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

Saturday, July 31, 2010

week ending July 31

Fed Increases Quarterly Value of AIG, Bear Stearns Holdings -The Federal Reserve raised by 3 percent its combined estimated value of investment portfolios acquired in the rescues of American International Group Inc. and Bear Stearns Cos. The net holdings of three corporations set up by the Fed for the mortgages and securities it took on in bailing out AIG and Bear Stearns in 2008 rose by $2 billion to $69.1 billion, the Fed said today in a quarterly revaluation of the assets. The Bear Stearns investments increased to $29.4 billion, while the two AIG portfolios rose to $39.7 billion. The three special-purpose companies were named Maiden Lane, Maiden Lane II and Maiden Lane III after a street bordering the New York Fed building in Manhattan. The Fed’s balance sheet declined by $7.04 billion during the past week to $2.33 trillion as of yesterday as its holdings of mortgage-backed securities decreased by $7.1 billion, according to today’s weekly balance-sheet release. Assets reached a record $2.35 trillion on May 19. Currency swaps with other central banks were unchanged at $1.25 billion. The Fed restarted the swap lines in May in response to Europe’s sovereign-debt crisis.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 29, 2010

Fed reports paper profit on Bear and AIG bail-outs - The Federal Reserve Bank of New York says toxic assets that the government took over from American International Group Inc. and Bear Stearns at the height of the financial crisis are gaining value for the first time.The New York Fed says the investments are worth about $2 billion more than they were during the previous quarter. They lost value quickly, triggering the government bailouts of those companies.The New York Fed engineered a rescue of AIG that was worth up to $182 billion. It took on bad assets from Bear Stearns to help JPMorgan Chase & Co. buy the failed investment bank.

Should We Buy Fed’s Reports of Gains on AIG Bailout Vehicles? - Yves Smith - Readers may recall that the Federal Reserve created three vehicles to hold dodgy assets it obtained via the Bear and AIG bailouts, namely Maiden Lane (for Bear), Maiden Lane II (for AIG residential mortgage backed securities) and Maiden Lane III (for CDOs the Fed bought as part of taking out AIG credit default swap counterparties at 100% of notional value).Per the Financial Times: The Fed yesterday reported gains on its exposures in these entities due to improved market conditions. Our Tom Adams, who has done extensive valuation work on Maiden Lane III, weights in on the latest report. Not surprisingly, the central bank bank does not provide enough information on its website to allow for quantitative analysis. Tom’s bottom line is that while he finds the change in value reported this quarter to be not entirely implausible, he finds the earlier valuation to be exaggerated. In other words, the percentage gains shown may be defensible, but they were applied to a base number that looks inflated.

The Central-Bank Balance Sheet as an Instrument of Monetary Policy - While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.

Now Let Us Stress-Test The Central Banks - Though their details deserve debate, the underlying logic of the US and European commercial bank stress tests is irrefutable. Commercial banking in normal times is profitable. In exigent circumstances additional capital is needed. The requisite amount of additional capital is a function of the specific exposures of each bank and the probability of a confluence of economic and market events. This logic now needs to be applied to the world’s central banks. Though the suggestion is purely hypothetical – no supra-national institution like the International Monetary Fund, World Bank or Bank for International Settlements has any such authority – such an exercise would reveal crucial fault lines in the global financial system and possibly help us remediate them. While the conduct of central banking remains a purely sovereign affair, there are growing and eerily similar tendencies between private and public-sector banks in their generation of risk and their mitigation activities. Central banks may not go “bust” per se, but they can lose money – lots of it. In a worst-case scenario, hundreds of billions in additional capital from taxpayers may be needed to restore their credibility.

Monetary Policy Dominates - Scott Sumner once used the analogy of arm wrestling with his daughter to describe why monetary policy always dominates fiscal policy.  Scott explained that no matter how hard his daughter tried to win the arm-wrestling contest he would always apply just enough pressure to offset her efforts and keep her in check.  Likewise, no matter how expansionary or contractionary fiscal policy may be, at the end of the day the Fed has the ability to offset such actions and place aggregate demand where it so chooses.  This point is vividly illustrated in the article titled Money Dominates by Steve Hanke. Read it.

Monetary policy: Choosing sides | The Economist - THERE'S a certain amount of head scratching that's been going on where the Fed's monetary policy choices are concerned. Everyone knows that Ben Bernanke is a believer in the power of central banks to handle economic weakness, and everyone sees the Fed's troubling economic forecasts: high unemployment and inflation weel-below target for the next several years. So why isn't the Fed acting? Some, myself included, have credited Fed optimism and internal divisions. My colleague recently half-agreed with my take, saying: I think the reasons for Mr Bernanke’s reticence are twofold. First, he’s genuinely optimistic the economy will be okay, in part because he’s sanguine about the expiration of fiscal stimulus.If it becomes clear in the current quarter that that optimism is misplaced, I think the Fed will swing into action quite quickly. Naturally, he didn’t say this week just what the Fed would do; Fed chairmen never do until after the FOMC votes. The FOMC’s internal divisions I think are not a deterrent

Fed’s Bullard Raises Policy Concerns - The Federal Reserve’s promise to keep its target interest rate near zero for an “extended period” could have the counterproductive effect of encouraging a Japan-like deflation trap, according to Federal Reserve Bank of St. Louis President James Bullard. In a provocative paper from the St. Louis Fed, Bullard argued that the best way to avoid this trap is for the Fed to shift away from interest rate policy and instead focus on “quantitative easing” measures to boost inflation expectations if inflation shows signs of ticking lower.Bullard is currently a voting member of the Fed’s policy-setting Federal Open Market Committee. But in a conference call with journalists to explain his paper, he said it wasn’t a signal that he would dissent at the FOMC’s Aug. 10 meeting if the committee maintains its standard line on rates, but rather was meant to provoke debate on the effectiveness of the current policy stance. (Related Post: Remarks Don’t Signal Wider Policy Shift)

Low Interest Rates “For an Extended Period”, A Sign of Failure - James Bullard: Again, the data in this Figure do not mix at all—- its boxes on the right [US] and circles on the left [Japan]. But the most recent observation for the U.S., the solid box labelled “May 2010,”is about as close as the U.S. has been in recent times to the low nominal interest rate steady state. It is below the rate at which policy turns passive in the diagram. In addition, the FOMC has pledged to keep the policy rate low for an extended period.”This pledge is meant to push inflation back toward target is certainly higher than where it is today thus moving to the right in the Figure. The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense (long after policy becomes passive), creating a second steady state for the economy. Many of the responses to this situation described below attempt to remedy this situation by recommending a switch to some other policy in cases when in‡ation is far below target. The regime switch required has to be sharp and credible— policymakers have to commit to the new policy and the private sector has to believe the policymaker.Unfortunately, in actual policy discussions nothing of this sort seems to be happening.

Fed Officials Clash on Need for More Stimulus - ABC News - Federal Reserve officials clashed on Thursday over whether the central bank should be more aggressive in supporting the stumbling economy and one said the Fed's current policy may be contributing to worryingly low levels of inflation.The Fed's promise to hold benchmark interest rates exceptionally low for an extended period -- a vow aimed at giving extra punch to rock-bottom borrowing costs -- "may be increasing the probability of a Japanese-style outcome for the U.S.," St. Louis Federal Reserve Bank President James Bullard said. Japan has struggled to break out of deflation and weak or no growth for years.Bullard, a voter on the Fed's policy-setting panel this year, said the central bank should be ready to shift its focus to more aggressively pumping credit into the financial system to get the economy going if the recovery appears at risk.  Dallas Fed President Richard Fisher said any further monetary accommodation would have as little effect in boosting the economy as "pushing on a string.""We've done our job. We've restored liquidity to the market, we've leveraged up our balance sheets,"

Fed Watch: Rising NAIRU?-- Brad DeLong reads Greg Mankiw and reaches the conclusion that: Mankiw's broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse--and hence have the government stand back and wash its hands of the situation. Paul Krugman concurs, adding a sense of urgency to the current situation:. I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded…...Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.

Ambivalence is Not a Good Sales Pitch - I really wish Paul Krugman would not be so be tepid in his pronouncements of the efficacy of monetary policy.  His recent articles on what monetary policy can do have been less than inspiring and leave great uncertainty as to whether the Fed can actually do anything.   Here is a prime example: The zero lower bound on short rates really does matter...  So it’s not safe to assume that the Fed can, for example, hit any target for nominal GDP that it chooses...The Fed deserves to be chastised for not doing more....  Wishy-washy calls for more Fed action like the above will not convince anyone, let alone the Fed. Now readers of this blog know that unlike Krugman I do believe the Fed can, for the most part, hit any nominal GDP target that it wants if it so desired.  The reasons for this belief are threefold: (1) Ben Bernanke and other fed officials believe that the Fed could do more; (2) monetary policy was shown to be highly effective in the early-to-mid 1930s, a far worse economic environment than today; and (3) many top economists believe the Fed could do more.  One of these top economists, who happened to win the Nobel Prize for economics, went so far as to argue monetary policy and not fiscal policy is the key to economic  recovery in a depressed economy:

My Reply to Bruce Bartlett - Bruce Bartlett has a new piece summarizing his views on what monetary policy can and can't do for the U.S. economy. Although no names are listed I suspect the excerpt below from his piece is directed to folks like Scott Sumner and me: The problem is that the Fed did increase the money supply a lot... Of course, there has been no inflation because deflation remains the economy’s central problem.That is because all the money created by the Fed never got spent; it just piled up in bank reserves. I explained this problem in my July 16 column. This was the fallacy of the monetarist view. Monetarists just assumed that increases in the money supply would be spent. While it is true that Scott Sumner and me have argued that there would be little need for fiscal policy had monetary policy been doing its job all along no where have said it was simply a case of increasing the money supply more.  Rather we have been making a more nuanced case for more Fed action.  Below is my reply to him.

The Opposite of Monetization - One objection to the Fed’s erstwhile policy of purchasing longer maturity Treasury securities was that the Fed was “monetizing the debt.” I find this objection odd. The Fed had set a near-zero target for the federal funds rate, and it was already committed, if necessary, to maintain this target by purchasing an indefinite quantity of Treasury bills. In practice it hasn’t had to do many such purchases, because there are plenty of private sector buyers willing to “monetize the debt” on their own, and when the Fed purchases other assets, the sellers of those assets go ahead and buy T-bills with the proceeds. But generally, open market operations – consisting primarily of purchases and sales of T-bills – are the normal method by which the Fed enforces its interest rate policy, and accordingly, “monetization” of some sort is inherent in the zero interest rate policy that was already in place when the Fed began its longer-maturity Treasury purchases (and that remains in place today).

Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean? - Mish - Inquiring minds are once again digging deep into money supply questions. They are intrigued by the fact that money supply measures M2 and TMS1 are plunging towards zero, while TMS2 is still sporting a hefty 10+% year-over-year growth. TMS stands for "True Money Supply". The suffix (1 or 2) stands for alternate measures, one including savings accounts and the other not. M2 is a widely used Fed aggregate for money. The idea behind TMS1 and TMS2 is to sort credit transactions from actual money available on demand. I can and will explain in easy to understand terms exactly what is happening and why, along with what it all means.

Interpreting Recent Movements in the Money Supply and Price-Level - In my previous post, I noted how the Fed has recently doubled the supply of base money. At the same time, the price-level (however measured) has shown no correspondingly dramatic change. This led me to question a simple version of a popular theory of the price-level; the so-called Quantity Theory of Money (QTM). Maybe I was a little too hasty. After receiving several thought-provoking comments on that post, I am led to re-think what I was trying to say. The basic idea is that new money used to purchase assets (a la the Fed's MBS purchase program) need not have any price-level effect -- even if the increase in the money supply is permanent.  On the other hand, it seems that it is also possible to square the observed phenomenon with a conventional QTM. Below, I discuss both interpretations.

Close substitutes vs. perfect substitutes - For me, pluots and grapes are close substitutes, though not perfect substitutes. Apply a similar analysis to cash and T-Bills.  At low nominal interest rates they are close substitutes but not perfect substitutes.  T-Bills are of greater use for clearinghouse collateral, and yield a bit more, but they are not liquid in exactly the same ways.  Even if cash and T-Bills are close substitutes, monetary policy will change the banks' mix and so banks eventually will reequilibrate, converting extra cash into AD, one way or another.  But as with the pluot adjustment, this won't happen all at once. Equilibration (and the accompanying AD boost) may be slow, maybe too slow for comfort.

The Work Of Depressions - Krugman - I’ve been surprised by a lot of things since the financial crisis broke, few of them good. One of the truly amazing things, however, is the return of full, 1930s-type liquidationism — the idea that a slump serves a useful purpose, and that stimulating the economy, even through monetary policy, is a mistake. And so we have Raghuram Rajan in today’s FT arguing that with 9.5 percent unemployment, long-term unemployment at record levels, and falling inflation, we need to … raise interest rates: The US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily. With households now struggling with this remaining debt, should we expect them to spend beyond their means again, or ask them to do so? Moreover, if consumers are now going to want fewer houses and cars, a significant number of jobs will disappear permanently. Workers who know how to build houses, or to sell or finance them, will have to learn new skills. This means resources have to be reallocated into other sectors to ensure a robust recovery, not simply a resumption of the old binge. But this will not necessarily be facilitated by ultra-low interest rates.

Fed Should Resume Treasury Purchases if Deflation Risk Grows, Bullard Says - Federal Reserve Bank of St. Louis President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero. “The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released yesterday about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.” Bullard’s stance increases the odds the Fed will make such a move and reject other options should the economy weaken further, former Fed Governor Lyle Gramley said. Other alternatives to aid growth include using communication to plot the path of interest rates or cutting payments to banks on reserve deposits, Chairman Ben S. Bernanke said last week.

Within Fed, Subtle Shift Toward Deflation Concerns - NYTimes On Thursday, James Bullard, president of the Federal Reserve Bank of St. Louis, warned that the Fed’s policies were putting the economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.” The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, came days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so. On Friday, the government will release its estimate of gross domestic product for the second quarter of this year. At the Fed, Mr. Bullard had been associated with the camp that sees inflation, the central bank’s traditional enemy, as a greater threat than deflation brought on by anemic growth. Until now he had not been an advocate for large-scale asset purchases to reinvigorate the economy.

A New Spotlight on Japanese-Style Deflation - In a scholarly paper that was released today James Bullard, President of the Federal Reserve Bank of St. Louis, stated, "The U.S. is closer to a Japanese-style outcome than at any time in recent history".  As everyone knows, the Japanese economy has undergone a period of extremely slow growth with periodic recessions combined with price deflation over the past 20 years.  Bullard’s paper is the latest of a recent realization that deflation is a major threat and that the U.S. could follow Japan into its own lost decade (or two?).  However, Comstock pointed this out over a year ago in a comment dated May 21, 2009, titled "Deleveraging—-U.S. vs. Japan".  In that comment we wrote, referring to Japan, "Now nearly 20 years later, both the stock and commercial real estate markets remain more than 70% off their peaks, while residential land prices are more than 40% below their peak.  Although the optimistic view is that the various stimulative plans by the new administration together with the massive easing by the Fed will help the U.S. avoid the same deleveraging result as Japan, it is exceedingly difficult to see how that will happen".

Bullard and Deflation - The St. Louis Fed President, Jim Bullard, released a paper today that he has written on the possibility of a Japanese-style deflation occurring in the US in the near future. This is mainly a survey of a body of macroeconomic academic literature, and an interpretation of that literature in terms of the current monetary policy debate. This literature is fairly technical, even for your average macro nerd, so I'll try to give you a brief summary. The departure point for Bullard's paper is published work by Benhabib et. al. on "The Perils of Taylor Rules" from 2001. A Taylor rule (discussed here) is a policy rule for a central bank that dictates how the central bank's interest rate target should be set in response to the inflation rate and the "output gap" Why should we be concerned about this? As Bullard argues, much macreconomic analysis and policy discussion is carried on in the context of Taylor rules. Further, the Fed's actual behavior seems to conform to a Taylor rule. In the current context, according to Bullard, the US economy is getting dangerously close to the a state where the nominal interest rate is zero for an extended extended period, and could slip into an extended period of deflation.

Fed Member's Deflation Warning Hints At Policy Shift - A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening. On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis, warned that the Fed’s current policies were putting the American economy at risk of becoming “enmeshed in a Japanese-style deflationary outcome within the next several years.”  The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman, said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

Bullard Remarks Don’t Signal Wider Fed Shift - James Bullard’s line that the Federal Reserve should consider reviving a crisis program to buy government debt to avoid a Japanese-style deflationary trap shouldn’t be seen as a shift in Fed policy.The president of the St. Louis Fed argued in a paper that buying more assets would be more effective to combat a weak economy than keeping a promise that short-term interest rates will remain close to zero for an “extended period.” Bullard is a voting member in the Fed’s policy-making body this year, but his remarks should be viewed more as aiming to provoke a debate on the current policy stance than as a shift in the stance.Chairman Ben Bernanke last week signaled there’s little appetite at the Fed to restart quantitative easing. Supporting this view Thursday — and in a way refuting Bullard’s remarks — Federal Reserve Bank of Dallas President Richard Fisher said he sees little left for the central bank to do to buoy the economy. Fisher isn’t currently a voting member of the policy-setting Federal Open Market Committee.

Japanese Style Deflation - CNBC’s Larry Kudlow had a segment last night about if Japanese style deflation is coming to America. His guest, David P. Goldman of First Things magazine, said that the U.S. today “very closely resembles Japan of the 1990s”. He said that the only thing that can prevent Japanese style deflation from occurring in the U.S. is “American entrepreneurship”.NIA believes deflation is the last thing in the world Americans need to be worried about. Japanese style deflation would be the best possible outcome of our upcoming fiscal crisis, but NIA believes this outcome is nearly impossible. In our opinion, Zimbabwe style hyperinflation is the inevitable outcome. Even if the U.S. had enough “American entrepreneurship” to create 700 new companies as successful as Apple Inc., NIA believes we are still headed towards hyperinflation.

Japanese Monetary Policy (Wonkish) - Krugman - Hmm. I see that Scott Sumner has a post heatedly attacking the idea that Japan is stuck in a deflationary trap; he insists that Japan has deflation because that’s what the Bank of Japan prefers: I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not. He guesses right: that’s not at all the view of those who have been following Japanese monetary policy since the 1990s, and have even talked to BOJ people now and then. I’m sorry to say that the fact is that Japan is in a deflationary trap. You can argue that the BOJ should have done more — and I would. But persistent deflation isn’t a target, it’s what has happened because conventional monetary policy has lost traction and the BOJ isn’t willing to be more adventurous.

Six of one...SCOTT SUMNER has been arguing that Japan hasn't been in a deflationary trap for twn years, from which the Bank of Japan is helpless to extricate the economy. He writes: I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not. And as evidence he notes: The Bank of Japan would never raise interest rates during a period when inflation is “too low,” that would make no sense. I agree. The problem is that the BOJ did raise interest rates during the 2000s, indeed more than once. So although Western economists consider Japanese inflation to be “too low,” it is quite apparent that the BOJ feels differently. Paul Krugman disagrees; he says that the Bank of Japan would love to be rid of deflation but lacks the courage to be more adventurous with policy. That, by itself, seems a little suspicious. I mean, if the central bank really hated deflation and wanted to be rid of it, it would buck up the courage to act, wouldn't it?

The money-inflation connection: It's baaaack! - Atlanta Fed's macroblog - Our St. Louis Fed colleague David Andolfatto declares it is time to bury the old saw that says when it comes to inflation, follow the money: Andolfatto goes on to note that the monetary base—the sum of currency in circulation and the banks' reserve balances held at the Federal Reserve (at that page, search "reserves")—more than doubled since fall 2008, while the rate of inflation fell.That's certainly true, though most versions of the quantity theory applied to monetary policy discussions lean on broader measures of money—for no better reason than those measures help the theory fit the facts. Specifically, since the 1980s the phrase "inflation is everywhere and always a monetary phenomenon" has in effect meant "inflation is everywhere and always a monetary phenomenon when we measure money by M2."And here's an interesting thing. If you look at the relationship between M2 growth and core inflation over the past decade and a half, it appears that the money-inflation nexus has been gaining in strength:

U.S. may face deflation, a problem Japan understands too well - For now, the dominant theme of the nation's economic policy debate remains centered on the comparative dangers of deficits and inflation. However, economists across the political spectrum — here and abroad — are talking more often about the potential for deflation.When deflation begins, prices fall. At first that seems like a good thing.But soon, lower prices cut into business profits, and managers begin to trim payrolls. That in turn undermines consumers' buying power, leading to more pressure on profits, jobs and wages — as well as cutbacks in expansion and in the purchase of new plants and equipment.Also, consumers who are financially able to buy often wait for still lower prices, adding to the deflationary trend.All these factors feed on one another, setting off a downward spiral that can be as hard to escape from as a stall in an airplane.

Deflation Risks - Krugman - Good news: more people at the Fed are taking the risk of a Japanese-type trap seriously. But not all of them: “I think the fear of deflation in and of itself is probably overblown, from my perspective,” Charles I. Plosser, president of the Philadelphia Fed, said last week in an interview. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said.  Atrios asks whether this makes sense. No, it doesn’t. I mean, if we’re talking about the risk of turning Japanese, shouldn’t we, um, look at Japanese experience? Here’s Japan’s monetary base — the sum of bank reserves and currency in circulation — from 1995 to 2005:  All that money sitting there — and deflation continued apace. I remember Taka Ito telling me that the only consumer durable selling well was … safes. When you’re in a liquidity trap, the size of the base doesn’t matter.

Drip after drip of deflation data – Today’s release on manufacturing activity by the Richmond Fed is pretty ghastly, as you would expect given that the effects of fiscal stimulus are now wearing off at accelerating pace – before the happy handover to the private sector is safely consummated – and given that the structural East-West imbalances that lay behind the global crisis are getting worse again. The expectations index for the US 5th District is crumbling: This follows yesterday’s horrendous fall in the Texas business activity index from the Dallas Fed, which fell from -4 in June to -21 in July. “Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June,” said the bank.

Some Thoughts on Deflation - John Mauldin - The debate over whether we are in for inflation or deflation was alive and well at the Agora Symposium in Vancouver this this week. It seems that not everyone is ready to join the deflation-first, then-inflation camp I am currently resident in. So in this week’s letter we look at some of the causes of deflation, the elements of deflation, if you will, and see if they are in ascendancy .. This week, the theme in various publications was the lack of available credit for small businesses, with plenty of anecdotal evidence. This goes along with the surveys by the National Federation of Independent Businesses, which continue to show a difficult credit market.Businesses are being forced to scramble for needed investments, generally having to make do with cash flow and working out of profits. This is an interesting quandary for government policy makers, as 75% of the “rich” that will see the Bush tax cuts go away are small businesses.

Mysteries Of Deflation (Wonkish) – Krugman - Jon Hilsenrath has a nice piece on the puzzles of gradual deflation, Japan-style. But I’m not sure whether readers will understand quite what the puzzle is — and they certainly wouldn’t gather from the article that there’s actually a literature about this puzzle.So here’s the underlying puzzle: since Friedman and Phelps laid out the natural rate hypothesis in the 60s, applied macroeconomics has relied on some kind of inflation-adjusted Phillips curve, along the lines of Actual inflation = A + B * (output gap) + Expected inflation where the output gap is the difference between actual and potential output, and A and B are estimated parameters. (The output gap is closely correlated with the unemployment rate). Expected inflation, in turn, is assumed to reflect recent past experience. This relationship predicts falling inflation when the economy is depressed and the output gap is negative, rising inflation when the economy is overheating and the output gap is positive;\

Deflation Defies Expectations—and Solutions - The old bogeyman of deflation has re-emerged as a worry for the U.S. economy. Here's something else to fret about: After studying more than a decade of deflation in Japan, economists have slowly realized they have no idea how it works. Deflation is usually associated with a Great Depression-like drop in demand. Consumer prices, incomes and asset prices fall. Interest rates go to zero, as low as they can go. As prices and incomes fall, the cost to borrowers of servicing debt does not, sucking life out of the economy and pushing prices down further. A bad situation, in short, gets worse. In 1932, U.S. consumer prices fell 10% and between 1929 and 1933 they fell 27% in all. Economists don't have good answers. "We don't know how deflation works," says Adam Posen, a member of the Bank of England's monetary policy committee who has been studying Japan since 1997. "We don't have a way of rationalizing steady, several-year flat deflation," he says.

Deflation: Pay Close Attention -- Inflation in the US is now just below 1%, whether you look at the CPI, the Cleveland Fed's measure, or the Dallas Trimmed Mean CPI. The Fed's favorite, the PCE, is also approaching 1%. The Dallas numbers are a little behind, but they are at all-time lows.The classic definition of deflation is an economic environment that is characterized by inadequate or deficient aggregate demand. Prices in general fall, and normal economic relationships start to fall apart.Deflation is also associated with massive wealth destruction. The credit crisis certainly provided that element. Home prices have dropped in many nations all over the world, with some exceptions, like Canada and Australia. Trillions of dollars of "wealth" has evaporated, no longer available for use. Likewise, the bear market in equities in the developed world has wiped out trillions of dollars in valuation, resulting in rising savings rates as consumers, especially those close to a wanted retirement, try to repair their leaking balance sheets.

Inflationistas And Deflationistas - Krugman - A followup on the question of deflation risks: it’s worth bearing in mind that the last year and a half has been a fairly clean test of alternative views about how the economy works. When the economy slumped, budget deficits skyrocketed, and the Fed began large-scale asset purchases, there were two kinds of people: people who divide people into two kinds, and people who don’t On one side were people who said that deficits would drive interest rates way up, crowding out private investment, and that all that money printing would lead to high inflation. On the other were those who said that we’d entered a Japan-type liquidity trap, which meant that (a) there was a savings glut, so deficits would not crowd out private investment and interest rates would stay low (b) increases in the monetary base would just sit there, (c) the risk was deflation, not inflation.And so far, the inflationistas have been completely wrong, the deflationistas completely right. This wasn’t a coincidence.

The Market Is a Hologram Masking Deflation - Since the global financial crisis started in earnest in 2008, there has been a debate raging in economic circles. Is the economy experiencing inflation or deflation? The first consideration in solving this riddle is to agree on terms. Rising or falling prices at your local grocery store is 'price inflation' but not inflation as defined in terms of an expanding money supply.* Getting back to what happened in 2008, when the markets hit the skids, the government reacted by increasing the money supply; just as they did after the 1987 crash, the Long Term Capital Management crisis, the dot-com crash, 9/11, and the sub-prime crash. But unlike any of those instances, the money supply kept shrinking and prices kept deflating.At first it looked like the liquidity stimulus was going to revive the economy and there was an anemic bounce in 2009, but that death rattle has now expired and the primary trend of falling real estate prices, falling wages, and deteriorating bank balance sheets has reasserted itself and threatens to take the economy down again dramatically (read: depression). The question of a 'double dip' is misleading. The economy started down a depressionary slide in 2008 and hasn't looked back.

