlier, only 1 in 10 was foreign born. About 40 percent of the foreign-born labor force in 2009 was from Mexico and Central America, and more than 25 percent was from Asia.Today CBO released an update to its November 2005 report on the role of immigrants in the U.S. labor market. That earlier report included data through 2004; this update, the first of several on various aspects of immigration, incorporates data through 2009 from the Census Bureau’s Current Population Surveys. The update includes various tables showing statistics on the number of foreign-born workers, the countries from which they have come, their educational attainment, the types of jobs they hold, and their earnings.

Longer Unemployment Equals Worse Re-employment - Compared to people out of work for only a short while, people who have been unemployed for long periods of time are more likely to say that the new job they eventually find is worse than their old one.That is one of the findings of a new report from the Pew Research Center. The report is based on a survey conducted from May 11-31, with 810 adults who are or had been unemployed at some point during the recession.The survey showed that most people who are out of work are optimistic about finding a decent replacement job. Of those idle workers, 58 percent are “very” or “somewhat” confident that the next job they find will be at least as good as the one they lost. However, those who have been unemployed longer are less confident:

Unemployment Brings Emotional Cost - It’s a common refrain among the long-term unemployed: Joblessness comes with a financial loss, but the emotional price tag might be even higher.A new Pew Research Center survey puts numbers to that sentiment. Among those who have been out of work for at least six months, 38% say they’ve lost some self respect since they lost their job, based on data from interviews with 810 adults, ages 18 to 64, who are currently unemployed or had been at some point during the recession. For those unemployed for shorter spells, 29% felt they had lost some self respect. Nearly a quarter of the long-term unemployed workers surveyed said they had turned to professional help for depression or some other emotional issue after losing their jobs. Just 10% of those out of work for less than 3 months said the same.

BS explanation for rising inequality? - Chicago economist Raghuram Rajan offers the following explanation for the long-term stagnant real incomes of Americans at the 50th percentile of the income distribution (compared to their compatriots at the 90th): A number of factors are responsible for the growth in the 90/50 differential. Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills. A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today. But the education system has been unable to provide enough of the labor force with the necessary education. . I really find this difficult to believe. My guess is that, in terms of the real skills objectively needed to do the job, a high school diploma is more than adequate for most office work. Of course, it may be that, because of competition for those jobs, you need a higher level of qualification to get one. But that’s a different story.

Income Inequality: A Deeper Look -  Via Andrew Sullivan, Lane Kentworthy charts US income disparity.  Its impressive that the income for the Top 1% races off while the income for the middle and lower class is squished towards the bottom.  I was concerned, however, that this chart might be somewhat misleading because even if the various income classes had the same growth rate – not suggesting they did, just saying – the increases for the Top 1% would dwarf everyone else, since they started from a higher baseline. I tried plotting the income growth as common logs.  A similar though, perhaps, less shocking looking story. There is growth, albeit mild in the middle and lower classes, and stronger more robust growth among the Top 1%.  If your used to common logs then you can see that the Top 1% moved from being about an order of magnitude above the middle class to about one and half orders. Or in other words from 10 times greater to 30 times greater.

Trickle Down Meanness - Maxine Udall - Linda Beale over at ataxingmatter had a really excellent post a few days ago about a study that examines ...a heretofore ignored consequence of rising executive compensation. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. The study conclusions are consistent with my own conjectures that there are ethical as well as economic consequences that result from dysfunctional financial markets and the dysfunctional labor markets they induce. The economic consequences include gross misallocations of financial, physical and human capital, away from activities that would promote long run economic growth and well being and to activities that will promote rising income inequality.If the above study is right, we can add frank meanness to the list of ethical consequences.

Rough justice in America: Too many laws, too many prisoners - The Economist - In 1970 the proportion of Americans behind bars was below one in 400, compared with today’s one in 100. Since then, the voters, alarmed at a surge in violent crime, have demanded fiercer sentences. Politicians have obliged. Justice is harsher in America than in any other rich country. Between 2.3m and 2.4m Americans are behind bars, roughly one in every 100 adults. If those on parole or probation are included, one adult in 31 is under “correctional” supervision. As a proportion of its total population, America incarcerates five times more people than Britain, nine times more than Germany and 12 times more than Japan. Overcrowding is the norm. Federal prisons house 60% more inmates than they were designed for. State lock-ups are only slightly less stuffed. The system has three big flaws, say criminologists. First, it puts too many people away for too long. Second, it criminalises acts that need not be criminalised. Third, it is unpredictable. Many laws, especially federal ones, are so vaguely written that people cannot easily tell whether they have broken them.

Die young, live fast: The evolution of an underclass - FROM feckless fathers and teenaged mothers to so-called feral kids, the media seems to take a voyeuristic pleasure in documenting the lives of the "underclass". Whether they are inclined to condemn or sympathise, commentators regularly ask how society got to be this way. There is seldom agreement, but one explanation you are unlikely to hear is that this kind of "delinquent" behaviour is a sensible response to the circumstances of a life constrained by poverty. Yet that is exactly what some evolutionary biologists are now proposing. Editorial: Why biology should inform social policy

Food stamps and incentives - A new NBER paper argues that food stamps lead people to work less, especially single family parents: Labor supply theory makes strong predictions about how the introduction of a social welfare program impacts work effort…. We use the cross-county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply, earnings, and family cash income. Consistent with theory, we find modest reductions in employment and hours worked when food stamps are introduced. The results are larger for single-parent families. This is not to say by any means that food stamps are not still a desirable program, but it is always worth thinking about how you can improve or replace existing welfare programs to better align incentives. This is a reminder that food stamps are not without their potential problems.

The Food Stamp Program Is Effective and Efficient - The Food Stamp Program (renamed SNAP — the Supplemental Nutrition Assistance Program) is the cornerstone of the nation's safety net and nutrition assistance programs. It currently provides over 40 million participants in more than 18 million low-income households with debit cards they can use to purchase food each month. Because eligibility is not restricted to specific subgroups of people, the Food Stamp Program serves a wide range of low-income households, including families with children, elderly people, and people with disabilities. Participants include families with adults who work in low-wage jobs, unemployed workers, and people with fixed incomes, such as Social Security. About 75 percent of food stamp recipients live in households with children. Nearly one-third live in households with seniors or people with disabilities.

1 million Ontario workers face wage freeze - Ontario union leaders and other officials will sit down with Finance Minister Dwight Duncan on Tuesday to discuss a possible wage freeze for more than one million workers.Duncan is faced with a $21 billion deficit and has already said some public-sector workers — bureaucrats, teachers and nurses — will face wages freezes when their collective agreements expire.Now it appears Duncan wants to extend the freeze throughout the Ontario civil service.Not only would 700,000 unionized workers face a wage freeze, but 350,000 managers would as well.

Most States Post Drop in Jobless Rates (with table) The jobless rate in 39 states and Washington, D.C. fell in June compared to the prior month, as the nation’s unemployment rate fell 0.2 percentage point to 9.5%, the Labor Department said. Meanwhile, five states saw unemployment rate increases, while the rate was unchanged in six other states.Nevada remained the state with the highest unemployment rate in the nation — 14.2% — a full percentage point higher than Michigan’s 13.2% rate, which declined again. Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively.Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops, See the full interactive graphic.

State Unemployment Rates: Generally lower in June - This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate).Sixteen states and D.C. now have double digit unemployment rates. Arizona and New Jersey are close.Nevada set a new series high at 14.2% and now has the highest state unemployment rate. Michigan held the top spot for over 4 years until May.From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally lower in June. Thirty-nine states and the District of Columbia recorded unemployment rate decreases, five states had increases and six states had no change, the U.S. Bureau of Labor Statistics reported today.

Unemployment Rate rate falls in 39 states in June - The unemployment rate fell in most states in June, mainly because more people gave up searching for work and were no longer counted.Fewer states saw job increases, the latest evidence that the economic recovery is slowing.The jobless rate declined in 39 states and Washington, D.C. last month, the Labor Department said Tuesday. That's a slight improvement from May, when 37 states saw their rates decline. But only 21 states saw net job gains in June, the government said. That compared to 41 the previous month and is the fewest this year.

Are you better off than you were a year ago? 28 States Say No. -The WSJ Economics Blog, discussing June 2010 unemployment rates by state, uses the headline "Most Regions Show Improvement"I suppose we should be encouraged by the headline and not look at the text: Washington, DC and 16 states recorded jobless rates in excess of 10%. North and South Dakota continued to have the lowest rates in the country, at 3.6% and 4.5%, respectively. Despite the improvements in the jobless rates, 27 states posted a decline in payroll employment, while 21 notched increases. Montana and Alaska had the highest percentage increase from the previous month, while New Mexico and Nevada reported the largest percentage drops. [emphasis mine] Less money is being paid in a majority of states. The clearest explanation, then, remains that the "decline" in U-3 reflects people dropping out of the work force, not being employed. It gets more interesting if you look at the Year-on-Year Change.

Payrolls Fall in 27 U.S. States, Led by California - Payrolls decreased in 27 U.S. states in June, led by California and New York, signaling the slowdown in hiring is broad-based.  Employers in California cut staff by 27,600 workers last month and those in New York reduced employment by 22,500, the Labor Department said today in Washington. Tennessee, Arizona and New Mexico rounded out the five states with the biggest job losses.  The U.S. lost 125,000 jobs last month as the government cut temporary workers conducting the 2010 census and private payrolls rose a less-than-forecast 83,000, according to Labor Department figures issued July 2. The data signal companies are becoming reticent to hire as the economy cools.

For Most Occupations, Pay Is Highest in San Francisco Area - Of all the country’s major metro areas, the San Jose-San Francisco-Oakland area of California has the highest average pay for civilian workers.  It was, in fact, 20 percent above the national average in 2009. But that’s not true for every industry. The Bureau of Labor Statistics yesterday released a detailed report on how metro areas ranked in pay by occupational category. I’ve embedded the data in a spreadsheet below. A value of 100 represents the average nationwide, and so a value of 110 means the metro area’s pay is 10 percent above the national average (and likewise a score of 90 means the pay is 10 percent below the national average):

NJ faces $10.5B budget deficit heading into next year— New Jersey faces a $10.5 billion budget deficit heading into next year — nearly the same size as the gap that opened up before this year’s spending plan passed, according to an analysis by a nonpartisan legislative office. The internal report, obtained by The Star-Ledger, means next year’s budget challenges could be just as difficult as this year, when Gov. Chris Christie slashed funding for schools, municipalities and property tax rebates. The Office of Legislative Services calculated a $10.5 billion shortfall by counting all mandatory increases in state funding and assuming all programs now in the budget would be included next year.

Christie Won’t Raise Taxes to Fill $10.5 Billion Gap (Bloomberg) -- New Jersey Governor Chris Christie won’t raise taxes to close a $10.5 billion deficit next year, a gap almost matching the record hole he and lawmakers filled in the current $29.4 billion budget, his spokesman said.The fiscal 2012 deficit estimate by David Rosen, chief budget officer for the non-partisan Office of Legislative Services, is based on using existing revenue sources to fund all state programs and obligations. Christie, a Republican who took office in January, cut services and spending to close a $10.7 billion gap in this year’s plan without raising taxes. “New Jersey doesn’t have a revenue problem, it has a spending problem and it is not our intention to tax our way out of this problem,” Christie’s spokesman Michael Drewniak said in an interview today.

State managing potential $1B problem in new budget - Belmont, Mass. — Patrick administration officials are crafting plans, due in 10 days, to manage more than $1 billion in spending reductions and exposures in the state's brand new $27.6 billion budget.The plans will inform Gov. Deval Patrick's decisions about state government program and service changes, and decisions about layoffs and alterations in state regulations or laws needed to allow departments to operate at reduced funding levels, according to new financial disclosure documents reviewed by the News Service.The black eye on the new state budget provides a fresh indication that spending and revenue spasms, which have rocked the budget and public programs and services since the recession began in 2008, are continuing.

Food program assisting needy goes bankrupt - Thousands of needy Oklahoma families trying to save money on groceries got some bad news this week. Food Share America, a company that distributes low cost grocery items to churches around the country, has canceled all future distributions. Four churches in Oklahoma, including locations in Enid and Guthrie, took part in the Food Share program. On Food Share's Web site, the company announced all future distributions have been cut as the company enters into bankruptcy.

Chickens set to invade Lansing - Many cities across Michigan have changed city ordinances to allow the raising of hens in backyards. Nearby Portland and East Lansing already allow the famed feathered friends. It especially made sense in East Lansing where a poultry expert once ruled the College. Technically speaking, Lansing residents can already raise hens in the backyard since Ingham County allows up to four hens in an enclosure. Hen raising is limited to single family or two family dwellings, but there is a minor problem in Lansing since most lot sizes are too small to meet the standards for raising chickens. Typical requirements call for chicken coops to be 40 feet from a neighbor’s residences, and most of us who live in the city know that lot sizes are often only 33 feet wide, which seems to preclude a coop and chickens. Lansing will have to figure that out.

Competing currency being accepted across Mid-Michigan - New types of money are popping up across Mid-Michigan and supporters say, it's not counterfeit, but rather a competing currency. Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender.They sound like real money and look like real money. But you can't take them to the bank because they're not made at a government mint. They're made at private mints."I sell three or four every single day and then I get one or two back a week," said Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township. Gillie also accepts silver, gold, copper and other precious metals to pay for food. He says, if he wanted to, he could accept marbles. The U.S. Treasury Department says the Coinage Act of 1965 says "private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise."

Competing Currencies: Part Two - There was a time in America when you could buy four gallons of gas for a dollar.That dollar came in the form of a coin, around one ounce, made mostly of silver.In today's market, that same coin is worth about 10 times its face value because of the silver.Therefore, that same coin in theory, could still buy around four gallons of gas.Dave Gillie, owner of Gillie's Coney Island Restaurant in Genesee County's Genesee Township, says "silver has always pretty much worth the same thing. Even if you go back thousands of years, the amount of products you could buy with an ounce of silver or gold has always been pretty standard."That can't be said of the U.S. dollar bill or U.S. coins made after 1964 that are no longer made with silver.According to the U.S. Department of Labor, since 1913 until 2001, the U.S. dollar has lost 96% of its purchasing power.

Thousands fear eviction from public housing in San Francisco - Read the headlines on San Francisco’s Housing Authority, and you may feel like you’ve stumbled upon a history book about Chicago’s public housing. Gross mismanagement. Rents not collected. Multi-million dollar deficit. Poor upkeep. Serious lawsuits because of negligence. A real mess. Now, San Francisco is looking to remedy two of those problems - the deficit and the rent collection in one fell swoop. They’ve issued thousands of eviction notices for families living there, letting them know they’ve got to pay up or get out. The problem is, many residents can’t trust what they’re told they owe. Record keeping has been so bad that many who have paid every month have also gotten eviction notices, or people are being asked to pay much larger sums than they think they owe.

California Official's $800,000 Salary in City of 38,000 Triggers Protests - Hundreds of residents of one of the poorest municipalities in Los Angeles County shouted in protest last night as tensions rose over a report that the city’s manager earns an annual salary of almost $800,000. An overflow crowd packed a City Council meeting in Bell, a mostly Hispanic city of 38,000 about 10 miles (16 kilometers) southeast of Los Angeles, to call for the resignation of Mayor Oscar Hernandez and other city officials. It was the first council meeting since the Los Angeles Times reported July 15 that Chief Administrative Officer Robert Rizzo earns $787,637 -- with annual 12 percent raises -- and that Bell pays its police chief $457,000, more than Los Angeles Police Chief Charlie Beck makes in a city of 3.8 million people. Bell council members earn almost $100,000 for part-time work.

Daniel Borenstein: Oakland faces a recipe for fiscal disaster - IF YOU think Oakland city finances are bad now, you haven't seen anything yet. Although city officials laid off more than 10 percent of their police force last week to wipe out much of a $31 million budget deficit this fiscal year, they face a much bigger problem that has barely been mentioned. Simply put, the city faces a financial time bomb, fueled by at least $2 billion of unfunded liabilities for employee pensions and retiree health care costs. That's an amount equal to about five times the annual general fund budget. It's the result of unrealistically generous benefit promises to workers, the city's failure to adequately fund the benefits, and the financial downturn's erosion of money that was set aside

Violent Weekend Plagues Oakland Following Layoffs -Oakland saw a wave of crime over the weekend that certainly won't help its reputation of being rough at times. The violence came just days after the city cut its police by 80 officers. The rash of violence started Saturday morning when BART and Oakland police officers killed a man witness said was carrying knives. Witnesses said the man also asked for officers to shoot him. Early Sunday morning, there was a shootout on Interstate 580 followed by a robbery downtown that ended with the death of 45-year-old Virginia man. "I've been here two years in PIO, been in the department for 12 years and this is probably one of our busiest weekends that we've ever had,"

Newark cutting toilet paper to help close $70 million budget deficit - New Jersey's largest city is cutting workers' hours and even eliminating the purchase of toilet paper to close a $70 million budget deficit. Newark Mayor Cory Booker has proposed a $600 million budget, which includes the possibility of laying off as many as 350 police and firefighters. Booker announced on Wednesday 1,450 non-uniformed city workers will begin a four-day work week on Sept. 27 that would represent a 20 percent pay cut. The mayor, in a City Hall briefing today, said he also would seek to eliminate 600 other jobs and scale back trash pickup and park maintenance.

Newark, New Jersey, May Move to a Four-Day Work Week Amid Gap, Booker Says - Newark, New Jersey’s largest city, may fire as many as 350 police and firefighters, institute a four-day work week and reduce all non-essential spending to cope with a $150 million budget gap, Mayor Cory Booker said.  The reduced work schedule, which Booker said may begin Sept. 27, would cut the pay of affected city employees by 20 percent. The mayor, in a City Hall briefing today, told reporters he also would seek to eliminate 600 other jobs and scale back trash pickup and park maintenance.

Muni `Race to Bottom' May Cost $1 Trillion, Former Los Angeles Mayor Says (Bloomberg) -- U.S. cities and states may need more than $1 trillion of federal assistance in the next three years to stave off financial failure, former Los Angeles Mayor Richard Riordan said.Local governments are in a “race to the bottom” and U.S. taxpayers will inevitably be called on to bail them out, Riordan said in an interview at Bloomberg News’s Los Angeles office. The federal government should make pension, health-care and school reform a condition of receiving the aid, he said yesterday. “It’s not just L.A., it’s not just California, it’s all over the country, you’re going to see all these entities become totally insolvent,” Riordan said. “I think the federal government has to come in and have a list of what the states have to do to be saved.”

Cities Rent Police, Janitors to Save Cash - Faced with a $118 million budget deficit, the city of San Jose, Calif., recently decided it could no longer afford its own janitors. So the city's budget called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million.To keep all its swimming pools open and staffed, the city is replacing some city workers with contractors. After years of whittling staff and cutting back on services, towns and cities are now outsourcing some of the most basic functions of local government, from policing to trash collection. Services that cities can no longer afford to provide are being contracted to private vendors, counties or even neighboring towns.

Reserves dwindling as city faces $700M budget gap - Chicago is facing a record budget shortfall -- approaching $700 million when the cost of police and fire contracts are factored in -- setting the stage for another raid on reserves generated by the parking meter and Chicago Skyway leases. As of Dec. 31, the city had just $180 million left from the $1.15 billion parking meter windfall that was supposed to last for 75 years. There was $550 million remaining from the $1.83 billion deal that privatized the Skyway for 99 years. Mayor Daley has already promised to hold the line on property taxes in the 2011 budget that would serve as his re-election platform if he chooses to seek a seventh term. That's even after this week's promise to hire 100 more police officers to help stop the bloodshed on Chicago streets. If the mayor keeps his hand out of taxpayers' pockets for a second straight year, his choices are few unless he revives the failed deal to privatize Midway Airport.

