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

Saturday, July 3, 2010

week ending July 3

Fed s balance sheet shrinks in latest week - The US Federal Reserve's balance sheet shrank in the latest week, Fed data released on Thursday showed. The balance sheet a broad gauge of Fed lending to the financial system declined to USD 2.314 trillion in the week ended June 30 from USD 2.328 trillion the previous week.While the balance sheet contracted in the most recent data, it remains near its record high of USD 2.334 trillion hit in May. The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae and Freddie Mac totaled USD 1.118 trillion on June 30 versus USD 1.129 trillion on June 23.The US central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was USD 164.76 billion on June 30 versus USD 165.61 billion on June 23. Primary credit via the Fed's discount window averaged USD 162 million per day in the latest week versus USD 151 million per day in the previous week

Fed Made Taxpayers Junk-Bond Buyers Without Congress Knowing (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money. The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds. By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. “Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,”

Is monetary policy too expansionary or not expansionary enough? - Martin Wolf - People with a free-market orientation believe that the economy has a strong tendency towards equilibrium. Over the long term money is “neutral”: a rise in the money supply merely raises the price level. In the short term, however, monetary policy may have a big impact on the economy. A big question, however, is over how to measure the impact of monetary policy in an environment such as the present one, when short-term interest rates are close to zero and the credit system is damaged.The difficulty arises because of the huge divergence between what is happening to the monetary base (the monetary liabilities of the government, including the central bank) and what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. ...

My Response to Martin Wolf - Martin Wolf has an article where he considers whether monetary policy is currently too tight or too expansionary. He asks his readers what they think. Here is the reply I left at his siteTwo points. First, one of the better ways to currently measure the stance of U.S. monetary policy is to look at the market's expectation of future inflation. This can be seen by looking at the spread between the nominal Treasury yield and the real yield on TIPS. Given that productivity is not changing rapidly and affecting the price level, this forward-looking measure of inflation will be implicitly reflecting the market's expectation of aggregate demand in the future. The central bank, if it has the will, can shape total nominal spending and stabilize it.  Second, I think it is useful to think about what monetary policy should do and how it can do it by taking the equation of exchange, MV=PY, and expanding the money supply or M term in it. (V = velocity, PY = nominal GDP.) Since M = Bm, where B = monetary base and m = money multiplier, the expanded version of the equation of exchange can be stated as follows: BmV = PY

Credit Still Tightening, Fed Governor Says - The level of outstanding credit in the American economy continues to fall as strong and weak banks alike pull back on lending, worsening the prospects for businesses and consumers to regain their footing, a Federal Reserve governor said Wednesday. Credit has been slower to return to prerecession levels than in any downturn over the last 40 years, with the exception of the 1990-91 recession, Elizabeth A. Duke, one of five sitting governors on the Fed’s board, said in a speech in Columbus, Ohio, citing new research by the central bank. Total loans held by commercial banks fell by 5 percent, or more than $345 billion, last year, Ms. Duke said, and that trend, which began in the last quarter of 2008, has continued. Bank lending contracted in April and May at an annualized rate of about 7.75 percent, excluding the effects of an accounting change that added a significant volume of loans to bank balance sheets as of March 31. “There really is no single step that can be taken to quickly unclog all lending markets,”

We must accept central banks’ limitations, says Fed’s Plosser – Philadelphia Federal Reserve president warns mistaken view of central banks as omnipotent risks damaging their credibility  Governments and the public, financial markets especially, have come to expect far too much from monetary policy, Charles Plosser, the president of the Philadelphia Federal Reserve, has warned."Everybody seems to think that if the Fed just prints more money and keeps interest rates low, then everything will be fine. That's wrong," he said. "The public has come to believe that central banks can solve almost any economic problem. This is unfortunate. It has led to expectations that central banks can accomplish things that they cannot do - things that they will fail trying to do."

BIS Blasts Fed's ZIRP Policy, Warns About Negative Side Effects From Extended Low Interest Rates - Well, at least Ben Bernanke will never be able to conduct sworn testimony claiming nobody warned him about the adverse side-effects of ZIRP. As part of its 80th annual report, the BIS has dedicated an entire chapter to diagnosing Ben Bernanke's terminal Keynesianism, entitled: "Low interest rates: do the risks outweigh the rewards?" The openly negative, and borderline critical narrative, coming from the central banks' central bank, adds yet more fuel to the rumor that there is an open schism developing between the BIS and the Fed, with the IMF's increasingly fiat-y SDR likely to suffer as a result. Whether the BIS is planning the creation of some non-fiat currency, as some have speculated, is unknown at this point.

RBS Tells Clients To Prepare For 'Monster' Money-Printing By The Federal Reserve -- As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.  Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.  The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

NY Fed Tweaks Agency MBS Program - Starting this week, the New York Fed “will begin conducting a limited amount of agency mortgage-backed security (MBS) coupon swap operations in order to facilitate the timely settlement of the Federal Reserve’s agency MBS purchases,” the bank said in a statement.The Fed owns $1.25 trillion in agency mortgage-backed securities, which it bought as part of a now-ended effort to lower borrowing rates, aid the housing market, and help the economy move out of recession. The buying ended in March.The New York Fed announcement doesn’t change the ultimate aim of mortgage buying program. It is instead a bid to deal with supply issues that are in part the result of falling mortgage rates. Currently, about $17 billion in securities bought in the program are as yet undelivered, and the swap arrangement is supposed to help the Fed work through this backlog.The bank said it would “swap unsettled Fannie Mae 30-year 5.5% coupon securities,” which have been in high demand, “for other agency MBS that are more readily available for settlement.”

The Fed Has Lost It; Publishes Essay Bashing Bloggers, Tells General Public To Broadly Ignore Those Without An Econ PhD - Some Fed economist (with a hard-earned Ph.D mind you) named Kartik Athreya (who lasted at Citigroup as an associate Vice President for a whopping 7 months before getting sacked in 1998 only to find solace for his expiring unemployment benefits in the public sector) has written the most idiotic "research" piece to come out of the Federal Reserve since 1913, and the Fed has written a lot of idiotic research since then - after all you don't destroy 98% of the dollar's purchasing power in 97 years with non-idiotic research. But this just takes the cake. In "Economics is Hard. Don’t Let Bloggers Tell You Otherwise" Kartik says: "I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public."

Time to shut down the US Federal Reserve? – By Ambrose Evans-Pritchard - Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order. Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences). However, Dr Athreya’s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.

Ambrose Evans-Pritchard Unloads Both Barrels at the Fed - Ambrose Evans-Pritchard always has something interesting to say about economic policy. Some observers have called him sensational, but he often is spot on in his analysis of U.S. monetary policy. His latest piece doesn't disappoint. It is a reply to Kartik Athreya's now infamous essay that tells readers to ignore economic commentators on matters of monetary policy and only listen to the high priests of the Federal Reserve System. What is really great about this reply is that it summarizes many of my own views on the evolution of U.S. monetary policy over the last 10 years: monetary policy was too loose in the first half of the decade and has been effectively too tight in the latter half. It also does a good job highlighting how the Fed's inordinate focus on stabilizing credit markets has come out the expense of stabilizing aggregate demand. Here is Evans-Pritchard: Dr Athreya’s assertions cannot be allowed to pass... Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

Ouch! - Maxine Udall - Still traveling (and catching up on reading), but had to post the following from the Ambrose Evans-Pritchard, in response to poor (at best misguided, at worst brain-washed, now beleaguered) Richmond Va. Federal Reserve Economist, Kartik Athreya (link to paper here).You can get a sense of it here, here, here and (I especially like this comment by Rajiv Sethi) here. Evans-Pritchard is harsher on the profession than I would be. We may not bring much to the table, but at least economists have some sense of the potential value of efficient production and allocation. Recognizing the importance of a budget constraint is also not a bad place to start from in examining both human behavior, the aggregate behavior of markets and economic actors within them, and the welfare and wealth of nations. Athreya's position is not that much different from the profession's own (implicit) attitudes about whose voice should count in economic policy (at least up until the recent financial sector problems). His specific critique of Elizabeth Warren as a voice that should be ignored seems remarkably similar to voices that urged that Brooksley Born be stopped from regulating derivatives in the late 1990s.

The Fed Criticises Bloggers? - Over the last couple of days, in reviewing the news, I have noted that there is an increasing sense of panic and chaos in the world economy. Today, it seemed particularly bad. I typically look at the Telegraph, the Times, the New York Times, the Guardian, and Reddit as a daily routine, and occasionally the Economist. I am focusing on this paper by Athreya, as it contrasts nicely with the headlines. The Masters of the Universe, sitting in their ivory towers are clearly not in control. Instead, they pull their levers, enact their policy, and it all comes to nothing but more chaos. They propped up the financial system, supporting their selected 'too big to fail' banks, they printed money and poured it into the markets via their favoured financial institutions, and they aimed to drop interest rates to the floor. Despite this, we still see a world economy racked with volatility and close to panic.

Official warns of asset risk for Fed - The Federal Reserve would risk its credibility if it bought more assets to stimulate the economy, board member Kevin Warsh said in a speech on Monday.Buying more assets – to add to the $1,600bn of Treasury and mortgage-backed bonds it has bought since 2008 – is one measure the Fed could take if it thought the economic recovery had stalled. Mr Warsh’s comments suggest he would oppose such a move. “I would want to be convinced that the incremental macroeconomic benefits [of buying more assets] outweighed any costs owing to erosion of market functioning, perceptions of monetising indebtedness, crowding-out of private buyers or loss of central bank credibility,” said Mr Warsh. Until recently the Fed’s focus was on how and when to sell its bond portfolio, but Europe’s fiscal crisis, soft data on the housing and labour markets, and political opposition to further fiscal stimulus have prompted questions about what it could do if the economic situation declined

Whose Expectations - Expectations show up in almost all modern business cycle models. However, the question is “whose expectations” Via Calculated Risk Fed Governor Walsh muses: In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny. I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning...or loss of central bank credibility. The Fed’s institutional credibility is its most valuable asset, far more consequential to macroeconomic performance than its holdings of long-term Treasury securities or agency securities. That credibility could be meaningfully undermined if we were to take actions that were unlikely to yield clear and significant benefits.  The governor is clearly saying that he is worried about expectations of loose monetary policy. If it appears that the Fed is simply moving to alleviate short term concerns without paying attention to its long term mandate then it will loose its grip on the markets. There is also no doubt that expectations of loose monetary policy exists

The Conventional Superstition - Krugman - Calculated Risk points us to a speech by Kevin Warsh that strikes me as almost the perfect illustration of the predicament we’re in, in which policy is paralyzed by fear of invisible bond vigilantes. Warsh isn’t an especially bad example — but that’s the point: this is what Serious People sound like these days.The bottom line of Warsh’s speech — although expressed indirectly — is that it’s time for fiscal austerity, even though the economy remains deeply depressed; and no, the Fed can’t offset the effects of fiscal contraction with more quantitative easing. In short, the responsible thing is just to accept 10 percent unemployment.  And why is this the responsible thing? On fiscal policy, market forces are often more certain than promised fiscal spending multipliers. Um, but those market forces are currently willing to lend money to the US government at an interest rate of 3.05 percent. But never mind: unanticipated, nonlinear events can happen So it’s these “unanticipated, nonlinear events” that are “more certain” than the direct effects of fiscal policy? I’m confused

ECRI Weekly Leading Index Growth Lowest In 13 Months -A measure of future economic growth fell slightly in the latest week, while its annualized growth rate continued to decline, indicating the economy is about to slow, a research group said on Friday. The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 122.2 in the week ended June 25 from 122.9 the week before. The index’s annualized growth rate fell to minus 7.7 percent from minus 6.9 percent the prior week. That was its lowest level since May 22, 2009 when it stood at minus 8.7 percent.-ECRI websiteThe signs that a double dip is coming seem to be mounting. The ECRI weekly leading index is certainly as close to showing double dip as it can get. In my view, monetary or fiscal stimulus cannot stop this from happening given the lag with which policy works.

Keeping an eye on Europe - Atlanta Fed's macroblog - In June, a third of the economists in the Blue Chip panel of economic forecasters indicated that they had lowered their growth forecast over the next 18 months as a consequence of Europe's debt crisis. When pushed a little further, 31 percent said that weaker exports would be the channel through which this problem would hinder growth, while 69 percent thought that "tighter financial conditions" would be the channel through which debt problems in Europe could hit U.S. shores.Tighter financial conditions also were mentioned by the Federal Open Market Committee in its last statement, where the committee noted, "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad." In his speech today, Atlanta Fed President Dennis Lockhart explicitly expressed his concern that Europe's "continuing and possibly escalating financial market pressures will be transmitted through interconnected banking and capital markets to our economy."

SIFMA Systemic Risk Information Study - In anticipation of legislation establishing a systemic risk regulatory regime for large, interconnected financial institutions, the Securities Industry and Financial Markets Association (SIFMA) undertook a study to identify the potential types of industry risk information and capabilities a systemic risk regulator would likely require from industry participants. SIFMA engaged Deloitte & Touche LLP to assist with the information gathering and analysis. This study seeks to promote greater awareness and understanding of potential systemic risk information requirements. It focuses on the types of information a systemic risk regulator, irrespective of its structure, may require to monitor systemic risk, and how financial institutions and regulators currently capture, report, and analyze the information. Download the report to learn more. SIFMA Systemic Risk Information Study

Fed's Lockhart: Sustainable final demand not yet supporting growth - From Atlanta Fed President Dennis Lockhart: Recovery and the Challenge of Uncertainty The central question is whether the recovery that is now well under way will be sustained or will falter, resulting in a slowdown or even a second recession—the so-called double dip....Rising consumer activity surprised many in the first quarter of the year, but in April and May consumers seemed to put away their wallets to a certain extent. ... Business spending on equipment and software has been strong in the first half of the year. ... Manufacturing production is up about 8 percent over the past year through May. ...Here's a key point about these contributors to recovery—each could be transitory. The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth.

Dallas Fed: Risk of Slower Growth Ahead - The Dallas Fed, like the rest of us, is having trouble figuring out where future growth in GDP is going to come from. What many people don't realize is how much of recent growth has been driven by inventory correction, and that this is coming to an end: Risk of Slower Growth Ahead, FRB Dallas: The U.S. economic recovery appears to have been solid through second quarter 2010. However, with fiscal stimulus measures and the inventory correction nearing an end, there are reasons to be concerned that growth will slow in the second half of the year. ...The composition of growth so far in this recovery is a source of concern. During the recession, real GDP fell below final sales as firms sought to reduce bloated inventories. Once final sales began to recover, firms sought to moderate the pace of the inventory drawdown—they began to close the gap between production and sales. The recovery up to now, which began in third quarter 2009, has been unusual in how much it has relied on this production catch-up effect.

Cleveland Fed: It's Not Looking Good - The Cleveland Fed has launched a new website that will provide on a monthly basis estimates of expected inflation over various horizons. These estimates are supposed to be cleaner than those coming from Treasury inflation-protected securities (TIPS) which are contaminated by risk premia. The model that is the basis for these estimates can also be used to derive real interest rates and an inflation risk premium. This is a great addition to the universe of online economic data and the Cleveland Fed should be commended for providing it to the public. The numbers for June 2010 are not pretty. Here is the lead paragraph: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.84 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. It gets worse. This 1.84% is down from the previous month as is all yearly horizons of inflation expectations.. This figure shows the expected inflation over maturities ranging from 1 to 30 years:

‘Double dip’ and deflation fears fuel another plunge in Treasury bond yields - The economic pessimists are winning the argument in the U.S. Treasury bond market. Yields on Treasury issues have fallen across the board  to their lowest levels in more than a year as some investors continue to seek a haven. Traders say some investors are taking their cue from budget-cutting promises made over the weekend by the world’s wealthiest nations at the G-20 group summit. The biggest countries committed to slashing their budget deficits in half by 2013.The more the industrialized nations talk about reducing spending, the greater the risk that the global economy tilts back toward recession and deflation. At least, that’s how new bond buyers see it, said Tom Di Galoma, head of  U.S. rates trading at Guggenheim Partners in New York. “This is carryover from the ‘double-dip,’ deflation outlook” that fueled heavy buying of Treasuries last week, Di Galoma said. Economist Paul Krugman has been leading the pack of analysts warning about the risk of sinking into a new morass if governments and central banks pull back on policies to boost the economy. “We are now, I fear, in the early stages of a third depression,” Krugman wrote in the New York Times over the weekend.

On the Treasury “Bubble” - I (Invictus) posted here about a debate in which David Rosenberg squared off with Jim Grant about whether “bonds are for losers” or if, as Dave likes to quip, “bonds have more fun.”  At the time of the debate the 10-year was hovering around 4%.  At the time of my post it was about 3.4%, and is currently around 3.20%, give or take.Among the bond-bullish arguments Rosie makes is an analysis of the $68 trillion household (and nonprofit) balance sheet and what, exactly, households (and nonprofits) own (all this data is captured in Table B.100 of the Fed’s Flow of Funds report, released last week).Here is a pie chart showing the relative insignificance of treasuries and munis on the household balance sheet:

Record Low Interest Rates Signal Deflation, Depression – Barrons - Investors have contracted to lend to the U.S. government at returns so low as to be unimaginable just a few months ago. For instance, it was only three months ago that it was confidently asserted those returns had nowhere to go but up. Mike Lewis of Free Market Inc. bristles Fed Chairman Ben Bernanke's "prolonged ultra-low rate strategy" will prove as disastrous as when his predecessor, Alan Greenspan tried it, which will result in a sharper-than-expected tightening to make amends.Still, even those who see the contractionary forces restraining the economy look for Treasury note yield to return to the middle of their recent road. Dave Resler of Nomura saw a "not insignificant" risk of deflation saw the 10-year Treasury moving back to the mid-3% range over the next 12 months. So did Paul Kasriel of Northern Trust, who made powerful points about weak money and credit growth and fiscal policy makers wanting to return to the good old days of the 1930s.

Destined to Fail – Magical Thinking at the G20 - The G20 meeting has revealed two important things that tell us something about our combined economic future. First we learned that the US lost the battle to try and get everyone back on the Keynesian print-a-thon bandwagon and this tells us something about US leadership in these troubled times. Once-upon-a-time the US could dictate such things and those days are apparently over which deserves to be noted. I am a supporter of austerity as the least worse of two paths (the other being printing) which I will outline below, but I wanted to be sure to give the global rejection of the US position on stimulus the proper attention it merits. Here’s the relevant information:

Is Obama Losing The Economic Argument? - Barack Obama was in effect stretchered off the field at the G20, having failed to persuade fellow world leaders to sign up to a further round of economic stimulus. Instead, the final communiqué was an austere affair, promising efforts to curb government spending, reduce deficits and start reducing the mountains of debt. In the World Cup of Economics, it was Austerity 4, Stimulus 1. And in the US? While the President has been admonishing others on the international stage, he appears also in danger of losing the same arguments at home. Congress has three times failed to pass a new mini-stimulus aimed at extending benefits for the long-term unemployed and, across the country, states are slashing spending in the teeth of a vicious budgetary crisis. The fear of sky-high deficits and the costs of servicing huge national debts have breathed life into an austerity movement in a country that is already instinctively sceptical of government spending.

Europe’s Fiscal Dystopia: The “New Austerity” Road to Neoserfdom - Europe is committing fiscal suicide – and had little trouble finding allies at this weekend's G-20 meetings The United States is playing an ambiguous role. The Obama Administration is all for slashing Social Security and pensions, euphemized as "balancing the budget." Wall Street is demanding "realistic" write-downs of state and local pensions in keeping with the "ability to pay" (that is, to pay without taxing real estate, finance or the upper income brackets). These local pensions have been left unfunded so that communities can cut real estate taxes, enabling site-rental values to be pledged to the banks of interest. Without a debt write-down (by mortgage bankers or bondholders), there is no way that any mathematical model can come up with a means of paying these pensions. To enable workers to live "freely" after their working days are over would require either (1) that bondholders not be paid ("unthinkable") or (2) that property taxes be raised, forcing even more homes into negative equity and leading to even more walkaways and bank losses on their junk mortgages. Given the fact that the banks are writing national economic policy these days, it doesn't look good for people expecting a leisure society to materialize any time soon.

The Third Depression  - Krugman - Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.  And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

The Third Depression? - That’s what Paul Krugman says is on the horizon.  In a sobering article in Sunday’s NY Times Mr. Krugman says policy errors are leading us right off the cliff: “We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense. Regular readers know my position.  I never thought the secular bear ended or that the credit crisis was over.  This has become abundantly clear as unemployment has remained stubbornly high and the credit crisis evolves into a full blown sovereign debt crisis.  The recent evolution of the Greek crisis and scare mongering of certain market participants is almost certainly walking us off the edge of the cliff.  Policymakers have misdiagnosed this crisis from the very beginning so it’s not surprising to see them continue down this same path.

Economics Is Hard For Those Who Got Everything Wrong - Well, this is cheery news. Paul Krugman fears we’re headed towards another Long Depression. The European and other G-20 leaders are collectively herding themselves like lemmings towards the cliffs of insanity by promising to cut spending and reduce demand before their economies have recovered from a serious global recession. For some unexplained reason, the White House seemed to downplay their concerns over this lemming-like behavior. It’s not clear what harm there is in loudly proclaiming they’re making a horrendous mistake and they’ll regret it. Why coddle this folly? But instead of reemphasizing these points that our media too often forgets, he recalled OMB Orszag’s trivial cuts on non-discretionary spending and gave a nod to the deficit reduction (cat food) commission, gratuitously adding that we have to solve "the entitlements problems" in Medicare/Medicaid and Social Security. As Dean Baker and others have repeatedly shown, Social Security is in surplus and not a deficit issue, and lumping it in with the health cost issue is an egregious misstatement of whatever long-run deficit issues we face.

David Frum Poses the Question; Here’s the Answer - Let’s be clear: The “free market solution”, to use Frum’s terminology, is basically deflation. If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. In the absence of any countervailing fiscal stimulus, common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies — that is, unless creditors are generously willing to renegotiate existing debt contracts en masse. I suspect that some of Frum’s fellow conservatives actually think this sort “cleansing” is good.

Inflation or Deflation, why settle for just one? - If you are trying to decide whether to fret about inflation or deflation, don’t bother: you may just get both. Yes, in the spirit of these austere times, it is a two for one offer; deflation comes first, followed by an almighty inflation after central banks press the “go nuclear” button on the quantitative easing machine. It seems clear that, at least in the near term, the stars are aligned for deflation. Rather than lancing a massive debt bubble, policy-makers have added to it and the intense pressure to clean balance sheets has spread from corporations and households to nations. If neither banks nor governments are willing and able to stoke demand then prices will fall, and as we have seen, absent an outside shock this is a cycle which feeds on itself. Of course in a system in which the government can create money at will, deflation should theoretically be an easy problem to solve; central banks can, in Chairman Bernanke’s famous image, simply drop money from helicopters. That, of course, is a bit like saying that anyone can rid their house of termites, as long as they have enough gasoline and matches; it will work but there may be considerable collateral damage.

Daniel Gross: Why We Don't Need to Fear Deflation - What's so bad about deflation? After all, it's a pleasant surprise when prices of many items fall. Generations of Econ 101 students and central banks have been schooled to think that inflation is the great bogeyman, since it erodes the value of savings. And for much of our lifetimes, moderate inflation has been the norm. Well, it turns out there's good deflation and bad deflation.Bad deflation is the kind we had in the Great Depression. "The last time we really had significant deflation in the U.S. was in the 1930s," notes Michael Bordo, professor of economics at Rutgers University. "Between 1929 and 1933, prices fell on average by 15 percent." This deflation was driven by a decline in output, demand, and credit—too little money and wages chasing too many goods and workers. The Depression-era cratering of wages and prices was disastrous because it rendered companies and consumers less able to pay their debts.

How Not To Re-Inflate A Bubble - How can someone be brilliant enough to teach themselves calculus and at the same time be foolish enough to continue pumping capital into a ripped bubble, trying to re-inflate it? This is beyond comprehension. It defies logic, especially when the capital/"air" going in is borrowed money and puts the value of our currency (or what is left of it) in harms way. A patch for the bubble would have been locking subprime mortgage rates at or below their existing rate. About 93% of subprime loans made from 2004-2006 had exploding interest rates. If this was done in 2007(or sooner) it would have reduced the amount of capital needed. It would have allowed renters who bought to remain homeowners, not all, but many. It would have reduced the number of responsible innocent people who got hit by the collateral damage.

Roubini on CNBC's The Kudlow Report: Is the Recession Heading for a Double-Dip? CNBC: The Kudlow Report -- Crisis Economics: Discussing whether the recession is headed for a double-dip, with Nouriel Roubini, Roubini Global Economics chairman.  (Click for Video [6:48])

Double Dip Recession or Not? - CNBC video - Debating whether the double-dips trade is over-baked, with John Hussman, The Hussman Strategic Total Return and Michael Darda, MKM Partners.

2nd Half: Slowdown or Double-Dip? - No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010. For the unemployed and marginally employed, and for many other Americans suffering with too much debt or stagnant real incomes, there is little difference between slower growth and a double-dip recession. What matters to them is jobs and income growth. In both cases (slowdown or double-dip), the unemployment rate will probably increase and wages will be under pressure. It is just a matter of degrees. The arguments for a slowdown and double-dip recession are basically the same: less stimulus spending, state and local government cutbacks, more household saving impacting consumption, another downturn in housing, and a slowdown and financial issues in Europe and a slowdown in China. It is only a question of magnitude of the impact.

Slouching Toward a Double Dip or a Lousy Recovery at Best - Robert Reich - The economy is still in the gravitational pull of the Great Recession and all the booster rockets for getting us beyond it are failing. The odds of a double dip are increasing.In June the nation added fewer jobs than necessary merely to keep up with population growth (private hiring rose by 83,000 after adding only 33,000 jobs in May). The typical workweek declined. Average earnings dropped. Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year.  So what are we doing about it? Less than nothing. The states are running an anti-stimulus program (raising taxes, cutting services, laying off teachers, firefighters, police and other employees) that’s now bigger than the federal stimulus program. That federal stimulus is 75 percent gone anyway. And the House and Senate refuse to pass another one. The second booster rocket – the Fed’s rock-bottom short-term interest rates – are having almost no effect.

Robert Shiller Says the Depression Scare is Back (video) Cutting government spending, raising taxes, raising interest rates, and hoping the rest of the world does the same as some have called for is not the answer to the threat of a depression. If people don't begin to see unemployment falling soon, or some strong signal that employment markets will improve soon, pessimism is going to build -- the optimism some people may have felt is fading and you can feel it building now, and that's one of Shiller's worries. Cutting monetary and fiscal stimulus at a time when people are becoming more pessimistic about the economy's prospects will make things worse, not better. As I've said before, and will continue saying so long as these misguided ideas persist, if anything, monetary and fiscal policy should be more aggressive right now.

Hussman - Recession Warning… Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

Mauldin: The Risk of Recession - I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession. This was not based on data, but rather on research which shows that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama’s head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion. If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession – at least the way I see it

Recovery Faces Tough Road, Double Dip or Not - Now, especially after Tuesday’s alarming 9.8-point drop in the Conference Board’s index of U.S. consumer confidence, the words “double dip” stand for a far less amusing idea: a return to recession. While that’s not a consensus forecast among economists, both the data and the gloom pervading financial markets suggest the current recovery will be a long, painful process.As some observers pointed out during the recession of 2008-2009, this recovery wouldn’t match the fast rebound that followed the past two recessions. Whereas those involved a traditional business cycle reversal, this one was provoked by a financial crisis and so would be dogged by the spending restraint with which consumers, businesses and governments pared down debt.

The End of the Nominal Recovery – Monetary and fiscal stimulus can halt a deflation spiral, but central banks and governments can’t print purchasing power. In other words, one year after the official end of the recession, the economy shows no signs of booming. Emergency Keynesian policy measures taken to keep the debt crisis from devolving into a 1930s deflationary spiral show signs of losing effectiveness, and the self reinforcing economic growth story is giving way to talk of a “double dip” recession, as trouble in Europe is expected to slow the US economy by the end of the year. Confidence in the resilience of the recovery is waning. The last time the economy struggled under the weight of public debt taken on to stimulate demand after a private-sector credit collapse was during the Great Depression. Is the nation’s debt-heavy balance sheet able to finance ongoing stimulus spending without triggering a US debt and currency crisis? The question is once again divided along ideological lines. It’s 1937 all over again as Democrats and Republicans battled in the Senate last week over how to pay the $141 billion cost of new legislation that extends unemployment benefits to more than two million who remain unemployed a year after the recession ended.

PIMCO - Outlook - Alphabet Soup, Bill Gross - Global financial market returns stand at the threshold of mediocrity. With bonds priced not for recession but near depression, most major global bond indices now yield less than 3%, surely a forerunner of returns to come. Yet, what has seemed obvious to those of us collectively at PIMCO for several years now is less than standard fare in the trading rooms of institutional money managers. While the phrase “New Normal” has been welcomed into the lexicon of reporters and commentators alike, the willingness of investors to accept its realities is fog-ridden and whispered, or perhaps softly whistled, much like midnight passersby at a graveyard. Our “New Normal” two-word duality seems to resonate more on the “normal” than the “new” to economists whose last names aren’t Roubini, Reinhart, Rogoff, or Rosenberg. It’s as if “R” has been eliminated from the financial alphabet, and “new” from investors’ dictionaries worldwide.

Mobius sees 80-percent chance of new crisis; derivatives pose threat -- Templeton Asset Management's Mark Mobius said he sees an 80 percent change of a fresh financial crisis. Two big risks are that central banks could take liquidity away and that the regulatory system won't be able to cope with the US$600 trillion of outstanding derivatives. “The regulatory system can't handle this volume of derivatives,” Mobius told reporters in Paris Friday

That 1937 Feeling - There are suddenly a lot of portents of economic doom. Annie Lowery notes that consumer confidence fell through the floor this month. Meanwhile, Calculated Risk predicts a slowdown. This again raises the question of why policymakers are contributing to the slowdown by pulling back on economic stimulus. David Leonhardt doesn't break a ton of new conceptual ground in his column today, but he makes the case with perfect clarity. The advanced world is making a very risky bet that the private sector can pull the economy into recovery in the face of contractionary public policies. It's really worth reading Leonhardt's entire column. This section is especially good, explaining why various advanced countries don't act. There's a strong chance the United States would be acting were it not for the unusual rules of the Senate which allow the minority party to block action.

The Krugman question - Nobel laureate Paul Krugman is warning — perhaps rightly — that the U.S. has entered an economic depression. His policy prescription is misguided, but where are the conservative solutions? What if Paul Krugman is right? Or at least in the neighborhood of right? The New York Times columnist and Nobel laureate economist has been warning for months: The economy is not recovering. Through the spring of 2010, Krugman’s warnings seemed to be refuted by signs of growth. But in recent weeks, that expansion has faltered. Private-sector job creation is sputtering. Yesterday's market drop was especially alarming. Back of it all is the huge anchor that continues to weigh down the economy: the crushing debt load on homeowners. Here's a simple way to think about that load. About 44 million U.S. households carry a mortgage. For about 11 million of those, their mortgage exceeds the (current) value of their home. More than 8 million of the 11 million are still making good on their loan payments. But what happens if more people just quit paying?

23 Doomsayers Who Say We're Heading Toward Depression In 2011 - Could the world economy be headed for a depression in 2011? As inconceivable as that may seem to a lot of people, the truth is that top economists and governmental authorities all over the globe say that the economic warning signs are there and that we need to start paying attention to them.  The two primary ingredients for a depression are debt and fear, and the reality is that we have both of them in abundance in the financial world today. Meet The New Doomsayers > In response to the global financial meltdown of 2007 and 2008, governments around the world spent unprecedented amounts of money and got into a ton of debt.  All of that spending did help bail out the global banking system, but now that an increasing number of governments around the world are in need of bailouts themselves, what is going to happen?  We have already seen the fear that is generated when one small little nation like Greece even hints at defaulting.  When it becomes apparent that quite a few governments around the globe cannot handle their debt burdens, what kind of shockwave is that going to send through financial markets? The truth is that we are facing the greatest sovereign debt crisis in modern history.  There is no way out of this financial mess that does not include a significant amount of economic pain.

Rich countries 'are out of ammunition' - Rich western countries had fired all the fiscal bullets at their disposal and there was nothing left in the kitty to salvage their economies if they sank into recession again as feared, former Development Bank of Southern Africa CEO Ian Goldin warned yesterday.“There is absolutely nothing left to fire,” Mr Goldin, director of Oxford University’s James Martin 21st Century School, told a gathering at the Fortune-Time-CNN Global Forum. There was a high risk of a double- dip recession, made all the more dangerous as most governments did not have any more ammunition to deal with it, he said. “Markets are very fickle and if they turn and spreads widen much further we could get into a very nasty downward spiral,” Mr Goldin said.

U.N. report:: U.S. Dollar should be replaced as International currency -- The dollar is an unreliable international currency and should be replaced by a more stable system, the United Nations Department of Economic and Social Affairs said in a report released Tuesday. The use of the dollar for international trade came under increasing scrutiny when the U.S. economy fell into recession. "The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the report said. Many countries, in Asia in particular, have been building up massive dollar reserves. As a result, those countries' currencies have become undervalued, decreasing their ability to import goods from abroad. The World Economic and Social Survey 2010 is supporting a proposal long advocated by the International Monetary Fund to create a standardized international system for liquidity transfer.

A new global reserve? - EVERY three months the IMF publishes data on the composition of official foreign exchange reserves. There are two things predictable about this release. One, the level of reserves continues to rise and two, renewed speculation about the role of the dollar as a global reserve currency.  This time round was no different. Total worldwide reserves stood at $8.3 trillion in the first quarter of 2010, up from $7.2 trillion during the same period last year. As a share of allocated reserves, the dollar's weight has fallen from 73% in 2001 to 61%. Even China, which makes up the bulk of the $3.7 trillion unallocated reserves, is thought to be diversifying away from the dollar.  But adding weight to the numbers are two reports—one from the Asian Development Bank and the other from the UN—calling for a new global reserve system. Both reports correctly point out that as a store of value, the dollar is too volatile. The dollar-dominated regime probably worsened the crisis due to a liquidity shortage, before the Fed opened swap lines with other banks. Rising deficits and slow growth in America are also making central bankers weary of holding additional US debt.  These are all valid points, but I think they overlook an important aspect of a reserve currency—ease of transaction.

IMF chief says would consider yuan for SDR basket (Reuters) - The head of the IMF said on Monday he would like to consider putting the Chinese yuan into the basket of currencies that make up the Fund's Special Drawing Rights "the sooner the better", but its value first needed to be freely determined by the market.Dominique Strauss-Kahn told reporters in a news conference that he believed there would be more pressure to include yuan, also known as the renminbi, among SDR currencies as China's economic clout grows. "This question has to be considered. I think it will be difficult to include the renminbi before the renminbi really has a market price and is in one way or the other a floating currency. But but the sooner, the better," he said.

A special report on debt: In a hole | The Economist - Stagnation, default or inflation await. The only way out is growth. THERE is an old joke about a stranger who asks a local for directions and gets the cheerful reply: “If I wanted to go there, I wouldn’t start from here.” That advice sums up the dilemma the developed countries face in dealing with their debt. They have accumulated a mountain of it at every level, from the personal to the corporate and the sovereign. As this special report has shown, this was encouraged by a legal system that sheltered debtors, a corporate and financial sector that used debt to boost its returns and a cultural change that made it more respectable

IMF tells US to tighten fiscal policy - The US will have much less room to grow than it believes and should therefore tighten fiscal policy more rapidly, according to estimates by the International Monetary Fund. In the first report of the G20’s “mutual assessment process”, by which leading economies are supposed to hold each other accountable for growth, the IMF suggests that the “advanced deficit countries” – dominated by the US – should tighten fiscal policy more rapidly than planned. “Major fiscal consolidation is needed in the years ahead in G20 economies with high public deficits and debt,” the IMF said. The fund said it believed permanent harm had been done to the US economy by the financial crisis and recession, which puts it at odds with the official US view. The IMF calculates that potential output in 2013 is nearly 2 percentage points below the US estimate, suggesting less room to grow quickly. Under that more pessimistic estimate, continued fiscal stimulus would be more likely to push up interest rates and crowd out private sector growth

Watchdog says US needs to tackle debt fast - FT -The US needs to find a way to increase revenues and reduce spending as quickly as possible, the congressional budget watchdog said on Wednesday, as it warned that the federal debt was on a path towards “unsustainable levels”. The bipartisan Congressional Budget Office said that spending on Social Security and mandatory healthcare entitlement programmes was set to increase from a combined 10 per cent of gross domestic product at present to 16 per cent of GDP in 2035 on the back of America’s ageing population. The CBO noted that this increase in spending would occur in spite of the passage of healthcare reform legislation this year, which is projected to shrink the deficit over the next two decades. Douglas Elmendorf, CBO director, said that, under a relatively optimistic scenario that involved little changes to current law, US debt would rise from 62 per cent of GDP this year to about 80 per cent of GDP in 2035. But under an alternative scenario, in which several changes were made by lawmakers, including the extension of tax cuts pushed through under George W. Bush, the former president, US debt could hit 185 per cent of GDP by 2035

It’s the debt, stupid – Bill Gross edition - On Monday when I wrote Why Stimulus Is No Panacea, I mentioned that I had written two posts in the past entitled "It’s the debt, stupid" (read them here and here). Just as the Clintonites of 1992 pointed to the economy as the Elephant in the political room, Team Obama should have been pointing to the debt in 2008 and beyond. But they haven’t done so. Instead, they have been pointing to ‘aggregate demand’ as if stimulus would somehow turn a solvency crisis of too much debt into a liquidity crisis of too little something.But they are wrong. 2008 was not 1992 and 2010 is not 1994. I know the Clintonites controlling economic policy in the Administration want to believe that. But it is simply a false analogy. Stimulus alone will not work because the U.S. private sector needs a debt restructuring. Too much consumption has been pulled forward and financed by too much debt. The result a horrible misallocation of productive investment to which we are now awakening. That necessarily means lower economic growth and lower income growth going forward – a situation which makes many debt contracts of yesteryear uneconomic. Debtors are simply too indebted to take on more.

Eroding a Mountain Range of Debt - At the moment, there is a great debate occurring between Keynesians such as Paul Krugman, who argue the government should run deficits to stimulate the economy, and the forces of fiscal austerity who argue the government needs to reduce its debt. In thinking about this, it seems like the key fact is the accounting identity that   -   Private Sector Balance + Government Balance + Foreign Balance = 0  --  Now, there are deep structural reasons why the US is running a current account deficit that cannot be changed soon (dependence on foreign oil, offshoring of labor-intensive work).  Developments in Europe are making it even more difficult for the US to run a current account surplus.  So the third term in the accounting identity pretty much has to be positive (foreigners are net lenders to the US).  If we want the private sector to deleverage, then the private sector balance should be positive.  That means the government balance must be negative (the government should be a net borrower).  This is the argument against government fiscal austerity, and it's quite compelling.

Getting Capitalists to Act Like Capitalists - There is a common argument against austerity and in favor of further fiscal stimulus going around resting on this equation: Net Private Sector Financial Position - Net Government Deficit = Current Accounts Surplus (ie, net exports) The idea is that, as a matter of arithmetic necessity, the balance sheet of the private sector must match that of the government sector, plus that of any external trade. Martin Wolf, among others, have used this as a case for further government stimulus. The private sector, the argument goes, is deleveraging as a matter of necessity after a severe shock. The export channel may be a useful boost for certain countries, but cannot be helpful on a global scale since the exports of one country necessarily match the imports of another. Additional government borrowing remains the only way to sustain a proper global recovery. Rob Paranteu, referenced by Steve Waldman, cautions us on this interpretation.

Betting That Cutting Spending Won’t Derail Recovery: The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome. In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.  Today, no wealthy country is an obvious candidate to be the world’s growth engine, and the simultaneous moves have the potential to unnerve consumers, businesses and investors,  “The world may be making a mistake, and it may turn out to make things worse rather than better,”

Taleb and Roubini on Government Intervention - While we were interviewing America's two most prominent doomsters a few weeks ago, Nassim "Black Swan" Taleb and Nouriel "housing crisis" Roubini, the two got into an argument. It was friendly enough -- they admire each other -- but vigorous, and it concerned the great economic debate of the moment: more government stimulus, or less?  We thought viewers would be interested in their take on the issue and so we edited a relevant segment of our interview for the web. Here it is: (Watch a larger version of the video.)

Flaky Debt Reduction - On the day when the Congressional Budget Office projected that the federal debt could reach 185 percent of Gross Domestic Product by 2035, consider a bill introduced by two Arizona lawmakers, Senator John McCain and Representative Jeff Flake.  Carrying on a nearly two-decades-old tradition, the two GOP legislators have introduced the “Debt Buy-Down Act,” which would let taxpayers designate up to 10 percent of their federal income tax liability for debt reduction. Congress would have to cut specific programs by the aggregate amount of designated taxes or accept an across-the-board spending reduction.  McCain and Flake say their goal is to rein in federal spending and reduce the national debt. But it is little more than “feel good” legislation that abdicates Congress’s fiscal responsibility. The bill effectively says, “We in Congress can’t control spending so we’ll let taxpayers force us to reduce the debt.” 

Deficit Reduction Or More Stimulus? - I have been asked a lot recently by Wall Street economists about where Washington fiscal policy is headed.  In short, I don't expect much change.  We'll stay stuck at around $1 trillion of annual deficits in FY10, FY11, and probably FY12.  I say that because Congress has so far been unable to pass the extenders bill without fully paying for it.  Although I expect unemployment insurance, another federal contribution to state Medicaid, and expiring tax provisions to pass eventually, it has taken far longer than I expected.  Similarly, large deficit reduction is off the table as evidenced by Congress' failure to pass a budget resolution with the reconciliation instructions necessary to take a bite out of the deficit.  If the Republicans take the House in November and gain 5 or 6 seats in the Senate, Congress will be even more polarized next year.  I see offsetting demands for spending cuts and tax cuts that leave the deficit essentially unchanged. 

Deficit Doves, the Gift that Keeps on Giving -Deficit doves are doing more harm than the hawks — here’s what they need to know. The deficit hawks are prevailing. The economy remains an economic and social disaster. Medicare has already been cut by the Democratic majority in the new health care bill. Social security is now under attack by the new bipartisan Congressional Commission on Fiscal Sustainability and Reform. Meanwhile, the media tries to present a balanced approach, pairing deficit hawks with deficit doves. But the deficit hawks aren’t the problem. They do the best they can with arguments that feature empty rhetoric supported by the underlying assumption that deficits are ‘bad.’ Actually, it’s the well-intentioned but misinformed deficit doves featured by the media that may be doing the most harm. They don’t understand actual monetary operations and reserve accounting, and therefore incorporate the same fundamentally incorrect assumptions as the deficit hawks.

FEDERAL DEFICIT - In Linda's post on the budget deficit in the comments it was claimed that the budget deficit was Obama's fault and a chart was cited that showed the deficit in someone's estimate of real dollars. The standard way of comparing deficits across time and across different countries is to show the deficit -- past and projected future -- as a share of GDP. There are good reasons for this standard practice, as it is the only valid way to make meaningful comparisons over long periods of time when the dollar values change so much. Using other approaches makes it too easy for readers to be mislead.

Obama Says US Deficit-Cutting Goals Match G-20 Targets (Bloomberg) -- President Barack Obama welcomed the deficit-cutting goal set by the Group of 20 nations even as he warned against acting too quickly to pull back on measures to stimulate economic growth. The G-20’s endorsement of cutting deficits by 2013 mirrors U.S. targets and takes into account the fiscal and economic needs of each nation, Obama said at a news conference.“We can’t all rush to the exits at the same time,” the president said of steps to curtail stimulus actions. “What we have to recognize is that the recovery is still fragile.”

Regulatory and credit policy: Procyclicality everywhere - The Economist- FISCAL austerity in a time of near recession is a bad idea when monetary policy is helpless as Brad DeLong has been pointing out for oh, several years now. Let’s broaden this debate about procyclicality beyond fiscal and monetary policy. As we saw during the crisis, both regulatory policy (forbearance) and credit policy (bail-outs and liquidity) can also be used for macroeconomic stimulus. How are they doing now: still stimulating? Unfortunately, no: they are showing symptoms of the same inchoate procyclicality as fiscal policy. The latest sign of this was the hasty decision by House and Senate negotiators to kill the Troubled Asset Relief Programme, effective immediately, to help pay for financial reform after Republican senators blocked the original $19 billion bank tax. As it was, TARP was already due to wind up in October. I don’t think we’ll need to bail anyone out anytime soon, and resolution authority in the financial-reform plan is supposed to make TARP unnecessary. But if what we’re seeing in Europe is any indication, it’s way too early to take the bail-out option off the table, and if there is a second leg to this crisis, the odds of getting something like TARP passed again in Congress are close to zero. It’s not a smart idea to throw a spare tire like this away when there’s no prospect of getting another.

Deficit – Fix It Week - Dylan Ratigan, MSNBC video

The Fed and the 1938 RecessionBartlett made a point in an e-mail: Fiscal tightening wasn’t the only mistake. The Fed prematurely tightened by doubling reserve requirements at banks. I’ve always thought its role in the 1937 debacle has tended to be overlooked by economic historians. One of these days we will see some unmistakable signs of inflation, and the Fed’s instinct will be to nip it in the bud. But I think we could use a bit of inflation to get us out of the current mess, which is essentially a problem of deflation. The trick, of course, will be to have a bit of inflation but not too much. Unfortunately, the Fed tends not to be able to make subtle distinctions between just enough inflation and too much.

Will the Fed Get the Memo? - I, for one, am happy that the Fed has begun taking heat over its unwillingness to act in the face of strong evidence pointing toward a double-dip recession. A few commentators are now pointing to the Fed’s erroneous policy action of increasing reserve requirements in 1937, which is quite refreshing, but unfortunately this error has already been made in our modern times — in October 2008, the Fed instituted a policy of paying interest on reserves. This has the exact same effect as increasing reserve requirements: it raises the demand for reserves, and significantly depresses velocity (V). This is, of course, self-evident from the ongoing inflated state of excess reserves, which has seen a recent rise. It is also evident in the recent fall in MZM. Just as well, market expectations of inflation are well under trend, and the interest rate on 10yr nominal bonds is 2.97. But one has to ask, will the Fed get the memo this time?