Deflation Revisited (The Studio Version) The Automatic Earth has been predicting a devastating deflationary period for as long as we've been in existence, and prior to that we did so at The Oil Drum Canada. We have always and consistently said that worrying about inflation in the next few years is completely misguided.  The debt deflation that is already underway will be so destructive to our lives and societies that we must be aware of what is coming in the short term and what we can do to prepare for it, instead of worrying about a possible inflationary period that may or may not follow afterwards. The deflation issue has recently become much more topical, as the idea is spreading now that the larger trend in the markets has turned down. It is time to review the mechanism and rationale for deflation, given that the mainstream press is suddenly all over it.

Clockwise Spirals - Krugman - Why are deflationistas like me worried about the possibility of deflation? In a word, history. Back when I learned macroeconomics — this was when dinosaurs roamed the earth, we performed simulations using stone axes, and students still learned about fiscal policy — one thing we were taught was that if you plot unemployment against inflation, the economy tends to go through clockwise spirals: high unemployment leads to falling inflation, then inflation stabilizes and maybe rises again once unemployment comes down. All of this was to be understood in terms of a Phillips curve in which actual inflation at any point in time depends both on the unemployment rate and on expected inflation, and expected inflation gradually adjusts in the light of experience. These clockwise spirals were really clear in cases where a severe recession produced a spike in unemployment and disinflation. Here’s the slump of the mid-1970s:

Dipping and Deflating - As the Federal Reserve puts a brave face on the recent spate of weak U.S. economic data, one has to hope that it is not underestimating the very real risk of a double-dip U.S. recession by early next year. A double-dip recession now appears all too probable and such an occurrence would more than likely tip the U.S. economy into deflation. A Fed once again behind the policy curve would only exacerbate the long-run damage that such deflation can wreak. The reason the Fed should guard against a double-dip recession is not simply that recent U.S. economic data points to a marked slowing in the economy. It is rather that the U.S. economic recovery has been very weak to date. This has been the case despite the extraordinary depth of the recession that preceded it and despite the remarkable amount of fiscal support provided to the economy.

The Problem With Rosie On Inflation – I highly respect David Rosenberg at Gluskin Sheff, one of the few mainstream economists to call the crash, and whose observations about the markets are always worth reading. This morning he came out with a long-term analysis of inflation which I don’t think is right. I urge you to read his commentary, below, but in general he sees one to two years of continuing “deflationary” pressure that favors the bond market and he says “inflation” will be at zero. He then see the beginning of “inflation” as the result of war and the need of government to fund it. The result, he says, will be high inflation and perhaps hyperinflation. While you would think as a fellow doom and gloomer I would hop on his bandwagon, but for the most part I think Rosenberg’s analysis of the forces behind inflation and deflation are wrong.

Inflationista! - Joachim Fels just isn’t giving in.Here’s what Morgan Stanley’s central-bank watcher had to say on his recent theme of inflation on Thursday — never mind the contrary case building for deflation: If we are right, then central bankers and investors may be in for a rude awakening once it becomes clear that monetary policy has remained too expansionary for too long. Then, monetary policy will face an awkward choice between allowing inflation to run its course and raising interest rates aggressively despite high debt levels. Our suspicion is, as we have explained in the past, that they would opt for the former – allow higher inflation for some time in order to help reduce the debt burden.

Inflation versus Deflation - Deflation is a fact. It is happening now, it is real, and we see it in the actual data.Inflation does not exist presently. It is, at best, an opinion. It might happen in the future, or it might not — but it does not exist, at least on a measurable form, presently.What about deficits? Debt? Overspending? QE/ZIRP/Low rates? Well, Japan cut rates, wildly overspent, borrowed like loons — and they had a decade plus of deflation, not inflation. We may not be Japan, but they are the 2nd largest economy in the world, and represent an actual economy that behaved, well, the way the US is.Until the slack in the labor market is reduced — near record low weekly hours, 16% U6 unemployment, etc. — inflation simply is not a threat.

The Aftermath of the Global Housing Bubble Chokes the World Banking System. Only a Coordinated Loan Massacre Could Defeat a Japanese-Style Dead-and-Dying-of-Debt Kamikaze. Hell Approaches Us All, But Only For An Extended Period. -Sometimes the complexity of the world is a ruse, and seeing the overwhelming future of our fortunes is strangely simple. Our past and future credit crisis is but one case in point. Remember when fear and failure wrecked markets wising up to the fallout of debt given to anybody for anything, but especially for buying houses? Naturally our financial leaders around the world took the radical steps required to reduce the debt created in a massive credit bubble. Oh, sorry, that was my fantasy world I was talking about. What our leaders are doing is correcting a severe cyclical recession. What our reporters are doing is covering a severe cyclical recession. What sublime kabuki theater. Back in the real world, the destruction of debt required to cure a credit bubble hasn’t been done. That means the reason for the new credit crisis is no different than during that past time of fear and failure – except that now we have new magnificent malignant clusters of sovereign debt serving as a sort of hand-held fan covering the unclothed emperor. Does that count as cover?

What Happens if the Interest Rate on Reserves Goes to Zero? - The Fed is currently paying interest on reserves at 0.25%. Bernanke, in his session with the House panel, made clear what the Fed's position is:  The rationale for not going all the way to zero has been that we want the short-term money markets like the federal funds market to continue to function in a reasonable way because if rates go to zero there will be no incentive for buying and selling federal funds, overnight money in the banking system, and if that market shuts down ... it'll be more difficult to manage short-term interest rates, for the Federal Reserve to tighten policy sometime in the future.  That being said, it would have a bit of an effect on monetary policy ... (and) we'd certainly consider that as one option. What would happen if the IROR on reserves went to zero? Would the fed funds market shut down? Currently there is a massive quantity of reserves in the system, but nevertheless there is an active federal funds market (though much less activity than in normal times). Why?  A surprising feature of financial markets currently is that the effective fed funds rate (currently at 0.18%) is lower than IROR (0.25%) - there is something inhibiting arbitrage here, as without that the effective funds rate should be 0.25%.

Dropping $100 Bills on the Sidewalk, or Even More on Excess Reserves - The sarcasm of the title of my recent post notwithstanding, there are some things economists understand to be true that are. Among those: People respond to incentives  As with the Supreme Court, economists extend this principle to organizations, on the (generally correct) idea that organizations are made up of people who act in their own best interest.  (It isn’t, pace the old joke, that they wouldn’t pick up a $100 bill lying on the sidewalk; it’s that they would never believe someone would drop one there in the first place.)  This is how you get to teach courses in “Organizational Behavior” and the like—it’s not the madness of crowds if they all act “rationally” on an individual basis. In economic models, as I obliquely ,mentioned last post, there is no risk-free arbitrage: if there were, “the market” would eliminate it, because it would mean someone was dropping $100 bills on the sidewalk, and the “the market” would make certain that person (or organization) was bankrupted, or at least suffered enough of a loss to change its behavior.

Some observations regarding interest on reserves - ATL Fed macroblog - One of the livelier discussions following Federal Reserve Chairman Ben Bernanke's testimony to Congress on monetary policy has revolved around the issue of the payment of interest on bank reserves. Here, for what it's worth, are a few reactions to questions raised by that discussion: Is interest paid on reserves (IOR) a free lunch? Ken Houghton has the following objection: "… in September of 2008, the Fed decides to pay interest on reserves—including Excess Reserves. The banks can now make 25 times what they pay in interest, risk-free, just by holding onto money. The Fed is, essentially, leaving $100 bills on the sidewalk." I'm not sure exactly where the "25 times" comes from, but it seems to me that the most obvious transaction would be to borrow in the overnight interbank lending market—the federal funds market—and then "lend" those funds to the Fed by placing them in the Fed's deposit facility. The differential between the return on those options is a good deal lower than a multiple of 25. In fact, as many have noted before, the puzzle is why the gap between the funds rate and the deposit rate exists at all.

Bring the Chopper ‘Round, Again! - Bryan Caplan writes: Why are [people] saving in the first place? Once again, there are two theories: Theory #1: People just don’t have anything they want to buy. Theory #2: People want a buffer. They aren’t comfortable with their current asset cushion, so they’re saving in order to return to their comfort zone. Theory #1 is wholely implausible. There’s tons of stuff that people still covet. The truth, then, lies in Theory #2: People will start spending again once they feel like they’ve got enough breathing room. If theory #2 is the truth, then there is no situation in which “helicopter drops” could fail to boost demand, save for a puzzling situation where we run out of gasoline, or paper and ink…but then again, just put some zeros behind peoples’ bank account balances. That doesn’t even require a helicopter! And if it doesn’t work the second time, take another flight. And another. At some point, people will no longer demand excess cash balances, and will begin spending like crazy. If the Fed credibly commits to permanently increasing the monetary base in this way, it would certainly change NGDP expectations.

The Death of Paper Money - People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money. "Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Fetters of gold and paper - The world economy is experiencing tensions arising from inflexible exchange rates – particularly the dollar-renminbi peg and the Eurozone. Drawing on lessons from the gold standard, this column points out that an international monetary system is a system – nations’ policies have spillovers. Now, as in the 1930s, surplus nations’ refusals to increase spending force deficit countries to contract. Keynes drew this lesson from the Great Depression, which is why he wanted measures to deal with chronic surplus countries. Sixty-plus years later, we seem to have forgotten his point.

What if the Fed Bought Euros? - Scott Sumner writes, The US can't really use the exchange rate as a policy tool, it is too controversial. And so, we have to turn to less controversial tools, like pouring more wood on what the CBO says is a fiscal fire.  That is not what Sumner says, of course. He says that the Fed can just announce a target for nominal GDP, and the markets will obey. I find that highly implausible for nominal GDP, but I do find it plausible for the exchange rate. If the Fed announced a policy of "20 percent weaker dollar or bust," and proceeded to buy euros, yen, and other currencies, by golly, I do not think that private speculators would try to get in the way. And if foreign governments tried to get in the way, that would probably lead to some sort of worldwide monetary expansion that I imagine would make Sumner happy.One point to make here is that this represents another reason to reject the notion of a liquidity trap. If the Fed runs out of T-bills to buy, it can always buy foreign currencies.

Fed’s Report Shows Slowing Growth - NYTimes - The report, known as the beige book, described an economy struggling under the weight of a depressed real estate market, high unemployment and wary consumers. The manufacturing sector especially appears to be losing steam. The Federal Reserve regional report, said manufacturing activity in most of the 12 districts experienced some growth since the last report in early June. But the pace of activity “slowed” or “leveled off” in half of them, including Cleveland and Chicago. In both regions, automobile manufacturing grew, while steel manufacturing declined.  Business contacts in Atlanta and Chicago said economic activity slowed in June and July, with significant worries in Atlanta related to the Gulf Coast oil spill. Almost all districts reported that they had “sluggish” housing markets as a result of the April expiration of the government’s homebuyer credit. Commercial and residential construction activity was weak in almost all districts. Cleveland, in particular, said it did not expect an improvement in new home construction this year.

Beige Book Highlights Weariness of Consumers - The strength of U.S. consumer represents one of the biggest question marks about the recovery. The latest beige book report from the Federal Reserve didn’t offer much reassurance that Americans are ready to loosen the purse strings. Many districts reported spending was solid for necessities, but discretionary and big-ticket purchases remain under pressure. Retailers are noting some improvement from last year, but the gains benefit from a comparison to a terrible spring in 2009 and many business owners aren’t optimistic about the next few months, which include the important back-to-school season. Here are some highlights from each of the 12 districts, focusing on consumer spending and retail:

Chicago Fed: Economic activity declined in June - From the Chicago Fed: Index shows economic activity declined in June Led by deterioration in production- and employment-related indicators, the Chicago Fed National Activity Index declined to –0.63 in June, down from +0.31 in May. Three of the four broad categories of indicators that make up the index made negative contributions in June, while the sales, orders, and inventories category made the lone positive contribution.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:  A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. This is a compositive of other indicators. June was definitely a weak month.

More disappointing news - Just a quick note on a couple of new data releases today. The Chicago Fed National Activity Index aims to summarize in a single number 85 separate measures of real economic activity that are now available for the month of June. The CFNAI fell from +0.31 in May to -0.63 in June. Berge and Jorda found the CFNAI to be one of the most useful indicators for summarizing the state of the economy, with a value for the 3-month average below -0.72 often reliably signaling an economic recession. The good news is that the current 3-month average still stands at -0.05. But two more months like June would definitely be worrisome.Today we also learned that last month was the worst June on record for new home sales. Part of my optimism (at least relative to some observers) had been based on the idea that sectors like housing and autos really couldn't get much worse than they had been. Seemed like a nice idea at the time.

Fed's Fisher sees 'suboptimal' growth pace ahead - Richard Fisher, the president of the Dallas Federal Reserve Bank, said Thursday he was worried the economy "will be sailing forward at a suboptimal speed." In a speech in San Antonio, Fisher said recent data point to "a slightly weaker national outlook, with growth from the first quarter onward likely to fall below 3% for a prolonged period." Fisher blamed Washington's "capricious" manner for drafting health-care legislation and other laws, which he said had forced businesses to the sidelines. "No amount of further monetary policy accommodation can offset the retarding effect of heightened uncertainty over the fiscal and regulatory direction of the country," Fisher said.

SF Fed Official: Economy Suffering From Temporary Weakness - The recent slowdown in the U.S. economy should prove transient, although it will take years for the nation’s unemployment rate to fall toward more acceptable levels, an official at the Federal Reserve Bank of San Francisco said Wednesday. “The recent softness in the economic data looks much more like a bump in the road of what we already thought would be a gradual recovery, rather than a swerve into the ditch,” said John Williams, the bank’s executive vice president and director of research. He noted that “monetary policy remains highly supportive of recovery” and “interest rates are extraordinarily low.”

ECRI WLI in Negative Territory 8 Consecutive Weeks, Index Drops to -10.7 - The ECRI's Weekly Leading Indicators (WLI) has now fallen 8 consecutive weeks and has been below -10 for two consecutive weeks. click on chart for sharper image..Given the July bounce in the stock market, the ever-optimistic me expected some sort of anemic bounce in the WLI as well, but that bounce never came. Of course, it would be helpful to know the makeup of WLI (components and percentages), but unfortunately that information is proprietary. Nonetheless, we can say there has never been a WLI plunge in history of this depth and duration, nor any dip at all below -10 that has not been associated with a recession. Whatever the ECRI sees preventing them from issuing a recession alert remains a mystery.Then again, as I pointed out two weeks ago in ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call? the ECRI is literally paranoid about calling a recession that does not occur. So they wait until it is blatantly obvious we are in one before issuing a warning.

US faces prolonged sluggish growth prospects - A year after bouncing back from a brutal recession, the US economy is losing steam and may enter a long period of sluggish growth inadequate to ease high unemployment, analysts warn. A series of data the past month underline a slowdown in economic activity in the world's largest economy -- retail sales, new home construction, manufacturing, inventory building and exports were all weaker than expected. Consumer confidence, a key barometer, has plunged to its worst level in five months on concerns over unemployment and business conditions, according to a closely-followed survey released Tuesday.

Marc Faber: Sit Still, This Is Going to Hurt - My views are not all that negative. I think they're just realistic. I want to face reality. You have people like Paul Krugman who thinks we should have another bubble to pull us out of this. He actually said that. But he said the same thing in 2001. And you know how that turned out.  The Fed doesn't seem to have learned anything at all from its mistakes. Their current policy of cutting rates to zero is designed to create sustainable growth, but they've created larger and larger volatility in markets. There are many unintended consequences of their actions.The oil bubble of 2008 is a good example.,,, The Fed doesn't pay any attention to asset bubbles when they grow. That's their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It's a very asymmetric response and it has many unintended consequences

Bill Gross Ponders "Deep Demographic Doo-Doo" - Please consider Private Eyes: The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do.The preceding analysis does not even begin to discuss the aging of this slower-growing population base itself. Japan, Germany, Italy and of course the United States, with its boomers moving toward their 60s, are getting older year after year. Even China with their previous one baby policy faces a similar demographic. And while older people spend a larger percentage of their income – that is, they save less and eventually dissave – the fact is that they spend far fewer dollars per capita than their younger counterparts. No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next 5–10 years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise.

David Rosenberg raises odds of double-dip recession to 67% - Some market players may be breathing a sigh of relief that the economic recovery remains on solid footing, with signs European growth has picked up heading into the third quarter Leave it to David Rosenberg, one of Bay Street’s well-known bears, to think otherwise. In his Monday note to clients, the chief economist and strategist at Gluskin Sheff + Associates said he has raised the odds of a double-dip recession in the United States from 45% a month ago to 67%, based on his firm’s in-house economic modelling.In his note, he cited yet another decline in the Economic Cycle Research Institute’s index of weekly leading indicators (or ECRI WLI). The index — a composite of economic factors ranging from industrial prices to housing — is designed to pick up swings in economic activity ahead of other indicators. And for the week of July 16, ECRI reported that its growth rate, which is designed to minimize monthly fluctuations, fell 10.5%. That marks the seventh consecutive week that the growth rate has dropped.

Chance of Double-Dip US Recession is High: Shiller - The state of the U.S. economy is worrisome and there is a high possibility of a double-dip recession, one of the property market's most well-known economists said Tuesday. Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor's S&P/Case-Shiller home price indexes, told Reuters Insider he does not know where home prices may be headed, but believes the economy may be on a precarious path.  "For me a double-dip is another recession before we've healed from this recession ... The probability of that kind of double-dip is more than 50 percent," Shiller said. "I actually expect it."

Double Dip: Off the Cone and On the Table - After fervently denying for months the remote possibility of a so-called “double dip” recession, as if anyone can predict an unknowable future, even the most ardent of green-shooters find their proofs of nascent improvement withering away in the face of a host of data that perhaps suggest a funny thing happened on the way to economic recovery.We would venture to suggest a double dip recession is unlikely, but for completely different reasons. Chief among them is that, as far as we can tell but only the National Bureau of Economic Research, arbiter of the nation’s business cycles, knows for sure, we never actually emerged from that recession which began officially, according to NBER, in December 2007.

A triple dip? - Michael Boskin:...Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.These are not rare occurrences. Around the same time, Germany had this type of double dip and the UK a quadruple dip. In the early 1980’s, the UK, Japan, Italy, and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession.

Double Dips - Michael Boskin writes that double dip downturns are more the rule than the exception. I find this to be a very misleading article. What he is writing about is what happens in an actual recession when sometimes real GDP does bounce up for one quarter before resuming its fall.But that is not the impression the article actually presents. Most readers will think he is talking about a recovery -- when the economy experiences several quarters of sequential growth and surpasses the prior peak before quickly falling into a second recession.As he correctly points out this happened once, after the 1980 recession when the economy rebounded strongly and surpassed the prior peak two quarters after the bottom.But it is the only example of a double dip recession in the post WW II US history --as this table demonstrates. It is a table of real GDP in recoveries with real GDP at the economic trough set equal to 100. the quarters where real GDP is less than the prior quarter are in red. The red quarters in the 1980 column are the 1981-82 recession.

Has the Recession Really Ended? - In the course of a discussion this past week, I made the point that I do not believe our economy has ever truly come out of the recession which officially began in December 2007. The National Bureau of Economic Research (NBER) is responsible for measuring the start and end dates for economic contractions and expansions. Why is it that the NBER has never officially declared an end to the recession? Interesting, very interesting.On this topic, a good friend shared with me a fabulous piece which addresses our current economic health and the major hurdles for our future economic growth and prosperity. This piece, Quarterly Review and Outlook by Hoisington Investment Management in Austin, TX, addresses these hurdles in forthright, layman’s fashion. I strongly encourage readers to take the ten minutes necessary to scan this research piece. The ’sense on cents’ provided by Hoisington will clarify a lot of the daily noise and nonsense circulating throughout our nation.

How Much Will The Economy Slow? - Amidst all the great earnings reports coming from U.S. companies this week there is a disqueting talk of a real slowdown ahead in the economy. I was reminded of it Tuesday morning when PIMCO's Mohamed El-Erian stated on Bloomberg TV that the indicators his firm watches most closely (and presumably trusts the most) show that "the economy continues to lose momentum." Also, mutual fund giant Vanguard released its economic forecast Tuesday in which it noted that "Near-term risks remain tilted toward the downside owing to important headwinds involving real estate, consumer balance-sheet repair, and, most recently, the sharp transition toward fiscal austerity in Europe." Vanguard's analysts put the probability of a double-dip recession at 20%. That may sound optimistic but it's unusual, they note, to even be considering recession's possible return  so early in an economic recovery. Also, there's a lot of room for slowdown before you trip the double-dip switch.

Q2: real annualized GDP growth slows to 2.4% -From the BEA: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent. A few key numbers: "Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first."PCE is slowing.Investment: Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.Residential investment was boosted by the tax credit and will decline in Q3.

Today's GDP Report: Getting Real About the Recession - So it was a humdinger, after all. Friday morning's GDP report, which is the first stab at estimating growth in the just completed second quarter of 2010, also provides some significant revisions to prior quarter growth estimates. The latter news is perhaps bigger than the 2nd quarter's 2.4% gain—a bit below the consensus expectation of 2.7%. But what should really rock the boat is that the Commerce department did revisions across the full span of the pre-recession and post-recession period. While this big a revision across multiple quarters  is not unprecedented, it will be an eye opener to many who commonly compare this recession to ones that occurred in the past two decades. What's now clear is those comparisons were apples to oranges. What we suffered in the past recession—the depth of the contraction— hasn't been seen since the 1940s. 

The Great Growth Recession? - According to the BEA's advance estimate, the US economy continued to grow in the April-June quarter, but at a not-very-fast 2.4% annual rate.That's not fast enough to bring the unemployment rate down. Since output growth has been positive for a year now, we can't really say we're in a "recession," but with growth too slow to reduce unemployment, the word "expansion" doesn't really feel right. An informal term for this positive-but-slow growth state is "growth recession." While we shouldn't read too much into one quarter's (preliminary) data, it does raise the question of whether or not the "great recession" will be followed by the "great growth recession."

Q&A: Romer Reacts to GDP Data Gross domestic product came in Friday slightly below economists’ expectations at a 2.4% annual growth rate for the second quarter, and some raised concerns about the second half of this year. Christina Romer, who chairs the president’s Council of Economic Advisers, spoke with the Journal about the report. She said that there is room for the government to do more to promote economic growth and jobs, and noted some encouraging signals, including a higher savings rate that indicates much of the necessary consumer retrenchment may be past. Here is a Q&A.

Slow and slower - MONTHS of disappointing economic figures have now culminated in a disappointing advance estimate for second quarter output growth. Real GDP increased at a 2.4% annual pace in the second quarter—less than forecast and the lowest rate since the third quarter of last year. Real GDP growth for the first quarter was revised back up to 3.7%, a full percentage point higher than had last been estimated. But 2.64 percentage points of that rise was attributable to inventory shifts (a transient factor that tends to power growth early in recoveries). Meanwhile, the annual revision of income and product account data subtracted from previous growth totals for 2007, 2008, and 2009. For the moment, it looks as though growth is leveling off, even as real output has yet to attain its pre-recession level

Petroleum Imports Play Complex Role in GDP - Petroleum imports may shave more off GDP than some economists think, according to a recent analysis by St. Louis forecasting firm Macroeconomic Advisers. The firm is forecasting that GDP grew 2.3% in the second quarter, compared with a consensus estimate of 2.5%.But part of the firm’s lower-than-consensus estimate is a function of how the government adjusts for seasonal fluctuations in petroleum imports. Here’s how it works: Most economists derive their import forecasts using the Census Bureau’s foreign trade figures, which are released in advance of the Bureau of Economic Analysis’s GDP report. The Census figures are reported on a seasonally adjusted basis, and some forecasters have assumed that the BEA uses the same adjustment factor. But an analysis by economist Ben Herzon at Macroeconomic Advisers seems to show the BEA doesn’t use the exact same numbers, and the difference typically raises the growth of petroleum imports in the second quarter, relative to the figures already reported by Census. “It appears the BEA is making a further adjustment,” he says.

Revisions: Real GDP and PCE far away from previous peak - These two graphs show the revisions for real GDP and PCE. The recession was clearly worse than originally estimated (we suspected this already using Gross Domestic Income).  In fact real GDP in Q2 2010 was lower than originally reported for Q1 2010. And annualized real GDP is still 0.85% below the pre-recession peak. This means that real GDP would have to grow at a 3.4% rate over the nextquarter to reach the recession peak.This shows that St Louis Fed President Bullard was too optimistic in a speech last month. From Bullard in June: The Global Recovery and Monetary Policy ...I disagreed with him, and pointed out that GDI suggested downward revisions.Real PCE was revised down even more.Annualized real PCE is now 1.1% below the pre-recession peak, and would have to grow 4.3% over the next quarter to reach the previous peak. Cleveland Fed President Sandra Pianalto had it right in February: When the Small Stuff Is Anything But Small

EconomPic: Great Recession was Worse than Thought - I detailed that Q1 GDP was revised up one full point... great news right? Not when past quarters have been revised down. Per Calculated Risk:The recession was worse in 2008 than originally estimated.Q1 2010 was revised up, but Q3 and Q4 2009 were revised down. So the recovery is a little weaker than originally estimated.On a cumulative basis over this time frame, the current level of GDP is 0.8% smaller than previously estimated.

Fed Outlook Now Looks Too Rosy - It was just over a month ago the Federal Reserve downgraded its outlook for the economy slightly, citing the financial market fallout from Europe’s debt crisis. But Friday’s gross domestic product report reinforces a view that the Fed’s downgraded outlook already looks too rosy.  At its last meeting June 22-23, the Fed’s policy-setting body trimmed its GDP prediction to around 3.3% this year and to some 3.8% in 2011. Fed Chairman Ben Bernanke stuck to that scenario in testimony before Congress last week, probably more out respect for the Federal Open Market Committee than because he’s convinced they are still right. Second quarter GDP growth, at 2.4%, was well below the forecast. Many private analysts see the economy continuing to languish at a slow pace.  In the latest Wall Street Journal survey published July 15, they forecast, on average, that growth will come in just below 3% both this year and next, also below the Fed’s forecast.