400 CPS teachers to get the ax this week - Notices began going out Wednesday to 400 classroom teachers and 200 educational support personnel, a CPS official said. The 600 represent staff at about 200 Track E elementary schools that start their year earlier than most schools, on Aug. 10. The notifications -- actually confirmations of the layoff-possibility notices CPS and other districts were required by law to have sent teachers earlier this summer in the face of an Illinois cash crunch -- come as the district and Chicago Teachers Union prepare for budget talks that start Friday.On the same day the notices went out, CTU President Karen Lewis issued a statement calling on CPS to commit to hiring back before any new teachers 239 "citywide" teachers not formally attached to classrooms who were fired

Investing in our young people - This paper reviews the recent literature on the production of skills of young persons. The literature features the multiplicity of skills that explain success in a variety of life outcomes. Noncognitive skills play a fundamental role in successful lives. The dynamics of skill formation reveal the interplay of cognitive and noncognitive skills, and the presence of critical and sensitive periods in the life-cycle. We discuss the optimal timing of investment over the life-cycle.

Salaried Students? A Reasonable Proposal - Rodger Malcolm Mitchell has what amounts to a very reasonable proposal for education/stimulus policy- read the whole thing for the details. Here’s the crux of it: Generally, I prefer to state a problem, then propose a solution. But when one solution addresses several problems, perhaps the reverse sequence is appropriate. The solution is: The federal government should pay all students – elementary school, middle school, high school, college and post grad – a salary…  The salary can be lowest for the lowest grades and increase stepwise through post graduate. It might vary according to average local salaries, with the student’s home being the determinant. For high school and above, the salary should be above the single person’s poverty guideline for each geographic area. Of course, the proposal’s success relies on students responding to this incentive by investing more time and effort in their education. This leap should be easy for most economists, although I’m sure there are some behavioral economists who might cite perverse incentives, capture of money by parents, and others. At the margins, though, it’s likely that salaries would reduce dropout rates and increase post-secondary completion rates. Depending on how high the uptake is, this proposal could be high bang-for-buck as far as education policies go.

The Creativity Crisis - With intelligence, there is a phenomenon called the Flynn effect—each generation, scores go up about 10 points. Enriched environments are making kids smarter. With creativity, a reverse trend has just been identified and is being reported for the first time here: American creativity scores are falling.Kyung Hee Kim at the College of William & Mary discovered this in May, after analyzing almost 300,000 Torrance scores of children and adults. Kim found creativity scores had been steadily rising, just like IQ scores, until 1990. Since then, creativity scores have consistently inched downward. “It’s very clear, and the decrease is very significant,” Kim says. It is the scores of younger children in America—from kindergarten through sixth grade—for whom the decline is “most serious.”…It’s too early to determine conclusively why U.S. creativity scores are declining. One likely culprit is the number of hours kids now spend in front of the TV and playing videogames rather than engaging in creative activities. Another is the lack of creativity development in our schools. In effect, it’s left to the luck of the draw who becomes creative: there’s no concerted effort to nurture the creativity of all children.

Fewer Americans See College as Good Investment - As the price of higher education continues to rise through a shaky economic recovery, fewer Americans are considering college a good investment, especially compared to other needs for savings. In a survey of 3,000 people, 63.5% said a college education is still a good financial investment for young adults given rising costs, compared to 79.1% last year and 80.9% in 2008. The declining sentiment is reflected across all age groups — 63.5% of those aged 18-29 said college is a good investment, compared to 76.7% last year. Just 61.5% of those over 65 years old said it is a good investment — 82.1% said the same in 2009. Most Americans — 42.8% — said this year that saving for their own retirement was more important than saving for their child’s college education, indicating an increase from last year’s 40.7%. Consequently, the proportion of those who prioritized saving for their child’s education decreased — to 40.7% this year from 47% last year. This year, 16.5% said they were not sure, marking the greatest uncertainty over the last four years.

Once a Leader, U.S. Lags in College Degrees - NYTimes - Adding to a drumbeat of concern about the nation’s dismal college-completion rates, the College Board warned Thursday that the growing gap between the United States and other countries threatens to undermine American economic competitiveness.  The United States used to lead the world in the number of 25- to 34-year-olds with college degrees. Now it ranks 12th among 36 developed nations.  “The growing education deficit is no less a threat to our nation’s long-term well-being than the current fiscal crisis,” Gaston Caperton, the president of the College Board, warned at a meeting on Capitol Hill of education leaders and policy makers, where he released a report detailing the problem and recommending how to fix it. “To improve our college completion rates, we must think ‘P-16’ and improve education from preschool through higher education.”

For-profit colleges: Monsters in the making? - The Economist - IT SEEMS too good to be true, at least for companies. Customers arrive at for-profit colleges by the million. With them comes billions of dollars of federal student grants and loans, to be poured into corporate coffers. Public subsidies may provide up to 90% of revenue; the government bears the risk of loan defaults. This business model has served firms rather well. Its effect on students and taxpayers is less clear. This summer, however, a brawl over for-profit colleges has exploded at last. Proprietary colleges have morphed into behemoths, some of them publicly traded companies that reach hundreds of thousands of students in classrooms and online. Enrolment jumped by 225% between 1998 to 2008, more than seven times the rate for all post-secondary programmes. The recession has accelerated this trend. The Apollo Group’s University of Phoenix, the biggest proprietary college, now enrolls 476,500 students. With more students comes more public money. In 2008-09 $24 billion in Pell grants and federal loans went to for-profit colleges.

Nature, Nurture and Human Capital - Most parents have concluded by the time their children hit toddlerhood that they are who they are (nature) but that you should do everything you can to teach them to identify colors, gain admission to the best preschool, and advise them to wait to eat marshmallows (nurture). Now, a paper by two economists confirms the point. “The nature versus nurture distinction is obsolete,” write Flavio Cunha, an assistant professor of economics, and James J. Heckman, a Nobel laureate and professor of economics, both at the University of Chicago.  The paper reviews the academic literature on how children acquire skills, and how those skills relate to future success. It also looks at how investments in developing those skills can have different effects depending on the ages of the children.

Facing Pension Woes, Maine Looks to Social Security: Lawmakers in Maine have found an unusual tool for tackling their state’s pension woes: Social Security.  Just as workers in the private sector participate in Social Security in addition to any pension plan at their companies, most states put their workers in the federal program along with providing a state pension. Maine and a handful of others, however, have long been holdouts, relying solely on their state pension plans. In addition, most states have excluded some workers — often teachers, firefighters and police — from the national retirement system and its associated costs, 6.2 percent of payroll for the employer and an equal amount for the worker. Now, Maine legislators have prepared a detailed plan for shifting state employees into Social Security and are considering whether to adopt it. They acknowledge it will not solve their problem in the short term but see long-term advantages.

Forecast for Oregon pensions: stormy - Oregon cities, counties, school districts and state agencies are bracing for bad news Friday from the state's Public Employees Retirement System, which will release early figures on pension rate increases projected to add up to $1 billion statewide.The PERS board at its regular meeting will receive a briefing about the financial status of the pension system, which provides benefits for nearly all government entities in Oregon. PERS will use that information to calculate how much every public employer must pay for its employees' pensions during the 2011-13 biennium. Those rates are expected to more than double, based on early projections that PERS officials say are turning out to be fairly accurate.

PERS rates for state agencies will more than double in 2011. - The actuary for Oregon's Public Employee Retirement System confirmed Friday what is already a common-knowledge piece of the state's looming budget shortfall: the cost of funding PERS will increase sharply in 2011.Mercer Inc. told the PERS board Friday that systemwide, the payroll rates paid by cities, counties, school districts and state agencies to cover their employees' pension and health care benefits will more than double in 2011, from their current level 5.2 percent of payroll to 10.8 percent of payroll.As of Dec 31, the retirement system had 76 cents in assets for every $1 in liabilities, excluding prepaid contributions. The system's investments declined about 1 percent year through May 31, Mercer said. If they finish the year at this level, the system's overall funded status, excluding prepaid contributions, will decline to about 70 percent, Mercer said.

Social Security Under Attack: Cuts Proposed, Higher Retirement Age Suggested - The attacks on Social Security have steadily intensified in the past few months. House Majority Leader Steny Hoyer recently called for a higher retirement age, and House Minority Leader John Boehner suggested raising the retirement age to seventy. Meanwhile, President Obama’s bipartisan eighteen-member commission dealing with the nation’s public debt is due to come out with a report in November that is expected to recommend cuts to Social Security. We speak with Dean Baker of the Center for Economic and Policy Research. [includes rush transcript] Watch Part II Here.

Poll: Faith In Social Security System Tanking - Battered by high unemployment and record home foreclosures, most Americans seem to have lost faith in another fundamental part of their personal finances: Social Security.A USA TODAY/Gallup Poll finds that a majority of retirees say they expect their current benefits to be cut, a dramatic increase in the number who hold that view. And a record six of 10 non-retirees predict Social Security won't be able to pay them benefits when they stop working. Skepticism is highest among the youngest workers: Three-fourths of those 18 to 34 don't expect to get a Social Security check when they retire.

Unfunded Entitlements ‘r’ Us Michael Cembalest of JP Morgan’s latest contains this chart comparing funded and unfunded entitlements – stuff countries have promised citizens, but haven’t figured out how to pay for – in the U.S. and Europe.And how might we pay for such absurd obligations? Here’s Cembalest:

  • By 2020, the average EU country would need to raise its tax rate to 55 percent of national income to pay promised benefits
  • The U.S. could fund its shortfall by doubling the 15.3 percent payroll tax on employers and employees (forever)
  • Alternatively, the U.S. could reduce discretionary spending by 80%, on things like education, defense and environmental protection.  Why so high?  There’s not enough discretionary spending left (the OMB estimates that mandatory spending will make up 71% of government expenditures by 2016) 
  • Of course, the other option would be the printing press (inflation), which would be worse given how much would be needed

Why Is “Entitlement” A Dirty Word? - On the San Francisco public radio show I did yesterday, the host kept informing me that she was getting many calls and emails (and maybe “tweets”) complaining about my use of the word “entitlements” when I referred to the Social Security, Medicare and Medicaid programs.  No one actually explained to me why they found the word offensive, but one hint I got was the one caller who suggested that my organization was part of a “libertarian” effort to end/dismantle/destroy Social Security.  (I was not given the opportunity nor had enough time to explain that our goals are precisely the opposite; if someone like Erskine Bowles, a co-chair of the President’s fiscal commission, compares the fiscal unsustainability of the federal budget to a “cancer,” it is because they want to get rid of the cancer, not let it kill the patient.) So I started wondering why the term “entitlement” was viewed with such hostility as a value-laden, judgment-laden term. 

The Retirement Nightmare: Half of Americans Have Less Than $2,000 Banked for Their Golden Years - The days of quietly retiring with a nest egg built up from years of savings from a long career on the verge of disappearing. For tens of millions of Americans, facing rising costs, shrinking incomes and growing debts they already have disappeared.  "One out of three working Americans does not have retirement savings beyond Social Security, and about 35% of those over 65 rely almost totally on Social Security alone," Dallas Salisbury, president of the Alliance for Investor Education and the Employee Benefit Research Institute (EBRI) , explained to AlterNet. "Of the remaining two-thirds of working Americans that have some retirement savings,  27 percent report less than $1,000, 16 percent between $1,000 and $9,999, 11 percent between $10,000 and $24,999, 12 percent between $25,000-$49,999, and 36 percent $50,000 or more." Perhaps the most shocking number is that half of Americans have $2,000 or less saved for retirement.  Crunch the numbers and you end up with a retirement myth, rather than a money-maker.  We face a colder economic reality: Not only are there no astronomical retirement returns coming down the financial pike, but what nuts and nest-eggs families have set aside for their futures have been mostly sucked dry.

Alice Rivlin: Reform Social Security to Save Social Security - And speaking of that dirty word, “entitlements,” and the gross misconceptions about what deficit hawks really want to do about those programs by referring to them as “entitlements” and talking about reforming them…Here’s a very nice column by Alice Rivlin (senior fellow at the Brookings Institution), who happens to be a member of the President’s deficit reduction commission, on why the best reason for reforming Social Security is not to reduce the deficit, but to sustain the program itself:

Welfare and Warfare - The United States has hit the proverbial jackpot, with a rapidly aging population, a $106 trillion unfunded liability, an administration that has piled more unfunded healthcare obligations upon our future unborn generations, spineless politicians that refuse to address the crisis, and as icing on the cake 700 military basis spread throughout the world and an annual defense budget of $895 billion equaling the total spending of the next 11 countries combined. The number of Americans over 65 will surge by 35% over the next 10 years and then by an additional 30% in the following decade. Baby Boom demographics have caught up with politician promises. Therein lays the dilemma.

Michigan may lose $560M in Medicaid funding -- Michigan likely will lose at least $260 million in Medicaid funding in the coming year, and possibly as much as $560 million, Gov. Jennifer Granholm said Thursday.  Such a loss threatens mental health care, prescriptions and other Medicaid services that Michigan now provides but that are "optional" under the federal Medicaid program, Granholm said.  Hopes have dimmed that Congress will approve an extension of higher Medicaid payments Congress approved in 2008 for states hardest hit by the economic downturn, Granholm said. The payments were funded by stimulus money and are set to expire Dec. 31.

Deathly Medicaid? - Never draw broad policy conclusions from one study. It could hurt your brain. Well it hurts mine, anyway.Avik Roy writes,Medicaid so severely underpays doctors—reimbursing them at 72 percent of already-stingy Medicare rates—that many physicians refuse to see Medicaid patients. Medicaid patients, in turn, fill up emergency rooms, where they delay the care of the seriously injured.Now comes word, via a large study by the University of Virginia (h/t Joseph Colletti), that surgical patients on Medicaid are 13% more likely to die than those with no insurance at all, and 97% more likely to die than those with private insurance.The policy implication is that we should make Medicaid as close as possible to private insurance, thereby making Medicaid surgical patients 97% less likely to die. Or, if that is too costly, we should instead make Medicaid more like no insurance at all and boost survival by 13%. Talk about bang for the buck!

What to do about Medicaid? - Avik Roy responds to my post. He lists several more studies that find Medicaid patients have far worse outcomes than privately insured ones and the uninsured too. I’m not going to undertake a literature review. I don’t have time. So, I’m not really debating the merits of the studies Avik Roy cites or whether they are representative of the entire body of work in this area. So, let’s presume they are credible and representative, then what is the implication? Should we make Medicaid more like private insurance or more like no insurance? Should we Federalize the program? I believe that everyone should have access to affordable insurance that facilitates access to affordable, high-quality care. (I’m happy to skip the insurance part and just get everyone access to the care, but that’s not how our system works right now.) If Medicaid doesn’t fill that role for low-income individuals, some of whom are very sick and/or disabled, then it should be reformed. That probably means spending more money on it.

Newly Fired Workers Won't Get Health-Care Break Under Jobs Bill - U.S. workers who lost their jobs as of June 1 won’t be eligible for a 65 percent federal subsidy to help pay for health insurance under an unemployment bill Congress will send to President Barack Obama for signing. Eligibility for the financial help expired May 31, meaning workers who lost their jobs after that date don’t qualify. Those already receiving the benefit may continue to pay reduced premiums for up to 15 months, according to the Department of Labor.  “If you’re unemployed you’re not in a position to be able to pay for coverage of your family at full price,” said Kathleen Stoll, director of health policy for Families USA, a nonprofit, consumer-advocacy group based in Washington. “This was a really important provision that put health-care coverage within reach.”

Firms cancel health coverage - The relentlessly rising cost of health insurance is prompting some small Massachusetts companies to drop coverage for their workers and encourage them to sign up for state-subsidized care instead, a trend that, some analysts say, could eventually weigh heavily on the state’s already-stressed budget.Since April 1, the date many insurance contracts are renewed for small businesses, the owners of about 90 small companies terminated their insurance plans with Braintree-based broker Jeff Rich and indicated in a follow-up survey that they were relying on publicly-funded insurance for their employees.In Sandwich, business consultant Bill Fields said he has been hired by small businesses to enroll about 400 workers in state-subsidized care since April, because the company owners said they could no longer afford to provide coverage. Fields said that is by far the largest number he has handled in such a short time.

Blue Cross and Blue Shield insurers amass huge surpluses… Nonprofit Blue Cross and Blue Shield health insurers in several states have accumulated billions of dollars in surplus money over the last decade even as they continued to raise their insurance rates by as much as 20% annually for many customers, according to a report Thursday. The study by Consumers Union found that seven of 10 such health plans across the country held more than three times the amount of surplus funds needed to remain solvent.The plans that were studied are in Alabama, Arizona, Massachusetts, Michigan, New York, North Carolina, Oregon, Pennsylvania, Tennessee and Wyoming. They held more than $32 billion in surplus cash at the end of 2008, the report said. Consumers Union, the nonprofit publisher of Consumer Reports magazine, called for states to reexamine the purpose of surplus funds and to reject or scale back rate increases when insurers have more surplus cash than necessary to remain solvent.

Those surpluses could buy a lot of catfood -  Good thing health-care reform preserved the ability of so-called non-profit insurance groups not to have competition in the form of a public optionThe report released Thursday by Consumers Union, the nonprofit publisher of Consumer Reports, found that seven of 10 Blue Cross Blue Shield affiliates examined had amassed surpluses more than three times the level regulators deemed necessary for them to remain solvent. Oh, what to do…say, bring back the public option?What, save money and help tens of millions of Americans? Nah, rich people gotta be richer, the rest of us have to work until we die…in debt for our medical expenses though, so that will show ‘em. Hey, this plan worked for the Romanovs, sort of.

For Insurers, Fight Is Now Over Details - The legislative battle over the health care overhaul ended months ago, but it is hard to tell from the intense effort now under way by insurance companies to retool a critical provision.  The law requires health insurers to spend at least 80 cents out of every dollar they collect in premiums on the welfare of patients, a critical issue for the companies’ bottom lines. But state regulators are only now deciding what precisely that means, as they draft the rules to enact the law. WellPoint, which operates Blue Cross plans in more than a dozen states, wants to include the cost of verifying the credentials of doctors in its networks. Insurance companies like Aetna argue that ferreting out fraud by identifying doctors performing unnecessary operations should count the same way as programs that keep people who have diabetes out of emergency rooms.

Why the US spends more on health care - The figure below is from a National Institute for Health Care Management Expert Voices article by Eric Jensen and Lenny Mendonca of McKinsey & Company. If you can’t make out the fine print, click to see an enlarged version. It’s worth some careful scrutiny. Anything jump out at you?At first I was amazed to see that outpatient care represents such a large portion of total spending (41%) and a huge fraction of spending above what would be expected given the nation’s wealth (68%). By comparison, inpatient care is a meager 22% of total spending. Wow! Perhaps hospitals are not to blame for the vast majority of health spending after all. But something didn’t make sense …Don’t be fooled. “Outpatient” doesn’t mean “non-hospital” and “inpatient” doesn’t represent all that occurs in a hospital. According to a 2009 Health Affairs press release, hospital-based spending accounted for $1.4 trillion of the $2.4 trillion in 2008 U.S. health spending (58%). So a whole lot of stuff is happening in hospitals. In fact, the Jenson/Mendonca article tells us that one of “[t]he two largest categories of outpatient spending [is] same-day hospital care.”

Inequality and infant and childhood mortality in the United States in the Twentieth century - This paper deals with the issue of using infant and childhood mortality as an indicator of inequality. The case is that of the United States in the 20th century. Using microdata from the 1900 and 1910 Integrated Public Use Microsamples (IPUMS), published data from the Birth Registration Area in the 1920s, results from a number of surveys, and the Linked Birth & Infant Death Files from the National Center for Health Statistics for 1991, infant and child mortality can be related to such other variables as occupation of father or mother, education of father or mother, family income, race, ethnicity, and residence. 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.

Depression makes the world look dull - To investigate links between mood disorders and vision, Emanuel Bubl at the University of Freiburg, Germany, and colleagues ran an electrode along one eye in each of 40 people with depression, and 40 people without. The electrodes measured activity in the nerves connecting photoreceptors - which detect different aspects of light - to the optic nerve, but not the brain.Participants sat in a dimly lit room and watched a black and white chequered screen which became greyer in six distinct stages, reducing the contrast between each square. Each stage was presented for 10 seconds, and the experiment was repeated over an hour.The team found that electrical signals to the optic nerve were lower in people with depression.