Poor, off-the-cuff Attempt -- I would suggest everyone read this Piece, though I don’t agree with it at all. The Solution to economic recovery lies not in flooding the Markets with Cash, but with actually putting people back to Work. I get static all the time for the simple demand that Someone provide a coherent outline for economic recovery. No one wants to put their Name and Reputation on the line with a definite list of objectives. The hidden rationale behind this lack of effort consists of a lack of belief by everyone that anything will make any economic difference. At this conjuncture I perceive that I must take the first Step, and be laughed at; the trick here being that economists must come up with alternate options to criticize myself. So here goes: 1) Let all Tax Cuts expire–go back to the Tax Codes of the mid-1990s....

Deficits are not the enemy of jobs - It is all too common for Washington’s economic debates to feature strongly held views with little underlying logic or evidence. The debate over whether the Obama administration should emphasise job growth or deficit reduction is only the most recent example. That’s particularly unfortunate because America’s economy badly needs two policies that critics say pull in opposite directions: more government support for jobs and a credible path toward fiscal sustainability. The good news is that the critics are wrong. In the current economic moment jobs and deficit reduction are friends, not enemies.  In normal times, deficit spending is like adding water to a glass that is already full. Public spending just displaces private. Even if deficit spending did add to the glass, the Fed would avoid the spill by jacking up interest rates. We’d be creating more debt for no good reason.  But when you have so many people out of work – so much extra capacity – the outcome is different.

Choose your own deficit - It's sexed up a Web site filled with white papers and charts with a game called "Stabilize the Debt," which allows you to make the sort of difficult choices necessary to bring the federal budget into balance, bringing some discipline and realism to a question too often marred by vague, high-polling platitudes.  If we're going to talk about debt and deficits -- and it seems that we are -- we may as well do it right. First, there's the difference between accumulated debt (how much our country owes) and deficits (how much we're spending compared with how much we're getting in tax revenue). People often use the terms interchangeably. They shouldn't.

Obama on faux deficit hawks: 'I'm calling their bluff'-- President Obama says it'll be put-up or shut-up time on cutting deficits soon enough. Obama said on Sunday that he would deliver serious deficit reduction proposals next year. And when he does, those politicians who talk tough on debt simply to score votes will have to show their hand, he said."When I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, because I'm calling their bluff," the president said at a press conference during the G-20 summit in Toronto.

Time to Grab the Third Rail: Address the Fiscal Problem by Social Security Reform -The big current economic question is what to do about budget deficits.   The Greek crisis has made sovereign debt a genuine concern even among advanced countries.  (I should say “especially among advanced countries,” because developing countries have stronger fiscal positions, in a historic reversal of roles.)   At this weekend’s G-20 Summit, Germany and the UK are defending strong fiscal austerity, with language that doesn’t even allow for the idea that short-term spending might be expansionary under severe recessionary conditions such as 2008-09.   American economists have no shortage of ideas for cutting the US budget deficit in the long run, in economically efficient ways.   (Among other steps, limit tax expenditures.)   There are two big obstacles.  First, political infeasibility:  All the proposals hurt somebody, and will therefore be politically opposed.   Second, the relatively weak economy:  Even though the recession is almost certainly over, the recovery is still in its early stages.  Raising taxes or cutting spending immediately might throw us back into recession.   But it can be done.   We did it in the 1990s.

America Speaks in LA – They Want Economic Recovery, No Social Security Cuts - The America Speaks meetings held in 19 cities across the country today, funded to the tune of $1 billion dollars by the Peter G. Peterson Foundation, were a study in how subtle messaging and deficit hyping can mold and shape opinions that move the public toward right-wing solutions about slashing social spending. America Speaks has the support of a number of Washington-based organizations, and they claim to represent a broad spectrum of ideological interests. But the main funder is Pete Peterson, who has waged a decades-long effort to cut Social Security, Medicare and Medicaid. And this emphasis was certainly reflected in the event todayDespite an insistence of neutrality, organizers of this series of town hall meetings allowed their agenda to show through, particularly in their presentation of options for how to deal with the nation’s fiscal future. But attendees in Los Angeles and around the country weren’t totally buying it in the first half of the meeting. (video)

Why austerity now? - Somebody must take a loss on the economy's bad loans – and bankers want the economy to take the loss, to "save the financial system." From the financial sector's vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be "made whole" to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation. This is not the familiar old 19th-century class war of industrial employers against labor, although that is part of what is happening. It is above all a war of the financial sector against the "real" economy: industry as well as labor.

A Pendulum Swing Toward Austerity - “The Road to Serfdom,” the critique of socialism written 65 years ago by ... Friedrich von Hayek, was recently No. 1 in nonfiction sales at  Many people, including the Fox News commentator Glenn Beck, have contended that growth of government power has, indeed, set us on such a road today. But the reality looks different. In many respects, the expansionary phase of big government is coming to an end, and quickly.  In the last few years, we have seen — for better or worse — huge financial bailouts, a $787 billion stimulus plan and legislation for near-universal health insurance coverage. But the policy mood in Washington is now much more modest: no second major stimulus is forthcoming and, in the environmental arena, a cap-and-trade system for greenhouse gas emissions is unlikely to move forward. The financial regulation bill will most likely pass, but it won’t fundamentally restructure the American economy. For instance, there is no longer talk of breaking up the big financial institutions, and Simon Johnson, the M.I.T. economist, has described the legislation as a failure.

Austerity: A healing pain? - Positive experiences with budget cuts are almost always associated with devaluations, which are off the table for euro area members. They're usually combined with structural reforms, but Ireland has already rid itself of much of the burdensome economic rules that held back its economy in earlier decades. Austerity can also boost growth by reducing interest rates, but this isn't helpful when markets shrug off the cost-cutting (as they have where Ireland is concerned) or when rates are already low (as they are in America and Britain)... it's far from clear that austerity can ultimately lead to growth in an environment where global demand remains weak and many countries are simultaneously making fiscal (or other economic) adjustments. Economists observed high debt levels and market panic and seemed to assume that austerity for every country with a big deficit was the right prescription. That may well prove to have been a big mistake.

American Austerity -Today's New York Times article on the Irish economy makes for depressing reading.  Despite swift moves for wage cuts and other austerity measures (backed by the unions, no less), the deficit is almost 15% of GDP, and the spread between Irish and German debt is about 300 basis points.  Unemployment is high, and long-term unemployment makes up a significant portion of the problem. Given all that, Kevin Drum asks In the case of Ireland, it's not clear if they had a lot of choice. They're a eurozone country, so they couldn't devalue their currency, and they're running monster deficits even with the cutbacks they've made. Bigger deficits might simply not have been possible for a country their size.Still, the results are pretty obviously horrific, and any country that can avoid Ireland's fate surely ought to. We certainly can, for example. So why do so many people want us to follow the Irish path instead?

Austerity: A Prisoner’s Dilemma? - Maybe not, but it’s worth a look. The basic idea is that, leaving aside prices (which are flat or falling out to the horizon), fiscal policy can be viewed as having three macroeconomic impacts: on domestic demand, external demand, and fiscal space itself. Austerity is negative on the first and second, but positive on the third. Putting all of this together, it would be a project to assess the extent to which PD dynamics play a role in austerity—whether, in other words, the world faces a problem of competitive austerity. You would have to factor in not only the income multipliers and trade coefficients, incorporating n-round effects, but also the difficult-to-quantify perceptions of the costs of depressed income and employment, as well as the risks of a fickle bond market. It’s at least an article, possibly a book (or a doctoral thesis in IPE). Has it all been done before? I remember similar analyses in which the cost of cooperation (stimulus) was a trade deficit, but not the risk of bond market distress. I don’t recall how formal they were.

To spend or not to spend - David Leonhardt is out with a great column on the spend-vs.-austerity debate (which Steve and Michael have also rung in on). Leonhardt's piece provides both historical context and intellectual honesty: there are reasons to think it's time to cut governmental spending and avoid future problems associated with high levels of sovereign debt, but there are also reasons to think that cutting back on fiscal stimulus right now is ill-timed since the recovery isn't strong and that such action could retrigger recession. Read that column and you'll walk away understanding that anyone who tells you that the answer is obvious in either direction is being either ideological or dumb.  But there is also a big difference between now and then. In the late Depression, policymakers cut back not just on fiscal stimulus, but also on monetary measures to prod along the economy.

The holy grail of high growth and low spending - In the ongoing debate over whether or not this is the right time for fiscal austerity, everybody seems to be able to agree on one thing: the holy grail is to be able to have your cake and eat it, by reducing deficits while at the same time accelerating economic growth. Germany’s finance minister, Wolfgang Schäuble, calls this “expansionary fiscal consolidation” — but is it a chimera, or does it actually exist? Mohamed El-Erian, for one, seems to think that such a thing does indeed exist, calling on industrialized economies “to adopt both fiscal adjustment and higher medium-term growth as twin policy goals”. And how exactly are they meant to do that? To begin to achieve both, countries must quickly implement what were once known in the emerging market lexicon as “second generation structural reforms”…Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind.

Invisible Friends -Krugman-  I’ve written before about the strange power of invisible bond vigilantesIt’s one thing to be intimidated by bond market vigilantes. It’s another to be intimidated by the fear that bond market vigilantes might show up one of these days, even though you’re currently able to sell long-term bonds at an interest rate of less than 3.5%. Since I wrote that post, by the way, the long-term interest rate has dropped to 3.12%. But even stranger, in a way, is the power of invisible bond market friends, who will reward you if you just scourge yourself hard enough. Consider this article in Reuters, which tells us that  A market backlash against countries seen to be dragging their feet on cutting debt and deficits has sparked budget cutbacks all over Europe as governments try to rein in spending. But the rewards to austerity remain, well, invisible. Ireland’s risk spreads are worse than Spain’s, even though Ireland wasted no time on self-flagellation while Spain hesitated. Market confidence in Greece has declined since the government accepted the IMF austerity plan.

Listening to Arsonists - DeLong : I had always thought that Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being.You don’t pick an arsonist to head the fire department.

Myths of Austerity -  Krugman - For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.  This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests ... on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.  Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.  What reason do we have to believe that any of this is true?

I'm Gonna Haul Out The Next Guy Who Calls Me "Crude" And Punch Him In The Kisser - Krugman - Brad DeLong deals with the substance of this Economist leader; despite complete lack of evidence, the Economist still believes in the confidence fairy. But notice one more thing: the Economist’s blithe declaration that Mr Krugman’s crude Keynesianism underplays the link between firms’ and households’ behaviour and their expectations of future tax and spending policy.  All through this debate, a recurring theme among anti-Keynesians has been that Keynesians like me or Brad are ignorant primitives who don’t know anything about modern macro. It’s really hard to see where that comes from, since I’ve done plenty of intertemporal optimizing in my time. Part of the problem seems to be that the people saying this are taken aback by what we’re saying because they don’t actually understand the implications of their own models. But anyway, for the record: I understand the importance of expectations perfectly well — well enough to know that taking such expectations into account makes the case for stimulus stronger, not weaker.

It’s The Economy, Stupid - Looking back at a wide array of progressive interest groups’ thinking in the winter of 2008-2009, I think history will show that essentially everyone put too little emphasis on a “do what it takes to fix the economy” strategy. Instead, groups working on climate and energy reform worked on climate and energy reform. Groups working on immigration reform worked on immigration reform. At best, groups worked on repackaging their existing agenda as a “jobs” agenda rather than genuinely reorienting. And of course there’s a reason for that. If you’re a professional advocate working on such-and-such an issue, you’re really in an institutional situation where you can’t say “eh, congress should put my issue aside and focus on jobs.” But the fact of the matter is that the failure to enact policies in February and March of 2009 that were sufficient to produce a reasonably robust recovery is dooming us all. You can’t make substantial progress on labor law or child poverty or immigration or anything else in this climate, and when the governing majority’s inability to deliver the economic bacon leads to big GOP wins in the midterms, the outlook for progressive causes will get even bleaker

The Expansionary Effects of Fiscal Consolidation - It may sound like a contradiction in terms, but the idea that fiscal consolidation--deficit/debt reduction--could be economically expansionary is very much in vogue. I explain where this idea came from and who is promoting it in my new Fiscal Times column. While I concede that under certain circumstances it is possible for fiscal consolidation to be expansionary, I don't believe those conditions exist in the U.S. today. Fiscal consolidation at this time is much more likely to be contractionary than expansionary.

Fiscal Consolidation: Could It Be Expansionary? - There has been an intense debate among economists for the past year over whether we should provide additional fiscal stimulus to keep growth on track, offset higher taxes and spending cuts at the state and local level, and perhaps prevent a double-dip recession, or begin the process of fiscal consolidation. Now it appears the debate is over. Further government stimulus is extremely unlikely and debate among economists is shifting to the question of whether deficit reduction will bring on a recession, as happened in 1937, or actually be expansionary. JPMorgan Chase estimates that the withdrawal of last year’s stimulus will subtract 1.25 percent from the annual real GDP growth rate over the next six quarters. Nevertheless, the need to begin fiscal consolidation appears to have reached virtually a consensus level among international economic agencies

Reduced Stimulus Equals Slower Growth - Wealthier countries are likely to reduce their emergency stimulus sharply in 2011 compared to this year, producing a 1.25 percentage point hit to global growth, according to forecasts by the Institute of International Finance.  The IIF, a Washington D.C. trade group of international banks said that globally the second quarter of 2010 will “probably be the high-water mark for growth over the next 18-24 months.” The group said that 2011 will be a year of “significant, synchronized fiscal tightening. This tightening will not be one-off. 2011 will be year one in an extended phase of fiscal tightening in mature economies.” In 2009 and 2010, stimulus spending in the Group of 20 industrialized countries amounted to about 2% of GDP, the group estimated. It didn’t give a specific forecast for stimulus spending in those countries in 2011.

The importance of getting specific on the deficitMichael Kinsley and Ross Douthat both make the point that simply letting current policies roll forward might reduce the deficit, but it's not easy and it's not necessarily best. I think everyone can agree on that. At any rate, the point isn't that CBO's report shows deficit reduction is easy. It shows it's possible, and gives us one way to get specific. If you don't want to do it by following current law, then you should get specific about the exact policies you'd like to see followed. These, for instance. But at some point, the conversation has to move from "we should do something about deficits" to "we should do this about deficits." The CBO report, at the least, gave us one picture of what "this" could look like. Here are some other guidelines.But until we get specific, it's very hard to say whether the people claiming to be deficit hawks are interested in reducing the debt or interested in picking up a politically resonant argument against further stimulus spending (which isn't an important contributor to the debt anyway). Getting specific helps us figure out exactly which conversation we're having.

Deficit reduction should take a back seat to job creation -"The economy remains fragile and is performing well below its potential," EPI Research and Policy Director John Irons said during a June 30, 2010 testimony before the National Commission on Fiscal Responsibility and Reform. "Major deficit reduction should not be on the table until the recovery is firmly on track, that is, until unemployment has dropped significantly and is on a downward trajectory. To be concrete, unemployment should reach 6 percent or lower, and be trending downward, before any fiscal contraction should be seriously considered. In fact, with unemployment hovering near 10 percent and with projections putting unemployment at elevated levels for at least the next couple of years, further job creation is indeed necessary." Irons stressed that "Deficit reduction and job creation are not competing priorities. Job creation is needed today to ensure a strong economy and a solid tax base tomorrow: you can't reach reasonable budget targets without a strong and rapid recovery, and you won’t get a strong recovery if you pursue austerity too early."Read Irons' full testimony

Why high unemployment is terrible for the economy - Last week, I argued that the Federal Reserve doesn't seem to care much about high unemployment. Apparently, very few other people in Washington do, either. That's one way of interpreting the events of the last week. Congress is adjourning without extending unemployment benefits, in large measure due to repeated Republican filibusters. On Thursday, President Obama gave a major address about … immigration reform. All this on the eve of a jobs report that showed the economy lost jobs in June, due largely to the loss of temporary census jobs. Forget about the damage to the economy at large, or to those people who aren't working. For both parties, whether you're a deficit hawk, a tax-cutting obsessive, or an incumbent bent on re-election in 2010 or 2012—persistent high unemployment is poison. Payroll and income taxes—in other words, taxes paid by people with jobs—provide the lion's share of federal tax revenues. For Democrats, there's no way to cut the deficit or find revenue for new initiatives unless they grow. Should Republicans retake control of the House and Senate next year, their first order of business would be to preserve the Bush tax cuts that are set to expire—a move that would make already large deficits even larger and thus render significant tax-reduction impossible.

Mark Zandi: Congress Should Quit Its Deficit Dithering Unless It Wants Another Recession - Mark Zandi, chief economist with Moody's and a former adviser to Sen. John McCain (R-Ariz.), said Friday that Congress needs to hurry up and reauthorize expired jobless aid or risk derailing the nascent economic recovery.  "The odds that the economy will slip back into the recession are still well below even," Zandi said during a conference call with reporters. "But if Congress is unable to provide this help, those odds will rise and become uncomfortably high." Extended unemployment benefits for the long-term unemployed lapsed at the beginning of June as a domestic aid bill containing the benefits stalled in the Senate. Since then, nearly 1.7 million people who've been out of work for longer than six months have missed benefit checks they would have received had they been laid off closer to the beginning of the recession.  Without the extended benefits in place, the unemployed in most states are eligible for only 26 weeks of benefits. The average duration of unemployment is 35 weeks, according to the Labor Department's report on Friday.

Why The Fiscal Commission Does Not Serve the American People - President Obama and his economic team face a daunting challenge: how to deliver economic growth they know can only come from deficit spending, while deferring into the future the “fiscal consolidation” which is being pressed on them by practically everyone, from Peter G. Peterson to Angela Merkel.Clearly the “bipartisan deficit commission” — like practically all bipartisan commissions –  was a device to deflect this pressure.  The President created the Commission while pressing for a stronger growth strategy, and has sent every discreet signal (notably in the commission’s minuscule operating budget) that the exercise should not be taken seriously.Nevertheless, there is a danger that the Commission will take a path — “stimulate now but austerity later” –  that will lead to unnecessary, economically-damaging and socially destructive cuts in Social Security and Medicare.  And there is a danger that such cuts will be stampeded through Congress in the months immediately following the 2010 elections.

James K. Galbraith’s Testimony Blasts Fiscal Commission - James K. Galbraith, one of the country’s most respected economists and a ND20 contributor, offered a statement today to the Fiscal Commission on behalf of Americans for Democratic Action, an organization co-founded in 1949 by (among  others) by Eleanor Roosevelt. We at New Deal 2.0 recommend that you grab a coffee, sit back, and read this elegant, blistering, and brilliant description of why the Commission is both misguided and malignant. Read full text of testimony here.

Numerology on the Deficit Commission - An excellent point from Dean Baker who rightly slams Deficit Commission Chair Erskine Bowles for laying down a seemingly arbitrary principle that federal government spending should never exceed 21 percent of GDP.  On the one hand, the problem here is just that Bowles gives us no reason to think anything in particular is motivating this number. On the other hand, the problem is that the government spending share of GDP is a highly imperfect measure of the government’s role in the economy. Looking at federal government spending is even more arbitrary.  The point is that we should endeavor to provide public services in an effective and efficient way, or else not provide them at all.

Just How Bullish Is the White House? - Brad DeLong is surprised by an upbeat White House memo on the economy. I had thought that the settled White House line was that the normal sources of recovery are not present when a recession is caused by a financial crisis, and that as a result a post-financial crisis recovery tends to look like an “L” rather than a “V”.  He quotes this section from my column: An internal memo from White House economists argued, the economy’s strengths, like exports and manufacturing, “more than make up for continued areas of weakness, like housing and commercial real estate.” And then he adds: Either I am misinformed and wrong about what the White House analysis of the state of the economy is supposed to be, or some freelancer willing to leak paper to David is engaged in a line wobble — which doesn’t strike me as a terribly constructive thing to be doing. I’m not sure Mr. DeLong and I actually have a very different view of the White House’s take on the economy. As I understand it, White House economists believe a) that recoveries from financial crises tend to be weak and b) that a forceful policy response has made a big difference

Spend or Scrimp? Two Sides in White House Debate - Those pressing for more stimulus measures include Christina Romer, the chairwoman of the Council of Economic Advisers; Jared Bernstein, economic adviser to Vice President Joseph R. Biden Jr.; and the Treasury secretary, Timothy F. Geithner, who took that message internationally to the Group of 20 summit meeting of developed nations last weekend in Canada. Lawrence H. Summers, who as director of the National Economic Council tries to broker what he calls the “brakes-versus-accelerator” debates, nonetheless makes the economic arguments for an additional stimulus, officials say.  More focused on deficits — or at least on positioning Mr. Obama to show his concern — are his chief strategist, David Axelrod, other political advisers and Rahm Emanuel, the White House chief of staff, according to Democrats. Their lone supporter among the top economic aides is Peter R. Orszag, the budget director, who will leave the administration this month.

Thou Shalt Not Ignore Obviously-Wise Fiscal Solutions - In his latest wailing on the failure of politics to produce wise fiscal policy (on any front it seems, lately), Ezra Klein describes what would be the ideal policy were it not for the screwed-up politics:  Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain. But the American political system has a lot of trouble making unpopular choices and some trouble sticking to those choices once they’re made. This is where you might expect a bloc of deficit hawks to step into the middle of the legislative debate with a proposal pairing spending in 2011 with savings beginning in 2014, but we’ve seen no such thingI still maintain I know the answer–or at least one pretty good possible answer–to the riddle:  How can we find such a policy that Ezra describes as “pairing spending in 2011 with savings beginning in 2014?”  My answer is to extend only the Obama-proposed portions of the Bush tax cuts only temporarily, with a call for revenue neutrality relative to current law

A progressive budget calculator - Not to be outdone by the Committee for a Responsible Federal Deficit, the Center for Economic Policy Research has a new budget calculator out that lets you put more liberal policies into play and see what happens to the debt level in 2020. I got us below 60 percent (the magic number, at least according to some budget hawks) by ending the wars in Iraq and Afghanistan, creating a Medicare-like public option, adding a modest carbon tax, adding a financial transactions tax, allowing Medicare to negotiate drug prices, increasing the cap on taxable earnings for Social Security, converting the mortgage-interest deduction to a 15 percent credit, and letting the estate tax return on schedule. Oh, and I did all this while adding $2.1 trillion in infrastructure, R&D, and education spending, and increasing the generosity of Social Security benefits. I am a budget genius!

Long-Term Budget Outlook - CBO Director's Blog - This morning CBO released the latest in its series of reports on the long-term budget outlook. (Addendum: I presented the key findings of the report to the National Commission on Fiscal Responsibility and Reform.) The report examines the pressures on the federal budget by presenting our  projections of federal spending and revenues over the coming decades. Under current laws and policies, an aging population and rapidly rising health care costs will boost outlays for Social Security benefits and sharply increase federal spending for health care programs. Unless revenues increase at a similar pace, such spending will cause federal debt to grow to unsustainable levels. If policymakers are to put the nation on a sustainable budgetary path, they will need to let revenues increase substantially as a percentage of gross domestic product, decrease spending significantly from projected levels, or adopt some combination of those two approaches.

Social Security Policy Options -CBO Director's Blog - Social Security is the federal government’s largest single program, and as the U.S. population grows older in the coming decades, its cost is projected to increase more rapidly than its revenues. That trend, in combination with the rising cost of the government’s health care programs, will lead to sharp increases in government spending relative to the size of the economy, placing the federal budget on a path that is unsustainable over the long term. Also as a result, under current law, resources dedicated to the Social Security program will become insufficient to pay full benefits in about 30 years, CBO projects. Long-run sustainability for the program could be attained through various combinations of raising taxes and cutting benefits; such changes would also affect the share of Social Security taxes paid and the share of benefits received by various groups of people. In a study released this afternoon, CBO examines a variety of approaches to changing Social Security, updating an earlier work, Menu of Social Security Options, which CBO published in May 2005.

CBO Releases Long Term Budget Outlook - CBO Director's Blog summary of Long Term Budget Outlook (Interesting side comment: "Later this week, CBO will release a report on a number of different policy options for changing Social Security"). Elmendorf, not surprising given his history and current job, is fully on the side of the deficit hawk/hysterics. Report text (1.2MB PDF) Long Term Budget Outlook...Interestingly if we examine the above two figures we see that 'Extended baseline' which essentially means 'Current law' shows the deficit vanishing by 2014 and Debt Held by the Public stabilizing through 2035. Making some of the "If this goes on the sky will fall!" rhetoric around Obama policy a little overstated, just as with Social Security a plan of "Nothing" getting oddly some pretty good projected results.

The challenge - THE Congressional Budget Office has updated its long-term budget outlook. Very narrowly speaking, the news is somewhat, just a teeny bit good: That's the current law scenario, and what it indicates is that if Congress allows the Bush administration tax cuts to expire in their entirety and doesn't do the budget tweaks it normally does (the Medicare doc and Alternative Minimum Tax fixes, for instance) then deficits over the long-term won't actually be very large. Hooray! But that's not actually good news. For one thing, it's impossible to imagine Congress allowing most of those developments to take place. For another, it's not necessarily a good thing for the broader economy to have government revenues rising as a share of GDP indefinitely. And so, the more likely budget picture is something like this:

CBO: Long-term deficit depends on congressional decisions - The Congressional Budget Office released the latest version of the long-term budget outlook today. It's an interesting document, because it requires the CBO to do some fancy footwork. In theory, CBO's deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades. See for yourself: But current law is not likely to advance unmolested. So the Congressional Budget Office also publishes an alternative scenario. In this world, we fix the Medicare doctor payment system so that our budget forecasts show how much we're actually paying doctors (the one-year increases in pay we've been doing lately leave the long-term forecasts artificially low), the cost-control elements of the Affordable Care Act aren't implemented, and, well, I'll let CBO explain the big gun: "More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP." Here's what that looks like:

The Fiscal Singularity is Near - The Congressional Budget Office just released its latest so-called Long Term Budget Outlook. From the summary: this report focuses largely on the next 25 years. However, because considerable interest exists in the longer-term outlook, figures showing projections through 2080 and associated data are available in Appendix A of the report The whole report is important, but I think the sentence quoted above is what is most significant. In the past, the report has focused on the outlook to 2080, where the main issue becomes "bending the cost curve" for health care spending. Now, the CBO seems to have drawn the same conclusion that I would, which is that we do not have the luxury of worrying about the outlook from 2035 to 2080. Instead, we are on a path to have a crisis by 2035.  In addition, I read the CBO as highly skeptical that Congress means it when it comes to holding down Medicare spending. The CBO's "alternative scenario" reflects that skepticism.

How Bad is the Budget Outlook? - The Congressional Budget Office offers two visions of the future in its new long-run budget outlook. The first imagines a world in which lawmakers take pay-as-you-go budgeting really seriously. In that strict—and unrealistic—PAYGO world, our debt would continue to increase faster than the economy, rising from about 60% of gross domestic product today to about 80% in 2035. Of course, no one believes that Congress will really be that disciplined. That’s why CBO offers a second vision, in which lawmakers give in to temptation. They extend the tax cuts, patch the AMT, limit bracket creep, increase payments to Medicare docs, allow discretionary spending to rise with GDP, and turn off some of the health legislation offsets after 2020. If policymakers give in to all those temptations, the debt skyrockets, rising from about 60% of GDP today to 185% by 2035. And that’s assuming no negative effects on the economy. As my colleagues Len Burman, Jeff Rohaly, Joe Rosenberg, and Katie Lim have pointed out, out-of-control deficits would weaken the economy by crowding out investment and driving up interest rates, so the debt-to-GDP ratio would actually grow even faster.

CBO Report on Long-Term Budget Outlook Is Grim, But How Much Is Obama's Fault? - The federal budget deficits for 2009, 2010 and 2011 are large and historic, but they are not entirely the result of changes made by the current administration. While partly structural, those deficits are mostly cyclical, i.e. the result of a downturn in the macroeconomy and not the result of policy changes implemented today. The stimulus bill, judging by a static score, did increase the deficit. However, the deficit would have still approached record levels had Obama and Congress done nothing. Some Keynesians may even argue that the stimulus bill somewhat paid for itself and didn't add to the deficit much at all, or possibly even made it less. The large deficits we face today and faced last year should not be confused with the structural deficits in the years going forward. That is, even if the economy is healthy from 2015 onward, the United States faces serious issues with its budget. "Structural deficit" is the term given to the deficit when the economy is at its potential (i.e. not in contraction or rapid expansion).

Strange Response to the CBO Outlook from the Committee for a Responsible Federal Budget - As previously noted, according to the Congressional Budget Office, if congress sticks by current law the fiscal situation is more-or-less okay for the next 20-25 years. It’s also true that according to the CBO and most everyone you meet, Congress seems unlikely to do that. So the message here should be: “Congress! Don’t live up to your bad reputation! If you don’t want to enact scheduled tax increases and payment cuts to doctors, then you ought to pay for those moves.” But I got the following press release from Maya MacGuineas at the Committee for a Responsible Federal Budget:“Aging, health care costs, and an outdated, insufficient revenue system are set to bury the country in debt,” . “Are the findings in this report really the messages we want to be sending our creditors?”  “Policymakers must begin working on real solutions to our long-term problems now,” said MacGuineas. “With debt levels expected to soar, policymakers must embrace meaningful reforms to help us regain control over future deficits, reduce the risks of a fiscal crisis, and keep the economic recovery on track. If this year’s Long Term report isn’t a call to action, I don’t know what is.” None of this seems accurate...

Congressional Budget Office - Distribution of Federal Taxes (series of six charts)…

What VAT Rate Could Solve CBO's Long-Term Budget Outlook? - Yesterday, the Congressional Budget Office released its long-term projections of federal spending and tax revenues under different scenarios. As has been the case for many years now, CBO's projections show an unsustainable budgetary path for the next 75 years. Under these assumptions, the public debt would hit 185 percent of GDP by 2035 and an unfathomable 854 percent of GDP by 2080.Since the Value Added Tax is being talked about as a possible solution to the nation's long-term fiscal problems, we did some back of the envelope estimates of what percentage VAT would been needed to fill CBO's projected budget gap over the long term. Assuming a VAT base of 41 percent of GDP (the average of European-style VATs[1]), the government would need a 11.7 percent VAT each year to close the 25 year gap, a 16.8 percent VAT to close the 50 year gap, and a 21.2 percent VAT to close the 75 year gap. VAT rates in excess of 20 percent are pretty common in Europe and haven't seemed to prevent their fiscal woes. One has to wonder whether it would be the salvation for ours.

Another tax that hits the middle class - WITH THE agreement at the Toronto G-20 summit of major nations to cut public deficits at least in half by the year 2013, we will start hearing a lot more about a value added tax . We should keep our hands on our wallets. The goal of cutting the deficit by a set amount by 2013 is arbitrary and premature. Whether that formula makes sense depends on whether the recession is really over. Until we get a stronger economic recovery, too much deficit reduction reduces purchasing power and slows job creation.A VAT, which is a kind of national sales tax, is especially perverse because it is a tax directly on consumers, who have already been hit hard by the recession.  VAT supporters include many members of President Obama’s own fiscal commission, which holds a rare public hearing today; the billion dollar Peter G. Peterson Foundation (which bankrolls a lot of deficit-hawkery); former Democratic Treasury Secretary Robert Rubin; and the outgoing director of the Office of Management and Budget, Peter Orszag.

Randall Holcombe's case against a VAT - I don't agree with everything in this paper, but it's the best case against a VAT that I have seen to date. ...the tax is not a good fit for the United States. It taxes a base that has traditionally belonged to state governments, its introduction would bring with it intergenerational inequities, it has a cumbersome administrative structure that would impose large compliance and administrative costs, and it would slow economic growth. Because of slower economic growth, tax revenues from existing tax bases will fall if a VAT is introduced.   If you're wondering, as an alternative he favors a mix of spending cuts and, if needed, increases in the income tax.

The three biggest lies about the economy - The G-20 calls for members to slash their budget deficits. The U.S. Senate ices further aid for the unemployed. The head of the Business Roundtable slams President Obama for undermining American capitalism. Wall Street succeeds in watering down reform.  But there's just one problem. We're still living in a fantasyland. Most people have no idea what's really going on in the economy. They're living on spin, myths and downright lies. And if we don't know the facts, how can we make intelligent decisions?  Here are the three biggest economic myths -- the things everything thinks they know about the economy that just ain't so.

    • Myth 1: Unemployment is below 10%  -What nonsense that is. The official jobless rate, at 9.7%, is a fiction and should be treated as such.

    • Myth 2: The markets are panicking about the deficit To hear the G-20 tell it, the U.S. and other top countries had better slash those budget deficits before the world comes to an end.  But the rates on U.S. bonds have been plummeting recently. The yield on the 30-year Treasury bond down to just 4%.

    • Myth 3: The U.S. is sliding into "socialism"  -For a system allegedly being strangled in its bed, U.S. capitalism seems to be in astonishingly robust shape.

Is the Dodd-Frank Bill Strong Enough? - NYTimes - The bill is awash in so much minutiae that by late Friday its ultimate impact on the financial services industry was still unclear. Certainly, the bill, which the full Congress has yet to approve, is the most comprehensive in decades, touching hedge funds, private equity firms, derivatives and credit cards. But is it the “strong Wall Street reform bill,” that Christopher Dodd, the Connecticut Democrat, said it is? For this law to be the groundbreaking remedy its architects claimed, it needed to do three things very well: protect consumers from abusive financial products, curb dangerous risk taking by institutions and cut big and interconnected financial entities down to size. So far, the report card is mixed. On the final item, the bill fails completely. After President Obama signs it into law, the nation’s financial industry will still be dominated by a handful of institutions that are too large, too interconnected and too politically powerful to be allowed to go bankrupt if they make unwise decisions or make huge wrong-way bets.

The Dodd-Frank Financial Fiasco - The sheer complexity of the 2,319-page Dodd-Frank financial reform bill is certainly a threat to future economic growth. But if you sift through the many sections and subsections, you find much more than complexity to worry about. The main problem with the bill is that it is based on a misdiagnosis of the causes of the financial crisis, which is not surprising since the bill was rolled out before the congressionally mandated Financial Crisis Inquiry Commission finished its diagnosis.  The biggest misdiagnosis is the presumption that the government did not have enough power to avoid the crisis. But the Federal Reserve had the power to avoid the monetary excesses that accelerated the housing boom that went bust in 2007. The New York Fed had the power to stop Citigroup's questionable lending and trading decisions  The Securities and Exchange Commission (SEC) could have insisted on reasonable liquidity rules to prevent investment banks from relying so much on short-term borrowing through repurchase agreements to fund long-term investments. And the Treasury working with the Fed had the power to intervene with troubled financial firms, But instead of trying to make implementation of existing government regulations more effective, the bill vastly increases the power of government in ways that are unrelated to the recent crisis and may even encourage future crises.

Compromise a perversion - Can we all agree that Dodd-Frank is a terrible compromise?  The WSJ notes that the authors are now trying to find a replacement for the bank tax imposed.  I heard a local banker yesterday say that the tax took 10% off his bottom line; his is a bank that engaged in none of the shenanigans of Wall Street, and has probably as good a balance sheet as any bank in Minnesota. And worse yet, FDIC insurance is proposed to be permanently elevated to cover deposits to $250,000 from its previous limit of $100,000, increasing the amount of moral hazard by decreasing the skin in the game for depositors -- a problem FDIC itself has long been aware of. (Text of the Dodd-Frank agreement is here.) If you think the bill is a good idea, please read this morning's NYT article about AIG and then ask:  Would this bill prevent the bailout of those banks and financial firms that invested in the next AIG?  And if not, why do you nevertheless support this bill?

Bank overhaul bill has plenty of rules and critics - To keep taxpayers from having to bail out giant banks again, lawmakers faced two choices: design rules to try to prevent them from failing, or shrink them so that if they do fail, they won't threaten the financial system. Our political leaders chose the rules. At more than 2,000 pages, the new financial regulatory bill takes aim at everything from megabanks straddling the globe to street-corner payday lenders. And with a bit of luck, the overhaul — the most sweeping since the Great Depression — will help make big bank failures less likely and less damaging if one does occur. The House and Senate hope to pass the bill this week in time for President Barack Obama to sign it before July 4. Its backers say it is needed to avoid the kind of cascading fear that brought the financial world to a near standstill after Lehman Brothers collapsed in September 2008.

US banks off the hook until 2022 - It was billed by Barack Obama as the toughest crackdown on Wall Street since the great depression. But top US banks could be given until 2022 to comply with the so-called Volcker rule, which is supposed to restrict financial institutions' risker trading activities. A string of delays and extension periods written into a final version of Congress's financial regulation reform bill means that firms such as Citigroup and Goldman Sachs could exploit loopholes until 2022 before withdrawing from "illiquid" funds such as private equity. The long gestation period is an example of the degree of compromise inserted into the package following months of lobbying on Capitol Hill by powerful banks.

With Financial Overhaul Near, Lobbyists Focus on Regulations… Well before Congress reached agreement on the details of its financial overhaul legislation, industry lobbyists and consumer advocates started preparing for the next battle: influencing the creation of several hundred new rules and regulations. The bill, completed early Friday and expected to come up for a final vote this week, is basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact — and giving partisans on both sides a second chance to influence the outcome.  The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition.

Bank reform: Fake it 'til you make it - Much of the Dodd-Frank bill pushes the important decisions until years later. How to tame Wall Street in the meantime? Giant banks, it turns out, like quite the show of theatrics, which has most of the public groaning but has been quite convincing to the eyes of Congressional referees. In the eleventh hour, financial reform became more like financial delay. The Dodd-Frank bill may be over 2,000 pages, and much of them, it seems, are devoted to dumping major decisions in the lap of the SEC, commissioning unnecessary studies, or otherwise creating more homework for regulators in the future.As Keefe Bruyette & Woods analyst Robert Lee said in a note this week, the true scope of financial reform is hard to understand because there are so many delays to its implementation.

Ten untruths about central clearing - Central clearing and CCPs have been much in the news recently, thanks to their prominent role in US regulatory reform and Basel 3. Some commentators remain skeptical, and I commend both the Streetwise Professor (see for instance here or here) and Jon Gregory (see here) to your attention. Here I am not going to address the debate head on, but rather correct a few misconceptions. Factor in CCP competition on margin requirements and the fact that a CCP’s default fund does not cover some risks the CCP might run (such as operational risks including legal risk), and I fear that if central clearing of OTC derivatives is badly implemented, it might leave us in a worse position systemically than we are in today.

Dodd, Lincoln Try to Quell Derivatives Fury - Sens. Christopher Dodd (D., Conn.) and Blanche Lincoln (D., Ark.) are trying to calm furious bankers and business groups over an early morning change to the financial overhaul bill that critics now say could completely disrupt the way companies hedge against risk. Democrats altered a key provision to the derivatives section of the financial overhaul bill. It has a completely different meaning depending on who you ask. Some believe the language would require ALL people engaging in derivatives contracts to post “margin,” or more costs to engage in a deal. Others believe it would only apply to big banks and major dealers of derivatives. The difference could swing billions of dollars one direction or another. Regardless, the confusion has led to an uproar. Sen. Saxby Chambliss (R., Ga.) tried to reopen the derivatives section of the bill on Tuesday to change this provision. He was nearly successful, with his bid stalling in a 6-6 tie after Sen. Lincoln sided with Republicans. Democrats have said they would try to clarify the language through letters and floor speeches, and a June 30 letter from Sens. Dodd and Lincoln aims to do that.

Former CFTC Chair Brooksley Born Endorses Bank Bill -  A high-profile former financial regulator who was shunned for her aggressive stance on curbing derivatives said she would support the major financial overhaul bill that congressional Democrats are struggling to get to the president’s desk. Brooksley Born, former chairman of the Commodity Futures Trading Commission, endorsed the bill in an interview Tuesday. She called the legislation “an important step toward regulating the over-the-counter derivatives market.” Born was an early and vocal proponent for regulating derivatives in the 1990s, during the Clinton administration. But her efforts to act on those concerns were blocked by then-Federal Reserve Chairman Alan Greenspan and then-Treasury Secretary Robert Rubin. Born is now a member of the 10-member Financial Crisis Inquiry Commission, which Congress appointed to examine and report on the causes of the 2008 financial crisis.

Financial Reform Legislation Does Not Eliminate Too Big To Fail - This bill is not going to end the problem of too big to fail. If the banking system is threatened, then one way or the other it will be bailed out. The consequences to the economy would be too large to do otherwise. Thus, banks that are big enough to pose a systemic risk enjoy an advantage over other banks. Banks that pose a systemic risk will be assumed to be safer than other banks due to the implicit government guarantee. This gives large banks an advantage over smaller banks that do not, on their own, threaten the financial system if they fail. In addition, the implicit guarantee gives large banks the incentive to take on too much risk, and this is a reason to regulate the amount of risk they can take (and I don’t think the proposed legislation does enough in this regard).So two things are needed. One is to ensure that the banks that operate under the implicit guarantee cannot take on excessive risk, and the other is to eliminate the advantage that the implicit guarantee gives to bigger banks.

Volcker Rule May Give Goldman, Citigroup Until 2022 to Comply - Goldman Sachs Group Inc. and Citigroup Inc. are among U.S. banks that may have as long as a dozen years to cut stakes in in-house hedge funds and private- equity units under a regulatory revamp agreed to last week. Rules curbing banks’ investments in their own funds would take effect 15 months to two years after a law is passed, according to the bill. Banks would have two years to comply, with the potential for three one-year extensions after that. They could seek another five years for “illiquid” funds such as private equity or real estate, said Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker LLP in Washington. Giving banks until 2022 to fully implement the so-called Volcker rule is an accommodation for Wall Street in what President Barack Obama called the toughest financial reforms since the 1930s. The Glass-Steagall Act of 1933 forced commercial banks such as what is now JPMorgan Chase & Co. to shed their investment-banking units in less than two years.

JP Morgan Responds To Financial Reform: The Poison Pill Strategy - Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.  This is terrific corporate strategy – and very dangerous for the rest of us.Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail. He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power – in principle – vis-à-vis failing financial institutions in the future.But Mr. Dimon also knows – as a board member of the NY Fed and sometime White House/Treasury confidante – that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries. In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government.  This is so simple, so brilliant, and so dangerous that it should take your breath away.

Did We Wind Up With Any Reform of the Shadow Banking System? - In my last post, “Tracking the Rabbit through the Anaconda” , I mocked Geithner a bit and promised you all a spot of moaning about what’s missing from the financial reform bill.Well, the anaconda has now had the time it needed to produce its offering. As an outsider considering the 20 hour orgy of bill consolidation and last-minute horsetrading that rounded off the whole process, I must say I find the US legislative process combines frivolity, pomp and ineptitude in a way that – reminds me of dear old England. Perhaps you are all very proud. Shadow banking reform is the subject this post, since it is terribly important, much more compact than the rest of the reform, and the outcome is very very depressing. That leaves consumer finance, derivatives, and consumer finance for later. And let us see what FASB deliver in accounting changes, if anything.

The Beginning of a Return to Consumer Protection? -Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there. Over the next thirty years, we’ve gone backwards in ways that were literally inconceivable in the 1970's. 

Greater Fools - The depth of our financial ignorance is startling. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.  Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”

The CFPA--A Bureaucracy to Benefit Women and Families » I recognize that some folks dislike the idea of a CFPA. Indeed, it may well feel like just another bureaucracy--and sometimes it seems that our country is awash in the doggone things. Why in the world would we want another one? I think there are many good reasons for a CFPA, and not the least of which is discussed in a paper I recently published in Journal of Family and Economic Issues. As I discuss in the article, among families who are experiencing extreme financial distress, it is overwhelmingly the wives who are left alone to juggle the bills, deal with debt collectors, and eventually make the decision to file bankruptcy. And even when they ask for their husband's help, many men simply refuse to get involved. The upshot is that these wives are left emotionally exhausted--reporting severe depression, paranoia, and insomnia. A few even openly describe their wish for death as a way to escape the pressure of the bills.

Editorial - The Fed and Your Credit Card - NYTimes - Congress passed legislation last year banning many of the worst practices of credit card companies and ordered the Federal Reserve to issue new rules to ensure that late charges and all other penalties — a major source of abuse — are “reasonable and proportional.”  The Credit Card Act of 2009 has provided consumers with a great deal of necessary relief. It requires companies to give a 45-day notice before raising interest rates, so that customers have time to cancel the card. In most cases, it forbids companies from raising interest rates on existing balances and prevents them from juggling due dates to trigger penalty fees. It also bars companies from issuing cards to minors without establishing their ability to pay or securing the co-signature of an adult.  The Fed’s new rules build on these protections. Late fees can no longer exceed the amount of the payment due and can go no higher than $25 in any month, unless one of the previous six payments was late or the company can prove that the lateness cost them more than this amount. The new rules also do away with “inactivity fees,” and bar companies from hitting customers with multiple penalty fees for a single violation of account terms.

Yes, Let's Increase Financial Literacy -- Maxine Udall - A recent New Yorker article by James Surowiecki on the Dangers of Financial Illiteracy is a must read, especially by the financially literate and the lucky "quants" among us. It is also a must read for anyone who believes that we can rely on (and blame when they default) individuals who "pick a loan payment". My point here is that Surowiecki's suggestion that we adopt the "financial equivalent of 'driver's ed' " is right on and critical, IMHO. At least one undergrad program I'm familiar with provides exposure to interest/amortization in their basic required "math for poets" course. But, college is too late and interest/amortization is only a start. The material should be placed in a real world context, related directly and graphically to credit card balances as I did for my friends and to home loans.

The Financial Reform Bill: A Very Limited Step Forward - The final compromise bill approved by the conference committee on Friday will improve regulation in the financial sector. However, given the severity of the economic crisis caused by past regulatory failures, the public had the right to expect much more extensive reform. On the positive side, the creation of a strong independent consumer financial products protection bureau stands out as an important accomplishment. The requirement that most derivatives be either exchange traded or passed through clearinghouses is also an important improvement in regulation. However, important exceptions remain, which the industry will no doubt exploit to their limit. The creation of resolution authority for large non-bank financial institutions is also a positive step, although the fact that no pre-funding mechanism was put in place is a serious problem.On the negative side, there is little in this legislation that will fundamentally change the way that Wall Street does business. The rules on derivative trading will still leave the bulk of derivatives to be traded directly out of banks rather than separately capitalized divisions of the holding company. The Volcker rule was substantially weakened by a provision that will still allow banks to risk substantial sums in proprietary trading.