We're Number One! - Krugman - I’ve seen a peculiar meme surfacing here and there lately — the assertion that people like me are exaggerating how bad our current difficulties are, that things were actually worse in the 70s and 80s. I wonder where that’s coming from. The truth is that this really is the big one. Catherine Rampell recently updated the recession comparison chart, showing declines in employment. Here’s the percentage decline in employment in recessions since 1970:  We’re really number one, by that standard.But wasn’t the unemployment rate higher in the past? Well, in 1982, although not in the 1970s, it was briefly a bit higher than the peak this cycle:But back then the “full employment” level of unemployment was higher, so the increase wasn’t as large; more important, most of the unemployment was short-term, nothing like the deeply corrosive long-term unemployment we’re facing now:

A New Approach to Estimating the Natural Rate of Unemployment The non-accelerating inflation rate of unemployment (NAIRU) is frequently employed in fiscal and monetary policy deliberations. The U.S. Congressional Budget Office uses estimates of the NAIRU to compute potential GDP, that in turn is used to make budget projections that affect decisions about federal spending and taxation. Central banks consider estimates of the NAIRU to determine the likely course of inflation and what actions they should take to preserve price stability. A problem with the use of the NAIRU in policy formation is that it is thought to change over time (Ball and Mankiw 2002; Cohen, Dickens, and Posen 2001; Stock 2001; Gordon 1997, 1998). But estimates of the NAIRU and its time variation are remarkably imprecise and are far from robust (Staiger, Stock, and Watson 1997, 2001; Stock 2001).

Beveridge Worries - Krugman - Apropos this post, Mark Thoma reminds me that he wrote about the shifting Beveridge curve a little while ago, linking to David Altig. Here’s the worry, and the puzzle: in general, we expect high unemployment to be associated with low numbers of job vacancies, loosely speaking because employers, facing a buyers’ market, should be able to fill positions quickly. An upward shift in this relationship might therefore indicate a worse-functioning job market — say, because employers find a higher proportion of the unemployed unsuitable workers. And in the past, shifts of the Beveridge curve relating unemployment to vacancies seem to have been associated with movements in the NAIRU.So now we face what looks like an abrupt shift for the worse:  What’s driving this shift? One scary possibility is that we’re rapidly developing a case of Eurosclerosis, as the long-term unemployed come to be seen as unemployable. Another possibility is that it has something to do with the housing market: workers are trapped in place by homes they can’t sell, or by negative equity, and can’t move to where jobs are.

Blunt opinions, supported elsewhere but not here -The current downturn is a mix of AD and real shocks, in uncertain proportions, and in a manner which is hard to separate empirically.  It is now obvious there is a lot of structural unemployment and there is a quick and probably unjustified rush to define it all as AD-influenced unemployment turned sour.  The structural theories have their problems, but they can better explain why corporate profits are high and can better explain the distribution of unemployment across income and educational classes.  The regional distribution of unemployment is persisting because of labor immobility, which involves both AD and structural issues.  The sectoral shift view is more about shifting out of optimism-linked activities, within any particular sector, rather than about shifting out of construction and finance per se.

Recession in U.S. Was Even Worse Than Estimated, Revisions Show - The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to revised figures. The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the Commerce Department said today in Washington. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942.  “We do tend to get bigger revisions at turning points in the economy,” Steven Landefeld, director of the Commerce Department’s Bureau of Economic Analysis, said in a press conference this week. On the more positive side, “in the past, we’ve tended to undershoot the recovery” as well, he said.

Stimulus: The depression that might have been | The Economist - THE big topic of discussion in the economics world today is the release of a new paper by Alan Blinder and Mark Zandi estimating the impact of all government interventions deployed to combat the Great Recession—two rounds of stimulus, financial stabilisation measures, and broader Fed activity. Here's what they find: In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation...They find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.

The Impact of Another Kind of Stimulus - On Wednesday, Alan Blinder, the Princeton economist and former Federal Reserve vice chairman, and Mark Zandi, chief economist of Moody’s Analytics, will release a new analysis of the federal government’s response to the Great Recession. As far as I know, it’s the first serious attempt at analyzing the effect both of the stimulus programs passed by Congress and of the various financial-market policies put in place by the Fed, the Treasury and Congress. My colleague Sewell Chan has the details.

How the Great Recession was brought to an end (Alan Blinder and Mark Zandi)

Zandi: Financial rescue and stimulus responsible for saving or creating 8.5 million jobs - Here's your big thought of the day: George W. Bush and Barack Obama did a pretty good job stabilizing the economy and kickstarting recovery after the financial crisis began. That, at least, is the conclusion of a paper (pdf) written by Moody's chief economist Mark Zandi and Princeton's Alan Blinder. They estimate that without the financial interventions and the stimulus, "GDP in 2010 would be about 6½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation." I spoke to mark Zandi this afternoon. An edited transcript of our conversation follows.

Mark Zandi And John Taylor Debated Stimulus Tonight - A few minutes ago, I watched two top economists, Mark Zandi and John Taylor, debate whether the government's massive fiscal and monetary stimulus was effective on the PBS Newshour. The video will be posted here tomorrow. Wednesday, Zandi and Alan Blinder published a Moody's macro simulation that estimated 8.4 million more jobs and 6.6% of real GDP would have been lost 2010 without either stimulus. Taylor argued that much of the stimulus was ineffective, that the economy revived because of business investment, and that now we are saddled with massive debts which will burden future growth. It's hard for an experienced economist to come to an informed choice between these two positions, so most viewers tonight came away with one conclusion: Economists can't agree on anything, just like our political leaders.

Mark Zandi and John Taylor debate stimulus (PBS Newshour) video & transcript - A new study by economists Mark Zandi and Alan Blinder showed the U.S. government's nearly $800 billion economic stimulus and the Wall Street bailout likely steered the American economy away from another depression. Jeffrey Brown moderates a debate between Zandi and Stanford University economist John Taylor.

How A “Great Recession” Is Lied to an End (Zandi and Blinder) - Yesterday saw the release of a report, “the first of [its] kind”, purporting to gauge the “comprehensive…effects of the financial-market policies”, i.e. the Bailout including the Obama corporate stimulus, on the economy.  It’s really just a propaganda broadside, written by two hacks, the appropriately named Alan Blinder, and Moody’s own Mark Zandi.   I won’t bother parsing their phony baloney numbers, since I’m instead going to focus on the ideology of the piece. But their basic claim is that without the government’s actions, “GDP in 2010 would be about 11.5% lower, employment would be less by some 8.5 million jobs, and the nation would now be experiencing deflation.” They believe most of this effect is from the Bailout proper, with some added effect from the stimulus. This tabloid sure has a flashy title: “How the Great Recession Was Brought to an End”. So evidently “great recession” is their term for the GDP hiccup as the Bailout took over from the “normal”, “Great Moderation” version of neoliberal kleptocracy; kleptocracy 1.0.

Memo To Blinder And Zandi — Stop Your Bullshit! - The New York Times has a story on a forthcoming report by economists Alan Blinder (Princeton) and Mark Zandi (Moody's which says the wise & prudent policies of the Federal Reserve and the Federal Government saved us from a second Great Depression. Fuck this noise! Did we avert a second Great Depression? Who knows? It's too early to tell. The economy is going down the tubes again, which I will be detailing tomorrow in anticipation of the sacred GDP number. And we are indeed experiencing deflation according to the consumer price index (CPI), and if the CPI were calculated to include actual house prices, instead of some owner's equivalent rent nonsense, it would have been obvious that we've been in deflation for some time now, not just the last 3 months. The housing market is crashing again. And about 18.3% of Americans are underemployed. The list goes on & on.

The Hidden Future of the US Economy - These days, it is common to read forecasts predicting that the US economy will grow at a 3% annual rate in the coming year. But just what does that mean? Many forecasters currently believe that there is a significant probability that the economy will slump during the next 12 months – a “double dip” in the expansion process. It is possible for them to hold that view and still forecast 2% growth for the next 12 months as the most likely outcome or the “median” of their probability distribution. Any decision maker who depends on forecasts – a businessman, an investor, or a government official – needs to know the probability of very low or very high growth rates, as well as the median forecast. But that information remains hidden.

Uncertainty’s Impact on Growth - Uncertainty has become the mantra of this economic cycle. Federal Reserve Chairman Ben Bernanke told Congress last week he didn’t know how strong an impact uncertainty had on the economy. Treasury Secretary Timothy Geithner mentioned it on the Sunday morning talk shows. The challenge is that policy makers may not be able to do much about removing uncertainty. Economists worry that this unique recession and the squabbling in Washington may be making the future less clear than during similar stages of past recoveries. Indeed, exactly what role uncertainty plays in business decisions is hard to gauge. The long-held notion is that executives take a “wait-and-see” stance in the face of uncertainty.

The Government Debt Is Becoming A Pure Ponzi Scheme - In an interview conducted with Business Week, Nassim Taleb discusses his view of the biggest black swan in the market currently, and isn't shy to call government debt a "Pure Ponzi scheme." - When asked where he the biggest potential source of systemic fragility is, he responds: "The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it. The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers."

U.S. Debt Not Sustainable - Niall Ferguson: There is a fundamental imbalance between what we expect the federal government to spend on Medicare and Social Security and national security and what we're prepared to pay in taxation. And that is really the core of the issue. The Greeks found that out this year. My fear is that Americans may find this out next year or the year after. Ryssdal: That quickly? Ferguson: Oh absolutely, these things happen really dramatically, because when the bond market turns its blinker gaze in your direction and investors say, "You know what, lending these people money for 10 years in return for 3.2 percent a year isn't that smart. Maybe we should ask for a little bit more for the risk that we're taking." That's the kind of thing that happens very suddenly in international financial history.

Sun could set suddenly on superpower as debt bites - What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night? Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis. Complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes, what scientists call the amplifier effect.

US CBO: US Could Face 'Difficult Choices' If Rates Spike - The U.S. government would also face difficult choices if interest rates on its debt spiked. For example, a 4-percentage point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion relative to CBO's baseline projection-a jump of more than 40 percent. As longer-term debt matured and was refinanced at such higher rates, the difference in the annual interest burden would mount; by 2015, if such higher-than-anticipated rates persisted, net interest would be nearly double the roughly $460 billion that CBO currently projects for that year.11 Moreover, if debt grew over time relative to GDP, the effect of a spike in interest rates would become increasingly pronounced.  A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt-losses that might be large enough to cause some financial institutions to fail

Federal Debt and the Risk of a Financial Crisis - CBO Director's Blog - In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.

CBO: How the Long-Term Budget Outlook Can Affect the Short-Term Economy - Nice issue brief just released by the Congressional Budget Office.  It explains that besides the “gradual consequences” of the gradual worsening of the fiscal outlook, there are these shorter-term risks to the economy: Beyond those gradual consequences, a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence declined, giving legislators advance warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. But as other countries’ experiences show, it is also possible that investors would lose confidence abruptly and interest rates on government debt would rise sharply. The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by a number of other factors, including the government’s long-term budget outlook, its near-term borrowing needs, and the health of the economy.

 Experts warn Obama panel: Fiscal crisis is getting 'closer' - The government should consider capping what it pays in benefit programs such as Medicare, Medicaid and Social Security, experts told President Obama's fiscal commission today. Without tough new controls to bring down a $1.5 trillion budget deficit and $13.2 trillion national debt, a fiscal crisis such as Europe is facing could force even more draconian changes, the 18-member, bipartisan panel was warned. "It could be startlingly abrupt," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "We're receiving more and more warnings that we may be getting closer." "We do not have the ability anymore to have totally uncapped programs," said Barry Anderson, a former top official at the White House Office of Management and Budget.

China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"  -America's biggest creditor - China - has called our bluff.As the Financial Times notes, the head of China's biggest credit rating agency has said America is insolvent and that U.S. credit ratings are a joke:The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview.

Should China Dump Dollars for Commodities? What about the "Nuclear Option" of Dumping Treasuries? Can Global Trade Collapse? - Every time there is a little blip by China in its purchasing or holding of US treasuries, hyperinflationists come out of the woodwork ranting about the "Nuclear Option" of China dumping treasuries en masse. Such fears are extremely overblown for several reasons. 1. China's purchasing of US assets is primarily a balance of trade issue. If the US runs a trade deficit, some other countries ruin a trade surplus and thus accumulate dollars. This is purely a mathematical function as I have pointed out many times. 2. If China dumps treasuries for Euro-based assets, oil-based assets, yen-based assets or for that matter anything other than dollar based assets, the problem merely shifts elsewhere and those buyers would have to do something with the dollars such as buying US treasuries or other US assets. This too is purely a mathematical function. 3. If China dumped treasuries it would tend the strengthen the RMB and China has been extremely reluctant to let the RMB appreciate. Indeed, the US is begging China to revalue the RMB upward, but China resists.

Why the Euro is B**ch Slappin' the US Dollar - I got a chuckle out of this one: Not so long ago during the height of the so-called euro crisis, foreign exchange commentators were issuing doom-laden prognostications about how the single currency would fall to parity with the US dollar in a short space of time. Well wonder of wonders--the Eurozone is not collapsing. Indeed, the currency has recently vaulted its way past the $1.30 handle. I like to think it has something to do with ECB President Jean-Claude Tritchet--a great, great man--warning against runaway stimulus spending's deleterious effects on maintaining the value of the currency debts are denominated in. As America has shown in recent years, it has little compunction in devaluing its currency. (After all, shortcuts to boosting export competitiveness and devaluing debts can't be that bad, right?) Store of value--such an eccentric European conceit.

Debt Commission: Dealing With Federal Debt Likely To Require Tax Hikes, Spending Cuts - On both sides of the aisle, lawmakers are coming to terms with hard political fact: services are going to have to be cut and taxes are going to have to go up to keep the $13 trillion-plus national debt from skyrocketing into infinity and beyond.  Even some leading Republicans have said in recent days they expect that a debt reduction plan will include a "revenue" element. That means taxes. It turns out the national debt, when you factor in the promised benefits of Social Security and Medicare versus what those programs are expected to bring in, is much higher than the $13 trillion national debt – between $61 and $106 trillion, depending on whom you talk to.

A spending goal too small for aging America…I don't want to overreact. I'd hate to prematurely diss President Obama's National Commission on Fiscal Responsibility and Reform, which held its fourth public meeting Wednesday. But the commission's Democratic co-chair, Erskine Bowles, may have already blown it.  In little-noticed remarks a few weeks ago, Bowles suggested that the long-term goal the commission should adopt for federal spending should be 21 percent of gross domestic product. This sounds like a bookkeeping matter. But Bowles' goal would end progressive ambition, ratify America's declining competitiveness and bury the American dream.

US economic recovery slow, further stimulus needed: IMF (Xinhua) - The U.S. economic recovery has been slow and the outlook remains uncertain with rising downside risks, which warrants further policy stimulus to keep recovery on track, the International Monetary Fund (IMF) said Friday."Private demand has been sluggish, while the unemployment rate has receded only modestly from near post-Depression highs," the IMF said in its annual assessment of the U.S. economy and policy response. "Looking ahead, risks are elevated and tilted to the downside, with particular risks from a double dip in the housing market and spillovers if external financial conditions worsen," the IMF said after its Executive Board concluded consultations with U.S. authorities.

IMF Says U.S. Financial System May Need $76 Billion in Capital - The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.  The findings, released today as part of a broader IMF report on the U.S. financial system, suggested that while the nation’s banking system is stable, it remains vulnerable. Home prices, commercial real estate loans and economic growth have the potential to cause shocks that could expose banks to more losses.  Under one scenario, small and regional banks as well as subsidiaries of foreign banks would need $40.5 billion in additional capital to meet a benchmark capital ratio of 6 percent Tier 1 common equity from 2010 to 2014. Under the adverse scenario, those needs rise to $76.3 billion, according to the report.

Jim Rickards Compares The Collapse Of The Roman Empire To The US, Concludes That We Are Far Worse Off - In the latest two-part interview with Jim Rickards by Eric King, the former LTCM General Counsel goes on a lengthy compare and contrast between the Roman Empire (and especially the critical part where it collapses) and the U.S. in it current form. And while we say contrast, there are few actual contrasts to observe: alas, the similarities are just far too many, starting with the debasement of the currencies, whereby Rome's silver dinarius started out pure and eventually barely had a 5% content, and the ever increasing taxation of the population, and especially the most productive segment - the farmers, by the emperors, to the point where the downfall of empire was actually greeted by the bulk of the people as the barbarians were welcomed at the gate with open arms. The one key difference highlighted by Rickards: that Rome was not as indebted to the gills as is the US. Accordingly, the US is in fact in a far worse shape than Rome, as the ever increasing cost of funding the debt can only come from further currency debasement, which in turn merely stimulates greater taxation, and more printing of debt, accelerating the downward loop of social disintegration.

Two Point Nine One - Krugman - Remember this? May 29, 2009: They’re back. We refer to the global investors once known as the bond vigilantes, who demanded higher Treasury bond yields from the late 1970s through the 1990s whenever inflation fears popped up, and as a result disciplined U.S. policy makers. The vigilantes vanished earlier this decade amid the credit mania, but they appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November...Bond yield as of yesterday: 2.91 percent. What I’ve never quite understood is why so many investors still loooove the likes of the WSJ editorial page, while they hate, hate, hate people like, well, me — when believing anything the former says has historically been a very good way to lose a lot of money.

Goldman: Pullback by Government Set to Drag on Growth The pullback in fiscal policy at the federal, state and local levels is expected to have a sharp negative impact on U.S. economic growth this year and next, according to a new analysis from Goldman Sachs economists. Goldman economists have noted in the past that the waning stimulus and expiration of federal programs to boost growth will start dragging on growth this year and accelerate through 2011. But the latest analysis shows that adding the drag from state and local government cutbacks will increase the overall drag on gross-domestic-product growth to -1.7 percentage points in 2011. Goldman estimates that fiscal policy added 1.3 percentage points between 2009 and early 2010. They note that the influence of federal stimulus programs was muted during that time by state and local policy.“State and local finances have been a drag on growth all along, and this drag has increased somewhat in early 2010,” said Goldman Sachs chief economist Jan Hatzius.

The political genius of supply-side economics - Martin Wolf -The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world’s most important economy, it also matters greatly for the world. My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done. Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

Martin Wolf Is Shrill - Krugman - He has a long post arguing that the tax-cutting radical right, not liberal advocates of stimulus spending, poses the real threat to US solvency. (And yes, it is possible to have a solvency problem, even here.) Wolf’s argument and main points are similar to those I made in a recent column; that’s not a criticism, because we need more people saying this. Martin ends on a deeply pessimistic note. I wish I could disagree.

Fiscal policy: When does fiscal stimulus work? - RECOVERIES around the world are looking less certain than they did a few months ago, and this has prompted a new round of calls for additional expansionary policy. Most supporters of new expansion have focused their argument on monetary authorities, since new fiscal expansion is either financially unwise (in southern Europe) or politically unpalatable (America). But a few have kept up the demand for an additional fiscal boost. Congressional Democrats had hoped to deliver a $130 billion (or so) mini-stimulus this summer, but the package was ultimately shaved down to just $34 billion in unemployment benefits. With new calls for stimulus come new arguments over whether and how fiscal boosts work. Greg Mankiw has produced an interesting assessment of fiscal policy in National Affairs. He is perhaps a little unkind toward last year's stimulus package.

Policy stuck in the doldrums? Consumers think so - Rebecca Wilder- Consumer confidence: that extremely coincident, but often cited as leading consumer spending, indicator of really just jobs growth during recovery has struck again, down near four points to 50.4 in July. During the recovery phase of the business cycle, confidence is highly correlated with jobs growth. The chart below illustrates the recession and recovery path of consumer confidence since 1973. The 2007-2009 recovery in confidence - I mark the technical end of the recession at June 2009 but the exact month is not important- is tracking earlier "jobless recoveries": 1990-1991 and 2001. The problem is, we can’t afford (economically, that is) a jobless recovery this time around! Consumers are not feeling very good these days, with good reason! I like the way Dean Baker tersely puts it: The problem is not confidence. It is a lack of money. That is why consumers are not spending more and will not anytime soon regardless of how happy they are. In my view, it's (more precisely) the lack of money during the recovery of a balance sheet recession. In order to lower household leverage (i.e., pay down debt burden) the easy way, a significant increase in nominal income is needed, wage growth.  Only then will workers have enough pricing power (in aggregate) to demand sufficient wage gains in order to deleverage the safe way (not through default).

Why Conservatives Hate Keynes - Conservatives relentlessly bash all the people who got it right about the economy; and at the same time insist we follow the austerity policies that Herbert Hoover laid down after the Crash of 1929. Among the bashees is John Maynard Keynes, whose book, The General Theory of Employment, Interest, and Money, is the classic example of getting it right, and being hated for it. One explanation for conservative hatred of Keynes is his complete lack of respect for large aggregations of capital and the people who own and manage them.

The deficit terrorists have found a new hero. Not!  - Last year it was Reinhart and Rogoff being rammed down our throats as the deficit terrorists were claiming that governments in the advanced nations were on the cusp of defaulting on their sovereign debt. More recently, the deficit terrorists have been holding up a new effigy – a new hero. Another Harvard economist – Alberto Alesina. What is it about that place? Alesina has allegedly provided a solid theoretical case to support the absurd claims by the austerity proponents that cutting the very thing that is supporting growth at present will not damage that growth. He is now the new hero. Well it is another scam job! He chooses to use flawed orthodox textbook models to assert his case without mind to the situational context and other realities. I had read the Alesina paper – Fiscal adjustments: lessons from recent history – and decided it was so poor that I wouldn’t comment on it. But it has come back again in a Wall Street Journal article (July 26, 2010) where it is once again claimed that:Before the debate over the efficacy the 2009 stimulus is resolved, Congress is turning to whether it’s time to start cutting deficits.Mr. Alesina says it is: In 107 periods since 1980 when governments cut deficits, doing so tended to quicken economic growth, not slow it

Mark Thoma: The Cost of Convenient Optimism - One of the many things that puzzles me about the Obama administration’s economic policy is why they continue to rely upon best case scenarios to set policy. The initial stimulus was not big enough, and part of the reason was an overly optimistic forecast for the trajectory of the economy. The recession turned out to be much worse than forecast, but since policy did not allow any buffer for the forecast to be wrong, the stimulus package — – which wasn’t big enough to begin with for a variety of reasons — turned out to be even more inadequate.Why wasn’t more done when it became clear that the initial stimulus package was not as big as needed? Ezra Klein offers the following explanation:What went wrong with stimulus

Government as Deux Ex Machina - When people advocate government intervention, they rarely, maybe never, tell us how the incentives will be set up so that government will do the right thing. Think about how asymmetric the argument is. Incentives in the private sector are such that someone will do something in his interest that hurts others in society, but he doesn't take account of that hurt in his decision. Or, someone could take action that would benefit others a great deal but it isn't in his interest to take the action. Notice the use of reasoning about incentives to show why the market fails. Therefore, continues the argument, we should have government intervene.  Did you catch the non sequitur? The argument proceeds at first using standard economic tools. We show that the incentives are such that the private actors make the decision that leads to sub-optimal results. Then we (not really we, but many of us) conclude that government should step in. But there's no analysis of government incentives.

White House Predicts Record $1.47 Trillion Deficit - New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends. That's actually a little better than the administration predicted in February. The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 - a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.

A legacy of budget trickery: Peter Orszag's sleight of hand -No more budget gimmicks? That’s what outgoing White House budget director Peter Orszag promised as the Obama team prepared to take control of the White House. “The president prefers to tell the truth, rather than make the numbers look better by pretending,” he told The New York Times. But numbers games turned out to be Orszag’s specialty. He’s set to step down at the end of July, but for the last 18 months, he’s presided over a wave of fiscal trickery. This year’s White House budget, which Orszag played a key role in preparing, is a prime example. In the federal budget process, the baseline scenario is typically based on current law. But the Obama administration has argued that it should be able to work from “current policy.” That way, they can stuff all sorts of expensive future changes into the baseline.

U.S. Needs To Articulate Credible Fiscal Consolidation Plan - Moody's - The U.S. government needs to articulate clearly a credible plan to tackle its bulging debt profile in order to keep its triple-A credit rating, Moody's Investors Service's lead sovereign analyst for the country said Thursday. In contrast to the U.S., the credit health of Asian countries remains broadly positive and their resilience has been highlighted by Europe's debt crisis, which looks to have peaked, Steve Hess, senior credit officer in the sovereign risk group at Moody's told Dow Jones Newswires in an interview. Hess is the rating's agency's top sovereign analyst for the U.S., East Asia and Australasia.Hess said if U.S. government budget projections for debt as a percentage of national output and interest payments as a percentage of revenue are realized in coming years, the Aaa rating of the world's largest economy will come under scrutiny.

Congress clears war funding - Tens of billions of dollars in new Afghanistan war funding cleared Congress late Tuesday, even as the House easily upended a liberal challenge to the increased U.S. military presence — and drone attacks — across the border in Pakistan.  The back-to-back votes buy precious time for President Barack Obama to show progress on his strategy for the region. But even as the anti-war movement remains weak in Congress, Obama can’t ignore a growing split among House Democrats over the cost of his military commitments at a time of tighter budgets and economic troubles at home. A solid majority of the caucus —148 Democrats — still held firm with the president on the 308-114 vote, but the scene was in stark contrast with just a year ago when all but 32 Democrats supported a still larger $105.9 billion war funding measure for Afghanistan and Iraq operations.

Audit: U.S. can't account for $8.7 billion in Iraqi cash  — The U.S. Defense Department is unable to properly account for over 95 percent of $9.1 billion in Iraqi oil money tapped by the U.S. for rebuilding the war ravaged nation, according to an audit released Tuesday. The report by the U.S. Special Investigator for Iraq Reconstruction offers a compelling look at continued laxness in how such funds are being spent in a country where people complain basic services like electricity and clean water are sharply lacking seven years after the U.S.-led invasion that toppled Saddam Hussein.

The War - A Trillion Can Be Cheap - NYTimes - The conflicts in Iraq and Afghanistan have cost Americans a staggering $1 trillion to date, second only in inflation-adjusted dollars to the $4 trillion price tag for World War II, when the United States put 16 million men and women into uniform and fought on three continents. Sticker shock is the inevitable first reaction to the latest statistics on the costs of all major United States wars since the American Revolution, compiled by the Congressional Research Service and released late last month, and the figures promise to play into intensifying political and economic pressures to restrain the Pentagon budget. We have managed to create and field an armed force that can engage in very, very lethal warfare without the society in whose name it fights breaking a sweat.” The result, he said, is “a moral hazard for the political leadership to resort to force in the knowledge that civil society will not be deeply disturbed.”

The Budget Deficit Chicken Hawks - Most people are familiar with the concept of "chicken hawks." Chicken hawks are the politicians who are anxious to send other people to risk their lives in war, but somehow managed to avoid service when they had the opportunity to fight themselves. It turns out that we have a similar story with budget policy, where there appears to be a large contingent of budget deficit chicken hawks. The deficit hawks have been filling the news lately. These are the folks who are yelling that something terrible will happen if we don't reduce the deficit. Most of them seem to have missed the fact that something terrible is now happening. We have almost 15 million people unemployed and 9 million underemployed, with several million facing the loss of their home in the next few years.