The Suicide Conundrum - I've written a lot about this topic over at Microkhan, primarily from a public-health angle. Despite all we've learned about human psychology over the past several decades, we seem unable to make much of a dent in America's overall suicide rate, which has remained remarkably stable over the past half-century. In fact, the rate of suicide attempts seems to have gone up over that time period; the rate of successful attempts has most likely held steady due to advances in emergency-room medicine. (Sparsely populated states such as Montana often have high suicide rates because people live so far from ERs.)So, aside from offering psychological intervention at the right time, what's the best strategy for helping people who are sorely tempted to take their own lives? Historically, the greatest declines in suicide rates have come about due to changes in the availability of methods.

State budget cuts worry mental health advocates - HOUSTON – A proposed round of state budget cuts is worrying advocates of the mentally ill. Earlier this year, the Legislative Budget Board and Gov. Rick Perry's budget office asked departments to slash their 2012-2013 budgets by 10 percent. The Department of State Health Services recently announced $245.9 million in proposed cuts. Much of that total affects mental health services."We had to make some tough decisions," said Carrie Williams, the department’s spokesperson. "It was impossible to leave mental health services untouched as they're such a large part of our budget."The Mental Health Mental Retardation Authority of Harris County is calling the proposed cuts “devastating” to the mentally ill.

Health Care Thoughts - Public Policy Dilemma - Fifty years ago much mental illness treatment was done in-patient in state run facilities, and many of them were hellholes (One Flew Over the Cuckoos Nest was probably too positive compared to what I saw early in my career).The de-institutional movement (starting in the late 60s) caused a build up of community based services, and in combination with better therapies has made a much better (although not perfect) system. In many areas the mental illness and substance abuse facilities are run through common governance, some areas not so.But there are still people who need in-patient services, especially those who also have chronic physical health problems, and there are too few beds and too few payment paths to accommodate those patients. So what to do?

CDC - Gulf Oil Spill 2010: Seafood Safety Following the Gulf Oil Spill - The ongoing oil spill disaster in the Gulf of Mexico has the potential to raise food safety concerns about possible health effects from contaminated seafood harvested from the Gulf. The United States Food and Drug Administration (FDA), with other federal and state agencies are monitoring the seafood supply for signs of oil contamination. For the seafood to pose a health risk, the food would have to be heavily contaminated with oil, and would therefore have a strong odor and taste of oil. Presently, testing of seafood from the gulf is being conducted by the Gulf States, FDA and the National Oceanic and Atmospheric Administration (NOAA). CDC is monitoring for potential illnesses across the United States that may be associated with exposure to contaminated seafood. Persons who consume seafood contaminated by oil may experience the following symptoms: nausea, vomiting, diarrhea, and abdominal pain. We understand that these symptoms are general, and that consumption of contaminated seafood might not necessarily be the cause.

Columbia University Brain Imaging Center Routinely Injected Mental Patients with Drugs that Contained Potentially Dangerous Impurities - Columbia University has quietly suspended research at a nationally prominent brain-imaging center and reassigned its top managers after federal investigators found that it had routinely injected mental patients with drugs that contained potentially dangerous impurities. The investigations found that the center — regarded by experts as the nation’s leader in the use of positron emission tomography, or PET, for psychiatric research — repeatedly violated Food and Drug Administration regulations over a four-year period.

Stress - Here's one example of how stress destroys the body. Elissa Epel, a former grad student of Sapolsky's and a professor of psychiatry at UCSF, has demonstrated that mothers caring for chronically ill report much higher levels of stress. That's not surprising. What is surprising is that these women also have dramatically shortened telomeres, those caps on the end of chromosomes that keep our DNA from disintegrating. (Women with the highest levels of stress had telomere shortening equal "to at least one decade of additional aging.") When our telomeres run out, our cells stop dividing; we've run out of life. Stress makes us run out of life faster.

How hot is it? Masters reports nine countries have smashed all-time temperature records, “making 2010 the year with the most national extreme heat records.” - It's so hot the Washington Post almost gets the story right! - A heat wave of unprecedented intensity has brought the world’s largest country its hottest temperature in history: Globally, NOAA just reported that June is the fourth month in a row of record global temperatures, and the first half of 2010 is on a record pace.  This is 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 must-read NASA paper notes.If the planet as a whole is busting global records,  you wouldn’t be surprised if national temperature records were dropping like overheated flies.  And they are, as uber-meteorologist Jeff Masters reported last week: A withering heat wave of unprecedented intensity brought the hottest temperatures in recorded history to six nations in Asia and Africa, plus the Asian portion of Russia, in June 2010….

How Do Los Angeles Residents Cope With Heat Waves? - For 4 straight days, it has been pretty hot here in LA. This article highlights the diversity of climate experiences within this big metro area. Near the beach in Santa Monica and Malibu the temperature hasn't been above the 70s but far inland it has been over 110 degrees. Guess what this temperature variation leads people to do? The people who live in East LA go to the beach! I thought that this article did a nice job talking about "high frequency" adaptation --- the little things that people do to "beat the heat". Now, it is no accident that home prices are so much higher closer to the water but just because you live in a hot area --- you can take some steps to protect yourself and have a pleasant day (especially on a weekend). This quick case study is relevant for thinking about climate change adaptation --- I will return to this theme again and again starting in September 2010.

Overcome by Heat and Inertia - This city just endured its hottest June since records began in 1872, according to the National Oceanic and Atmospheric Administration. So did Miami. Atlanta suffered its second-hottest June, and Dallas had its third hottest. In New York, the weather was relatively pleasant: only the fourth-hottest June since 1872. Then again, New York is on pace for its hottest July on record. Yet when United States senators and their aides file into work on Wednesday, on yet another 90-degree day, they may be on the verge of deciding to do approximately nothing about global warming. The needed 60 votes don’t seem to be there, at least not at the moment. Harry Reid, the Senate majority leader, and President Obama may still find a way to cobble together the votes, as they did on health care and financial regulation. Perhaps they can somehow persuade moderate Republicans to support a market-based limit on power plant emissions — a policy that power plants themselves seem open to.

It’s Getting Hot in Here - Another excellent column from David Leonhardt. I’ll just leave you with this scary excerpt: “According to NASA, 2010 is on course to be the planet’s hottest year since records started in 1880. The current top 10, in descending order, are: 2005, 2007, 2009, 1998, 2002, 2003, 2006, 2004, 2001 and 2008.”The House of Representatives has already passed a bill that would constitute a decent start on grappling with this problem. And you can easily imagine 50 Senators voting for such a bill as well. But you really can’t imagine 60 Senators voting for such a bill at this point. Instead, we’re hoping that maybe—just maybe—it’ll be possible to scrap something together that at least moves forward rather than backwards. It’s a sad time and a great moral failing on the part of many of the political and economic elites in the United States

Democrats Call Off Climate Bill Effort - The effort to advance a major climate change bill through the Senate this summer collapsed Thursday even as President Obama signed into law another top Democratic priority — a bill to restore unemployment benefits for millions of Americans who have been out of work for six months or more.  Bowing to political reality, Senator Harry Reid, the Nevada Democrat and majority leader, said the Senate would not take up legislation intended to reduce carbon emissions blamed as a cause of climate change, but would instead pursue a more limited measure focused on responding to the oil spill in the Gulf of Mexico and tightening energy efficiency standards. “We know where we are,” Mr. Reid told reporters “We know that we don’t have the votes.”

Editorial - Climate Bill Out With a Whimper - NYTimes - On Thursday, the Senate majority leader, Harry Reid, abandoned the fight for meaningful energy and climate legislation. The Republicans — surprise — had been fiercely obstructionist. But the Democratic leaders let them get away with it, as did the White House. It has been weeks since President Obama spoke out about the need for a serious climate bill to address the very real danger of global warming and to lessen this country’s dependence on imported oil. Last year, the House passed a decent if imperfect bill that would have placed economywide caps on greenhouse gas emissions. John Kerry and Joseph Lieberman offered an equivalent bill in the Senate. Mr. Reid counted noses and decided his best chance was with a stripped-down version that caps only emissions from power plants. Now even that bill has fallen by the wayside.

Climate Bill, R.I.P. - A comprehensive energy and climate bill – the centerpiece of President Obama's environmental agenda – is officially dead.  But the failure to confront global warming – central not only to Obama's presidency but to the planet itself – is not the Senate's alone. Rather than press forward with a climate bill in the Senate last summer, after the House had passed landmark legislation to curb carbon pollution, the administration repeated many of the same mistakes it made in pushing for health care reform. It refused to lay out its own plan, allowing the Senate to bicker endlessly over the details. It pursued a "stealth strategy" of backroom negotiations, supporting huge new subsidies to win over big polluters. It allowed opponents to use scare phrases like "cap and tax" to hijack public debate. And most galling of all, it has failed to use the gravest environmental disaster in the nation's history to push through a climate bill – to argue that fossil-fuel polluters should pay for the damage they are doing to the atmosphere, just as BP will be forced to pay for the damage it has done to the Gulf.

In Sweltering DC, Political ‘Reality’ Trumps Actual Reality Again - As Washington, D.C. wilts in the global heat wave gripping the planet, the Democratic leadership in the Senate has abandoned the effort to cap global warming pollution for the foreseeable future, unwilling to test a Republican filibuster. Instead of testing the hypocrisy of climate peacocks, Senate Majority Leader Harry Reid (D-NV) will instead attempt to pass a limited bill with new energy incentives and oil reduction policies next week. The decision was formally made at a meeting of the Senate Democratic caucus today. After the meeting, Sen. John Kerry (D-MA), whose efforts to craft comprehensive climate legislation had foundered, focused on the challenge of overcoming a filibuster:But we’ve always known from day one, that in order to pass comprehensive energy/climate legislation, you’ve got to reach 60 votes, and to reach those 60 votes, you’ve got have some Republicans. And as we stand here today, we do not have one Republican.

After the Climate Bill Failure - With the Senate slinking away from any effort to control climate-altering carbon emissions, the frustrated and perplexed are asking, now what? Can federal and state governments move ahead under existing law to achieve some or all of the greenhouse gas reductions envisioned in the failed legislation?Just in time comes a report from the respected World Resources Institute attempting to answer just that question. The 60-page paper was released on the very day that the Senate majority leader, Harry Reid, Democrat of Nevada, pulled the plug on the already-comatose Senate climate bill.The study (warning: quite wonky) looks at federal and state laws governing greenhouse gas pollutants and asks if they can achieve the goal set by President Obama at the international climate conference in Copenhagen last December — a 17 percent reduction over 2005 levels by 2020.The short answer from the institute is no. The longer answer is that it depends on how hard federal and state officials try.

The White House lamely blames environmentalists for climate bill failure - The blame game has already begun.One exasperated administration official on Thursday lambasted the environmentalists – led by the Environmental Defense Fund – for failing to effectively lobby GOP senators.“They didn’t deliver a single Republican,” the official told POLITICO. “They spent like $100 million and they weren’t able to get a single Republican convert on the bill.” No doubt that is a quote from somebody in the Rahm and Axelrod camp.But while I certainly think that enviros  made mistakes — see Can you solve global warming without talking about global warming? — I agree with CAP’s Dan Weiss who told Climate Progress today:In my 30 years of environmental advocacy, this has been the most sophisticated, political savvy, vigorous legislative campaign. The Environmental Defense Fund undertook heroic efforts to convince reluctant senators of both parties to support investments in clean energy jobs, reduce oil use, and cut pollution.

Veggieworld: Why eating greens won't save the planet - IF YOU'RE a typical westerner, you ate nearly 100 kilograms of meat last year. This was almost certainly the costliest part of your diet, especially in environmental terms. The clamour for people to eat less meat to save the planet is growing ever louder. "Less meat = less heat", proclaimed Paul McCartney in the run-up to last December's conference on global warming in Copenhagen. And this magazine recently recommended eating less meat as a way to reduce our environmental footprint.If less is good, wouldn't none be better? You might think so. "In the developed world, the most effective way to reduce the environmental impact of diet, on a personal basis, is to become vegetarian or vegan," says Annette Pinner, chief executive of the Vegetarian Society in the UK.It seems like a no-brainer, but is it really that simple? To find out, let's imagine what would happen if the whole world decided to eliminate meat, milk and eggs from its diet, then trace the effects as they ripple throughout agriculture, the environment and society. The result may surprise you.

The 50-Year Farm Bill - We need new strategies for agriculture that emphasize efficient nutrient use in order to lower production costs and minimize negative environmental effects. The trouble is, the best soils on the best landscapes are already being farmed. Much of the future expansion of agriculture will be onto marginal lands where the risk of irreversible degradation under annual grain production is high. As these areas become degraded, expensive chemical, energy, and equipment inputs will become less effective and much less affordable. The sooner successful alternatives are available, the more land we can save from degradation. Our vision is predicated on the need to end the ecological damage to agricultural land associated with grain production—damage such as soil erosion, poisoning by pesticides, and biodiversity loss. The most cost-effective way to do this and stay fed is to perennialize the landscape

Peak Phosphorus Today it seems too easy to name environmental hazards with potentially global implications. Climate change, finite fossil-fuel reserves and the risk of water scarcity quickly come to mind. Now some scientists want concern for the world’s dwindling phosphorus (P) supply tacked onto that short list. The Global Phosphorus Research Initiative, led by Swedish and Australian scientists, estimates that the world’s readily available phosphorus supplies will be inadequate to meet agricultural demand within 30 to 40 years. Others predict shortages sooner or later. All seem to agree that phosphorus price increases seen recently on global markets will recur, and that they will likely hit farmers in the developing world hardest. “Our current use of phosphorus is not sustainable,”

Biofuel, BS, and a bit of BP -- Let’s see how a 24.6% return looks in practice; Anyhow, it turns out that if we have invested enough to have £10,000 in the scheme at the start of year three, our descendants, if we just keep reinvesting, will be £14,781,961,370,990 to the good, by the start of year 99. Most excellent! If we assume that a Jatropha plant costs about the same as a Millettia plant (another oil-bearing plant, 463 plants for £10,000, according to another deeply unpersuasive website from the same stable), and needs the same amount of room (¼ hectare for 463 plants; source: same unpersuasive site), then, in year 99, that Jatropha plantation occupies an impressive 369,549,034 hectares. A quick Google turns up a figure for the earth’s land surface – 148,939,100 km^2. At 100 hectares per km^2 that is 14,893,910,000 hectares; only 13.31% of that is arable, though, according to Wikipedia.Do the sums: by year 99, just six reinvesting Jatropha oil dynasties, each starting with £10,000, will have taken over the arable land surface of the entire planet, and everyone else will starve. Bummer!

Revisiting the Fake Fire Brigade Part 2: Biomass - A Panacea? - In many resource discussions, biomass emerges as a solution that allows us to continue many activities currently powered by fossil fuels: First, to move cars, trucks, machinery and planes when oil runs out or becomes too expensive. Second, to provide flexibility in electric power generation, i.e. when other sources are stochastic and inflexible, biomass would provide the necessary gap-filling power. Third, to heat our homes, after natural gas production declines. There are many estimates of future uses for biomass, and many new technologies that are making their first baby-steps, quite a few of them promising and worth trying.

Google Data Centers Co-Locate Near Wind Farms: -As you know, Erin Mansur and I are almost done with a new paper that examines the geography of where different types of manufacturing industries locate as a function of local electricity prices. Recognizing that the manufacturing sector is a declining share of our economy, I had hopes of exploring where electricity intensive data centers were opening in the United States. Simple economics would predict that they should be attracted to areas featuring cheap electricity prices and close to population centers. But, My friends at Google have not provided me with data on where they locate their data centers. The new news about the NextEra/Google partnership highlights that Google is thinking through how to be a "green business". The carbon emissions factor associated with its data centers will plummet if wind power produces the electricity. My question for the Google guys is why did they take this action now? Do they predict that the Senate will pass a carbon cap & trade on the electric utilities and this will raise electricity prices? Or, is Google simply "doing no evil"?

Smart Decline in Post-Carbon Cities - Many American cities—mostly in the Midwest and Northeast—have, however, seen serious continuing shrinkage in recent decades and are now beginning to face up to it. A few have tentatively tried to craft measures that accept the persistence, even permanence, of their smaller size. As these cities search for answers, one of the few models they can turn to comes from, of all places, the buffalo country of the Great Plains states. There, communities that fought population decline for decades are now preparing for the realities of a smaller, but not necessarily worse, future. Through our work with these communities over many years, we believe that they have experience that can help guide shrinking cities in what we have called “smart decline.”

Health risks of shipping pollution have been 'underestimated'… One giant container ship can emit almost the same amount of cancer and asthma-causing chemicals as 50m cars, study finds. - Britain and other European governments have been accused of underestimating the health risks from shipping pollution following research which shows that one giant container ship can emit almost the same amount of cancer and asthma-causing chemicals as 50m cars.Confidential data from maritime industry insiders based on engine size and the quality of fuel typically used by ships and cars shows that just 15 of the world's biggest ships may now emit as much pollution as all the world's 760m cars. Low-grade ship bunker fuel (or fuel oil) has up to 2,000 times the sulphur content of diesel fuel used in US and European automobiles.

The Big Green Buy - The fixation on new "game-changing" technology is omnipresent. Think of the metaphors we use: a green Manhattan Project or a clean-tech Apollo Program. It recalls Tocqueville's observation that "the American lives in a land of wonders, in which everything around him is in constant movement, and every movement seems an advance. Consequently, in his mind the idea of newness is closely linked with that of improvement."Yet according to clean-tech experts, innovation is now less important than rapid large-scale implementation. In other words, developing a clean-energy economy is not about new gadgets but rather about new policies.An overemphasis on breakthrough inventions can obscure the fact that most of the energy technologies we need already exist. You know what they are: wind farms, concentrated solar power plants, geothermal and tidal power, all feeding an efficient smart grid that, in turn, powers electric vehicles and radically more energy-efficient buildings.But the so-called "price gap" is holding back clean tech: it is too expensive, while fossil fuels are far too cheap.

I agree with Leonard and Stavins: A price on carbon is the only honest way of dealing with climate change - David Leonard: ....The most efficient way to begin attacking the global swelter is no mystery. It involves raising the price of carbon emissions, which are warming the planet, and then letting the private sector find innovative ways to use less dirty energy. Conservative economists, like Gregory Mankiw, support this approach. So do liberals, like Joseph Stiglitz. But taxing carbon has never had much of a political chance. It’s too honest. ....Robert Stavins, the Harvard economist, told me he would actually prefer a bill that cut emissions less in the short term but created a template for much bigger cuts in the future. “Success, to me, would be the beginning of political acceptance of carbon pricing,” he said. Read the whole article. If you're worried about distributional issues associated with a carbon tax (and I might be too), then deal with those separately with appropriate transfers and safety nets.

Lieberman: Utilities Want A ‘Breather’ From Letting People Breathe - As negotiations on a stripped-down bill to limit global warming pollution from coal-fired power plants reach the final hour, Sen. Joe Lieberman (I-CT) is sympathizing with the utility industry’s attempt to suspend Clean Air Act rules on pollutants that kill tens of thousands of Americans a year. At a meeting with environmentalists, Duke Energy CEO Jim Rogers “led the call for regulatory relief on a number of existing Clean Air Act programs dealing with sulfur dioxide, nitrogen oxide and mercury, including a new EPA rule proposed last week that deals with interstate pollution.” However, thirty-one environmental and health organizations sent a letter to senators last week calling such rollbacks “simply unacceptable.” Center for American Progress senior fellow Van Jones called it a “literal poison pill.” Today, Lieberman made the ironic claim that polluters “just want a breather” from clean air rules:

Accept more poison to get less carbon? Kill this crazy idea NOW - In exchange for cutting their carbon emissions, power plants want to undermine the EPA and get permission to increase other kinds of dangerous pollution. They even want the go-ahead to dump more sulfur and deadly mercury into our air and water.This literal “poison pill” proposal would turn progress in climate protection into a devastating setback for the health of all Americans -- especially for those who live near power plants. The dirty energy lobby hopes that America can be convinced to accept more poison to get less carbon.