The break-even point- WITH the financial reform bill finally reconciled, the regulatory action has now moved to Basel. Despite the early promise of the American bill, tough decisions around systemic risk were not really dealt with. The forum at Basel may now offer the best hope of guaranteeing future bank stability. Chief among the recommendations of Basel III is an increase in the amount of capital that banks need to hold as a buffer against future crises. Not surprisingly, banks are resisting calls to increase capital level, arguing that rasing new capital would lead to reduced lending or higher funding costs to its customers. But the issue here isn't with the profit or loss of a single bank. It is the risk posed to the system by the failure of one or a group of banks. In that sense the economic value of imposing higher capital requirements should be measured by its effect on reducing the probability or severity of another financial crisis. That is not easy to measure. Fortunately the Bank of England's just released Financial Stability Report makes an attempt. It bases its analysis on a simple cost-benefit approach.

Senator's concern may complicate Wall Street bill vote (Reuters) - President Barack Obama's efforts to win final approval of a historic financial regulatory reform bill looked more complicated on Saturday after a Republican senator threatened to oppose it."I was surprised and extremely disappointed to hear that $18 billion in new assessments and fees were added in the wee hours of the morning by the conference committee," Massachusetts Senator Scott Brown said. He issued the statement after negotiators from the Senate and House of Representatives emerged from a marathon session early Friday morning with a final compromise on a bill that would bring about the most sweeping financial rules revamp since the 1930s.

Scott Brown Cannot In Good Conscience Support This Bill With The New Stuff Slipped In - Bloomberg reports Brown sent a letter to Dodd and Frank stating: “This tax was not in the Senate version of the bill which I supported. If the final version of the bill contains these higher taxes I will not support it.”

Guess What: Financial Reform Might Seriously Be DEAD - It's not just Scott Brown. Now Susan Collins (R-ME) is saying she may not be able to vote for The Dodd-Frank Act, as a result of the new bank levies that were announced added in during last Friday's early-morning dealmaking. Suddenly, this is looking like a situation where nobody wants to be the 60th vote, and beyond that, the GOP is feeling that the President is toxic enough, such that they're willing to "side with Wall Street" and oppose him. Between Sens. Brown and Collins, and the passing of Robert Byrd, suddenly this goal of having a bill on the President's desk by July 4th feels like a longshot, at least at this moment.

Financial Reform Bill Breakdown, Lucy and the Football - It looks like Scott Brown for certain, and possibly Collins and Snowe, are worried about a $20 billion dollar fee that the financial reform bill would add, and are now going to not vote for the bill. First off, as Ryan Avent notes, this shows how completely not serious Republicans are about the deficit: Also as Dave Dayen points out: If this isn’t a Lucy-with-the-football moment, I don’t know what is. Brian Beutler reports that Hill aides told him President Obama’s Treasury Department sided with Scott Brown in the waning moments of the Wall Street reform conference committee, favoring his loophole for the Volcker rule designed to help asset management companies in Massachusetts. In the process they shot a giant hole through the efforts to stop the mega-banks from investing in private equity or hedge funds, allowing them to use up to 3% of Tier One Capital…So the White House put all their eggs in the Scott Brown basket to ensure passage, and now he’s wavering.

 Without Byrd, Senate Financial Reform Vote In Doubt - A sweeping overhaul of financial regulations faced new obstacles in the Senate on Monday – the loss of one and potentially more crucial votes to guarantee its passage.The death of Sen. Robert Byrd, D-W.Va., and new misgivings by Republican senators who previously supported the legislation put the bill's fate in doubt. Democrats scrambled to secure votes for one of President Barack Obama's top priorities. Last month, 61 senators backed an original Senate version of the bill; only four of them were Republicans.On Monday, three of them – Scott Brown of Massachusetts and Susan Collins and Olympia Snowe of Maine – complained about a $19 billion fee on large banks and hedge funds that House and Senate negotiators added to the bill last week to pay for the cost of the legislation. With Byrd's death, Democrats can't afford to lose any votes to overcome the 60-vote procedural hurdles that could defeat the legislation.

Bank Tax to Be Killed to Win Passage of Financial Overhaul - With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.  Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session,Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill's costs by shutting down a $700 billion bank-bailout program.  "I haven't talked to everybody, but I gather from a number of people they like this option,'' said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.

A Bank Fee Is Cut From Financial Overhaul Bill - NYTimes— Congressional negotiators briefly reopened the conference proceedings on a sweeping financial regulatory bill on Tuesday after Senate Republicans who had supported an earlier version of the measure threatened to block final approval unless Democrats removed a proposed tax on big banks and hedge funds. Conference negotiators voted to eliminate the proposed tax and adopted a new plan to pay the projected five-year, $20 billion cost of the legislation. The new plan would bring an early end to the Troubled Asset Relief Program, the mammoth financial system bailout effort enacted in 2008, and redirect about $11 billion toward heightened regulation of the financial industry.  The conferees also voted to increase the reserve ratio of the Federal Deposit Insurance Corporation, but specified that small depository institutions — those with less than $10 billion in consolidated assets — be exempt from paying any increase.

House passes financial overhaul; Senate leaders postpone vote -The House approved new financial regulations Wednesday, but Senate leaders postponed a vote on the bill, preventing the landmark legislation from reaching President Obama's desk until at least mid-July.  House members voted 237 to 192 to approve the final version of the bill, which emerged from the House-Senate conference committee earlier in the week. The sweeping legislation would, among other things, set up an independent consumer bureau within the Federal Reserve to protect borrowers from lending abuses, establish oversight of the vast derivatives market and enable the government to wind down large, failing firms. After two final hours of debate, 234 Democrats and three Republicans voted for the overhaul. The margin of victory was greater than when the House initially voted on its version of the bill in December, when no Republicans voted yes.

U.S. Regulatory Bill’s Support May Weaken as Senate Delays Vote - The U.S. financial-regulatory bill, approved by the House of Representatives yesterday, may still be compromised in the Senate, which postponed its vote until after the week-long July 4 recess. The delay may give opponents of the legislation time to persuade undecided lawmakers to vote against the measure. Republican Senators Scott Brown of Massachusetts, Chuck Grassley of Iowa, and Olympia Snowe and Susan Collins of Maine voted for a previous version of the bill and are being courted by Democratic leaders to support its final passage.  “While the odds are that a week doesn’t change anything, certainly Snowe, Collins and Brown are going to get lots of visits over that week from their local community bankers and anyone else who has an interest in this,” said Mark Calabria, a former Senate Banking Committee staffer who is now a director of financial-regulation studies at the Cato Institute.

Why We Must Pass the Wall Street Reform Bill - Below this short blog post, you will find a very lengthy description of what victories were won in the Wall Street reform bill, what compromises were made, and what defeats were suffered. It is, on balance, an argument for why we should pass the Wall Street reform bill, and a roadmap of where the fight continues.Senator Russ Feingold is a personal hero of mine. Yesterday, he posted an editorial explaining why he is opposing this bill. I am not going to pick a fight with Senator Feingold over what he could have done, or should have done on the bill. While this is a rebuttal of sorts, mainly it is to let people know that there is a lot of good in this bill, and it is possible to present that information in an honest, self-aware manner that acknowledges where it falls short. There are a lot of victories in this bill. We need to pass those victories into law. If the bill is defeated by pro-Wall Street forces over the next two weeks, the only parts which will be defeated are the victories, while all of its shortcomings will remain in place.

Video: David Axelrod Unedited Interview - TheDailyShow - Jon Stewart- In this complete, unedited interview, David Axelrod details the Obama administration's progress on health care and financial reform.

John Boehner: Raise Retirement Age To 70; Wall Street Reform Is Like 'Killing An Ant With A Nuclear Weapon' -House Minority Leader John Boehner (R-Ohio) believes that a "political rebellion" akin to the American revolution of 1776 is brewing, that the Social Security retirement age should be raised to 70, and that the Wall Street reform bill currently moving through Congress is comparable to "killing an ant with a nuclear weapon." In an explosive interview with the Pittsburgh Tribune-Review, the GOP leader also charged that Democrats are "snuffing out the America that I grew up in." He added, "Right now, we've got more Americans engaged in their government than at any time in our history. There's a political rebellion brewing, and I don't think we've seen anything like it since 1776." Boehner did not go so far as to predict, as he has before, that this "political rebellion" would necessarily mean that Republicans will retake the House of Representatives in November, paving the way for him to become the next Speaker.

Obama Slams Boehner: Americans Know The Country Needs More Than An ‘Ant Swatter’ To Recover - In recent weeks, Republicans have been making headlines for their unabashed advocacy on behalf of Wall Street and big business at the expense of American taxpayers. In a recent interview with the Pittsburgh Tribune-Review, House Minority Leader John Boehner (R-OH) compared the financial crisis to a poor little ant, and criticized Democrats for “killing” it with a “nuclear weapon” (i.e. financial reform).  Yesterday, White House Press Secretary Robert Gibbs went after Boehner and called him “completely out of touch with America.” A staffer for House Speaker Nancy Pelosi (D-CA) responded, “An ant, Mr. Boehner? It was the worst financial crisis since the Great Depression — Americans lost 8 million jobs and $17 trillion in retirement savings and net worth.” Today at a town hall event in Racine, WI, President Obama went directly after Boehner, telling him that most Americans don’t think “the financial crisis was an ant and we just need a little ant swatter to fix this thing”:

Derivatives group in $1 trillion warning - U.S. companies may be required to secure as much as $1 trillion due to a change in the wording of the financial reform bill currently being finalized in Congress, according to the International Swaps and Derivatives Association Tuesday. The group said companies will need a combined $400 billion for collateral to cover the current exposure of their over-the-counter derivatives transactions and another $370 billion in additional credit capacity to cover potential future exposure of those transactions. "If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion," said ISDA in its report. The comprehensive financial reform bill is aimed at establishing standards for mortgage underwriting and strengthening bank capital among other measures.

 Panel examines role of derivatives in crisis - The complex instruments at the heart of the financial meltdown, and the way two giant companies were wrapped around them and entwined with each other, are being examined by the special panel investigating the origins of the economic crisis. The Financial Crisis Inquiry Commission is turning its focus to derivatives at two days of hearings starting Wednesday. On the hot seat will be former executives of American International Group Inc., the insurance conglomerate saved from collapse by a $182 billion taxpayer bailout, and current officials of Goldman Sachs Group Inc., the finance powerhouse that has been one of Wall Street's biggest derivatives dealers. Traded in an opaque global market valued at around $600 trillion, derivatives have caught a big part of the blame for the financial crisis that ignited in late 2008. The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Carried Interest Goes Down - It looks like the industry can breathe a sigh of relief as the fears about a rise in the rate of taxation of carried interest will not come to fruition. It’s possible the push could be revived. But for now the industry won’t face what many thought would be a doomsday scenario. Reid will probably fail again, since his own party’s Sen. Ben Nelson (D-Neb.) has joined the Republican opposition against this tax hike bill. Republicans will probably block any tax hike. Sen. Nelson specifically said he does not want the carried interest repeal on real estate partnerships, which are a big factor in every state, unlike like hedge funds, private equity and venture capital funds concentrated in New York, California, Illinois, Massachusetts and other larger states. Repealing carried interest is losing appeal as more and more leaders oppose its consequences, unintended or otherwise. It’s a growth killer in this weak economy and it’s un-American to tax small businesses with ordinary income after their lifetime of hard work to build up their business with risk capital. These entrepreneurs, including investment managers, deserve capital gains when appropriate

The bankruptcy canard with conservatives. -Put me with Felix Salmon here, commenting on John Taylor’s WSJ editorial on financial reform. Felix: Meanwhile, your own proposed solution to the problem of how to prevent further crises is simply impossible: “reform of the bankruptcy code to allow large complex financial firms to go through a predictable, rules-based Chapter 11 process without financial disruption and without bailouts”. Well yes, that would be lovely, and it would be great if we could all get a pony, too. But there are very good reasons why banks can’t file for Chapter 11 bankruptcy. This reminds me of Eugene Fama’s argument that if we let all the major banks go into bankruptcy court everything could have been figured out “in a week or two.” Now that guy is a financial economist.  What about asking a bankruptcy judge?  Say Lehman’s bankruptcy judge, who declared: “This is the most momentous bankruptcy hearing I’ve ever sat through. It can never be deemed precedent for future cases. It’s hard for me to imagine a similar emergency.”   And Lehman wasn’t even that big.Taylor also didn’t mention that this bill is a bankruptcy bill as a default, with several waves of checks that need to be hurdled to put FDIC’s “resolution authority” into motion.

In U.S. Bailout of A.I.G., Forgiveness for Big Banks - When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.  But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

The inexplicable AIG waiver - Louise Story and Gretchen Morgenson have another huge AIG/Goldman story today, which centers on one new and interesting piece of information: when AIG paid off its bank creditors in full, with the help of that monster government bailout, it also signed a waiver forfeiting its right to sue those banks, including Goldman. The waiver is buried on page 385 of the 823 pages of documents that the NYT has, wonderfully, put online in a very easy-to-read form. (It’s also linked to the full 250,000-page document dump from the House Committee on Oversight and Government Reform, if you want to go trawling through the documents yourself.) . Taking out some of the legal blather, it comes down to this: Each of AIG-FP and AIG Inc, for good and valuable consideration, the sufficiency of which it hereby acknowledges, forever releases the Counterparty from any and all Claims of any nature whatsoever that AIG-FP or AIG Inc ever had, now has or can, shall or may have, by reason of any matter, cause or thing occurring from the beginning for the world to the Termination Date that arises out of or in any way relates to the CDS Transactions. Yes, it really says “from the beginning for the world.”

Debunking Goldman’s FCIC Testimony on AIG and Real Estate Shorts - Yves Smith -The Financial Crisis Inquiry Commission grilled Goldman chief operating officer Jonathan Cohn and CFO David Viniar this week, with today’s session focusing on AIG, and in particular, whether Goldman’s collateral calls were abusive and damaged the insurer.  Readers know that I have perilous little sympathy for Goldman. However, it is important that investigations focus on matters likely to hit pay dirt. And despite the sabre rattling at the New York Times and various websites on the matter of Goldman’s collateral marks, we think the ire is misguided, and this is one of the few cases where Goldman’s defense is sound. By contrast, the Commission missed other smoking guns. 

Financial Crisis Commission Turns Up Heat On Goldman Sachs: 'Nobody Here Believes You' - The panel created to investigate the roots of the financial crisis escalated the government's assault on Goldman Sachs on Thursday, criticizing the Wall Street firm for failing to turn over basic documents and accusing it nearly lying under oath. For a second consecutive day, the bipartisan Financial Crisis Inquiry Commission reiterated its request for additional data from Goldman, namely figures regarding the firm's derivatives activities. And for a second consecutive day, Goldman's top executives demurred. "We generally do not have a derivatives business," David Viniar, Goldman's chief financial officer, told the panel Thursday under oath. Goldman Sachs holds more than $49 trillion in notional derivatives contracts, making it the third-largest derivatives dealer among U.S. banks, according to first quarter figures from national bank regulator the Office of the Comptroller of the Currency. The commission has found that Goldman is a party to more than 1 million different derivatives contracts, Commissioner Brooksley Born disclosed Thursday

Goldman Sach's Abacus deal in a simple chart (Financial Crisis Inquiry Commission )

Why are we still discussing the causes of the financial crisis? - Here's a question that might be worth asking. With both the House and the Senate zeroing in on passing a bill to overhaul the financial industry, why are we still so deeply enmeshed in debating the causes of the financial crisis in the first place? I ask because as Congress enters what appears to be the final stretch of its financial-overhaul negotiations, the Financial Crisis Inquiry Commission (FCIC)—which Congress created to figure out the causes of the crisis—is just starting to hit its stride. Today was the first of two days dedicated to the role of derivatives. Joseph Cassano, the former head of AIG's derivatives unit (remember that implosion and government bailout?), testified, as did Goldman Sachs president Gary Cohn. Yet Congress has already decided what to do about derivatives—run them through clearinghouses and limit how much banks are allowed to play around with them. If we've already done the legislating—that is, if we've already determined, rightly or wrongly, what needs to be fixed—then why are we still having these sorts of hearings? The FCIC's report back to Congress isn't due until December.

How the FCIC can help the regulation debate - Yesterday, Barbara Kiviat asked why we’re even bothering with the Financial Crisis Inquiry Commission, given that the financial regulatory reform bill has been written and negotiated long before the FCIC has even finished its hearings. Her answer is a good one: reform isn’t over yet, and there will be further bills and further iterations of the present bill in the years to come; the FCIC’s report can and should inform all of that. But another answer to Barbara’s question is given by John Taylor today, who has decided to publish a highly contentious and unhelpful criticism of the Dodd-Frank bill in the WSJ. Essentially what he’s doing is politicizing financial regulatory reform, and trying to make it seem as though the entire narrative of financial institutions being largely responsible for the financial crisis is some kind of Democratic blame game. With any luck, the FCIC report should be authoritative and bipartisan enough to put an end to this kind of thing, especially since Taylor makes the connection explicit:

Illegitimacy Of Wall Street Profits Exposed By Financial Reform Bill - The emerging bank reform legislation might be viewed in a singularly positive light if the reforms were not the byproduct of a skewed capital system that made several million Americans undeservedly powerful and rich while Congress slept. One could feel downright hopeful about the future of American banking if moral hazard had not contaminated the land. But too much polluted water has gone under the bridge. The good in the reforms is counteracted by the poisons that produced the need for remedial interventions. The attractions of the banking legislation now pale in the light of the overwhelming injustices embedded in the nation’s amorally skewed distribution of wealth. Consequently, this is a day for mourning, not rejoicing, since massive wealth gained by manipulative elites is not likely to be recovered for the public domain until the hand of God is eventually revealed.

MSNBC’s Ratigan: Stock market an ‘obviously corrupt’ fraud…On his afternoon show Tuesday, MSNBC host Dylan Ratigan explained why he believes the usual explanations given in the media for why the stock market went up or down on a given day are nonsense. "Seventy percent of the volume [of trades on the stock market] is computers that are run by the banks playing ping pong with stocks for 10 seconds at at time," Ratigan said. "The stock market at this point, which used to be a reflection of the future value of actual businesses in this country, has been turned by our government and our banks into little more than a paper shredding facility [about which] we can make up reasons why it goes up and down," Ratigan said. "But when the computers ... at the banks are controlling the action, most everything else is kind of silly." Ratigan concluded that it's time to create an "alternative investment structure" that would allow people to invest their money without putting it "into the obviously corrupt stock market in this country."

New Feudal War Part 3: “Austerity” - By now all the major activities of big corporations and government combine in a nexus of organized crime. In principle the finance sector’s activity is meant to help corporations and governments cover up for the fact that all sectors are mature, that it’s been many years since there’s been any real growth, and that most large entities are in the red if not insolvent. This covered up as long as it could for the structural collapse of the debt economy, resource depletion, and the fact that much of what wealth is still being produced is simply embezzled from society by a handful of gangsters. The criminals, in corporations and governments, engage in this control fraud to pretend the money is still there and growing. That’s the nominal fraud mode. When the ponzi scheme blows up, as with American mortgages, everything shifts into disaster capitalist mode. The system pretends the blowup is some kind of act of god, force majeure which is nobody’s fault. It’s also the implicit will of god that the rich who benefited from the bubble don’t have to divest themselves to cover the losses now that all those “profits” are proven to have been fictional.

The Vicious Circle of Debt and Depression: It Is a Class War - Never before has so much debt been imposed on so many people by so few financial operatives--operatives who work from Wall Street, the largest casino in history, and a handful of its junior counterparts around the world, especially Europe. External sovereign debt, as well as occasional default on such debt, is not unprecedented [1]. What is rather unique in the case of the current global sovereign debt is that it is largely private debt billed as public debt; that is, debt that was accumulated by financial speculators and, then, offloaded onto governments to be paid by taxpayers as national debt. Having thus bailed out the insolvent banksters, many governments have now become insolvent or nearly insolvent themselves, and are asking the public to skimp on their bread and butter in order to service the debt that is not their responsibility

Why We Are Totally Finished - In A Nutshell: Corporatocracy Has Replaced Capitalism Capitalism Fixes Problems & Preserves Democracy: Capitalism is what we should be relying on to fix our problems. Capitalism has it's own ecosystem, just like biology's ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance. The problem is we are no longer a capitalistic society. What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past. As outlined in "It's Not A Financial Crisis - It's A Stupidity Crisis", we created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble. Now, after the second Stupidity Crisis there isn't a third bubble to inflate.

Extreme Measures: Arming the Zealotocracy, Serving the Elite - One of the most significant developments in the modern world -- history may find it to be a decisive one -- has been the deliberate cultivation of religious extremism by ruling elites trying to sustain and expand their power.  The rise of virulent extremism in almost every major religion -- Islam, Christianity, Judaism, Hinduism -- has many other causes, of course. Chief among these is the turbulent encounter between modernity and tradition, a confrontation that has played out -- and is playing out -- in so many different ways both within and across various cultures.

The Private Sector Fallacy - Felix’s post is largely about two factors. One is that big company executives are prone to exactly the same sort of cognitive fallacies as ordinary people, and hence make stupid decisions routinely. The second is that the incentives of individual people who make decisions (or provide information to people who make decisions) are only tangentially related to the interests of the company as a whole, and certainly not when you think of those interests over the long term.A third factor is simply that companies are big, dumb, poorly designed institutions. There’s lots of talk about how individual human beings do not resemble the rational actors of textbook economic theory. The same is at least as true of big companies, of which I have seen many, from various perspectives. Yet the belief that the private sector is the answer to all our problems remains deeply rooted. One might even call it an ideology. I would hope that the financial crisis (and the BP disaster) might cause people to question that ideology, at least a little bit.

Could We Require Bailed Out Investment Bankers & Auto Company CEOs to Sign an Affidavit? -- Maxine Udall - Here's my idea of a better affidavit for investment bankers: I will hold a higher minimum level of capital that will be determined by my risk exposure and I will restrict my trading practices with regard to obscure derivatives and any new derivative-like financial instruments I may create (and that benefit only my bank at the expense of both my investor clients and the larger society) and will provide a full and transparent accounting of the risk therein to all potential investors. Oh, wait, that's not an affidavit. That's regulation. And thank goodness it looks like we will now have some of it after all. Regulation by regulators who believe in regulation is almost certainly better than an affidavit, but I sort of like the idea of an affidavit, too. It seems only fair.

Your tax dollars at work - A reader sent a link to the following paper. I had no idea. Abnormal Returns from the Common Stock Investments of the U.S. Senate, The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993-1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive.

 [Updated] The Coming Super-Seed Crash Unnoticed by almost no-one, the startup financing landscape has been transformed: a combination of ease of entry, lower capital requirements, failing incumbent venture capital (VC) firms, and general fervor has driven the emergence of a host of new "super-seed" firms. These small-ish outfits -- usually running less than $20m -- specialize in seeding a bazillion companies, following on in very few, and generally trying to be fast-moving and networked.  Now, however, the super-seed crash is coming. We have silly numbers of companies being seeded -- I had someone at a well-known, larger venture fund tell me yesterday in San Francisco that they were seeing dozens of Series A-seeking newly angel-funded companies a week. Valuations are escalating as super-seeding angels compete against one another, while fourth-quartile incumbent VCs jack prices to buy deals through dint of having more money to put to work. At the same time, more companies seeded means more full-cycle money required to break through the noise and competition, which while drive dilution of seed investors who can't follow-on in subsequent larger rounds.

SULTANS OF SWAP: BP Potentially More Devastating than Lehman! As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

BP and Counterparty Risk - Several reporters have called me to ask about the implications of BP’s travails for its trading operations, and more crucially, for the markets broadly.  Here are some key points:

  1. BP probably has the largest energy trading operation of any firm in the world.
  2. There is a non-trivial risk of BP going bankrupt as a result of ballooning liabilities associated with the Gulf spill.  Don’t believe me?  Look at the company’s gargantuan CDS spreads.
  3. BP’s counterparties are well aware of this, but are adopting a public “what, me worry?” response to any queries about BP’s counterparty risk.  Nobody wants to raise doubts

BP oil spill: Barack Obama and David Cameron agree BP must not collapse - BP must not be allowed to implode in the wake of the Gulf of Mexico oil spill disaster, Barack Obama and David Cameron have declared, as the company starts the week with its shares at a 14-year low. The US President and British Prime Minister said that the stricken oil giant should "remain a strong and stable company" after meeting to discuss the environmental disaster on the sidelines of the G20 summit in Toronto. The discussions come amid growing worries that the company could never recover from the Deepwater Horizon disaster, which has left BP facing unquantifiable costs and damaged its strategic ambitions. The two leaders said that the company should "meet its obligations to cap the leak, clean up the damage and meet legitimate compensation claims," but added that "it was to both countries' advantage for BP to remain a strong and stable company."

Do Hungry People Take Bigger Financial Risks? -That is one possible implication of a fascinating new study, which finds that people who are hungry are more risk-seeking, and people who are sated are more risk-averse. Researchers put study subjects on different diets to affect their metabolic states, and then week after week gave them options to participate in different kinds of lotteries. Some of the lotteries were riskier than others, in terms of their expected and potential payouts. Generally speaking, when subjects were in hungrier states, they chose the riskier lottery options, and when they were full, they choose safer lotteries. The authors suggest that this means metabolic states, and the hormones associated with them, can affect our appetite for all sorts of risks. From the study:Changes in metabolic state systematically altered economic decision making …

Banks borrow slightly more from Fed - Banks borrowed slightly more last week from the Federal Reserve's emergency lending program, but are still well below levels seen during the 2008 financial crisis. The Fed, in a report issued Thursday, said banks averaged $162 million in borrowing for the week ended Wednesday. That's up from $151 million in the previous week. Loans from the central bank's emergency lending program, known as the discount window, had surged to a high of $110 billion a day during the height of the financial crisis in the fall of 2008. At the time, banks turned to the Fed as a lender of last resort because their sources of credit were frozen. With financial and economic conditions improving, the Fed has been winding down its special lending programs. Still, the central bank's balance sheet has swollen to $2.3 trillion, more than double its pre-crisis level of less than $1 trillion.

Obama pushes U.S. bank tax – President Barack Obama, fresh from a win on a sweeping overhaul of Wall Street regulations, on Saturday urged Congress to take up his proposal for a US$90 billion, 10-year tax on banks as the next step in reform.Mr. Obama wants to slap a 0.15 percent tax on the liabilities of the biggest U.S. financial institutions to recoup the costs to taxpayers of the financial bailout."We need to impose a fee on the banks that were the biggest beneficiaries of taxpayer assistance at the height of our financial crisis -- so we can recover every dime of taxpayer money," Mr. Obama said in his weekly radio and Internet address. Mr. Obama joins Britain, Germany and France who proceeding with taxes on their financial istitutions in the wake of the financial crisis. Canada and many developing countries stant staunchly opposed.

Banks Face $5 Trillion Rollover by 2012 - Banks around the world must refinance more than $US5 trillion ($5.8 trillion) of debt in the coming three years, a massive rollover that poses threats to financial stability and growth. The need to replace these funds, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth… US banks have issued $US230 billion of debt in the first five months of the year, about 60 per cent of the rate they need to achieve over the three year period. Euro zone banks have issued $US133 billion, or about 70 per cent of their needed run rate. One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. It is possible that a global desire to save more helps to blunt this effect, but even so the macroeconomic effect and the effect on asset prices will both be strongly downward.

New Legislative Effort to get Bankruptcy Exemption….For Guns.- Don’t let Goldman and Bank of America repossess all the guns!  “The gun wars are pretty much over, and the gun rights side won. One wonders when they’ll will figure it out.” Not so fast. There’s one last battle to be fought. A friend on the hill forwarded me the following. Supported by the NRA, Rep John Boccieri (D-OH) is pushing to allow firearms to be exempt from bankruptcy: “In those states that allow a debtor to use federal exemption law, this provision would prevent a trustee from selling a debtor’s firearms to satisfy the claims of creditors.” This amendment would make it so someone going through bankruptcy can’t have their guns liquidated and sold to pay off their bills.

Guns and Bankruptcy » Mike Konczal at Rortybomb has an interesting post about the Protecting Gun Owners in Bankruptcy Act of 2010 (the Pro-GOB Act).  This legislation would make firearms exempt from creditors' claims in bankruptcy.  I'm still not sure if it is a joke or real legislation; I haven't been able to find the text of a proposed bill.  Even if one thinks this legislation is a good idea (which it isn't), it is all sizzle, no steak.  It would be inapplicable to almost all bankruptcy cases.  It would only affect Chapter 7 debtors who own firearms and live in 16 states.   To the uninitiated, certain property of consumer debtors is "exempt" from creditor' claims, meaning that the creditors cannot levy on and sell off the property.  State law exempts certain property as does federal bankruptcy law.  There is tremendous variation in exemptions, which range from generous (unlimited dollar value homestead exemptions in a few states and DC) to quite stingy (Delaware & Wyoming, e.g.).  A debtor who files for bankruptcy can choose between the applicable state and federal exemptions, unless the state has opted out of the federal exemptions.   Even for those handful of Chapter 7 cases that involve assets, a federal firearms exemption would be worthless for the residents of the 34 states that have opted out of the federal exemptions.

A Comeback in Wall Street Hiring? - New data from the New York Labor Department have shown a sharp increase in financial industry jobs, with the city adding 6,800 positions from the end of February through May. That’s the largest three-month increase since 2008, and it has understandably attracted a lot of buzz in the econoblogosphere. But my colleague Eric Dash, who covers the banking industry, warns that people may be reading too much into this number, since it is not adjusted for seasonal changes. Eric writes me:The banking industry’s hiring boom may be short-lived. Wall Street typically experience a pickup in hiring during the spring and early summer. Most bankers will not join a new firm until late January or February, when they receive their annual bonus paycheck. The banks, meanwhile, are hesitant to hire in the fall to avoid guaranteeing big year-end bonus payouts along with a forced vacation, known as garden leave.

$2.3 Billion in Troubled CMBS Loans Coming Due Over Next 6 Months - There are 960 fixed rate loans representing $9.6 billion scheduled to mature by the end of the year, according to a Fitch Ratings' review of CMBS fixed rate commercial loans. Of these 960 loans, 103 loans representing $2.3 billion (23.3%) are in special servicing. Of those in special servicing, 27 loans (representing 48% by balance) are current.  The maturity breakdown by month through December is as follows:
* July: 148 loans, $1.7 billion
* August: 134 loans, $1.4 billion
* September: 154 loans, $1.1 billion
* October: 180 loans, $1.9 billion
* November: 161 loans, $1.6 billion
* December: 183 loans, $1.9 billion

If There’s A Bottom In Sight For Commercial Real Estate, We Can’t See It - In the last 18 months, the commercial real estate market has seriously deteriorated. Yet many analysts are hopeful that the worst is over and that pressure on property owners will begin to ease. Let's take an in-depth look at whether their optimism is justified.

US House Backs Homebuyer Tax Credit Extension – CNBC -The U.S. House of Representatives Tuesday approved giving extra time to homebuyers trying to get a popular federal tax credit by the end of the month. The House backed by a vote of 409-5 a measure to extend the closing deadline to Sept. 30 for buyers who met the April 30 deadline to have a signed contract. The current deadline requires those buyers to close the transaction by June 30 to receive the $8,000 tax credit for first-time homebuyers. The Senate must still approve the measure before President Barack Obama can sign it into law.

House Passes Homebuyer Tax Credit Closing Extension - From Reuters: U.S. House backs homebuyer tax credit extension This is bad policy ... and the Senate will probably pass it tomorrow.

Housing's Powerful Lobby Surges Ahead - Last week, at the monthly lockup for the existing home sales report, the Realtors' chief economist, Lawrence Yun, told reporters that if the closing date wasn't extended, 180,000 home buyers who signed contracts by April 30th, would lose the tax credit due to delays in closing. He blamed these delays on the tough mortgage market, new appraisal rules and the still-complicated short sale process (when a home is sold for less than the value of the loan). So Congress tried to attach a three month extension on the closing date to other legislation last week, but those bills never passed. But the powerful troika of Realtors, builders and mortgage bankers pushed full speed ahead, rallying the troops.  I can't tell you how many calls we got here in the CNBC DC bureau from Realtors claiming there would be "rioting in the streets". Congress, at the eleventh hour, passed an extension of the closing date on the home buyer tax credit.

Fannie And Freddie: Where Do We Go From Here? : NPR -There are two really big things that the sweeping financial regulation bill doesn't even begin to tackle — Fannie Mae and Freddie Mac.  At $145 billion and counting, bailing out the mortgage giants is turning out to be the most expensive part of the financial meltdown.  Fannie and Freddie are basically expensive wards of the state. And yet, they are critical components of the housing market recovery — such as it is. "Right now they're responsible for the financing of roughly three out of every four mortgages," says Ed DeMarco, the government's conservator who oversees Fannie and Freddie. In September 2008, the federal government stepped in to save the firms from insolvency. And the U.S. Treasury is backing up the firms' losses — some estimate the total bill could reach $400 billion. Fannie and Freddie's future is in doubt, but DeMarco says one thing is certain: "We cannot do this indefinitely."

Government Agencies Hold 46% of REO Inventory...and More Is Coming - As the GSEs and other federal agencies involved in housing finance sell their collective inventory of repossessed homes, they will generate significant pressure on prices, according to a new report from the real estate analytics firm Radar Logic. And with an even larger share of government-backed loans in the delinquency pipeline, their influence over home prices could last for years, the New York-based company says. Based on Radar Logic’s analysis, the federal government’s REO inventory — including homes owned by Fannie Mae, Freddie Mac, HUD, and the Department of Veterans Affairs (VA) — has increased steadily for over 24 months and now accounts for approximately 46 percent of the nation’s total REO supply

Trends in FHA-insured loan performance still not encouraging - The FHA is a little bit sensitive about any suggestions it might not be A-OK, but the steady trickle of less-than-reassuring news about the federal mortgage insurer difficult to ignore. Consider the following assertions from the Cleveland Fed, contained in a report on mortgage lending patterns:FHA-insured loans at least 60 days delinquent show a cyclical pattern that is higher than the delinquency rate of all prime loans.The percentage of FHA-insured loans in foreclosure follows trends similar to prime loan performance, albeit at elevated rates. Still, officials at the FHA’s mothership, the US Department of Housing and Urban Development remain upbeat. As Reuters reported on June 21

Potentially 'Thousands' Of Homeowners Improperly Denied Obama Mortgage Modifications, Administration Admits - Potentially "thousands" of troubled homeowners were denied opportunities to lower their monthly mortgage payments under the Obama administration's signature foreclosure-prevention plan due to servicer errors and inadequate oversight by the Treasury Department, a government audit has found. Mortgage servicers failed to comply with basic guidelines, used different criteria to evaluate borrowers, recorded error rates up to six times their established thresholds, and couldn't provide evidence that potentially eligible homeowners had been solicited for the administration's Home Affordable Modification Program, also known as HAMP. The errors are partly due to Treasury's failure to issue specific guidelines for servicers to follow, and the administration's lack of quality-control standards. Because servicers aren't required to adhere to the same set of standards, there's a risk that firms aren't identifying practices "that may lead to inequitable treatment of borrowers or harm taxpayers through greater potential for fraud or waste,"

Freddie Mac: 90+ Day Delinquency Rate steady in May - Click on graph for larger image in new window. Freddie Mac reported yesterday that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business was steady at 4.06% in May, the same rate as April, and up sharply from 2.73% in May 2009. "Single-family delinquencies are based on the number of mortgages 90 days or more delinquent or in foreclosure as of period end ..." The "good" news is the delinquency rate has stopped rising rapidly. However some of the earlier increase was because of foreclosure mortatoriums, and distortions from modification programs - loans in trial mods were considered delinquent until the modifications were made permanent.

Fannie Mae: Serious Delinquency rate declines in April - Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business decreased to 5.30% in April, down from 5.47% in March - and up from 3.42% in April 2009. "Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans." This is similar to the report from Freddie Mac (although Fannie Mae releases data one month later). Just as for Freddie Mac, some of the earlier rapid increase was probably because of foreclosure moratoriums, and distortions from modification programs because loans in trial mods were considered delinquent until the modifications were made permanent.  More modifications have become permanent (and no longer counted as delinquent) and Fannie Mae is foreclosing again (they have a record number of REOs) - so there has been a slight decline in the delinquency rate.

Strategic Default Penalties Threaten Struggling Homeowners…On Wednesday, Fannie Mae, the government-sponsored enterprise that buys up mortgage contracts from loan originators to keep the housing market liquid, announced new penalties for homeowners who strategically default. “Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure,” the company announced, adding that the policy goes into effect July 1. “Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.” The new provisions mean that if you strategically default, you likely cannot get a conforming mortgage for seven years. And if you strategically default in some areas, Fannie Mae will come after you in court.But the Fannie Mae rule — one of several new provisions aimed at penalizing strategic defaulters — raises the possibility that the government and loan servicers might imminently begin targeting an economically vulnerable population, one characterized by housing insecurity and joblessness. It brings up the immediate concern — for both defaulting homeowners and the agencies trying to keep them paying — of how to distinguish “strategic” defaulters from those defaulting because they have no choice. And the data shows that those considering default are by most metrics in financial straits, whether solvent or not.

How Far Underwater Do Borrowers Sink Before Walking Away? - At what point do borrowers who owe more than their homes are worth decide to stop paying the mortgage?A new study from economists at the Federal Reserve Board aims to answer that question. The research found that the median borrower who “strategically” defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.The study is bad news for the mortgage industry in that it backs up the idea that a growing share of borrowers are walking away from loans. Concerns are mounting among lenders and investors that some borrowers who owe far more than their homes are worth are now choosing not to pay mortgages that they can afford.But the silver lining here is that it suggests a rather high threshold for borrowers to walk away.

Number of the Week: Could Walk Away Stimulus Be Waning?355,000: The number of people who defaulted on their mortgages in the first half of 2009, even though they could pay. To the various clouds gathering over the economic recovery, add a new one: The U.S. will eventually run out of people willing to walk away from their mortgages. Throughout the recovery, the economy has received a boost from an unlikely source: So-called strategic defaulters, who renege on their mortgages even though they can pay. The practice raises moral questions, can be tough on families, precipitates losses for banks and adds to the country’s growing stockpile of foreclosed homes. But it also frees up a lot of cash that the defaulters can spend on other things, adding to the consumer spending that tends to account for the lion’s share of economic growth.

Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’ - A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were “strategic,” where borrowers who appeared to have the capacity to pay their mortgages stopped doing so. The research follows on an earlier report by Experian and Oliver Wyman that first aimed to quantify the share of mortgage defaults that are “strategic.” Strategic defaulters are defined as those who miss six straight mortgage payments without missing multiple payments on auto loans and other consumer debts for the six months after they first fell behind on mortgage payments.The report finds that the share of borrowers who strategically defaulted through the first half of 2009 is unchanged from the end of 2008. Still, the absolute number of strategic defaults in the first half of 2009 increased 53% from the year ago period.

Nearly 1 in 3 first-quarter home sales a foreclosure: report (Reuters) - Nearly one out of every three U.S. home sales in the first quarter was a foreclosure property as steep price discounts boosted demand for distressed real estate, RealtyTrac said in a new report on Wednesday. Foreclosure homes accounted for 31 percent of all residential sales in the first quarter of 2010, with the average sales price of properties that sold while in some stage of foreclosure nearly 27 percent below homes that were not in the process, Irvine, California-based RealtyTrac said. "In a normal market, only 1 to 2 percent of home sales are foreclosures, so this is certainly a significant level," Rick Sharga, senior vice president at RealtyTrac, said in an interview."

Foreclosure Sales One-Third Of All Home Sales In Q1 – The number of homes going into foreclosure is, by some measures, more than 300,000 a month. Buyers are taking advantage of that trend. RealtyTrac reports that “foreclosure homes accounted for 31 percent of all residential sales in the first quarter of 2010, and that the average sales price of properties that sold while in some stage of foreclosure was nearly 27 percent below the average sales price of properties not in the foreclosure process.”The most stunning information from the research is that “Total foreclosure sales in 2009 were up more than 1,100 percent from 2006 and up more than 2,500 percent from 2005.”The news in another piece of data about why the housing recovery, if there was one, has stalled. Homebuyers can take advantage of the need for banks to sell “abandoned” homes to get them off their books. Banks are ill-equipped to maintain vacant properties. Financial firms are better off selling at a loss than watching properties fall into disrepair.

Foreclosed Homes Sell at 27% Discount as Supply Grows - Homes in the foreclosure process sold at an average 27 percent discount in the first quarter as almost a third of all U.S. transactions involved properties in some stage of mortgage distress, according to RealtyTrac Inc. A total of 232,959 homes sold in the period had received a default or auction notice or were seized by banks, RealtyTrac said in a report today. That’s down 14 percent from the fourth quarter and 33 percent from the peak a year earlier, the company said. The average price of a distressed property was $171,971, according to the Irvine, California-based data seller. “The discount will probably stay between 25 percent and 30 percent as lenders carefully manage the number of new foreclosure actions in order to avoid flooding the market,” “We’re clearly creating more properties that will be sold at distressed prices than the market is absorbing,”

Bankruptcy revenge: Modify loan or declare bankruptcy? – Some have struggled unsuccessfully to keep their homes, and others have just walked away. Phillips decided he wanted revenge and was willing to ruin his credit record for it.  When a short sale didn't work out as planned, the 32-year-old Chicagoan opted for Chapter 7 bankruptcy liquidation, a move that will leave Phillips with little except for the scant possessions in his one-bedroom condo. It also will leave his lender, Chase, with little except for, eventually, a condo that has lost value. Meanwhile, Phillips continues to live there, mortgage-free. "I've gotten past being shameful." Phillips' move may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second "piggyback" mortgages used to buy homes.

Combining Chapter 13 with a Voluntary Mortgage Modification - Most of us are all too familiar with the failure of Congress to pass legislation allowing judicial modification of mortgages in chapter 13 bankruptcy cases. Sadly, our predictions of millions of foreclosures, most of which could have been prevented by that legislation, are coming true, and most knowledgeable observers believe the worst is yet to come. In the absence of a law requiring lenders to modify mortgages, creative bankruptcy attorneys have been doing the best they can with the tools that are available and are having considerable success.      Increasingly, consumer bankruptcy attorneys are combining loan modifications under the Obama Administration's HAMP (Home Affordable Modification Program) with chapter 13 plans that can eliminate or greatly reduce most other debts. In some cases second and third mortgages can even be eliminated in chapter 13. This strategy was made much more feasible by recent changes in the mortgage modification program directives that prohibit mortgage companies from discriminating against homeowners who are in bankruptcy cases.

Short-sale datapoint of the day - How long does it take to complete a short sale? If you have a prime loan from GMAC, it takes a full six months: painful. But what’s much worse is that GMAC is by far the fastest mortgage servicer of the lot: prime loans from Countrywide take, on average, 13 months. Subprime loans from Morgan Stanley’s Saxon unit are even worse, at 17 months. And then there’s the subprime loans from Equicredit and Ocwen, which take a mind-boggling 29 months to go through, on average.Jorge Newberry has some common-sense ideas about how to speed things up a bit, but the fact is that these servicers have demonstrated their inability to do their jobs multiple times over the past few years: they’re simply overloaded. Too few staff, with too few qualifications, are trying to do too many things at once.The result is predictably depressing: more foreclosures, less money for servicers, more distressed sales, more empty homes, lower house prices. Treasury has done nothing to alter this situation to date, and neither has Congress. So expect more of the same going forward, for years and years to come.

Why banks are self-defeating on housing - Why are banks so bad at short sales, even when such things are clearly in the banks’ interest? Cynic has a spectacularly good comment which is worth elevating to a blog entry of its own:It’s tempting to lay the blame on servicers’ lack of incentive to process these short-sales speedily. Or to suspect that banks aren’t eager to speed the process, because they’d like to wait to recognize the losses until their balance sheets are a little more robust, even if that ends up costing them more in the long run. And those are real problems, but they’re not the whole picture. The bigger problem here is Milton Friedman. There is an absolute refusal to recognize the possibility that, for a variety of reasons, the lenders will not act in their own best interests unless forced to do so. That runs directly contrary to the axiomatic tenets of neoclassical economics – surely sophisticated businesses will always pursue their own economic self-interests, and have the ability to discern it. But, alas, not.

Housing Bust in the Exurbs - From the LA Times: Undone by their dreams In 2005: Amid the imposing two-story designs, they settled on a modest single-story home — yet with 2,400 square feet, it was large enough for their growing family. The sales representatives told them ... if they put down a $3,000 deposit they could lock in the price at $365,000.They could barely scrape together the deposit, and they didn't have a down payment for the mortgage. The sales representatives didn't seem worried. ... Countrywide Financial Corp. turned them down. [they had filed bankruptcy 4 years earlier] Freedom Plus Mortgage said yes. And the result in 2009:  They spoke to the bank but were told that they didn't qualify for a loan modification ... In October, the house was sold for $125,000.The buyers could "barely scrape together" a 1% deposit, they could hardly qualify (even Countrywide turned them down!), their commute to work was more than an hour each way ... the 2,400 sq ft tract house could probably be built for under $150K today on land that is very cheap ...

Case-Shiller: House Prices increased in April due to tax credit - These graphs are Seasonally Adjusted (SA). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs. S&P/Case-Shiller released the monthly Home Price Indices for April (actually a 3 month average). This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).  The first graph shows the nominal not seasonally adjusted Composite 10 and Composite 20 indices (The Composite 10 index is off 29.7% from the peak, and up 0.3% in April (SA).The second graph shows the Year over year change in both indices. The Composite 10 is up 4.6% compared to April 2009. The Composite 20 is up 3.8% compared to April 2009.The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller, by Metro Area (June Update) - The S&P/Case-Shiller Composite 20 home price index, a broad gauge of U.S. home prices, posted a 0.8% gain in April from a month earlier and rose 3.8% from 2009, as the expiration of a federal tax credit boosted prices. Eighteen cities posted month-to-month increases in April, but price levels remain close to April 2009 lows. Miami and New York were the only two cities to post monthly drops, dropping 0.8% and 0.3%, respectively. New York posted a new relative index low. San Diego has now shown 12 consecutive months of positive returns. It is the only market that didn’t contract in the late winter months. “The April result likely benefited from demand created by the impending expiration of the homebuyer tax credit. Indeed, homebuilders and realtors are reporting a steep drop in demand since the recent expiration of the credit. Prices are likely to follow demand, so we expect this index to trend weaker in coming months,”

First-Time Homebuyer Traffic Nose-Dive  -First-time buyers purchased 46% of existing home sales in May, down from 49% in April.We all knew that first-time home buyers activity was going to fade after the tax credit expired. But there was not much of a way to quantify exactly what the impact would be beforehand. We could wait for subsequent monthly sales data to reflect that weakness — but that is hardly much of a solution. Enter the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions, a proprietary survey of 1,500 real estate agents nationwide. The results of the first survey are out, and not surprisingly, it indicates that first-time “homebuyer traffic dropped sharply in May. This drop implies fewer signed contracts in June and fewer closed transactions in July and August.