Pelosi: Social Security cuts should not be part of federal deficit fix - The leader of the U.S. House of Representatives doesn’t want to trim Social Security benefits to ease the federal deficit.House Speaker Nancy Pelosi (D-Calif.) said at a conference in Las Vegas that she has no interest in raising the retirement age to decrease the cost of Social Security to the federal budget.“To change Social Security in order to balance the budget, they aren’t the same thing in my view,”“When you talk about reducing the deficit and Social Security, you’re talking about apples and oranges.”Changing the benefits paid by the Social Security Administration could significantly affect the financial planning for millions of boomers and older Americans who count on Social Security payments as part of their financial plan. This year marks the first year in which Social Security payments have exceeded the money taken in from younger workers

Reverse Psychology? - Instead of a series of op-eds by Christina Romer, Larry Summers, Jared Bernstein and other members of the administration making a strong, strong case for more stimulus -- particularly that devoted to job creation -- along with the president himself making the case to the nation, the appearance of key administration officials on Sunday talk shows to bolster the effort, and so on, the administration has decided to try and sell a recovery that hasn't yet taken hold. Thus, instead of a much needed and impressive effort to move Congress to action, or at least make clear to voters who is and who isn't trying to help those struggling with the recession, here's Timothy Geithner saying it's time for the government to back off because a solid recovery is underway:

Private Investment? - The WSJ is quoting Treasury Secretary Timothy Geithner as saying it is time for private investment to take over from government stimulus: “We need to make that transition now to a recovery led by private investment,” Mr. Geithner said Sunday on NBC’s “Meet the Press.” ...“I think the most likely thing is you’ll see an economy that gradually strengthens over the next year or two, you’ll see job growth start to come back, investments expanding ... but we’ve got a long way to go still,” Mr. Geithner said. I discussed this last week - in most sectors of the economy there is over capacity or too much supply (housing), so there is no reason for significant new private investment.

It’s the Unemployment, Stupid - On Friday, the Obama administration released its annual mid-session budget review, which contains its short-term and long-term predictions for economic growth. The media has focused most of its attention on the White House's deficit projections. By contrast, the administration's projections for unemployment are genuinely worrisome. For 2011, the administration expects unemployment to remain high at 9 percent and drop to 8.1 percent in 2012. From there, the White House expects 7.1 percent unemployment in 2013, 6.3 percent unemployment in 2014, and 5.7 percent unemployment in 2015. The administration doesn't see unemployment declining to pre-recession levels until 2016, nearly a decade after the recession began. What's more, there's little indication of a decline in the number of long-term unemployed, which is at an unprecedented high with nearly 6.7 million people out of work for more than six months.

Bruce Bartlett on the deficit, economy and VAT: Six questions for Bruce Bartlett - The Economist - IT'S difficult to classify Bruce Bartlett politically. He has worked on the staffs of Congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen. He was senior policy analyst in the Reagan White House; and deputy assistant secretary for economic policy at the Treasury Department during the first Bush administration. But he has also written a book titled, "Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy". So you could say that Mr Bartlett's loyalties are economic, not partisan. Currently Mr Bartlett is a columnist for the Fiscal Times, an online newspaper covering the economy, and he blogs at Capital Gains and Games. He has also written several books, the latest of which is "The New American Economy: The Failure of Reaganomics and a New Way Forward". We recently asked him some questions about the economy, the deficit, and the chance that America will one day have a VAT.

Why Congress should let the Bush tax cuts expire - Think back to the beginning of the Bush administration tax cuts. It seems almost impossible to believe, but the argument then was that the budget surplus was too large. There was, or so President George W. Bush assured us, ample cash to cut taxes for everyone and protect the Social Security surplus and set aside $1 trillion over the next decade for "additional spending needs" and pay down the national debt. "The people of America have been overcharged, and, on their behalf, I'm here asking for a refund," Bush told Congress in February 2001.  You know what happened next. The refund came. The supposed surplus evaporated. The Social Security surplus was spent. Instead of being paid down, the $3.3 trillion national debt ballooned to $9 trillion.  The only thing that remained the same was the clamor for tax cuts. Same argument, different rationale. The Bush tax cuts are set to expire at the end of this year, and the argument now is that they must be extended -- for everyone. This time not because the fiscal bottom line is too healthy but because the economy is too shaky.

Niall Ferguson Debates Himself - I’ve been known to remark on the conservative movement’s strong adherence to Keynesian arguments as a justification for tax cuts in the wake of the mild 2001 recession, adherence that seems puzzling in light of their contrary rhetoric in the wake of the cataclysmic 2008-2009 downturn. Brad DeLong observes that one particularly hilarious example of this is historian-turned-pundit Niall Ferguson who wrote a December 12, 2003 article on the Bush administration that’s in considerable with his contemporary take on things. DeLong requests a Ferguson v Ferguson debate, and with assistance from Ryan McNeely I’m prepared to unveil one.

Big Fight Ahead on Expiration of Bush Tax Cuts - NYTimes - Democratic leaders, including Mr. Obama, say they are intent on letting the tax cuts for the wealthy expire as scheduled at the end of this year. But they have pledged to continue the lower tax rates for individuals earning less than $200,000 and families earning less than $250,000 — what Democrats call the middle class.  Most Republicans want to extend the tax cuts for everyone, and some Democrats agree, saying it would be unwise to raise taxes on anyone while the economy remains weak. If no action is taken, taxes on income, dividends, capital gains and estates would all rise.  Beyond the implications for family checkbooks, the tax fight will serve as a proxy for the bigger political clashes of the year, including the size of government and the best way of handling the tepid economic recovery.

The Tax Debate The Bush Tax Cuts and the Alternative Minimum Tax has plagued Us for years, basically because they were all designed poorly, and were set neither to Inflation or the percentage increase in federal debt. The cherished Private Sector of the Republicans would never set their own budget performance in concrete; as they insist that the federal government do. I personally prefer that all the Bush Tax Cuts and the Alternative Minimum Tax structure be abandoned as bad Tax policy, but readjusted with an alternate system granting Tax relief where needed, and relatively nowhere else. I also believe in the need for further Stimulus, but only if it is directed to Those in need of Tax Relief. The Taxes which functionally everyone pays are Property and Sales Taxes. I previously stated I would allow both the Bush Tax Cuts and the Alternative Minimum Tax to expire, the later taking a proper legislative action. I would allow the Estates Tax to go into effect once more

"Brother can you spare an economist?" - The argument against allowing tax cuts to expire on the top 2% is that it would be counter-productive in a time of recession presumedly because it would serve to cut back on investment by that same top 2%. But if they are all sitting on their money anyway, resisting personal spending and as the controllers of capital sitting not only on piles of corporate cash but also on huge banking reserves hence choking off liquidity via loans to smaller banks and small businesses how exactly is nicking them an extra 3% or so in top marginal rates actually creating a net retreat in investment? It seems the argument that "If you tax the rich in a recession they won't lend/invest" kind of fails somewhat if they aren't lending/investing to start with. Gosh, if I only knew some smart, forward thinking economists to pose this question to.

Extending Tax Cuts Better Than Nothing, But Not Much - During the George W. Bush administration, Congress enacted a number of large tax cuts, none of which were made permanent. They all expire at the end of this year, which will impose a large tax increase on Jan. 1 unless they are extended. Congress is now in the midst of deciding what do to. More than likely, Congress will just kick the can down the road and extend all of the tax cuts for another year. Given the weakness of the economic recovery, it would be unwise to raise taxes; economists across the political spectrum are united on that. Unfortunately, this means that substantive debate on the efficacy of the Bush tax cuts and alternatives that might be better for the economy will be put off until next year.

Taxing the Rich - I may be more sympathetic to certain kinds of regulations than Matt Yglesias is, but I'm certainly open to higher taxes on the rich as well. Via Matt, then, here's a Wall Street Journal chart showing exactly who would be affected by Obama's tax plan (which allows Bush's tax cuts on high earners to expire) vs. the Republican plan of extending the entire Bush package. Call me crazy, but after a decade of living large in ever more sumptuous beach houses and promoting policies that almost wrecked the economy, I think the folks earning a million bucks a year can probably afford to pay an extra 5% in taxes. Seemed to work OK in the 90s, anyway.

Geithner favors allowing some tax cuts to expire - Treasury Secretary Tim Geithner said that allowing tax cuts for the wealthy to expire would be "the responsible thing to do."This is the last year for the tax cuts enacted under President George W. Bush. Republicans have generally favored extending all of them. While Democrats are divided on the issue, President Barack Obama has favored allowing the expiration of cuts he says have applied to the wealthiest people."It's responsible to let the tax cuts expire that just go to 2 percent to 3 percent of Americans, the highest earning Americans," Geithner told ABC's "This Week" in an interview broadcast Sunday.Doing so would show the world that the U.S. is "willing as a country now to start to make some progress" reducing long-term budget deficits, he said.Geithner said he does not believe that higher taxes for those high earners will hurt economic growth.

Timothy Geithner: Allow Bush Tax Cuts For The Wealthy To Expire (VIDEO) Treasury Secretary Tim Geithner said that allowing tax cuts for the wealthy to expire would be "the responsible thing to do."This is the last year for the tax cuts enacted under President George W. Bush. Republicans have generally favored extending all of them. While Democrats are divided on the issue, President Barack Obama has favored allowing the expiration of cuts he says have applied to the wealthiest people."It's responsible to let the tax cuts expire that just go to 2 percent to 3 percent of Americans, the highest earning Americans," Geithner told ABC's "This Week" in an interview broadcast Sunday.Doing so would show the world that the U.S. is "willing as a country now to start to make some progress" reducing long-term budget deficits, he said.

Will Republicans Really Block Tax Cuts Because They Go Only to Earners Below $250K?: President Obama proposes allowing the Bush tax cuts to expire next year — as they are scheduled to do if nothing is changed — for those earning more than $250,000, but changing the law so as to extend the tax cuts for those earning less than that amount. Republican politicians are opposing the proposal. I don’t understand what they are thinking. Their position doesn’t make sense to me, regardless whether they are thinking about short-term stimulus, long-term fiscal conservatism, good economics, or even pure politics.

Extending High-Income Tax Cuts is the Wrong Answer – Romer, White House - President Obama has made it clear that he favors extending the 2001 and 2003 tax cuts for middle-income families, but letting those for high-income earners expire as called for in current law.  Recently, some have argued that extending the high-income cuts is necessary for the economy.  This is simply wrong. First, extending the high-income tax cuts would provide very little job creation in 2011. There is widespread agreement that the short-run economic benefits of high-income tax cuts are small.  The Congressional Budget Office lists a tax cut for high-income earners as a particularly ineffective job creation measure.  Private sector forecasters have reached the same judgment.1 The vast majority of economic research shows that higher-income earners spend less of a tax cut and so tax cuts to those earners create fewer jobs throughout the economy.2

Gingrich: Renew Bush Tax Cuts or Economy Will Sink - In an exclusive interview with Newsmax.TV, former House Speaker Newt Gingrich said, “If we have large tax increases in January, this economy will sink deeper into recession, there will be higher unemployment, the recovery will be longer. This was exactly the mistake made in 1937 and ’38 and it created a second mini-depression . . . I think the simple battle cry ought to be ‘No tax increase in 2011, period.’ Keep current law exactly as it is through 2011.”The architect of the "Contract with America" also excoriated the financial overhaul law as "one more job-killing bill" Democrats have passed.

How Would President Obama's Tax Plan Raise Tax Payments for a Couple Earning $250,000 or Less? -The Tax Foundation launched a new calculator last week that helps users see how their taxes might rise in 2011. In a FoxNews piece about it, we explained that some families making $250,000 or less could see a tax increase under Obama's budget proposal, which would be a violation of his famous campaign promise not to raise taxes on families with incomes of $250,000 or less. Here's how that would happen.Consider a couple with two children under seventeen, with each parent making $125,000 in wages. Assume this family pays $10,000 in local income taxes, $12,500 in real estate taxes, and has a further $25,000 worth of other itemized deductions, such as charitable contributions and a mortgage interest deduction. Our calculator at shows that if all the Bush tax cuts expire, their tax burden would go up by $2,650. However, even under President Obama's tax proposals, which keep most of the Bush tax cuts in place, this family would see its income tax payment increase by $1,750. To understand why, we need to look at the specifics of the President's plan.

The Estate Tax - However, economic arguments against estate taxation point out that it distorts behavior before death increasing consumption over investment.  The estate tax translates into a tax on investment because, in the event of death, a fraction of the payoff will be confiscated.  There is a simple way to amend the estate tax to undo this distortion and increase tax revenue. The government can offer a tax shelter in the form of a life-insurance policy where the household pays c in cash to the government in return for shielding a fraction q of wealth from estate taxation.  The effect is to capture some of what would have been extra expenditure on consumption in the form of a direct transfer to the government, and compensate the estate by reducing taxes after death.A standard textbook analysis of per-unit vs lump-sum tax shows why this raises revenue and makes the estate better off. 

Who Ultimately Pays the Corporate Income Tax? - So, given that even economists cannot agree on who actually bears the burden of the corporate income tax, why not abolish the tax altogether and instead tax human beings directly? The arguments against such a move are twofold. First, even bringing in only 12 percent or so of total federal taxes, the corporate income tax represents the third-largest source of federal revenue and could not easily be replaced with an alternative source, especially in these times of fiscal pressures. Second, if the profits of corporations were not taxed, the corporate form of enterprise would become one more major tax shelter through which wealthy people could shield their income from taxation. That probably is the main reason why abolishing the corporate tax has never had any political traction, in the United States or abroad.

Don’t Know Much About Economics - Krugman - Hoo boy. I missed this; but Yglesias points out that in Ezra Klein’s interview with Paul Ryan, Ryan says that the way to increase lending is to raise interest rates: We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper. I don’t even know where to start with this. What does Ryan think the fed funds rate is? (It’s the rate at which banks lend each other money overnight, usually to help meet reserve requirements.) He obviously doesn’t know the the Fed funds rate basically equals the return on federal paper, so that raising that rate would make banks more, not less, likely to stay with that federal paper. I’m sure someone will try to come up with a reason why Ryan is being smart here, but the truth is that he’s stone-cold ignorant.

In American politics, stupidity is the name of the game - Can a nation remain a superpower if its internal politics are incorrigibly stupid?  Start with taxes. In every other serious democracy, conservative political parties feel at least some obligation to match their tax policies with their spending plans. David Cameron, the new Conservative prime minister in Britain, is a leading example.  He recently offered a rather brutal budget that includes severe cutbacks. I have doubts about some of them, but at least Cameron cared enough about reducing his country's deficit that alongside the cuts he also proposed an increase in the value-added tax, from 17.5 percent to 20 percent. Imagine: a fiscal conservative who really is a fiscal conservative.  That could never happen here because the fairy tale of supply-side economics insists that taxes are always too high, especially on the rich.

US Financial Regulations: Plugging holes in a faulty dam - Paul Volcker says the financial reregulation bill passed to much hoopla by Congress in mid-July deserves only a grade of B.  Sheila Bair, head of the Federal Deposit Insurance Corporation, says the Basel committee of the Bank for International Settlements is already backing off stern capital requirements for banks that the bill was supposed to establish. Michael Mandel, the former chief economist of Business Week, says he cannot even tell you what the financial regulation bill is trying to accomplish. To most people, the new financial reregulation package must look like the work of a bunch of Congressmen, along with the President’s economic team, plugging holes in a dam.   The Obama Treasury got the nation off on the wrong track when it issued its June 2009 white paper. It basically listed a series of problems that had to be dealt with. Does anyone have a sense which are the biggest holes, how many there are, and whether we’ve really plugged them?   Or why there were holes in the first place?

Dodd Fails to Understand Dodd-Frank, Unclear About CFPB Interim Director - Chris Dodd told TPM today that Elizabeth Warren still “may not be confirmable” for the position of director of the Consumer Financial Protection Bureau, and he rejected the notion of a recess appointment for the position. But in a troubling sign that Dodd doesn’t understand the bill that bears his own name, he made no reference to the fact that the Treasury Department can choose an interim director of the CFPB while the bureau is under their control, and that doesn’t require Senate confirmation.

Why Elizabeth Warren Will Likely Be Confirmed - Most telling is the basic Senate math. According to two senior Senate aides—one whose boss favors Warren and the other whose boss would prefer an alternative—pretty much every Senate Democrat (and Independent) would find it agonizingly difficult to join a filibuster of Warren’s nomination, which would mean opposing an outspoken consumer advocate at a time of deep anti-Wall Street sentiment. Simply put: hoping the president will choose another candidate—something that describes several Senate Democrats—isn’t the same as opposing his eventual nominee.

Megan McArdle’s Hack Post on Elizabeth Warren’s Scholarship - So Megan McArdle wrote a long post attacking Elizabeth Warren as a scholar. What’s surprising is how little “there-there” there is to her critique. I would love to see nomination hearings based around how expansive of a definition to use for medical bankruptcies and watching Warren rip the face off of Senators when it comes to empirical methods. I doubt it is going to come to this, but I’ll go ahead and respond. (I’ve been waiting for part two to respond, which I assume may not show up.) Because that isn’t what this is about. It’s about giving the impression that Warren is a weak scholar. Given that Warren is considered “the leading authority in the country on bankruptcy law,” being called a hack by McArdle, of all people, is something. Especially when we get a gem of a major screwup like this right out the door in the post:

The Confirmation Bias of E. Warren - Economics 21 has a pretty concise takedown on why Elizabeth Warren should not serve as chair of the Consumer Financial Protection Agency. It highlights concerns about her work on family income and bankruptcy, as well as her position on bank nationalization. Here, Adam, has been critical of her position on high interest lending as well. Across the blogosphere her defenders have scrambled to poke holes in all of those arguments. My take: E. Warren is no fool. I don’t think she publishes hack reports and I have little doubt that there is a fair defense of her methodology.  She seems to have strong beliefs and the analytical ability to plow through anyone in her way. A cold-hearted pointy head would make a better referee. That’s not to say that passion has no place in intellectual discourse, but it is why its important that passions balanced. It doesn’t matter how good your intentions are, confirmation bias and a lack of diversity will leave glaring blind spots.

Elizabeth Warren and Her Discontents - Somebody really, really doesn't want Elizabeth Warren to run the new Consumer Protection Financial Bureau, or "CFPB," which she first envisioned and proposed. Who? The big banks, for sure, as well as others who don't want their misbehavior brought to light. And Tim Geithner, whose vision of Wall Street and its problems is fundamentally different from Warren's. There are others, too -- ideologues like Megan McArdle of the Atlantic, who has made something of a cottage industry out of attacking Warren on specious grounds.  The President's attempting to split the baby when it comes to appointing Ms. Warren, but the facts and public perception are aligned and present him with a stark reality: He must choose between appointing Ms. Warren or placating the big banks. There is no Third Way. Unfortunately for the President, Elizabeth Warren is a yes or no question.

Who's afraid of Elizabeth Warren? - Elizabeth Warren doesn't look or sound scary. She's a 61-year-old Harvard Law School professor from Oklahoma who has written personal finance books, some with her daughter. But conservatives and some bankers are trying to kill any chance that Warren - a consistent critic of the financial sector before it was cool to be one - will run the consumer financial protection agency that's part of the Wall Street reform measure just signed into law by President Obama. "I think there's a lot of controversy around Elizabeth Warren's services," Senate Minority Leader Mitch McConnell said Tuesday in a media briefing. "It is an extraordinarily powerful position with an incredibly large budget and authority that is constrained by almost nothing. And, therefore, the person that does serve in that capacity is going to have to be trusted by everyone."

Analysis: Wall Street loathing for Warren lifts regulator bid (Reuters) - Elizabeth Warren, clad in cardigans and pearls, has become Wall Street's public enemy No. 1, but it's that very vitriol that could earn her a post heading the government's new consumer watchdog agency. Warren, a Harvard law professor and outspoken consumer rights advocate, is currently a top monitor of the government's $700 billion bailout of the financial system.Now she is one of the main contenders to head the Consumer Financial Protection Bureau, an agency to regulate financial products ranging from credit cards to mortgages. Banks bitterly opposed White House efforts to create the agency, but lawmakers pushed it through as part of the Wall Street reform legislation passed this month. Now, industry players, fearing a profit crunch, are taking aim at the woman who could be their new regulator, calling Warren dogmatic and unwilling to compromise. "I don't think she can run that new agency in a fair, balanced way where she can listen to all the constituencies, not just the consumer advocates," Any person you put in that role really ought to have some industry experience."

Editorial - Elizabeth Warren - NYTimes - President Obama should nominate Elizabeth Warren to head the new Bureau of Consumer Financial Protection, and not only because of her credentials. Ms. Warren — a bankruptcy expert at Harvard Law School, an Oklahoma native whose father was bilked of his savings by a business partner — developed the idea for the bureau in a 2007 article. Since then, as head of the panel that monitors the bank bailouts, she has become one of the nation’s most prominent consumer advocates. There are other candidates, of course. What Mr. Obama needs to recognize is that this particular job, at this particular time, is about more than competence. As the reform bill went through Congress, the banks were unrelenting in trying to kill or weaken the bureau. Having failed, they want influence in selecting its director. Meanwhile, polls have shown public mistrust or misunderstanding of the administration’s economic policies. Mr. Obama’s choice to head the bureau must demonstrate that he cares more about ordinary Americans than about Wall Street, that he understands that the public interest differs — sometimes sharply — from the interests of big banks. He needs someone the banks do not want, and that someone is Ms. Warren.

4 Bogus Attacks Bankers and Their Political Puppets Are Using to Attack Elizabeth Warren - No reformers question whether Elizabeth Warren is the best candidate to head the new Consumer Financial Protection Bureau. She's a lauded scholar, an inspiring advocate who will draw talented and dedicated reformers to the new agency and she came up with the whole idea for creating the CFPB in the first place. By contrast, there are no compelling arguments against appointing Warren. Four have basically been offered, and they are all so weak that it's hard to view them as anything but bad-faith excuses to block somebody the bank lobby simply doesn't like. There's a perfectly rational reason for the bank lobby not to like Elizabeth Warren: she's spent much of her career explaining how elite bankers rip off American families, and there is every reason to believe she will crack down on this behavior if she's given the CFPB post. That's not a knock against Warren—that's what the CFPB director is supposed to do.Here are the lousy objections that bankers and their apologists are voicing

The Messenger Again Wears A Skirt - Taking a page from his former boss and mentor Larry Summers, Geithner behind closed doors has expressed opposition to Dr. Elizabeth Warren heading up the Consumer Financial Protection Bureau as reported by The Huffington Post.For those of you who may not recall, Larry Summers testified in front of Congress about Brooksley Borns efforts to regulate CDS as: “casting a shadow of regulatory uncertainty over an otherwise thriving market."  While one could not predict what Brooksley may have been able to accomplish if given the go-ahead, it is pretty certain the market place as Greenspan describing it as “self-regulating” did little to regulate itself. At least, Larry had more balls than Timothy and Brooksley would have been more proactive than either Larry or Timmy.Make no mistake, Dr. Elizabeth Warren has asked the pointed questions needing to be asked of Timothy Geithner “Show Me The Money” on You Tube. Joining Timothy Geithner is Senator Dodd, the same as Greenspan, Levitt, and Rubin joined Larry Summers in opposing Brookley Born.

Women on the Verge -The campaign to get Elizabeth Warren appointed to head the new Consumer Financial Protection Bureau got me thinking -- why is it that so many of the heroic leaders who have pushed the Obama administration to be more steadfastly progressive on financial issues just happen to be female? That honor roll would begin with Warren; it would include Sheila Bair, who heads the FDIC; House Speaker Nancy Pelosi; Senator Maria Cantwell of Washington State; former commodities regulator Brooksley Born; and Heather Booth who spearheaded Americans for Financial Reform.  Inside the administration, the member of the senior economics team who has pushed hardest for a more expansive approach to economic recovery is the chair of President Obama's Economic Council, Christina Romer. What these people have in common is that they are not members of the financial old boys' club, in both senses. They are neither one of the boys, nor did they come out of the Wall Street milieu.

Federal Government Hiring Thousands in Wake of Financial Reform Bill – Federal agencies are getting ready to hire thousands of finance pros to help implement the new financial reform bill's measures, which means that it's a great time for anyone who's considered a career in the public sector to make a move. Agencies across the spectrum are beefing up resources: CFPB, OCC, FDIC, CFTC and the SEC. At least 1,343 jobs are being created across two agencies over the next three years, with more to follow. The creation of an entirely new agency, the Consumer Financial Protection Bureau (CFPB), means new opportunities for finance pros of all stripes. The Bureau will create rules on checking accounts, mortgages and credit cards, and also enforce rules on lending practices. All big lenders, except the auto industry, will be affected by the new mandates. While it's too early to tell how many employees of the agency will simply transfer from other agencies, it's safe to assume that they'll contribute much of the hiring. There will still be room for new hires, however.

New financial regulation reform bill exempts SEC from FOIA - When Barack Obama signed the new financial-regulation reform bill into law, its supporters claimed it as a victory for transparency and accountability.  That may be true for Wall Street, although debatable, but it’s not true for government and the regulatory regime it enhanced.  The SEC now claims that the bill has given them an exemption from Freedom of Information Act requests, the very device by which citizens and media force transparency in the halls of power: Under a little-noticed provision of the recently passed financial-reform legislation, the Securities and Exchange Commission no longer has to comply with virtually all requests for information releases from the public, including those filed under the Freedom of Information Act. The law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from “surveillance, risk assessments, or other regulatory and oversight activities.” Given that the SEC is a regulatory body, the provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.

What SEC Sources Say About FinReg and FOIA - The impetus for the Securities and Exchange Commission to seek broader exemptions from public-disclosure law in the new Dodd-Frank financial-reform law came from a concern that the SEC must keep confidential the proprietary data it picks up in its examinations of financial concerns, SEC sources say.The SEC intends for the provision only to be used to protect the confidentiality of data the agency gets when it examines financial companies. The SEC sources say the clause is needed now because the Dodd-Frank bill forces the SEC to audit more financial companies than ever before—including new audits of hedge funds, private equity funds, and venture capital funds. The fear is that these funds have threatened to not comply with their new SEC audits required under the Dodd-Frank bill if the SEC did not protect their proprietary trading information—and the SEC says it could not catch the “bad guys” if they balked.

Has the U.S. Lost its Grip on the Credit-Rating Business? - There's a new name in the credit-rating-agency business these days: It's Dagong Global Credit Rating Co. Ltd., and this Beijing-backed business is China's bid for a spot in the global-credit-rating oligopoly. And Dagong's Chairman Guan Jianzhong doesn't think much of his long-established U.S. competitors. "The Western rating agencies are politicized and highly ideological and they do not adhere to objective standards," Jianzhong told The Financial Times earlier this month. Is he right? And does the newly passed Wall Street Reform and Consumer Protection Act correct their flaws, or does it make matters worse? It's a question that affects all investors - even those of us that don't invest in bonds, as we'll soon see.