GAO: No “Clean Coal” Technology Without Price on Carbon Pollution - Another blow to the "breakthroughs will save us" bunch - CAP’s Daniel J. Weiss reports on the new GAO report on CCS.  For background, see “Is coal with carbon capture and storage a core climate solution?”   The Senate clean energy and global warming debate should begin the week of July 26th.   As it looms closer, Senators John Rockefeller (D-WV) and George Voinovich (R-OH) introduced comprehensive legislation to invest in “carbon capture and sequestration” technology (often called “clean coal”) that would capture and permanently store 80 percent or more carbon pollution from coal fired power plants.  Yet they oppose legislation to shrink carbon pollution, which would create a market for CCS technology.  On Friday July 16th, the Government Accountability Office unmasked the inconsistency of this approach when it determined that CCS remains an “immature” technology, and a price on carbon is essential to its development and deployment. GAO found that many barriers remain before widespread adoption of CCS:

NASA: Land Surface Temperatures, early July 2010 - A heat wave scorched the eastern United States in early July 2010, straining power grids, slowing transit, forcing nursing homes to evacuate, and prompting East Coast residents to shelter in “cooling centers,” according to news reports. Temperatures topped 105 °F (41 °C) in Baltimore for two consecutive days. The U.S. heat wave was echoed in several places around the globe. Beijing also experienced near-record heat, and temperatures soared to 122 °F (50 °C) in Kuwait. This global map shows temperature anomalies for July 4–11, 2010, compared to temperatures for the same dates from 2000 to 2008.  Areas with above-average temperatures appear in red and orange, and areas with below-average temperatures appear in shades of blue. Oceans, lakes, and areas with insufficient data (usually because of persistent clouds) appear in gray.A bright red swath runs down the east coast of North America. Warm temperatures also occur in western Canada, parts of Western Europe, Siberia, and eastern China. The most conspicuous patch of above-average temperatures appears north of the Caspian Sea.

Is the cure (geoengineering) worse than the disease (global warming)? - If there's one thing more potentially contentious than the international politics of global warming..., it's the politics of the most radical suggestion to solve it: geoengineering. Geophysicist Kate Ricke of Carnegie Mellon University and her colleagues show that one of the more feasible geoengineering methods—injecting reflective particles into the atmosphere to mimic the world-cooling effects of a volcanic eruption—will have effects that vary from place to place. So, for example, India might be rendered too cold (and wet) by a level of particle injection that's just right for its neighbor China while setting the levels to India's liking would toast the Middle Kingdom. What's worse, the computer models that show that such injections might work in the short term also show that they will change global weather patterns by making part of the atmosphere more stable—and therefore less likely to promote storms. That means less rainfall to go around—and these side effects become worse with time.

NASA: Dead Zones in the world's oceans - The size and number of marine dead zones—areas where the deep water is so low in dissolved oxygen that sea creatures can’t survive—have grown explosively in the past half-century. Red circles on this map show the location and size of many of our planet’s dead zones. Black dots show where dead zones have been observed, but their size is unknown. It’s no coincidence that dead zones occur downriver of places where human population density is high (darkest brown). Some of the fertilizer we apply to crops is washed into streams and rivers. Fertilizer-laden runoff triggers explosive planktonic algae growth in coastal areas. The algae die and rain down into deep waters, where their remains are like fertilizer for microbes. The microbes decompose the organic matter, using up the oxygen. Mass killing of fish and other sea life often results. Darker blues in this image show higher concentrations of particulate organic matter, an indication of the overly fertile waters that can culminate in dead zones.

EPA slams State Department tar sands pipeline study - In unusually blunt comments the Environmental Protection Agency has sharply criticized the State Department’s draft Environmental Impact Statement on the $7 billion pipeline project which is awaiting a State Department decision on granting a permit. At the very least, EPA’s concerns about the potential environmental effects of the pipeline are likely to slow the decision process.“We think that the Draft EIS does not provide the scope or detail of analysis necessary to fully inform decision makers and the public, and recommend that additional information and analysis be provided,” EPA advised State in a July 16 letter. EPA said that the draft environmental analysis needed further work on a range of issues, ranging from the basic need for the pipeline given U.S. clean energy and carbon pollution reduction goals to its potential impacts on greenhouse gas emissions, air pollution, wetlands, migratory birds, public water supplies and minority communities.

Geologist Berman: Shale gas reserves 'substantially overstated' - Art Berman is a geological consultant whose specialties are subsurface petroleum geology, seismic interpretation, and database design and management. He is currently consulting with a wide range of industry clients such as PetroChina, Total, and Schlumberger. Mr. Berman has an MS in geology from the Colorado School of Mines and is active with the American Assoc. of Petroleum Geologists. Art spoke with us last Thursday after a presentation in Canada at the CIBC Technical Conference.

The shale gas fairytale continues  - There comes a moment towards the end of any financial bubble when even sceptics wonder if they are wrong, and trees really can grow to the sky. That’s how I’ve felt recently about the shale gas mania, which is sweeping the world of sovereign wealth funds, private equity partners, and other people who attend international big-think conferences.  So I looked again at shale gas production reports, development costs, technical papers, and, yes, the PowerPoints. I went to Texas to meet producers, geologists, and landmen.  And I’m sticking with my position. Yes, shale gas is there, but it is expensive to produce, and there is much, much less of it available at today’s low prices than policy people, investors, and energy consumers are counting on. It is not a cheap and simple way to replace coal (in America), or Russian gas supplies (in Europe). I am, however, humbled in the presence of the marketing genius of the promoters who have convinced so many people to buy the story.

We’re Not Ready on Nuclear Power - We were told by oil industry executives and their acolytes and enablers in government that deep-water drilling in the Gulf of Mexico would not cause the kind of catastrophe that we’ve been watching with an acute and painful sense of helplessness for the past three months. Advances in technology, they said, would ward off the worst-case scenarios. Fail-safe systems like the blowout preventer a mile below the surface at the Deepwater Horizon rig site would keep wildlife and the environment safe.  Americans are not particularly good at learning even the most painful lessons. Denial is our default mode. But at the very least this tragedy in the gulf should push us to look much harder at the systems we need to prevent a catastrophic accident at a nuclear power plant, and for responding to such an event if it occurred.  Right now, we’re not ready.

The Roof of the World, Melting - My Sunday column looks at new photographs that document the melting of glaciers in the Himalayas. The difference between today’s photographs and those of 80 years ago, from the same vantage points, is stunning. Of course, the melting of glaciers is one of the best-documented aspects of climate change. We’ve seen how glaciers are shrinking in the Andes, in Glacier National Park, on Kilimanjaro. But Himalayan glaciers are the highest in the world and feed the major Asian river systems, so they are particularly important. The impact on the rivers is still being worked out. At first, more glacier melt means there is more water. Then eventually the glaciers disappear and there is no water — and the Indus River Valley in particular faces catastrophe. It has been odd and dispiriting to see skepticism about climate change actually rising lately in the United States. I hope these pictures and this field work will chip away at some of that skepticism.

Sea Level Rise Swamps Islands - It's a restful sound, waves, unless they happen to be submerging the island or coastal plain you call home. A combination of climate change and bad environmental practices like coral mining is now swamping some low-lying lands. Take the islands off the coast of Panama. These Caribbean islands regularly find themselves inundated with seawater for days—and some indigenous inhabitants have begun to move to hillsides on the mainland. New research from the National Center for Atmospheric Research suggests that climate change is already causing even greater sea level rise along the coastlines of the Bay of Bengal, the Arabian Sea, Sri Lanka, Sumatra and Java—coastlines inhabited by hundreds of millions of people. The same climate change is also responsible for falling sea levels around the Seychelles and a potential weakening of the monsoons.

Senate Democrats turn focus to Gulf spill response (AP)  – Senate Democrats hope to pass a narrow energy bill next week that responds to the oil spill in the Gulf of Mexico and takes steps to improve energy efficiency, after abandoning plans for a sweeping measure that caps greenhouse gases blamed for global warming.Senate Majority Leader Harry Reid said no Republican senator was willing to back a comprehensive energy and climate bill, a development he called "terribly disappointing" and even dangerous. "It's easy to count to 60," Reid told reporters Thursday. "I could do it by the time I was in eighth grade. My point is this, we know where we are. We know we don't have the votes."

BP launches effort to control scientific research of oil disaster - Foreign oil giant BP is on a spending spree, buying Gulf Coast scientists for its private contractor army.   TP’s Brad Johnson has the story. Scientists from Louisiana State University, Mississippi State University and Texas A&M have “signed contracts with BP to work on their behalf in the Natural Resources Damage Assessment (NRDA) process” that determines how much ecological damage the Gulf of Mexico region is suffering from BP’s toxic black tide. The contract, the Mobile Press-Register has learned, “prohibits the scientists from publishing their research, sharing it with other scientists or speaking about the data that they collect for at least the next three years.”  Bob Shipp, head of marine sciences at the University of South Alabama — whose entire department BP wished to hire — refused to sign over their integrity to the corporate criminal:

BP accused of trying to silence science on spill - The head of the American Association of Professors accused BP Friday of trying to buy the silence of scientists and academics to protect itself after the Gulf oil spill, in a BBC interview."This is really one huge corporation trying to buy faculty silence in a comprehensive way," said Cary Nelson. BP is facing lawsuits after the oil spill, which has destroyed the livelihoods of many people along the coast of the Gulf of Mexico. A copy of a contract offered to scientists by BP, which the BBC said it had obtained, said scientists are not allowed to publish the research they do for the oil giant. They are also not allowed to speak about the data for at least three years or until the government gives final approval for the company's restoration plan for the whole of the Gulf, said the British broadcaster.

Testing Gulf Water: One Sample Exploded in Lab (video)

Fish kill covers shore in Gulfport near Jones Park -(WLOX) - Something besides oil washed ashore along a section of beach in Gulfport. Construction workers at Jones Park called WLOX Monday morning with news about a fish kill. You could smell the problem before seeing it. Dead menhaden, or pogeys, washed ashore along the beach. The large fish kill created quite a mess. Piles of the small, silvery fish cover much of the shoreline just east of Jones Park from 15th Avenue to Moses Pier. While many laid baking in the late morning sun, others were pushed ashore by the gentle surf. Our news video and pictures can give you some sense of how many dead fish have washed ashore, but what can't be conveyed is the nasty smell of the rotting pogeys.

+50 Ways of Visualizing BP’s Dark Mess - It’s been almost three months since the Deepwater Horizon disaster occurred, in the Mexican Gulf. Arguably, the most horrifying man-made environmental catastrophe of all times, it has been illustrated all over the world in magazines, newspapers and websites. Today, we’ll see how information design can also show the less enjoyable side of our life, and how powerful it can be unveiling the cruel facts behind such tragedies as this one.

Prison Labor rather than civilian labor in the gulf spill - When the BP oil gusher mess first began, BP hired prison labor in order to reap tax benefits instead of hiring coastal residents whose livelihoods crashed with the explosion of the wellhead. When the community expressed their outrage, BP did not stop the practice of using prison labor. No, apparently BP simply tried to literally cover-up the use of prison labor by changing the clothing worn by the inmates to give the appearance of a civilian workforce. Big surprise.However, Abe Louise Young, author of the article in The Nation, was not convinced that BP had actually stopped using prison labor in Grand Isle, Louisiana because “nine out of ten residents are white, [but] the cleanup workers are almost exclusively African-American men.” Ben Jealous, the president of NAACP, also demanded to know “why black people were over-represented in ‘the most physically difficult, lowest paying jobs, with the most significant exposure to toxins.’”

BP’s Scheme to Swindle the ‘Small People’ - Gulf Coast fishermen and others with lost income claims against BP are outraged by a recent announcement that the $20 billion government-administered claim fund will subtract money they earn by working on the cleanup effort from any future damage claims against BP. This move, according to lawyers in Louisiana working on behalf of Louisiana fishermen and others affected by the BP oil disaster, contradicts an earlier BP statement in which the company promised it would do no such thing.Kenneth Feinberg, who was appointed by President Obama as the independent administrator of the Gulf Claims Facility for the $20 billion BP Deepwater Horizon oil disaster compensation fund, said yesterday that the wages earned by people working on BP's cleanup will be deducted from their claims against the company.He said the fund is designed to compensate fishermen and others for their lost income, and if BP is already paying someone to help skim oil and perform other cleanup work, those wages will be subtracted from the amount they're eligible to claim from the fund.

Gulf fishermen furious over oil claims (Reuters) – Fishermen in Mississippi say they are angry that under the terms of BP's $20 billion oil spill fund, money they earn doing clean-up will be subtracted from their claim against the company.The fishermen reacted after Kenneth Feinberg, the federal official in charge of administering the compensation fund, announced the decision at a town hall meeting in Biloxi on Friday. Some walked out of the meeting in protest, arguing it was pointless to work under the Vessels of Opportunity program, set up by BP to help clean up the damage from the deepwater leak that started in April.Thousands of fishermen in Louisiana, Mississippi, Alabama and Florida, out of work because federal authorities have closed much of the Gulf to fishing, are working for the Vessels of Opportunity program, skimming oil from the water and protecting coastlines

Perfect Storm for Louisiana's Economy. - In the blink of an eye, the economic focus in Louisiana has shifted from recession recovery to avoiding actual and potential job losses piling up at a staggering rate.And there's very little that the state can do: The tally is due to the Obama administration decisions affecting petroleum, defense and space -- all coming together in a perfect storm.Last Tuesday, Northrop Grumman Corp., faced with tighter Pentagon spending and Obama administration priorities aimed at Afghanistan and away from the Navy, said it would shut its Avondale shipyard -- the state's largest industrial employer with about 5,000 workers -- in early 2013 after two military ships are finished.Another source of misery is the deepwater petroleum drilling moratorium in the Gulf of Mexico. The six-month "pause" that the Obama administration insists on could kill the drilling business off the Louisiana coast for years, industry and government officials warn.

Bobby Jindal’s ‘Barrier Islands’ Are Washing Away - As experts warned, Bobby Jindal’s “obvious” response to the BP oil disaster is failing. Since the beginning of May, Gov. Bobby Jindal (R-LA) has pushed a crash effort to build artificial “barrier islands” from dredged sand to prevent BP’s toxic oil from reaching Louisiana’s fragile coastline. He and other Louisiana politicians excoriated the federal government for waiting until June 3 to authorize the $360 million project, even though “categorically, across the board, every coastal scientistquestioned its wisdom. In mid-May, Jindal justified the barrier-island construction by saying it was the “obvious” thing to do

For Oysters, a ‘Remedy’ Turned Catastrophe -In late April, just days into what has turned out to be the largest oil spill in American history, Gov. Bobby Jindal of Louisiana, with the support of local parish officials, ordered the opening of giant valves on the Mississippi River, releasing torrents of freshwater that they hoped would push oil back out to sea. Now, reports indicate that the freshwater diversions have had a catastrophic impact on southeastern Louisiana’s oyster beds that is far in excess of the damage done by oil from the spill. The Associated Press broke the story of the oyster deaths last week, and local news outlets along the coast are following it as well. On Tuesday, The Wall Street Journal chimed in with its own in-depth report.Oysters require saltwater to live, and major infusions of freshwater can quickly kill them. Once dead, the beds can take two to five years to become commercially viable again.  Now, some oyster fishermen along the coast are reporting mortality rates as high as 80 percent along thousands of acres of oyster beds.

Gulf Oil Spill May Cost 17000 Jobs, Moody's Says -BP Plc’s oil spill may cost the U.S. Gulf Coast region 17,000 jobs and about $1.2 billion in lost economic growth by year-end even if the flow is stanched permanently next month, Moody’s Analytics said.  Under a more pessimistic scenario in which the oil spill continues through December and President Barack Obama’s six- month moratorium on deepwater drilling is extended, economic losses may reach $7.4 billion, and more than 100,000 jobs would be lost, Moody’s said Louisiana, with its heavy dependence on fishing, aquaculture and oil extraction, and Florida, which relies on tourism, are likely to be hardest hit by the spill, the report said. Outside the five-state Gulf region, which also includes Texas, Alabama and Mississippi, the spill’s impact is likely to be negligible, according to the report.

US oil spill could destroy 100000 jobs: experts -  The impact of the Gulf of Mexico oil spill was thrown into sharp relief Tuesday, as US data showed rising unemployment in Louisiana and experts warned the disaster could cost up to 100,000 jobs.The US Department of Labor said Louisiana -- among the US states worst hit by the spill -- was one of only five states across the country to see a rise in unemployment last month, with the jobless rate up 0.2 points to seven percent. While the bayou state's unemployment rate remains well below the national average of 9.5 percent, the data comes amid warnings that a worst-case scenario would see 100,000 jobs lost across the Gulf Coast.  Analysts at Moody's reported that the region could face billions of dollars in lost growth from the spill, depending on whether a recent cap halts the flow of crude.

BP testimony: Officials knew of key safety problem on rig - BP officials knew about a problem on a crucial well safety device at least three months before the catastrophic April 20 explosion in the Gulf of Mexico but failed to repair it, according to testimony Tuesday from the company's well manager. Ronald Sepulvado testified that he was aware of a leak on a control pod atop the well's blowout preventer and notified his supervisor in Houston about the problem, which Sepulvado didn't consider crucial. The 450-ton hydraulic device, designed to prevent gas or oil from blasting out of the drill hole, failed during the disaster, which killed 11 men on the Deepwater Horizon rig and set off the worst offshore oil spill in U.S. history.Investigators said BP did not disclose the matter to the appropriate federal agency and failed to suspend drilling operations until the problem was resolved, as required by law.

EPA Whistleblower Accuses Agency of Covering Up Effects of Dispersant in BP Oil Spill Cleanup - With BP having poured nearly two million gallons of the dispersant known as Corexit into the Gulf of Mexico, many lawmakers and advocacy groups say the Obama administration is not being candid about the lethal effects of dispersants. We speak with Hugh Kaufman, a senior policy analyst at the EPA’s Office of Solid Waste and Emergency Response and a leading critic of the decision to use Corexit. Meanwhile, the Occupational Safety and Health Administration, or OSHA, has released its analysis of BP’s data on the exposure of cleanup workers to the chemical dispersants being used in the Gulf. OSHA chief David Michaels told the environmental website Greenwire that, quote, "I think you can say exposures are low for workers. Exposures of workers on shore are virtually nonexistent. There are significant exposures near the source, and that’s to be expected given the work being done there. Those workers are given respiratory protection," he said.

Experts: Health Hazards in Gulf Warrant Evacuations - When Louisiana residents ask marine toxicologist and community activist Riki Ott what she would do if she lived in the Gulf with children, she tells them she would leave immediately. "It's that bad. We need to start talking about who's going to pay for evacuations.". For the past two months, she's been traveling back and forth between Louisiana and Florida to gather information about what's really happening and share the lessons she learned about long-term illnesses and deaths of cleanup workers and residents. In late May, she began meeting people in the Gulf with symptoms like headaches, dizziness, sore throats, burning eyes, rashes and blisters that are do deep, they're leaving scars. People are asking, "What's happening to me?"She says the culprit is almost two million gallons of Corexit, the dispersant BP is using to break up and hide the oil below the ocean's surface. "It's an industrial solvent. It's a degreaser. It's chewing up boat engines off-shore. It's chewing up dive gear on-shore. Of course it's chewing up people's skin. The doctors are saying the solvents are making the oil worse." Coast Guard planes are flying overhead at night spraying Corexit on the water and on land.

The Poisoning - Capping the well, even temporarily, is welcome progress, but it is not the end of the story. Since the blowout in late April, up to four million barrels of oil and nearly two million gallons of toxic dispersants have been dumped into the Gulf. The clean-up operation will continue for months, but it's mostly PR — only a small fraction of the oil will actually be removed. More important, no one has a clue yet what the longer-term effects of this catastrophe will be: how many dead dolphins will wash up on the beaches, how many local residents will lose their livelihoods, how the complex ecosystem of the Gulf will be altered, or, indeed, what the political fallout will be for the Obama administration. Sorting all that out is a much larger story, and right now, it is just beginning.