Are Home Prices Too High — or Too Low? - Several readers expressed surprise that I still believed home prices remain too high, as discussed in the A Closer Look at the Second Leg Down in Housing last week.Paul Kasriel, in a recent Daily Global Commentary — “The U.S. Housing Market – Post-Tax Credit Give-Back or Something More Fundamental” — argued the exact opposite. In that piece, he wrote:“Is there any reason to believe that after a couple of months, home sales will pick up again? Yes. Why? Because with mortgage rates at rock-bottom levels and with house prices very low in relation to household incomes, housing is about as an attractive a purchase as it has been in the past 40 years.Are we on the eve of a renewed housing boom, given this attractiveness? No. But are we likely to slip back into a full-fledged housing recession? No. Two steps forward, one step backward.”So which is it? Are house prices low or high relative to income? What’s the basis of Kasriel’s homes-are-cheap statement?To find out, I pinged Paul as to the basis of his Housing is cheap thesis.

The double-edged sword of low mortgage rates - Long-term interest rates are tumbling further today: 10-year Treasury yields are now a hair’s breadth away from breaking the 3% barrier. And where long-term interest rates go, mortgage rates are bound to follow. So it’s easy to see why the purple line is falling on this chart, which comes from Barry Ritholtz and which is doing the rounds today: Meanwhile, it’s equally easy to see why the red line is rising. It’s the ratio of rents to prices, and the first-order effect of falling prices is rising rent-to-price ratios. But Paul Kasriel of Northern Trust reads a lot into this chart: it’s cheaper to buy than to rent, and therefore now is a good time to buy. Indeed, he says, “housing is about as an attractive a purchase as it has been in the past 40 years.”The big picture, in terms of house prices and interest rates, is clear: prices go up when rates are falling, and they go down when rates are rising.

MBA: Mortgage Refinance Applications increase, Purchase Applications near 13 Year Low - The MBA reports: Mortgage Refinance Applications Increase as Rates Continue to Drop in Latest MBA Weekly Survey - The Refinance Index increased 12.6 percent from the previous week and is the highest Refinance Index observed in the survey since the week ending May 22, 2009. The seasonally adjusted Purchase Index decreased 3.3 percent from one week earlier.  “Purchase applications declined for the seventh time in the last eight weeks, keeping the purchase index near 13-year lows...The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.67 percent from 4.75 percent, with points decreasing to 0.96 from 1.07 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This is the lowest 30-year contract rate recorded in the survey since the week ending April 24, 2009. This graph shows the MBA Purchase Index and four week moving average since 1990. The purchase index has collapsed following the expiration of the tax credit suggesting home sales will fall sharply too. This is the lowest level for 4-week average of the purchase index since 1996.

Pending Sales of Existing U.S. Homes Decreased 30% in May - The number of contracts to purchase previously owned houses plunged in May by more than twice as much as forecast after a homebuyer tax credit expired. The index of pending home resales dropped 30 percent from the prior month, figures from the National Association of Realtors showed today in Washington. The drop was the biggest in records dating to 2001 and compared with a 14 percent decrease forecast in a Bloomberg News survey of economists.  The decline shows that the industry at the center of the financial crisis remains vulnerable in the absence of government support. A stabilization in housing will depend on gains in incomes and employment that may stem foreclosures and give Americans the confidence to start buying again.

Pending homes sales tumble in May to lowest level on record after tax credits expire-- The number of buyers who signed contracts to purchase homes tumbled in May, a sign the housing recovery can't survive without government incentives.The National Association of Realtors said Thursday its seasonally adjusted index of sales agreements for previously occupied homes dropped 30 percent in May from April. The index fell to 77.6 from 110.9. May's reading was the lowest dating back to 2001.  The index also was down 15.9 percent from the same month a year earlier.The index provides an early measurement of sales activity because there is usually a one- to two-month lag between a sales contract and a completed deal."

Mortgage Rates on 30-Year U.S. Loans Fall to Record - Mortgage rates on 30-year U.S. loans slid to a record low for the second straight week, lowering borrowing costs for homebuyers as demand slumps. Rates for 30-year fixed loans sank to 4.58 percent in the week ended today from 4.69 percent last week, Freddie Mac said in a statement. The average 15-year rate fell to 4.04 percent, also a new low, the McLean, Virginia-based company said. The decline in mortgage rates, fueled by investor demand for government-supported bonds tied to housing loans, has failed to lift U.S. home sales after the April 30 end of a federal tax credit for buyers. Purchases are more dependent on consumer confidence and employment than rates, said Cameron Findlay, chief economist at in Irvine, California. Confidence among U.S. consumers fell in June more than forecast as Americans became distressed over the outlook for jobs. The Conference Board’s confidence index declined to 52.9 last month from a revised 62.7 in May, according to a June 29 report.

Whitney, Ritholtz Issue Bearish Calls on Housing Market - While the headline focuses on her outlook for housing, Whitney is bearish across the board, seeing little reason to cheer on the employment and bank earnings fronts. She sees a 10% fall in housing prices in the next six months (!), which will hit bank earnings (Whitney has argued since at least early 2009 that banks have been goosing earning by underreserving for losses) and the economy generally (a further decline in home equity plus lack of mobility of consumers wanting to sell their houses but facing a declining market has implications for consumer spending generally). She point out that consumer credit is tightening, which puts a crimp on small businesses (both via lower revenues and via restricted access to funds), the biggest engine of hiring, and on top of that, municipalities and states are cutting spending and shedding jobs.Click here to view the segment.

Lumber Prices Indicate Next Wave Down Underway - As I’ve been saying all along, nothing is solved until the DEBT SATURATION is resolved. Depressions move in 3 waves, A down, B up, C down. The psychology of each wave is different – wave A equals “oh no!” Wave B equals “we’re saved.” And wave C equals real change is forced to occur – no fooling around this time. You can clearly see how the psychology is different now than it was during the plunge in 2008. Instead of “stimulus” the buzz word is “austerity.” No where else are the A,B,C waves more clear than in the price of lumber. First let’s look at a monthly chart of lumber going back to about 2001. You can see a sharp rise into a $460 peak, then a plummet that led the stock market by nearly 3 years all the way down to $140 – a stunning 70% collapse! That would be wave A. Note on this chart that the current month’s price of $182.80 is not yet reflected:

Home Sales and Construction Slowed in May - NYTimes -The economic indicators were the latest features that economists and analysts used to gauge the pace of the economic recovery. But all eyes are on the monthly employment figures scheduled for release Friday, which are expected to show a net loss of 125,000 nonfarm payroll jobs in June, and an unemployment rate of 9.8 percent, compared with 9.7 percent in May.  According to new statistics, pending homes sales and construction both declined in May. In addition, figures showed that while manufacturers recorded some gains in June, the pace of activity in that sector slowed last month compared with May and also came in slightly below estimates

Construction Spending declined in May -Overall construction spending declined in May, and private construction spending, both residential and non-residential, also decreased. From the Census Bureau: May 2010 Construction at $841.9 Billion Annual Rate  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during May 2010 was estimated at a seasonally adjusted annual rate of $841.9 billion, 0.2 percent below the revised April estimate of $843.3 billion.Spending on private construction was at a seasonally adjusted annual rate of $536.3 billion, 0.5 percent below the revised April estimate of $538.9 billion. Residential construction was at a seasonally adjusted annual rate of $260.8 billion in May, 0.4 percent below the revised April estimate of $261.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $275.6 billion in May, 0.6 percent below the revised April estimate of $277.2 billion. This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted.

Habitat For Humanity Among Top U.S. Homebuilders - As the housing and financial crisis struck several years ago, the large publicly traded builders, including D.R. Horton Inc. and KB Home, pulled back. But Habitat kept building. "We're a lot less tied to the market as a whole," said Mark Andrews, Habitat's senior director for U.S. operations. "We've been able to keep chugging along at a pretty solid pace." As a result, Habitat, a Christian group founded 34 years ago in Americus, Ga., around a philosophy of constructing and rehabilitating homes for low-income families, was recently ranked as one of the nation's top 10 builders for the first time in a closely watched industry list compiled by Builder Magazine.

Biggest Monthly Pending Home Sales Drop On Record As ISM Manufacturing Index Misses Big - Another big leg down into the recognition that i) the recession was really a depression all along and ii) we are smack back in it. The ISM Manufacturing index came at 56.2 on expectations of 59, previous was 59.7. And the stunner - the prices paid index came in at 57 on expectations of 70, with a previous read of 77.5. The crash in margins will be surreal and companies will have no choice but to raise prices. And just so there are no mistakes that the Great Depression 2.0 is here, pending homes sales plunged a massive 30% on expectations of -14.2, and a previous read of 6%. This was the biggest MoM drop on record. Deflation is here, as is a full blown economic contraction, coupled with the complete pull out of the US consumer, who, absent government subsidies, will contain purchases solely to the iPad. Ben Bernanke has no choice but to print money now, or it is game over.

ISM Mfg index shows slower expansion in June, Pending Home sales collapse - PMI at 56.2% in June down from 59.7% in May. From the Institute for Supply Management: June 2010 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in June for the 11th consecutive month, and the overall economy grew for the 14th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®. The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector continued to grow during June; however, the rate of growth as indicated by the PMI slowed when compared to May. The lower reading for the PMI came from a slowing in the New Orders and Production Indexes. And from the NAR: Pending Home Sales Drop as Expected The Pending Home Sales Index, a forward-looking indicator, dropped 30.0 percent to 77.6 based on contracts signed in May from a reading of 110.9 in April ... NAR chief economist Lawrence Yun said, “The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June.”  Both the ISM index and pending home sales were below consensus.

Special report: Repent at leisure - The Economist - MAN is born free but is everywhere in debt. In the rich world, getting hold of your first credit card is a rite of passage far more important for your daily life than casting your first vote. Buying your first home normally requires taking on a debt several times the size of your annual income. And even if you shun the temptation of borrowing to indulge yourself, you are still saddled with your portion of the national debt.  Throughout the 1980s and 1990s a rise in debt levels accompanied what economists called the “great moderation”, when growth was steady and unemployment and inflation remained low. No longer did Western banks have to raise rates to halt consumer booms. By the early 2000s a vast international scheme of vendor financing had been created. China and the oil exporters amassed current-account surpluses and then lent the money back to the developed world so it could keep buying their goods.

No, you shouldn’t criminalize credit… wait, are we seriously having this conversation? - Daniel Indiviglio has a strange post at The Atlantic that I have been trying to ignore, but the website editors there keep putting it on their front page in a box called “Things you might have missed”.  His argument is that credit should be criminalized because that would make the economy more stable. Daniel recognizes that the effects would be devastating in the short run, but claims that eventually it would only mean that the economy grows “a little slower”. This is not just my ungenerous interpretation: It would involve an extraordinarily difficult transitional period, including massive job losses, deflation, and a deep recession as the government and population adjust. But if Congress managed to embrace a credit ban, we would end up with an overall economy that grows a little slower, but is incredibly stable. All that systemic credit risk? Gone. That reward would be well worth the cost. [Emphasis mine]Would it really be worth the cost? Let’s consider what criminalizing credit would really mean.

Personal Income up 0.4%, Spending Increases 0.2% in May - From the BEA: Personal Income and Outlays, April 2010 Personal income increased $53.7 billion, or 0.4 percent ... Personal consumption expenditures (PCE) increased $24.4 billion, or 0.2 percent.  Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in May, in contrast to a decrease of less than 0.1 percent in April Personal saving as a percentage of disposable personal income was 4.0 percent in May, compared with 3.8 percent in April. The following graph shows real Personal Consumption Expenditures (PCE) through May (2005 dollars).The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter. This graph shows real personal income less transfer payments since 1969. This measure of economic activity is moving sideways - similar to what happened following the 2001 recession. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the May Personal Income report. The saving rate increased to 4.0% in April (increased to 3.7% using a three month average).

Savings Rate Climbs To 4%, Highest Since September 2009, Even As Spending And Income Both Miss Expectations - The BEA's May Personal Income and Spending data is out - as expected, with gizmos like the iPad out there, Americans once again outspent themselves: May Income came in at 0.4%, below expectations of 0.5%, flat with a revised April reading of 0.5%; Spending on the other hand was greater than expectations of 0.1%, coming in at 0.2%, compared to a previous reading of 0.0%. Yet despite the excess spending, the Personal Savings rate climbed to 4.0% - an increase from last month's revised 3.8%, and the highest since September 2009. Summary from the BEA:

Personal Savings Rate: Worse Than We Thought - FORTUNE -- The long decline of the savings rate in the United States has been widely discussed, yet every revisit of the data brings new cause for alarm. Hedgeye recently provided its clients a chart showing savings as a percentage of GDP. In the 1970s and 1980s savings were in the 5 - 7% range. In the decades since, personal savings have declined to the 1 - 3% range. Many pundits suggest the decline in savings is a non-issue, while others, more on the extreme, believe that it one of the primary economic issues currently facing the United States. While the implications can be debated, the fact remains that the savings rate has declined dramatically over the past few decades and is among the lowest of any modern nation state.

Consumer Confidence Plummets in June - From the Conference Board: Consumer Confidence Index® Drops Sharply The Conference Board Consumer Confidence Index® which had been on the rise for three consecutive months, declined sharply in June. The Index now stands at 52.9 (1985=100), down from 62.7 in May.  “Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up.” I rarely mention consumer confidence because it is mostly a coincident indicator, but this is quite a miss (expectations were for about the same level as May).

Another look at consumer sentiment and consumer spending - Atlanta Fed's macroblog  - In the most recent economic forecasting survey by the Wall Street Journal, 23 percent of the surveyed economists said consumers spending more readily than anticipated is the biggest upside risk of their growth forecast for the second half of the year. So anything that can shed light on future spending habits is of particular interest. Two of the most commonly cited measures of consumer attitudes are the Conference Board's Consumer Confidence Index and the Thomson Reuters/University of Michigan's Index of Consumer Sentiment. A key question is, do these indicators improve consumption forecasts? Previously, economic researchers have looked at the predictive power of these indexes for consumer spending, and they generally found that the ability of consumer confidence measures to predict consumer spending largely disappeared once some other measures of economic conditions were taken into account.

Demographics and Macroeconomics – Part 1 (Wonkish) -When it comes to the overall link between demographics and macroeconomics we already have a number of core workhorse models in the form of the life cycle and life course framework where the former deals with consumption and savings decisions as a function of age and the latter deals, broadly, with life time events and their individual and aggregate importance on economic dynamics. The adequate impact on the macro economy from the dynamics of demographics must then be developed as a function of the attempt to do two things; firstly, to continuously develop the life cycle and life course theories themselves and secondly to seek out new ways to apply life cycle and life course theory to existing macroeconomic problems and themes. In the first series, I will begin with the latter. 

Consumer Confidence Crushed -  EconomiPic - The AP details:  Americans, worried about jobs and the sluggish economic recovery, had another relapse in confidence, causing a widely watched barometer to tumble in June. The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May. Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8. June's reading marked the biggest drop since February, when the index fell 10 points. The index had risen for three straight months since then. Both components of the index — one that measures how consumers feel now about the economy, the other that assesses their outlook over the next six months — dropped. The Present Situation Index decreased to 25.5 in June from 29.8 in May. The Expectations Index declined to 71.2 from 84.6.

Wrong Track Distress - NYTimes - It’s getting harder and harder for most Americans, looking honestly at the state of the nation, to see the glass as half full. And that’s why the public opinion polls contain nothing but bad news for Barack Obama and the Democrats. The oil gushing into the Gulf of Mexico, the war in Afghanistan and, above all, the continuing epidemic of joblessness have pushed the nation into a funk. All the crowing in the world about the administration’s legislative accomplishments — last year’s stimulus package, this year’s health care reform, etc. — is not enough to lift the gloom. Democrats have wasted the once-in-a-lifetime opportunity handed to them in the 2008 election. They did not focus on jobs, jobs, jobs as their primary mission, and they did not call on Americans to join in a bold national effort (which would have required a great deal of shared sacrifice) to solve a wide range of very serious problems, from our over-reliance on fossil fuels to the sorry state of public education to the need to rebuild the nation’s rotting infrastructure. All of that could have been pulled together under the umbrella of job creation — short-term and long-term.

Restaurant Index "Softened" in May - For the second consecutive month, same store sales and customer traffic both declined in May (year-over-year).  This has taken a toll on the positive outlook in the "expectations index" and the overall index showed contraction in May. Note: Any reading above 100 shows expansion for this index. (see graph) From the National Restaurant Association (NRA): Restaurant Industry Outlook Softened in May as Restaurant Performance Index Fell Below 100...Restaurants are a discretionary expense, and they tend to be 'first in, last out' of a recession for consumer spending (as opposed to housing that is usually first in and first out). Since restaurants both lead and lag recessions, this contraction could be because of the sluggish recovery or might suggest further weakness in consumer spending in the months ahead.

10 retailers at risk: Chains on shaky ground - The recession that began in December 2007 has hit retailers hard. Electronics seller Circuit City, discount department store operator Filene's Basement, casual-apparel outfitter Eddie Bauer, skin-care specialist Crabtree & Evelyn, fast-food purveyor Fatburger and photo expert Ritz Camera are among the chains that have reorganized or liquidated since 2008.Despite a recent uptick in U.S. economic activity, risks persist. Forbes has been working with Audit Integrity, a Los Angeles company that provides quantitative forensic analyses of corporate behavior, to screen more than 2,000 publicly traded U.S. companies for signs of financial trouble. Audit Integrity's risk model evaluates such traditional factors as balance-sheet strength and earnings. But it also examines the quality of a company's accounting practices and its corporate governance for early indications of possible bookkeeping irregularities, regulatory troubles, class-action lawsuits or financial distress.\

Financial Armageddon: Not the Time for Happy Talk and Wishful Thinking - One of the drawbacks of living in a digital age is a pervasive, tunnel vision-like focus on "the numbers," often to the exclusion of everything else. Sure, hard data matters, especially when the topic at hand is business and finance, but that's not the end of it. What is just as important is what those numbers actually mean, how they are interpreted, and what people plan to do as a result.If, as we've seen in the U.S. (and elsewhere), the statistical picture is ostensibly positive but the majority are clearly in no mood to spend or invest, then it seems to me that the soft data, as such, should be weighted much more heavily. In fact, the dark and deteriorating social mood, as revealed through first-hand accounts, anecdotal and news reports, and other means, is one of the reasons why I have remained steadfastly bearish despite all the "good news" Washington and Wall Street keep shoveling our way.

Consumer Bankruptcy Filings at Highest Level Since 2005 - Consumer bankruptcy filings reached their highest point since 2005 in the first half of this year. Through the first six months of 2010, consumer bankruptcy filings increased to 770,117 — 14% more than filings made over the same period last year, the American Bankruptcy Institute said. This marks the largest number of filings since the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted to curb the increase in filings five years ago.Month-to-month, June figures indicate a decline for the third consecutive month. Bankruptcy filings totaled 127,000 last month, down more than 7% from May. The number of June 2010 filings, however, was more than 8% higher than last year, based on data compiled by the National Bankruptcy Research Center. ABI expects another 1.6 million bankruptcy filings by the end of the year

Personal Bankruptcy Filings up 14% in first 6 months of 2010 - From the American Bankruptcy Institute: Consumer Bankruptcy Filings up 14 percent through First Half of 2010 U.S. consumer bankruptcy filings totaled 770,117 nationwide during the first six months of 2010 (Jan. 1-June 30), a 14 percent increase over the 675,351 total consumer filings during the same period a year ago.The consumer filings for the first half of 2010 represent the highest total since 2005,"Years of rising consumer debt and low savings rates, combined with the housing and unemployment crises, are causing bankruptcy levels not seen since the 2005 amendments to the Bankruptcy Code," "We expect that there will be more than 1.6 million new bankruptcy filings by year end." This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from Excluding 2005, when the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" was enacted (really a pro-lender act), the record year was in 2003 when 1.62 million personal bankruptcies were filed. This year will be close to that level.

Another Recession, or a Long, Slow Recovery? - A few economists are saying that we will soon have a second recession. Although I expect the labor market recovery will take years, it will be a recovery nonetheless. Double-dip recessions have occurred in the past. The severe 1981-2 recession began only a year after the 1980 recession ended. The Great Depression of the 1930s also came in two phases: 1929-33 and 1937-8. The first phase of this recession seemed to end in 2009, when real gross domestic product and employment stopped falling in the second half of the year. It is certainly possible that in 2010 we will see a quarter in which real G.D.P. falls a bit. Measured G.D.P. increased so sharply at the end of 2009, with hardly any improvement in the labor market, that economists have been suspicious that real G.D.P. was overstated. National employment will be lower this month than it was in May, largely because many employees are finished working on the 2010 Census. But a small one-time drop in G.D.P. or layoffs at the Census Bureau should not be confused with a new recession.

Slowing Growth or Recession ?- The Recovery that we have seen has been uneven, with the Economy best described as “lumpy.”  Pockets of growth not evenly distributed; lots of Fed and Treasury largesse driving activity. Corporate (non-fin) balance sheets are cash rich and debt free, earnings are strong.  The bright spots are Manufacturing and Industrials; On the other hand, Retail (except Autos) Housing, Finance, Materials are weak or weakening. But overhangs of another leg down in Housing and weak job creation make it unlikely we will see any more 3-4% GDP over the next few Qs. And as we have noted for nearly a year now, record low hours worked means Employers can expand production without any new hires — they simply add hours to workers who gratefully will accept them. Based on the economic data, what we see now is for economic growth to slow — right now, we project the next few Qs of GDP to be in a 1.5 – 2.5% range. We do not rule out a double dip or a recession in 2012 — we simply do not have sufficient evidence to draw that conclusion.

Jobless recoveries - Also in town for last week's International Symposium on Forecasting was Bill Gavin from the Federal Reserve Bank of St. Louis. I had an interesting discussion with him about changes over time in U.S. employment dynamics that I wanted to share with our readers. In the earlier postwar recessions, the unemployment rate began to fall very quickly once the expansion began. By contrast, the unemployment rate continued to climb even after the recovery had begun for the 1990-91 and 2001 recessions. No one is predicting a rapid drop in the unemployment rate this time around, either.Bill called my attention to the contribution of temporary layoffs to this changing behavior in the unemployment rate. He noted that the Social Security Amendments of 1958 explicitly exempted unemployment insurance from income taxation, and recalled a 1976 paper by Martin Feldstein which proposed that this gave firms a strong incentive to use temporary layoffs in response to a business downturn.

Stimulus slowing: With federal stimulus funds running out, economic worries grow - With home sales sliding, employers reluctant to hire and world stock markets gyrating wildly, the U.S. economy is in danger of stalling. Now one of its only reliable sources of fuel is running out: federal stimulus spending. Funds flowing from the $787-billion legislation passed last year have helped create hundreds of thousands of jobs and propped up social programs such as unemployment benefits. But with much of that money spent and lawmakers reluctant to approve another big round of spending, concerns are rising about what will replace it in the short term to keep the economy moving. Economists worry that the weak labor market will spook U.S. consumers, whose spending fuels the economy. Dwindling federal stimulus funds are only heightening those fears.

Survey Finds Fewer Layoffs, but Lower Compensation -There may have been fewer layoffs in the second quarter, but employers are trimming costs in other ways, according to a recent report. For the fifth consecutive quarter, fewer employees in a Glassdoor employment confidence survey of 2,418 U.S. adults reported layoffs. But the majority of respondents — 57% — said their companies made compensation adjustments including cuts to salary, benefits or perks. And the outlook for the future wages wasn’t exactly bright. Of those surveyed, 40% expect to see pay raises in the next year, while 43% don’t. The other 17% remain uncertain. Meanwhile, the unemployed said they are increasingly uncertain: 42% of job seekers report they are unsure whether they will find a position within the next six months that matches their skill level — up from 32% in the first quarter. Of those searching and without a job, 55% have been unemployed for six months or more.

Treating R&D as Investment, Rather Than Expense, Boosts GDP - If research and development costs were treated as an investment, rather than as an expense, gross domestic product would have been 2.7% higher between 1998 and 2007, according to updated figures released Wednesday.The way GDP is currently calculated counts R&D as a so-called “intermediate expense” — salaries paid to research scientists are lumped with salaries paid to assembly-line workers, for example. But a joint study from the Commerce Department’s Bureau of Economic Analysis and the National Science Foundation that is now in its fifth year treats R&D spending as an investment, such as the cost of a new computer. Accounting for R&D in this way — something the Commerce Department plans to do eventually — adds $301 billion to GDP between 1998 and 2007. It also shows that GDP grew, on average 3% during those years, up from 2.8% under the current methodology.

General Motors: Sales up 10.7% compared to June 2009 - General Motors Co. said Thursday that June U.S. sales rose 10.7% to 195,380 vehicles from 176,571 in the year-ago period.This seems very weak considering GM was in bankruptcy last June. This is based on an easy comparison in several ways: in June 2009 U.S. light vehicle sales fell almost 30% to 9.7 million (SAAR) from 13.8 million (SAAR) in June 2008. The sharp decline last year was due to the financial crisis, the recession, and of course the Chrysler and GM bankruptcy filings (Chrysler filed for bankruptcy at the end of April, 2009 and GM filed for bankruptcy on June 1, 2009).
Update 1: From MarketWatch: Ford total sales rise 13.3% to 175,895 units
Update 2: From MarketWatch: Chrysler U.S. June sales jump 35% to 92,482 units
Update 3: From MarketWatch: Toyota U.S. June sales rise 6.8% to 140,604 units

Detroit looks east: GM sells more cars in China than in the US - Here's a remarkable sign of the shifting balance of global trade - for the first time in its 102-year history, Detroit's biggest carmaker, General Motors, is selling more cars in China than it does in the United States. GM and its joint venture partners reported 1.21m vehicle sales in China during the first six months of 2010, compared to 1.08m deliveries in the US. The figures offer a clue of how GM has achieved a remarkable resurgence from bankruptcy a year ago to profitability and a likely re-entry to the stockmarket. Growth in Chinese demand has been phenomenal as the country's population of 1.3bn becomes more affluent and Beijing's economic stimulus efforts fuel purchases of cars.

U.S. Light Vehicle Sales 11.1 Million SAAR in June - Based on an estimate from Autodata Corp, light vehicle sales were at a 11.08 million SAAR in June. That is up 14% from June 2009 (when sales were very low), and down 4.6% from the May sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for June (red, light vehicle sales of 11.08 million SAAR from Autodata Corp). The second graph shows light vehicle sales since the BEA started keeping data in 1967.Note: dashed line is current month sales rate. Auto sales have recovered from the low levels of early 2009, but are below the lowest point of the '90/'91 recession (even with a larger number of registered drivers).

Factory Jobs Return, but Employers Find Skills Shortage— Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery. And because they laid off so many workers — more than two million since the end of 2007 — manufacturers now have a vast pool of people to choose from. Yet some of these employers complain that they cannot fill their openings.  Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed.  Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker.  Makers of innovative products like advanced medical devices and wind turbines are among those growing quickly and looking to hire, and they too need higher skills.

Manufacturing Rebound Slows Down -  In an article in today’s paper, I explore an apparent mismatch that manufacturing employers report between the skills they need and the skills available among the ranks of the unemployed.As expected, manufacturers continued to add jobs in June, but at a much slower rate than in previous months. Manufacturing added 9,000 jobs in June, compared with 32,000 in May, revised upward from an initially reported 29,000. That takes the total number of manufacturing jobs added since the beginning of the year to 136,000, still a fraction of the two million-plus lost during the recession. The numbers may underreport hiring on the factory floor somewhat, Nonetheless, the numbers are disappointing to those who had seen manufacturing as one of the few bright spots in private sector hiring since the beginning of the year. As recently as April, manufacturers added 44,000 jobs, the largest increase since 1998.

Orders to U.S. Factories Declined in May More Than Forecast - Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.  The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.  Manufacturers are seeing a pause in demand after the industry helped the world’s largest economy emerge from the worst recession since the 1930s. Today’s figures underscore the Federal Reserve’s concerns that the European debt crisis poses a risk to a self-sustaining U.S. recovery.  “Manufacturing has been the star of the economy this year so any signs that conditions are turning would cause some concern,”

Factory orders fall 1.4 percent in May; worst showing in 9 months casts doubt on recovery -- Orders to U.S. factories declined broadly in May after nine straight months of gains.The Commerce Department says orders for manufactured goods decreased by 1.4 percent in May. It was the biggest drop since March 2009.Excluding the volatile transportation sector, orders fell by 0.6 percent. In April, orders grew by 1.0 percent.The numbers cast a cloud over the manufacturing sector. Factories have been a rare bright spot, helping lead the country out of recession with increased hiring and productivity. However, economists fear high unemployment and less demand for exports could cause them to slow in the coming months

Factoryocracy - Here’s a letter to the Washington Post:A prominent group of 18th century economic thinkers – the Physiocrats – argued that the ultimate source of all wealth is agriculture.  They regarded the then-just-emerging industrial sector to be sterile. Harold Meyerson is a member of a group that we might call the “Factoryocrats.”  Just as the Physiocrats misread the once-dominant role of agriculture as proof that the only truly productive activity is farming, Mr. Meyerson’s histrionic fear about the decline of manufacturing employment in America suggests that he misreads the once-dominant role of factory work as proof that the only truly productive activity is manufacturing (“In recession battle, Germany and China are winners,” July 1). The Physiocrats would be astonished to learn that Americans today are very well fed (and otherwise provided for) even though a mere 2 percent of the work force is in agriculture.  Similarly, if Mr. Meyerson weren’t blinded by Factoryocratic myths, he’d see that Americans today are very well supplied with manufactured goods (and food and services) even though a mere 10 percent of the work force is in manufacturing.

Do developed and developing countries compete head to head in high-tech? - Judged by export shares, the United States and developing countries specialize in quite different product categories that, for the most part, do not overlap. Moreover, even when exports are classified in the same category, there are large and systematic differences in unit values that suggest the products made by developed and developing countries are not very close substitutes—developed country products are far more sophisticated. This generalization is already recognized in the literature but it does not hold for all types of products. Export unit values of developed and developing countries of primary commodity–intensive products are typically quite similar. Unit values of standardized (low-tech) manufactured products exported by developed and developing countries are somewhat similar. By contrast, the medium- and high-tech manufactured exports of developed and developing countries differ greatly. This finding has important implications. While measures of across product specialization suggest China and other Asian economies have been moving into high-tech exports, the within-product unit value measures indicate they are doing so in the least sophisticated market segments and the gap in unit values between their exports and those of developed countries has not narrowed over time.

Bet on Private Sector for Recovery Could Prove Risky - The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.  In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

Bill to Extend Unemployment Benefits Dies – WSJ - Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago. The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs. The impasse has been weeks in the making and reflects the deepening concern on Capitol Hill with the nation's fiscal situation, as well as a hardening of Republican opposition. Democrats had moved several times to pare the cost of the bill in an effort to win support from centrist Republicans and to make up defections from their own ranks.

As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5% - As we reported on Friday, a critical bill that was unable to pass this past week was the extension of unemployment benefits to millions of Americans currently collecting a $1,200 average monthly stipend from the US government for sitting on their couch and not paying their mortgage. As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week." Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising: as a reminder the DOL reported over 5.2 million Americans currently on Extended Benefits and EUC (Tier 1-4). The net result is yet another hit to the US ledger, as soon 2 million Americans will no longer recycle $1,200 per month into the economy. In other words, beginning in July, there will be $2.4 billion less spent each month by America's jobless on such necessities as LCD TVs (that critical 4th one for the shoe closet), iPads and cool looking iPhones that have cool gizmos but refuse to hold a conversation the second the phone is touched the "wrong" way. As the number of jobless whose benefits expire grows, the full impact of lost money will progressively increase, and absent some last minute compromise, the monthly loss will promptly hit $5 billion per month.

Unemployment Extension Fails: Senate Rejects Jobless Benefits 58-38 -The Senate rejected Wednesday -- for the fourth time -- a bill that would have reauthorized extended benefits for the long-term unemployed, by a vote of 58 to 38. Democrats will not make another effort to break the Republican filibuster before adjourning for the July 4 recess. By the time lawmakers return to Washington, more than 2 million people who've been out of work for longer than six months will have missed checks they would have received if they'd been laid off closer to the beginning of the recession. Only two Republicans, Sens. Olympia Snowe and Susan Collins of Maine, crossed the aisle to support the measure. That gave Democrats 59 of the 60 votes they needed to break the GOP filibuster, but without the late Sen. Robert Byrd (D-W.Va.), Nebraska Democrat Ben Nelson's nay vote was enough to kill the bill.  (The final tally shows only 58 yea votes due to arcane rules of Senate procedure, which require Senate Majority Leader Harry Reid (D-Nev.) to vote against the bill in order to allow for another vote on it in the future.)

For Senate Advocates of Unemployment Insurance Extension, a Battle to Nowhere - On Wednesday night, a bare-bones measure to keep federally funded unemployment insurance checks headed to the long-term unemployed failed in the Senate.without Sen. Robert Byrd (D-W.Va.), who passed away earlier in the week, Sen. Harry Reid (D-Nev.) — the majority leader who hails from the state with the worst unemployment rate in the country — once again found himself stuck at 59 votes. By the time Byrd’s replacement is in place, in mid-July, two million Americans will have lost their benefits, and the bill extending them will have languished for some 11 weeks. Economists insist it should not be like this. Benefits for the jobless remain one of the most effective forms of stimulus. Mark Zandi, chief economist at, estimates that they generate $1.61 of stimulus for every dollar spent. Moreover, expanding unemployment insurance is wildly popular, even among conservatives. Poll after poll shows that a vast majority of Americans support giving aid to the laid-off. And on Capitol Hill, even the most stringent deficit hawks do not object to the unemployment benefits themselves. They object to expanding the deficit to pay for them.

1.3 million unemployed won't get benefits restored— More than 1.3 million laid-off workers won't get their unemployment benefits reinstated before Congress goes on a weeklong vacation for Independence Day. An additional 200,000 people who have been without a job for at least six months stand to lose their benefits each week, unless Congress acts.For the third time in as many weeks, Republicans in the Senate successfully filibustered a bill Wednesday night to continue providing unemployment checks to people who been laid off for long stretches. The House is slated to vote on a similar measure Thursday, though the Senate's action renders the vote a futile gesture as Congress prepares to depart Washington for its holiday recess

Who Will Fight for the Unemployed?, Editorial, NY Times: Without doubt, the two biggest threats to the economy are unemployment and the dire financial condition of the states, yet lawmakers have failed to deal intelligently with either one.  Federal unemployment benefits began to expire nearly a month ago. Since then, 1.2 million jobless workers have been cut off. The House passed a six-month extension ... in May, but the Senate, despite three attempts, has not been able to pass a similar bill. The majority leader, Harry Reid, said he was ready to give up after the third try last week when all of the Senate’s Republicans and a lone Democrat, Ben Nelson of Nebraska, blocked the bill. Meanwhile, the states face a collective budget hole of some $112 billion, but neither the House nor the Senate has a plan to help. The House stripped a provision for $24 billion in state fiscal aid from its earlier spending bill. The Senate included state aid in its ill-fated bill to extend unemployment benefits; when that bill failed, the promise of aid vanished as well. As a result, 30 states that had counted on the money to help balance their budgets will be forced to raise taxes even higher and to cut spending even deeper in the budget year that begins on July 1.

Will the Jobless Cost Democrats Their Jobs? - "Today’s employment report shows continued signs of gradual labor market recovery,” crows Christina Romer, the head of the president’s council of economic advisers. “Private nonfarm payroll employment increased by 83,000 in June and the unemployment rate fell two-tenths of a percentage point to 9.5%. June marks the sixth month in a row that private sector employment has increased. These continued signs of healing are important …”Indeed they are. Or are they? “A brutal unemployment report this month,” reports Washington Post blogger Ezra Klein. “Payrolls dropped by 125,000. In another one of those unwanted lessons in how we calculate unemployment data, the unemployment rate dropped from 9.7 percent to 9.5 percent — but not because people got hired. Instead, 652,000 people gave up and stopped looking for work.

Congress Needs to Extend Emergency Unemployment Benefits - Brookings - While the labor market seems to be moving in the right direction, it is still very weak. The unemployment rate, at 9½ percent, is still nearly double its level when the recession began, and the job gains this year are small relative to the 8 million-plus jobs lost over the previous two years (not to mention the jobs that would have been created for our growing population had the economy not entered a downturn). Under these circumstances, it is unfortunate, in my view, that Congress has not extended the emergency unemployment benefits that expired on June 1st. More than a million unemployed workers have already seen their benefits lapse and 200,000 people are expected to lose their benefits with each passing week that Congress does not act. Reinstating those benefits would reduce the painful cutbacks in consumption that many households that have lost jobs would otherwise have to make. Reinstating the benefits would also help the broader public by contributing to overall demand in goods and services and thereby mitigating the risks of a double dip in the economy.

ADP: Private Employment increased 13,000 in June - ADP reports: Nonfarm private employment increased 13,000 from May to June 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change in employment from April to May 2010 was revised up slightly, from the previously reported increase of 55,000 to an increase of 57,000. June’s rise in private employment was the fifth consecutive monthly gain. However, over these five months the increases have averaged a modest 34,000. Recent ADP Report data suggest that, following steady improvement through April, private employment may have decelerated heading into the summer. Note: ADP is private nonfarm employment only (no government jobs).  This is below the consensus forecast of ADP showing an increase of 60,000 private sector jobs in June.

June Employment Report: 100K Jobs ex-Census, 9.5% Unemployment Rate -From the BLSTotal nonfarm payroll employment declined by 125,000 in June, and the unemployment rate edged down to 9.5 percent, the U.S. Bureau of Labor Statistics reported today. The decline in payroll employment reflected a decrease (-225,000) in the number of temporary employees working on Census 2010. Private-sector payroll employment edged up by 83,000.  Census 2010 hiring decreased 225,000 in June. Non-farm payroll employment increased 100,000 in June ex-Census.This graph shows the unemployment rate and the year over year change in employment vs. recessions. Nonfarm payrolls increased by 125 thousand in June. The economy has lost 170 thousand jobs over the last year, and 7.5 million jobs since the recession started in December 2007. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). The dotted line is ex-Census hiring. The two lines will rejoin later this year when the Census hiring is unwound.

EMPLOYMENT REPORT (w/ 5 charts) The employment report was bad, as private payroll employment only rose 83,000. Moreover, the household survey showed a drop in employment of -350,000. The unemployment rate fell. But that is because the - 350,000 fall in household survey was offset by a -652,000 drop in the labor force. A labor force contraction is really bad news as it implies public confidence in the availability of jobs deteriorated. Moreover, the average workweek on private nonfarm payrolls fell 0.1 to 34.1 hours. As a consequence of modest employment gains and a drop in the workweek the index of aggregate hours worked only rose 0.1%. However, the three month growth rate of hours worked did expand t0 3.3% (SAAR), almost exactly the same as last month. In addition, average hourly earnings also fell and the year over year growth in average hourly earnings fell to 1.7% . The drop in workweek also caused the gain in average weekly earnings to tick down as well. Regardless of how it is calculated, the current gap between employment and the long term trend of employment is at post WW II record levels.

Employment falls - It’s never good when employment falls during what’s meant to be an economic recovery. It’s worth remembering that, if people start getting excited about today’s drop of 125,000 in the total-employment number. Yes, private-sector hiring was marginally positive, by 83,000, but we’d all like to see much bigger numbers than that. Unemployment dropped sharply, to 9.5%. But why? It doesn’t seem to be thanks to people getting jobs: after all, employment fell. And the labor force participation rate — the number of employed people divided by the total number of people capable of working — hit another new low today, of 64.7%. If people are just giving up and removing themselves from the workforce, then a falling unemployment rate only serves to hide the bad news. What’s more, the only important statistical decline in the unemployment rate was among white women, who already have lower unemployment than just about anybody else. The rest of the country — including, crucially, men overall — was pretty much unchanged.

Unemployment Declines, but the News is Not Good - This report is discouraging. While positive private sector job growth is better than negative growth, we need at least 100,000 new jobs each month just to keep up with population growth, and the number is probably closer to 125,000. So the number of jobs that were created in the private sector last month fell just short of the amount needed to absorb new workers from population growth and stop the employment problem from getting worse. It did nothing to help the millions and millions of workers who have lost their jobs during the recession (estimates vary, but around eight million workers, or more, have lost jobs and need to be reemployed, so we need many hundreds of thousands of new jobs each month to absorb new workers, and to reabsorb those who have lost jobs during the recession).It’s also discouraging that hours worked fell. This means that when things do get better, employers will have more room to expand the hours of the existing labor force before they’ll need to hire new workers, and this will further delay in the recovery of employment.

Why Did the Unemployment Rate Drop? - The unemployment rate fell in June to 9.5% from 9.7%, reaching its lowest point since last July. But the decline wasn’t due to improvement in the labor market. Instead, jobless Americans dropped out of the labor force in droves. June’s decline in the civilian labor force of 652,000 was the sharpest one-month decline in 15 years in the Labor Department’s survey of households. Some people could be frustrated with their job searches, choosing to take time off or pursue other options like school. Some could be experiencing the end of their unemployment benefits, which required them to maintain an active job search. Whatever the cause, over the past two months almost one million people simply stopped looking for work. And over those two months, the U.S. population grew by 361,000 — with more than half of that gain coming in June.

Decline in Labor Force Leads to Drop in Unemployment - The Labor Department reported that 652,000 people left the labor force in June, causing the unemployment rate to edge down to 9.5 percent, even as the number of employed reportedly dropped by 301,000. The establishment survey showed a gain of 100,000 jobs, excluding the 225,000 Census workers who lost their jobs in June. The establishment survey also showed declines in both the length of the average workweek and the average hourly wage, providing further concerns about labor market weakness going forward.The employment-to-population (EPOP) ratio fell to 58.5 percent, reversing gains from the prior three months; although this is still 0.3 percentage points above the low hit in December. This decline was concentrated among men who saw their EPOP fall by 0.3 percentage points, as their unemployment rate edged up from 9.8 to 9.9 percent. The EPOP for women was unchanged, with their unemployment rate falling from 8.1 percent to 7.8 percent.

Broader Unemployment Rate Drops to 16.5% - The U.S. jobless rate dropped 0.2 percentage point to 9.5% in June, the lowest level since July, but the government’s broader measure of unemployment only ticked down 0.1 point to 16.5%. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. This month the gap expanded between the official rate and U-6. Mostly that was due to an increase in the number of discouraged workers, considered marginally attached to the labor force. That figure puts a dark cloud on the drop in the national rate. It indicates that many of the people who dropped out of the labor force in June did so because they gave up looking for jobs. The 9.5% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report ... This graph shows the job losses from the start of the employment recession, in percentage terms - but this time aligned at the bottom of the recession. The current recession bounced along the bottom for a few months - so the choice of bottom is a little arbitrary (plus or minus a month or two). The Employment-Population ratio decreased to 58.5% in June from 58.7% in May. This had been increasing after plunging since the start of the recession, and the recovery in the Employment-Population ratio was considered a good sign - but the ratio has now decreased for two consecutive months. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. The Labor Force Participation Rate decreased to 64.7% from 65.0% in May. This is the percentage of the working age population in the labor force. This decline is very disappointing, and the rate is well below the 66% to 67% rate that was normal over the last 20 years.  The reason the unemployment rate declined was because people left the workforce - and that is not good news. The number of persons employed part time for economic reasons (some times referred to as involuntary part-time workers), at 8.6 million, was little changed over the month but was down by 525,000 over the past 2 months.

Employment Report: Temporary Help and Diffusion Index- From the BLS reportWithin professional and business services, employment continued to increase in temporary help services (+21,000). Employment in temporary help has risen by 379,000 since a recent low in September 2009.The following graph was used early this year as the basis for some optimistic employment forecasts. This graph is a little complicated. The red line is the three month average change in temporary help services (left axis). This is shifted four months into the future. The blue line (right axis) is the three month average change in total employment (excluding temporary help services).The BLS diffusion index for total private employment decreased to 52.2 from 54.8 in May. For manufacturing, the diffusion index is at 52.4; down sharply from 62.2 in May. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS:

Fewest Teen Jobs added in June since 1951 - According to the BLS, only 497,000 teens (ages 16 to 19) found jobs in June 2010 NSA (June is the key months for summer employment). This is the fewest teen jobs added in June since 1951. This graph shows the number of teens looking for work (lowest since 1954) and the number of teens found jobs in June (data is not seasonally adjusted). This partially explains the large drop in participation rate in June - an extremely low number of teenagers joined the workforce, and this resulted in 256,000 teens leaving the workforce on a seasonally adjusted basis - of the total 652,000 total people leaving the workforce (seasonally adjusted).  Teens not looking for jobs - because the job market is so bad - actually helped push down the unemployment rate!

Bleak Outlook for Long-Term Unemployed - If you’ve already lost your job, your prospects for finding a new one are looking dismal. Especially if you lost your job a long time ago. The average length of time that the typical unemployed person has been looking for work increased again in June, to yet another record high of 35.2 weeks.  The increasing average duration of joblessness, however, is skewed by a sizable group of workers who lost their jobs long ago and are still unable to find new positions. The typical unemployed person churns back into the job market after a few weeks or months. But those who have already been out of jobs for a longer period of time have been falling further and further behind. Here’s a chart, taken from these Labor Department numbers, showing the percentage of all workers who are unemployed, broken down by how long they’ve been out of work:

Series: UEMPMED, Median Duration of Unemployment (FRED graph)

Series: UEMP27OV, Civilians Unemployed for 27 Weeks and Over  (FRED graph)

Series: NDMANEMP, All Employees: Nondurable Goods Manufacturing  (FRED graph)

Job Market "Anemic", Unemployment Rate Falls For "All the Wrong Reasons" The U.S. job market remains anemic.  Employers cut 1250,00 jobs in June, more than expected.  The job cuts came as the government let go 225,000 temporary census workers, as expected. Meanwhile, the private sector gained 83,000 jobs, the sixth-consecutive monthly increase but still less than most economists forecast.Yet the unemployment rate fell to 9.5% in June from 9.7%, the lowest level in nearly a year.  Unfortunately, it dropped “for all the wrong reasons” says Nigel Gault, U.S. chief economist at IHS Global Insight.   The unemployment rate is lower simply because the labor market shrank, as more than 650,000 people gave up on the job search last month.  More telling is the "real unemployment" rate, or U6.  Including people working part-time and those who've given up looking, the real unemployment rate is 16.5%.