Mavericky: GOP Thwarts Disclosure Bill - A modest but worthwhile effort to curb the power of money in politics died on Tuesday afternoon when Senate Republicans refused to let debate on the measure go forward.The DISCLOSE Act would require corporations and interest groups to identify themselves when they sponsor political ads and, in the case of smaller organizations, to reveal their donors.President Obama and Democratic leaders hoped the bill would, among other things, help undo the damage of the recent Citizens United ruling, in which the Supreme Court threw out limits on corporate political spending. And since the bill merely called to publicize who was putting money into politics, rather than limit that money, Obama and the Democrats hoped they could peel off enough Republican votes to break a filibuster. They were wrong. Not one Republican voted to proceed with debate--not even after the Democrats modified the bill, in order to address GOP arguments that it would treat unions differently from other groups.

Why Higher Capital Standards Are Needed - At one level, the pursuit of higher and more robust capital requirements for banks is not going well. The United States Treasury insisted, throughout the yearlong financial reform debate, that capital should be the focus — increasing the loss-absorbing buffers that banks must carry — and that it (and other regulators) needed to negotiate this is through the Basel Committee process.But Basel has come under great pressure from the banking lobby, which argues that any increase in capital requirements would limit lending and slow global growth, an issue discussed by Douglas Elliott in this useful paper. The Institute of International Finance, a lobbying group for big banks, issued an influential argument along these lines, and the European stress-test results strongly suggest that European politicians do not want to press more capital into their financial system — just enough would be fine with them.However, at another level — in terms of the analytical consensus around these issues — a great deal of progress has been made.

Reforming the global financial system - Nice interactive graphic from the FT on reforming the financial system

Ezra Klein - Why you should care about Basel III - We just passed financial reform. There was a signing ceremony and everything. So why should we care about Basel III? Will it actually matter for our financial system? It matters immensely. The Dodd-Frank bill was the biggest set of changes in financial reform since the Great Depression, but it’s only half the battle. It leaves many important things to be decided by the regulators. Of those, the most important is the level of capital that banks have to hold in order to deal with the unexpected. The Basel III process is a way of getting countries around the world to agree on how much capital banks will carry. And that’s a tricky balance: On the one hand, we clearly need larger safety margins. We don’t want to have to go through this crisis again. On the other hand, safety margins are expensive. If there are too many, bank loans will become more expensive for consumers.

Basel Group Agrees to New Global Rules for Banks - NYT - Central bankers and regulators have reached an almost unanimous preliminary agreement on new standards to reinforce the stability of the global financial system, adding to investors’ confidence in the outlook for many banks. Under the new requirements, banks would have to hold more in capital reserves and more cash on their balance sheets to cushion against unexpected shocks, though regulators have not specified a minimum amount. One country — Germany — said it needed more time to negotiate accords that it believed could put some of its lending institutions at a disadvantage.

The Basel Committee Moves Quickly on Basel III - The Basel Committee on Banking Supervision put on a burst of speed today, coming to broad agreement on many of the major outstanding issues regarding Basel III. (For more information on the goals, consequences, and process of the committee, please see my primer on Basel III.) The good news goes beyond the high probability of meeting their deadline. The Committee appears to have preserved the integrity of their original set of proposals, laid out in a consultative document in December of last year. There has been considerable "horse trading", but the results appear sound.

Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements - Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour (among others, the SEC's suit against Goldman), and never looked back. Well, I did not forget about it, and thanks to the uptick in flights — and thus reading time — in the last few months, I can now credibly claim to have read....well, not every single word in the Examiner's Report (some appendices are just pages of CUSIPs), but all of the substantive sections, including all of the substantive appendices, and many of the underlying documents.Now, since I read the whole damn thing, I think I have a pretty good handle on what went wrong at Lehman, and why it failed. Obviously, there isn't just one reason why Lehman failed, despite what most commentators would have you believe. But there's one issue that stands out to me as the biggest problem at Lehman — in short, they were misrepresenting their liquidity pool. In a huge way.

Goldman Already a Step Ahead of FinReg - Goldman Sachs has figured out a novel approach to getting around the Volcker Rule’s restrictions on trading: it’s remaking its risk-taking traders into asset managers, and the rest of Wall Street may soon follow, FOX Business Network has learned.The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets.The move is designed to exploit a loophole in the Volker Rule, part of the recently signed financial-reform legislation named after presidential economic adviser and former Federal Reserve chief Paul Volcker. The Volcker Rule is supposed to scale back on Wall Street risk taking by ending what’s known as proprietary trading, where firms use their own ideas and capital to make market bets.

Financial reform whack-a-mole - ONE of the most contentious pieces in the financial reform bill was the Volcker rule, which forced banks to move proprietary trading off their books. It was intended to prevent banks protected by government guarantees from making speculative bets on the market and barred them from operating and investing in hedge funds and private-equity funds. But the final version of the rule was watered down. This story in the New Yorker has some of Paul Volcker's thoughts on the matter ("[I]t doesn’t have the purity I was searching for").Now a report from Fox Business outlines how Goldman Sachs intends to "comply" with the rule. The firm will basically move its proprietary trading team to its asset management division where traders will have access to Goldman's clients. By reclassifying traders as asset managers and allowing them to take positions on behalf of clients, even one client, the bank circumvents restrictions around proprietary trading.

Too Bad Not to Fail - A synthetic collateralized debt obligation (CDO), the subject of the Security and Exchange Commission’s lawsuit against Goldman Sachs this April, is also a derivative. But before you can have a “synthetic” CDO, you have to have an actual CDO. What’s that? Say that a person who is a poor credit risk takes out a mortgage he can’t afford. Thousands of such mortgages are collected into a security—a mortgage-backed bond. Then a number of those bonds are collected into another security. This is a CDO that is sold to investors. A “synthetic” CDO refers to an actual CDO with no underlying asset, meaning, in this case, no mortgages. It is essentially a wager, and, like any bet, it requires two sides: a “long,” who is betting that housing prices will go up, and a “short,” who is betting that housing prices will decline. The short bettor, by means of a credit default swap (CDS), agrees to pay the interest owed to the long bettor. In return, the long bettor agrees to pay the principal of the CDO if it defaults. Goldman was the bookie who put the bets together; Rube Goldberg would have blanched at such a grotesque contraption.

Goldman Reveals Where Bailout Cash Went - Goldman Sachs sent $4.3 billion in federal tax money to 32 entities, including many overseas banks, hedge funds and pensions, according to information made public Friday night.Goldman Sachs disclosed the list of companies to the Senate Finance Committee after a threat of subpoena from Sen. Chuck Grassley, R-Ia.Asked the significance of the list, Grassley said, "I hope it's as simple as taxpayers deserve to know what happened to their money."He added, "We thought originally we were bailing out AIG. Then later on ... we learned that the money flowed through AIG to a few big banks, and now we know that the money went from these few big banks to dozens of financial institutions all around the world."Grassley said he was reserving judgment on the appropriateness of U.S. taxpayer money ending up overseas until he learns more about the 32 entities.

Goldman Sachs Relied on Citigroup, Lehman for AIG Protection - Goldman Sachs Group Inc. documents show that it depended on banks including Citigroup Inc. and Lehman Brothers Holdings Inc. for protection against a failure of American International Group IncCitigroup, which received the biggest government bailout of any U.S. bank, was Goldman Sachs’s largest provider of credit- default swaps on AIG as of Sept. 15, 2008. Lehman Brothers, which declared bankruptcy that same day, is listed as fifth- biggest. Credit-default swaps act like insurance contracts, paying the owner in the event of a default. “Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counterparties,” Rosner said. Moral hazard is created when government bailouts are perceived to reward risky activity.

Goldman Threatened With Audit - Goldman Sachs is facing a threat by the Financial Crisis Inquiry Commission to bring in outside accountants to comb through the bank’s systems for data on its derivatives business, the panel’s chairman has said.The commission will not back down from demands for information Goldman’s executives have maintained they do not track, Phil Angelides told the Financial Times. “We have a deep level of questioning about whether we’re getting the straight scoop here and whether Goldman is working with us on information that they surely have,” Mr Angelides, chairman of the US Congress-appointed commission.His comments mark the latest episode in the dispute between Goldman and the commission, which has scolded the bank for its “abysmal” response to the inquiry. The frustration of FCIC members was evident several weeks ago when two of Goldman’s executives, Gary Cohn, president, and David Viniar, chief financial officer, told the panel the bank’s accounting systems did not break out trading revenue generated strictly from derivatives.

Wall Street Still Doesn’t Have a Sheriff -THE current range of opinion on the Securities and Exchange Commission’s $550 million settlement in the Goldman Sachs fraud suit lines up closely with that evoked by previous S.E.C. settlements with corporate defendants. Some Americans are outraged that Goldman “got off easy,” while others feel the deal could be a model for gaining some measure of justice against those responsible for Wall Street’s meltdown. Both sides are wrong: at best, such agreements reflect case-specific facts and circumstances; at worst, they are nearly arbitrary. While the government often claims such high-profile deals are of historic significance, they typically have little effect on future cases and do nothing to resolve long-standing conflicts as to how the law should treat misconduct by public companies.

Let Them Eat Losses - This had nothing to do with the so-called “Trickle Down” theory. This was “Gush Up.” In Bush/Obama economics, the richest and biggest that had lost billions through bad investments, or were in danger of going bust, had to be rescued. If the Über-Rich weren’t saved, there would be nothing left to trickle down to the population below. By government decree, those taxpayers who had never felt any trickle to begin with, now had to finance the failed financiers.If taxpayers found themselves unable to understand the thinking behind “Gush Up”, it was not surprising. Why should it make sense? Nothing else did. The entire financial system had been hijacked by bandits. It was criminal from beginning to end.

Which is the Bigger Threat: Terrorism or Wall Street Bonuses? - Which is a greater threat to the nation — terrorism or the relentless decline of middle income families? Unless we abandon our core values out of unwarranted fear, terror cannot fundamentally change our way of life. The number of people affected by growing income disparity is vast. When I was a student, income disparity was indicative of an underdeveloped and unstable society.\The government appropriately devotes enormous resources to protect our lives and property from terrorism.  It is unthinkable that a leader would display any weakness opposing this threat.  Politicians have stiff backbones when it comes to terrorism. In contrast, the government is timid and half-hearted in its approach to the system which perversely rewards a few Wall Street traders with billions of dollars of bonuses, yet allows the foundation to decay.

How to Pay a Banker - The United States’ Federal Reserve Board recently adopted a policy under which bank supervisors, the guardians of the financial system’s safety and soundness, would review the compensation structures of bank executives. Authorities elsewhere are considering or adopting similar programs. But what structures should regulators seek to encourage? It is now widely accepted that it is important to reward bankers for long-term results. Rewarding bankers for short-term results, even when those results are subsequently reversed, produces incentives to take excessive risks. But tying executive payoffs to long-term results does not provide a complete answer to the challenge facing firms and regulators. The question still remains: long-term results for whom?

Study: Boards Use Peers to Inflate Executive Pay - Corporate boards appear to routinely use compensation peer groups to artificially inflate pay for their chief executives, helping to contribute to the cascading increases in executive compensation over the last several years, according to an academic study on corporate governance. While the rate of pay increases was nearly 11 percent in one recent year, the study highlights one of the various ways that corporate boards go about determining huge compensation packages for executives.  Executive pay has increased substantially over the last few years. For example, in 1965 chief executives at major American companies earned 24 times more than a typical worker, while in 2007 they made 275 times more, according to the Economic Policy Institute. Are chief executives that much more valuable now than they were 45 years ago?

Cash piles - TYLER COWEN has been asking bloggers to explain why, if a demand shortfall is the explanation for the American economy's continuing limpness, corporate profits are so high. Yesterday, the New York Times took a look at the question:So, one explanation would seem to be that firms have trimmed workforces by more than called for based on declines in sales alone, and having created a deep pool of unemployed labour, firms now have the leverage to demand higher levels of productivity from remaining workers without paying higher wages.Now, higher productivity is a good thing. It does lead to worker dislocations, but because new wealth is generated expansion should take place elsewhere in the economy, ultimately absorbing unemployed workers. A problem with this story, however, is that in recent years firms have opted to hold on to cash rather than save. Cash holding as a share of firm assets is at its highest level since the mid-1960s. A recent piece in the print paper examined this phenomenon:

Ma! He's Looking At Me Funny! - That’s basically the thrust of Mort Zuckerman’s op-ed accusing Obama of “demonizing” business. The op-ed contains the usual — false claims that Fannie and Freddie caused the financial crisis, false claims that fear of government policy — as opposed to weak demand — is holding back investment and hiring. But I was struck by this passage: The predilection to blame business was manifest in one of President Barack Obama’s recent speeches. He lashed out at “unscrupulous and underhanded businesses, who are unencumbered by any restriction on activities that might harm the environment, take advantage of middle-class families, or, as we’ve seen, threaten to bring down the entire financial system.”This kind of gratuitous and overstated demonisation – widely seen in the business community as a resort to economic populism on the part of Mr Obama to shore up the growing weakness in his political standing – is exactly the wrong approach.That sounded odd, since Obama is not, in fact, given to random business-bashing. So what’s the context? Here’s what Obama actually said:

Fitch says its head will essplode - GM, with $75 bn in cash in reserves, bought AmeriCredit, a small subprime lender,  in an all cash deal for $3.5 bn. GM is also currently in bankruptcy.AmeriCredit, which is rated BB by Fitch, was put on watch by Fitch, after the deal announcement.Fitch is unsure whether the deal will help or hurt the debt rating of AmeriCredit.A giant, though bankrupt, company, that is effectively a ward of the state, with an upcoming IPO being steered by US Treasury, is buying a tiny subprime lender for all cash – and Fitch says it can’t tell which is the good company and which is the bad.That is the current state of finance, rating agencies and Treasury department machinations, in a nutshell.

Hypocrite Geithner Says Private Sector Must Drive Economy - Like most politicians, Treasury Secretary Tim Geithner likes to talk out of both sides of his mouth, generally saying contradictory things in sound bites that may sound reasonable at first glance, but look idiotic upon closer inspection. For example please consider Private sector must drive economy: Geithner: Businesses are still "very cautious" and are trying to get as much productivity from current employees as possible, Geithner explained. "They are in a very strong financial condition though. I think that's very promising because there's a lot of pent-up demand and there's a lot of capacity still for them to step up and start to invest and hire again," he added. "The government can help but we need to make this transition now to a recovery led by private investment." For starters Geithner is wrong about pent up demand. The only pent up demand is in the opposite sense Geithner suggests.  

Blame Games -The U.S. economy is limping along. The job market is in rotten shape, and business investment is hitting historic lows. And, if you’re looking for a culprit for this dismal state of affairs, many businesspeople would be happy to point you to the White House. Companies aren’t hiring or investing, businessmen say, because of Barack Obama’s anti-corporate attitude and a blizzard of new regulations and proposed taxes...There’s no doubt that Obama is unpopular in the business world. ... From an economic perspective, the important question is whether such perceptions are really what’s keeping the economy in neutral. Those who think that they are say that “uncertainty surrounding regulations and taxes,” ... is making business hold back. But uncertainty is a fact of business life, and the impact of new regulations on most companies has been overhyped: unless you’re a financial-services or health-care company, Obama’s initiatives aren’t remaking your business. In fact, Wall Street and health care are among the few industries currently adding jobs, which suggests that new regulatory burdens aren’t the cause of sluggishness. In surveys, meanwhile, fewer small businessmen cite regulation as their biggest problem today than did in the boom years of the nineteen-nineties. ...

Unofficial Problem Bank List over 800 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for July 30, 2010. Changes and comments from surferdude808: FDIC actions this week led to many changes in the Unofficial Problem Bank List as they closed five institutions and finally released their enforcement actions for June 2010. The list total finally pushes through the much anticipated 800 level and finishes the week at 808 with aggregate assets of $414.8 billion.

Banks aren't lending. One more One more time -Wait!  A few banks are making loans and keeping the loans on their books (eg, see comments here)Yea, but...  That is, fundamentally, a dumb business for anyone to be in.  This is why only "yokel" banks out in the sticks are actually "lending".  What do I mean?

  • Today a bank making a typical home loan ties up, say, $200,000 for 30 years. 
  • They get 5.75% on that money. 
  • But they pay typically 1.25% (short term deposits) to 3.5% (long term deposits) for the use of the $200K
  • Although pundits on CNBC say inflation will begin next year, most folks say it's years away.  Still, at some point rates will rise.
  • Within the 30 year period of the loan, the bank is almost guaranteed to be cash-flow negative at some point.
  • So the bank relies on the fact that most houses are sold within 10-15 years, and therefore they will come out ahead.
  • But this requires being able to fortel the future.
  • This plan worked most of the 20th century, but not after the late 80's.  Rates became too uncertain, mostly due to securitization.

Small-Business Program From Obama May Create $300 Billion of `Junk' Loans (Bloomberg) -- President Barack Obama is on the verge of creating as much as $300 billion in credit for small businesses as bankers raise doubt about whether there’s demand for new loans and how much will be repaid. The U.S. Senate may vote this week on a bill to funnel $30 billion of capital to community banks, whose business customers typically are small firms. Banks could leverage the sum to make $300 billion in loans that create jobs, according to a Senate summary. That could more than double the commercial and industrial loans at eligible banks as of the first quarter, according to data compiled by KBW Inc. Bankers say the problem isn’t scarce credit, it’s lack of demand from creditworthy firms in a weak economy. The result may be more loans given to distressed firms and higher losses.

Republicans block small business plan in Senate -(Reuters) – Senate Republicans blocked a $30-billion plan to help community banks boost lending to small businesses, dealing a blow to President Barack Obama's election-year battle to reduce unemployment. Tempers ran high as Democratic leaders failed to muster the 60 votes needed to advance the measure over Republican objections. Republicans were upset that Democrats shut them out from amending the package that also includes about $12 billion in tax breaks for small businesses. Obama twice this week called for the Senate to pass the bill. He wants to show Americans he is focused on job creation, mindful that voter anxiety over the lackluster economy and the 9.5 percent unemployment rate could translate into big losses for his Democratic Party in November congressional election.

Hank Paulson: Blame Crisis on FHA/GSEs - Hank Paulson, the criminally inept Treasury Secretary who shoveled trillions of taxpayer dollars to insolvent banks, facilitated the grand theft of some near $20 billion dollars from AIG by Goldman Sachs (where he was previously CEO), is attempting to change the narrative of the credit crisis and collapse.In today’s Washington Post piece, Paulson ignores facts, rewrites history, and fabricates causes of the economic collapse:“A significant root cause of the crisis was the combined weight of government policies promoting homeownership; these are apparent in the housing GSEs, the Federal Housing Administration (FHA), the Federal Home Loan Banks, the federal tax deduction for mortgage interest and various state programs. Homeownership was overstimulated to the point that it was unsustainable and dangerous to the broader economy.”Let us point out a small problem with Paulson’s rewrite: Throughout the 20th century, interest rates were kept in a realistic range, at least relative to economic growth, by bond traders and the Fed

Did regulation cause the housing crisis? - When people talk about government intervention as a causal factor in the house price bubble, they’re usually talking about the contentious issue of Fannie/Freddie, the CRA, and other policies associated with encouraging homeownership. Much more important than those factors, whose existence are not necessary conditions for the bubble, may be local regulations that restrict land use. A new paper investigates: “Using data from 326 US cities, our study examines empirically how residential land use regulation, geographic land constraint and credit expansion are related to the swing of house prices between January 2000 and July 2009… We find that cities that are more regulated or have less developable land experienced greater price gains between January 2000 and June 2006, and greater price declines between June 2006 and July 2009.

Too Big to Nail: Why There Will Never be an Investigation into Freddie and Fannie - Jonathan Weil asks why there is no investigation into Freddie and Fannie: Still absent from the government’s agenda is any serious effort to hold anyone accountable for their ruin or investigate why they collapsed. I can only assume Weil’s column is rhetorical, because it is shriekingly obvious why there will never be an inquiry into the failure of Freddie and Fannie. The two GSEs did exactly what Congress mandated them to do, while Congress also stymied the attempt to reform them in 2004-05. Politicians are not interested in establishing an inquiry that can only lead to one conclusion: they were the authors of the global financial crisis of 2008.

Debating the Securitization of Mortgages - Has the securitization of mortgages been a great boon or a terrible curse? Assets backed by American mortgages enable global risk-sharing, but securitization may also have weakened lenders’ incentives to screen out bad borrowers and to renegotiate bad loans. And should the government continue to subsidize securitization through entities such as Fannie Mae and Freddie Mac?The pre-2006, conventional narrative about the rise of securitization ran something like this. Once upon a time, local bankers — all of whom looked and talked like George Bailey — received deposits from their neighbors and then lent this money back to other neighbors who wanted to buy homes. These bankers had a lot of local knowledge, but they were vulnerable to swings in interest rates or the local housing market. We should never forget what happened to the savings and loan industry when it was ensnared by rising interest rates. According to the legend, this world was shattered by free-wheeling, guacamole-chomping financial entrepreneurs who figured out how to tie mortgage payments to securities and sell those securities worldwide. Michael Lewis’s “Liar’s Poker” provides us with an indelible picture of Salomon Brothers’ Lewis Ranieri, who coined the term securitization and did as much as anyone to make that market. Mr. Ranieri was hardly alone.

The Hidden Leverage of Mortgage Securitization - Ed Glaeser has a nice piece about the debate over whether securitization should get the blame for the subprime mess. But it doesn't address one of the problems created by securitization: hidden leverage.When banks (commercial and investment) sold off mortgage backed securities, they got them off their balance sheets, and so there was a pretense that they were no longer liabilities. But in order to sell the MBS, the lenders had to offer repurchase agreements, which said that if there was something materially wrong with the loan underwriting, the investor could return the mortgage backed security to the lender at par. Lenders also often kept residual positions of mortgage backed securities, meaning that to reassure investors, the lenders (i.e., the sellers of the securities) would take first loss positions. Ironically, the fact that financial institutions ate some of their own cooking--something that should have mitigated moral hazard--made them more vulnerable.

Seeing vs. Doing on Problem Loans - NYTimes -“WHAT did they know, and when did they know it?” Those are questions investigators invariably ask when trying to determine who’s responsible for an offense or a misdeed. But for the Wall Street banks whose financing of the subprime mortgage machine placed them at the center of the credit crisis, it’s becoming clear that a third, equally important question must be asked: “What did they do once they knew what they knew?” As investigators delve deeper into the mortgage mess, they are finding in too many cases that Wall Street firms did nothing when they learned about problem loans or improprieties in lending. Rather than stopping practices of profligate originators like New Century, Fremont and Ameriquest, Wall Street financiers, which held the purse strings for these companies, apparently decided to simply look the other way.

FDIC to Issue Bonds Backed by Residential Mortgages (Bloomberg) -- The Federal Deposit Insurance Corp. plans to issue securities backed by about $500 million of home mortgages acquired from failed banks, leaning again on guarantees to help sell the debt.The FDIC will back about 85 percent of bonds created for the offering and it may not sell the deal’s junior-ranked notes, which will lose principal first amid any defaults on the underlying loans, David Barr, an agency spokesman, said.“The decision hasn’t been made yet,” he said today in a telephone interview. “We may sell all or a portion of the certificates at some point in the future,”The FDIC, which has closed more than 250 banks since 2008, began raising cash in the bond market for the first time since the early 1990s in March. The Washington-based agency that month sold $3.8 billion of guaranteed notes in three deals

Extend and Pretend: The Russian doll version - The US government is looking at possible solutions for the mess that Fannie Mae and Freddie Mac have long since become. There is, however, no solution available. Period. Simple as that. The government has dug itself into a hole when it comes to mortgages and mortgage-based securities that it cannot find a way out of.  If the government had any sense left, it would get out of the mortgage market by, let's say, yesterday morning. Take apart Freddie, Fannie and Ginnie Mae, along with the Federal Housing Administration, sell off all of their assets at whatever price is being offered (if any), and be done with it already. But the government has no such sense. It will instead elect to insert more layers of Russian dolls, one after the other, to maintain the illusion that domestic real estate has some actual intrinsic value left. And sure, yes, this does make some sense, if you look at the situation in just the right sort of light.

Say Goodbye To The American Dream - Even die-hard optimists must admit that the housing market is rolling over again, as I recently discussed in The New Housing Bust. Ad hoc government programs that artificially pushed demand forward have wound down. House sales are falling and inventories of houses for sale are increasing. A nationwide decrease in average home prices can't be far behind. When prices fall, more home owners become home owers—these underwater home "owners" owe more on their house than it is worth. This circumstance is called negative equity.As of June, 11.2 million Americans were underwater on their mortgages. Of these, about 5 million were paying on a mortgage that exceeded their home's value by 25% or more. Talk about red ink—these home "owners" taken all together were $656 billion shy of getting even at current prices. (See my post The New Housing Bust.) What a disaster! A new report from the New York Fed calculates the "effective" home ownership rate in the United States—

Don't Give the Tax Credit Too Much Credit - The Home Buyer Tax Credit contained in the American Recovery and Reinvestment Act of 2009 has been given much credit for buoying the housing market. But simple arithmetic shows that the credit’s effect has been minimal. Last week the Federal Housing Finance Agency released its housing price index for May 2010, and yesterday the Standard & Poor’s/Case-Shiller index was released. Both show that housing prices have not fallen significantly, if at all, from what they were a year before. News articles have asserted that housing prices stopped falling because of the tax credit and have planted seeds of worry that a housing-market collapse could continue when the credit expires. The Internal Revenue Service reports that only $19 billion of tax credits have been claimed so far. The average credit was $6,000 to $7,000, small compared with the average sales price for a home of more than $200,000. More importantly, most home sales transactions involved no tax credit because the buyer was unqualified, or perhaps unaware.

The New Math Surrounding HAMP Doesn’t Add Up – There is no other way to say this: we’re being lied to. Willfully. Anyone who managed to read headlines around the U.S. Treasury's latest HAMP report card last week would likely have thought the program a huge success –- with more than one media outlet trumpeting impossibly miniscule re-default rates among permanent HAMP mods. Surprisingly, even a few trade publications –- media outlets that ought to know better – took the “low redefaults!” theme and made screaming headlines out of it last week. At HW, we chose not to run with the HAMP redefault numbers except to note that Treasury officials had added them into the latest report card. And this choice was made with purpose: we knew these numbers were fake. Nobody gets a 1.7% redefault rate 6 months after modification –- not even Uncle Sam — and any media outlet reporting that number with a straight face quite simply doesn't understand the industry it's covering.

Obama Housing Bailout Under Attack – Criticism of the Obama Administration's mortgage bailout, the Home Affordable Modification Program, is reaching a fever pitch, and I know this because, among other things, the Administration itself appears to be mounting a defense. Recently, reporters who cover housing were called to the Treasury Department for a "background briefing" by Administration officials, who tried to focus attention on the many, varied Administration efforts to stabilize housing; the message's not all about our modification program. Yesterday I received several emailed announcements from both HUD and the Treasury. One alerted us to a "Conference on the Future of Housing Finance," set for quite possibly the slowest news week near the end of August.