Altered BP photo raises eyebrows - John Aravosis of AMERICAblog made an interesting find Monday night: A high-resolution image on BP's website of the troubled company's Houston-based Deepwater Horizon response command center had been altered.The altered image was later removed by BP and replaced with what they say is the original (the altered image is above and the original is below). You'll notice that three underwater images were inserted onto screens to the right on a wall of video feeds in the altered image, where blank images exist on the screens in the original. The photo flap inspired the usually staid Washington Post to quip, "Apparently BP is no more adept at doctoring photos than it is at plugging deep-sea oil leaks."

Scientists: Oil plumes definitely from BP's well (AP)  Researchers in Florida say they have the first scientific proof that two plumes of oil beneath the surface of the Gulf of Mexico came from BP's broken well. University of South Florida scientists said Friday they linked the oil to BP's well based on chemical tests of two plumes discovered in late May. BP initially denied the plumes even existed. Federal researchers say concentrations of underwater oil doubled last month over what they were in May. Figuring out the oil's source is pivotal as the government assesses the environmental damage caused by the massive spill and how much BP will have to pay for it.

Engineers detect seepage near BP oil well -- Engineers monitoring BP damaged well in the Gulf of Mexico detected seepage on the ocean floor that could mean problems with the cap that has stopped oil from gushing into the water, the U.S. government’s top oil spill official said on Sunday. Earlier on Sunday, BP officials had expressed hope that the test of the cap which began Thursday could continue until a relief well can permanently seal the leak next month. Oil gushed from the deepsea Maconda well for nearly three months until the new cap was put in place last week. But late on Sunday, the U.S. government released a letter to BP Chief Managing Director Bob Dudley from retired Coast Guard Admiral Thad Allen that referred to seepage near the mile-deep (1.6 km-deep) well as well as “undetermined anomalies at the well head.”

Seepage detected in Gulf (CNN News video)

Gibbs: BP's ruptured oil well leaking from top - A White House spokesman says BP's ruptured oil well is leaking at the top, along with seepage about two miles away. Robert Gibbs also says officials are monitoring bubbles that can be seen on an underwater camera. Leaks could mean the cap on the well has to be opened to prevent oil and gas from escaping elsewhere.The mechanical cap on the well stopped the flow of oil into the Gulf of Mexico on Thursday.

BP's Deepwater Oil Spill - White House Press Secretary Gibbs Confirms "Ruptured Oil Well Leaking from Top" and a Seep Two Miles Away - The White House says the well is leaking at the top and a seep is 2 miles away. Here is the link: the end of last week, BP began the testing of the Deepwater well cap, closing all the valves and stopping the flow of oil and natural gas into the Gulf waters. With this cut-off in flow, the volumes to be collected at the surface are rapidly diminishing around the well, and the use, albeit controversial, of the dispersant at the same time as more of the oil was collected, means that the amount making it to the shore has also already diminished. So now the question becomes, does BP restart the collection process by re-opening valves to the surface vessels? It also opens the questions as to how much of the preventative work now being brought up to speed, is actually going to be needed.

BP's Deepwater Oil Spill - Bubble, Bubble Oil and Trouble - I rather suspect that we will know a lot more about the behavior of the sediments and matter at the bottom of the Gulf within the next year or so than we have learned in the past hundred years. I am looking at the view from the Skandi ROV 2 at 10 am on Monday, and it is looking at a patch of mud that is bubbling a little, though over a relatively significant area (that of the camera illumination). There is no trace of oil venting and flowing upwards (and a fish just swam by) so there will be, no doubt, some samples taken, and, over time, we will learn what is the cause.There were other views, from different ROVs that seemed to show clouds of something, but the definition was poor, and it was not clear that this was not mud that the ROV itself had stirred up. This has been the case several times today, in watching the video, though there were, in the seep area, shots of small drops of oil heading up to the sea surface.

Feds: Seepage near BP cap coming from another well - The federal government's oil spill chief says seepage detected two miles from BP's oil cap is coming from another well.There are two wells within two miles of BP's blowout, one that has been abandoned and another that is not in production.There around 27,000 abandoned wells in the Gulf, and an Associated Press investigation showed this month that they're not checked for leaks.Allen also says five leaks in and around the broken well are more like 'drips' and don't mean the well is unstable.

What If He's Right?  - Last week, Simmons came on Dylan Ratigan's MSNBC financial show, but he did a longer interview over at the King World News website. (click here for Eric King's interview with Simmons). Simmons's current warning about the situation focuses on the gigantic "lake" of crude oil that is pooling under great pressure 4000 to 5000 feet down in the "basement" of the Gulf's waters.  More particularly, he is concerned that a tropical storm will bring this oil up - as tropical storms and hurricanes usually do with deeper cold water - and with it clouds of methane gas that will move toward the Gulf shore and kill a lot of people. (I really don't know the science on this and welcome any reader to correct me, but I suppose that the oil "lake" deep under the Gulf waters contains a lot of methane gas dissolved at pressure, and that as the oil rises toward the ocean's surface, and lower pressures, the gas will bubble out of solution.)

After Oil Spills, Hidden Damage Can Last for Years - On the rocky beaches of Alaska, scientists plunged shovels and picks into the ground and dug 6,775 holes, repeatedly striking oil — still pungent and dangerous a dozen years after the Exxon Valdez infamously spilled its cargo. More than an ocean away, on the Breton coast of France, scientists surveying the damage after another huge oil spill found that disturbances in the food chain persisted for more than a decade. And on the southern gulf coast in Mexico, an American researcher peering into a mangrove swamp spotted lingering damage 30 years after that shore was struck by an enormous spill.  These far-flung shorelines hit by oil in the past offer clues to what people living along the Gulf Coast can expect now that the great oil calamity of 2010 may be nearing an end.

Shared Write-ups on BP’s Macondo Deepwater Horizon Well - We’ve been receiving inquiries from people wanting information to better understand what caused the Macondo well blowout experienced by the Deepwater Horizon rig. In response, we have decided to post a free series of write-ups providing information about the industry, offshore drilling, and the Macondo well specifically. If you like the quality of our work after reading these articles, we encourage you to enroll in our oil and gas overview and business-skills courses. The same quality and thoroughness goes into all of our presentations and we can give our attendees a broad perspective level in just 1-2 days. Anyone that works in or with the industry would benefit from the programs – whether a newcomer or a veteran.

BP Contractor: ‘What This Company Is Doing To This Country Right Now Is Just Wrong’ - A former contractor has come forward to denounce foreign oil giant BP and the “cutthroat individuals” running the oil disaster response. On Friday, contractor-turned-whistleblower Adam Dillon told New Orleans television station WDSU he was fired “after taking photos that he believes were related to the use of dispersants and to the cleanup of the oil.” As a BP liaison, he had rebuffed reporters’ attempts to observe cleanup operations in Grand Isle, LA, in June, before being promoted to the BP Command Center near Houma, LA. At the command center BP manages the private contractors running practically every aspect of the spill response. Dillon, a former U.S. Army Special Operations soldier, “has lost faith in the company in charge

BP accused of ‘buying academic silence’ -The head of the American Association of Professors has accused BP of trying to "buy" the best scientists and academics to help its defence against litigation after the Gulf of Mexico oil spill. "This is really one huge corporation trying to buy faculty silence in a comprehensive way," said Cary Nelson. BP faces more than 300 lawsuits so far. In a statement, BP says it has hired more than a dozen national and local scientists "with expertise in the resources of the Gulf of Mexico".  The BBC has obtained a copy of a contract offered to scientists by BP. It says that scientists cannot publish the research they do for BP or speak about the data for at least three years, or until the government gives the final approval to the company's restoration plan for the whole of the Gulf.

BP Plans Deep-Water Drilling Off Libya - BP is to begin deep-water drilling off Libya, despite environmental concerns following the Gulf of Mexico spill and an international row over the release of the Lockerbie bomber. The plans, reported in the Financial Times, come in the shadow of controversy, as the oil giant faces new scrutiny of its 2007 deal to acquire gas and oil fields off the Libyan coast at a cost of $900 million.  At a depth of more than 1700 metres below sea level, the new site in Libya’s Gulf of Sirte will be 200 metres deeper than the Gulf of Mexico well that exploded on April 20, killing 11 oil workers and causing immeasurable environmental damage.

BP signs major offshore gas deal with Egypt – BP signed a significant agreement with Egypt on Monday to develop two offshore gas fields in the largest deal for the beleaguered energy giant since its drilling rig disaster in the Gulf of Mexico.Egypt's petroleum ministry said in a statement that the deal with Egyptian General Petroleum Corp. would develop five trillion cubic metres of gas from the North Alexandria Deepwater block and the Western Mediterranean block. The fields will produce 900 million cubic metres of gas a day starting from 2014, the ministry said. BP said in a statement that the concessions will produce up to one billion cubic metres a day.

Updated Iraqi Oil Production Graph - It's been a while since we talked about Iraq.I updated my production graph with the latest statistics (above). Very roughly speaking, Iraqi production is a tug of war between the opposing forces of the al-Shahristani plan trying to increase production, and the general forces of entropy and chaos pulling the country apart.  Over the last year, production has been roughly flat, slightly down.  It's really too soon to expect the al-Shahristani contracts to have had much impact - Rumaila is the field furthest along, and no production increases were expected there till the second half of this year.In the meantime, the political elites in the country have still been unable to form a government, four months after the last elections.  That level of uncertainty can't be helping future prospects for oil production.

'Last' Huge Oil Fields to Cost $2Bln - The Energy Ministry is seeking a record price of 60 billion rubles ($2 billion) to develop the Trebs and Titov oil fields, and the government looks determined to get as much as it possibly can from oil companies for the massive deposits. The fields are classified as strategic — meaning that they have more than 70 million tons of reserves — and their sale would be the first of a strategic deposit since changes to the law on subsoil resources in 2008. Trebs and Titov have extractable ABC1 reserves of 78.1 million tons and 132.8 million tons, respectively. "For oil execs, this is the last cherry to pick. Russia doesn't have deposits of this size left,"

It’s a race to failure between rogue states and global oil output - Dwindling global oil supplies are leaving the world ever more reliant on a group of unstable countries – many of which are themselves facing major domestic problems right now. It’s a fact of life that oil tends to come from unstable places – the very term petro state is shorthand for a country with “weak institutions and a malfunctioning public sector,” and an economy based around imports, not exports, due to exchange rates.  The reality is that seven of the countries currently listed by the US Energy Information Administration as the nation’s current Top 15 sources of crude oil are also on the State Department’s Travel Warning List, for their “long-term, protracted conditions that make a country dangerous or unstable.” These are: Saudi Arabia, Mexico, Nigeria, Iraq, Columbia, Algeria, and the Democratic Republic of the Congo – with Saudi Arabia, Mexico and Nigeria being respectably second, third and fourth most important source of US imports.

Oil Reserves: Declining, But How Fast? - (Reuters) -A declaration by Venezuela last week that it hopes soon to overtake Saudi Arabia as the country with the biggest oil reserves has stoked debate on how much oil and gas the world really has left. OPEC said last week its proven crude oil reserves rose 4 percent in 2009 to 1.06 trillion barrels, led by an increase in Venezuela. BP estimated last month total global oil reserves were over 1.33 trillion barrels -- equivalent to more than 40 years of consumption at current rates. But many industry analysts have cast doubt on these figures, saying estimates may be inflated for a variety of reasons. Following is a selection of some of the key issues involved:

RIGZONE - Today's Trends: Middle East Remains Home to Most Proven Reserves (pie graphs) The Middle East continues to hold the majority of the world's proved oil reserves, although this percentage has declined in the past two decades, according to BP's Statistical Review of World Energy that was published last month.At the end of 1989, the Middle East held 661.0 billion barrels of oil, or 65.7% of the world's proved oil reserves, and at the end of 1999, the region had 685.8 billion barrels of the world's proved oil reserves, or 63.2%. By the end of last year, the Middle East had 753.7 billion barrels of oil, or about 56.6% of the world's proven oil reserves. Global proved oil reserves in 1989 totaled 1006.4 billion barrels; a decade later, the world's proved oil reserves totaled 1085.6 billion barrels. At the end of last year, total proven oil reserves worldwide stood at 1333.1 billion barrels.

Oil production during deleveraging - I've been musing on the interaction between a) an extended period of economic stagnation/contraction due to deleveraging, and b) peak oil. Let's start with the above graph, which shows the global history of oil production as year-over-year percentage changes (taken from this 2006 Oil Drum post of mine), along with an orange box that highlights the years of the Great Depression.   The Great Depression is the most recent analogy we have to a global deleveraging event.  You can see that, overall, growth in oil production was lower during the depression than it was before (or after) but that it did grow except during the first few years of particularly sharp contraction.  For comparison, here's the level of US GDP during the years 1920-1940 (from here): You can see that the main setback to US GDP coincides with the main setback of global oil production.  Overall, the growth rate during major eras of global oil production was as follows:

Hollow Men of Economics - Left unaddressed during the past 3 years in most of the debates between economists has been the problem of energy. The reason is simple: post-war economists don’t do energy, except as an ever-expanding resource that the credit system and technology makes available. For the post-war economist, the supply curve of energy–save for brief lags–is always coming back into rough equilibrium with the economy. Accordingly, the ongoing dispute between Keynesians and Austrians (or Austerians if you like) is exceedingly boring in this regard. As late as 2008, for example, economist Paul Krugman was at least an infrastructure-and-engineering Keynesian. However, Paul quickly converted to becoming just a throw lots of money at the existing system Keynesian. The hollow nature of Krugman’s debate with Niall Ferguson meanwhile comes via their shared belief that the system will self-organize, if you follow their respective prescriptions.  However, neither allowing the economy to deflate further from here via austerity, nor throwing more debt-marked stimulus will solve the present day problem. For the United States, along with the rest of the developed world, has reached a boundary in energy.

Wall Street And Peak Oil - One of the enduring lines about peak oil is that authorities keep it a secret because there would be some kind of financial havoc if it were revealed. A recent example is a claim that Steven Chu, US energy secretary:“… knows all about peak oil, but he can’t talk about it. If the government announced that peak oil was threatening our economy, Wall Street would crash.” Is it really possible that oil traders, investors and analysts haven’t heard of peak oil?Or that they have decided to ignore it altogether? First, peak oil is hardly shunned by the financial world; just Google ‘peak oil funds’ to see how many investment managers are basing their strategy around this. Oil market traders can’t ignore the question of peaking oil production either, because the supply/demand balance is intrinsically bound up with oil prices. So they follow it as though their livelihoods depend on it.

Failed Safety Device On Deepwater Horizon Rig Was Modified In China - BP ordered the owner of the Deepwater Horizon rig, whose explosion led to the worst environmental disaster in US history, to overhaul a crucial piece of the rig's safety equipment in China, the Observer has learnt. The blow-out preventer – the last line of defence against an out-of-control well – subsequently failed to activate and is at the centre of investigations into what caused the disaster.Experts say that the practice of having such engineering work carried out in China, rather than the US, saves money and is common in the industry.

Chinese Oil Pipelines Explode - More than 2,000 firefighters worked overnight to control flames and further blasts on a second pipeline after the initial explosion. China Central Television showed flames raging among tanks at the port in the northern city of Dalian, and state media described flames 30 meters high. The cause of the initial blast was not clear. The Xinhua News Agency said it happened after a tanker uploaded oil at the port. China National Radio said officials were considering the evacuation of about 600 homes nearby. The pipelines are owned by China National Petroleum Corp., which is Asia’s biggest oil and gas producer by volume.

China seals oil port after spill (Reuters) - One of China's biggest ports, Dalian, shut on Monday after an pipeline explosion triggered a major offshore oil spill, forcing a refinery to cut processing and importers to divert cargoes elsewhere. The aftermath of the weekend fire could disrupt shipments of oil, iron ore and soy and add to pressure for stricter environmental standards in China, already reeling from a toxic copper mine leak in the south of the country which burst into headlines last week amid accusations of a cover up.The fire began on Friday while a crude oil tanker was being off-loaded. Nobody was hurt, but hundreds of firefighters battled for more than 15 hours to douse the fire, and state media said about 1,500 tonnes of oil had spilled into the sea, causing a 183 sq km (71 sq mile) slick, 50 sq km of which was "severe."

To watch the video of the man rescued from drowning in China's oil spill click here.

Growing China oil spill threatens sea life, water – Environment - China's largest reported oil spill had more than doubled by Wednesday, closing beaches on the Yellow Sea and prompting an environmental official to warn the sticky black crude posed a "severe threat" to sea life and water quality.  Some workers trying to clean up the inky beaches wore little more than rubber gloves, complicating efforts, one official said. But 40 oil-control boats and hundreds of fishing boats were also deployed in the area.  "I've been to a few bays today and discovered they were almost entirely covered with dark oil," said Zhong Yu, a worker with the environmental group Greenpeace China, who spent Wednesday on a boat inspecting the spill. "The oil is half-solid and half liquid and is as sticky as asphalt," she told The Associated Press.

China world's biggest energy consumer, says International Energy Agency - CHINA has passed the US to become the world's biggest energy consumer, according to new data from the International Energy Agency.  The milestone reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant. China's ascent marks “a new age in the history of energy”, IEA chief economist Fatih Birol said. The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for US energy security.The Paris-based IEA, energy adviser to most of the world's biggest economies, said China consumed 2.25 billion tons of oil equivalent last year, about 4 per cent more than the US, which burned through 2.17bn tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas and renewable sources such as hydropower.

China Becomes World's Biggest Energy Consumer - WSJ -China has passed the U.S. to become the world's biggest energy consumer, according to new data from the International Energy Agency, a milestone that reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant. China's ascent marks "a new age in the history of energy," IEA chief economist Fatih Birol said in an interview. The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for U.S. energy security.The Paris-based IEA, energy adviser to most of the world's biggest economies, said China consumed 2.252 billion tons of oil equivalent last year, about 4% more than the U.S., which burned through 2.170 billion tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas and renewable sources such as hydropower.

China's oil grab - An amazing thing has happened. According to the International Energy Agency (IEA), China has now surpassed the United States as the world's biggest energy consumer. The Wall Street Journal reports the story in China Tops U.S. In Energy Use— This "new age in the history of energy" is likely to be extremely turbulent.  Casual talk about future Oil Wars may not be too far off the mark. For many years now, China has moved aggressively to secure supplies in various producing regions—Angola (West Africa), Sudan (East Africa), Russia, Iran, Iraq, Kazakhstan, Venezuela, et. al. The Chinese have also tried to step up domestic production in the Tarim Basin, the South & East China Seas, and Bohai Bay even as its biggest fields Daqing & Shengli have tipped over into permanent decline. Like the United States, China must import most of the oil it consumes. The Chinese have never produced 4 million barrels-per-day, although they have gotten close this year. Yet in June, China consumed approximately 9.4 million barrels each and every day. Of this total, they imported 5.44 million barrels. China knows—unless they are deluding themselves—that we have entered the Peak Oil Era. —

China Eats World: Commodities and the Dragon - New paper from Milken Institute on China’s incredible ardor for commodities. The abstract follows: Has China embarked on a long-term strategy of controlling access to natural resources from around the world? There are, after all, precedents for such a strategy – and in China’s own backyard. Resource-poor imperial Japan rationalized its military adventures in East Asia in the 1930s as an attempt to become self-sufficient in raw materials critical to military and economic survival. Indeed, the nominal trigger for going to war with the United States in 1941 was Franklin D. Roosevelt’s export embargo on iron, steel and aviation fuel. The rest of the paper is after the jump:  China's Commodity Binge

China and the Goldfinger Syndrome - China is attempting to diversify their portfolio of US Treasury dollar holdings. They are obviously accumulating 'real goods' including stockpiles of basic materials, gold, silver, oil and investments in the means of production in their own region and in key regions around the world. This is more difficult than it might appear on the surface. Real goods are often strategic, and governments are sometimes reluctant to allow them to be acquired by a government considered a potential threat. The first difficulty is the strategic importance of some assets, such as the China's offer for the purchase of Unocal. But there is also a need for confidentiality, stealthiness if you will. If word were to leak out that 'China is dumping its Treasuries' there would be a run on the market and the Chinese could lose a portion of their reserve wealth rather quickly.  It would matter because US dollars are still the currency of choice for most international trade including the all important international commodity, oil. If you think that philosophically dollars have no value because they are just paper, I would be more than happy to dispose of them for you.