Job Creation at a Glacial Pace - The June 2010 employment report released this morning by the Bureau of Labor Statistics provides a sobering snapshot of where we are now, two-and-a-half years since the start of the recession in December 2007.   Unemployment remains at a very high 9.5%.  Nearly half (45.5%) of all unemployed workers have been unemployed for over six months, and there are 25.8 million workers who are either unemployed or underemployed.  The labor force is actually smaller than when the recession started, another indication of lost opportunities.The unemployment rate declined 0.2 percentage points in June, but that was primarily due to a decline in the labor force of 652,000 workers.  If these workers had remained in the labor force and were unemployed, the unemployment rate in June would have been 9.9%.

Gallup Finds Underemployment at 18.3% in June, a 2010 Low - Underemployment, as measured by Gallup, fell to 18.3% of the U.S. workforce in June -- down from 19.1% in May, and a new 2010 low.  Gallup's underemployment rate has two components: the percentage unemployed and the percentage of those working part time but wanting full-time work. It is reported on the basis of 30-day rolling averages and includes interviews with approximately 20,000 U.S. adults aged 18 and older in the workforce. Results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks. Unemployment, as measured by Gallup, was 9.2% in June -- down from 9.4% in May and 10.8% in January. At the same time, the percentage of those working part time who want full-time work also declined, to 9.1% in June from 9.7% in May. The net result is that June's underemployment rate is the lowest of the year to date.

Getting used to disappointment - IT HAS been a rare economic variable in recent months that has surprised to the upside. That should probably tell us something important—that expectations are likely to fall. Things like this won't help: Nonfarm private employment increased 13,000 from May to June 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change in employment from April to May 2010 was revised up slightly, from the previously reported increase of 55,000 to an increase of 57,000. June’s rise in private employment was the fifth consecutive monthly gain. However, over these five months the increases have averaged a modest 34,000. Recent ADP Report data suggest that, following steady improvement through April, private employment may have decelerated heading into the summer. Meanwhile, forecasters had been expecting an increase of around 60,000 private sector jobs. The official Department of Labour number will come out on Friday.

The Recovery Is Losing Steam - Forget about the drop in the unemployment rate last month. The economic recovery has lost significant steam in the last few months. Today’s employment report is clear on that score. Job growth in the private sector has slowed — to 83,000 last month and a three-month average of 119,000. From February to April, the private sector added 154,000 jobs a month. (With the Census winding down, the federal government cut jobs last month, which explains the drop in overall employment.)  And unlike in May, when private-sector job growth slowed but the workweek got longer, employers cut hours last month, too. Total hours worked last month fell in June for the first time since February. Average hourly pay dropped, too, to $22.53 in June, from $22.55 in May.

The End of the Jobs Recovery? - The economy lost 125,000 jobs in June. But that's not the worst news contained in the economic report that came out on Friday about who's working and who's not. Here's what we should be really worried about: American workers are losing faith in the economy faster than they have in 15 years. In fact, the jobs numbers themselves are not really as bad as they appear. That's because at least part of the drop was due to the fact that much of the work of people who knock on your door to make sure you live there is done. The Census bureau cut 225,000 temporary workers in June. Factor out the government completely and the private sector actually added 83,000 jobs. In fact, the unemployment rate even dropped in June to 9.5% from 9.7% the month before. Wow, this job loss is looking better and better. So does that mean we are out of the woods? Not even close.

If higher unemployment is the tradeoff to fear of inflation, what does that mean for you and I? - Invariably, when we start debating jobs programs and stimulus spending, people start talking about the long-term problem of government spending. It raises our national debt, and could cause inflation down the road. But what is often overlooked when inflation is brought up, is that not doing anything about high unemployment can have really bad long-term ramifications for the economy, perhaps even worse than inflation. Here's why: First of all, it's not just upward mobility that is at risk. I wrote a story back in January about high teen unemployment and that what is at risk is not just whether teens will have to cut out trips to the mall. Without entry-level jobs, young workers can't gain work experience. The result is a lower skilled workforce that results in longer-term productivity for the US economy in general.

It's the Jobs, Stupid - The Americans wrapped up their meetings at the Toronto summit in an oddly contradictory posture. With much of the world afflicted with austerity fever, President Obama's team found itself in the awkward position of pushing the Europeans not to abandon economic stimulus -- while Obama himself is unable to get the U.S. Senate to approve even modest sums to extend expiring unemployment insurance for upwards of a million workers, or his $23 billion request for emergency aid to the states to spare 300,000 schoolteacher layoffs. The British, Germans, and Canadians, meanwhile were giving priority to deep budget cuts in their own countries -- while smaller European nations were being made to extract even more severe cuts in exchange for guarantees of their government debt. Obviously, if every nation is cutting back, then economic recovery falters. But this seems far from obvious to the world's leaders.

The Global Jobs Competition Heats Up - U.S. multinational companies have long been among America's strongest firms..., they account for about 19% of all private jobs, 25% of all private wages... They are responsible for 41% of the increase in private labor productivity since 1990. Despite the common allegation that multinationals simply "export jobs" out of the U.S., research shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. ...  But there is no guarantee that the past will be prologue. McKinsey conducted in-depth interviews with senior executives from 26 of America's largest ... multinationals. Their message is sobering: Today the U.S. is in an era of global competition to attract, retain and grow the operations of multinational companies that it's never faced before. ...

Biden: We Can't Recover All the Jobs Lost - Vice President Joe Biden gave a stark assessment of the economy today, telling an audience of supporters, "there's no possibility to restore 8 million jobs lost in the Great Recession." Appearing at a fundraiser in Milwaukee, the vice president remarked that by the time he and President Obama took office in 2008, the gross domestic product had shrunk and hundreds of thousands of jobs had been lost. "We inherited a godawful mess," he said, adding there was "no way to regenerate $3 trillion that was lost. Not misplaced, lost." Claims for jobless benefits fell by the largest number in two months last week, but were still high enough to signal weak job growth. Meanwhile, the Senate last Thursday failed to pass an extension of unemployment benefits.

Why Job Growth May Be Better Than It Seems - The official government statistics are probably understating job growth right now.That tends to be the pattern after recessions end. As the economy is starting to add jobs again, the Bureau of Labor Statistics understates job growth. And the opposite happens during recessions. Then, the government understates job losses. The chart below shows the revisions — that is, the difference between the initial estimate and the final number — in the bureau’s payroll employment statistics. You’ll notice that the numbers tend to be negative when the economy is losing jobs (1990-91, 2000-03, 2007-09) and positive when the economy is gaining jobs.

How was your recession? - STEPHEN GORDON passes along a fascinating chart tracking labour market performances across the G7 through the recession and recovery: How to explain the differences? Stronger automatic stabilisers and labour market protections helped insulate workers from the effect of the downturn in some places. Italy and Germany have well-known labour sharing programmes in place; where American employers might meet slackening demand by trimming workforces, German employers are encouraged to hoard labour and reduce hours worked. Meanwhile, America faces structural adjustments that other countries, like Canada, have largely come through already. It's interesting to think about how leaders from different countries might place different emphasis on demand-side versus structural measures to boost the economy, based on these performances.

Still Not Looking Up - Although opinion polls have their flaws -- among other things, people are fickle and don't always mean or do what they say -- they can be of some help in determining which way the economic winds are blowing. More specifically, while I wouldn't bet the ranch on any one survey, a series of polls that tell a similar story should not be taken lightly. With that in mind, a just-released survey from the Pew Research Center, headlined "The Great Recession at 30 Months," reinforces other recent reports indicating that things are (still) not looking up as far as most Americans are concerned.More than half (55%) of all adults in the labor force say that since the Great Recession began 30 months ago, they have suffered a spell of unemployment, a cut in pay, a reduction in hours or have become involuntary part-time workers, according to a new survey by the Pew Research Center's Social and Demographic Trends Project.

Looks Like Another Stinking Jobless Recovery - There’s nothing pretty about this morning’s jobless claims report. Claims jump 13,000 to 472,000 in the week ended June 26. The previous week’s level was also revised upward, from 457,000 to 459,000. And all this comes as economists had expected claims would fall by 2,000. “This is unquestionably a negative, even more so we as we see the Southern states that might be affected by the oil spill not accounting for a large uptick in claims,” Miller Tabak’s Dan Greenhaus writes. As we mentioned in the opener, a Labor Department economist blames the latest rise on the educational services sector, where bus drivers, cafeteria workers and others lost their jobs due to the summer holidays. What a crock of … I mean, c’mon. Think about it, the school year coming to an end isn’t some brand new phenomena; it happens every year at the exact same time. Isn’t seasonally adjusted data supposed to take these sort of situations into account?

The Little, but Real, Effects of Unemployment - Annie Lowrey has a post about the year-long battle over unemployment insurance, well worth reading. The battle to get growth instead of austerity is one I take seriously, and you should too. The long term impact of high unemployment for our country is difficult to measure, but we have every reason to believe it is quite damaging. Take, for instance, this paper, Short-run Effects of Parental Job Loss on Children’s Academic Achievement by UC Davis (my underline): We study the relationship between parental job loss and children’s academic achievement using data on job loss and grade retention from the 1996, 2001, and 2004 panels of the Survey of Income and Program Participation. We find that a parental job loss increases the probability of children’s grade retention by 0.8 percentage points, or around 15 percent.  Job losses impact a child’s learning. It’s something you probably assumed already, but here it is confirmed in the data.

Recession cut into employment for half of working adults - The recession has directly hit more than half of the nation's working adults, pushing them into unemployment, pay cuts, reduced hours at work or part-time jobs, according to a new Pew Research Center survey. The economic shock has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fueled mostly by consumer spending. More than six in 10 Americans say they have cut down on borrowing and spending, the survey found.  The reason: Nearly half of the survey's respondents say they are in worse financial shape as a result of the downturn, which destroyed 20 percent of Americans' wealth.

The Unemployment Insurance Crisis - An overlooked fiscal crisis looms: the depletion of the trust funds out of which states pay unemployment benefits. As of June 24, unemployment insurance (UI) trust funds in 30 states and the Virgin Islands were insolvent, requiring loans from the federal government totaling over $38 billion. The Department of Labor expects that as many as 40 states will require federal loans in fiscal 2013, with borrowing totaling $93 billion. This amount is above and beyond the $130 billion in additional federal spending on unemployment benefits in the current economic cycle.To put these amounts in context, the federal government will loan more to the states than the stimulus bill provided for Medicaid. From a different angle, the $93 billion in projected loans is less than the rescue package that European nations and the International Monetary Fund provided to Greece ($146 billion), but federal spending to extend UI benefits since July 2008 has already exceeded $131 billion, and the net federal spending in this area far exceeds the Greek bailout

"Broken" New York unemployment trust may cost $1.3 billion(Reuters) - New York's "broken" unemployment trust could cost the state $1.265 billion in interest penalties over the next eight years because it has a $3.2 billion deficit, Governor David Paterson said Wednesday. By driving up unemployment, the recession has drained many state unemployment trusts, forcing them to rely on federal loans.New York is one of the few states that does not index its benefits for unemployed workers to the average weekly wage, the Democratic governor said in a statement. Benefits for unemployed New Yorkers have not been raised from $405 since 2000.

State/Local Government Still Shedding Jobs - States, counties and school boards continue to shed jobs amid tight budgets and anemic tax revenues, according to today’s jobs report. State and local governments shed 10,000 jobs in June and have cut some 242,000 workers since the peak in state and local government employment in August 2008, including 95,000 jobs this year. The pace of state and local government job loss has slowed in recent months. State/Local governments shed 10,000 jobs in June, compared with 18,000 a month earlier and more than 25,000 in each of the first two months of the year. That may be because governments have seen tax revenues stabilize in recent months and many states have now passed their budgets for the next fiscal year (which started yesterday for most states). Still, state and local government employment may still have a ways to fall — especially if the pace of economic growth slows. A recent report from the National Governors Association showed states still face $127 billion in budget gaps over the next two years; this year, 40 states made $22 billion in midyear budget cuts.

City Unemployment Rates: Vegas Struggles, Washington on Top - Fifteen of the 49 largest cities in the U.S. saw year-over-year declines in their unemployment rates in May, according to new Labor Department data, even as the unadjusted national rate — at 9.3% — was 0.2 percentage points above its year-ago level.But four of those metro areas — Minneapolis-St. Paul, Detroit, Charlotte and Portland — still had rates in excess of the national average. In all, 22 of the 49 cities with populations over one million posted unemployment rates in excess of 9.3%. The highest rate in the nation among large cities was 14.1% for Las Vegas, which has been particularly hard hit following the housing bust. On the other end of the spectrum Washington had the lowest rate at 6%. Across the country, jobless rates were higher in May than a year earlier in 222 of the 372 metropolitan areas, lower in 141 areas, and unchanged in 9. The Labor Department doesn’t seasonally adjust its data on city-level unemployment, making month-to-month comparisons difficult. Below see a chart of the jobless rates for the 49 U.S. metro areas with populations over one million

Federal Aid to States May Be Lost as Jobs Bill Stalls- NYTimes - Financially struggling states, already facing record budget shortfalls, are now confronting the possibility of losing out on billions of dollars in federal aid that they had been counting on, if Congress does not revive a jobs bill that stalled in the Senate this week.  The result, governors and state budget officers are warning, could be hundreds of thousands of layoffs at the state and local levels, as well as draconian spending cuts.  “It’s a bloodletting,” said Gov. Edward G. Rendell of Pennsylvania, a Democrat.  But Mr. Rendell and other state leaders are running up against Senate Republicans and at least one Democrat concerned about the spiraling federal deficit. “What we’re not willing to do, is use worthwhile programs as an excuse to burden our children and our grandchildren with an even bigger national debt,” the Senate minority leader, Mitch McConnell, Republican of Kentucky, said in a statement Thursday.

As States Cut Public Workers, Congress Is Reluctant to Act …For tens of thousands of America’s teachers, it is the start of an endless summer. In the past month, the Los Angeles Unified School District has sent pink slips to 693 employees. The Detroit school system has laid off 1,983 teachers, including Michigan’s 2007 teacher of the year. And Greensboro, N.C., has received national attention, as its supervisor has fired or reassigned more than 500 teachers in a district serving just 71,000 students. In 2010, the Obama administration has estimated, school districts across the country might lay off as many as 300,000 employees, many of them teachers. That would be five times the number of layoffs in 2009, and ten times the number of layoffs in 2008.  These pink-slipped teachers are just the first and most noticeable wave of public-sector employees getting the chop as states slash their budgets. (Schools need to notify teachers that they might be laid off at the end of spring or beginning of summer in order to officially let them go before school comes into session in the fall.) As state and local governments prepare to begin their new fiscal year on July 1, they are frantically cutting not just teachers, but social workers, firefighters and police officers.

Editorial - Bad News Back Home - NYTimes - How bad does it have to get before Congress notices? Kevin Sack reported in The Times on Thursday that budget shortfalls have led 11 states to close enrollment in programs that provide drugs to people with H.I.V. and AIDS. Worse, the number of those turned away is expected to surge in the months ahead as more states defer enrollment and cut eligibility.  Against that backdrop — and with other draconian state budget cuts under way or on the drawing board — Congress has refused to provide more fiscal aid to states. The House leadership, bowing to demands from fiscally conservative Democrats, stripped a provision for $24 billion in state aid from a jobs bill it passed in May. The Senate included the aid in its version but has failed repeatedly to pass the measure.  Spending cuts also mean layoffs. In all, the center projects that closing the states’ budget gaps could cost the economy up to 900,000 jobs, both among government workers and private contractors.

States struggle to pass budgets without stimulus - For at least 30 cash-strapped states counting on federal stimulus money, the news was a stunning blow: A deficit-weary Congress had rejected billions in additional aid, forcing lawmakers into a mad scramble to balance their budgets.Now, with a new fiscal year just days away in most states, many governors are proposing to make up for the shortfall with tax increases, cuts in essential services and potential layoffs of thousands of public employees. "I support restraining federal spending, but cutting the only funding designed to help states maintain the very safety-net programs Congress mandates us to preserve will have devastating consequences," California Gov. Arnold Schwarzenegger said in a letter to his state's congressional delegation. California faces a whopping $19 billion deficit _ more than 20 percent of the state's total budget _ despite deep cuts that have already been made to many programs. Its new fiscal year begins July 1, and a budget deal there is nowhere in sight.

Federal Stimulus, State Sedative - The stimulus bill passed in February 2009 and presumably started taking effect in the second quarter of 2009 and beyond (red shaded area). Add up the numbers and they show that federal spending was responsible for 1.58 percentage points of GDP growth during that period while state spending was responsible for -0.36 percentage points of GDP growth. Look at just the three most recent quarters and it's even worse: 0.73 points of growth from the feds and -0.84 points from the states. In other words, it's exactly what Ezra said: the federal stimulus has been largely offset by declines in state spending. Now, it's true that federal spending in general has a fairly small impact on total GDP. But that's because when you remove transfer payments the federal government only accounts for about 15% of total spending. The rest is private sector. There's nothing mysterious about this.

The State Budget Disaster - An already storm-tossed economy is about to receive a thorough drenching, as states across the nation face a collective budget shortfall of $140 billion this summer. The details, contained in a new report from the Center on Budget and Policy Priorities are sobering, not the least for what they suggest about the fragility of the national recovery. Tax receipts — property, income, you name it — have dwindled and dwindled some more, the federal stimulus gas tank is near empty, and as many as 900,000 workers could lose their jobs as a result of state budget-cutting in the coming fiscal year. Nor is there much help on the way. Deficit hawks are in the ascendancy in Washington, where taking a tough line against more aid to states and to the millions of long-term unemployed has become a curious sort of litmus test for many politicians. Congress has refused to extend jobless benefits — which puts money directly into the pockets of the hard-pressed — and declined to extend an enhanced federal match for Medicaid that 30 states, New York and California among them, were counting on to help balance their budgets.

States' budget crises threaten to 'destroy social fabric' of the US - Maywood has hit on a unique solution to its budget crisis. Crushed by the recession and falling tax revenues, the city is disbanding its police force and firing all public sector employees. Maywood has opted for an extreme solution, by contracting out all public services, including the most basic, to save cash. But it is not alone. States around the US are cutting costs wherever possible as they prepare budgets for the fiscal year that starts this week for most of them. Their combined deficit is projected to reach $112bn (£74bn) by June 2011. Local government activities, such as funding police, school buildings, fire departments, parks and social programmes, are in the line of fire

States’ Budget Woes Only A ‘Modest’ Drag, San Francisco Fed - Financial problems at the state level are unlikely to send the U.S. economy back into recession, a report from the Federal Reserve Bank of San Francisco said Monday. “State fiscal crises aren’t likely to go away soon and will probably get worse before they get better,” bank economists Jeremy Gerst and Daniel Wilson wrote in the release.“Painful budgetary choices lie ahead for many states, though the drag on the national economy should be modest,” they wrote. State and local government finance issues have been on the minds of economists and policy makers for a while now. Unlike the federal government, states are rather limited in their ability to make up for falling tax receipts, given that most are legally required to run balanced budgets. That often forces local leaders to cut back on spending and investment programs just at the time many economists believe they need to keep the stimulative power of those activities ongoing.

State and Local Tax Revenue increased slightly compared to Q1 2009 -The Census Bureau reported this morning that state and local tax revenues grew 0.8% in the first quarter 2010 compared to Q1 2009. This was the second straight quarter of growth compared to the same quarter of the previous year.  Individual income tax increased 2.7% compared to Q1 2009. General sales tax revenues increased 0.3%. Corporate income tax declined 5.4%. Property taxes declined 0.6% (the first year-over-same quarter decline since 2003). This graph shows state and local tax revenue on a rolling 4 quarter basis (this removes seasonality).  The three main sources of revenue are property taxes, sales taxes and personal income taxes. Property taxes tend to be the most stable, even with the sharp drop in real estate prices.  Most of the decline in revenue during the recession came from sharp declines in personal income and sales taxes.

Tax Receipts and Expenditures at the State and Local Level - This is a graph of state and local expenditures and taxes since the 1970s showing how much both spending and taxes have fallen in the current recession (it's part of a more general discussion of the causes and consequences of the fiscal crisis in state and local government from the SF Fed):In both the 73-74 and 2001 recessions, revenues fell sharply. Not as much as in the current recession, but the fall in both cases is still steep and pronounced. Yet, unlike in the present recession, expenditures stayed relatively constant during the recession. After the 73-74 and 2001 recessions, when the economy had recovered, expenditures did fall noticeably and the deficit flips from negative to positive, but this is exactly how countercyclical policy should work so that is not a problem, it's a feature. But in the present recession, spending has fallen quite a bit which is not desirable.

States of Crisis for 46 Governments Facing Greek-Style Deficits - Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end. Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt. Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone. Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June

Another View on the States' Budget Plight - I had no sooner posted a piece on the Center on Budget and Policy Priorities report about states’ dire fiscal future than the Mercatus Center at George Mason University got in touch with its own take. The center is a policy research organization that leans libertarian and conservative (the Center on Budget and Policy Priorities leans liberal), and it has a tough-love argument. The center says that the federal stimulus — or bailout, in its terms — has encouraged all manner of bad habits in state legislatures. The Obama administration, in its view, has taken billions of dollars and papered over problems. In the words of a Mercatus report, stimulus has discouraged “long-term fiscal prudence,” masked “underlying structural” problems in the states, and increased federal control over state budgets, thereby upsetting the constitutional balance between the federal government and the states.

The High Budgetary Cost of Incarceration The United States currently incarcerates a higher share of its population than any other country in the world. We calculate that a reduction in incarceration rates just to the level we had in 1993 (which was already high by historical standards) would lower correctional expenditures by $16.9 billion per year, with the large majority of these savings accruing to financially squeezed state and local governments. As a group, state governments could save $7.6 billion, while local governments could save $7.2 billion. These cost savings could be realized through a reduction by one-half in the incarceration rate of exclusively non-violent offenders, who now make up over 60 percent of the prison and jail population. A review of the extensive research on incarceration and crime suggests that these savings could be achieved without any appreciable deterioration in public safety.  Issue Brief - PDF | Flash

Arnold Schwarzenegger orders minimum wage for state workers - Gov. Arnold Schwarzenegger on Thursday ordered about 200,000 state workers to be paid the federal minimum wage this month because the state Legislature has not passed a budget, but the state controller is refusing to comply. Department of Personnel Administration Director Debbie Endsley sent the order in a letter to the state controller, who refused a similar order two years ago. The matter is tied up in the appellate courts, leading the controller to say he will abide by whatever final ruling emerges, which could be years down the road. He said he can't follow the order now due to technical and legal issues.The Republican governor has been frustrated by the Legislature's failure to close California's $19 billion budget deficit, even as the new fiscal year began Thursday.
Schwarzenegger's order does not affect the 37,000 workers, including California Highway Patrol officers, who are in unions that recently negotiated new contracts with the administration. Those contracts included pay cuts and pension reforms that will save the state money.

California welfare recipients withdrew $1.8 million at casino ATMs over last eight months -  Gov. Arnold Schwarzenegger issued an executive order requiring welfare recipients to promise they will use cash benefits only to "meet the basic subsistence needs" of their families. The order also gave the state Department of Social Services seven days to produce a plan to reduce other types of "waste, fraud and abuse" in the welfare program. The moves came after The Times reported Wednesday that officials at the department failed to notice for years that welfare recipients could use the state-issued cards to withdraw taxpayer cash at more than half of the tribal casinos and state-licensed poker rooms in California. The state initiated the debit card program in 2002.

Governor puts 200,000 state workers on minimum wage -Roughly 200,000 state workers will receive minimum wage paychecks next month under terms of an order issued Thursday by the Schwarzenegger administration. According to a letter delivered to Controller John Chiang in late afternoon, July pay for most hourly state employees will be withheld to the minimum allowed by federal law – $7.25 an hour – and then restored once there's a budget. Chiang, whose office cuts state paychecks, said Thursday that he won't follow the order unless a court tells him to.  The letter from the governor's Department of Personnel Administration instructs Chiang to withhold employees' pay because the state started the 2010-11 fiscal year Thursday without a budget appropriating money for payroll. Hours earlier, Gov. Arnold Schwarzenegger officially ended 17 months of furloughs for state workers.

Appeals court affirms Schwarzenegger's order to cut state workers' pay - A state appeals court ruled Friday that Gov. Arnold Schwarzenegger can reduce state workers' pay to the federal minimum wage when the state budget is late. The ruling comes a day after the governor ordered the pay of nearly 200,000 state employees to be reduced to $7.25 an hour until a budget is passed, but State Controller John Chiang, who issues the paychecks, has said he would not obey the order. The ruling by the 3rd District Court of Appeals centers on a 2008 case, when during a similar budget impasse Schwarzenegger ordered state workers' be paid the federal minimum wage. The court ruled Friday that the governor's administration "the authority to direct the Controller to defer salary payments… due to a budget impasse." Chiang said on Thursday that he would defy Schwarzenegger's minimum wage order. His office did not immediately respond to a request for comment Friday.

Peralta says state budget coming soon -State Sen. Jose Peralta (D-Jackson Heights), is hopeful that the state budget may soon move from a dream to reality.  “We are very close,” Peralta said Tuesday afternoon. “We have passed 70 percent of the budget via extenders.”  The most recent extender, number 12 in a series, was passed Monday. However, according to Peralta, the process of passing the budget via extenders sets a dangerous precedent.  In each extender, which allows the government to continue running, Gov. David Paterson either includes budget items or new taxes, such as the cigarette tax, included in the most recent extender. Peralta says the process puts the voting body up against a wall, where they either shut down government, or approve whatever the governor has included in the extender, since all items are bundled together.

Paterson's budget agenda is rejected - So went the latest move by the Democratic-controlled Legislature in its game of fiscal chess with Gov. David Paterson, as lawmakers Sunday night ignored his special session agenda amid a last-ditch push today to adopt their own final portions of the stalled 2010 budget. Lawmakers late Sunday refused to let Paterson submit his emergency appropriation bill, leaving only their plan for a vote today, despite the governor's threat to veto hundreds of millions of dollars in their added spending. Their plan includes more money for public schools and rejects his plan to let the state university system raise tuition on an annual basis. The Legislature, insisting its plan will complete the final components of a $136 billion budget, also rejected Paterson's plans to cap annual property tax growth, permit wine sales in grocery stores and bolster gubernatorial powers during financial emergencies.

Quinn to announce plans for huge Ill. budget gap Gov. Pat Quinn plans to spell out how he'll use his emergency budget powers to keep state government afloat despite the biggest deficit in Illinois history. Quinn is scheduled to announce his plans Thursday, the first day of the state's fiscal year. Illinois faces a deficit of roughly $13 billion.Rather than balance the budget, lawmakers voted to give Quinn special authority over spending. That means he'll decide which programs are slashed, which bills will go unpaid and which special funds will be raided.The Chicago Democrat also may pressure lawmakers to return to Springfield and approve borrowing about $4 billion for government pensions. Without permission to borrow the money, Quinn will have to find it by cutting other parts of the budget more deeply.

Ill. to begin new fiscal year with deficit, debt - The state of Illinois is about to begin a new budget year that will involve debt, deficit and spending cuts.The old budget expires at midnight Wednesday. Gov. Pat Quinn says he will sign the new budget into law sometime before then.The state could be $13 billion short of all the money it will need in the coming year. Quinn and other officials have agreed to deal with that gap by borrowing money and letting more unpaid bills pile up.Quinn has also been given special powers to cut spending where he sees fit. The Chicago Democrat is scheduled to reveal on Thursday where he plans to cut.

Illinois' unpaid bills tally stands at $4.5B — As Gov. Pat Quinn prepares to outline possible cuts in state services during an event today in Chicago, Illinois ended the fiscal year with $4.5 billion in unpaid bills. Those still owed money by the state on Wednesday include schools, universities, caretakers of seniors and business owners, including Decatur pharmacy owner Dale Colee. “It’s real frustrating,” said Colee, who routinely waits about 90 days for the state to reimburse him for Medicaid costs. He said he pays his taxes on time, even though the state is late on its payments

Ill. governor signs new budget, outlines deep cuts - Illinois Gov. Pat Quinn has signed a state budget that cuts spending and has warned that further cuts are likely. The new budget includes $1.4 billion in cuts to schools, hospitals and prisons as the state grapples with a roughly $13 billion deficit — the biggest deficit in its history. But Quinn postponed a decision that could lead to far more painful cuts. The Chicago Democrat didn't say how he'll make $3.7 billion in payments to government pension systems. He hopes that legislators will reverse themselves and vote to borrow the pension money.

Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole - He picks the papers off his desk and points to a figure in red: $5.01 billion. "This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says. For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.  Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

$14 Billion to Fix Hawaii - For decades, Hawaii neglected its critical public infrastructure. Inadequate roads and highways have left us with mind-numbing traffic jams, not just in Honolulu, but in Kona, Kihei and Lihue. Our harbors – the entry point for food, fuel and other necessities – lack enough piers and yard space. Thirty-eight percent of the state’s bridges are structurally deficient or functionally obsolete. More than 120 million gallons a day of raw sewage passes through sewers that are bursting at the seams. And our children attend schools and colleges with crumbling buildings and leaky roofs. The roster of major repairs and capital-improvement projects is almost endless.But at least now we have some idea what it’s all going to cost. A report released this month by the Hawaii Institute for Public Affairs says the state and counties will spend at least $14.3 billion on critical infrastructure over the next six years.

More Unintended Trash Consequences | Well-meaning policies can often have unintended consequences: trash taxes, for example, have been associated with backyard burning of trash in Ireland, trash dumped in the woods (in Virginia), and rat-infested sewers in Germany (thanks to flushed trash).  Now, a family in Sharon Township, Ohio (where residents are charged for their trash), left behind a big mess when they moved out of their home. “When I opened the garage door, there was a year’s worth of garbage stacked in the garage, and on top of that garbage was a rat that looked like a small cat to me,” said a neighbor.

Ga Faces Worst Fiscal Crisis in 70 Years - The 2011 fiscal year starts Thursday and the Georgia Budget and Policy Institute says the state is facing the worst fiscal crisis in 70 years.  State revenues have dropped dramatically over the past two years, resulting in multi-billion dollar budget deficits. Although federal Recovery Act funds have helped Georgia avoid cuts to Medicaid and limited somewhat cuts to education and public safety, most state agencies have seen their budgets slashed by 15 percent or more. The strategy of Georgia lawmakers to slash the budget is impacting every facet of state government and is resulting in severe cuts to government services as well as layoffs and furloughs of thousands of teachers and state employees.

NJ Assembly, Senate Pass $29.4B Budget - New Jersey's Democratic-controlled Legislature has approved a $29.4 billion budget, sending back to the Republican governor a spending plan that cuts hundreds of millions of dollars in public school aid, suspends property tax rebates and adds levies on businesses, students, the elderly and the disabled. The budget, approved by the Assembly early Tuesday morning and by the Senate hours earlier, is close to the one Gov. Chris Christie introduced in March amid some blunt talk about the state's bleak finances. He said New Jersey was facing an $11 billion deficit and needed to cure its addiction to spending.

Bankers Who Broke Big Dig With Swaps Gone Awry Get Paid for Fix (Bloomberg) -- The same bankers who sold Massachusetts interest-rate swaps that blew up the debt financing for the so-called Big Dig road and tunnel project in Boston -- costing taxpayers $100 million -- are getting even more money to fix what they broke.UBS AG bankers showed up at the Massachusetts Turnpike Authority in 2001 with a solution to a growing deficit at the state agency overseeing the $15 billion project. The bank gave the authority $29.1 million for an interest-rate swap linked to $800 million of Big Dig bonds, an agreement meant to cut the cost of paying back the debt and cover part of the budget shortfall. JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. made similar deals. The deal with UBS backfired as credit markets faltered two years ago, costing toll payers $36.3 million in extra interest and leading the Zurich-based bank to demand as much as $400 million to end the arrangement when the Big Dig bonds’ insurer lost its top credit ratings.

State Ends Funds For Funerals Of Poor - Starting Thursday, Kansas will no longer help pay to bury people whose families can't afford funeral expenses. That has counties, and funeral homes, worried that they will end up with the bill. Among other concerns, the group worried about what would happen when funeral homes pick up bodies only to realize that the family has no money to pay for services.

Oregon schools consider eliminating programs and restructuring to cover state funding shortfall - Skip textbook purchases. Dip into reserves. Keep vacant jobs open. Those are among the first ways that school districts try to trim budgets. But for most Oregon districts, those options have been exhausted.Now, many school leaders face a third consecutive year of reductions and are planning cuts that will hit the core of Oregon's K-12 education system -- school days, teachers and programs.  Oregon's trends mimic those in about 45 other states, says Mike Griffith, a senior policy analyst at the Education Commission of the States. Nationally, school districts are making deeper cuts that are increasing class sizes and eliminating popular programs. Some school systems are on the brink of insolvency.Griffith said there is no doubt that the past three years have been the worst period for state and school district budgets in 50 years. "The Recovery Act kept the floor from falling through," Griffith said. "Now that money is gone. This year's budget is worse than the last, and there are no federal dollars to make up the difference."

LA braces for pink slips - Thousands of government workers throughout Los Angeles could begin losing their jobs this week with the start of the new fiscal year, even as officials make last-minute bids to save positions through further service cuts, tax hikes and union concessions. Up to 4,300 jobs could be cut next fiscal year from local government agencies, including the city, county and schools, if officials and unions fail to reach deals to slash spending.  Los Angeles Unified School District alone could shed up to 2,500 jobs this year, although that number is expected to fluctuate through the fall as officials negotiate with unions and monitor the state revenue picture.

Five Monterey County school districts face insolvency - The number of California school districts that appear headed for financial trouble has increased dramatically since March, with five in Monterey County making the list. King City Union, King City Joint Union High, North Monterey County Unified, Santa Rita Union and Washington Union were included in the list of 174 districts that must make significant cuts to remain solvent. The information is based on preliminary reports districts were required to submit to the state in April with information as of March 15. ""The number of California K-12 districts that could face financial difficulties went from 108 in 2009 to 174 this year, a number that has statewide officials concerned, given the realities of California's budget woes.

Detroit Schools budget deficit grows 66% -- The budget deficit for Detroit Public Schools has ballooned from $219 million last year to $363 million, according to budget documents released Tuesday by the district. The 66-percent spike in the debt occurred during the first full year of leadership under Robert Bobb, the state-appointed emergency financial manager. Bobb was appointed by Gov. Jennifer Granholm to help eliminate the district's deficit. His term expires in March. A year ago Bobb pledged to end overspending and expected a $17 million surplus that would help whittle the $219 million deficit accumulated from previous years. In March, The Detroit News reported the district's deficit was projected to instead grow to $317 million for the year, but in less than four months it has added $46 million.

On Average, Charter Schools Are About Average - Here at the blog we’ve repeatedly touted the success of KIPP schools and urged the world to try harder to scale these programs up and not just use the difficulties of scaling as an excuse to dismiss them. But it should always be remembered that the average performance of charter schools is about the same as the average performance of traditional public schools. In other words, there’s no magic in the water. Some public school systems perform much better than others. And some charter schools perform much better than others. I think it’s essential that jurisdictions—especially jurisdictions like Washington, DC where the public schools are far below average—allow new charters to start up and successful ones to franchise and expand. But it’s equally essential for charters that persistently underperform to be shut down.

LSU Facing Massive Cuts - Via WAFB:  LSU president warns of deep cuts and dismissals Lombardi said Louisiana’s higher education system will need to absorb nearly $310 million in state funding reductions as federal stimulus support comes to an end.  Lombardi said the university might have to cut 23 percent from its current budget. Random departments might face deeper cuts than others. […]An LSU employee close to the budget crisis acknowledged LSU has “cried wolf” in the past when it comes to announcing potential budget cuts. “But this one is the real deal,” the source said. “We are being asked to prepare for deep, drastic cuts.”

Top 20: Colleges That Offer Best Return on Investment - A college degree has proved to be a better shield than a high-school diploma in a tough labor market, but the investment can be daunting for students and parents. A new study released this week shows which colleges are most worth your money. Average student loan debt among graduating seniors in 2008 was $23,200, but research has revealed that college graduates earn more than those with just a high-school diploma. And the unemployment rate for those with at least a bachelor’s degree was 4.7% in May, compared to 9.7% for the nation as a whole and 10.9% among high-school graduates who didn’t attend college. The Massachusetts Institute of Technology topped the list with a 12.6% annual return on investment, totaling $1,688,000 over 30 years. The California Institute of Technology came in second with a $1,644,000 ROI — also 12.6% annually, and Harvard University ranked third with a 12.5% ROI, totaling $1,631,000.

Children Born Poor More Likely to Be Dogged by Poverty - Children born poor are far more likely to be dogged by poverty through childhood and into early adulthood than those who aren’t, a new study shows. Using data from a University of Michigan program that has been tracking the same families for over 40 years, economists at the Urban Institute found that 49% of children who are born into households below the poverty line spend at least half of their first 18 years in poverty. Among children not poor at birth, just over a quarter spend any of their childhood years poor, and only 4% are poor for at least half of their childhood

Should States Cut College or Prison Spending? - Faced with a $19 billion budget deficit this spring, California Gov. Arnold Schwarzenegger announced that he was taking a cleaver to state health and welfare programs for the poor, the disabled, and the elderly. And rather than removing another slice from the state’s vaunted higher education system—which had already experienced years of reductions in state aid, ensuing tuition hikes, and student protests in response—budget cutters took more than $1 billion out of the state corrections programs, particularly prison health care.It may seem odd that state funding for college kids often competes with money for prisoners, but if you track spending in California over the past 30 years, you’ll see evidence of a long-standing tug of war between these two very different constituencies. Over much of the past decade, funding for corrections has gone steadily up, while spending on state colleges has tumbled. “The state seems to be saying we have more of a future in prisons than in universities,” University of California president Mark Yudof said in a recent speech.

That's One Way to Get Out of Student Loan Debt - So you can’t get your student loans discharged in a bankruptcy. Have you tried suing your parents instead? From The Connecticut Law Tribune:It’s But even experienced attorneys say it’s rare when the disagreements grow to a point where litigation is required. So consider the odd case of Dana Soderberg, who went to court to force her father to live up to a deal to pay her tuition at Southern Connecticut State University. After Ms. Soderberg’s parents divorced in 2004, she convinced her father to sign a contract committing to pay for the costs of her education until she reached age 25. He lived up to the deal for a while, but then stopped paying before her senior year of college began, the article says. Earlier this month the judge ruled that the father had indeed breached the contract.

For-profit college loans a threat -- The nation's next federal loan-related time bomb may be ticking among for-profit colleges that aggressively recruit low-income students who never graduate and can't repay their loans, a Senate committee was told this week. Although fewer than 10% of college students attend for-profit colleges, these schools account for 44% of all defaults on federal student loans."We've just loaded one generation of Americans with mortgage debt that they can't afford to pay back," portfolio manager Steven Eisman of FrontPoint Financial Services Fund told members of the Senate Health, Education, Labor and Pensions Committee on Thursday. "Are we going to load up a new generation (with) student loan debt that they can't afford to pay back?"

Why Auto-enroll 401(k)s May Reduce Retirement Savings - For the past decade, policymakers and pension experts have encouraged employers to increase worker participation in 401(k) plans by automatically enrolling their employees in these retirement programs. And it works. One study concludes that participation  among new hires nearly doubles—from less than half to nearly 90 percent—when workers are auto-enrolled.But important new research by the IMF's Mauricio Soto and Urban Institute’s Barbara Butrica finds there may be a downside: While more employees enroll thanks to the opt-out design, their employers are likely to match less of their contributions. And that might actually reduce the level of overall pension contributions for some workers. No good deed, as they say, goes unpunished.  In many ways, auto-enrollment makes a lot of sense. Because inertia is so powerful, new workers often don’t bother to fill out the paperwork to participate in 401(k)s. But if their employers sign them up, few workers take the trouble to disenroll even though they are allowed to do so. The 2006 Pension Protection Act as well as 2009 Internal Revenue Service regs are intended to further encourage employers to auto-enroll their workers.

Middle class families face a triple whammy - The claim made by the IMF's Financial Stability Report in 2005, in a seemingly throwaway remark, was that households had become the financial system's "shock absorber of last resort". In other words, whereas in previous eras, much of the pain of recession and financial crisis was borne by businesses or governments, with families afforded some degree of protection by the pensions system or welfare state, it was now households who were far more likely to face the music. At the time, the idea received little attention. But it has truly radical implications for economics and politics around the world. This is not merely about the financial crisis, but something more deep-seated: the way in which wealth is distributed around society. It is about the middle classes, and why they have become the biggest victims of all. The problem is that families face a threefold threat to their prosperity. The first issue – the one that the IMF was originally focusing on – is pensions. Not so long ago, households were lucky enough to receive gold-plated pensions that would guarantee a certain pay-out upon retirement. Most companies have closed their schemes after realising they are simply unaffordable.

John Boehner Steps On The Third Rail - House Minority Leader John Boehner suggested in an interview today that the Social Security retirement age should be raised: He said he’d favor increasing the Social Security retirement age to 70 for people who have at least 20 years until retirement, tying cost-of-living increases to the consumer price index rather than wage inflation and limiting payments to those who need them. “We need to look at the American people and explain to them that we’re broke,” Boehner said. “If you have substantial non-Social Security income while you’re retired, why are we paying you at a time when we’re broke? We just need to be honest with people.” Boehner also proposed other changes to the Social Security System in this video:

New proposal would push retirement age to 70 for Social Security benefits -- You could be forced to work until you're 70 just to cash in your Social Security retirement benefits.  It's an attempt to make up for the Social Security budget crisis. The current age to retire and receive Social Security benefits is 65, but House Republican Leader John Boehner proposed pushing the retirement age back to 70. If approved, the new age would only affect those not set to retire for another 20 years. The proposal is being made to make up for the Social Security Administration's budget crisis.

No Easy Way to Fix Social Security - This is coming up over and over again--an "easy" fix for Social Security wherein "all" we have to do is get rid of the cap on Social Security payroll taxes, without increasing benefits.  Dylan Matthews has the charts that are currently making the rounds, which show that this simply solution not only eliminates the Social Security shortfall, but also generates a substantial surplus! This is not actually surprising, since what this amounts to is hiking the marginal tax rates on high incomes by 15 percentage points--making the federal tax take on the highest incomes 55% in 2012, assuming that Obama and Congress follows through and allows the Bush tax cuts to expire in 2011.   This is obviously a gigantic hike, and moreover, when Medicare, state, and local taxes are added in, would push the tax burden on the highest incomes to over 2/3 in the hightest tax jurisdictions. Whatever you think of this plan, this is not an easy solution. 

Fixing Social Security - Megan McArdle responds today to the idea of balancing Social Security's books in one fell swoop by removing the cap on earnings that are hit by the payroll tax. This cap changes with inflation each year and it's currently set at a little over $100,000. If we removed the cap and taxed all income, Social Security's financing would be in great shape:, This is basically right — though I think the marginal increase would be 12.4%, not 15%. But that's still a helluva lot. If we're ever going to raise marginal rates on the rich by that amount, I'd want to use it for more than just balancing Social Security's books. Really, though, you don't need to go down this road. Contra Megan's headline ("No Easy Way To Fix Social Security"), Social Security is a pretty easy problem to address, and the reason it's easy is that you don't have to limit yourself to a single big solution

Soak the rich - WOW, the answer to our fiscal woes from Andrew Sullivan: Well it is not pain-free, as I conceded. But it is easy and elegantly simple. And if you are going to raise taxes, as we must, there's no way for them not to target the wealthy. That's almost only where the money now is. This is his response to Megan McArdle’s thoughtful argument that lifting the cap on income subject to the payroll tax is not such an easy fix to Social Security insolvency. I suppose lifting the payroll tax cap is attractive to people with limited knowledge of public finance because they can understand it. But is this honestly the only option? Gee, what about increasing the retirement age and indexing it to life-expectancy? How about changing indexation rules in a progressive manner (Social Security income above a certain level is indexed to inflation instead of wage growth)? How about subsidising saving of low and middle income Americans to off-set any benefit cuts? That sounds better to me than marginal tax rates exceeding 60% for the job-creating segment of the population (particularly as the population ages and wage earners make up an increasingly smaller segment of it).

CBO Scores Social Security Policy Options - Following up on the publication of CBO's Long Term Budget Outlook (see previous two of my posts) CBO yesterday published Social Security Policy Options (Summary for Web) and Social Security Policy Options (Full 51 pg PDF) scoring various revenue and spending cut measures that have been proposed for Social Security. The included Table shows various fixes scored as a percentage of 75 year GDP with the gap measured at -0.6%. Meaning that any fix scored at 0.6% or above backfills the entire gap, while fixes scored below that would have to be applied in combination. CBO does warn that certain fixes are interactive meaning that they are not simply additive, applying two might have either positive or negative effects on the total. I am going to publish this to get the ball rolling but will be updating both this post and comments over the next couple of hours. BTW, the full version provides an excellent summary of Social Security overall, people not totally familiar with how the system operates (and some who think they are familiar but labor under certain misconceptions) might find it useful to skim through the relevant sections.

CBO LTO for Social Security - Under CBO's 'Extended Baseline', i.e. roughly Current Law the 75 year actuarial gap is up to 1.6% from 1.3% and the date of Trust Fund Exhaustion moved back from 2043 to 2039. Under the 'Alternative Fiscal Scenario' the corresponding numbers are 2.1% and 2037 or right in line with the Social Security Trustees 2009 projections. Meaning that the NW Plan as currently formulated would handle even CBO's more pessimistic projection. The sky is not falling and contrary to some people's calculations the Trust Funds will not go to zero by 2012. And while the percentage of GDP that will go to Social Security is projected to increase from 4.8% to 6.2% under both alternatives this has to be (or at least morally should be) balanced against the fact that the percentage of people eligible for retirement will grow from 22% to 35%. Unless someone would care to make the argument that older people should ipso facto get a smaller share of productivity per capita in the future than they do now this hardly seems unreasonable.