Treasury: HAMP Re-default Rate incorrect - Several analysts noted the reported re-default rate appeared too low ... it was.  HuffPo has the story: HAMP Report Revised After Analysts Question New Metric The Obama administration has revised its latest monthly report on its signature foreclosure-prevention plan, deleting a heavily-criticized performance metric used to measure whether assisted homeowners are re-defaulting on their taxpayer-financed mortgages."In an effort to review and better explain the methodology, we learned from our program administrator, Fannie Mae, that not all cancelled loans were included in the underlying information provided to Treasury,"

Lawler: “Slam-Dunk” Stimulus? MS = Missing Something!!!! - Early this week Morgan Stanley put out a piece entitled “Slam Dunk Stimulus,” in which MS analysts argue that changing mortgage refinance “requirements” (for GSE or government mortgages) would “inject a significant amount of stimulus into the US household sector,” have “zero impact on the budget deficit,” and would “not require an exit strategy” and would “not distort markets.” The “logic” of the proposal is straightforward: if the GSEs, FHA, and VA already “own” the credit risk on the mortgages they own or guarantee, then allowing a more “streamlined” refi process “makes sense.” The authors note that “(t)he notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications for refinancing has been raised by others in the past.” What the authors do NOT note, however – and this is truly shocking -- is that this “notion” was a major reason why the Administration/the GSEs rolled out the well-intentioned but poorly executed Home Affordable Refinance Program, or HARP!!!!!

Popular ‘Zero Down’ Mortgage Program Makes Comeback – One of the nation’s last sources of no money down financing for home loans appears to be making a comeback: Legislation that restores a Department of Agriculture home-buying program is headed to President Barack Obama’s desk for signature.The legislation makes the USDA’s Single-Family Housing Guaranteed Loan Program self-sufficient, the National Association of Realtors reports. Borrowers will have to pay a higher “guarantee fee” of 3.5%–essentially upfront mortgage insurance–but the fee can be folded into the mortgage. Buyers won’t mind paying a bit more in fees, says Sue Botelho, a senior mortgage advisor with Waterstone Mortgage Corp. in Ft. Walton Beach, Fla. “It’s great news,” she said. “It’s a huge part of my business. I am thrilled.”

Cash-In Refinancing Nears Record High in Q210 – It's never been cheaper to borrow money to buy a house, but when it comes to refinancing more borrowers are choosing to pay down their mortgage principal rather than increase it by borrowing against their home's equity. Borrowers that contributed additional cash to pay down their mortgage principal when refinancing tied for the second-highest rate in 25 years, according to the latest Freddie Mac quarterly report. During Q210, 22% of homeowners that refinanced their first-lien mortgage paid down part of their principal balance during the process. The cash-in rate peaked at 36% in Q409, and the Q210 rate ties Q204 for the second highest since Freddie Mac began tracking the data in 1985. The rate was 19% in Q110 and 16% in Q209. According to separate monthly volume reports from April to June, Freddie Mac's total refinance volume was $54.6bn during Q210, down nearly 60% from $134.5bn during Q209.

Survey shows house prices falling in June, but long wait for house price indexes - Campbell Surveys put out a press release this morning: Home Prices Tumble in Most Categories During June (no link)  A drop in homebuyer activity helped trigger a noticeable decline in home prices between May and June, according to the latest Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Average prices tumbled by 6.8% for move-in ready foreclosed properties, 6.3% for short sales, and 4.6% for non-distressed properties. “Buyers just plan on deducting the $8,000 off what they are going to offer now. So, now prices are dropping to compensate for the credit not being available,” “Contracts signed in June will be closing in July and August,” The Case-Shiller index is a three month average and is released with a two month lag. The Case-Shiller house price index to be released tomorrow will be for a three month average ending in May.

Anecdotal Evidence That Banks Are Hiding Depressed High End Real Estate - Why are Banks Hiding High End Residential Real Estate? Real Estate Channel - Without the FTB tax credit, the housing market is receiving artificial demand and price support from the FHA loan guarantees and banks sitting on mortgages of homes once valued at $300,000.  Banks in areas that were severely damaged by the downturn in domestic real estate (Cook County, Illinois, Miami-Dade County, Florida, Orange County, California) have significant inventories of homes worth more than $300,000 that they will not put on the market, even after foreclosures lasting more than 2 years. According to Bruce Krasting over at Zero Hedge, the FHA is “Officially Broke” anyway: FHA – “We are Officially Broke” After perusing the data above, one would wonder why… (Link to FHA/FR)

New US Home Sales Surge in June, Inventory at 42-Year Low…CNBC -Sales of new U.S. single-family homes rebounded strongly in June from the prior month's record low, driving the number of houses on the market to its lowest level in nearly 42 years. The Commerce Department said on Monday sales jumped 23.6 percent to a 330,000 unit annual rate from a downwardly revised 267,000 units in May. The sales pace last month was still the second lowest since records started in 1963. The percentage increase was the largest increase since May 1980, and partially unwound the prior month's historic 36.7 percent decline. Analysts polled by Reuters had forecast new home sales rising to a 320,000 unit pace last month from May's previously reported 300,000 units.

New Home Sales: Worst June on Record - Ignore all the month to previous month comparisons. May was revised down sharply and that makes the increase look significant. Here is the bottom line: this was the worst June for new home sales on record. The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 330 thousand. This is an increase from the record low of 267 thousand in May (revised from 300 thousand). The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2010. In June 2010, 30 thousand new homes were sold (NSA). This is a new record low for June. The previous record low for the month of June was 34 thousand in 1982; the record high was 115 thousand in June 2005. The second graph shows New Home Sales vs. recessions for the last 47 years. And another long term graph - this one for New Home Months of Supply. Months of supply decreased to 7.6 in June from a revised 9.6 in May (revised from 8.5). The all time record was 12.4 months of supply in January 2009. This is still very high (less than 6 months supply is normal).

Not earthshaking, but here is an interesting comparison for today - US new home sales rebound in June in the Financial Times today and New Home Sales: Worst June on Record at Calculated Risk. Both headlines are "true". Much of the same data sources and figures are used. The differences in information are not as stark as the headlines suggest after reading the articles. CR offers a broader historical context but that context is not left out of the Financial Times. Both appear to offer information for the same purpose, as information (ie. not information from National Realtors Assoc.). Yet I come away with very different feelings about the nature of this news in a casual reading.

Chart of the Day: Home Builder Stocks and New Home Sales In a note to investors today, a well-regarded strategist on the equity sales desk at a major sell side firm put up the following two Bloomberg charts next to each other.The two charts reflect different time frames but are from related data sets. The first chart is a long-time series dating from 1963, the seasonally-adjusted annualize rate of new home sales. You can see home sales falling off a cliff into this past recession. The second chart is a three-day chart of the ITB, the iShares home construction ETF which consists mostly of home builder shares. The home builders are crushing today as new home sales in June came in up over 23% month-over-month.  Of course, May was a record low, the slowest ever in 46 years of data

Is The Real Estate Market Turning Around? - Interesting things have been happening in the real estate markets. The home sales index spike from the home buyer tax credit has almost run out. If you didn't have a deal in escrow by April 30, you didn't get the credit. The time to close a deal was extended to September 30. The predictions were that we'd see a fall in July activity which is exactly what is occurring. The reports that are currently coming in don't yet reflect July sales which will show a drop in sales. For example, the Case-Shiller report came in today for May, 2010, but that report is a three-month average of prices. The report said prices were up 1.2% MoM, and 5.4% YoY. That was the peak of housing credit driven sales. According to S&P which publishes the index:

Trillions for Wall Street – On Tuesday, the 30-year fixed rate for mortgages plunged to an all-time low of 4.56 per cent. Rates are falling because investors are still  moving into risk-free liquid assets, like Treasuries. It's a sign of panic and the Fed's lame policy response has done nothing to sooth the public's fears. The flight-to-safety continues a full two years after Lehman Bros blew up.  Housing demand has fallen off a cliff in spite of the historic low rates. Purchases of new and existing homes are roughly 25 per cent of what they were at peak in 2006. Case/Schiller reported on Monday that June new homes sales were the "worst on record", but the media twisted the story to create the impression that sales were actually improving! Here are a few of Monday's misleading headlines: "New Home Sales Bounce Back in June"--Los Angeles Times. "Builders Lifted by June New-home Sales", Marketwatch. "New Home Sales Rebound 24 per cent", CNN. "June Sales of New Homes Climb more than Forecast", Bloomberg.

Hooray for bad news - STRANGELY enough, many news outlets have reported todays figure on new home sales for the month of June in a positive fashion. Bloomberg, for instance, noted:U.S. stocks rose, erasing the Dow Jones Industrial Average’s 2010 decline, after a report showing improved new-home sales eased concern about the economy. So what about that sales figure? Well, the number everyone has seized on is the 25% increase in sales from May to June. And that sounds great! But May new home sales (seasonally adjusted, annual rate) set the all-time record low for monthly sales. Let me show you what that looked like: On a year-over-year basis, sales in June were down nearly 17%. This is, by any comparison except that with the previous month, an atrocious housing report. Though not an unexpected one. The post-credit housing relapse is upon us.

Let’s Stop Praying to the Credit Score - Mortgage brokers, and those hoping to buy homes, are disgusted by the preeminence of the credit score in “scoring” a home loan today. According to an article, in Friday’s New York Times, this overemphasis on credit scoring in the home mortgage market is not helping the economic recovery either, because people just cannot qualify for a home. Some people’s scores have decreased even though they have done nothing differently. The author’s interesting article recounts many mistakes in his own credit report, a common phenomenon as it turns out.  The author is so disguised, he thinks the CFPB ought to take up credit reporting and scoring as a high priority once it is up and running.

Foreclosures Rise in Three-Fourths of U.S. Cities in 2010 - Foreclosures increased in 154 of 206 US metro areas in the first half of 2010 over the year-ago period, according to RealtyTrac, which analyzed foreclosure data in metropolitan areas with 200,000 people or more. Metropolitan Statistical Areas (MSAs) in four states — Florida, California, Nevada and Arizona — accounted for the top-20 foreclosure rates in the country. Florida had nine of them, followed by California with eight, Nevada with two and Arizona with one. Las Vegas led the way. One in 15 houses in Las Vegas received a filing. That’s 6.6% of all houses there for a total of 53,525 properties. It is a decrease of nearly 9% from the first six months of 2009 and 15% below the amount of foreclosures in the last half of that year.

Foreclosure Filings Rise in 75% of U.S. Metro Areas - Foreclosure filings climbed in three-quarters of U.S. metropolitan areas in the first half as high unemployment left many homeowners unable to pay their mortgages, according to RealtyTrac Inc. The number of properties receiving a filing more than doubled from a year earlier in Baltimore, Oklahoma City and Albuquerque, New Mexico, the mortgage-data company said today in a report. Notices of default, auction or bank seizure rose more than 50 percent in areas including Salt Lake City; Savannah, Georgia; and Atlantic City, New Jersey.“Foreclosures are spreading out from areas that had been hardest hit,” Rick Sharga, senior vice president for marketing at Irvine, California-based RealtyTrac, said in a telephone interview. “We’re dealing with underlying economic weakness as opposed to unsustainable home prices and bad loans.”

Census: Moves because of evictions increase – The 2009 American Housing Survey shows the stark effect the recession and housing crisis have had on some people's lifestyles in just two years. The survey, last conducted in 2007, captures the brunt of the downturn's impact on housing. "It seems to mark some erosion in the standard of living of Americans,". "It's not surprising given the depths of the recession. ... Some portions of Americans are now in survival mode."In 2009, when the USA suffered the worst job losses since statistics were created, 8.5 million jobs vanished.The Census survey is based on a sample of about 60,000 housing units, 45,000 of them occupied. It shows:•The number of households that moved in the past year because they were evicted soared 127% to 191,000.•3.1 million households, or 18% of those who moved in the past year, said they're in a worse home, up 10% from 2007; 2.3 million, or 13%, said they're in a worse neighborhood, a 12% increase.

Foreclosures Continue To Dramatically Increase In 2010 - In a very alarming sign for the U.S. economy, foreclosures have continued to dramatically increase in 2010.  But there has been a shift.  Back in 2007 and 2008, experts tell us that most foreclosures were due to toxic mortgages.  People were being suckered into mortgages that they couldn't afford with "teaser rates" or with payments that would dramatically escalate after a few years, and when those mortgages reset, the people who had agreed to them no longer could make the payments.  But now RealtyTrac says that unemployment has become the major reason for foreclosures.  Millions of Americans have become chronically unemployed during the economic downturn and many of them are losing their homes as a result.  But whatever the cause, one thing is certain - foreclosures have continued to skyrocket at a staggering rate. According to a new report from RealtyTrac, foreclosure filings climbed in 75% of the nation's metro areas during the first half of 2010.  At a time when the Obama administration believes that we are "turning the corner", things just seem to get even worse.

Localities, states scramble to spend foreclosure relief aid –— Local governments are at risk of losing more than $1 billion in foreclosure relief funds they can't spend quickly enough. With use-it-or-lose-it spending deadlines weeks away, cities and counties are scrambling to shore up neighborhoods by buying foreclosed and abandoned properties — but are often stymied by market forces, federal regulations and a lack of staffing.The $3.9 billion Neighborhood Stabilization Program (NSP), passed in 2008, was intended to help areas hardest hit by the housing crisis buy foreclosed homes and residential properties. In 2009, Congress added $2 billion via the stimulus bill. Last week, President Obama signed into law another $1 billion for a third round of spending, for a total of $6.9 billion.

Cities View Homesteads as a Source of Income - Give away land to make money?  It hardly sounds like a prudent scheme. But in a bit of déjà vu, that is exactly what this small Nebraska city aims to do.  Beatrice was a starting point for the Homestead Act of 1862, the federal law that handed land to pioneering farmers. Back then, the goal was to settle the West. The goal of Beatrice’s “Homestead Act of 2010,” is, in part, to replenish city coffers.  The calculus is simple, if counterintuitive: hand out city land now to ensure property tax revenues in the future.

Q2 2010: Homeownership Rate Lowest Since 1999 - The Census Bureau reported the homeownership and vacancy rates for Q2 2010 this morning. Here are a few graphs ...The homeownership rate declined to 66.9%. This is the lowest level since 1999.  The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. The increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to the 66% to 67% range - and not all the way back to 64% to 65%. A normal rate for recent years appears to be about 1.7%. This leaves the homeowner vacancy rate about 0.8% above normal. This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 500 thousand excess vacant homes. Other reports have suggested that the rental vacancy rate has declined slightly. This report is nationwide and includes homes for rent.

US home ownership reaches 10-year low - About 18.9 million homes in the US stood empty during the second quarter as surging foreclosures helped push ownership to the lowest level in a decade.The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.6 million in the year-earlier quarter, the US Census Bureau said in a report today. The ownership rate, meaning households that own their own residence, was 66.9 per cent, the lowest since 1999. Lenders are accelerating foreclosures as borrowers fall behind in mortgage payments after the worst housing crash since the Great Depression. A record 269,962 U.S. homes were seized in the second quarter, according to RealtyTrac Inc. Foreclosures probably will top 1 million this year, the Irvine, California-based data company said in a July 15 report.

How far will the homeownership rate fall? - Earlier today the Census Bureau released the homeownership and vacancy rates for Q2 2010.  I posted a few graphs this morning, and I noted that the homeownership rate had fallen to the 1999 level of 66.9%. A few years ago - when the homeownership rate was at 69%, I forecast that the rate would probably fall to the 66% to 67% range. Here is a repeat of the graph from this morning showing the trend of the homeownership rate since 1965.It is certainly possible that the homeownership rate might fall further than I originally expected since certain cohorts now own at a lower than historically normal rate - and many of these people might be turned off on home ownership for some time (if not forever). The second graph shows the homeownership rate by age cohort for 1989, 1999, 2005 (peak of housing bubble), and Q2 2010.

Why are so many homes unemployed? - Theories of unemployed labor are a subset of theories of unemployed resources.  The U.S. housing vacancy rate--an unemployment rate for home--is at its highest level since at least 1965 (see figure).  Why?  Is it sticky prices? Lack of aggregate demand? Structural?House prices may be sticky but they have fallen a lot--maybe not enough--but they have fallen a lot more than have wages.  On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels. What about lack of aggregate demand?  The homeownership rate was 67.2 in 2000 and today it's 66.9.  Thus, we don't have too great a supply of houses in the aggregate so aggregate demand is likely a factor.

Think of the unemployed houses - THIS is an interesting thought experiment, courtesy of Alex Tabarrok, who notes that America's housing vacancy rate is at record highs and writes:House prices may be sticky but they have fallen a lot--maybe not enough--but they have fallen a lot more than have wages.  On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels.What about lack of aggregate demand?  The homeownership rate was 67.2 in 2000 and today it's 66.9.  Thus, we don't have too great a supply of houses in the aggregate so aggregate demand is likely a factor.Is the problem structural?  It does seem that we have too many houses in the South and the West where the boom was concentrated.  If we think of the unemployment rate as a measure of where there are too many houses then the following figure shows that there is a positive correlation between the home vacancy rate and the unemployment rate.  It's not as tight as one might expect, however.  California, for example, has a high unemployment rate but a home vacancy rate slightly below the national average and many states such as Wisconsin have plenty of unemployment but a very low home vacancy rate.

An unemployment problem with an easy solution - Alex Tabarrok draws an interesting analogy between home vacancies and unemployment, pointing out that vacant homes are just unemployed resources. He also provides this chart: Unlike human unemployment, this is a problem with a really easy fix. It’s actually a fix that doesn’t require government spending, includes a bit of non-government Keynesian spending, and will help with our debt as well as lower global poverty. Right now, there are millions and millions of people who want to “employ” our “unemployed” housing stock: immigrants. Simply let more of them in and they will buy, rent, and live in these empty homes.Can you imagine if a such a simple solution existed for any other resource underutilization problem that was having a huge negative impact on the wider economy, and not only were politicians not discussing it, but people aren’t demanding it. What is going on here?

The Oversupply of Larger Homes There is an oversupply of larger homes in the U.S. Home sales have plunged over the past year, leaving builders saddled with excess inventory, especially of larger, more expensive homes. In July, new-home sales were running at a seasonally adjusted annual rate of 870,000 units, down sharply from 1.3 million in 2005. As I've argued before (and here), the problem is exacerbated in the Raleigh/Wake County area. Now that the bubble has popped, the demand for these larger, more expensive homes is gone, yet builders continued to build big. Too many people, most notably the real estate profession, argued that this area was impervious to the housing bubble - keep building. Had the Treasury and the FED not recapitalized the banking sector, banks would have been forced to call in loans of builders and foreclose on many of the homes that have sat empty for two or more years. They've simply prevented the market from clearing.

Supply of Homes Set to Grow - Home builders, which began buying up land lots late last year in anticipation of an economic and housing rebound, are stuck with thousands of acres that are prone to lose value as the market struggles. Many will build homes on the land, rather than write off its value and wait for the market to improve. "Builders are willing to pay a premium to not have that risk on their hands. They're still facing a tremendous amount of stress,""They're discounting the homes, they're making very small profit margins, but they're building homes. They're very interested in securing market share."Several former bubble markets are seeing the biggest increase in home construction. According to Metrostudy, new-home starts in the second quarter show signs of rising 68.1% in South Florida, 83.7% in Naples/Ft. Myers, 65.1% in Las Vegas and 59.7% in Denver from the same period in 2009. Most metro areas are flush with vacant homes as well: Metrostudy found that of the 48 metro areas the firm covers, only four—northern Virginia, San Antonio, Houston and Baltimore—have what is considered a "balanced" inventory of unsold homes, or about three months' supply or less.

The Two Bleak Sides of Housing -- We now have a fairly complete look at the health of the housing market over the last two months and it’s looking pretty weak. Pricing is at 2003 levels, mortgage applications are at levels last seen in the mid-to-late 1990s despite record low rates, inventories are back up to August 2009 levels, new homes sales are at the second-lowest level on record, homebuilder confidence dipped back down to where it was in the dark days of March 2009, and housing starts are at a multi-decade low.  All of this before considering that the pending home sales index, or the pipeline of future existing home sales based on contracts signed without the tax credit, plummeted by 30% in June. While these figures suggest a rather serious situation ahead for housing and the broader economy, one might believe that the other housing market would benefit from such weakness. Well, not so much. The rental market looks flat-lined.

Apartment Rentals Surge in U.S. on Home Foreclosures, Job Gains -U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live. The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half, according to MPF Research. That’s almost double the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December. “Demand is pretty stunningly strong in the first half,” Greg Willett, a vice president at the Carrollton, Texas-based apartment-industry research firm, said in an interview.

Case-Shiller: House Price indexes increase in May - 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 May (actually a 3 month average).This includes prices for 20 individual cities, and two composite indices (10 cities and 20 cities).  From S&P: For the Past Year Home Prices Have Generally Moved Sideways...The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 29.3% from the peak, and up 1.0% in May (SA).The Composite 20 index is off 28.7% from the peak, and up 1.1% in May (SA).The second graph shows the Year over year change in both indices.The Composite 10 is up 5.4% compared to May 2009.The Composite 20 is up 4.6% compared to May 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 (July Update) The S&P/Case-Shiller Composite 20 home price index, a broad gauge of U.S. home prices, posted a 1.3% gain in May from a month earlier and rose 4.6% from 2009, as the expiration of a federal tax credit boosted prices. Nineteen cities posted month-to-month increases in May — just Las Vegas posted a decline. But price levels remain close to April 2009 lows. While nearly all of the cities posted increases, the numbers were boosted by seasonal factors in addition to the residual effects of the tax credit. On a year-to-year basis, which eliminates some of the seasonal variations, prices were down in seven cities, though three cities — Minneapolis, San Diego and San Francisco — posted annual increases over 10%.

Up again - HAVING called the American housing market atrocious yesterday, it's only fair that I point out the latest Case-Shiller home price data, released today. According to the non-seasonally adjusted data (which, Standard & Poors tells us, may be more reliable at the moment) every metro area (except Las Vegas) recorded an increase in its price index from April to May. Both national indexes also rose on a monthly basis, and the year-over-year increase in May marked the fourth consecutive annual rise. Good news, right? It could certainly be worse, but there are several complicating factors to consider. First, index values are computed as a three-month moving average, and so May prices reflect the average of transactions in March, April, and May. These are also closed sales, with contracts concluded a month or two prior to May. Why is this relevant? Because the price data is based entirely on transactions originated before the government's housing tax credit expired. .

Negative Equity Breakdown - Here is some data from a recent congressional briefing by Mark Zandi, Chief Economist of Moody's, and Yale Professor Robert Shiller. I believe all of this negative equity data was presented by Zandi. A few key points, as of Q1 2010: There is almost $2.4 trillion mortgage debt for homes in negative equity. The total negative equity is $771 billion. There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth). This graph shows the percent of homeowners with negative equity (dashed line), percent of homeowners with mortgages with negative equity (blue), and the mortgage debt for homes with negative equity - all since Q1 2006. The second graph shows the number of homeowners in negative equity, by the percent of negative equity. There are 4.1 million homeowners with more than 50% negative equity, and another 5 million homeowners with 20% to 50% negative equity.

Existing Homes: Double Digit Months-of-Supply Watch - How the NAR calculates existing home inventory is a bit of a mystery. However housing economist Tom Lawler has been tracking inventory several different ways. For July, Lawler reports listings totaled 4,038,133, up about 1.6% from June (using And this brings us to the double digit months-of-supply watch ...For June, the NAR reported sales were at a 5.37 million seasonally adjusted annual rate (SAAR), and inventory was at 3.992 million. To calculated the months of supply, divide 3.992 by 5.37 and multiply by 12 months. This gives 8.92 months-of-supply (note: there is a seasonal pattern for inventory, but the NAR uses the NSA data). This graph shows the 'months-of-supply' metric. The NAR reported that the months-of-supply increased to 8.9 months in June.

Shadow Inventory to Push 2011 Home Prices Lower than '09 -Altos Research -The culprit behind the forecast is the weight of the shadow inventory of homes yet to hit the market. But, Sambucci said, anyone who generalizes the size and length of time it takes to clear the shadow inventory will be wrong. “The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.” Other firms have released estimates of the national shadow inventory and the general time it could take to clear it. According to Morgan Stanley, the shadow inventory of foreclosures could top 7m properties and take nearly four years to clear. The credit rating agency, Standard & Poor’s, put the total aggregate balance of the shadow inventory at $480bn worth of loans and would take nearly three years to clear.

Don’t hold your breath for a bounce in home prices – Thought the housing crisis was over? Not quite. Despite four years of falling prices and recent signs that they were finally bottoming out, homes are expected to lose still more value in many metro areas over the next year.Parts of the country already pummeled by the housing crisis, like Las Vegas, Phoenix and Miami, will be hit hardest. But even some places that have rebounded or held up relatively well — including New York, Los Angeles and Washington, D.C. — will suffer, too.That's the conclusion of economists who have been reducing their estimates for home prices as the outlook for the economic recovery has darkened. The number of homes for sale or headed for foreclosure is so high that they think prices will be even lower by next July.

Home Prices Heading for a Second Dip - Recent gains in home values are temporary and markets are poised for a 5 percent dip during the balance of 2010.Even worse, prices will continue to bounce around for as long as three years to come.  That’s the latest scenario from Fiserv, Inc., a technology provider to the financial services industry that bases its forecast from an analysis of home price trends in more than 375 U.S. markets from the Fiserv Case-Shiller Indexes. In the first quarter of 2010, U.S. single-family home prices rose an average of 2 percent over the year-ago quarter, the first year-over-year national gain since 2006. However, prices have fallen 28.7 percent since 2007. “We expect to see prices bounce up and down around their lows for the next two to three years, especially in markets that experienced the largest home prices bubbles. This will result in alternating bouts of optimism and pessimism regarding the housing market recovery, similar to what we have seen for the economy as a whole. This will make it difficult to know exactly when the housing market has reached its bottom.,”

Few in U.S. move for new jobs, fueling fear the economy might get stuck, too - Labor mobility has nearly ground to a halt in the past two years, and policymakers are increasingly worried that the slowdown is not just a symptom of the nation's economic struggles but also a barrier to overcoming them.  With many people locked in homes by underwater mortgages, only 1.6 percent of Americans moved between states in a one-year period that ended in March 2009 -- a labor stagnation not seen in half a century. Though household mobility has gradually declined for more than two decades, the recent sharp downturn has caused economists to worry that it could harm the already struggling recovery.  "In the past, people tended to move to where the jobs are,"  "Now it is necessary to have more of a strategy to move the jobs -- and create new jobs -- in areas where the people are." The labor migration rate is down sharply since the start of the economic downturn in 2007 and is just half the rate of a decade earlier, according to William H. Frey, a Brookings Institution demographer who has analyzed Internal Revenue Service and census data.