China’s Underappreciated Boost to Global Resource Supply - China’s contribution to global resource demand is well known, but its important contribution to augmenting global resource supply is underappreciated, frequently misunderstood, and often feared. Concerns over Chinese intentions in relation to commodity production and pricing were readily apparent in the Australian debate over Chinalco’s failed bid for Rio Tinto last year, but have also been raised in relation to other acquisitions. These issues are examined in a new study, China’s Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities, authored by Theodore Moran, a member of the US Director of National Intelligence Advisory Panel on International Business Practices. Rather than just raising abstract concerns, Moran examined the actual record of China’s 16 largest foreign resource procurement arrangements between 1996 and 2006, including several in Australia.

Official says yuan may weaken; discusses rates - “If [the central bank] had raised the value of renminbi in March and raised interest rates in April, financial markets would have been more stable.” This from Japanese media Asahi Shimbun, interviewing Zhou Qiren, a member of the Monetary Policy Committee, an advisory body to the People’s Bank of China.  The short interview transcript is well worth a read. Mr Qiren also points out one obvious consequence of a more flexible, or floating, currency: its value may fall as well as rise. If exports were to start suffering, the yuan would weaken to help the economy, Mr Qiren said. So far, the value of the yuan has strengthened almost imperceptibly: the blue lines on the chart are the tolerance levels for the original value of the yuan on 19 June.

China's U.S. investments soar - China's great outward march of investing into the United States is turning into a mad dash. Chinese investments into the U.S. rose 360% in the first half of this year compared to last year, according to Chinese government figures released Tuesday.But not everyone -- namely U.S. steelmakers who are trying to block Chinese investments in the name of "national security" concerns -- is being so welcoming, holding up at least one major deal announced in May.  The Ministry of Commerce in Beijing has not yet released actual figures except to say that the total of its global overseas investments had reached $55.2 billion by the end of June, compared to $43.3 billion for the entirety of 2009. Last year, Chinese companies announced new direct investments in the U.S. of close to $5 billion -- up from an average of $500 million a year previously, according to economic consultancy the Rhodium Group.

China Should Reduce Dollar-Reserve Assets, Yu Writes  (Bloomberg) -- China should reduce its holdings of U.S. dollar assets to diversify risks of “sharp depreciation,” Yu Yongding, a former adviser to the central bank, wrote in a commentary in the China Securities Journal.The nation should convert some holdings currently in U.S. dollars into assets denominated in other currencies, commodities and direct investments overseas, he recommended. China’s dollar assets are surplus to requirements and the proportion is too high, Yu said. “It’s completely possible and also necessary for China to expand direct investments in Asia, Africa and Latin America,” he wrote. “It’s also a rare opportunity for Chinese companies to acquire businesses overseas.”

China Should Widen Yuan's Float: PBOC Researcher - China should let the yuan float within a wider range in a gradual process over the next five years, an official at a local branch of the central bank said in comments published on Thursday. Wang Yong, with the central bank's training school in Zhengzhou, Henan province, also said the People's Bank of China should scale back its intervention in the foreign exchange market so long as the yuan does not bump up against the limits imposed on its daily fluctuations.The Chinese yuan can now move within a daily range of 0.5 percent up or down from a reference rate set by the central bank, but has rarely approached those limits. On July 21, 2005, China abandoned a decade-old peg to the US dollar by allowing its currency to fluctuate against a basket of currencies and appreciate by 2.1 percent. Since then, the yuan has strengthened further, though slowly, and risen more than 21 percent against the greenback. The daily range should be expanded to 1 percent next year and 2 percent in 2015, Wang said in an article published in the Shanghai Securities News.

Fear of a Chinese planet - MATT YGLESIAS directs us to a new Pew survey on attitudes concerning Chinese growth and development. As it turns out, Americans aren't the only ones feeling anxious: Concerns about China’s economic might are high among publics in the U.S. and Europe. In most of these countries, majorities or pluralities consider China’s growing economy a bad thing for their countries. Respondents in France are the most likely of all the countries surveyed to be concerned about China’s economic prowess (67%). In Britain, the public is divided on this issue, while in Russia, a plurality think China’s growing economy is a good thing for their country (49%). In several developing countries, majorities consider China’s growing economic strength a good thing. Notable exceptions are Turkey (60%) and India (56%), where majorities are concerned about China’s economic might.

Monetary theory from a Chinese historical perspective - The world is still learning about the multifaceted marvel which is China. China the rapidly growing giant (Mitchener and Yan 2010), China the super saver (Wei 2010), China the super-competitive exporter (Huang 2010), China the ancient culture, etc. One aspect that has been little appreciated is China as a source of economic theory. In recent work we summarise pre-industrial revolution thinking on money and monetary policy (Xueyi et al. 2010) – the first in what we hope is a series papers on ancient Chinese economic thought.

China: goldilocks or inflation crisis? - Independent economist Andy Xie has issued a typically bearish warning to Chinese policymakers: raise rates, or face an inflation crisis. In his article - ‘More stimulus, more trouble’ - he says that the overhang from last year’s monster credit growth will soon come back to haunt China, as it enters “an inflation era”. So why doesn’t anyone else seem that worried?Qing Wang, economist at Morgan Stanley, seems pretty happy with China’s growth picture. As both inflation and GDP growth eases (as per data last week), he says that China is getting it just right:Given these latest developments, the downside risks to both growth and inflation outlook under our base case scenario for 2010 - which we have flagged in previous research notes - are materializing. While we would need to mark-to-market and revisit our forecasts, we still feel quite comfortable with our long-standing call for a goldilocks scenario in 2010. Moreover, in light of receding inflationary pressures, the policy stance in 2H10 will likely show an easing bias, in our view.

Meanwhile, in the Chinese property market… - Tip of the hat to the FT’s Tim Harford for this — an old-school academic’s take on life inside China’s uh, keen real estate sector. Mysterious goings on inside the country’s state-owned enterprises included. ‘Evaluating Conditions in Major Chinese Housing Markets,’ an NBER paper by Jing Wu, Joseph Gyourko and Yongheng Deng, is old-school by the way because it’s focused on land supply. From the abstract (emphasis ours):Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.

Beijing’s population surges near 20 million - Beijing municipal people's congress revealed this week that the Chinese capital now has 19.72 million inhabitants, growing by over 3% in the past 2 years.Previous estimates had predicted that the city's population would swell to that level a decade later than it has. According to the guidelines regarding Beijing's development between 2004 and 2020 set by the State Council, the number of permanent residents living in capital should have been capped below 18 million until the end of 2020.However, a recently released report from the population investigation and research team within the people's congress shows that by the end of 2009, approximately 12.46 million people in the capital held a Beijing "hukou" (permanent residence). An additional 7.26 million inhabitants were migrant workers who had been living in the city for more than half a year and who are therefore also classified as permanent residents.

Beijing home prices rise to '22 times income levels' -A typical Beijing flat costs about 22 times average incomes in the city, state media said Monday, highlighting the challenge China faces providing affordable housing amid a property boom. A 90-square-metre (968-square-foot) apartment in Beijing cost 1.6 million yuan (236,000 dollars) last year, the China Daily said, citing an independent report. That compared to an average household disposable income of around 71,000 yuan in 2009, according to city figures.

The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance - Local officials, [required by] the government to produce double digit GDP growth numbers, give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. Every scheme has a ring leader whose job is to collect money from all the participants in the Ponzi scheme. When some of these Ponzi schemes blow up, the party leaders always get bailed out first. Most of the funds that are collected in this classic Ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the Ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.

Here Comes The Real Stress: Only 27% Of China Project Loans To Be Repaid In Full - And now, for today's real news: "Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator. Only 27 percent of the loans to the financing vehicles can be repaid in full by cash generated by the projects they funded, the person said. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year." Got China CDS? Because this is the point where one follows Hugh Hendry's advice about that whole panic thing.

Inside China’s gated communities for the poor - Gated villages in China have for years been symbols of affluence; places where the rich can live in villa-style homes, surrounded by private schools and swimming pools, with fences to keep out those who don’t belong.  Now China is gating off low-income villages, where migrant labourers from the countryside (the people who built those expansive villas) live in near squalor. The newly erected fences and nighttime curfews are designed to hold in the residents, and the criminality that supposedly emanates from these communities. “Enhance the idea of safety and reduce illegal crimes,” reads a red banner hanging over the main road to one such village south of Beijing, home to some 7,000 migrants

The end of cheap Chinese labour? - EARLY today, Matt Yglesias quoted a New York Times piece on an interesting new trend—lost textile jobs in China, to neighbouring Bangladesh where wage rates are lower.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.This is an example of an historically common phenomenon—an economy built on low-wage manufacturing moves its way up the skill and wage ladder, progressing from cheap emerging market to rich developed nation. The unusual aspect of this transition, however, is that the rising wage country is China, which is home to over 1.3 billion people, hundreds of millions of which remain poor and rural. Could China really be losing its cheap labour edge, and if it were, what would that mean for the rest of the world economy?

Garment factories, changing women's roles in poor countries - While visiting garment factories in Bangladesh on assignment recently, I met young women who had migrated from villages to the city in search of jobs that they needed to support their families back home. It is a fairly standard story in this part of the world. What struck me, however, was how their journeys had changed them and their views about life. My conversations with Ms. Akthar and the other woman appeared to confirm what economists, policy makers and businessmen had told me: By giving women an independent source of livelihood, Bangladesh’s garment industry has changed this conservative Muslim country’s society in immeasurable ways. (More than 80 percent of the three million people who work in the industry are women.) Mr. Mobarak, a Bangladeshi who has advised his country’s government, found that the presence of apparel jobs appears to bolster school enrollments of girls, especially for young girls.

After PRC, Other Asian Nations See Pay Disputes - Workers of the world unite! (Or, at least some of those in Asia.) After the much-ballyhooed worker suicides at Chinese original equipment manufacturer (OEM) Foxconn, many multinationals sensitive to charges of operating in China to, well, exploit labour arbitrage opportunities quickly followed suit with pay rises. The PRC powers-that-be then mounted an investigation to try and quell matters. Nevertheless, a spectre is haunting Asia--the spectre of labour militancy. In true butterfly-flapping-its-wings-starting-a-hurricane fashion, anecdotal reports now report that countries in the wider region are facing similar howls of protest over insufficient pay. Avast, ye capitalists! The following FT article focuses on aftershocks being felt in Southeast Asia. Like China, Vietnam and Laos are ostensibly "socialist" regimes that have in recent times adopted measures to solicit foreign direct investment--AKA "market socialism." I'd certainly like to ask Marx what that is...

Capital controls: Thailand joins Asian central bankers taking on Greenspan - First it was Indonesia, then South Korea. Inspired by the strength of an Asian recovery that has left the western developed world standing, regional central bankers are challenging old Western orthodoxies, and are embracing once dreaded capital controls. Is Thailand about to become the latest country to join them?  No. But that hasn’t stopped the new central bank governor from talking about it. Tarisa Watanagase, the governor of Bank of Thailand, said yesterday that while the bank had no imminent plans to introduce capital controls, many were questioning the conventional thinking on the subject matter. Capital controls were previously dismissed as something old fashioned, something that interferes with the market mechanism and should not be an acceptable tool of a central bank and I think that idea has changed.

Keynes In Asia -Krugman - David Pilling: However much Asians trumpet the value of parsimony, their governments have been as bold as any in opening the fiscal sluices. One reason is the bitter memory of the 1997 Asian financial crisis when the International Monetary Fund imposed fiscal austerity on several Asian countries. Those measures are now almost universally seen as a blunder that unnecessarily exacerbated economic misery. Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular.  In early 2009, the IMF estimated the size of stimulus programs (pdf) in G20 countries:There are several interesting things about this table; one is the fact that in the face of the crisis, Germany’s actions were very different from its rhetoric; it was pretty Keynesian in the crunch. I have no idea what was going on in Russia. But the main point here is that Korea and China both engaged in much more aggressive stimulus than any Western nation — and it has worked out well.Part of the reason Asians felt empowered to do this was the fact that during the good years they did what you’re supposed to do. Keynesian economics is often caricatured as a policy of deficit spending always; but as I’ve tried to explain, deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down.

Asia decoupling? - My colleague has been lamenting the lack of positive economic data in recent times. Ben Bernanke’s testimony to the Congress this week, in which he admitted that the American economy faced “unusual uncertainty”, wasn’t very encouraging either. And the results of the stress tests for Europe’s banks, due out today, may provide only short-lived relief. If most banks pass, markets will question the rigour of the test, especially given the challenges facing a number of banks in Spain, Greece and Germany. But Asia seems sunnier, with indicators revised upwards. The Asian Development Bank has released its economic update for the region, in which growth for emerging East Asia this year is projected to be 8.1%, up from 7.7%. The bank believes that most economies in the region are assured of a sharp V-shaped recovery this year. Does this mean that Asia is now fully decoupled from the West?

They thought Asia would save the world economy. They were wrong. - Yes, Asia has changed dramatically in the past decade. It helps to frame that transition in the context of two crises -- its own pan-regional conflagration of 1997-1998 and the global crisis of 2008-2009. Over this time span, the region has moved aggressively to insulate itself from global financial shocks -- specifically, taking its reservoir of foreign-exchange reserves from less than $1 trillion in the late 1990s to some $5 trillion in 2008. But developing Asia hasn't done enough. Most importantly, it has failed to wean itself from the export-led growth model that has long defined its economic character. It actually increased its dependence on external demand, boosting the export share of pan-regional GDP from 35 percent in 1997 to 45 percent by early 2007. That leaves the region in a very uncomfortable place in this post-crisis era -- more dependent on external demand than ever before. And, unfortunately, this dependence comes at precisely the time when the crisis-battered economies of the developed world are least equipped to deliver the external demand that export-led Asia needs as fuel for its growth machine.

Double dip in the Baltic - The raging dispute over the Baltic Dry Index is starting to feel like the Jansenists debate with the Ultramontanists, with the Big Media playing the enforcement role of Pope Innocent X against heretical bloggers such as Zero Hedge. Is the latest collapse in the BDI a leading indicator of a wilting souffle in China/US/world, or is it just the lagging effect of new ships flooding the market? Or both at once. The facts are that the BDI index of freight rates for bulk goods such as iron ore, coal, and soybeans, has fallen from 4,200 to 1,720 since the end of May. The Capesize index (ships too big for the Suez Canal, and essentially a proxy for iron ore) has dropped even more sharply from 5,520 to 1,676. These indexes are highly volatile. They gave a good warning signal before the onset of the Great Recession, but they also gave a false alert when they plunged in the early summer of 2005.

Running in Place on Trade - Meetings of G-20 leaders regularly affirm the importance of maintaining and strengthening openness in trade. June’s G-20 summit in Toronto, although not very effusive on trade, did not back away from it. Yet talk is cheap, and the open-mouth policy of (generally pro-trade) pronouncements has not been matched by action.The paradox is that this has been good for holding the line on protectionism. After all, actions are also necessary to “roll back” open trade. So we have largely stood still, in trade jargon. But lack of trade activism has also meant that we are not moving forward with trade liberalization. The long-standing Doha Round of multilateral trade negotiations seems to have been put on indefinite hold.

Chinese Vice Premier Vows to Push forward WTO Talks - Chinese Vice Premier Wang Qishan Wednesday pledged to push forward the new round of talks at the World Trade Organization (WTO)."China will work with all sides to push the Doha round of talks to success," Wang told WTO Secretary-General Pascal Lamy, who is in China for the Shanghai World Expo. Wang said China firmly opposes trade protectionism and actively strives for free trade. Wang also said China hopes to promote mechanisms for mutually beneficial trade.Lamy stressed the importance of the Doha round of WTO talks and hailed the positive role China is playing in the process

Rotting rice - The WSJ reports on the troubles that seasonal rains have brought to northern India. The federal government had previously bought up large quantities of local wheat and rice, and now has no place to store it, so seasonal rains are washing the rice away or causing it to rot. One New Delhi-based think tank says that the solution is simply to bring in the private sector: It is gross mismanagement and negligence...If only you had handed over the grain to the private sector, not a grain would have been lost. But now, it is nobody's grain. Unfortunately, it is not quite as simple as that. The process for private firms to build warehouses in India is far from straightforward.

Is Another Economics Possible? - “Another World Is Possible” is the slogan of the World Social Forum, an event first convened in Porto Alegre, Brazil, in 2001 as a challenge to the World Economic Forum, the annual gathering of the world’s political and corporate leaders in Davos, Switzerland. The possible world imagined in Brazil (and at subsequent gatherings of the World Social Forum) is based on more cooperative, sustainable, egalitarian and democratic institutions than those favored at Davos. It is designed and implemented from the bottom up rather than the top down, in opposition to both authoritarian state planning and capitalist profit maximization. “Another U.S. Is Necessary” is the tagline to the slogan added by organizers of the latest U.S. Social Forum, held June 22-26 in Detroit, attended by about 15,000 activists. Carl Davidson of the Solidarity Economy Network describes an unusually young, ethnically diverse and enthusiastic crowd reaching for imaginative ways to make ideals reality.

The Economist As Political Philosopher - Few positions educate the incumbent more thoroughly to a global point of view than that of chief economist of the International Monetary Fund. It is not surprising, therefore, that each of the three holders of the job in the last ten years has become a household name, at least in households where economic ups and downs are analyzed as well as experienced..  Thus Kenneth Rogoff, of Harvard University, is famous  for his collaboration with Carmen Reinhart, of the University of Maryland, on This Time Is Different: Eight Centuries of Financial Folly. Simon Johnson, of the Massachusetts Institute of Technology’s Sloan School of Management, and author, with James Kwak, of 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown, continues to thunder on his highly influential website, Baseline Scenario , against the financial oligarchs. And Raghuram Rajan, of the University of Chicago Booth School of Business, has produced Fault Lines: How Hidden Fractures Still Threaten the World Economy, superior in many ways to its more flamboyant competition, Crisis Economics: A Crash Course in the Future of Finance, by  Nouriel Roubini. 

A view on the world outlook (Rajan) The world is clearly slowing in the second half of 2010 as the effects of the corporate inventory rebound come to an end, and as the fiscal stimulus across the world stops growing. As the fiscal stimulus starts winding down across the world, there will clearly be headwinds to world growth. For this biweekly post, I thought I would summarize my views on where the world is headed, with all the caveats that accompany forecasts.

Japan: Land of the Rising Debt - Investors are understandably scared of the sovereign debt crisis unfolding in Europe. Amid their angst, however, they are ignoring a more likely, and significantly larger, debt catastrophe that is about to hit the nation with the second-largest economy in the world — Japan. Two decades of stimulative, low-interest-rate fiscal policy have made Japan the most indebted nation in the developed world, and as new Prime Minister Naoto Kan recently said, in his first address to Parliament, that situation is not sustainable. Japan has little choice but to raise interest rates substantially, with dire consequences far beyond its shores.

Deflation 'main threat' to Japan economy - AFP - Stubborn deflation and low demand from an ageing population prone to tight-fistedness spell a difficult future for Japan's economy, the government warned in an annual report Friday.Falling prices have been at the core of the lacklustre performance of the world's number two economy over the past two decades, said the Cabinet Office in its Annual Report on the Japanese Economy and Public Finances. Japan has been hit by repeated bouts of deflation since an asset price collapse in the early 1990s that ended the country's economic boom, later compounded by the 2008-2009 global financial crisis.