Some Excellent New Deal 2.0 Posts on Social Security - New Deal 2.0 has been running some excellent Social Security commentary over the past couple weeks. They ran a series of articles under the heading Social Security Fiscal Fitness which included contributions by Robert Kuttner: The Stealth Attack on America’s Best-Loved Program and Greg Anrig: How Social Security Can Gain Without Much Pain.Two specific posts I want to extra encourage you to check out. First is a post, Deficits, Social Security, and the American Public, based on a Roosevelt Institute working paper, Understanding Public Opinion On Deficits and Social Security, by noted scholars Benjamin I. Page and Lawrence I. Jacobs. I also want to point out this post, Social Security’s Family Benefits and the Fiscal Commission by Yung-Ping Chen. He makes the point, one I don’t hear often, that instead of simply using this opportunity to slash benefits, you could actually reorganize the way benefits are paid out to reflect the way the American population is changing

CalPERS cost increase for 2011 - The California Public Employees Retirement System will be raising its health-care contribution rates by a total of 9.1 percent for its 1.3 million program members. These increases will be enacted by 2011. “This increase mainly reflects higher costs that plans anticipate for hospital, medical and prescription drug use next year – not from members using more services or the new federal health care law,” CalPERS Board President Rob Feckner said in a prepared statement. “These are the best rates we could negotiate in the current market, where similar increases are forecast next year for other employer purchasers.”

Another round of pension bonds for Illinois possible - Illinois hopes to issue pension obligation bonds to raise the $3.7 billion required contributions to the five state retirement systems for the fiscal year that began Thursday, Gov. Pat Quinn said in a teleconference. The pension borrowing plan, which was approved by the Illinois House, is pending in the state Senate, he said. The bond issue “will accelerate revenue into the state to pay the pensions,” Mr. Quinn said. Last January, Illinois sold $3.466 billion in pension obligation bonds, priced at an interest rate of 3.854%, to finance its contributions to the five systems for fiscal year 2010. Illinois still has outstanding almost all of the $10 billion in taxable pension obligation bonds it issued in 2003.

Older population makes New England pension reform urgent (Reuters) - An older population than the U.S. average demands urgent public pension reform in the six New England states, according to a report from the New England Public Policy Center released on Wednesday. "Population aging is placing financial pressure on the retirement programs that support older people in the United States, and indeed around the world," said Richard Woodbury, an economist with the National Bureau of Economic Research. "We've been talking about population aging for a long time, but the next 20 years are going to be something different," he said. Woodbury presented his findings at a Boston Fed conference on state pension reform. Across the nation, state public pension fund assets and their funding ratios are falling, Standard & Poor's Ratings Services said in a report on Wednesday. The demographic imperative means New England -- the states of Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and Connecticut -- will confront the issue much sooner, Woodbury said.

S&P: US Pensions a Significant State Budget Challenge - States and local governments should not count on future economic growth to solve the financial challenges stemming from public pension funding, and should instead take a proactive approach to retirement benefit funding, Standard & Poor's said Wednesday.  Otherwise, they expose themselves to more "hardship," the rating agency said in a report titled Pension Funding And Policy Challenges Loom For U.S. States.  "If governments consistently ignore postretirement benefits and underfund contributions in the hope that future economic growth will bolster their finances sufficiently, they could be setting themselves up for greater hardship, in our view," Standard & Poor's said. Overall, the report added its voice to mounting warnings against letting pension funding issues become massive financial burdens for states, threatening their ratings, with heavy implications for their financing costs.

NY, Michigan Governors Press Congress on Medicaid (Bloomberg) -- The governors of New York, Pennsylvania and Michigan led states pressing Congress to extend higher financing for Medicaid, the health-care program for the poor whose use surged during the economic crisis. David Paterson of New York, Edward Rendell of Pennsylvania and Jennifer Granholm of Michigan and three other governors, all Democrats, traveled to Washington today to appeal for funds after the Senate failed to approve $16 billion in extra financing for Medicaid and extended jobless benefits. Republicans opposed the measure’s cost. The Senate action last week dealt a blow to cash-strapped states, about 30 of which had anticipated that the federal help would be extended for another six months. U.S. states at year- end will lose the additional Medicaid money they receive under the economic-stimulus package unless Congress steps in. The governors said the money is needed to prevent cuts to programs such as schools, whose funding has already been slashed. “We’ve depleted our resources,” “Where are we going to go? We are going to have to go back to some of these same places and create unimaginable pain.”

America Speaks Back: The Effort to Gut Social Security and Medicare Takes a Hit - The opponents of Social Security and Medicare are getting in high gear. After all, it makes perfect sense that after the collapse of a housing bubble has just destroyed the life savings of near retirees that we would cut their Social Security and Medicare. Okay, at least in Washington that makes perfect sense. President Obama’s deficit commission is moving forward with Social Security and Medicare explicitly in their sights. They got a dry run for how this effort is likely to sell with the public on Saturday as the Peter Peterson funded group America Speaks sponsored a series of 19 "21st Century Town Meetings." It seems that events didn’t quite go as planned. The exercise was intended to convince people that there were no options other than large cuts to Social Security and Medicare to hit their deficit targets. To ensure this result, the America Speaks crew put together a booklet that exaggerated future budget problems (the exercise was for the year 2025) by assuming a worse budget path than the country is currently facing. America Speaks also excluded the possibility that the Fed would buy and hold more debt, in effect continuing its current course. There is no reason that the Fed could not follow the same path, unless the goal is to force cuts in Social Security and Medicare.

Congress blasts Medicaid hole in states' budgets ( -- Young children in Massachusetts will lose state-funded mental health services. Welfare recipients will see their employment and training programs slashed. And homeless families will lose nearly all their state assistance to move into more permanent housing. Massachusetts lawmakers had to make these and other difficult cuts last week after discovering they had to slash another nearly $700 million out of the state budget. The Bay State had assumed Congress would pass $24 billion in additional Medicaid funding for states before their fiscal years start on July 1.  But that money hasn't materialized.So officials in Massachusetts and 29 other states that counted on the funds to balance their budgets are left with the task of slashing services and payrolls once again.

Governors to bring Medicaid fight to Washington (Reuters) - Desperate U.S. states are preparing to bring the fight for financial help to the Congress as early as Monday after the Senate rejected their pleas for assistance in paying for Medicaid. Late on Thursday, a bill that would have sent billions of dollars to states to help them cover the costs of Medicaid, the healthcare program for the poor, failed in the U.S. Senate.By Friday morning, governors were planning to come to the nation's capital to tell lawmakers that without the money, they will have to slash already lean budgets for fiscal 2011, which for most states begins in a week."For Michigan and for states across the country this is devastating," said Michigan Governor Jennifer Granholm, a Democrat, in a conference call with reporters.She noted that 30 states, including some with Republican governors, have assumed the increased Medicaid funding in their fiscal 2011 budgets.

Cowen’s Road - With a blog post titled “The Road to Medicare, not The Road to Serfdom,” Tyler Cowen got me to read his NY Times column in which Medicare is mentioned exactly once: While we can expect a larger public sector in America, the cause is mainly the aging of the population, and it will play itself out over the next 30 years with an increase in government transfer payments, mostly through Medicare. Furthermore, even Professor Hayek favored welfare spending and social insurance, so those programs will not alone bring us to serfdom. The message of the column, titled “A Pendulum Swing Toward Austerity,” is that (1) fiscal belt-tightening is back and (2) it should be. But what has this got to do with Medicare? Everything. Public health spending is the source of our long-term debt problem (see first graph below). What underlies that problem is not that Medicare is a public program per se, but that the rate of increase in health spending in general is too high. That is, the same health spending growth problem exists on the private side too (see second graph below).

Short-term insurance buyers drive up cost in Mass. – The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.  The result is that insured residents of Massachusetts wind up paying more for health care, according to the report. “The active members subsidize some of the costs tied to those individuals who terminate within one year,’’ the report says. The report was released as state lawmakers consider proposals to make it harder for consumers to jump in and then dump their health insurance coverage.

Short-term insurance buyers in Massachusetts - Kay Lazar reports on the increase in part-year insurance buyers described in a new Massachusetts Division of Insurance report in today’s Boston Globe. The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance. The result is that insured residents of Massachusetts wind up paying more for health care, according to the report. … The number of people engaging in this phenomenon — dumping their coverage within six months — jumped from 3,508 in 2006, when the law was passed, to 17,177 in 2008, the most recent year for which data are available. … Part of the problem is that individuals can jump in and out of coverage anytime during the year. Senate President Therese Murray and Governor Deval Patrick are both considering legislation to address this by allowing just one or two annual open enrollment periods.

Colorado Now the Only State With Obesity Rate Less Than 20%… Take a look at this map. See that blue state in a sea of red and purple hues? It’s Colorado, the only state in the union with an adult obesity rate below 20%. (”Just” 19.1% of its residents are obese.)We’re talking obesity here — defined as a body mass index of 30 or higher, or about 180-plus pounds for a 5′5″ person — not merely overweight (defined as a BMI of between 25 and 30). The annual “F as in Fat” report from the Trust for America’s Health and Robert Wood Johnson Foundation has precious little good news for people concerned about obesity as a public-health problem.  (As the NYT wrote yesterday, some people think this concern is “a pointless and hysterical national fuss” and are protesting by purposefully gaining weight — and, of course, blogging about it.)

Health care: The appeal of repeal | The Economist - Republican leaders in Congress have long detested the new law. Since its passage in March various bills—including a new one this month from Utah’s Senator Orrin Hatch, the American Liberty Restoration Act—have been introduced in both chambers with the aim of overturning the legislation. More than 20 states have also joined lawsuits that challenge the law’s “individual mandate”, the requirement that everyone should buy health insurance, as unconstitutional.  Grass-roots opposition to health reform has been strong too. The tea-party movement has been pushing conservative candidates to sign up to its goal of repealing the president’s bill. Heritage Action For America, a lobbying group allied with the Heritage Foundation, a conservative think-tank, wants to foment similar unrest at the “grass tops” level of politics. Now, however, there are two new prongs to the attack, broadening the assault beyond the right. Many states are complaining about the costs of the new law’s provisions. And businesses are grousing that the administration is breaking its promises that existing employer-provided health coverage would be exempted from the onerous requirements being imposed on new health plans.

Republican Health Care Fratricide - The conservative base has settled on a strategy of repealing the Affordable Care Act with a simple, straight-up repeal vote, sponsored by Steve King (R-Alternative Universe.) The Republican leadership is supporting this drive, but they're also supporting a separate bill sponsored by Rep. Wally Herger to repeal health care and replace it with some Republican proposals. This is driving conservative activists nuts. Here is Erick Erickson: If the GOP unites behind the Heritage effort on the King “Repeal Obamacare” bill, we actually have a chance of winning. 60% of Americans want this to happen, and numerous Democrats are gettable in this fight. The Herger “Repeal and Replace” bill has zero chance of passing, it will drive a number of GOP members away who don’t agree with this particular replacement bill and give Democrats an easy excuse to not sign onto the repeal movement. ...

QCEW State and County Map - BLS map of changes in education and health services employment, by state; interactive graphic

The size of government is not the amount of governance - Matt Yglesias reminds us that government spending as a percent of GDP is a problematic measure of the real amount of government intervention: …government spending share of GDP is a highly imperfect measure of the government’s role in the economy. For example, we could raise taxes by some gigantic amount and then use the funds to provide everyone with a basic health insurance policy. Alternatively, we could have a regulatory agency define “basic health insurance policy” and then make a rule that everyone who fails to purchase a basic health insurance policy has to pay a fine, and then raise taxes a modest amount and subsidize the purchase of basic health insurance policies for people who can’t afford it. There are pros and cons to each approach, but these are basic similar policies, despite the fact that they’ll lead to wildly different levels of government spending as a percent of GDP. This I think highlights what will be a growing theme in governance: how can elected officials get done what needs to get done while hiding the costs.

A New Problem for Insurance Markets - An article in the Wall Street Journal notes that scientists have identified genetic markers for the proclivity to live a long life.  This raises a host of interesting economic questions:

  • Will linsurance companies start offering better life-insurance rates to those with these markers? 
  • Will they require annuity purchasers to take this test and offer the long-lived worse rates? 
  • If insurance companies do not use these markers, perhaps because of regulation, will the availability of these tests cause the markets for life insurance and annuities to unravel because of increased adverse selection?
  • In light of the above considerations, what should public policy be toward insurance companies using these tests?

WARNING: 3D Video Hazardous to Your Health - Nintendo unveils 3DS and quickly follows-up with a statement about dangers to children under 7 playing with the company’s new portable gamer.  Samsung releases a line of 3D HDTVs then issues a warning about its potential health risk to certain viewers. What they haven’t told you is that these warnings come after years of industry spin and cover ups. The truth is that prolonged viewing of 3D video may be even more harmful than the consumer electronics industry wants you to know.  Before you bring a 3D HDTV into your house or let a child under seven play with a brand new Nintendo 3DS, you need to understand the fragile development of an aspect of human vision called stereopsis.

BBC News – Genes predict living beyond 100 -US scientists have developed a way of predicting how likely a person is to live beyond the age of 100. The breakthrough, described in the journal Science, is based on 150 genetic "signposts" found in exceptionally long-lived people. The Boston team created a mathematical model, which takes information from these signposts to work out a person's chance of reaching 100.It is based on the largest study of centenarians in the world. This is a rare trait - only one in 6,000 people in industrialised countries reaches such a ripe old age. And 90% them are still disability free by the age of 93.

Nature vs. Nurture: The neuroscientist with a murderer's brain - James Fallon studies the biological basis of behavior, especially the differences between the minds of psychopaths and normal people. It's research that can produce an almost knee-jerk recoil, given that this kind of stuff was once used to justify forced sterilization and other eugenic practices. But Fallon's story actually ends up illustrating why you can't just write off people as "damaged goods", even if they do carry genes that might predispose them to violence. When Fallon's own family history turned out to be chock full of murderers (including Lizzie freaking Borden), he started studying himself, and found that his brain scans match those of people born with a lowered ability to control their id-like appetites—from rage to food to sex. He also carries a gene that prevents his brain from properly using the calming chemical Serotonin—a gene that's associated with increased levels of aggression.But Fallon isn't a killer. Or even particularly off-putting, according to the story. The point: What makes you you isn't shaped entirely by brain chemistry or genetics. We can say that there are inherited traits that seem to predispose someone to certain behaviors, but we can't say how that will play out in the real world. Biology is destiny. Except, you know, when it's not.

The Web Shatters Focus, Rewires Brains - When first publicized, the findings were greeted with cheers. By keeping lots of brain cells buzzing, Google seemed to be making people smarter. But as Small was careful to point out, more brain activity is not necessarily better brain activity. The real revelation was how quickly and extensively Internet use reroutes people’s neural pathways. “The current explosion of digital technology not only is changing the way we live and communicate,” Small concluded, “but is rapidly and profoundly altering our brains.”What kind of brain is the Web giving us? That question will no doubt be the subject of a great deal of research in the years ahead. Already, though, there is much we know or can surmise—and the news is quite disturbing. Dozens of studies by psychologists, neurobiologists, and educators point to the same conclusion: When we go online, we enter an environment that promotes cursory reading, hurried and distracted thinking, and superficial learning. Even as the Internet grants us easy access to vast amounts of information, it is turning us into shallower thinkers, literally changing the structure of our brain.

Not just a high - In science’s struggle to keep up with life on the streets, smoking cannabis for medical purposes stands as Exhibit A. Medical use of cannabis has taken on momentum of its own, surging ahead of scientists’ ability to measure the drug’s benefits. The pace has been a little too quick for some, who see medicinal joints as a punch line, a ruse to free up access to a recreational drug. But while the medical marijuana movement has been generating political news, some researchers have been quietly moving in new directions — testing cannabis and its derivatives against a host of diseases. The scientific literature now brims with potential uses for cannabis that extend beyond its well-known abilities to fend off nausea and block pain in people with cancer and AIDS. Cannabis derivatives may combat multiple sclerosis, Crohn’s disease and other inflammatory conditions, the new research finds. Cannabis may even kill cancerous tumors.

Scientists Cite Fastest Case of Human Evolution - NYTimes - Comparing the genomes of Tibetans and Han Chinese, the majority ethnic group in China, the biologists found that at least 30 genes had undergone evolutionary change in the Tibetans as they adapted to life on the high plateau. Tibetans and Han Chinese split apart as recently as 3,000 years ago, say the biologists, a group at the Beijing Genomics Institute led by Xin Yi and Jian Wang. The report appears in Friday’s issue of Science.

"Nicotine Bees" Population Restored With Neonicotinoids Ban - Following France and Germany, last year the Italian Agriculture Ministry suspended the use of a class of pesticides, nicotine-based neonicotinoids, as a "precautionary measure." The compelling results - restored bee populations - prompted the government to uphold the ban. Yesterday, copies of the film 'Nicotine Bees' were delivered to the US Congress explaining the pesticide's connection to Colony Collapse Disorder. Despite the evidence, why does CCD remain a 'mystery' in the US? Nicotinyl pesticides, containing clothianidin, thiametoxam and imidacloprid, used to coat plant seeds, are released into the lymph as a permanent insecticide inside the plant. But after just sucking dew from maize leaves that absorbed neonicotinoids, disoriented bees can't find their way to the apiary. Massive numbers of bees get lost and die.

Democrats, Obama willing to scale back - Key Senate Democrats offered, during a White House meeting with President Barack Obama and skeptical Republicans on Tuesday, to scale back their ambitious plans to cap greenhouse gases across multiple sectors of the economy. Sens. John Kerry and Joe Lieberman told reporters after the 90-minute West Wing meeting that Obama held firm in his calls for a price on greenhouse gases. But they said the president acknowledged that he could agree to a more limited climate and energy bill than any the senators had previously drafted. “We believe we have compromised significantly, and we’re prepared to compromise further,” Kerry said."The president was very clear about putting a price on carbon" and curbing greenhouse gases,  he added.

Record Heat, And Is Climate Control Legislation Dead?... Science Daily reports that May had the highest average global temperature on record, with June quite likely to join it. Nevertheless, in his address to the nation about the BP oil spill, while President Obama called for the passage of clean energy legislation, he somehow neglected to add a call for the Senate to pass any sort of climate control legislation, whether of their own construction or some variation on the complicated cap-and-trade bill that Nancy Pelosi managed to barely get through the House of Representatives just over a year ago after a massive effort. It may be that this is due to the end of any sort of Republican support after Lindsey Graham jumped ship after Obama said we needed to pass immigration reform. Whatever the reason, I fear that this means that climate legislation is dead now, and probably for the foreseeable future, as I expect the Congress to become more hostile after this fall's election.

When the scientific evidence is unwelcome, people try to reason it away - What do people do when confronted with scientific evidence that challenges their pre-existing view? Often they will try to ignore it, intimidate it, buy it off, sue it for libel or reason it away, The classic paper on the last of those strategies is from Lord, Ross and Lepper in 1979: they took two groups of people, one in favour of the death penalty, the other against it, and then presented each with a piece of scientific evidence that supported their pre-existing view, and a piece that challenged it; murder rates went up or down, for example, after the abolition of capital punishment in a state. The results were as you might imagine. Each group found extensive methodological holes in the evidence they disagreed with, but ignored the very same holes in the evidence that reinforced their views. Some people go even further than this when presented with unwelcome data, and decide that science itself is broken.

Loan Giants Threaten Energy-Efficiency Programs - NYTimes - The Obama administration is devoting $150 million in stimulus money for programs that help homeowners install solar panels and other energy improvements, which they pay for over time on their property tax bills. At the same time, the two government-chartered agencies that buy and resell most home mortgages are threatening to derail the effort by warning that they might not accept loans for homes that take advantage of the special financing. The mixed messages have alarmed state officials and prompted many local governments to freeze their programs, which have been hailed as an innovative way to help homeowners afford the retrofitting of a house with solar panels, which can cost $30,000 or more before incentives. “The thing that is maddening is that this is having a real-life impact with companies laying off people and homeowners in limbo as all these projects are stalled,”

The Simple Economics of PACE Financing for Green Homes: The Challenge of Recessions - The New York Times has a long article on the PACE (property assessed clean energy) program that helps households finance "green" investments such as solar panels. While the article quotes lots of affected people it doesn't bother to actually explain the economics so permit me to try. Suppose that in 2007 you bought a $400,000 home in California. You financed this with a $80,000 in cash and a $320,000 loan. Your property tax is 2% so $8,000 per year to pick up the trash and have a couple of public schools and a few cops. You are an environmentalist and you like to look good to your friends so you inquire about installing solar panels on your sunny roof. You are quoted an upfront price of $30,000 to install. You turn down this option to "go green" because you don't have that much cash in the bank but the NREL calculator tells you that the present discounted value of saved electricity bills from having solar panels would have made this a good investment.  Facing this binding liquidity constraint, the PACE program helps you to achieve your dreams because the City will pay the upfront costs. But, this is not a free lunch! your flow of future property taxes will go up.

Record Power Demand Pushes Natural Gas Higher - New Yorkers running air conditioners during the hottest June in 16 years means natural gas for August delivery is trading at the highest price relative to longer- dated futures since 2004.  Record electricity demand cut the discount for August natural-gas delivery versus January to 82 cents on the New York Mercantile Exchange from $2 a year earlier.  Temperatures across New York, New Jersey and Connecticut rose to as much as 5 percent above normal last month and natural gas jumped 6.3 percent in June, the most for the month in two years.  Natural gas and coal are used to generate 70 percent of the nation’s electricity. Natural gas for August delivery traded at $4.616 per million British thermal units on June 30 on the Nymex. Gas for January delivery, when prices typically peak for the year, was $5.434. The discount for August futures versus January has averaged $1.87 since 2004, more than twice this year’s difference, at the end of June.

Obama Gives $2 Billion to Solar Plants-- The government is handing out nearly $2 billion for new solar plants that President Barack Obama says will create thousands of jobs and increase the use of renewable energy sources. The two companies that will receive the money from the president's $862 billion economic stimulus are Abengoa Solar, which will build one of the world's largest solar plants in Arizona, creating 1,600 construction jobs; and Abound Solar Manufacturing, which is building plants in Colorado and Indiana. The Obama administration says those projects will create more than 2,000 construction jobs and 1,500 permanent jobs.

How green is high-speed rail? - Life cycle costs can be a buzz kill. Just when you think you’ve got a great environmental solution, such as going paperless and doing everything digitally, or installing double-paned windows to make a home more energy efficient, you find out that manufacturing these supposedly environmentally-friendly technologies can create waste that offsets some of their “green” value. The same may be true for high-speed rail. A new study by Mikhail Chester and Arpad Horvath of the Department of Civil and Environmental Engineering at UC Berkeley attempts to calculate the life cycle environmental costs of California’s proposed high-speed rail system. Compared to other modes of transit, the researchers found that:High-speed rail has the potential to be the lowest energy consumer and greenhouse gas emitter only if it consistently travels at high occupancy or uses a low-emission electricity source such as wind, both of which will require appropriate planning and continued investment.

Prepare for Hotter and Drier Southwestern US, Climate Experts Urge Two prominent climate experts, including one from the University of Arizona, are calling for a "no-regrets" strategy for planning for a hotter and drier western North America. Their advice: use water conservatively and continue developing ways to harness energy from the sun, wind and Earth.The West, and especially the Southwest, is leading the nation in climate change -- warming, drying, less late-winter snowpack and drought -- as well as the impacts of this change," said Overpeck, a UA professor of geosciences and atmospheric sciences and co-director of the Institute of the Environment. In the past 10 years, temperatures in almost all areas in western North America have surpassed the 20th century average, many by more than 1 or even 2 degrees Fahrenheit. The warming has decreased late-season snowpack, which serves as a water reservoir, as well as the annual flow of the Colorado River, the researchers said.

Jeff Masters: All time high temp records set in Africa and Asia - A withering heat wave of unprecedented intensity and areal covered continues to smash all-time high temperatures Asia and Africa. As I reported earlier this week, Saudi Arabia, Iraq, Chad, Niger, Pakistan, and Myanmar have all set new records for their hottest temperatures of all time over the past six weeks. The remarkable heat continued over Africa and Asia late this week. The Asian portion of Russia recorded its highest temperate in history yesterday, when the mercury hit 42.3 °C (108.1 °F) at Belogorsk, near the Amur River border with China. The previous record was 41.7 °C (107.1 °F) at nearby Aksha on July 21, 2004. (The record for European Russia is 43.8 °C -- 110.8 °F -- set on August 6, 1940, at Alexandrov Gaj near the border with Kazakhstan.) Also, on Thursday, Sudan recorded its hottest temperature in its history when the mercury rose to 49.6 °C (121.3 °F) at Dongola. The previous record was 49.5 °C (121.1 °F) set in July 1987 in Aba Hamed. We've now had seven countries in Asia and Africa, plus the Asian portion of Russia, that have beaten their all-time hottest temperature record during the past two months. This includes Asia's hottest temperature of all-time, the astonishing 53.5 °C (128.3 °F) mark set on May 26, 2010, in Pakistan.

US promises $136 million in climate aid to Indonesia (Reuters) - The United States will spend $136 million over three years on environment and climate change programs in Indonesia, according to a statement issued by the White House on Monday. The agreement between two of the world's biggest emitters of planet-warming greenhouse gases follows Norway's $1 billion commitment in May to environmental programs in Indonesia.  Indonesia is regarded as a key player in the fight to slow climate change because its tropical forests and carbon-rich peatlands trap huge amounts of carbon dioxide but its rapid deforestation rate has sparked concern among environmentalists.

Temporary Shelter Tents Aren't Holding Up in Heavy Rains of Haiti -  Hurricane season in Haiti officially began three weeks ago, bringing rain to the region nearly every day. More than 1.5 million Haitians remain in the streets. Yet this week, the United Nations completed a study, revealing that 40 percent of all emergency shelters, including tents and tarps, already need to be replaced or "improved." It took the international community five months to distribute almost 700,000 tarps and 70,000 tents and remains one of the most complex and difficult accomplishments of the disaster response. The new study, however, shows that emergency shelter materials cannot withstand the extreme weather in Haiti. In particular, small camping-style tents have fallen apart

China's per capita emissions rising steeply - Carbon dioxide emissions per person in China reached the same level as those in France last year, the Netherlands Environmental Assessment Agency said Thursday. The Dutch agency said that per capita emissions were 6.1 tons in China in 2009, up from only 2.2 tons in 1990. Among the French, emissions were 6 tons per person last year, said Jos Olivier, a senior scientist at the Dutch agency. Per capita emissions in France tend to be lower than in some other industrialized countries because of the country’s heavy reliance on nuclear plants to generate electricity rather than fossil fuels. Per capita emissions in 15 nations of the European Union were 7.9 tons in 2009, down from 9.1 tons in 1990, the study said. In the United States, the figure was 17.2 tons in 2009, down from 19.5 tons in 1990.

Population Growth Must Stop - Earth’s population is approaching seven billion at the same time that resource limits and environmental degradation are becoming more apparent every day. Rich nations have long assured poor nations that they, too, would one day be rich and that their rates of population growth would decline, but it is no longer clear that this will occur for most of today’s poor nations. Resource scarcities, especially oil, are likely to limit future economic growth; the demographic transition that has accompanied economic growth in the past may not be possible for many nations today. Nearly 220,000 people are added to the planet every day, further compounding most resource and environmental problems. The United States adds another person every eleven seconds. We can no longer wait for increasing wealth to bring down fertility in remaining high fertility nations; we need policies and incentives to stop growth now.

A downside to the recovering ozone layer - While the hole in the Earth's protective ozone layer is slowly healing, its recovery might have a downside, scientists say: Climate change could change wind patterns and send ozone from high in the atmosphere down to the surface, where it is a major component of smog.  The discovery of a hole in the ozone layer above Antarctica was announced by a team of British scientists in 1985. The cause of the hole was attributed to ozone-depleting chemicals like chlorofluorocarbons (CFCs), which were primarily used in cooling units and propellants. When CFCs reach the ozone layer, they release chlorine atoms that rip ozone apart and peel away layers of Earth's natural sunscreen. Simulations of life without the ozone layer, which is located in the Earth's stratosphere, are not pretty. The stratosphere (the second layer of the Earth's atmosphere, just above the one in which we dwell, the troposphere) contains 90 percent of the Earth's ozone at altitudes between 6 and 31 miles (9.6 and 50 kilometers) above us, where it traps most of the sun's harmful ultraviolet (UV) rays before they can reach the Earth's surface.  Without this shield, we'd be sunburned within 5 minutes of exposure

Graph of the Day: Average Global Sea Surface Temperature, 1880–2009 - This graph shows how the average surface temperature of the world’s oceans has changed since 1880. This graph uses the 1971 to 2000 average as a baseline for depicting change. Choosing a different baseline period would not change the shape of the trend. The shaded band shows the likely range of values, based on the number of measurements collected and the precision of the methods used. Sea surface temperature increased over the 20th century. From 1901 through 2009, temperatures rose at an average rate of 0.12 degrees per decade. Over the last 30 years, sea surface temperatures have risen more quickly at a rate of 0.21 degrees per decade. Sea surface temperatures have been higher during the past three decades than at any other time since 1880.  The largest increases in sea surface temperature occurred in two key periods: between 1910 and 1940, and from 1970 to the present. Sea surface temperatures appear to have cooled between 1880 and 1910.

Ice shelf was kept intact by underwater ridge - The discovery of an underwater mountain ridge could help solve the mystery of why Antarctica's Pine Island glacier is vanishing so rapidly. A robot submarine sent beneath the glacier's floating ice sheet has shown that there is a ridge rising 400 metres from the sea floor. Until recently, the glacier would have rested on this ridge, preventing warm seawater from reaching the ice and melting it from underneath. But the submarine has shown that the glacier no longer rests on the ridge - it has thinned and now floats above it (Nature Geoscience, DOI: 10.1038/ngeo890). "Once you tip the glacier off the ridge, it continues to thin, and this allows even more warm water over the top of the ridge, so it reinforces the whole process," says Adrian Jenkins of the British Antarctic Survey.

Sea Ice in the Arctic Not Recovering: Another Critical Minimum Forecast - A critical minimum for Arctic sea ice can again be expected for late summer 2010, according to researchers. Scientists from the Alfred Wegener Institute for Polar and Marine Research in the Helmholtz Association (AWI) in Bremerhaven and from KlimaCampus of the University of Hamburg have now published data in this context in the annual issue of Sea Ice Outlook. The online publication compares the forecasts on ice cover for September 2010 prepared by around a dozen international research institutes in a scientific "competition." The ice reaches its minimum area at this time every year.The forecast developed by the team from KlimaCampus of the University of Hamburg, i.e. 4.7 million square kilometres (km2), is more negative than that submitted by the AWI researchers, who arrived at a figure of 5.2 million km2. Nevertheless, neither of the two research groups anticipates that the record minimum of 4.3 million km2 in 2007 will be reached.

Arctic climate may be more sensitive to warming than thought, says new study - A new study shows the Arctic climate system may be more sensitive to greenhouse warming than previously thought, and that current levels of Earth's atmospheric carbon dioxide may be high enough to bring about significant, irreversible shifts in Arctic ecosystems.  "Our findings indicate that CO2 levels of approximately 400 parts per million are sufficient to produce mean annual temperatures in the High Arctic of approximately 0 degrees Celsius (32 degrees F)," Ballantyne said. "As temperatures approach 0 degrees Celsius, it becomes exceedingly difficult to maintain permanent sea and glacial ice in the Arctic. Thus current levels of CO2 in the atmosphere of approximately 390 parts per million may be approaching a tipping point for irreversible ice-free conditions in the Arctic."

Natural gas as panacea: dubious path to a green future - The water pollution concerns alone should be sufficient to make the U.S. and other countries rethink future reliance on shale gas. Separating the gas from the shale, a process known as hydrofracturing, involves forcing a mixture of water, chemicals, and sand at high pressure down a well bore and into rock formations, creating small fractures that release the trapped gas. The process uses a huge amount of water — the New York State Department of Environmental Conservation estimates as much as 1 million gallons per well — at a time when water is already a limiting and precious resource. Second, hydraulic fracturing fluid may come back to the surface, or near enough, to affect groundwater supplies. This fluid is a mixture of chemicals including friction reducers, biocides to prevent the growth of bacteria that would damage the well piping or clog the fractures, a gel to carry materials into the fractures, and various other substances. Returning to the surface, it could also bring other environmentally damaging materials, such as heavy metals.

What the Frack: is pumping glass cleaner into the earth okay? - The natural gas industry is in a bit of a tizzy after the movie Gasland aired on HBO, exposing to a very wide audience the chemical contamination caused by the widespread use of a process called hydraulic fracturing.  Hydraulic fracturing is the reason there is so much money to be made in natural gas nowadays. The process makes gas that was virtually impossible to pump out of the earth accessible. Areas that would have probably never seen drilling are now fair game. Like the Roan Plateau in the Colorado Rockies where a company called Bill Barrett Corporation plans to drill up to 3,000 wells to get at the gas that lies deep below the surface. The problem is that while the natural gas companies might think hydraulic fracturing (or "fracking) is great for their bottom line, the process involves pumping thousands of gallons of toxic chemicals down into the earth.

Editorial - The Return of Superfund - NYTimes- Superfund — which cleans up abandoned hazardous waste sites — is one of the country’s most important environmental programs. It has been struggling since 1995, when a Republican Congress refused to renew the corporate taxes that gave it a steady source of financing. The pace of cleanups has dropped markedly. The Environmental Protection Agency has now asked Congress to reinstate Superfund taxes. Representative Earl Blumenauer, Democrat of Oregon, has introduced a bill that would raise about $19 billion over 10 years by imposing excise taxes on oil producers, refineries, chemical manufacturers and a few other industries.  Mr. Blumenauer’s bill stands a good chance in the House. But industry is expected to push back hard in the Senate, where Frank Lautenberg, a New Jersey Democrat, has offered a similar measure.

Death by Gadget in Congo - NYTimes -  An ugly paradox of the 21st century is that some of our elegant symbols of modernity — smartphones, laptops and digital cameras — are built from minerals that seem to be fueling mass slaughter and rape in Congo. With throngs waiting in lines in the last few days to buy the latest iPhone, I’m thinking: What if we could harness that desperation for new technologies to the desperate need to curb the killing in central Africa? I’ve never reported on a war more barbaric than Congo’s, and it haunts me. In Congo, I’ve seen women who have been mutilated, children who have been forced to eat their parents’ flesh, girls who have been subjected to rapes that destroyed their insides. Warlords finance their predations in part through the sale of mineral ore containing tantalum, tungsten, tin and gold. For example, tantalum from Congo is used to make electrical capacitors that go into phones, computers and gaming devices. Electronics manufacturers have tried to hush all this up. They want you to look at a gadget and think “sleek,” not “blood.”

Wrong Time for Congo Debt Forgiveness - Tomorrow the World Bank Board and International Monetary Fund Board of Directors will decide whether to forgive a significant portion of the "odious" debt of the Democratic Republic of Congo (DRC) accumulated to a large degree during the autocratic and kleptocratic regime of President Mobutu. Bilateral donors owed significant sums will probably follow suit. Human rights advocates, like us, are normally for debt forgiveness. Often, governments -- like our own -- provide support to regimes for political reasons: as the US supported Mobutu during the cold war despite his atrocious human rights record. This debt can crush progressive policies of new governments and facilitate a neo-colonial type relation between debtor and creditor, but forgiveness should not be given if the government is undeserving. But as DRC is not presently servicing its debt (neither paying interest nor principle), the act of debt forgiveness does not mean more money for schools, health care and for the justice system. It is also the wrong signal at this moment and should be delayed until the human rights situation in that country improves.

BP oil spill Corexit dispersants suspected in widespread crop damage - Just when you thought the damages BP could cause was limited to beaches, marshes, oceans, people's livelihoods, birds and marine life, there's more. BP's favorite dispersant Corexit 9500 is being sprayed at the oil gusher on the ocean floor. Corexit is also being air sprayed across hundreds of miles of oil slicks all across the gulf. There have been widespread reports of oil cleanup crews reporting various injuries including respiratory distress, dizziness and headaches. Corexit 9500 is a solvent originally developed by Exxon. Corexit is is four times more toxic than oil (oil is toxic at 11 ppm (parts per million), Corexit 9500 at only 2.61ppm). In a report written by Anita George-Ares and James R. Clark for Exxon Biomedical Sciences, Inc. titled "Acute Aquatic Toxicity of Three Corexit Products: An Overview" Corexit 9500 was found to be one of the most toxic dispersal agents ever developed. According to the Clark and George-Ares report, Corexit mixed with the higher gulf coast water temperatures becomes even more toxic.

Oil or Chemical Rain in South Carolina – Update – June 26, 2010 – PWA - This video is an update with more proof of what fell during the Thunderstorm today June 26, 2010 about 3:20 pm Eastern TimeThis video is raw un-edited video of something in the RAIN (oil or chemical) during a Thunderstorm in Upstate South Carolina. Interesting and Real Pollution! Does anyone have an explanation? Could this be caused from the Chemicals and or Oil Spill in the Gulf of Mexico? This video is an update with more proof of what fell during the Thunderstorm today June 26, 2010 about 3:20 pm Eastern Time.

Toxins in air from evaporating oil may pose greater threat to Gulf residents than oily water - Toxins that are released into the air from evaporating oil and dispersants may pose a greater health risk to clean-up workers and Gulf residents than oily water when the thickest parts of the oil slick wash ashore. Media coverage of the BP oil disaster, thus far, has largely focused on the threats to wildlife and the potential economic impacts, while downplaying health risks to Gulf coast residents.Scientists and researchers, however, are keenly aware of potential health risks to people not only from exposure to oil in the water, but also to fumes in the air. The Institute for Southern Studies (ISS) reported as early as May 10 that, “the latest evaluation of air monitoring data shows a serious threat to human health from airborne chemicals emitted by the ongoing deep water gusher.”On May 14, WWLTV in New Orleans also ran a report warning of the danger of airborne toxins:

Avertible catastrophe - Three days after the BP oil spill in the Gulf of Mexico began on April 20, the Netherlands offered the U.S. government ships equipped to handle a major spill, one much larger than the BP spill that then appeared to be underway. "Our system can handle 400 cubic metres per hour," Weird Koops, the chairman of Spill Response Group Holland, told Radio Netherlands Worldwide, giving each Dutch ship more cleanup capacity than all the ships that the U.S. was then employing in the Gulf to combat the spill. To protect against the possibility that its equipment wouldn't capture all the oil gushing from the bottom of the Gulf of Mexico, the Dutch also offered to prepare for the U.S. a contingency plan to protect Louisiana's marshlands with sand barriers. One Dutch research institute specializing in deltas, coastal areas and rivers, in fact, developed a strategy to begin building 60-mile-long sand dikes within three weeks.The U.S. government responded with "Thanks but no thanks," remarked Visser, despite BP's desire to bring in the Dutch equipment and despite the no-lose nature of the Dutch offer --the Dutch government offered the use of its equipment at no charge.

The Avertible Catastrophe in the Gulf - The Dutch know how to handle maritime emergencies. In the event of an oil spill, The Netherlands government, which owns its own ships and high-tech skimmers, gives an oil company 12 hours to demonstrate it has the spill in hand. If the company shows signs of unpreparedness, the government dispatches its own ships at the oil company’s expense. “If there’s a country that’s experienced with building dikes and managing water, it’s the Netherlands,” says Geert Visser, the Dutch consul general in Houston. In sharp contrast to Dutch preparedness before the fact and the Dutch instinct to dive into action once an emergency becomes apparent, witness the American reaction to the Dutch offer of help. The U.S. government responded with “Thanks but no thanks,” remarked Visser, despite BP’s desire to bring in the Dutch equipment and despite the no-lose nature of the Dutch offer — the Dutch government offered the use of its equipment at no charge. Even after the U.S. refused, the Dutch kept their vessels on standby, hoping the Americans would come round. By May 5, the U.S. had not come round. To the contrary, the U.S. had also turned down offers of help from 12 other governments, most of them with superior expertise and equipment — unlike the U.S., Europe has robust fleets of Oil Spill Response Vessels that sail circles around their make-shift U.S. counterparts.

Concerns About BP Relief Well Success Rise Along With Evidence of Chemical Damage, Spread of Oil -  Yves Smith - The Financial Times highlights a concern we had raised early on about the effort by BP to drill a relief well to stop the flow of oil into the Gulf. While many analysts have acted as if the BP forecast, that the well would be completed by August, there is no reason to assume the initial effort will succeed, particularly at this depth, which is unprecedented for this effort. We pointed out the last effort to drill a relief for a large leak in the Gulf, at Ixtoc in 1979, took ten month to yield results. The commentary in the Financial Times story suggests that a delay would not be as severe.On other fronts, another concern raised early on, that the dispersant used by BP, Corexit, was dangerous and could cause additional harm, appears to be valid. Crops near the Gulf Coast are showing damage consistent with Corexit toxicity.

Secretary of Energy Steven Chu Confirms that Some of BP’s Oil Well Casing Has Been Demolished - Oil industry expert Matt Simmons has said for many weeks that the well casing was destroyed by the initial explosion at the Deepwater Horizon rig. He said that when oil wells blow out, the casing often shoots up above ground. He has been ridiculed by many because no one has seen well casing on the seafloor. But the Department of Energy has just partly exonerated Simmons. As the Los Angeles Times notes today: A team of scientists from the Energy Department discovered a new twist: Their sophisticated imaging equipment detected not one but two drill pipes, side by side, inside the wreckage of the well's blowout preventer on the bottom of the Gulf of Mexico. The discovery suggested that the force of the erupting petroleum from BP's well on April 20 was so violent that it sent pipe segments hurtling into the blowout preventer, like derailing freight cars.

BP Discussing a Backup Strategy to Contain Oil - Since shortly after oil began spewing into the Gulf of Mexico two months ago, relief wells have been discussed as the ultimate solution, their success in permanently plugging the runaway well deemed a foregone conclusion. But BP and government officials are now talking about a long-term containment plan to pump the oil to an existing platform should the relief well effort fail. While such a failure is considered highly unlikely, the contingency plan is the latest sign that with this most vexing of engineering challenges — snuffing a gusher 5,000 feet down in the gulf — nothing is a sure thing.  Experts said it was conceivable that the “kill” procedure would not be effective, particularly if only a single relief well was used and the bottom of the well bore was damaged in the initial blowout. Pumping large quantities of erosive mud into the well could even end up damaging the well further, hindering later efforts to seal it.

Sites to stop Gulf oil leak near completion - One of two relief wells being drilled to stop the Gulf oil spill is within about three football fields of intersecting the original, leaking pipe, and 15 feet off to the side, a BP spokesman said Wednesday. But it's still not expected to be finished before August: The process becomes more delicate the closer the drill gets. The relief well begun May 2 is now 16,900 feet deep, 1,100 feet above the original well, BP's Mark Proegler said. The second relief well, begun May 16, is down to 12,038 feet, about 6,000 feet above the original well.The rate of drilling is now slowing as engineers work to precisely angle the relief borehole so that it will intersect the original, leaking well at its full depth of 18,000 feet below the surface.

BP’s Gulf Intercept Well Ahead of Schedule With 600 Feet to Go - BP Plc’s first intercept well aimed at plugging its Gulf of Mexico gusher is ahead of schedule and about 600 feet from the leaking well that’s caused the worst oil spill in U.S. history.  BP has said the so-called relief well will drill into the leaking Macondo well and pump in mud and cement to permanently seal it.  The drilling is “slightly ahead of schedule,” U.S. National Incident Commander Thad Allen said yesterday. The target for completion is still mid-August. “I’d rather under- promise and over-deliver,” Allen said at a White House briefing.

BP Says Oil Spill Cleanup Operation May Be Delayed by Storm (Bloomberg) -- BP Plc said its efforts to contain the largest oil spill in U.S. history in the Gulf of Mexico may be disrupted as Tropical Storm Alex strengthens. Alex, the first named system of this year’s Atlantic hurricane season, has already forced the evacuation of some offshore rigs in the Gulf. BP has been collecting gushing oil from the Macondo well through two systems feeding crude to the Discoverer Enterprise and the Q4000 drilling rig, with a capacity of as much as 28,000 barrels a day.BP needs about three more working days to connect a new cap that will carry crude from the leaking well to the Helix Producer, a vessel that can capture an additional 20,000 to 25,000 barrels a day, said Kent Wells, the company’s senior vice president. The work was to be completed by July 7, he said. “This is very precise work,” Wells said on a conference call yesterday. “A lot of it’s done on the surface and we require a flat sea state to do that work.”

Gag orders in the Gulf continue - From an article in the "Green Times" section of the June 23 - June 29 issue of the Manhattan Times Fifteen workers trained by the Sustainable South Bronx have been sent to Moss Point, Mississippi to aid in the clean-up of the BP oil spill. [...]Workers trained at the BEST (Bronx Environmental Stewardship Training) Academy of Sustainable South Bronx were sought out for the job because of the quality of training they receive, said Annette Williams, director of BEST. BEST training is unique in that it includes environmental remediation, said Williams. In addition, workers receive life skills and team building training.While some of the workers sent to the Gulf have returned to New York, they have been placed under a gag order and are not allowed to discuss the work that they did in the Gulf Coast, or anything they saw, said Williams. At this time, it is not clear where the gag order came from - the federal government, BP or companies involved in the clean-up.

Floating nurseries hit by Deepwater Horizon spill -The floating nurseries of the Gulf of Mexico are in the wrong place at the wrong time. Home to the larvae of more than 120 species of fish, the nurseries congregate along the US coast – precisely where the Deepwater Horizon oil slick is wreaking havoc. Ecologists in the region say the oil is already hitting the nurseries, as well as the feeding grounds of the world's biggest fish, the whale shark. "This could not have come at a worse time," "Everything is spawning right now. The coastal wetlands, which serve as nurseries to key commercial species like shrimp, have been the focus of environmental concern thus far. Once hit, they are very difficult to clean up. "But the spawning grounds for offshore fish are being impacted now," says Jim Franks, a fisheries scientist at the University of Southern Mississippi at Ocean Springs.