Housing-Lock Threatening Job Mobility - Conservatives like to say that the problem with the economy right now is all the uncertainty. Of course, their remedy is to repeal everything the Democrats have done and create more uncertainty. But never mind, it’s a talking point, the conservative plan for everything is “whatever they want, the other thing,” it’s not meant to be serious.However, to the extent that there’s uncertainty in this economy, it’s because of one thing and one thing only: millions of consumers don’t know if they’re going to be able to stay in their homes, and how that will affect their jobs and their lives.In the first half of 2010, more than 1.6 million U.S. properties were hit with foreclosure filings, which include bank repossessions, default notices and auction sale notices. That’s up 8 percent from the first six months of 2009 and puts the U.S. on pace to top 3 million filings this year. That includes more than a million bank repossessions, and while sub-prime borrowers and bad loans led the surge in foreclosures in 2008 and 2009, this year’s wave comes from homeowners who’ve lost their jobs

What Geithner must be seeing - Seems many in the center-right blogosphere are having conniptions about Treasury Secretary Tim Geithner's comment on This Week that the recovery is "pretty good."  Actually, if you only look at the last three recoveries, and you assume the recession ended last July (as many economists are lately), you might conclude the same thing:There are those of us who remember what recoveries used to look like, symbolized by the 1981-82 recession and recovery (the blue line above.)  For the eight recoveries between 1948 and 1982 you have an average of 3.3% growth in employment in eleven months after a business cycle trough or bottom.  But the last three recoveries have all looked like the one we have now.  Indeed, at 11 months from the bottom, the last three have had employment decline 0.3% after the 1990 recession and decline 0.4% after the 2001 recession, if you measure the same 11-month span.  We currently have an increase of 0.1%.

Durable Goods orders fall 1% in June - From the Census BureauNew orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 0.8 percent May decrease....Shipments of manufactured durable goods in June, down two consecutive months, decreased $0.7 billion or 0.3 percent to $195.0 billion. This followed a 0.7 percent May decrease. This was well below expectations, and is further evidence of a slowdown in the manufacturing sector.

Obama, Jobs and that Durable Goods Report - The latest news on durable goods orders is not encouraging, not just because it shows a monthly decline for June when we were hoping for a slight increase but because it suggests we could be facing new headwinds on the employment front. Here's the short form of the durable goods news:New orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 0.8 percent May decrease. The negative report, which also told us that durable goods inventories are up,  has import beyond the immediate news. As David Rosenberg at Gluskin Scheff points out, there is a tight correlation between durable goods orders and subsequent changes in employment. As the chart below shows,  the jobs payoff--or cost--from a change in durable goods orders comes roughly four months later, and it's a respectable (as in 82%) correlation. The recent downward turn in orders may quickly reverse, but if it doesn't we could see the dark line (nonfarm payolls) take a turn for the worse.

ATA Truck Tonnage Index declines in June - From the American Trucking Association: ATA Truck Tonnage Index Fell 1.4 Percent in June The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.4 percent in June, although May’s reduction was revised from 0.6 percent to just 0.1 percent. May and June marked the first back-to-back contractions since March and April 2009. The latest reduction lowered the SA index from 110.1 (2000=100) in May to 108.5 in June.  Compared with June 2009, SA tonnage climbed 7.6 percent, which was just below May’s 7.7 percent increase and the seventh consecutive year-over-year gain. Year-to-date, tonnage is up 6.6 percent compared with the same period in 2009. ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing.

Trucking Industry Says Economy Is Slowing - The quote of the week comes from Bob Costello, Chief Economist of the American Trucking Association who is warning of an economic slowdown: ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing.  Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult.  Nevertheless, Costello believes that tonnage doesn’t have to grow very quickly at this point since industry capacity has declined so much.  “Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect.” This came on the back of yesterday’s data release showing the second consecutive month of declines in truck tonnage:

Estimate of July Decennial Census impact on payroll employment: minus 144,000 -The Census Bureau released the weekly payroll data for the week ending July 17th this week. If we subtract the number of temporary 2010 Census workers in the week containing the 12th of the month, from the same week for the previous month - this provides a close estimate for the impact of the Census hiring on payroll employment. This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. The Census payroll decreased from 344,157 for the week ending June 12th to 200,346 for the week ending July 17th. So my estimate for the impact of the Census on July payroll employment is minus 144 thousand (this will probably be close). The employment report will be released on August 6th, and the headline number for July - including Census numbers - will probably be negative again. But a key number will be the hiring ex-Census (so we will add back the Census workers again this month). The following table compares the weekly payroll report estimate to the monthly BLS report on Census hiring (the weekly report is revised slightly, so the correlation looks better than in real time):

With Recovery Slowing, the Jobs Outlook Fades - NYTimes - The nation’s economy has been growing for a year, with few new jobs to show for it. Now, with the government reporting a growth rate of just 2.4 percent in the second quarter and federal stimulus measures fading, the jobs outlook appears even more discouraging. “Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession,” said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. “It’s still positive growth — rather than contraction — but it’s going to be very, very protracted.” A Commerce Department report on Friday showed that economic growth slipped sharply in the latest quarter from a much brisker pace earlier, an annual rate of 5 percent at the end of 2009 and 3.7 percent in the first quarter of 2010. Consumer spending, however, was weaker than initially indicated earlier in the recovery

Initial jobless claims drop to 457,000 -New jobless claims fell last week for the third time in four weeks but remain elevated. The decline is a sign that the economy likely added jobs in July, although not enough to lower the nation's high unemployment rate. First-time claims for unemployment insurance dropped by 11,000 to a seasonally adjusted 457,000, the Labor Department said Thursday. The number of people continuing to claim unemployment benefits rose by 81,000 to 4.57 million. That doesn't include an additional 3.67 million of the unemployed that are receiving extended benefits paid for by the federal government

Unemployment Claims: Eight Months of Moving Sideways -The DOL reports on weekly unemployment insurance claims: In the week ending July 24, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 11,000 from the previous week's revised figure of 468,000. The 4-week moving average was 452,500, a decrease of 4,500 from the previous week's revised average of 457,000. The advance number for seasonally adjusted insured unemployment during the week ending July 17 was 4,565,000, an increase of 81,000 from the preceding week's revised level of 4,484,000.This graph shows the 4-week moving average of weekly claims since January 2000.The four-week average of weekly unemployment claims decreased this week by 4,500 to 452,500.The dashed line on the graph is the current 4-week average. The 4-week average of initial weekly claims has been at about the same level since December 2009 (eight months) and the 4-week average of 452,500 is high historically, and suggests a weak labor market.

Companies Wringing Huge Profits From Job Cuts - NYTimes - This seeming contradiction — falling sales and rising profits — is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing. Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force. As companies this month report earnings for the second quarter, news of healthy profits has helped the stock market — the Standard & Poor’s 500-stock index is up 7 percent for July — but the source of those gains raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to rejoin the work force as the economy recovers.

The Great Decoupling of Corporate Profits from Jobs - Robert Reich - Corporate profits are up. And big American companies are sitting on a gigantic pile of money. The 500 largest non-financial firms held almost a trillion dollars in the second quarter, and that money pile is growing larger this quarter.  Profits that plummeted in the recession have bounced back. Big businesses have recovered almost 90 percent of what they lost.  So with all this money and profit, they’ll start hiring again, right? Wrong – for three reasons. First, lots of their profits are coming from their overseas operations. So that’s where they’re investing and expanding production. Second, big U.S. businesses are investing their cash in labor-saving technologies. This boosts their productivity, but not their payrolls. Finally, corporations are using their pile of money to pay dividends to their shareholders and buy back their own stock – thereby pushing up share prices.

Job Subsidies Also Lift Private Employers - NYTimes -States are putting hundreds of thousands of people directly into jobs through programs reminiscent of the more ambitious work projects of the Great Depression. But the new efforts have a twist: While the wages are being paid by the government, most of the participants are working for private companies.  The opportunity to simultaneously benefit struggling workers and small businesses has helped these job subsidies gain support from liberals and conservatives. Congress is now considering whether to extend the subsidy, which would expire in September, for an additional year. A House vote is expected on Thursday or Friday.  Despite questions about whether the programs displace existing workers, many economists have argued that direct job creation programs are a more cost-effective way to put some of the nation’s 14.6 million unemployed back to work than indirect alternatives like tax credits and construction projects.

Lawrence Mishel: Policy responses to long-term unemployment - On June 10, 2010, EPI President Lawrence Mishel told the House Ways and Means Subcommittee on Income Security and Family Support that the jobs crisis remains catastrophic and that “a better safety net” is needed to provide support to the long-term unemployed. He said that safety net spending was effective fiscal stimulus that immediately put money back into the economy, and stressed that job creation efforts are complimentary to deficit reduction.Read Mishel’s complete testimony - Watch Mishel's testimony

This Has Been An Equal Opportunity Recession When It Comes To Job Losses Across Industries - Economist Paul Krugman highlights Raghuram Rajan arguing in today’s Financial Times that the Federal Reserve should begin raising interest rates because “the US had far too much productive capacity devoted to houses and cars, because consumers could obtain financing for them easily.” Essentially, Rajan is arguing that monetary tightening is necessary to shift resources out of the too-large housing and car sectors. Krugman points out that this makes no sense because most of the job losses during the Great Recession haven’t been in the construction sector: If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble.

Permanently High Unemployment – Krugman - I really don’t think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded:Right now, I’m reading Larry Ball on hysteresis in unemployment (pdf) — the tendency of high unemployment to become permanent. Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we’re experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable.And there are already indications that this is happening. Bill Dickens, one of the people has who worked on downward nominal rigidity, tells me that the Beveridge curve — the relationship between job vacancies and the unemployment rate — already seems to have shifted out dramatically. This has, in the past, been a sign of a major worsening in the NAIRU, the non-accelerating-inflation rate of unemployment.

Is America facing an increase in structural unemployment? - IN DISCUSSIONS of the slow recovery of America's labour market, the shortfall in aggregate demand is the elephant in the room. Unemployment fell much more rapidly after the 1981-82 recession, largely because the economy expanded much more rapidly. But it's not absurd to think that there could be more than low demand keeping unemployment high. There are a number of factors available to provide an intuitive argument for structural barriers to full employment, including skills mismatch, workers geographically "stuck" in place by negative housing equity, and the reduced employability of the long-term unemployed. And so the question should be asked: is America facing an increase in structural unemployment, and if so, what should be done about it. That's one of the topics we put to our network of economic experts this week. So far, there hasn't been a great deal of agreement on the question.

Is America Facing an Increase in Structural Unemployment, and If So, What Should be Done About It? - The Economist asks: Is America facing an increase in structural unemployment, and if so, what should be done about it? My response is here (I talked mainly about the second half of the question). There are also responses from Daron Acemoglu, Scott Sumner, Richard Koo, Paul Seabright, Gilles Saint-Paul, and David Laibson, with more to come. [All Responses]

Is It Structural or Cyclical Unemployment? - The Economist magazine is asking whether there has been an increase in America's structural unemployment. If the answer is yes then macroeconomic policy may be limited in how much it can do to lower unemployment. Thus, even if the Fed further stabilized aggregate demand the benefits for the unemployed and  the broader economy may be muted.  My own view has been that both structural and cyclical unemployment have been important in this economic cycle. On one hand, the the rapid productivity gains in 2009 (they are down in 2010) point to increased structural unemployment, a point recently made by David Altig. On the other hand, there is evidence consistent with a slowdown in aggregate demand which points to increased cyclical unemployment. So how important are these two forms of unemployment?  Justin Weidner and John C. Williams of the San Francisco Fed have a note that helps answer this question.

Five myths about unemployment - After a hard-fought political battle, President Obama signed legislation Thursday restoring benefits to the long-term unemployed, aid that had expired more than seven weeks before. Under the extension, unemployed workers can receive up to 99 weeks of income assistance. Helping the long-term jobless in a prolonged recession is generally a bipartisan issue, but this time, Republicans argued that the measure will add too much to the national debt. It's a discussion that gets bogged down in myths about how to assist the long-term unemployed, and the economy, at the same time.

The job machine grinds to a halt · The problem isn't merely the greatest downturn since the Great Depression. It's also that big business has found a way to make big money without restoring the jobs it cut the past two years, or increasing its investments or even its sales, at least domestically. In the mildly halcyon days before the 2008 crash, the one economic outlier was wages. Profit, revenue and GDP all increased; only ordinary Americans' incomes lagged behind. Today, wages are still down, employment remains low and sales revenue isn't up much, either. But profits are the outlier. They're positively soaring. Among the 175 companies in the Standard & Poor's 500-stock index that have released their second-quarter reports, the New York Times reported Sunday, revenue rose by a tidy 6.9 percent, but profits soared by a stunning 42.3 percent. Profits, that is, are increasing seven times faster than revenue. The mind, as it should, boggles.

How much do UI extensions matter for unemployment? - James Pethokoukis of Reuters flags a blog post at the Atlanta Fed, highlighting Fed research on how UI benefit extensions have affected the unemployment rate. Two Fed studies suggest that they may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large. The first study, from the San Francisco Fed, looks at average duration of employment for unemployed people eligible for UI benefits, compared to those who are ineligible because they left jobs willingly or are new workforce entrants. Obviously, for both groups, average unemployment duration is up sharply in the recession, but for the UI-eligible it has grown by an additional 1.6 weeks. Attributing this additional increase to the increased term of UI benefits implies a rise in unemployment of 0.4 percentage points.

The struggling US labor market: teen employment - Rebecca Wilder - This recession caused a severe disruption in the labor market for teen employment. The chart below illustrates the unemployment rate alongside the employment-to-population ratio for those aged 16-19 years. The visual is quite striking: at the peak of the business cycle, December 2007, the difference between the employment-to-population ratio over the unemployment rate was roughly 17.3 percentage points (pps). In June 2010, however, the difference narrowed fully to -0.3 pps. Here’s the bigger picture: teen income is likely becoming increasingly important to the families at the bottom of the income distribution, while the jobs are becoming increasingly scarce. Without entry level jobs, aggregate work experience starts to decline, which translates into lower skill overall; and then productivity declines. Bad stuff.

American Economy So Awful Parents Now Buying Franchises to Keep Adult Children Employed -The American economy is so awful, the Wall Street Journal reports that parents of means are now resorting to buying franchise businesses to keep their adult children employed, shelling out  six figure sums to purchase their little darlings Pita Pit restaurants and College Hunks Hauling Junk moving trucks: Watching fellow college students working for $7.50 an hour after graduation, Tana Walther, a fashion-design major at Kent State University in Ohio, snapped up an alternative offered by her father — to run a Pita Pit restaurant he would buy.“I guess I bought her a job,” says her father, Jan Walther, of North Canton Ohio. Prospects of a career in fashion seemed remote, and Tana, a college athlete, loved eating at Pita Pit restaurants while traveling with her track team. Her first new restaurant opened last year near campus in Kent, and the 25-year-old hopes to open several more.

Should the Beveridge curve scare the Dickens out of us ? - Brad DeLong and Paul Krugman consider the increase in the number of job vacancies to be bad news -- to be a sign that long term unemployment has made it hard to increase employment even if there are vacant jobs. The high vacancies are held to be a sign of a problem which is more persistent and less absurdly easy to deal with than low aggregate demand.  One might imagine that high unemployment and high vacancy rates are, as you directly state, a bad sign as high unemployment combined with high vacancies lasts longer -- that the combination is a sign of hysteresis from a) deteriorated jobs skills, or b)deteriorated work habits, or c) irrational stigma due to employers assuming a or be or d) missmatch. I recall such a graph. It was the terrifying UK Beveridge curve from 1988-9 (look it up). The word (from among others Layard) was that unemployment had become almost impossible to fight as the long term unemployed were discouraged. Then employment took off.

Credit scoring and unemployment »  I was trying to find concrete data on the reportedly increasing use of credit "scoring" by prospective employers and its relation to the disturbing trend of very long-term unemployment. Because the two trends seem to me to be related -- like the two sides of a vise. MSN Money's Liz Pulliam Weston says a survey of HR managers found the use of credit-checks in hiring had increased from 25 percent in 1998 to 43 percent in 2006. Weston also describes the elegantly nasty conundrum this creates for those who lost their jobs in the global financial crisis:Many Americans these days are discovering the Catch-22 of unemployment. And that is: You might fall behind on your bills because you've lost your job, and you might not be able to land a new job because you've fallen behind on your bills.

Liberalism and Big Business - And here he is on Saturday, responding to my post about the increasingly popular practice of checking job applicants' credit scores before hiring them. At first, he says, this sounds good: But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).The more I think about this, the more it bothers me. Which is odd, in a way, since I'm not really a ravenous supporter of micro-regulating the business community.

Should Potential Employers have Access to Credit Scores ? - Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting. The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can’t improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn’t sure.  Yglesias wrote But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out). That is actually a pretty radical position. I wonder what clear externality the 64 civil rights act addressed.

After bailouts, new autoworkers make half as much as veterans in same plant - Among workers building the Jeep Grand Cherokee here, there are few obvious distinctions. Clutching lunch sacks and mini-coolers, they trudge together through the turnstiles at the plant's main gate each day to tinker with the same vehicles, along the same assembly line, performing the same tasks. Yet they fall into distinctly unequal classes: About half make $28 an hour or more, while the rest, the recently hired, make $14. This oddity, which could become the norm in much of the domestic U.S. auto industry, arises from the jury-rigged labor agreement that the United Auto Workers, U.S. automakers and the federal government reached during the industry's near-death experience last year. Now the revival of the U.S. industry depends on a compromise that some on all sides quietly acknowledge is divisive, among other things, and probably cannot last.

Entry Level Car Segment Stumbles - With the ongoing focus on reducing dependence on Middle East oil and reversing climate change, it seems like a no-brainer that small cars are becoming more and more popular.  The only problem is that this is not as clear-cut as you might think. The entry level car segment (sometimes called the subcompact segment), whose products are sized and priced under the compact sedan segment that includes the Civic, Corolla, and Focus, etc., saw dramatic growth from 2005 to 2008, with its share of the industry more than doubling to 4.31% in 2008. That year played right in to the hands of this segment with the spring 2008 dramatic jump in gas prices to more than $4 a gallon. However, since then entry level vehicles have lost share, and the segment now accounts for less than 3% of all new vehicle retail registrations, according to Polk registration data April 2010 CYTD. The segment's current share of 2.88% is almost a half point less than a year ago. While the entire new vehicle industry is up almost 10% in 2010, this segment is down 4%.

Does happiness affect productivity? -  Happiness economics typically looks at how macro-level variables such as economic growth affect happiness. This column turns such thinking on its head and asks whether a rise in happiness might change behaviour at the micro-level, looking specifically at productivity. Experiments suggest that happiness raises productivity by increase workers' effort. Economists may need to take the emotional state of economic agents seriously.

Weak Labor Cost Data Darken Consumer Outlook - To get a handle on the outlook for the recovery, look past Friday’s gross domestic product report and focus on a report released at the same time: the employment cost index for the second quarter. Compensation is barely growing and that highlights an obstacle to growth: consumers–even those with jobs–are strapped for cash. Without household spending rising at a healthy clip, the recovery will struggle to gain traction.Employment costs for civilian workers rose a mere 0.5% in the second quarter. Benefits, up 0.6% in the quarter, outpaced wages and salaries, up 0.4%.

Number of the Week: Default Repercussions- 25%: The share of Americans with a credit score of less than 600 The United States may still have a triple-A credit rating, but the creditworthiness of the people who live there has fallen sharply amid the housing bust and recession. In an economy where credit plays a central role, that presents a significant obstacle to recovery. Over the past couple years, millions of Americans have reneged on their debts — because they lost their jobs, because they took on more than they could handle, or both. For many, those defaults have brought immediate financial relief, leaving more cash to spend on other things. Now, though, they’ll also have to face the challenge of living with bad credit.As of April, 25% of Americans had fallen into the least-creditworthy category, garnering a rating of less than 600 from FICO, the main arbiter of consumer credit in the U.S. That compares to only 15% before the recession, according to data compiled by Deutsche Bank.

Consumer Confidence in U.S. Fell in July to a Five-Month Low - American consumers lost confidence in July, shaken by mounting concern over jobs and wages that threatens to constrain the economic recovery. The Conference Board’s sentiment index fell to 50.4, below the median forecast of economists surveyed by Bloomberg News and the lowest level in five months, figures from the New York-based private research group showed today. Another report showed home prices rose more than forecast in May as a government tax credit temporarily underpinned sales. A jobless rate that is projected to hover near 10 percent for the rest of the year means household spending, which accounts for 70 percent of the economy, will take time to recover. Ford Motor Co. is among companies lowering industry sales forecast for the year as concerned consumers focus on saving more and paying down debt.

Consumer confidence: that extremely coincident, but often cited as leading consumer spending, indicator of really just jobs growth during recovery has struck again, down near four points to 50.4 in July. During the recovery phase of the business cycle, confidence is highly correlated with jobs growth. The chart below illustrates the recession and recovery path of consumer confidence since 1973. The 2007-2009 recovery in confidence - I mark the technical end of the recession at June 2009 but the exact month is not important- is tracking earlier "jobless recoveries": 1990-1991 and 2001. The problem is, we can’t afford (economically, that is) a jobless recovery this time around!

U.S. Michigan Consumer Sentiment Index Fell to 67.8 - Confidence among U.S. consumers fell in July to the lowest level since November, posing a threat to the biggest part of the economy.  The Thomson Reuters/University of Michigan final index of consumer sentiment declined to 67.8 this month from 76 in June. The preliminary measure was 66.5. Employment growth has been slow to take hold and lower home prices are depressing wealth. The lack of confidence may further restrain consumer spending, which accounts for 70 percent of the economy, and limit the pace of growth.

Consumer confidence is down, so why are Americans spending more? - Are we in a period of gloomy growth? An era in which Americans are pessimistic and sour but buying more anyway? The Conference Board reported Tuesday morning that consumer confidence declined in July for the second straight month. Worse, consumers' expectations for the near future declined sharply. "Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves," said Lynn Franco, director of the Conference Board's Consumer Research Center. And yet there are signs that back-to-school shopping isn't going to be a disaster.

Consumer Metrics Institute: Home of Daily Consumer Leading Indicators - "Bringing the measurements of critical economic activities into the twenty-first century by mining tracking data for an understanding of what American consumers were doing yesterday."

Q&A: Rethinking U.S. Poverty Measure - Few measures have generated more disagreement than the federal poverty level. The threshold, distributed by the Commerce Department, is the same as it was in the 1960s and is largely a function of a family’s cash income. In March, the Commerce Department announced a new poverty measure that will be released next fall.Real Time Economics discussed poverty and the new measure with Bruce Meyer, an economics professor at the University of Chicago’s Harris School, who has written extensively about the subject. Some excerpts:

Are credit cards regressive? - A new paper from the Boston Fed investigates the transfers that occur as a result of credit card interchange fees: On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.

How Much Credit Card Rewards Cost the Poor - In a Your Money column earlier this year, “The Damage of Card Rewards,” my colleague Ron Lieber hypothesized that the poor are actually the ones subsidizing the credit card rewards of the affluent.How could this be? Well, in response to consumers who aggressively pursue credit card rewards by using their cards everywhere, stores raise their prices for everyone to cover the cards’ costs. As a result, the poor — those least likely to have credit cards and earn rewards — end up paying more without getting any of the benefits.Now, a new study from the Federal Reserve Bank of Boston appears to confirm and quantify this “reverse Robin Hood problem” theory.According to the report, “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations,” released Monday, the reward programs create “an implicit money transfer” to credit card users from noncard users (i.e. cash payers) because of the across-the-board price increases merchants put in place to cover the costs of accepting the cards.

The Great Interchange Fee Scam - Adam Ozimek is obviously trying to make my head explode this morning. Today he points to a new paper from the Boston Fed that investigates the consequences of credit card interchange fees. The basic background is this: (1) card companies charge merchants a 1-2% interchange fee on all credit card purchases, (2) merchants raise the prices of all their products slightly in order to cover this cost, and (3) because most merchants charge everyone the same price, regardless of whether they use cash or credit, cash users end up paying a little more than they should while card users pay a bit less than the actual cost of the interchange fee they incur. So what does it all mean? On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general

The Not-So-Scammy Interchange Fee Scam - When the great Credit Card Interchange Fee Debate began, I said I was generally skeptical of the idea of purely economic regulation (as opposed to regulation aimed at public safety or environmental hazards). Kevin Drum followed up yesterday with a post on “The Great Interchange Fee Scam” which cites a Boston Fed paper (PDF) that provides the following distributive analysis:  On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.Once you keep in mind the fact that the median household income in 2008 was slightly above $52,000 it’s not at all obvious to me that this is any kind of scam. Instead, it appears to be a classic positive sum business interaction.

The latest dialogue on interchange -  Lots of people talking about interchange fees recently: Matt Yglesias: Once you keep in mind the fact that the median household income in 2008 was slightly above $52,000 it’s not at all obvious to me that this is any kind of scam. Instead, it appears to be a classic positive sum business interaction. Megan McArdle: I never understood why the progressive consumer finance types got so worked up about interchange fees, which are essentially a knock-down fight between two very powerful business lobbies, not a cosmic injustice perpetrated against the American consumer….Kevin Drum Beyond that, let’s make it clear what I’m proposing. I don’t want to eliminate interchange fees. Card payment networks cost money to operate and there’s nothing wrong in theory with using interchange fees as a way of offsetting those costs. So let’s step back for a second. Plastic is becoming the new form of checking for the 21st century. Right now the Federal Reserve steps in and backstops the clearing risks on the checking system to make sure that checks clear at par. If I write you a check from Bank A you can cash it at your account at Bank B for the value of it. This is not a state of nature event; it happens because the government steps in. If interchange regulation is a bad thing at a meta level, then so is this, and we should roll back that checking regulatory enforcement to the late 19th century.

Looters - In this Huffinton Post piece, Senator Bernie Sanders rails against that part of capitalism that undermines democracy, the accumulation and misuse of power and it’s effect on the well being of the greater population. And while the Great Wall Street Recession has devastated the middle class, the truth is that working families have been experiencing a decline for decades. During the Bush years alone, from 2000-2008, median family income dropped by nearly $2,200 and millions lost their health insurance. Today, because of stagnating wages and higher costs for basic necessities, the average two-wage-earner family has less disposable income than a one-wage-earner family did a generation ago. The average American today is underpaid, overworked and stressed out as to what the future will bring for his or her children. For many, the American dream has become a nightmare. This is a shocking statement. Over decades, the second earner has been absorbed into the economy as a factor of production, and used like cattle, with the dramatic productivity growth going to the ownership class

What Produced the Inequality Boom? - Riffing off John’s post of a few days ago, the most recent issue of Politics and Society (which, as I noted before, has free access for the next few months” ) has a pretty interesting debate on this topic. There are four contender. One of these – the standard technology-leading-to-inequality-story – is not discussed at any length in Politics and Society, but this accont doesn’t in any event tell us why there has been substantial variation in the impact of technology on different industrialized democracies, and hence requires at the least an account of intermediating forces.