Europe freezes out Goldman Sachs - European governments are turning their backs on Goldman Sachs, the all-conquering investment bank that has suffered a series of blows to its reputation, capped by the biggest ever fine imposed on a Wall Street firm. According to data from Dealogic, Greece, Spain, France and Italy have all denied the bank a lead role in their recent sovereign bond sales. Last Thursday, Goldman agreed to pay a $550m fine to settle US regulators' claims that the bank misled investors in a mortgage-backed security.  But governments have also been shocked at the emergence of past transactions between Goldman and Greece and Italy, where products the bank helped to sell aided both in hiding government debt. Greece, which used Goldman in a bond sale this year, is practically at war with the bank. A sharp contrast with the situation months before, when Goldman bankers dined with the prime minister in a private meeting overlooking the Acropolis. Spain, which used Goldman among its top 10 bookrunners last year, has not done so in 2010, while Italy has not given the bank a leading role since 2007. France has not used Goldman in any lead position over the past three years, and it seems doubtful that it will do so in the near future. "French people would riot in the streets if we chose Goldman," said a person familiar with the French treasury.

Euro back at $1.30 - The euro is appreciating as investors get nervous about US prospects; The IMF wants to boost its lending resources to $1000bn to offer assistance for countries facing liquidity crisis; Greece start of the austerity programme earns compliments from the IMF; But challenges are still ahead, with looming protests and possible spending overruns in health care and social security; Martin Wolf kicks off a debate about the crucial policy question today whether to tighten fiscal policy or not; For the worst case scenario for sovereign bond defaults read the calculated risk blog; Francois Fillon and his comments on budget cuts keeps the French press wondering about the meaning of “rigueur”; Angela Merkel gets more support from La Tribune readers than at home; James Hamilton, meanwhile, looks at the possibility of deflation in the US.

After Tumult, Debt Worries Ease in Europe - Just two months ago, Europe’s sovereign debt problems seemed grave enough to imperil the global economic recovery. Now, at least some investors are treating it as the crisis that wasn’t. Spain held an auction of 15-year bonds last week that went off without a hitch, raising 3 billion euros, or about $3.8 billion, at a relatively favorable interest rate of 5.116 percent. That was up from 4.434 percent on a debt sale in late April, though the latest one was far more heavily subscribed.  Also last week, Moody’s Investors Service downgraded Portugal’s credit by two notches, citing the nation’s debt burden and poor growth prospects, a sign that the country’s underlying problems are not over. Yet investors, rather than punish assets linked to Portugal’s economy, seemed to take the news in stride.

91 Banks + 20 Nations = Stress Test Overload -The publication of stress test results for European banks looms large as midsummer’s event for financial Europe next Friday. It also could make for a few frightful hours if the results are released helter skelter from myriad sources, as early information suggests.Banking sources are beginning to shed early light on how the results will be disclosed. If true and left unamended, it could involve a blizzard of releases from national regulars and the individual banks at 1600 GMT.In Spain, for example, banking industry sources say that the local banking associations representing Spanish banks and the savings banks will post the test results of individual members on their websites. The Spanish central bank will then publish a report on how the sector did as a whole. Multiplied by the 91 banks and 20 nations being tested by the Committee of European Banking Supervisors (not including Switzerland),  the event will have news screens straining with information overload.

IMF says EU stress tests not transparent enough - This looks like an exercise that is already backfiring. Even the IMF has now lined up among those who criticise the EU’s stress tests. In a “health check” report, the IMF recommends full disclosure of stress test results to guarantee credibility of the tests. The IMF's annual health check on the eurozone economy said that while the markets seemed to have taken a positive view of the process so far, “some uncertainty regarding the stringency of the tests is likely to remain”.  Too many banks were still dependent on government support and were vulnerable to lapses in confidence. The FT mentioned that in another report The IMF staff had called for a more “detailed disclosure of inputs and outcomes, possibly at the institution level.” The board directors wouldn’t go so far but said that the fear of EU supervisors that stress test results could be too market sensitive is outdated.

Europe to go public with bank stress test results - Europe faces another moment of truth in its simmering debt crisis on Friday as regulators release the results of "stress tests" on 91 banks across the continent, an exercise that some fear could fail to credibly answer markets’ questions. The hope is that the operation, like stress tests carried out on 19 U.S. banks a year ago, will help shore up confidence. In that exercise, 10 banks were told to raise about $75 billion in extra capital.But the sprawling European tests come with potential risks — particularly as little is known about how the London-based Committee of European Banking Supervisors (CEBS), which will release the overall results, is conducting its analysis. Experts fear that bad news could badly hurt markets again, while too rosy a picture may prompt investors to think the tests weren’t rigorous enough

Markets nervous ahead of bank stress test results - Financial markets are nervously awaiting the results of stress tests on European banks, due later today, with Spanish newspapers reporting that several savings banks there did not pass.Several of Spain's 18 cajas, including some that have been merged recently, have failed the tests that examine how they would cope with worsening economic conditions. El País newspaper reported that some of the unlisted savings banks would need more capital if the economy were to worsen sharply and there were sovereign debt crises in several countries.Slovenia admitted yesterday that its largest bank, Nova Ljubljanska Banka, would fail the stress tests.Analysts also believe that Greek banks – weakened after the bailout of the country by the International Monetary Fund – as well as German regional banks, known as Landesbanken, are vulnerable. The Landesbanken have yet to account for losses incurred in the wake of writedowns on securitised assets such as collateralised debt obligations.

Spain’s cajas face no stress test shocks: association (Reuters) - Spain's banks or cajas will get no nasty surprises with the release of stress tests later this week, the director general of the Spanish Confederation of Savings Banks (CECA) said in a newspaper interview on Sunday. Many analysts have warned that Spain's savings banks could suffer the most when stress tests are published on Friday alongside those for other European banks, given many are heavily exposed to a badly hit property sector. Yet the CECA's Jose Antonio Olavarrieta, asked if there would be any surprises for Spanish lenders, was quoted as saying by ABC newspaper: "I don't believe there will be, either for the cajas or the banks."

European Bank Stress Tests Said to Describe Three Scenarios - European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors. Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes “sovereign shock,” according to a template prepared by CEBS for the banks and obtained by Bloomberg News.  In the last scenario, banks will publish their estimated losses on sovereign debt held in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document dated July 15.  Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices..

From stress-test inferno to capital purgatorio - Europe’s bank stress tests are coming to an end on Friday. Now what about the recapitalisation risk afterwards?Having sprung more leaks than the RMS Titanic, the tests seem to suggest that almost every bank has passed. We’ve even received the leaked list of questions to banks from regulators, via Reuters.But we won’t know for sure until the final results — while recapitalisation remains a problem ahead of new Basel regulations and economic uncertainty. And, as analysts from Macquarie noted on Wednesday (emphasis in original): There is still no regionwide commitment of governments to recapitalise banks in capital deficit.

Hurrah, the Landesbanken have passed the stress test - financial crisis now officially over - The first leaks of the stress tests are out: In Germany everybody passed, except HRE; Lex said the stress tests demonstrate that an already failed German bank is a failed German bank; if the result are confirmed on Friday, the reaction to this whitewash is likely to be negative; other leaks suggests that the imputed discount on Greek government debt was 23% - but this only affects the trading book, which accounts only for less than 10% of all sovereign bond holdings; no general haircut has been applied in the stress-tests; Lex argues that the problems faced by Ireland’s Nama suggests the difficulties associated to overcome a debt binge; Schauble tells Les Echos that a moderate public sector consolidation will increase private-sector spending; von Mirow warns of a spread of Hungarian crisis; Wolfgang Munchau sees parallels in the fall in the popularity ratings of Merkel and Sarkozy; Kenneth Rogoff, meanwhile, says the case for another stimulus now is weak.

European Bank Stress Test Results - Here are the Committee of European Banking Supervisors (CEBS) aggregate results. The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise...For the institutions that failed to meet the threshold for this stress test exercise, the competent national authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalisation. Results of the individual banks and statements on follow-up actions, where needed, are provided by the banks participating in the exercise and/or their national supervisory authorities.So the details will be available shortly.

7 EU Banks Fail Worst-Case Stress Test Scenario - Seven of 91 European banks failed stress tests aimed at measuring their strength in case the continent's government debt crisis takes a turn for the worse, regulators said Friday. European Union officials hope the results will reassure markets worried about hidden bank losses from the crisis. The EU said the tests were tough and showed their banking system was resilient enough to weather a slower economy and more turbulance on financial markets. The Committee of European Banking Supervisors said the seven banks would see their capital positions fall below levels deemed sufficient if there is a steep fall in the price of government bonds many of them hold, a worst-case scenario dubbed a "sovereign shock."

The silver lining to the lenient stress test - There’s a certain amount of relief in the markets that there’s absolutely nothing in the way of bad news coming out of the European bank stress tests. Essentially, the tests could be tough or they could be lenient; and there could be significant failures or no significant failures. The outcome, in the end, was that the tests were lenient and that there were no significant failures.  Clearly, a tough test with no significant failures would have been better news — but at the same time, a lenient test with significant failures would have been worse news. So we’re somewhere in the middle, and muddling along: in the CDS market, most banks have seen their spreads tighten modestly, by single-digit amounts, according to Markit.

Credibility Is Next Test - The European bank stress tests are done, and now they face a stress test of their own.  The credibility of the tests themselves are a key component of the exercise, which is meant to calm Europe's rattled banking industry. European regulators hope that the tests will prove sufficiently tough and transparent to restore trust in the financial system, and some rushed on Friday afternoon to assert that the results prove their nations' banks can absorb tough blows.  Based on the initial reaction, few outside observers were buying into the idea that the tests were rigorous.

EU stress tests: who knows, who cares? - The U.S. stress tests, keep in mind, were about restoring confidence, not measuring financial soundness. The assumptions in the U.S. stress tests were soft and virtually all of the banks passed. The U.S. government had already guaranteed the liabilities of most U.S. banks, General Electric and General Motors, and a variety of other formerly non-bank companies. Thus the stress tests are properly seen as an exercise in managing expectations of the bond vigilantes.The U.S. process was reasonably credible to investors because, despite their many failings, American regulators have a cohesive, if fragmented, approach to gathering data from regulated banks and disclosing same to investors. The data used in the stress tests actually bore some resemblance to public data available on these institutions.In the EU, on the other hand, there is virtually no transparency on bank financial statements and thus no visibility for investors in terms of making the stress tests credible. There is no SEC in Europe, no EDGAR or FDIC portals on the internet with extensive financial data on banks. There is not even a common template for gathering financial data on European banks or even credit statistics for many EU consumers.

Euro Falls as Stress Test Results Fail to Alleviate Banking Risk Concern The euro fell, ending its longest weekly rally in nine months versus the dollar, on concern stress tests of European Union banks failed to identify sources of weakness that would aggravate the region’s debt crisis.  The 16-nation currency depreciated against the majority of its most-actively traded counterparts, slumping the greatest amount versus growth-sensitive currencies such as the Australian and New Zealand dollars. Tests showing that only seven banks flunked the EU’s crisis scenario failed to ease concern lenders may lack sufficient capital, pushing the euro to reverse gains recorded earlier in the week.

Europe's Gap - Listening to the comments of Jean-Claude Trichet and others, you might have the impression that Europe is well on the way to recovering from its slump. So I took a look at the actual numbers, and even though I sort of knew what they said, it was a bit of a shock. In the figure below, I show an index of eurozone real GDP, from Eurostat, with 2007 fourth quarter — a quarter in which Europe was doing OK, but certainly not experiencing inflationary overheating — set at 100. And I compared it with a trend assuming 2 percent annual growth in potential output, a fairly conservative assumption even for Europe. Here’s what it looks like:  So a huge gap has opened up between a reasonable estimate of potential output and actual output. Even if you believe that growth in Europe has picked up since the first quarter — and that the pickup will continue — it will take years to close that gap.

Hungary Resists New Budget Cuts Despite Pressure - Facing growing public anger over years of budget cuts, Hungary’s conservative government insisted Monday that it would not impose further austerity measures despite pressure from its international creditors. The defiant stance, coming months ahead of important local elections, illustrates the fatigue — and resistance — that a continued push for fiscal rectitude in the wake of the sovereign debt crisis risks engendering across Europe.  Markets in Budapest reacted negatively Monday after the International Monetary Fund and European Union officials suspended a budgetary review in Budapest over the weekend.

All eyes on forint as IMF, EU suspend talks with Hungarian government The suspension of talks between the government and the International Monetary Fund and European Union could cause the forint to weaken and raise the premium Hungary pays on its debt, analysts told MTI on Sunday. The IMF and EU missions said late on Saturday that they had suspended the talks to give the government more time to consider open issues. The suspension of talks is bad news for markets because it shows investors the Hungarian government's cooperation with international organisations is not going smoothly, said Takarekbank chief analyst Zoltan Adam. A series of communication slip-ups a few weeks ago caused Hungary's credit default swap (CDS) spreads -- which show the cost of insuring the country's sovereign debt -- to widen from about the same level as Russia and Turkey to that of Romania, Croatia and Bulgaria, whose debt is considered riskier, he added

Hungary Like A Wolf for IMF Loans? Perhaps Not - European financial markets were in for a bit of a surprise Monday as Hungary was not able to agree with the EU and IMF on conditions for the release of another tranche of its EUR 20 billion standby agreement concluded in 2008. Current Hungarian Prime Minister Viktor Orban of the right-of-centre Fidez party ousted the previous socialist leadership which negotiated the IMF deal. Orban had already been PM from 1998 to 2002, but lost at the polls in 2002 and 2006. As is often the case in politics, traditional notions of "left" and "right" do not always match when it comes to dealing with the IMF and other foreign interlopers. Whereas the previous government was obviously more amenable to making concessions--especially on the fiscal austerity front--the current government is not quite. And so we have a populist backlash against the IMF. Ho-hum, where have we seen this movie before...

IMF and EU suspend talks with Hungary (Reuters) - The IMF and EU suspended on Saturday a review of Hungary's funding program, set up in 2008 to save the country from financial meltdown, saying it must take tough action to meet targets for cutting its budget deficit.Suspension of talks means Hungary will not have access to remaining funds in its $25.1 billion loan package, created by the International Monetary Fund and European Union and which it now uses as financial safety net, until the review is concluded. Negotiations with the lenders had been expected to finish early next week. Analysts said the forint currency could fall sharply when financial markets reopen Monday due to uncertainty over the international safety net for Hungary, which has financed itself from the markets since last year.

Good news from Hungary - Remember the storm-in-a-teacup Hungary crisis, back in June? Global markets all tumbled on fears about Hungarian austerity, of all things. It was all a bit weird for two reasons: firstly, the crisis was caused by remarks from a brand-new and wholly inexperienced incoming government, which had yet to find its legs or implement any policies at all. And secondly, Hungary is not a part of the eurozone, so there was no chance of a broader euro crisis resulting from what went on there: in the worst case scenario, the forint would simply weaken. The obvious conclusion was that markets were just looking for any excuse to plunge. Today, Hungary blew up all over again, the forint fell by more than 2%, and debt spreads widened out to their early-June levels, as austerity talks with the IMF fell apart. This was, on its face, a more credible crisis: it was caused by a real failure rather than just talk. But markets outside Hungary didn’t seem to notice, and neither the forint nor Hungarian spreads have yet found themselves at noticeably worse levels than they saw in June.

Hungary’s IMF revolt augurs ill for Greece - "We told the IMF/EU that further austerity was out of the question," said Hungary's economic minister Gyorgy Matolcsy, offering no hint that the Fidesz government is willing to back down despite yesterday's surge in Hungarian default costs by 51 basis points.  The Fidesz movement – an amalgam of libertarians and nationalists with a Left-populist tilt – won a crushing victory in April on a campaign of defiance against both Brussels and the IMF. It has been spoiling for a fight ever since. The collapse of Hungary's talks with the International Monetary Fund and the EU is a chilly reminder that sovereign debt crises do not end with a rescue package and a click of the fingers. As austerity drags on for year after year, democracies react.

Hungary Credit Rating May Be Cut to Junk After IMF Talks Fail - Standard & Poor’s said it may cut Hungary’s credit rating to junk after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service said it may also lower the country’s grade.  The IMF and EU on July 17 suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The creditors provided Hungary with a 20 billion-euro ($25.9 billion) rescue package in 2008, which had served to reassure investors. A rating downgrade would raise the cost of borrowing for Hungary at a time when the country is struggling to repair investor confidence after ruling party officials in June compared the country’s economy with Greece. S&P rates Hungary BBB-, its lowest investment grade. The Moody’s rating is two steps higher at Baa1.

Moody’s tires of Hungary, Hungary tires of austerity - Yet more evidence that Hungarian politicians’ careless talk costs, uh, currency — Moody’s placed Hungary’s Baa1-rated government bonds on downgrade review Friday in response to failed IMF talks.Moody’s reckons a one-notch cut is most likely, in the next four months — but this depends on whether talks resume. S&P slapped a negative outlook on its ratings of Hungary later on Friday, again noting the IMF soap opera. In particular, Moody’s has highlighted ongoing Hungarian FX risk: Moody’s also placed Hungary’s Baa1 foreign currency bank deposit ceiling on review for possible downgrade. This ceiling reflects the risk that the Hungarian government would freeze foreign currency deposits to conserve scarce foreign currency resources during a crisis… the rating agency believes that the country’s economy remains vulnerable because of the high foreign-currency indebtedness of both its private and public sector. Consequently, market confidence in both the government’s fiscal consolidation programme and the value of its currency are considered very important. Indeed — we’ve noted the mess that’s been made by Hungarian households taking out loans in foreign currency such as the Swiss Franc. As Barclays Capital’s analysts have also pointed out, FX lending imbalances exist throughout the economy:

Irish may halt budget reform early--govt party (Reuters) - Ireland may not have the political will to bring its budget deficit in line with EU rules as planned by 2014, the chairman of the smaller governing coalition member Green Party was quoted as saying on Sunday. Investors and European leaders have praised Ireland for austerity measures culminating in 4 billion euros ($5.2 billion) of spending cuts imposed in last December's budget for 2010. Green Party Chairman Dan Boyle told the Sunday Tribune it was "probably a heresy" for a government party to question whether the deficit could be cut to 3 percent of gross domestic product by 2014 from more than 14 percent in 2009.

Moody’s Cuts Ireland’s Credit Rating - Ireland’s efforts to pull out of a deep economic slump suffered a setback Monday when a major credit agency downgraded the country’s bond rating, citing a weak banking system and rising debt. Moody’s Investors Service downgraded Ireland one notch, to Aa2 from Aa1, although it remains comfortably above junk level. Moody’s also changed the outlook on the ratings to stable from negative.  “Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,”

Leprechauns And Confidence Fairies - Krugman - There’s a new report out from Ireland’s Economic and Social Research Institute (pdf) calling for even more austerity, arguing that this will lead to faster economic growth. And the report looks authoritative: it’s full of charts and tables, and frequently refers to an underlying quantitative model. What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see. They don’t even offer any quantitative assessment of the extent to which more austerity while the economy is still depressed would reduce future debt burdens. In short, it’s a pure appeal to the confidence fairy.

Moody's Downgrades Ireland On Fiscal Concerns, Weak Growth Outlook - International ratings agency Moody's downgraded the Republic of Ireland's sovereign debt rating, citing worsening public finance situation and weak growth prospects. The agency cut the rating by one notch to Aa2 From Aa1. The downgrade comes a day before the Irish government is holding an auction of 6-year and 10-year bonds. However, Moody's raised its outlook on the ratings of Ireland's debt to stable from negative as it sees upside and downside risks to be broadly balanced. "Today's downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability

Fiscal Free Lunches - The Irish Economy - Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic). But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong. This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit. The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper). I doubt that there are many Irish economists who would claim to hold this view if pushed.  However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery.

Bundesbank says Ireland will destroy eurozone -The Irish Independent picked up these incredible comments from the Bundesbank in its monthly bulletin in which it criticised Ireland, Spain, Portugal and Greece for running "persistently high" current-account deficits over the past decade, which the Bundesbank says is a "source of danger" for the single-currency region. The Bundesbank blamed the current-account deficits in Ireland and elsewhere on increases internal demand, "comparatively" strong inflation and a "grave" erosion of competitiveness. The Bundesbank dismissed the claim that reducing the German surplus would help to reduce the imbalances. Ireland's current account deficit would only improve by 1 percentage point if Germany increased imports by 10pc, the report says. “Ireland's economic policies pose a danger to the eurozone as a whole and we should take measures to improve the economy ourselves rather than look to others to change” (Interestingly, the Bundesbank does not think that persistent current account surpluses, which are the logical counterpart of current account deficits, constitute a “source of danger”. This suggests to us that the people who write these report are economically illiterate.)