Berm Notice: Jindal demagogues sand barrier ’solution’ that probably won’t help, will take many months, use up valuable resources, vanish in the first storm — and many scientists think will make things worse - Coastal geologist: "I have yet to speak to a scientist who thinks the project will be effective."The magnitude of the BP oil disaster guarantees devastation to the Louisiana shore no matter how effective the response — see 20-year veteran of the Coast Guard: “With a spill of this magnitude and complexity, there is no such thing as an effective response.” And that means cynical politicians are in a perfect position to demagogue dubious solutions, since if they are ignored, they can merely point to the environmental devastation and say, “if only you had listened to those of us who know this area best.” So we have Louisiana Gov. Bobby Jindal and the berms — low-lying barrier islands that are made of dredged sand (click on figure above to enlarge).  A great many articles have been written explaining why this approach is somewhere between an unproductive use of scarce resources and a counterproductive effort that will do more harm than good.  I’ll excerpt some at length, including an excellent Yale e360 piece [quoted above] by a top coastal geologist.

Cleanup Hiring Feeds Frustration in Fishing Town - Nine weeks into the disaster in the Gulf of Mexico, there is more money in this small, hardscrabble fishing town than there has been in decades, residents say. There are more high-paying workdays, more traffic accidents, more reports of domestic violence, more drug and alcohol use, more resentment, more rumors, more hunger, more worry.  From a hamlet of independent fishermen and seafood handlers, many second or third generation, Bayou La Batre has become something close to a one-employer town, with BP acting as both the destroyer of livelihoods and the main source of income, through cleanup programs and compensation for lost business. As the money flows in, many residents say it is not reaching them.

No skimmers in sight as oil floods into Mississippi waters — A morning flight over the Mississippi Sound showed long, wide ribbons of orange-colored oil for as far as the eye could see and acres of both heavy and light sheen moving into the Sound between the barrier islands. What was missing was any sign of skimming operations from Horn Island to Pass Christian. U.S. Rep. Gene Taylor got off the flight angry. "It’s criminal what’s going on out there," Taylor said minutes later. "This doesn’t have to happen.” A scientist onboard, Mike Carron with the Northern Gulf Institute, said with this scenario, there will be oil on the beaches of the mainland. There has been hope among state officials the islands would stop a lot of the oil and skimmers could take care of the passes or breaks between the islands.

Gulf Coast Beach Clean-Up Crew Hiring Remains Murky As Oil Keeps Washing Ashore - "When the oil hit last week, people were walking up and down the beach in tears," Dauphin Island, a fish-shaped sliver of land at the southwest end of Mobile Bay, is home to about 1,300 permanent residents, vacation homes, and the businesses that cater to them. The day I'm there, many of the shops and restaurants are closed. Oil began washing ashore here in early May. There's no boom along the water line and little visual evidence of oil now except small tar balls. BP has a claims office here, and Catholic Charities is offering qualifying residents emergency gas and electricity assistance.  "They're here waiting for oil," Most of the clean-up crew is resting under a tent shelter. When I ask what they've been doing today, they say "no comment," and "we can't talk to you." But the men in the nearby beach buggy who are supervising tell me they work for Clean Harbors - an "environmental, energy, and industrial services" company based in Norwell, MA.

Oil blankets Pensacola Beach. -The tide came in Tuesday night, under a moon almost full, and when the sun came up and the water retreated there it was: a broken band of oil about 5 feet wide and 8 miles long. It looked like tobacco spit and smelled foreign, and it pooled in yesterday's footprints as far as you could see. State officials called it the worst show of crude on shore from the gusher 120 miles away. As word spread, the people of Pensacola Beach walked to the black band to take a look, to take photographs, to be sure this wasn't some apocalyptic dream. They poured over the dunes all day, on pilgrimages to bear witness.Here came Courtney Laczko, 16 and sunkissed, who has been coming to the beach almost every morning since school let out because she knew the days were numbered. "It's actually really here," she kept saying.Gulf oil disaster: Pensacola Beach (click to see all 22 photos)

Pensacola Beach Covered In Oil Again (Video)

Deliberate Oil Cover Up Pensacola Beach (Video)

Deliberate Cover Up Of Oil With Sand On Pensacola Beach (Video) I was on the beach last night and it was covered in oil, this video shot before 6am shows heavy equipment that had been working through the night covering the oil, still at it. SOMEBODY has to put a stop to this - They are just covering the oil and toxins.

Louisiana Reports Oil Spill Illnesses - More people who have been exposed to the BP oil spill are falling ill. To date, reports CNN, 162 cases of sickness have been reported to the Louisiana state health department, citing a report released yesterday. Of the 162 cases, 128 involved workers who were either on oil rigs or who were involved in clean-up efforts. Generally, symptoms involved “throat irritation, shortness of breath, cough, eye irritation, nausea and headaches,” said CNN, citing the department’s oil spill surveillance report. The report, which is released weekly, pulls together information from physicians and various medical facilities. This week’s report stated that since the disaster struck, 120 male and eight female workers and nine men and 25 women from the general public have complained of illnesses allegedly linked to the spill, according to CNN.

Warning To Gulf Volunteers: Almost Every Cleanup Worker From The 1989 Exxon Valdez Disaster Is Now Dead - Are you sure that you want to help clean up the oil spill in the Gulf of Mexico?  In a previous article we documented a number of the health dangers from this oil spill that many scientists are warning us of, and now it has been reported on CNN that the vast majority of those who worked to clean up the 1989 Exxon Valdez oil spill in Alaska are now dead.  Yes, you read that correctly.  Almost all of them are dead.In fact, the expert that CNN had on said that the life expectancy for those who worked to clean up the Exxon Valdez oil spill is only about 51 years.  Considering the fact that the oil spill in the Gulf of Mexico is now many times worse than the Exxon Valdez disaster, are you sure you want to volunteer to be on a cleanup crew down there?  After all, the American Dream is not to make big bucks for a few months helping BP clean up their mess and then drop dead 20 or 30 years early.

CNN video: Almost All Exxon Valdez Cleanup Crew Dead

Biologists find ‘dead zones’ around BP oil spill in Gulf - Scientists are confronting growing evidence that BP's ruptured well in the Gulf of Mexico is creating oxygen-depleted "dead zones" where fish and other marine life cannot survive. In two separate research voyages, independent scientists have detected what were described as "astonishingly high" levels of methane, or natural gas, bubbling from the well site, setting off a chain of reactions that suck the oxygen out of the water. In some cases, methane concentrations are 100,000 times normal levels.Other scientists as well as sport fishermen are reporting unusual movements of fish, shrimp, crab and other marine life, including increased shark sightings closer to the Alabama coast.Larry Crowder, a marine biologist at Duke University, said there were already signs that fish were being driven from their habitat.

Despite an order to stop from the EPA, BP continues to spray toxic oil dispersants in the Gulf - BP is still spraying the same stuff - under the brand name Corexit - that led to EPA concerns in May. A month ago the Environmental Protection Agency ordered BP to stop spraying so much dispersant on oil gushing from the Deepwater Horizon well and to find a less toxic alternative to the chemical it was using.  Meanwhile, federal scientists confirmed this week what University of South Florida researchers and others had found: plumes of tiny oil droplets that stretch for miles underwater, which ``is consistent with chemically dispersed oil.'' Some of it, they found, had oozed into more shallow waters close to shore. ``That's particularly troublesome,'' said Ernst Peebles, a biological oceanographer at USF. Contaminants in more shallow water - about 30 feet deep - can be blown around more easily by wind, spreading it along the gulf's biologically rich continental shelf, he explained.

Oil Dispersant Study Released by EPA, But Big Questions Remain - Since the spill began, almost 1.6 million gallons of dispersant have been sprayed onto the water and released at the site of the leaking well. Dispersants break up the oil into smaller droplets, which break down faster and are less likely to coat birds or damage wetlands. But the dispersants themselves can be toxic to other marine life, such as shrimp and fish. BP has been using a dispersant called Corexit 9500, which appeared to be particularly toxic. On 20 May, EPA asked BP to find a less toxic alternative. When BP said it couldn't find a safer substitute, EPA began to test eight of the 14 dispersants that it had previously approved for oil spills. These tests aren't entirely new: Companies must submit toxicity data when they request approval for dispersants, but variation in methods made it difficult to compare the results. In addition, the existing tests looked at a mixture of dispersants and fuel oil, not the crude oil now gushing into the gulf.However, experts say that the combination of dispersant and oil can be more toxic than either alone. EPA is testing these mixtures, and Anastas says he expects results within the next few weeks.

Winds From Gulf Storm Disrupt Cleanup Efforts - Alex started the day as a tropical storm, but its winds reached hurricane strength, exceeding 74 miles per hour late Tuesday. The storm was on track to make landfall Wednesday in northern Mexico and southern Texas. That would keep it far southwest of the well site, as well as coastal areas of Louisiana and other gulf states affected by the disaster. But the winds were raising wave heights to seven feet or more, forcing the suspension of skimming operations and controlled burns, the Coast Guard said. Rough seas make it impossible to contain oil so that skimmers can pick it up or it can be ignited.  High waves at the well site delayed surface work to prepare for the next phase of BP’s system to collect oil at the wellhead, said Toby Odone, a company spokesman. That phase, in which up to 25,000 barrels of oil a day would be collected through a free-standing riser pipe that could be quickly disconnected if a hurricane threatened, is now expected to be completed in early July.

BP Oil Disaster: Choppy Seas Interrupt Everything – Except the Continued Use of Dispersant -Hurricane Alex has passed but the aftermath of the storm continues to hamper cleanup and containment efforts. The Helix producer ship has been waiting to join the capture effort. This will allow a switch of containment caps, which facilitates connecting and disconnecting when storms come in, and might help relief-well efforts, but could mean free-flowing oil for a week to ten days. The giant skimmer known as “A Whale” is waiting for seas to calm. Meanwhile Atrios makes an interesting point today, “BP’s interests are not aligned with the public good.” He links to a McClatchy story, Is BP rejecting skimmers to save money on Gulf oil cleanup? “By sinking and dispersing the oil, BP can amortize the cost of the cleanup over the next 15 years or so, as tar balls continue to roll up on the beaches, rather than dealing with the issue now by removing the oil from the water with the proper equipment,” By managing the cleanup over a period of many years, BP is able to minimize the financial damage as opposed to a huge expenditure in a period of a few years...

NOAA Models Long-Term Oil Threat to Gulf and East Coast Shoreline - NOAA has used modeling of historical wind and ocean currents to project the likelihood that surface oil from the Deepwater Horizon/BP oil spill will impact additional U.S. coastline. This modeling, part of NOAA’s comprehensive response to the unprecedented Gulf oil disaster, can help guide the ongoing preparedness, response and cleanup efforts.  In the technical report being released today, the model’s results aggregate information from 500 distinct scenarios (model outcomes). Each assumes a 90-day oil flow rate of 33,000 barrels per day – the net amount from the flow rate ceiling of 60,000 barrels per day (the lower bound is 35,000 barrels/day) minus the daily estimated amount being skimmed, burned, and/or collected by the Top Hat mechanism. The model also accounts for the natural process of oil “weathering” or breaking down, and considers oil a threat to the shoreline if there is enough to cause a dull sheen within 20 miles of the coast. If, for example, 250 of the 500 scenarios indicated a shoreline threat for a particular area, the overall threat for that area would be a 50 percent probability.  Considering these factors, the NOAA model indicates:

Florida Keys, Miami at high risk for oil pollution: US agency - The Florida Keys and resort beaches of Miami and Fort Lauderdale -- some of the busiest beach fronts in the United States-- are at high risk from the Gulf of Mexico oil spill, a US ocean monitoring agency warned Friday.  The National Oceanic and Atmospheric Administration used a computer model to estimate the likelihood that toxic crude will ride the Loop Current into the Gulf Stream, which whips around the southern tip of Florida and up the eastern US seaboard.The study found that much of Florida's western coastline along the Gulf "has a low probability (one to 20 percent) for impact," while the Florida Keys, Miami, and Fort Lauderdale areas "have a greater probability (61 to 80 percent)." Officials for weeks have warned that oil in the Gulf could get sucked into the Loop Current, but an oil pollution likelihood of up to 80 percent at top beaches will be unwelcome news for Florida just as it gears up for the Fourth of July holiday weekend.

ROFFS Oil Tracking Shows BP Gulf Oil Spill Traveling Up Entire East Coast Of Florida - I recently wrote that oil from the BP Gulf Oil Spill may be as far north as North Carolina based on satellite data and reports of oil off the Florida keys reported June 9th by a University of South Florida professor. I followed up with ROFFS to discuss the water oil mixtures off the east coast of Florida that extend north beyond Florida to find out how far north the water oil mixture locations extended.I confirmed that water and oil mixture then does indeed extend to the Florida Keys as shown on the ROFFS map which directly contradicts the statement NOAA has made stating that the Florida Keys and South Florida will be unaffected by the spill.ROFFS also told me that in addition to the confirmed Jacksonville oil concentration that there are unconfirmed reports of oil in Fort Pierce, Florida which is south of the Jacksonville as well as unconfirmed reports of oil as far north as the Washington D.C and Maryland area.Here is a transcript of the phone call.

Gulf Dead Zone Grows as No-Fishing Area Expands - The National Oceanic and Atmospheric Administration said it had decided to expand the fishing closure from its current northern boundary as a precautionary measure to make sure consumers don't eat seafood contaminated by the gulf oil spill. All told, a little more than 80,000 square miles, or 33 percent of Gulf of Mexico's federal waters, are now considered a closed area. Because this remains an evolving situation, NOAA said that it will retest the area and reopen fisheries when they are deemed safe. Meanwhile, commercial fishermen in the Gulf, who harvested more than one billion pounds of fish and shellfish in 2008, face another threat to their livelihood: a growing "dead zone" with little or no oxygen in the water.

Quote of the day - From the WSJ Numbers Guy: "Determining the size of the BP spill will be crucial because under a federal law passed in the wake of the Valdez disaster, oil companies pay penalties that are directly proportional to the amount of oil released into the water.* Yet the size of the current disaster is far more difficult to calculate than previous spills, because no one knows for sure how much crude was contained in the reservoir thousands of feet below the water's surface, nor whether the oil has been spewing at a constant rate. "Based on the history of past large spills, I am sure there will be differences of opinion on the exact amount that was spilled," says William J. Lehr, senior scientist in the National Oceanic and Atmospheric Administration's Office of Response and Restoration, and a member of the federal group estimating the amount of oil spilled in the Gulf. "We give the best scientific estimate we can, under tight time constraints and with the data available at the time."

States Weigh Big Claims Against BP - Gulf Coast states are gearing up to follow shrimpers and hotel owners in seeking payouts from BP PLC for lost revenue and other damages stemming from the Gulf of Mexico oil spill.The demands could far exceed the $305 million BP has already given the states of Louisiana, Mississippi, Alabama and Florida to help pay cleanup costs, promote tourism and begin building sand berms off the coast of Louisiana, state officials say. Lawyers advising the states said they would eventually seek multi-billion dollar payouts, but it was still too early to give a tally. BP declined to comment.

Manager of BP oil fund says not all claimants will be paid…The prominent US lawyer managing BP's 20-billion-dollar oil disaster fund said Wednesday not all claimants will be paid, especially some of those seeking compensation for falling houses prices."There's not enough money in the world to pay every single small business that claims injury no matter where or when," Kenneth Feinberg told the House of Representatives Committee on Small Business."You've got to decide in a principled way... and work out some definition in that regard," he said, while stating his determination to "pay every eligible claim.""I use that famous example of a restaurant in Boston that says, 'I can't get shrimp from Louisiana, and my menu suffers and my business is off.'" Well, no law is going to recognize that claim."In another example, Feinberg said the fund was not meant to pay out to all home owners whose properties had declined in value.

BP Criminal Case in Oil Spill May Be Inevitable, Analysts Say… It’s almost a foregone conclusion, legal experts agree, that the federal investigation of the Gulf of Mexico oil spill will produce criminal charges. After all, mere negligence leading to serious oil pollution constitutes a misdemeanor under the Clean Water Act.  Prosecutors “are very likely to bring criminal charges against BP and other companies involved,” says David M. Uhlmann, a former chief of the Justice Department’s environmental crimes section who now teaches at the University of Michigan Law School, Bloomberg Businessweek reports in its July 5 issue. Whether BP or any individuals will face felony charges --or even prison time -- is a more complicated question. One hint of what a broader indictment might look like comes from an unlikely source: private civil-racketeering lawsuits that have been brought on behalf of property and business owners in Alabama, Louisiana, and Florida.

Is it time to sink the sunk cost? - Former President Bill Clinton said during a panel discussion in South Africa that it may become necessary to blow up the Deepwater Horizon well that continues to spew oil into the Gulf of Mexico.  "Unless we send the Navy down deep to blow up the well and cover the leak with piles and piles and piles of rock and debris, which may become necessary - you don't have to use a nuclear weapon by the way, I've seen all that stuff, just blow it up - unless we're going to do that, we are dependent on the technical expertise of these people from BP," Clinton said.  There has been some pressure for BP to simply blow up the well, with critics suggesting the company is forgoing that option out of a desire to get as much oil as possible from the rig.  "If we demolish the well using explosives, the investment's gone," "They lose hundreds of millions of dollars from the drilling of the well, plus no lawmaker in his right mind would allow BP to drill again in that same spot. So basically, it's an all-or-nothing thing with BP: They either keep the well alive, or they lose their whole investment and all the oil that they could potentially get from that well."

Should We Nuke the Oil Well? -- CBS News, the Christian Science Monitor, CNN, Reuters and Fox (and see this) have all asked whether BP should nuke its leaking oil well. Indeed, some high-level Russian nuclear scientists and oil industry experts have suggested such an approach to stop the Gulf oil gusher. Here is archival footage of the Russians killing a gas leak with a nuclear device. And Obama's energy secretary and Nobel prize winning physicist Steven Chu included the man who helped develop the first hydrogen bomb in the 1950s as part of the 5-man brain trust tasked with stopping the oil. And oil industry expert Matt Simmons proposes the use of a tactical nuclear device every time he is interviewed on national television. However, even the history of Russia's successful use of nuclear devices to stop gushers has some important caveats.

Should BP nuke its leaking well? - Scientific American - "A nuclear explosion over the leak," he says nonchalantly puffing a cigarette as he sits in a conference room at the Institute of Strategic Stability, where he is a director. "I don't know what BP is waiting for, they are wasting their time. Only about 10 kilotons of nuclear explosion capacity and the problem is solved." Although the BP well is thousands of feet deeper than those closed in the Soviet Union, Nordyke says the extra depth shouldn't make a difference. He also says that so far below the ground, not much difference exists in onshore or underwater explosions -- even though the latter have never been tried. Nordyke says fears that radiation could escape after the explosion are unfounded. The hole would be about 8 inches in diameter and, despite the shockwave, the radiation should remain captured. Even in the case of radiation escape, he says, its dispersed effect would be less than that of floating oil patches.

Shallow Gulf Drilling Grinds Toward Halt as Permits Trickle Out - About one in three shallow-water Gulf rigs is idle, double the normal rate, said Jim Noe, general counsel at Houston-based Hercules, a driller that tripled its workforce during the oil rally of 2007 and early 2008. The permit process is so slow that it’s creating a “de facto moratorium” that will sideline most of the Gulf rig fleet by the end of this month as wells started before the spill are completed, he said.  “I will not be comfortable until we see a flow of permits.”  Drilling in Gulf waters less than 1,000 feet (305 meters) deep generates about 6 percent of the nation’s oil and natural- gas output, according to government data. Production off Louisiana’s coast yielded $4.9 billion in federal revenue last year.

Free Ride For Oil May Be Over - Every day, governments give away an estimated US$2 billion of taxpayer money to the fossil fuel industry. This largesse to a highly profitable sector by countries verging on bankruptcy or unable to feed large numbers of their own people is "complete madness", according to many experts.  In Toronto on Sunday, at the conclusion of the Group of 20 summit, countries agreed the madness must be constrained if not stopped.  "I was impressed. I think the commitment to phase out fossil fuel subsidies has finally arrived," said Mark Halle, director of trade and investment at the International Institute for Sustainable

How a broker spent $520m in a drunken stupor and moved the global oil price - PVM Oil Futures trader Steve Perkins bought 7m barrels of crude in late-night trading binge on his laptop, driving the oil price to an eight-month high.  It's probably not uncommon for City traders to wonder how they burnt so much cash during a drunken night on the town.  But Steve Perkins was left with a bigger black hole in his memory than most when his employer rang one morning to ask what he'd done with $520m of the oil trading firm's money. By 10am it emerged that Mr Perkins had single-handedly moved the global price of oil to an eight-month high during a "drunken blackout". Prices leapt by more than $1.50 a barrel in under half an hour at around 2am – the kind of sharp swing caused by events of geo-political significance. Ten times the usual volume of futures contracts changed hands in just one hour.

The Oil Drum | BP's Deepwater Oil Spill - Some Less Technical Issues -- It is easy to blame BP for all of the problems relating to the oil spill, and I am sure that at least part of the problem lies with BP. In fact, we are now reading that criminal charges many be placed against BP. But what are some of the other issues? Clearly one of the issues is the role profitability plays in decision making, given our capitalistic approach to running businesses. When profits are being squeezed, as they were with the drop in oil prices from $147 to half that amount, it is especially easy to cut corners, to keep projects close to profitable. If profitability is a company's number one goal, it can lead to all kinds of bad decisions, no matter what the field. For oil and natural gas, it can mean cutting corners on safety. For health care, it can mean over treatment of those who can pay for it, and under treatment of those who cannot. In the food industry, it can means unhealthy over-processed foods based on cheap ingredients are the primary ones that reach the market.

Geopolitics and oil spills: the perils of forecasting - Putting numbers on the likely levels of future oil supply and demand isn't easy at the best of times, and the Macondo disaster in the Gulf of Mexico is making the art of forecasting even more complicated than normal.Earlier this week, the International Energy Agency released its forecasts for the period to 2015. This is something the IEA does every year and what a difference a year makes. This time last year, the agency was warning that sharp cuts in upstream spending would result in world crude production capacity growing by just 4.2 million b/d in the period to 2014 rather than by the 5.5 million b/d forecast just a few months earlier.This year's report, which moves the forecast period to 2009-2015 from 2008-2014, restores the growth estimate to 5.5 million b/d, says that some of last year's concerns about medium-term oil supply prospects have eased, thanks to stronger crude prices, lower costs and renewed spending.The agency has changed its forecast dramatically for Iraq. Last year, it saw the country's oil production capacity rising by just 230,000 b/d, from 2.47 million b/d in 2008 to 2.7 million b/d in 2014.

The Peak Oil Crisis: The Real Gulf Crisis  - Someday, however, it will become apparent that the real disaster is taking place 150 miles to the south at BP's multi-billion dollar Thunder Horse oil platform that was supposed to extract a billion barrels of oil at a rate of 250,000 barrels a day (b/d). Production at Thunder Horse began in May of 2008 and by the end of the year had reached 170,000 b/d. Then something unexpected happened; instead of production increasing to the rated 250,000 b/d, production began to drop at 2-3 percent each month so by the end of 2009 production was down to 60 or 70,000 b/d. As BP is under no obligation to tell us what is going on, little news other than mandatory federal production reports have been released. While new oil discoveries are trumpeted widely, failing projects, especially multi-billion dollar ones, just seem to fade away. Another Gulf project know as Neptune is not doing too well either. Neptune was expected to produce 50,000 b/d. The platform peaked at 40,000 b/d in August 2008.

Oil Companies' Dash For Gas: Vapour Trails - The Economist - Potentially dangerous and always more difficult to manage than pouring liquid into a barrel, natural gas used to give oil companies a headache. Now gas is dominating the thoughts of Western oil bosses and, increasingly, their firms’ portfolios. Seven of the eight projects Exxon Mobil completed last year were for natural-gas developments. Two of the three it has scheduled for this year are also gas-related. Royal Dutch Shell says that by 2012 half of its output will come from gas. The current high oil price still makes crude the prize for any self-respecting major. But the West’s big oil companies are growing gassier. In part this is because oil is getting harder to find, for geological and political reasons.

Exxon, Shell May Consider Possible Bid for BP, JPMorgan Says…Exxon Mobil Corp. and Royal Dutch Shell Plc may consider bidding for BP Plc after the London-based oil company lost more than half of its market value in the wake of the Gulf of Mexico oil spill, JPMorgan Cazenove Ltd. said. Exxon Mobil has the stronger balance sheet and proven ability to integrate a large transaction, according to Fred Lucas, a London-based analyst at JP Morgan. It could make a cash and share offer, valuing BP at 473 pence a share compared with yesterday’s close of 308.25 pence, and including a $50 billion spin-off of BP’s downstream assets, according to JPMorgan. Any potential attempt to buy BP would have to be backed by “ruthless integration,” JPMorgan said. BP has many high quality assets, including deepwater positions and upstream operations, Lucas wrote under a future possible scenario.

Addicted to oil … and to economic growth - While the massive oil spill catastrophe in the Gulf of Mexico is demonstrative of our addiction to oil, it is also the latest example of modern capitalism’s addiction to economic growth.  For the last two centuries, Western economic theory has been based on the untenable proposition and requirement that economies must (and can) grow at substantial rates, indefinitely. Especially for the last hundred years or so, abundant and inexpensive fossil fuels have allowed an unprecedented rate of economic growth that has brought Americans and much of the rest of the developed world a previously unimaginable, but unfortunately unsustainable materialistically-based standard of living.  By its very nature, an economic system based on constant and inexorable dynamic growth contains the seeds of its own demise. Indeed, capitalism as it is practiced today in America and Europe has become the proverbial anchor that will send us all to the bottom if we can’t find the thoughtfulness and courage to devise a new path forward.

TransCanada's Keystone line now delivering oil - TransCanada Corp's (TRP.TO) $5 billion Keystone pipeline began operating on Wednesday, delivering 435,000 barrels per day of Canadian oil sands crude to Illinois refiners. TransCanada, the country's No. 1 pipeline company, said it has completed filling the Keystone line with oil and is making commercial deliveries to U.S. Midwest refineries, two years after construction began. The new line is just the first phase of a $12 billion program to increase market access for oil sands crude in the United States. TransCanada has already begun work on extending Keystone with a branch running from Steele City, Nebraska, to Cushing, Oklahoma, which will boost capacity to 591,000 barrels a day next year.

Cantarell Finally Slips Below 500 kbpd - It’s odd that people believe something truly new is possible in the world of global oil discovery. Oil deposits on earth follow a fairly well defined pattern: a handful of giant fields, and a great number of smaller fields. Unsurprisingly, 150 years of oil exploration and discovery has done nothing to upend this distribution. The giant fields were all found earlier in the oil age. Now we are into the latter part of the oil age, when the large fields have peaked and gone into decline, and we spend more capital, more labor, and more energy to extract oil from the smaller fields. A nice example of the pattern is Mexico. They inherited a giant, Cantarell. But now that Cantarell has been in fast decline since its peak in 2004, Mexico is left with a complex of smaller fields called Ku-Maloob-Zaap, and also the very low quality Chicontepec. As you can see from the chart, Cantarell Crude Oil Production 2008 – 2010, Mexico’s single giant finally slipped below 500 thousand barrels per day of production in May, to 499,286 kbpd. It’s still pretty astonishing to reflect that just two years ago, Cantarell was still producing a million barrels per day.

Mexico's declining oil output worries planners - Mexico's declining oil output is a potential major challenge for the country and its neighbors, including the United States, because of its inevitable fallout in all sectors of the economy. Already, because of uneven distribution of oil wealth and other factors, Mexico is riven by crime, drug trafficking and poverty-related issues that remained unsolved when the country produced more oil than it does now, figures made public this week showed. The seventh-largest oil producer in the world -- the third-largest in the Western Hemisphere -- faces urgent tasks ahead to reverse the decline in production from the giant Cantarell field.Analysts cited latest statistics from the Energy Information Administration that showed how the drop in Cantarell production could snowball into a major problem for Mexico.

Despite Gulf disaster deepwater oil is all we have left - The race is on: can we extract the last remnants of Western oil from such unlikely places as the ocean floor before the global economy picks up enough to test out the hypothesis that supplies have already peaked? Never mind the ongoing environmental and economic carnage in the Gulf of Mexico, rapidly reaching Biblical proportions – a poisoned sea allegedly spewing toxic rain across the US which, if whipped up by a hurricane, just might lead to a mass exodus from an entire seaboard – the industry is frantically promoting its right to continue with deepwater exploration. And never mind that a single accident on a single well can be enough to bring the world’s third largest oil company to the verge of insolvency. An insight into this level of need was given at the Fortune Global Forum in Cape Town, According to an item in the Guardian newspaper, Shell: deepwater drilling will go on:

We should have listened to Jimmy Carter…Back in 1977, President Jimmy Carter declared that the need to revise the nation's energy policies was "the moral equivalent of war," and characterized the need to end our dependency on oil as "the greatest challenge our country will face during our lifetimes." Failure to meet that challenge, he predicted, would result in "a national catastrophe."We failed, of course, to meet the challenge; and now we are, indeed, facing a national catastrophe. If any good can come out of that catastrophe, one that it will take many years, if not decades, to rectify, it should be that it finally leads to the adoption of a comprehensive energy policy similar to the one advocated by Carter more than 30 years ago.

Oil Price Swings to Worsen as Spare OPEC Capacity Shrinks…Swings in oil prices may widen over the next five years as OPEC’s shrinking spare production capacity increases traders’ concern about supply shortages. Oil’s 50-day historical volatility, a measure of how much crude fluctuates around its average price, was at 34 percent on June 25. The measure rose to a record 108 percent in January 2009 after OPEC’s spare production capacity fell to its lowest in almost four years. The group’s idled capacity may drop to 3.9 percent of world demand by 2015 from 6.8 percent this year, according to International Energy Agency estimates. “That is a fairly significant tightening in the spare capacity cushion,” Mike Wittner, London-based head of oil market research at Societe Generale SA, said by phone. “Over and above increasing volatility, directionally it is going to push up prices.”

Michael Klare: Grappling With The Age Of 'Tough Oil' - Journalist Michael Klare says the age of "easy oil" is over. "Easy oil would be the stuff that would be easy to get out of the Earth, in large reservoirs, close to the surface or in shallow, coastal areas, or in friendly countries that are law-abiding and nearby," he tells Fresh Air's Terry Gross. "All of that oil is now gone. We'll never see it again."  Klare has written several books about the oil industry. Blood and Oil examined America's dependence on foreign sources, and his latest, Rising Powers, Shrinking Planet, focuses on the geopolitical problems countries face if they don't find alternative energy resources. He sees America entering a new era: one of "tough oil." "Tough oil is deep underground, far offshore, in complex geological formations like shale rock or in the Arctic. Or in unfriendly, dangerous countries," he explains. "That's what I mean by tough oil. That's all that's left on the planet, so that, to the degree to which we remain dependent on oil, that's what we're going to have to go after."

Peak oil — a crisis postponed -As the global economy goes, so goes oil demand. If the outlook for the global economy is not so good, oil consumption will stagnate or increase very slowly. If oil demand grows slowly or not at all, consumption will remain below the world's productive capacity, as measured in millions of barrels-per-day. If oil demand remains below the available supply, there will be no oil price shock. A new oil price shock tell us that "peak oil"—an inability to grow supply to meet growing demand— has returned with a vengeance. The last time supply could not meet demand was in the years 2005-2007. The growing gap led directly to the oil price shock of 2007-2008. After July of 2008, the world economy unraveled, leading to the relatively low demand environment we have today. Although this simpleminded explanation smooths out all the messy details, it is basically correct. So where do we stand?

Merlin's time - An extraordinary blindness to the downside has become crazy-glued in place straight across contemporary culture. From economists who insist that the bubble du jour (right now, in case you haven’t noticed, it’s government debt) can keep on inflating forever, through technology fans who believe devoutly that their favorite piece of drawing-board vaporware will necessarily solve the world’s problems without side effects and with spare change left over, to millions of ordinary people who can’t or won’t imagine a future without the material abundance of recent decades, we seem to have lost the collective capacity to recognize that things can and do go very, very wrong. It’s not merely a matter of blindness to the “black swan” events Nassim Nicholas Taleb made famous, either; we’re just as bad at seeing white swans coming, even when they’ve been predicted for decades and the sky is so thick with them that it’s hard to see anything else.  It’s an appalling predicament: how can a community prepare for a troubled future if most people tune out even the slightest suggestion that it might be troubled? It’s for this reason, seemingly, that many people in the peak oil scene have chosen to downplay the difficulties and insist that we can have a bright, happy, abundant future if we just pursue whatever baby steps toward sustainability we all find congenial. I’ve been assured by some of the people making such claims that they’re perfectly aware that the situation is far more difficult and dangerous than that, but that the need to get as people involved in some kind of movement toward sustainability is so great, they say, that waffling on that point is as justified as it is necessary.

Observations: What happens when coal is gone? - What’s the best way to address a politically charged topic such as the future of energy? Remove the politics. “We’re going to skip over the politics,” Robert P. Laughlin, who won a Nobel Prize for physics in 1998, told a rapt audience of young scientists and others here at the 60th annual Nobel Laureate Lectures at Lindau. “I’m not interested in now but in the time of your children’s children’s children, six generations into the future and 200 years from now,” when all carbon burning has stopped because it’s been banned or none is left, he said. “Thinking about a problem this way is so simple. Instead of arguing about what to do now, I want to talk about what will happen when there’s no coal.". “Everybody I know thinks there will be big price increases with the end of easy oil and there’ll be a struggle over the resources,” he said Monday. The young scientists in the audience “need to figure out how to keep that struggle from turning into a hot war.”

EIA: The China Syndrome - Oil demand does not grow linearly with GDP. Rather, the bulk of oil demand growth occurs in the two decades during which societies typically acquire motor vehicles, after which per capita oil demand flattens. For example, per capita oil consumption in the United States is today lower than it was in 1979, even though per capita income has increased substantially since.  Demand levels attained in emerging economies are relatively comparable regionally. For example, per capita consumption in both Korea and Japan peaked at 1.9 U.S. gallons per day. Korean levels are unchanged; Japanese consumption has declined to 1.4 U.S. gal per person in the last decade. Both Japan and Korea are effectively islands (Korea due to its closed northern border), and both are densely populated, mountainous Asian countries.As a result, Japan and Korea's per capita oil consumption is comparatively low next to that of countries with large land masses like the United States, Canada and Australia. China has a land mass equal to that of the United States.

More than yuan problem - MENZIE CHINN passes along analysis of the challenge of Chinese rebalancing from Arthur Kroeber:A major theme of recent discussions of China's economy is the need for "rebalancing" -- a shift away from an investment- and export-intensive growth model that created excess industrial capacity, big trade surpluses and bloated corporate profits, to a more domestically-driven growth pattern where consumer spending plays a bigger role.The house view on this hot topic is straightforward. We believe that China's external "imbalance" -- a current account surplus that peaked at over 11% of GDP in 2007 -- mainly reflected domestic structural problems. The undervalued exchange rate that obsesses foreign analysts was decidedly secondary. The path to rebalancing therefore lies in comprehensive domestic reforms, including increased social service spending (to reduce household precautionary saving), deregulation of service markets (to encourage more private investment in non-tradable sectors), infrastructure investment (to better integrate domestic markets) and financial and fiscal reforms to discourage excessive investment in heavy industry and real estate. .

'No-One Is Going to Be Bought Off by a Tiny Revaluation' - Spiegel - In the runup to the G-20 summit, China has tried to placate the US with a revaluation of its currency. But the move is not a real change of course, explains the German Marshall Fund's Andrew Small in a SPIEGEL ONLINE interview. He argues that the Chinese leadership is more concerned with deflecting external criticism than with the health of the global economy.

US-China Pressure May Escalate Sooner Rather Than Later - Yves Smith - We and other cynics were very skeptical of the pre-G20 announcement by China that it was moving to a more market-oriented currency regime at some unspecified point in the future (particularly since China had said pretty much the same thing in 2005, and actually had committed to some baby steps then).Now that it is clear that any action will be modest and very much delayed (or worse, has high odds of being a devaluation against the dollar if the euro falls further), the US is resuming the war of words against China, and it is Obama who is now applying pressure. Before, the criticism was almost entirely at the Geithner level or below, so this relatively mild statement so close to the G20 is more significant that it appears. From Bloomberg:“If China has a currency that’s undervalued, that makes our exports more expensive, it makes their imports cheaper,” Obama said in response to an audience question at an event in Racine, Wisconsin. “So we have been putting pressure on them to say, let’s make sure that we’re not favoring one side or another.”

GE CEO Immelt Gets Pissy About China, Obama - Yves Smith - According to the Financial Times, the GE cheiftan said some less that politic things about China and Obama at a private gathering which his operatives tried to characterize as being taken out of context. Yeah, right. His commentary so typifies what you’d expect from the top executive of a large multinational (and major financial firm to boot) that it’s hard to see his remarks as anything other than a reflection of his views. They happen to be ugly because they represent American corporate arrogance writ large. From the Financial Times: Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals… “I really worry about China,” Mr Immelt, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”  Yves here. This is almost comical. A US corporate executive thought the Chinese officialdom was supportive of their business goals? China is out for China, period

BBC News – Why China’s currency has two names - China has indicated that it will allow its currency to appreciate - following months of pressure from the US. Some refer to the currency as the yuan, others call it the renminbi. Who is right? Both names are perfectly good, but in slightly different ways."Renminbi" is the official name of the currency introduced by the Communist People's Republic of China at the time of its foundation in 1949. It means "the people's currency". "Yuan" is the name of a unit of the renminbi currency. Something may cost one yuan or 10 yuan. It would not be correct to say that it cost 10 renminbi.

China as the World's Next Superconsumer - This goes into the "be careful what you wish for" file, but China's path to superconsumer status, while part of global economic rebalancing, comes with myriad consequences: Young urbanites are becoming as enthusiastic about french fries, burgers and fried chicken as their counterparts in New York or London. When the first KFC opened near Tiananmen Square in 1987, it was seen as a novel western dining experience; 20 years later, the company has 2,000 outlets in 400 cities, employing 200,000 people, making it easily the biggest restaurant chain in China. In roughly the same period, McDonald's had grown from one restaurant to 800.Along with the changing diet came a surge in obesity, diabetes and heart disease. Obese children used to be rare in China; now nearly 15% of the population is overweight. Shanghai is often cited as the worst affected city. Barbie™ burgers and the like are part of an increasingly carnivorous diet. To feed its growing livestock, China imports huge quantities of soya, much of it from Brazil, which has resulted in accelerated clearance of Amazonian forest and Cerrado savanna. Like many other wealthy cities, the high-protein, high-octane, jet-set lifestyle is being paid for elsewhere.

The Chinese economy’s secret recipe - China’s GDP growth this year may approach 10%. While some countries are still dealing with economic crisis or its aftermath, China’s challenge is – once again – how to manage a boom.Thanks to decisive policy moves to pre-empt a housing bubble, the real-estate market has stabilized, and further corrections are expected soon. This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.” Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth. For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times. Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises.

China Growth Forecast Cut by Goldman Sachs Amid Property Curbs (Bloomberg) -- Goldman Sachs Group Inc. cut its growth forecast for China this year to 10.1 percent from 11.4 percent as government restrictions on lending and real estate slow expansion in the world’s fastest-growing major economy. Hours after Goldman’s revision, China increased its estimate for last year’s growth to 9.1 percent, signaling output almost matched Japan’s as the world’s second-largest economy. Goldman joins BNP Paribas, Macquarie Securities Ltd. and China International Capital Corp. in reducing estimates as the government tightens property restrictions to prevent overheating. “China’s growth has been slowing down sharply and the tightening measures we saw in April on property have been quite aggressive,”

Is China taking the wind out of Asia’s post-crisis surge? - Growth in Asia’s manufacturing sector definitely appears to be slowing, looking at the raft of purchasing managers’ indices out today, but the conventional wisdom remains that this is a normalisation after the post-financial crisis surge and not the beginnings of a double-dip downturn.There is plenty of evidence to suggest that this is right. The numbers themselves (out so far today for China, South Korea and Taiwan, following Japan on Wednesday) all show that positive expansion is continuing, albeit a bit more slowly than in May, which itself was weaker than April.There are also grounds for optimism in other economic indicators such as South Korea’s solid Q2 export numbers and Japan’s fairly bullish Tankan business confidence survey, both published today. It is noticeable, though, that the slowdown in the pace of growth in factory activity is most significant in China, with both the official and unofficial but widely watched HSBC PMI indices down markedly for June.

No paper tiger - In 2008, China overtook the United States to become the world’s largest producer of paper and paper products. In 2008, China had been poised to become a net exporter of paper and paper products; but, the fall in global demand led to greater than expected inventories for Chinese producers. In November 2008, China’s National Bureau of Statistics (2003-09b) reported that the industry’s output had increased to 83.9 million metric tons, up 9.6% from the previous year. In 2009, China produced over 17% of the world’s total output in the paper industry; with exports of $7.6 billion in paper and paperboard, China consolidated its position as a lead exporter in the industry. Since 2000, China has increased paper production three-fold to assume a leading role in the global paper industry.

For rent in China: White people (CNN vdieo)For a day, a weekend, a week, up to even a month or two, Chinese companies are willing to pay high prices for fair-faced foreigners to join them as fake employees or business partners.Some call it "White Guy Window Dressing." To others, it's known as the "White Guy in a Tie" events, "The Token White Guy Gig," or, simply, a "Face Job."And it is, essentially, all about the age-old Chinese concept of face. To have a few foreigners hanging around means a company has prestige, money and the increasingly crucial connections -- real or not -- to businesses abroad."Face, we say in China, is more important than life itself," said Zhang Haihua, author of "Think Like Chinese." "Because Western countries are so developed, people think they are more well off, so people think that if a company can hire foreigners, it must have a lot of money and have very important connections overseas. So when they really want to impress someone, they may roll out a foreigner."Or rent one.

The Asian century calls for a rethink on growth - The United Nations is forecasting that the world’s population will rise by more than 40 per cent to 9.3bn by 2050, with the proportion living in cities increasing to 70 per cent from slightly more than 50 per cent today. But the impact will be concentrated in Asia, where two-thirds of the world’s population lives, and where rapid economic growth is accelerating the natural process of urbanisation. While Europe is dealing with the problems of ageing, Asia (excluding Japan) will be trying to cope with a rush to the cities estimated at nearly 140,000 people a day.  How well it succeeds will have a huge impact on whether this really does turn out to be the Asian century. So far, the signs are not good. About 550m people are living in slums and squatter settlements in the region, according to Anna Tibaijuka, head of Habitat, the UN agency responsible for the built environment. That is about 55 per cent of the global total, and it stems directly from a headlong rush for development that has largely ignored the consequences of growth.

Moody's: fiscal plan key to Japan rating (Reuters) - Japan's sovereign rating may face downward pressure over the next couple of years if the government fails to stick to its plan for fixing public finances, Moody's Investors Service said on Monday. Japan set ambitious targets to rein in its debt last week but also said these goals could not be met even under its rosiest growth scenario, the latest sign that the government may have to push through contentious tax hikes

More on the Coming European Bank Stress Test Fiasco - Yves Smith - We noted a bit more than a week ago that we expect the European banks stress tests to backfire. The US version was a successful con game because the officialdom provided adequate disclosure about the process and stayed firmly on message, the banks were allowed to “manufacture” as analyst Meredith Whitney put it, impressive earnings, putting a tail wind behind their stock prices, and there was a mechanism for the US to inject capital if banks who were directed to raise equity levels were not able to do so.  We pointed out these conditions were not likely to be operative in the case of the Eurobanks, with the most obvious likely gaps a unified strategy among European leaders, doubts about whether there is enough “stress” in the stress tests, and most important, lack of a credible equity injection mechanism. In Germany, perceived to be the strong man of the EU, the size of its banking sector is so large relative to its GDP as to raise doubts about its ability to backstop its banks.  Today, the Financial Times reports that the stress tests will be conducted on 100 banks, with details that were not encouraging:

Spain’s Debt Maturity Wave Hits Next Month And It’s Already Obvious They Don’t Have Enough Cash - Spain faces a confluence of events in July, whereby it will need to finance 21.7 billion euros within a single month. This combines shortfalls in its budget and a wave of scheduled government debt redemptions. Even if the Spanish government draws down its cash reserves, Goldman Sachs believes it will still be short 12.6 billion euros. Goldman:July: the government needs to finance €21.7bn (a €13.5bn cash deficit and a €8.2bn net redemption), of which only €9.1bn can be covered by cash reserves: the rest, €12.6bn, would then represent a potential shortage. This money will have to be raised through some sort of debt issuance. Here are Spain's options:

Spain May Need Financial Rescue, says Merrill - Spain's debt crisis may force the country to tap the EU-IMF rescue fund over the next two to three months and set off a political storm, according a confidential report by the Bank of America Merrill Lynch. "There is a serious risk that Spain have to make use of Europe's €750bn (£618bn) aid packet," said the document, obtained by Spanish newspaper Expansion. The bank declined to comment. The report said it was not yet clear whether weaker states on the periphery of the eurozone will be able to raise money to fund their debt needs at viable rates on the global markets. Any request for a bail-out by Spain would be extremely controversial, potentially bringing down the government.

Spanish Banks Rage At End Of ECB Offer - Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme. On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer. One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent.

The €442bn question — a guideline - July 1 is fast approaching and with it comes a surge in analyst notes mulling the possible consequences of the expiry of the ECB’s 12-month long-term refinancing operation at the start of the month. While Cazzulani admits it is difficult to ascertain the exact amount that is likely to be rolled over — i.e. carried over into the Bank’s medium-term operations — he suggests up to €50-70bn of speculatively tapped liquidity will be expired completely. As he explains: There are several reasons why speculative demand should be very subdued this time. First, market conditions have changed dramatically. Last year, the repo market was not functioning properly and this made it attractive to use ECB funding for carry trades. Now it is cheaper to do it in the market. Second, the bonds that were most appealing one year ago to set up carry-trades(those issued by peripheral countries) are those currently seen as more risky.Third, the time horizon this time will be less attractive: only three months.

Bank Stress, ECB Liquidity Withdrawal Efforts, Deflation Fears Rattle Markets - Yves Smith - We’ve warned for some time that the eurozone’s sure-to-fail muddle-through approach to its structural challenges was rattling investor confidence. Worse, its insistence on wearing an austerity hairshirt was not only committing Europe to deflation, but had high odds of sucking the global economy down along with it. Given how fragile the recovery is in advanced economies, and the magnitude of the debt overhang in many nations, a downturn could easily morph into a deflationary downspiral, potentially a full blown depression.  Let’s recap of some of the troubling sightings. First is that Spanish banks in particular, along with other Eurobanks, have been on the ECB drip feed for some time. However, in a rather remarkable bureaucratic dedication to deadlines over common sense, the ECB is terminating a €442 billion one year liquidity facility on July 1. An unknown but believed-to-be-large portion of the facility was used to fund carry trades within the EU, particularly that of Spanish and Greece sovereign debt

One Fiscal Size Does Not Fit All – a Korean lesson for Spain - Twelve years ago, the Asian Financial Crisis hit.  The International Monetary Fund took a common approach across the crisis countries, prioritizing fiscal austerity.  In retrospect, outside observers and the Fund itself came to the conclusion that this was a mistake – while appropriate for Indonesia, the ‘It’s Mostly Fiscal’ approach made the situation worse than it needed to be in South Korea, with negative spillovers for the rest of the region.  The euro area governments, under pressure from Berlin and Brussels, are repeating this mistake. European politicians, particularly in Germany, are visibly sick of Americans and others telling them that imposing uniform austerity beyond Greece and Portugal is in error.  But facts are facts, and it is an error.  The experience of the Asian Financial Crisis is directly relevant, and the willingness of the IMF to reconsider its position in the time since would be a good example to follow.  What matters is getting policies right, not adhering to a foolish consistency, either in policy recommendations across countries or in publicly taken positions.

Deutsche Bank, Commerzbank Rumored to Pass Meaningless Stress Test - Yves Smith - So it looks to be semi-official. The “stress test” label, in Europe as in the US, signifies an exercise that is designed to produce attractive report cards, as opposed to provide a valid measure of the sturdiness of a bank’s balance sheet in difficult conditions. So what is the biggest concern investors and counterparties have about European banks? Sovereign risk exposure. So what do the ECB stress tests apparently exclude? Sovereign risk exposure. From Bloomberg:

Will stress tests lead to recapitalisation? - Bankers and analysts expect up to 20 of Europe’s banks to be forced into cash calls as a result of this month’s stress tests, raising up to €30bn of fresh equity amid persistent unease about the outlook for European banks and eurozone sovereign debt, reports the FT. The news came as it emerged that Axel Weber told banks at a meeting on Wednesday that they should prepare emergency capital-raising plans in case they fail the stress tests. (Note also that there are different accounts what actually happened at the meeting. Yesterday we listed a news report according to which Weber supported national stress test, and only partial publication of the results. We also think that Germany is try to put the brakes on the process).

So much for the stress test: Axel Weber wants to impose conditions that render them a farce - FT Deutschland has the exclusive story that Bundesbank president Axel Weber supports German banks in their opposition to complete and uncontrolled publication of stress tests. The EU and the German government wanted a complete publication of all stress test results, hoping that transparency would reinstall market confidence. The banks instead fear that the publication of results would only attract speculators. One of the participants in the meeting at the Bundesbank yesterday said “we can thank God that we have Weber”. Weber still promotes publication of results, at least partly, but does not want to leave the control over the stress tests to the CEBS, the committee of European banking supervisors (though the Bundesbank is an influential member of this committee). Weber has changed his position, as he had supported full transparency in June. He risks to be at odds with the EU political leaders and his chances as a successor of Trichet.

Banks - Nervous wait for outcome of stress tests -  While the financial markets anxiously await the results of stress tests on European lenders, senior bankers are privately debating whether the crucial tests will shore up confidence, or spark an even broader sell-off. After another fast-moving news week, as it emerged that about 100 European institutions will be included in the tests – four times the size of the original group – some bankers are confident that the expanded programme will reveal that much of the banking sector is healthier than investors think. Even if the tests uncover problems within Germany’s Landesbanken – its eight state-owned regional wholesale banks – or at some of Spain’s cajas savings banks, as is expected, many bankers believe that the market is exaggerating the woes facing Europe’s lenders. “We believe that overall, the tests will be positive,” said one senior capital markets banker in London. “A few German banks failing is not going to surprise the market.”

More Evidence That Eurobank Stress Tests Are a Garbage-In, Garbage-Out Exercise - Yves Smith - The stress tests conducted on 19 large American banks by the US Treasury in 2009 were an amazingly effective exercise in salesmanship and sleight of hand. Banking industry experts, including Bill Black, Chris Whalen, and Josh Rosner, dismissed the process as mere theatrics: too little staffing and not enough “stress” in the economic forecasts and loss assumptions  But the Treasury’s Tinkerbell strategy worked. If they could create enough confidence, if they could get enough people to applaud, the banks would live – at least for a while. Imitation is the most sincere form of flattery. The ECB and European bank regulators are copying the US playbook for the stress tests, with results for 100 banks expected to be released around July 23. But the European authorities seem to have failed to understand why the US effort worked. The first was that Team Obama is particularly good at PR, and it used those skills to full advantage. Despite considerable evidence otherwise, it got the press to convey the message that the tests were tough, and the banks really were sound. Second, Geithner & Co. had a kitty they could draw on.

Safety Net Frays in Spain, as Elsewhere in Europe – NYTimes -For millions of Europeans, modest salaries and high taxes have been offset by the benefits of their cherished social model — a cradle-to-grave safety net which, in the recent boom years, seemed to grow more generous all the time. Now, governments across Europe say they have little choice but to pull back on social benefits, at least for now. Tax revenues are falling; populations are aging and rising deficits are everywhere, threatening the euro. Cutbacks and higher taxes have been announced in Ireland, Spain, Italy, Greece and Portugal. Even France, until recently a holdout, has now proposed to raise the legal retirement age to 62 from 60.  The reforms, however, may be politically explosive. In Spain, they come at a particularly hard time. The austerity measures are hitting a population that is already reeling from the highest unemployment in the euro zone — 20 percent over all, 40 percent for its young people. In some cases, entire families are surviving on the pension of a grandparent.

In Ireland, a Picture of the High Cost of Austerity - As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight. Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations. “When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”  Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

A Terrible Ugliness Is Born - Krugman -Liz Alderman offers an excellent, if depressing, portrait of Ireland in austerity. To fully appreciate its significance, you want to juxtapose it with what the apostles of austerity are saying. Jean-Claude Trichet: “As regards the economy, the idea that austerity measures could trigger stagnation is incorrect,” Trichet said, according to an English-language transcript published on the ECB’s Internet site.“I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”Uh-huh. The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

Business leaders fear for eurozone survival - World business leaders see a growing risk that the eurozone could break up in the next three years, according to research by the Economist Intelligence Unit commissioned by RBC Capital Markets, published on Monday. Half of the 440 chief executives and heads of banks questioned say there is a greater than 50 per cent chance of one or more countries leaving the eurozone by 2013 because of the deepening problems of debt in the 16-nation bloc. More than a third (36 per cent) see at least a 25 per cent chance of a complete breakup over the same period.

BBC News – Romania plans big VAT rise to secure bail-out funds - Romania plans to raise value-added tax (VAT) to 24% in an effort to curb the country's deficit, the prime minister has said.Emil Boc said the 5% rise was an attempt to guarantee a $20bn International Monetary Fund (IMF) loan.The move comes after Romania's top court ruled out plans to cut pensions, prompting the IMF to delay key talks. But critics say the VAT rise will hit consumer spending in the European Union country.Greece’s best option is an orderly default - Roubini - It is time to recognise that Greece is not just suffering from a liquidity crisis; it is facing an insolvency crisis too. Rating agencies have started to downgrade its public debt to junk level, while spreads on Greek sovereign bonds last week spiked to new highs. The €110bn bail-out agreed by the European Union and the International Monetary Fund in May only delays the inevitable default and risks making it disorderly when it comes. Instead, an orderly restructuring of Greece’s public debt is needed now. The austerity measures to which Greece signed up as a condition of its bail-out require a draconian fiscal adjustment of 10 per cent of gross domestic product. This would prolong the country’s recession and still leave it with a public debt-to-GDP ratio of 148 per cent by 2016. At this level, even a small shock is likely to trigger a further debt crisis. Sharp austerity may be needed – as agreed by the Group of 20 over the weekend – to stabilise debt-to-GDP ratios by 2016 in advanced economies; but for Greece such “stabilisation” would be at levels that are unsustainable.

The Icelandic Post-crisis Miracle - Paul Krugman - Iceland is, of course, one of the great economic disaster stories of all time. An economy that produced a decent standard of living for its people was in effect hijacked by a combination of free-market ideology and crony capitalism; one of the papers (pdf) at the conference I just attended in Luxembourg shows that the benefits of the financial bubble went overwhelmingly to a small minority at the top of the income distribution: But there’s an odd coda to the story. Unlike other disaster economies around the European periphery – economies that are trying to rehabilitate themselves through austerity and deflation — Iceland built up so much debt and found itself in such dire straits that orthodoxy was out of the question. Instead, Iceland devalued its currency massively and imposed capital controls.  And a strange thing has happened: although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations. Here’s GDP:

How Did Greece Get into this Mess? - People often say that the problem in Greece is profligacy. Greece, the story goes, is a nation living beyond its means. Reading the press, in fact, one gets the impression that Greeks must enjoy one of the highest standards of living in Europe while making the frugal Germans pick up the tab. In reality, Greece has one of the lowest per capita incomes in Europe, much lower than the Eurozone 12 or the German level. Furthermore, the country’s social safety net might seem generous by US standards but is truly modest compared to the rest of Europe. As to borrowing, Greece is far from unique in its level of overall indebtedness as a percentage of gross domestic product. So what’s the real problem? It all started when Greece embraced the Euro, which some saw as the country’s salvation. But as is so often the case, what once seemed a strength turns out to be weakness. .

Roubini says Greece needs orderly debt restructuring to avoid 'inevitable default' - Greece needs an orderly restructuring of its public debt to head off an "inevitable default", says Nouriel Roubini, the man credited with predicting the financial crisis. He said the "draconian" austerity measures agreed as part of a €110bn (£90bn) EU-IMF bailout is prolonging the country's recession. "It is time to recognised that Greece is not just suffering from a liquidity crisis; it is facing an insolvency crisis too," he writes in the Financial Times.  In return for the emergency loans, Greece has pledged to bring its fiscal shortfall under the EU's 3pc by 2014 from 13.6 percent last year and to implement structural reforms in its economy to make it more competitive.  Mr Roubini said this would still leave the country with an "unsustainable" public debt-to-GDP ratio of 148pc by 2016 and vulnerable to a further debt crisis from even minor shocks.

French Public Debt Rises 3.1% as Borrowing Jumps —France's general government debt, as defined under the Maastricht Treaty, rose €46.5 billion ($56.72 billion) in the first quarter to €1.54 trillion, reflecting a sharp increase in borrowing by the Treasury, French statistical agency Insee said Wednesday. Public debt at the end of March represented about 80.3% of France's gross domestic product, up 2.2 percentage points from three months earlier and a whopping 10.8 points from a year before. France's external debt has been climbing at a fast pace due to last year's economic slowdown, which has caused a sharp deterioration in the country's public finances.

Europe's recovery falters -The euro zone's economic recovery is faltering, and the muted inflation outlook should allow the European Central Bank to keep interest rates very low into next year. Released Monday, the Conference Board's Leading Economic Index for the euro zone dropped 0.5% to 109.7 in May, the first fall for 14 months. The index is an amalgam of eight indicators of activity and is designed to predict future activity.  Jean-Claude Manini, the Conference Board's senior economist for Europe, said the drop suggested the rebound in euro-zone growth may have peaked during the second quarter. Euro Area Unemployment -The above graph shows the unemployment rate in the same set of Euro area countries as the last post, using the same color key.  The 2010 data are all IMF estimates made in April, as are the 2009 data for Belgium and Greece.  All other data are actuals.

FT.Germany: Merkel’s nail-biter - When Angela Merkel returns to Berlin on Monday from the Group of 20 summit in Toronto, she knows that within 48 hours she will be facing a moment of truth for her ruling centre-right coalition and her own leadership.Germany’s chancellor since 2005 has become a central figure on the world stage, one of the few national leaders to have global recognition and respect. Barack Obama, US president, clearly admires her grasp of complex world issues. She is often a star at the G20, as she is at meetings of European Union leaders in Brussels.At home, however, Ms Merkel is in trouble. A vote on Wednesday that should have been a foregone conclusion – to elect a new federal president, a largely honorary position – has become a cliffhanger. If it goes against the chancellor’s candidate, Christian Wulff, it could doom her government.“If Mr Wulff is not elected, it would be a total disaster for the coalition,” It would be unprecedented for a German government to fall on such an issue. But it is being seen as tantamount to a vote of confidence in the coalition.

Botched Presidential Election: Merkel’s Disaster – SPIEGEL - The rebellion in the first two rounds of the presidential election on Wednesday amounts to the biggest setback of Angela Merkel's career. The chancellor's candidate came through in the third round, but the political damage will linger. On Wednesday, that which Chancellor Angela Merkel's coalition had been fearing -- yet never officially allowed as a possibility -- came true.  Her candidate for German president, Christian Wulff, needed three rounds of voting to be elected.  It is a fiasco for her and her government. Twice Wulff stood for election. And twice he failed to capitalize on the comfortable majority enjoyed by Merkel's conservatives and their junior coalition partner, the pro-business Free Democrats, in the Federal Assembly. It is a rebellion that Merkel and her ranks only managed to contain in the last moment. Had they not been successful, Berlin's political scene would have quickly become unrecognizable.

A Brief Note On German Unemployment - Krugman - A number of commenters have pointed out that unemployment has been falling in Germany over the past few months. Um, yes — but not in the eurozone as a whole. And that is what we’re talking about here, aren’t we? Or is European monetary and fiscal policy to be run solely based on how things are going in one country? Also, bear in mind Germany is benefiting from the manufacturing bounceback, partly driven by inventories; it’s worth noting that over the past few months unemployment has been falling fairly quickly in the East North Central region of America — the industrial midwest — too. The point is that what amounts to a regional development within an ailing European economy doesn’t signify much.

Most Germans want to ditch the euro - A majority of Germans wants to scrap the euro and bring back the old currency, the deutschemark, according to a new poll published on Tuesday. The Ipsos survey showed 51 per cent of people in Europe's top economy wanted their beloved deutschemark back, with 30 per cent wanting to keep the euro. The remainder was undecided. Older Germans were keener to return to the deutschemark, with 56 per cent of those over 50 years old saying they wanted the old money back in their pockets. In contrast, only 42 per cent of those between 16 and 29 shared this view.

German banks have foul credits of over €200bn – highest level in the EU - It is was always clear that Germany would be the most affected country in the EU by the global financial crisis, given its persistent and large current account surpluses. Yesterday came an alarming estimate of the scale of the problem from PriceWaterhouseCoopers, according to which the bad debt problem was €213bn at end-2009, a 50% increase from 2008. Now we suspect that the figure must have gone up since, and of course, this does not include any shocks from what German banks have yet to expect from their exposure to southern Europe. The German banks’ end-2009 exposure exceeds that of British banks of €155bn, and Spanish banks €55bn (why no French banks?), according to FT Deutschland. (Now these numbers are not strictly comparable since the auditor used national accounting rules as the benchmark to establish the estimate. Last year, the German bank regulator produced a worst-case scenario of some €800bn in write-offs. And while we are not there yet, it is quite alarming to see that by end 2009,  we were already a quarter of way there. Expect them to rise significantly over the next couple of years).

Euro unemployment holds at 10pc – European unemployment held at the highest in almost 12 years in May as the debt crisis made companies reluctant to add workers.The jobless rate in the 16-nation euro area remained at 10pc, the European Union’s statistics office in Luxembourg said today. That’s the highest since August 1998. The April figure was revised down from a previously reported 10.1pc. Producer-price inflation accelerated to 3.1pc in May from 2.8pc in April, a separate release showed. European companies may keep hiring plans on hold as the recovery shows signs of losing momentum. Governments have stepped up spending cuts to reduce budget deficits and restore investor confidence, which may curb demand in the region.

Merkel Says $945 Billion EU Rescue Deal Only Bought Some Time for the Euro - German Chancellor Angela Merkel said that the European Union’s 750 billion-euro ($945 billion) rescue package for the euro is only buying time for governments to cut budget deficits.  “A policy of saving, scaling back deficits that have risen very sharply -- that’s the task we have to accomplish now,” Merkel said in an interview with RTL television today in Berlin, citing the call for cutting deficits endorsed by her and other Group of 20 leaders at their meeting in Toronto last week.  “This work has to be done by all countries over several years, coupled with structural reforms, so we can say in the end that the euro is stable and sustainably secured,” even when “rescue umbrellas” aren’t in place, Merkel said.

The end of muddling through is nigh - Münchau - I was speaking recently to a group of investors who forced me – all but at gunpoint – to tell them how long I thought the euro would last. I normally prefer conditional forecasts but, in this case, I was asked to make an unqualified prediction. And so I yielded. My answer was that the eurozone would probably not survive the decade in its current form. As it turned out, I was the most optimistic person in the room, by far.  There are few people in Brussels – where I live and work – who would consider me an optimist. The point is not so much about how policymakers and investors relate to my predictions, but how the two groups relate to each other. They are worlds apart. Europe’s political classes still believe they are in control of the situation – and that a combination of austerity and financial repression will do the trick. Investors, meanwhile, do not understand how Greece, Spain and Germany can coexist in a monetary union.

Auerback: The ECB is the New “United States of Europe” - Wolfgang Munchnau is right. Only a closer union can save the euro. In the longer term, it will be necessary to put in place a permanent fiscal arrangement through which the central euro zone authorities distribute funds to be used by member nations. But politically, this is a non-starter, particularly in today’s environment. Germany in particular would only accede to a “United States of Europe” run on German lines, in effect making the euro zone a “United States of Germany” or, at the very least, a European Union with strongly German characteristics.  Enter the European Central Bank: With little fanfare, the ECB has been responding to the EMU’s solvency mess by conducting large-scale bond purchases in the secondary market (which, unlike direct purchases of government debt, is not contrary to the Treaty of Maastricht rules) for the debt of the EMU nations. As Bill Mitchell has noted, it is remarkable how little press coverage this has generated, but despite saying there would be neither be bailouts, nor unsterilized bond purchases, the ECB is now buying huge amounts of PIIGS debt to ensure the funding crisis in the EMU is contained.

Stimulus or Austerity - Financial TV has displayed (or reflected) some confusion lately over U.S. and European policies. Europe seems to be adopting “austerity” measures–why haven’t we heard the term ‘root canal’ lately?–while our administration is advocating stimulus for Europe and even more stimulus for the U.S. What’s wrong? Doesn’t economic theory provide the answer and shouldn’t the answer be the same here as in Euroland? The first step in sorting this out is to acknowledge that the problem to be fixed is not exactly the same in Euroland and the United States. We both need stimulus to boost a weak recovery. We both have growing budget deficits and debt levels that should be reduced. However, the budget and debt piper to be paid has shown up in Europe already, beginning in Greece and affecting all 16 members of the Eurozone through the impact on the Euro.

ECB Failed Fixed-Term Deposit Auction - Right on cue, as soon as I write a post saying that big stuff happens when I'm away, a significant story:  ECB Fixed-Term Deposit Auction fails.  What does this mean?  Well, although I don't have a PhD in economics, allow me to explain it to you in layman's terms:  the ECB's attempt to "sanitize" their bond purchases - they were going to distribute capital by buying bonds, and then remove capital by selling term deposits, so that no net money was created - failed.   The banks didn't want to buy ECB term deposits with their precious money.   Why?  Well, it seems that liquidity is pretty pretty pretty tight right now in Euro-land... I don't think that could ever be considered a good thing.

Crisis is back with a vengeance as ECB’s sterilisation auction flops -After a brief lull, during which the crisis seemed almost forgotten, the financial market reverted to crisis from, with what FT Alphaville called a generalised bloodbath across major equity markets. Overnight, Asian markets continue to lose. One of the reasons for the panic was concern about the state of the European banking system, and the surprising news was that the ECB’s €55bn fixed-term deposit flopped spectacularly, as it managed to managed to raise only €31.866bn at an average interest rate of 0.54%. This means that financial institutions continue to hog liquidity. Another reason was an unexpected decline in the Conference Board consumer confidence indicator, the latest indicator to suggest that the global recovery is running out of steam. There is a lot of gloom in the US at the moment. We have no time today to go in detail, but here some pointers. Robert Shiller says another housing recession is possible, and Paul Krugman is getting really, really gloomy and angry. US 10-year bond yields were down to below 3% last night.

Gathering clouds - THE big news in the currency markets is the less-than-expected uptake of the ECB's three-month loans. Tomorrow euro-zone banks are scheduled to return €442 billion in loans that they received from the central bank a year ago. This move had raised concerns about reduced liquidity. But today, banks took in just €170 billion in three-month loans, against an estimate of €250m. That may provide some relief to the Euro, but other indicators are not so encouraging.First, as Buttonwood reports, the three-month dollar Libor rate is almost as high as the two-year bond yield. Banks are reluctant to lend to Spanish and Greek banks because they are deemed too risky. This chart from the FT shows that European banks deposited €305 billion with the ECB on Monday night, despite getting only 0.25%. Next, Simon Derrick makes an interesting comparison between the behaviour of the euro now and during the crisis.  Simon notes that between September and December of 2008, the Euro collapsed against the Franc and Yen, while it gained on the Australian and Canadian dollars, which are commodity-linked.

ECB Lends 111 Billion Euros to Smooth Loan Expiry (Bloomberg) -- The European Central Bank said it will lend banks 111.2 billion euros ($136.5 billion) for six days to help them cope with the expiry of its landmark 12-month loan today. The Frankfurt-based ECB said 78 banks asked for the six-day funds at the benchmark interest rate of 1 percent. Banks today need to repay 442 billion euros in 12-month loans, the biggest amount ever awarded by the ECB. Banks asked for 131.9 billion euros in three-month loans yesterday, less than economists expected."

More please … the 12-month LTRO roll-over ain’t over yet - Relieved at the results of Wednesday’s three-month LTRO offer? Not so fast.We’ve noted ad nauseum that lower-than-expected demand for the European Central Bank’s three-month Long-Term Refinancing Operation (LTRO) — on the eve of the expiry of its €442bn 12-month LTRO — could hide discrepancies between eurozone banks. Last year, 1,121 banks tapped €442bn of one-year ECB loans at a fixed rate of 1 per cent when market rates (Eonia) were broadly similar. About half of that €442bn was used for what was once seen as a ‘riskless’ carry trade; banks used ECB funds to buy longer-dated government bonds. The other half was probably used as pure bank funding.On Wednesday, 171 banks tapped €132bn at a rate of 1 per cent, when market rates are about 0.46 per cent. And they’re probably not using that money to buy government bonds now, either. Put simply, if 950 banks didn’t renew their requests for ECB funds on Wednesday, 171 banks did — and far above current market rates. And for something other than frivolous carry trades.

With $1 Trillion In Loans, The ECB Is The Biggest Guarantor Of European Banks - Today's lower than expected interest in the 3-month LTRO operation was supposed to indicate a sign of stability for European banks. Nothing could be further from the truth. In an article which recaps a variety of data points presented here previously, the FT summarizes that European banks continue to exist solely due to a record and unprecedented $1 trillion in emergency loans issued to Europe's commercial banks. In turn, almost 40% of this liquidity is then recycled, and stored back with the ECB, as the very same banks have no trust whatsoever in any of their peers. In short: no matter what the Stress Tests indicate, the European financial system is now in a worse condition than ever in history, including the days just after Lehman.

Economics: The shaky science - In major advanced countries -- the 31 members of the Organization for Economic Cooperation and Development -- unemployment stands at 46.5 million people, up about 50 percent since 2007.  But what more can governments do? It's unclear.  We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists -- living and dead -- and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major theories: Keynesianism, monetarism and "rational expectations." Economics has become the shaky science; its intellectual chaos provides context for today's policy disputes at home and abroad.  Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis?

Thatcher-Reagan Reforms Come Under Fire - It was a bad for a pair of their political icons, Ronald Reagan and Margaret Thatcher, whose regulatory policies were partly blamed by a former ECB official for the recent spate of financial crises. “The Thatcher-Reagan reforms shifted the line dividing markets from government, enlarging the territory of the former at the expense of the latter,” But after those ideas became “conventional wisdom,” things went awry, he said. “The Thatcher-Reagan ‘revolution’ conquered the minds and set a new policy paradigm only late in the 1980s; and the worse came after both quit power, sometimes from leaders of opposition parties converted to pro-market ideas (like Clinton or Blair),”

Dire warning over impending slide of British manufacturing - British manufacturing will slide to a woeful 20th position in the world competitiveness rankings over the next five years unless there are serious efforts to address its poor image and recruit new talent. The UK is currently ranked 17th in the world in terms of the competitiveness of its manufacturing industries, according to a global index published for the first time by consultancy Deloitte today. By 2015 Britain will have been leapfrogged by Russia, Spain and South Africa. The top of the table remains dominated by the fast-growing Asian giants. China is top of the league, and will remain so in five years' time, says Deloitte. India and South Korea will also retain their respective second and third places. But the US is set to slip from fourth to fifth over the next five years, overtaken by Brazil. And Japan will drop from sixth to seventh – swapping places with Mexico. Germany will hold on to its respectable eighth position.

The $5 trillion rollover - Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth. The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth. For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012. If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. This is even before the fact that the banks need desperately to turn some of their riskier short-term funding into more reliable funding with a longer maturity.

Osborne’s first Budget? It’s wrong, wrong, wrong! - George Osborne will probably not be very bothered that there is a man who thinks he got last week's emergency Budget almost entirely wrong. But he should be. Because that man is a former chief economist at the World Bank who won the Nobel Prize for Economics for his work on why markets do not produce the outcomes which, in theory, they ought to. Professor Joseph Stiglitz, who has been described as the biggest brain in economics, is distinctly unimpressed by George Osborne's strategy. This, he predicts, will make Britain's recovery from recession longer, slower and harder than it needs to be. The rise in VAT could even tip us into a double-dip recession.

Osborne tries to put the brakes on banking reform –The Chancellor seeks to postpone deal at the G20, arguing banks should be given longer to implement the new Basel III rules. George Osborne is to push for a delay in global banking reform to get a deal on levels of liquidity and capital needed by banks so that multi-billion taxpayer funded bail-outs are not needed again. The Chancellor will argue at the G20 meeting today that banks should be given a longer transition period to put in place the new Basel III rules, possibly pushing the impact of the reforms out to 2018.

Britain ‘might not cope with another bank emergency‘ - Britain's mountain of debt could leave the country powerless to launch another rescue bid in the wake of a fresh financial crisis, the world's central bankers warned yesterday. Their "club" - the Bank of International Settlements - presented in its annual report a frightening picture of the impact of a second banking emergency on heavily indebted nations such as Britain. The Bank of England's Governor, Mervyn King, has estimated that the Government has pumped as much as £1trillion of taxpayers' money into the Banking system. Billions of pounds were spent part-nationalising the Royal Bank of Scotland and Lloyds Banking Group, as well as fully nationalising Northern Rock, in an attempt to stave off collapse. Measures such as the "special liquidity" scheme propped up other lenders and prevented the system from freezing up.

1.3m people to lose jobs in 'Austerity Budget' - Over a million people will lose their jobs due to the Government’s spending cuts over the next five years, a leaked document projects.  George Osborne’s Budget last week said that there would be a net increase of 1.3m jobs by 2015 but the Chancellor did not mention the figures used to arrive at that conclusion. Last night, unpublished Treasury documents disclosed that officials had estimated 2.5m jobs would be created but that a total of 1.2m would be lost in the same period, the Guardian reported. However, experts cast doubt on the private sector’s ability to be able to generate so many jobs in such difficult economic circumstances, meaning that the true gain in employment could be yet more modest.

Who will be Paying the Bills? - My last two posts have prompted a lively debate on the blog, and it is interesting to see how the debate parallels that which is taking place around the world. The G20 and G8 summits appear to be seeing the same divisions, with Obama on one side encouraging continuance of massive deficit spending, and the Canadian and many Europeans (e.g. Merkel, Cameron, Borroso) saying that the deficit spending has gone far enough (or perhaps already too far). This is from the Guardian: Signs of deep rifts at the G8 and G20 summits in Toronto over how quickly governments should cut deficits added to financial market jitters today, with the Americans warning of the dangers of a double dip recession if all countries started to rein back spending at once.

Crib notes for G7 unemployment rates - Rebecca Wilder - Unemployment rates across the G7 illustrate a broad-based labor recovery. Fantastic - now let's get to the underlying stories. Germany, France, and Italy: Germany's labor market is ostensibly improving, as the unemployment rate continues its descent. However, don't be fooled by these statistics: the German government is subsidizing firms to drop hours in lieu of outright layoffs. The United States: Spencer, as usual, gives his insightful take on the US employment release: not good. The real problem is that the US private sector is sitting on an iceberg of debt; and the only way to avoid the economic pain of large-scale default is by dropping leverage via nominal income (wages) growth. UK: The pace of the labor market deterioration is slowing (not evident in the unemployment rate, which dates to just March, but more evident in the claimant count). However, the unemployment rate is expected to rise as the government's self-imposed austerity measures are put into play. Canada: The labor market is strong as illustrated by the marked improvement in the employment figures.  Japan: The labor market is weak, as most industries posted job losses in May 2010 (access Japanese labor data here).

The Unaccountable G-8 - – In hosting the 2010 G-8 summit of major economies (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States), Canadian Prime Minister Stephen Harper called for an “accountability summit,” to hold the G-8 responsible for the promises that it made over the years. So let’s make our own account of how the G-8 did. The answer, alas, is a failing grade. The G-8 this year illustrates the difference between photo-ops and serious global governance. Of all of the G-8’s promises over the years, the most important was made to the world’s poorest people at the 2005 G-8 Gleneagles Summit in Scotland. The G-8 promised that, by this year, it would increase annual development assistance to the world’s poor by $50 billion relative to 2004. Half of the increase, or $25 billion per year, would go to Africa.The G-8 fell far short of this goal, especially with respect to Africa.

G-20 Focuses on Debt Reduction - WSJ —The wealthiest of the Group of 20 countries said they would halve their government deficits by the year 2013 and "stabilize" their debt loads by 2016, a signal to international markets and domestic political audiences they are taking seriously the need to wean themselves from stimulus spending. The weekend G-20 meeting suggested the world economy has moved into a new phase since the financial crisis was in full flow. Then, these industrialized and developing nations focused heavily on promoting stimulus spending. Now, countries at least rhetorically are preoccupied by deficits and debts as a key to sustaining growth. Expectations were limited for the Toronto session, largely because most of the issues of financial regulation weren't scheduled for completion until the end of the year at the Seoul summit. But the conference became a way for major nations to try to address fears in the market that government spending was spinning out of control.

The Day of the Deficit Hawks - The deficit hawks could claim partial victory from the weekend’s G-20 summit, as leaders of the world’s top economies agreed in principle to slash deficit spending in half by 2013. Leaders of the 20 largest and emerging economies agreed to the proposal by Stephen Harper, Canada’s prime minister, despite the misgivings of the leaders of the world’s largest economy, President Barack Obama and his Treasury Secretary, Timothy Geithner. Obama had wanted wiggle room for further stimulus spending, should the economic recovery stall with unemployment in the U.S. hovering above 9 percent. But European leaders, led by Germany’s Chancellor Angela Merkel, were more concerned about out-of-control sovereign debt of the kind that has led to Greece’s near default and a rescue plan for that nation. And don’t expect the language from the G-20 to calm markets troubled by the European sovereign debt crisis, Reuters reports.

A breakthrough on G20 budgets? - Chancellor Angela Merkel is making much of the fact that the major G20 economies are close to an agreement to halve their deficits as a share of the economy by 2013. But, as is usually the case on these occasions, the leaders will be signing up to a target they came here already pledged to achieve. Assuming that they are talking about the total deficit, not the structural piece that is not expected to go away with economic growth, every government of a major economy represented here is pledged to at least halve borrowing as a share of the economy by 2013, Before its recent austerity programme, the Germans had pledged to cut their deficit to 3% of GDP by 2013, from around 5.5% this year. But the new plans to tighten by an extra 1% of GDP over the next 3 years will put them well within the target.  President Obama has said that he will halve the deficit over the next 4 years. They are a bit fuzzy about whether this means 2013 and 2014 - but unless something very bad happens to America's recovery, economic growth should halve it as a share of the economy by 2013. What worries the financial markets is what happens after that.

G20: The Death Of Cooperation - As I've mentioned in the past, the Pittsburgh's G20 at the end of 2008 filled me with real hope that global policy makers were willing and prepared to tackle the painful issues that lay at the root of the global crisis. I'm not talking about morally corrupt bankers or delinquent US home owners but rather the massive capital imbalances created by individual nations and their excess spending or saving. After all, if it weren't for the current account surplus countries and their cash, there wouldn't have been the cash to finance the consumption binge in the US, UK etc. Now its possible that even with aggressive policy steps, it might have been impossible for politicians to curb the squirrel-like savings habits of the German's or the gargantuan appetite of US consumers. However, it's absolutely certain that if policy makers shirk this responsibility in the face of domestic pressures, we are just heading towards the next crisis as clearly as night follows day.   That's why this weekend's G20 was so thoroughly depressing as it was clear that on issue after issue, there was NO meeting of minds and officials have just retreated to their various national corners.

President Obama urges G-20 nations to spend; they pledge to halve deficits - President Obama warned Sunday that the world economic recovery remains "fragile" and urged continued spending to support growth, an expansionist call at the end of a summit marked by an agreement among developed nations to halve their annual deficits within three years.  The president's remarks tempered the Group of 20's headline achievement at the summit, a deficit-reduction target that had been pushed by Canadian Prime Minister Stephen Harper, the host of the meeting and a fiscal conservative. Although there is broad agreement that government debt in the developed world needs to be reduced, there is concern that cutting too fast and too deeply will slow growth and possibly spark a new recession.

US Loses at G20 Summit - Reuters compiled a nice list of G20 winners and losers. Here’s the America excerpt: U.S. President Barack Obama arrived at the summit on what White House officials hoped would be a triumphant note after House and Senate negotiators reached a final compromise on a bill that would bring about the most sweeping overhaul of financial rules since the 1930s. But he left having achieved little on the fiscal issues that dominated the summit. The United States was forced to give ground on European demands for a new emphasis on budget austerity, which it had warned threatened to torpedo the fragile economic recovery. Obama also told G20 leaders that existing proposals in the Doha world trade talks did not meet U.S. needs and would have to change significantly.Brazil was the only other loser on the list.

Has the G-20 doomed the recovery? -So they've gone and done it. Even though the G-20 called the recovery “uneven and fragile” in the final declaration from its weekend confab in Toronto, the advanced economies also pledged to at least halve fiscal deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. The statement read: Recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. So how will the G-20's position impact the rebound? Though there is no clear consensus among economists on whether or not fiscal retrenchment will sap the recovery, I think the way the G-20 is going about the process can only be negative.

A quiet crisis whispers of impending poverty - President Obama said during the G-20 meeting in Toronto, where he was told to take a hike by European leaders, that both he and British prime minister David Cameron "... are aiming at the same direction, which is long-term sustainable growth that puts people to work..." Somewhat curious, since his Vice President, Joe Biden, said a few days ago that "...there's no possibility to restore 8 million jobs lost in the Great Recession."  Looks a lot as if the nonsense now starts to contradict itself. Perhaps we shouldn't expect anything else. Biden then added that there is  " way to regenerate $3 trillion that was lost. Not misplaced, lost."  Don’t know what the Pennsylvania Avenue spin team thinks of Biden's remarks, but they do sound just about right to me, and a lot less hollow than Obama's empty fluff. Biden made me think of Springsteen's My Hometown (see video below)

Global Economic Policy: Austerity Alarm - The Economist - ECONOMIC policymaking, like hemlines, has fads. Last year the leaders of the G20 group of big economies led a global Keynesian boost, pledging fiscal stimulus worth a combined 2% of world GDP to prop up demand. At their most recent gathering, in Toronto on June 26th-27th, the club’s rich-world members pledged “at least” to halve their deficits by 2013. Though they left themselves wiggle room, the change of tone was clear. Thanks to Greece’s sovereign-debt crisis, which has terrified politicians, stimulus is out and deficit reduction is in.  The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. Japan’s new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress’s fears about the deficit have thwarted the Obama administration’s efforts to pass a new mini-stimulus (see article).

G20 inches forward on financial reform - In their Communique, the G20 leaders will for the first time make an explicit commitment to agree new minimum levels of capital for banks in time for the next Summit in Seoul in November.  UK officials say there will be no precise figure until then, but the statement will pledge that the capital buffer that banks are required to hold against future losses will be high enough to have prevented any major bank from needing government support in the financial crisis of 2007-9. It doesn't sound like much. But it does set limits on where this immensely complicated financial reform effort can end up. There will be a similar commitment to raise the amount of liquid assets that banks must hold, and set overall limits on leverage, or borrowing.As expected, they have not agreed a timetable for introducing the new regulations. There will also be considerable debate on the details - not least, which assets will count as capital, and how liquidity is going to be measured.

G20 Promises Tough Bank Capital Standards - World leaders on Sunday in Toronto offered a detailed commitment to soon impose tougher capital requirements against the world’s largest banks. They’ve been promising these standards for more than a year, but the language in the G20 communique on Sunday was more detailed than what they’ve said in the past. For example, leaders said the new capital requirements would be so high that banks would be able to endure another financial crisis without “extraordinary government support.” That wasn’t in the last communiqué.

Another summit that disappoints - G20 fails to agree on common rules for a bank tax; reaches token agreement on deficit reduction, according to which fiscal deficits should be halved by 2013 – which is consistent with most country’s current plans in any case; G20 also agrees that everything is not binding; common capital rule requirement downgrade from a target to an aim; in Spain, the newspapers focused on the fact that Zapatero was allowed to sit next to Merkel for the entire meeting; Clive Crook says the G20 has become a waste of time; France is now discussing austerity measures in detail; the Camdessus group recommends adoption of a German-style balanced budget rule; German political parties move towards consensus over an increase in the top tax rate; the financial crisis is now hitting the next asset class – corporate bonds; ten European banks gang up to create a pan-European market for securities products, similar to Pfandbriefe or covered bonds; Wolfgang Munchau, meanwhile, argues that the EU’s institutions and the financial markets remain world’s apart.

Summitry, what is it good for? - The Economist -THE G20 has been around for just over a decade now, but with the onset of deep financial crisis in 2008, the loose affiliation of major economies took on new importance. In the fall of that year President George W. Bush called for regular meetings of G20 leaders to discuss the state of the world economy and the global financial system. Since then, four G20 summits have taken place, the most recent of which was in Toronto this past weekend. Clearly there are aspects of global policymaking that practically demand international coordination. But do these summits help facilitate that coordination in any way? Are they worth having? That's the question we posed to our guest network of economists this week. The responses have been interesting.

IMF says G20 could do better - In a report to be published with the final communiqué, the IMF says that the G20 countries' economic plans carry "serious downside risks" for the global economy - and their leaders could do much more to promote global growth and employment.  The report says the policies that countries now plan to pursue carry "significant downside risks". If those risks were to materialise, the Fund reckons that global output could 3 per cent ($2.25 trillion) lower than currently forecast, and an extra 23 million jobs could be lost. The Fund's staff calculate that more constructive collaboration between countries on their economic and exchange rate policies would mitigate these risks, and increase global output by $1.5 trillion dollars over the next 5 years, relative to the path that countries are now on. It would also create around 30 million more jobs.

El-Erian on a disappointing G20 compromise - If anything, the outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world. If anything, we are being exposed this morning to the realities of different national historical experiences, different national initial conditions, and different national views on how economies should and do work.  The differences are most visible in the sections on fiscal adjustment and growth. They are also evident in the discussion of financial sector reform...the communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms. The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.

This global game of ‘pass the parcel’ cannot end well - Was the summit of the Group of 20 leading economies in Canada over the weekend a step forward towards co-operation or a step backwards towards disagreement? The answer seems to be both. The call for “growth-friendly fiscal consolidation plans” provides something for everybody. But it assumes what is to be proved: that rapid fiscal consolidation will now support growth, rather than undermine it. Yet, instead of examining the outcome in detail, I asked myself a broader question: where have we got to? When I did so, I found myself thinking of the British children’s game of “pass the parcel”. In this game, a package is passed around until the music stops. Thereupon, a player removes a piece of wrapping paper and the game restarts. The winner removes the last piece of paper and secures the prize.  Our adult game of pass the parcel is far more sophisticated: there are several games going on at once; and there are many parcels, some containing prizes; others containing penalties. So here are four such games

The G-20's China Bet - The G-20 communiqué released after the Toronto summit meeting on Sunday made it quite clear that most industrialized countries now have budget deficit reduction fever (see this version). The United States resisted the pressure to cut government spending and/or raise taxes in a precipitate manner, but the sense of the meeting was clear: cut now to some extent and cut more tomorrow. This makes some sense if you think that the global economy is in robust health and likely to grow at a rapid clip — say, close to 5 percent a year — for the foreseeable future. With high global growth, it will matter less that governments are cutting back, and unemployment will come down regardless. Taking this into account, the International Monetary Fund is actually predicting (as cited prominently by the G-20) that budget “consolidation” will actually raise growth over five years. But what about those larger countries, like Germany, France, Britain and the United States, which remain creditworthy? If these economies all decide to reduce their budget deficits, what will drive global growth? The answer in Toronto was obvious: China.

The G20 tees up another crisis - I’ve rarely seen as much unanimity regarding an important communiqué as I have around this one — an interminable 27-page effort from the G20 which only serves to underscore the fact that when they can’t agree on what to say, bureaucrats are very good at making up for it with astonishing quantities of sheer blather: Measures will need to be implemented at the national level and will need to be tailored to individual country circumstances. To facilitate this process, we have agreed that the second stage of our country-led and consultative mutual assessment will be conducted at the country and European level and that we will each identify additional measures, as necessary, that we will take toward achieving strong, sustainable, and balanced growth. A “consultative mutual assessment”? What could possibly go wrong?As Chris Giles points out, agreeing on “growth-friendly fiscal consolidation” is easy, because it’s actually meaningless. And so the G20, which is meant to play a crucial international coordinating role, is now just a shop for different heads of state to arrive at a form of words seemingly designed to constrain them as little as possible.

Reserves and Other Early Warning Indicators Predict Crises After All - With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of Early Warning Indicators to tell us what countries are most vulnerable.    Nobody should be surprised that it is not easy to forecast crises with high reliability.   Thus it is especially hard to predict the timing of a crisis.  Some economists, however, are skeptical that Early Warning Indicators (EWIs) have any useful predictive ability at all.  A common assessment is that EWIs have failed, in the sense that in each historical round of emerging market crises (1982, 1994-2001, 2008) those particular variables that appeared statistically significant in that round did not perform well in the subsequent round.   This is not the right conclusion. In a recent NBER working paper, George Saravelos and I began by examining more than eighty contributions to the pre-2008 literature on EWIs.   The table below reports which variables were most often found to have performed consistently well in predicting crises in the past.

Europe’s banks are still on ‘life support’, BIS warns –Europe's banks have yet to come clean over bad loans and may struggle to refinance short-term debt unless the region's bond crisis subsides soon, the Bank for International Settlements (BIS) has warned.  The BIS said in its annual report that banks on both sides of the Atlantic remain "highly leveraged and still appear to be on life support. The essential task of reducing leverage and repairing balance sheets is simply not finished. The Greek sovereign debt crisis shows just how fragile the financial system still is. "Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

Force banks to bolster capital, says BIS, as G20 is criticised for delay on reforms - Banks should be forced to bolster their capital cushions to aid economic recovery, a powerful group of central banks said today in an apparent contradiction of the G20's move to delay industry reforms. As the Bank for International Settlements, known as the central bankers' bank, set out the case for a rise in historically low interest rates around in the developed world, it also argued that making changes to the financial system had "acquired even greater urgency"."[The reforms] can provide the most immediate protection to the financial system in the event of a new crisis. Moreover, acting now to improve the capital base and the liquidity of bank balance sheets will not jeopardise the recovery. Rather – by making financial institutions sounder – those actions will promote a sustainable recovery," it said.The comments in the BIS annual report came amid complaints from pressure groups that banks were being "let off the hook" by the G20 after intense lobbying by the financial sector led to a delay in introducing rules requiring them to hold more capital.

BIS Warns Central Banks Against Keeping Rates Low for Too Long -The Bank for International Settlements issued a stern warning to central banks — keeping rates low for too long, and other actions like buying government bonds, creates risks to financial stability and opens central banks up to political pressure.The warning, contained in BIS’s annual report, comes as Europe’s debt crisis has pushed rate-increase forecasts for major central banks including the Federal Reserve, Bank of England and European Central Bank off until well into 2011. BIS concedes that slashing rates to record lows “was necessary to prevent the complete collapse of the financial system,” and isn’t recommending imminent hikes. Rather, the Basel, Switzerland-based organization, known as the central bank for central banks, worries that the latest crisis in Europe may delay for too long a “necessary” return to normal monetary policy

Central Banks Should Weigh Ending Stimulus to Avoid Side Effects, BIS Says -Central banks and governments should consider withdrawing extraordinary measures to avoid skewing investment decisions and delaying companies’ recording of losses, the Bank for International Settlements said.  “The time has come to ask when and how these powerful measures can be phased out,” the Basel, Switzerland-based BIS said in its annual report published today. “The cumulating side effects themselves pose a danger that, at the very least, implies exiting sooner than may be comfortable for many.”  Keeping interest rates too low for too long “alters investment decisions, postpones the recognition of losses, increases risk-taking in the ensuing search for yield, and encourages high levels of borrowing,” the bank said. Central banks must also “confront booms in asset prices and credit as being the threat to stable prices and growth that they are.”

The BIS is part of the problem - After the Teach-In I read the BIS Annual Report 2009/10 – which signalled to me that they are now firmly part of the problem that we face when dealing with the task outlining fiscally sustainable policy positions.On June 28, 2010, the Bank of International Settlements released their Annual Report for 2009-10 – Full PDF available. In the Overview of the Economic Chapters their message is clear although seriously deficient in its understanding of the difference between sovereign debt and privately-held debt. It also fails categorically to understand what the fiscal options of a sovereign government are. Their basic claim is that:  In monetary policy, despite the fragility of the macroeconomy and low core inflation in the major advanced economies, it is important to bear in mind that keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial and monetary stability.

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