What Germany Has Learned About Debt - IN many countries, including the United States, there are calls for the government to spend more to jump-start the economy, and to avoid the temptation to cut back as debts mount. Germany, however, has decided to cast its lot with fiscal prudence. It has managed rising growth and falling unemployment, while putting together a plan for a nearly balanced budget within six years. On fiscal policy and economic recovery, Americans could learn something from the German example. Twentieth-century history may help explain German behavior today. After all, the Germans lost two World Wars, experienced the Weimar hyperinflation and saw their country divided and partly ruined by Communism. What an American considers as bad economic times, a German might see as relative prosperity. That perspective helps support a greater concern with long-run fiscal caution, because it is not assumed that a brighter future will pay all the bills. Even if this pessimism proves wrong more often than not, it is like buying earthquake or fire insurance: sometimes it comes in handy. You can’t judge the policy by asking whether your house catches on fire every single year.

What Germany knows about debt - Here is my latest NYT column, I would add a few points:1. I am not sure why the American left so near-unanimously lines up behind Keynesian recommendations these days.  There are other social democratic models for running a government, including that of Germany, and yet a kind of American "can do" spirit pervades our approach to fiscal policy, for better or worse.  2. You sometimes hear it said: "Not every nation can run a surplus," or "Can every nation export its way to recovery?"  Reword the latter question as "Can every indiviidual trade his way to a higher level of income?" and try answering it again.  Productivity-driven exporting really does matter, whether for the individual or the nation.  3. There really is a supply-side multipler, and a sustainble one at that.4. The phrase "fiscal austerity" can be misleading.  Contrary to the second paragraph here, even most of the "austerity advocates" think that the major economies should be running massive fiscal deficits at this point.  5. The EU is an even less likely candidate for a liquidity trap than is the United States

What's Germany's secret? - TYLER COWEN has an interesting piece in the New York Times today, which recycles some arguments he's been making at his blog regarding the economic situation in Germany. In particular, he suggests that struggling countries shouldn't be giving Germany quite such a hard time, since its relative success is largely about structural things that it has done right—labour costs have been kept down, education and productivity are constant emphases, and the government has a reputation for responsibility when it comes to public debt. I think that structural strengths have been underplayed in this crisis and underappreciated through the recovery, so I have some sympathy with Mr Cowen's arguments. At the same time, I believe he is presenting the German case in an incomplete way:

A Keynesian Success Story: Germany's New Economic Miracle - Spiegel - The German economy has indeed come roaring back to life this summer. Two years after the outbreak of the financial crisis, the auto industry is adding extra shifts once again. The machine building, electronics and chemical industries are all reporting a rapidly growing number of orders. Total unemployment is expected to drop below the 2.8 million mark this fall, the lowest level since 1991.For the first time in decades, the former "sick man of Europe" is back to being an engine for economic growth. According to an internal government assessment, the country's gross domestic product increased by more than 1.5 percent in the second quarter of this year. In their last prognosis, completed in April, government officials had predicted only 0.9 percent GDP growth. Production in the manufacturing industry increased by 5 percent over the previous quarter. The government assessment also shows that exports grew by more than 9 percent in May.

In Greece, New Austerity Measures Rile Many | PBS NewsHour… with transcript

Italian Doctors Strike Against Cuts; 40000 Surgeries Delayed (Bloomberg) -- Italian doctors today begin a strike against Prime Minister Silvio Berlusconi’s planned budget cuts in a protest that will lead to 40,000 surgeries being postponed.Physicians belonging to CGIL, Italy’s biggest union, won’t show up for work in public hospitals and doctors will only guarantee services for emergencies, according to a statement on CGIL’s website. About 30,000 doctors retiring over the next four years won’t be replaced because of a hiring freeze, while about 12,000 health-care employees won’t have their temporary contracts renewed, daily la Repubblica reported.

Long-Term Unemployed Put Less Pressure on Wage Inflation - An old ECB paper has become newly relevant as officials around the world gauge the effect of rising joblessness on inflation.Based on the tried-and-true Phillips curve, the answer is pretty simple: higher unemployment means lower inflation as idled workers — and nervous ones still in the workforce — are unable to command higher wages. That means lower inflation, giving central banks room to embark on stimulative monetary policies via rate cuts and quantitative easing. But the ECB paper found a wrinkle in that argument: the longer the duration of unemployment, the smaller the impact on inflation. In the current context, that suggests a higher share of long-term unemployment means less of a damping effect on inflation, especially in Europe, giving the ECB less of an anti-inflation cushion to work with

Long term unemployment - The Economist - The duration of the global recession, as well as the fact that employment usually fails to pick up in the early stages of an economic recovery, mean that many people have now been jobless for a long time. The OECD reckons that in 2009, 45.5% of jobless Germans had been out of work for at least a year, the highest such proportion among the think-tank’s mostly rich member countries. In contrast, those who had been unemployed for at least a year made up only 16.3% of jobless Americans (although America’s unemployment rate was higher than Germany’s). Long-term joblessness causes people’s skills to become rusty, which makes it harder for them to find work even when the labour market recovers.

Spain’s unemployment devastates residents, adds country to European nations in crisis - In economic terms, Spain’s simultaneous property-bubble collapse and debt crisis mean the country will face years of adjustment to a lower living standard and a less generous government. Given the country’s comparatively strong underlying economy, it does not face a Greek-style lender panic, but it will likely be more than a decade before its economy returns to its previous levels.  In human terms, it means millions of Europeans who had been given a foothold in the middle-class world of property ownership, secure employment and university education have now been plunged into lives of rented rooms, paltry minimum-wage jobs and dependency on an increasingly feeble state. Many face huge

Spanish Bad Bank Debt Rises - Bad debt held by Spanish banks topped €100 billion ($129 billion) for the first time in May, as more companies filed for bankruptcy and unemployment continued to rise amid the economic downturn. Loans that are at least three months past their due date totaled to €100.37 billion in May, up from €99.89 billion in April, and from €86.74 billion a year earlier, according to data published by the Bank of Spain on Monday.

What’s up with Spanish mortgage lending? - The non-performing pain in Spain is back in the limelight. The total stock of non-performing loans sloshing around the Spanish banking system hit €100bn in May, according to data from the Bank of Spain released on Monday. Then again, broader trends in loan growth are also of interest as the pain in Spain turns toward deleveraging of debt. In particular, loans related to Spain’s real estate crash. As Santiago López Díaz of Credit Suisse noted from May’s data (emphasis ours): The most important points, in our view, however, have to do with: a) the decline in non mortgage lending, which is already falling at a -5.5% YoY rate and is the main factor responsible for the overall decline in the Spanish financial system and b) the surprising stabilisation in the YoY rate of growth in mortgage lending something, that, in our opinion, is not consistent with the current market environment

How housing slumps end (VoxEU) The world's current economic problems started when housing bubbles burst in several advanced economies. Economic recovery without housing market recovery is unlikely to be sustained. This column presents new research on the probability of housing slumps ending. There is at least a one-in-eight chance of housing slumps in the three big economies (US, Japan and Germany) ending imminently, but there is nothing approaching the same probability elsewhere. If things turn out as projected here, we may be about to have a test of the locomotive theory – whether the big economies can pull along their smaller brethren – both for housing markets and generally.

The rating agencies are no longer rating - A new US law makes rating agencies liable for the quality of their ratings; panicked rating agencies now advise their clients not to use their ratings; Structured bonds, which are obliged to have a rating, can no longer be issued; EU banks may give breakdown of their sovereign debt holdings with stress test results later today; Eurozone PMI rises stronger than expected, driven by strong performance of services; Spanish government cancels or postpones 231 infrastructure projects as part of their austerity programme; Jean Claude Trichet presents some tough arguments in favour of immanent fiscal consolidation; Martin Feldstein argues also in favour, but says that this does not avoid a double dip; German banknotes, meanwhile, will soon be printed abroad.

Key euro zone deficit widened in May - The European Central Bank has said the euro zone's balance of payments slipped further in May to a deficit of €5.8 billion, as member countries struggled with deficits and debt. The balance of payments, which includes payments for imports and exports of trade in goods and services, is a closely tracked indicator of a country's or area's ability to pay its way in the world. In April, the euro zone measure had recorded a deficit of €5.6 billion, revised data from the ECB showed, demonstrating a lack of competitiveness by the zone as a whole

ECB Paper Unlocks Credit Channel in U.S., Europe - With interest rates at the Fed and ECB at record lows, the transmission of monetary policy through the banking system has gotten increased attention of late, especially on the eve of Europe’s bank stress tests. The question is whether banks are reaping the benefits of low official interest rates but are not in turn lending to businesses and consumers due to balance-sheet constraints, or whether a sluggish economy has hampered demand for new loans. A trio of ECB economists has taken a crack at answering that question. Their 61-page paper boils down to a few main conclusions: Monetary policy has a significant effect on GDP and inflation via the credit channel; business loans are more affected by credit supply than by demand; and for households loans, demand has a biggest effect on the credit channel.

ECB's Noyer: Eurozone Members Must Cut Deficits, Debt Quickly - Eurozone governments should cut their budgetdeficits and debt quickly to remove uncertainty over the region's financial system and to restore confidence, Bank of France Governor Christian Noyer said Monday. Noyer, who is also a member of the European Central Bank Governing Council, wrote in the introduction letter of the French central bank's annual report that deficits, far from protecting the growth, threaten and compromise it because they undermine growth. He said re-balancing public finances is to restore confidence and thus creating current and future conditions favorable for strong growth.

ECB Economists on Why Austerity Is Better Than Stimulus - ECB officials have taken a strong stance against government stimulus to support the economic recovery, arguing that austerity is the better means to boost confidence, investment and spending. That has put them at odds with many economists in the U.S. who have warned against pulling the plug on stimulus too soon. An ECB paper explains their reasoning.“Our findings suggest that the effectiveness of spending shocks in stimulating economic activity has substantially decreased over time,” The authors conclude that aggregate demand is “increasingly being crowded out” by fiscal expansion, and “the response of private consumption to government spending shocks has become substantially weaker over time.”

A double dip is a price worth paying - Critics of the European countries’ decisions to front-load their deficit reductions miss the importance of seizing the current moment of crisis to take politically difficult budget actions. If the timing of the fiscal consolidation were just a technical economic problem, the right policy would be to enact a multi-year budget that starts with little or no deficit reduction for the first two years, followed by a rapid return to budget balance. The slow start would be particularly appropriate in those countries where aggregate demand is now very weak.But such a gradual adjustment strategy cannot work politically in countries where voters are sceptical about government promises of future deficit reductions. Immediate action is necessary to make future deficit cuts credible. And painful cuts in government pensions and in public payrolls as well as increases in personal taxes may only be possible while there is a sense of crisis throughout Europe.

Europe's Delusions of Safety - George Bernard Shaw observed that "Hegel was right when he said that we learn from history that man can never learn anything from history." Emerging details of European Financial Stability Facility (EFSF) bear testament to this. The structure echoes the ill-fated Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs). The recently appointed head also had a brief stint at Moore Capital, a macro-hedge fund, entirely consistent with the fact that the EFSF will be placing a historical macro-economic bet. In order to raise money to lend to finance member countries as needed, the EFSF will seek the highest possible credit rating -- AAA. The EFSF’s structure raises significant doubts about its credit worthiness and funding arrangements. In turn, this creates uncertainty about its support for financially challenged eurozone members with significant implications for markets.

Europe requires end of Merkel and Sarkozy  Ms Merkel is increasingly seen as a scheming tactician, focusing on her short-term gain, rather than her country’s long-term interests. Mr Sarkozy’s hyperactivity has made him look like a buffoon. Yet, despite those differences – and the fact that the two of them are evidently not close to each other – there is a common strand underlying their loss of popularity. They both lack a convincing strategy of how to get through this crisis. Elections are still two years away in France, and more than three in Germany – in other words too early for any forecasts. But the fall in the popularity of both leaders is not a fluke. Mr Sarkozy is now immersed in a party funding scandal . It is hard to judge how this will end, but it looks as if it will drag on and on. Even if it does not bring him down – and that may happen – he might still choke in the mud of the Bettencourt-Woerth affair – so named after the heiress of the L’Oréal empire, and Mr Sarkozy’s labour minister.

IMF: Europe's still in the dumps - The International Monetary Fund this morning released its latest review of the eurozone economy, a collection of 16 countries that, judging from the report's conclusions, are becoming the continent's new Brothers Grimm. Growth is slow -- and at risk of getting slower because bank credit has dried up. The banks themselves are undercapitalized and far too dependent on government support. Core prices are falling, raising the risk of a dangerous deflationary spiral. The entire project of the monetary union needs a full overhaul so that countries can be forced by a central authority to keep their budgets in line -- so that near-broke countries such as Greece look a bit more like Germany, and that tightwad Germany spends a bit more freely to support neighbors like Greece. The IMF, however, is never shy on dishing out tough love. Typical of the report's language was this staff appraisal: "The currency crisis results from unsustainable policies in some countries, delayed repair of the financial system, insufficient progress in establishing the discipline and flexibility needed for a smooth functioning of the monetary union, and deficient governance of the euro area."

Police Could Lose 'Up To 60,000 Officers' - Up to 60,000 police officer jobs could be lost in the next five years as the government seeks to eliminate the national debt, according to research published today.The figure is the worst-case scenario in a range of possible outcomes examined by Jane's Police Review magazine after the Treasury told government departments to prepare for cuts of up to 40%. If the police suffer average cuts, predicted to be around 25%, that will lead to the loss of between 11,500 and 17,000 jobs by 2015, said Dr Tim Brain, who recently retired as chief constable of Gloucestershire and Association of Chief Police Officers lead on finance.

David Cameron Carves Identity as Slasher of Government Bloat…After 10 weeks in office, Mr. Cameron, who met with President Obama in Washington on Tuesday, has emerged as one of the most activist prime ministers in modern times, rivaling in some respects even Margaret Thatcher, the “Iron Lady” who as the Conservative leader in the 1980s attacked unions and government bloat while privatizing national industries and vigorously pursuing free-market policies. With a relentless battery of policy announcements, Mr. Cameron and his coalition of Conservatives and Liberal Democrats have proposed to couple the deep deficit cuts the conservatives sketched out during the May general election campaign with a wider effort to break the mold of big government in Britain that, despite Lady Thatcher’s best efforts, has largely prevailed since World War II. In so doing, they have charted an economic course of almost savage austerity, an approach that contrasts starkly with the policies of Mr. Obama, who wrote to Mr. Cameron and other leaders last month warning against premature cuts in government spending that might drive the world into a double-dip recession.

ECB Chief Calls For Global Tightening - Public spending cuts and tax increases should be imposed immediately across the industrialised world as evidence of a healthy European recovery mounts, according to Jean-Claude Trichet, president of the European Central Bank. In a strident article for the Financial Times, Mr Trichet argues that policymakers who want to prolong the stimulus are mistaken and that cutting borrowing would have “very limited” effects on growth.  Firing a shot at the US administration and the International Monetary Fund, Mr Trichet criticises last year’s global push for budgetary stimulus.“With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: ‘stimulate’, ‘activate’, ‘spend’.”

Jean-Claude And The Invisibles - Krugman - Lords of Finance: The Next Generation will be about the men who helped turn the financial crisis of 2008 into a lost decade of high unemployment and deflation.And Jean-Claude Trichet will clearly be among the main protagonists.His column in today’s FT is almost a caricature of the austerity genre. Trichet’s explanation of why we must fear the invisible bond vigilantes would be funny if it didn’t have such serious consequences:In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.  Ask yourself, what evidence does he present in that passage? None, because the reality is that bond markets don’t look at all worried. What model does he refer to? None; the vague reference to “non-linear phenomena” is a giveaway that there’s no there there. So what are we to rely on for his definitive judgment that “consolidation is a must”? His “understanding” that “confidence is potentially at stake.” This is a basis for policy that affects hundreds of millions of workers?

The Debt Supercycle - I have been writing about The End Game for some time now. And writing a book of the same title. Consequently, I have been thinking a lot about how the credit crisis evolved into the sovereign debt crisis, and how it all ends. Today we explore a few musings I have had of late, while we look at some very interesting research. What will a world look like as a variety of nations have to deal with the end of their Debt Supercycle.  When I mention The End Game, you’ll immediately want to know what is ending. What I think is ending for a significant number of countries in the “developed” world is the Debt Supercycle. Essentially, the Debt Supercycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where bond markets rebel and the debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions.

Do sovereign debt ratios matter? - In the past few weeks I have been getting a lot of questions about serial sovereign defaults and how to predict which countries will or won’t suspend debt payments or otherwise get into trouble.  The most common question is whether or not there is a threshold of debt (measured, say, against total GDP) above which we need to start worrying. I have spent the last 30 years as a finance history junky, obsessively reading everything I can about the history of financial markets, banking and sovereign debt crises, and international capital flows. No aspect of history seems to repeat itself quite as regularly as financial history.  So although I am not smart enough to tell you who will or won’t default (I have my suspicions however), based on my historical reading and experiences, I think there are two statements that I can make with confidence.  First, we have only begun the period of sovereign default.

Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default - Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions.  In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period. As we saw in Part 2B, levels between 40% and 50% of sovereigns in default have been reached five times in the last two centuries, (1830s, 1840s, 1880s, 1930s, 1940s, source: Eight Centuries of Financial Crises, page 4). So, who defaults? A simple method is to choose the 45% of countries with large sovereign debts (over $50 billion) that currently have the highest cumulative probability of default. They are assumed to default in the same order as implied by their cumulative probability of default at 6/30/10 from CMA: Greece, Argentina (again), Portugal, Ireland, Spain, Italy, Turkey, Indonesia, Belgium, South Africa, Thailand, South Korea, Poland, Brazil, Mexico and Malaysia. But then, since this is a really bad scenario, Japan defaults too.

Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange - In Part 5A, I showed a Really Bad scenario consistent with some very bad historic default rates for sovereign debt. That produced an estimate of $15.3 trillion of defaulted sovereign debt, with $7.5 to $10.5 trillion of losses. In today’s post, we look at the effects of sovereign default on credit default swaps, interest rate swaps and options, and currency exchange contracts. Sovereign risk can make its way into over the counter markets in many ways, including:  A. For credit default swaps, the sovereigns are often the “reference entity”. In other words, market participants are often buying and selling insurance related to a potential future default of a country on its debt.   B. Sovereign bonds are a major form of collateral for over the counter trades. The collateral itself is often marked to market. Thus, movements in interest rates often changes the value of highly rated sovereign bonds posted as collateral, and a participant might post more or fewer bonds as collateral as a result. However, sovereign bonds are typically subject to larger haircuts if downgraded, and might not be accepted at all if rated lower than BB-.  C. Sovereigns ARE the participants in a large number of contracts. Yes, many governments and/or their central banks or sovereign wealth funds are active participants in OTC markets. The author’s impression is that sovereign participation in the CDS market is low, but participation in interest rate and FX markets is considerably higher.

In Crisis, Foreigners Turn to $100 Bill - The economic downturn has shown, again and again, that global investors and foreign governments turn to the safety of U.S. Treasury securities in a crisis. The same apparently goes for other foreigners, who socked away $100 bills at a rapid pace after the financial crisis struck in late 2008.As much as two-thirds of U.S. currency in circulation is held abroad, according to Federal Reserve estimates. In prepared testimony for a House subcommittee hearing this afternoon, Louise Roseman, director of the Fed’s Division of Reserve Bank Operations and Payment Systems, laid out the stats: The foreign component of currency holdings “increased significantly” starting in the late 1980s. In the 1990s, U.S. currency in circulation world-wide grew at a 7.7% average annual rate primarily due to increases in foreign demand and a demand surge at the end of the decade, she said. But annual growth rates began to fall in 2001 and fell below 1% in 2008, through August.

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