Household Net Worth (as % of Disposable Income) - Interesting chart that Macro Market Musings calls “The Revenge of the Balance Sheets.” Each of our double peak in assets — dot com stocks and housing — sent the ratio to unsustainable levels and back again. You may recall at each of these peaks, some idiot was invariably trotted out to discuss how the debt to asset ratio was very favorable, so there was nothing to worry about (move along!). Of course, to reach this conclusion, they had to ignore the simple fact that assets fluctuate in value, but debt persists until it is paid off. Here’s today’s chart:

Income of very richest shot up by 281% since 1979 - In the wake of BP's calamitous oil spill in the Gulf of Mexico, CEO Tony Hayward is stepping down, but he will be receiving a severance package amounting to an estimated $18 million. "That's what he gets for presiding over a record oil disaster and massive losses," commented Chris Hayes, Washington editor of The Nation. Hayes went on to note, however, that "Tony Hayward's $18 million payoff is an absolute pittance compared to the kind of cash top CEO's are raking in." He cited a recent Wall Street Journal story which revealed that over the past decade, the two highest-paid CEOs at public companies each took in over a billion dollars in compensation, while others in the top 25 received compensation in the hundreds of millions.

More Americans Are Financially Insecure Now Than in the Past 25 Years - A record one in five American households is financially insecure, the highest level in the past 25 years, according to a new study establishing the “Economic Security Index” (ESI). This new ESI index, designed to measure the economic well-being of American families, was developed by Yale political scientist Jacob Hacker and a team of researchers, with the support of the Rockefeller Foundation.According to the ESI, people can be considered economically insecure when two circumstances prevail. First, within a year's time they experience a major loss in income (25% or more) resulting from job loss or large out-of-pocket medical expenses (or both). Second, they don't have enough money saved up to replace those losses.  Download Full Report

Why the middle class is radically shrinking - The rich are getting richer and the poor are getting poorer at a staggering rate. Once upon a time, the United States had the largest and most prosperous middle class in the history of the world, but now that is changing at a blinding pace.So why are we witnessing such fundamental changes? Well, the globalism and "free trade" that our politicians and business leaders insisted would be so good for us have had some rather nasty side effects. It turns out that they didn't tell us that the "global economy" would mean that middle class American workers would eventually have to directly compete for jobs with people on the other side of the world where there is no minimum wage and very few regulations. The big global corporations have greatly benefited by exploiting third world labor pools over the last several decades, but middle class American workers have increasingly found things to be very tough. The 22 statistics detailed here prove beyond a shadow of a doubt that the middle class is being systematically wiped out of existence in America.

Why Is Economic Inequality Higher in English Speaking Industrialized Democracies? - What I really find conspicuous in the comparison of top income shares across rich nations is the similarity of the patterns observed in English-speaking countries as opposed to those found in continental European countries. It is striking that, after a prolonged period of moderate decline, the income share of the richest 1 percent suddenly began to rise in the mid-1980s in the United Kingdom, Canada, Ireland, Australia, and New Zealand as well as in the United States, while it exhibited no upward trend in France, Germany, the Netherlands, Spain, and Switzerland.

Who has gained from the inequality boom? - A question that comes up at CT quite a bit is: who has benefited from the massive increase in US income inequality over recent decades. I finally got around to chasing down Congressional Budget Office data (derived from tax records for the period 1979 to 2005), and the answer, in short is:

  • The top 1 per cent roughly doubled their share of both pre-tax income (9 per cent to 18 percent) and after-tax income (7.5 per cent to 15 per cent)
  • The rest of the top 10 per cent slightly increased their share (from about 20 to about 22 per cent)
  • The next 10 per cent held their share (about 15 percent)
  • The remaining 80 per cent of households saw their share drop (from 58 per cent to 48 per cent of post-tax income, with the biggest drops coming at the bottom. The bottom 40 per cent of households now get a smaller share of post tax income (14 per cent, down from 19) than the top 1 per cent.

Long-Term Economic Pain for American families - The pain coursing through American families is all too real and no one seems to know what to do about it. A rigorous new analysis for the Rockefeller Foundation shows that Americans are more economically insecure now than they have been in a quarter of a century, and the trend lines suggest that things will only get worse. Rampant joblessness and skyrocketing medical costs are among the biggest factors tearing at the very fabric of American economic life so painstakingly put together in the early post-World War II decades.  The analysis was done by a team of researchers led by Professor Jacob Hacker of Yale University. They created an economic security index, which measures the percentage of Americans who experience a decrease in their household income of 25 percent or more in one year without having the financial resources to offset that loss. (Major medical expenses were counted as a decrease in available income.)

The Gray And The Brown: The Generational Mismatch - In an age of diminished resources, the United States may be heading for an intensifying confrontation between the gray and the brown. Two of the biggest demographic trends reshaping the nation in the 21st century increasingly appear to be on a collision course that could rattle American politics for decades. From one direction, racial diversity in the United States is growing, particularly among the young. Minorities now make up more than two-fifths of all children under 18, and they will represent a majority of all American children by as soon as 2023, demographer William Frey of the Brookings Institution predicts.

Diversity and the Myth of White Privilege - Forty years ago, as the United States experienced the civil rights movement, the supposed monolith of White Anglo-Saxon Protestant dominance served as the whipping post for almost every debate about power and status in America. After a full generation of such debate, WASP elites have fallen by the wayside and a plethora of government-enforced diversity policies have marginalized many white workers. The time has come to cease the false arguments and allow every American the benefit of a fair chance at the future.

N.J. Food Pantries See Increase In Bare Shelves And Hungry Families - The empty, green bins are stacked some 6-feet high and stretch on for 20 feet inside a New Brunswick warehouse.There’s more than 1,000 of these plastic containers, all vacant, all waiting to be filled with donated food that would be distributed to some 70 pantries, soup kitchens and social service agencies in Middlesex County. The bins that are filled — 150 or so — have paper labels indicating how many items each pantry can take per week. On almost every container, the rations have steadily decreased, with some dropping to four items or fewer.“How do you split four cans of corn over 30 families?,” asked Sandra Burton, director of the Metro Park Assembly of God pantry in Woodbridge, which receives most of its supplies from the warehouse. “You don’t. You feed some of them this week and some of them next week.”

Hawaii Buys Homeless Plane Tickets to Mainland - With the homeless population up 15% over last year at a cost of $35,000 a head—and worries that tents on the beach will drive away tourists—the state is resorting to buying them one-way tickets to their home state. Proponents of the free flight to the mainland are getting criticized for dumping their problems on other states, and there's worry that some enterprising folks will game the system by flying one-way for a Hawaiian vacation, knowing they can cadge a free ride home. And then there's the irony that at least some of Hawaii's vagrants have already taken advantage of another state's fly-them-out-of-here program: It seems New York's Project Reconnect paid for at least five people's flight to Honolulu.

City Unemployment: Vegas Worst, DC Best - A dozen of the nation’s 372 metropolitan areas had unemployment rates in June of at least 15%, led by El Centro, Calif., where the jobless rate hit 27.6%, the Labor Department said Wednesday. Ten of them were in California. At 26.4%, the jobless rate in Yuma, Ariz. was the second highest. It also notched the largest year-over-year increase, up 2.9 percentage points.Six metro areas enjoyed jobless rates below 5%, five of them in North and South Dakota. North Dakota’s economy has been buoyed by its flourishing oil industry. Bismarck, N.D., had the lowest unemployment rate in June, 3.8%. That’s more than five percentage points below the national average of 9.5%.Among metro areas with populations over one million, Las Vegas had the highest jobless rate at 14.5% and Washington, D.C. and surrounding suburbs had the lowest at 6.4%.

Most U.S. States Cut Jobs as Tax Collections  Erode, Study Says -Most U.S. states cut government jobs last quarter as cities, counties and public agencies coped with falling tax revenue in the wake of the recession, a study found.  State government payrolls dropped in 28 states in April through June, compared with the same period a year earlier, while employment in local government fell in 30 states, according to an analysis released today by the Nelson A. Rockefeller Institute of Government in Albany, New York. State payrolls have fallen 0.8 percent and local government employment has dropped 1.4 percent since their peak in mid-2008 after the recession began, according to the institute. Those declines are less than the 6.8 percent drop in private-sector jobs, according to the institute.

More jobs cuts coming from strapped counties and cities – Local governments across the country are facing an intensifying fiscal crisis that is forcing them to make deep cuts in personnel and services just as more hard-pressed residents are seeking their help, according to a report released Tuesday. These cities and counties -- which have cut jobs significantly since the start of the downturn -- could slash as many as 500,000 more jobs over the current and coming fiscal years. The cuts would affect schools, public safety, libraries, trash collection and social services, according to survey released jointly by the National League of Cities, the National Association of Counties and U.S. Conference of Mayors.

Survey: Local Government job losses projected to approach 500,000 - As a follow-up to the previous posts on the 2nd half slowdown (cutbacks at the state and local level), here is a new report released today: Job losses projected to approach 500,000 The effects of the Great Recession on local budgets will be felt most deeply from 2010 to 2012. In response, local governments are cutting services and personnel. This report from the National League of Cities (NLC), National Association of Counties (NACo), and the U.S. Conference of Mayors (USCM) reveals that local government job losses in the current and next fiscal years will approach 500,000, with public safety, public works, public health, social services and parks and recreation hardest hit by the cutbacks. In May and June of 2010 NLC, NACo and USCM conducted a survey of cities and counties across the country for the purpose of gauging the extent of job losses. The survey was emailed and faxed to all cities over 25,000 in population and to all counties over 100,000 in population. The survey results presented below are based on 270 responses, 214 responses from cities and 56 responses from counties.

Cities threaten to cut 500,000 jobs – Cash-strapped cities and counties have been cutting jobs to cope with massive budget shortfalls -- and that tally could edge up to nearly 500,000 if Congress doesn't step up to help. Local governments are looking to eliminate 8.6% of their total full-time equivalent positions by 2012, according to a new survey released Tuesday by the National League of Cities, the National Association of Counties and United States Conference of Mayors. "Local governments across the country are now facing the combined impact of decreased tax revenues, a falloff in state and federal aid and increased demand for social services," the report said. "In this current climate of fiscal distress, local governments are forced to eliminate both jobs and services." The depth of the recession has pushed cities to make reductions in departments that are typically shielded from cuts because they provide core services to residents, including public safety, public works, public health, social services and parks and recreation.

“Glimmers of improvement,” but state woes remain –(Reuters) - State tax revenue is improving, but only slightly, and may not be enough to end steep spending cuts or replace the loss of assistance from the federal stimulus plan that expires in December, according to a report on Tuesday.The National Conference of State Legislatures said states faced a collective budget gap of $83.9 billion when creating their budgets for fiscal 2011, which for most began on July 1. Officials surveyed by the group, which represents state lawmakers, said revenue was beginning to pick up or at least slow its rate of decline. Nearly every state expects tax collections this fiscal year to surpass last year's.

Sales Tax Bill Introduced in Congress - Streamlined Sales Tax Project (SSTP) bill was introduced in Congress as H.R. 5660. Sponsored by Rep. Bill Delahunt (D-MA) with four cosponsors, the bill would permit states to force non-resident retailers to collect their state's sales tax on purchases made over the Internet or through the mail.States cannot constitutionality do this now for two reasons. First, there is skepticism that states can cooperate to divvy up taxes on transactions that cross state lines without destroying interstate commerce. Second, and relatedly, sales taxes are numerous (over 8,000 in the U.S.), not lined up to zip codes, differing bases and definitions, and constantly changing. Making Internet and mail-order retailers comply with all 8,000 systems while brick-and-mortar retailers only deal with one is not a level playing field. The bill sets out "minimum simplification requirements," but it's more about uniformity than simplification.

Banks Charge States Millions in Debt Binge to Fix Subprime Bust (Bloomberg) -- Bank of America Corp., owner of the most-active subprime lender, Countrywide Financial Corp., earned $2.9 million in interest and fees for a line of credit Arizona used through June to balance a budget undermined by the housing- market collapse.Morgan Stanley, fined $102 million by Massachusetts last month for allegedly breaking home-lending laws, shared in $579,000 of fees from helping run a $120 million bond sale for the state last week that pushed debt payments from this fiscal year into future budgets. Wachovia Bank NA and Bank of America managed $400 million of Chicago transportation note sales in 2009 and 2010 to cover delayed state funds even though Wachovia’s parent Wells Fargo & Co. and Countrywide have been sued by Illinois for steering minority borrowers to subprime loans. New Jersey, New Hampshire and other U.S. states also needed budget-balancing help that enriched the same Wall Street firms that touched off the longest economic slump since the 1930s by packaging loans to unqualified borrowers. States issued $92 billion of long-term debt since Jan. 1, 2009, generating about $488 million for banks

State budget gaps total $84 billion: study (MarketWatch) -- State budget gaps are now expected to total $83.9 billion for fiscal 2011, with shortfalls anticipated for the next couple of years, according to a study released Tuesday by the National Conference of State Legislatures.That bleak assessment contains one ray of good news: The total is slightly less than the estimate in March for an $89 billion gap. The biggest shortfall to make up may be the reduction in federal aid for medical programs. Congress hasn't approved extending this aid after increasing support as part of last year's stimulus package. Officials in many states told NCSL that revenues have started to improve, or at least the rate of decline has slowed. But they still worry stabilizing revenues won't be enough to replace the loss of federal stimulus funds, and several states project deficits through 2013

States go deeper into debt -- The states are broke, and like many consumers, they're borrowing big time to get out of their fiscal binds. The amount of debt that states are carrying spiked 10.3% last year to $460 billion, according to Moody's Investors Service. The debt is paid for through taxes and fees, making residents ultimately responsible. The median personal share of this burden jumped to $936, from $865 in 2008. (To see how much the tab is in your state, click here.)And it's likely that states will turn to the bond markets even more this year as federal stimulus money dwindles, experts said. After all, officials face an additional $12 billion shortfall for the current fiscal year and a $72 billion gap for fiscal 2012, which starts next July 1.

Gov. Paterson, angry at labor leaders, says planning for layoffs must begin 'immediately' Gov. Paterson is preparing to slash the state's workforce. Escalating his battle with public employee unions, Paterson said Monday planning for layoffs must begin "immediately" because labor leaders have not agreed to concessions. "Some unfortunate people who don't deserve it are going to get laid off," Paterson said. "And it burns me to have to say that because I don't think it's fair to them. But it's the only way we're going to be able to balance our budget." The governor was uncertain how many layoffs would be needed and when they'd start. He said the no-layoff pledge he signed with the unions a year ago was not binding because it presumed the state would get more federal Medicaid funding than it did. We lost what may be $1 billion from that source, and everybody is going to have to make a sacrifice," Paterson said.

California's Building Bust Choking Off Jobs - Amid the tepid economic recovery, California's construction industry continues to hemorrhage jobs, helping to explain why unemployment across the state remains so much worse than elsewhere in the country. Of the nation's 12 metropolitan areas with jobless rates of 15% or higher in June, 10 were in California, the Labor Department reported Wednesday. A major factor: The state's construction industry shed 74,400 jobs in the 12 months ended in June, more than any other sector lost. During that period, construction employment fell 12% in California, compared with a 1.3% drop in total nonfarm employment in the state

State jobless payments to $12 billion - California, which has the third highest unemployment rate in the country, paid out a record $12.3 billion in jobless benefits in the first six months of this year, reports the state Employment Development Department. That compares to $8.9 billion in the first half of last year during the heart of the recession. At this pace, the state's payments this year will outpace the $20.2 billion in payouts for all of 2009. The previous record for one year was $8.1 billion in 2008, says EDD spokeswoman Loree Levy. The biggest reason for the 38% jump in payments this year is the federal government's approval of extended unemployment benefits. In February of 2009, Congress approved four tiers of extended benefits plus so-called Fed-Ed aid for high unemployment states giving California's unemployed up to 99 weeks of payments. Laid-off workers normally are only eligible for 26 weeks of state benefits

Schwarzenegger orders more furloughs - Less than one month after ending furloughs for about 200,000 state workers, Gov. Arnold Schwarzenegger this morning brought back a scaled-down version of the policy, effective Sunday.The governor made the decision this week after Controller John Chiang said that unless lawmakers enacted a budget soon, the state's cash would go into the red by October. Chiang said he'll start issuing IOUs in August or September to conserve funds as long as possible."We have a fiscal crisis,"  "We're doing what we have to do to conserve cash."Like the policy that ended June 30, the governor's new executive order requires employees take three unpaid days off per month. The administration figures the payroll savings will amount to $147.2 million per month, about $80 million of that from the general fund. But unlike the earlier policy, this one has no termination date: Furloughs will end when lawmakers pass a 2010-11 budget. That could be weeks or months after the Legislature reconvenes on Monday.

Schwarzenegger threatens to leave office without signing budget - Nearly four weeks into the fiscal year without a budget, Gov. Arnold Schwarzenegger suggested Monday that California might have to wait until his successor is sworn in next year to get a spending plan — unless lawmakers give him everything he wants. Schwarzenegger has said the Legislature must curtail public pensions and change California's taxation and budgeting systems before he will sign the next budget, his last as governor. He leaves office in January. "If I do not get all of the things that we need … I will not sign a budget, and it could actually drag out until the next governor gets into office," Schwarzenegger told reporters

Schwarzenegger Orders Furloughs Amid California Budget Impasse - California Governor Arnold Schwarzenegger ordered more than 150,000 state workers to take three days of mandatory unpaid time off to conserve cash.The executive order, effective Aug. 1, stipulates that the furloughs will end when a budget for the fiscal year that began July 1 is enacted, the governor’s press secretary, Aaron McLear, said in an e-mail. It comes after government workers endured furloughs over almost 12 months that ended June 30. California began its fiscal year without a spending plan after Schwarzenegger and Democrats remained deadlocked over how to fill a $19.1 billion deficit. Controller John Chiang has warned he may again need to issue IOUs to pay bills if the impasse continues into September.“Every day of delay brings California closer to a fiscal meltdown,” Schwarzenegger said in a statement today. “Our cash situation leaves me no choice but to once again furlough state workers until the Legislature produces a budget I can sign.”

California ‘fiscal emergency’ declared – BBC - California governor Arnold Schwarzenegger has declared a fiscal state of emergency, putting pressure on lawmakers to pass a state budget that is now more than a month overdue.California's economy, which is the eighth largest in the world, faces a budget deficit of $19bn (£12bn). Mr Schwarzenegger said that without a budget in place the state's government would run out of cash by October. He also ordered most state employees to take three days unpaid leave a month. Earlier this month, the governor ordered 200,000 state workers to be paid the minimum wage because no budget had been passed.

Schwarzenegger declares California fiscal emergency  (Reuters) - California Governor Arnold Schwarzenegger declared a state of emergency over the state's finances on Wednesday, raising pressure on lawmakers to negotiate a state budget that is more than a month overdue and will need to close a $19 billion shortfall. The deficit is 22 percent of the $85 billion general fund budget the governor signed last July for the fiscal year that ended in June, highlighting how the steep drop in California's revenue due to recession, the housing slump, financial market turmoil and high unemployment have slashed its all-important personal income tax collection. In the declaration, Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state's cash to pay its debt, and for essential services.

California state of fiscal emergency: Schwarzenegger - California Governor Arnold Schwarzenegger declared a state of emergency over the state's finances yesterday, raising pressure on lawmakers to negotiate a state budget that is more than a month overdue and will need to close a $US19 billion ($A21.3 billion) shortfall. The deficit is 22 per cent of the $US85 billion general fund budget the governor signed last July for the fiscal year that ended in June, highlighting how the steep drop in California's revenue due to recession, the housing slump, financial market turmoil and high unemployment have slashed its all-important personal income tax collection.California's budget is five weeks overdue, joining New York among big states with spending plans yet to be approved, and Schwarzenegger and top lawmakers are at an impasse over how to balance the state's books.

Repairs tab may top $32B - Hawaii taxpayers are on the hook for billions of dollars in construction projects over the next few decades, ranging from sewer upgrades to undersea power cables. When unfunded liabilities for state pension and health benefits are included, the tab tops $32 billion, or an average of $781 per person per year for 30 years. Taxpayers might groan at the multibillion-dollar burden, but economists say the projects are mostly needed and that the tax burden can be handled."When you say billions, people have a cow about it, but a billion dollars is not that much money anymore," said Paul Brewbaker, director of TZ Economics. "People need to understand that the state spends $10 billion a year."

Looming NC deficit among nation's largest - North Carolina will face one of the largest state deficits in the country next year, according to a new report. The National Conference of State Legislatures surveyed 35 states to get a picture of their fiscal health heading into the 2011-12 budget year. Thirty of the states are projecting deficits that total $72 billion. North Carolina's deficit is already expected to be $3.2 billion next year, or more than 16 percent of its $19 billion operating budget. Lawmakers struggled to cut about $1.3 billion from the budget they passed last month

Legislators warn of projected $2B deficit, likely cuts - The state's budget situation is going to get much worse before it gets better, members of northeastern Louisiana's state legislative delegation said Tuesday afternoon. "If you think this year was bad in the Legislature, wait 'til next year," said Sen. Robert "Bob" Kostelka, R-Monroe. "The so-called 'cliff' we've been waiting for next year looks like Mount Everest." State-generated revenue for the fiscal year that ended June 30 was $7.2 billion, with $2.5 billion of that total coming from one-time funding sources. Just four years ago the state generated $11.2 billion in revenue

Oregon budget stands at precarious crossroad. -Oregon government stands at the edge of a financial chasm as precarious as any in its 151-year history, hemmed in by the global recession, questionable spending decisions and a budget-draining combo of skyrocketing expenses and sluggish growth. Consider this sobering fact: State expenses, including payroll, health and retirement benefits, and debt payments, are slated to rise by nearly $4 billion over the next two years -- a 26 percent jump. During the same period, however, revenues to pay those expenses are expected to increase by a little less than $2 billion, or about 14 percent -- and that assumes a return to a robust economy. Oregon simply can't keep up. Lacking a substantial tax increase, which appears unlikely, the state won't have the money to offer the same level of services, pay and benefits to the same number of people.

State Budget Cuts Impact Daycare Subsidies - About $17.3 million will be cut out of state daycare subsidies. With these cuts, some may wonder why road projects all over the state aren't being affected. The budget shortfall is affecting families who need help from state funded services. But construction projects and state services come from different pools of money. Construction is usually federally funded while day care services for low-income families typically pull from state dollars."Many of the projects you're seeing, specifically the road projects, are done with bonding that has been the result of policy decisions made several years ago," said State Representative Tim Freeman.  Once money is allotted to a project, it cannot be taken away, even if there's money left over. But the budget shortfall in Oregon can be explained.

State budget: Oregon can't move money from roads - The recession that gripped Oregon and tore a $577 million hole in the state's general fund budget has also created confusing contradictions. Here's a big one: Amid hand-wringing over program cuts and teacher layoffs, total state spending has increased by 17 percent in two years. How can that be? The explanation lies in the source of the money. Government borrowing, federal dollars and special fees all contribute to the money that flows in and out of the state budget. In the past two years, for example, about $1 billion in federal stimulus contributed to that overall spending increase. The problem is that most of that money is restricted and can't be used to pay for education or child care programs. Those programs depend on the state's general fund, which is supported primarily by income taxes and shored up with state lottery profits. As a result, some state programs are seeing huge spending increases even as others are laying off employees, from midlevel managers to special education aides.

Illinois Has Nation's Largest Budget Deficit -  Illinois has the largest budget deficit in the nation this year, according to a new study.  The study released Tuesday by the National Conference of State Legislators also said all the states together will have a shortfall of $83.9 billion for fiscal year 2011, MarketWatch reported.  As of the present time, seven states are projecting deficits for the end of fiscal year 2010,and Illinois has the biggest, according to MarketWatch. Following Illinois are Oregon, Michigan, Kansas, Washington state, Pennsylvania, and South Carolina, the report said.  At the start of the month, Gov. Pat Quinn passed a budget that cut 5.3 percent in spending. In the budget, schools took a $241 million hit, universities lost $100 million, and spending on human services fell by $312 million. And those cuts didn't come close to erasing the state's $13 billion deficit, which is the largest in Illinois history.

Illinois Likely to Boost Taxes, Budget Director Says  (Bloomberg) -- Illinois, which is in its worst financial position ever, will raise the income-tax rate in January to address its deficit, Governor Pat Quinn’s budget director said. Lawmakers probably will increase the individual and corporate income-tax rates by 2 percentage points, generating $6 billion of new revenue, the budget director, David Vaught, said in an interview. The Legislature failed to address the deficit this year because of the November election, he said.“We’re going to pass a tax increase in January,” Vaught said. “We expect it is going to be substantial.”

County-Level Revolt Brewing - Frustrated by Albany's backlog of unpaid bills, cash-strapped local governments around New York are threatening to suspend their Medicaid payments to the state. Last week, an upstate county announced that it was freezing Medicaid payments to Albany. The move, which was closely watched by other county leaders, may be the start of a broader revolt, as the consequences of the state's chronic cash shortage trickle down to the local level.On Tuesday, county officials across the state are planning to hold a meeting to discuss whether to stage a more widespread protest that could potentially deprive Albany of millions of dollars in Medicaid reimbursement from other county governments owed money by the state.

Empty pockets: City has $2.7 million - Mayor Daley closed the books on 2009 with just $2.7 million in the bank, having added $461 million to the mountain of debt piled on Chicago taxpayers, year-end audits show. As low as the unreserved cash balance is, it’s more than ten-times higher than the $200,000 the city had left after 2008. The cash cushion is somewhat scary for a city with an annual budget of $6.1 billion. It’s tantamount to the average homeowner letting his or her checking account dwindle down to pennies. Ten years ago, the city had an $80.6 million cash cushion. Experts recommend at least $200 million in reserve for a budget the size of Chicago’s, according to Civic Federation President Laurence Msall.“The city is in a very precarious financial position. … It’s going to call for a major restructuring of city services. Everything will have to be on the table,”

New York City Risks Larger Deficits Than Mayor Forecast, DiNapoli Says - In his annual review of the city budget, DiNapoli said today shortfalls may be as large as $5.1 billion next year, rising to $6.8 billion in 2014. The $63.8 billion budget Mayor Michael Bloomberg and the City Council approved for fiscal 2011, which began July 1, forecast potential gaps of $3.3 billion in 2012 and $4.8 billion in 2014. While revenue will probably increase by $250 million, New York’s spending plan may have a $726 million deficit this year because of the unexpected $626 million cost of a new teachers’ contract and the loss of $279 million in Medicaid subsidies the U.S. Congress may not approve, DiNapoli said.

Brockton’s bid to correct water mischarges stirs outcry - The Brockton Water Department has been inaccurately billing thousands of residents for more than a decade because of widespread failure in the city’s water meters, city officials said yesterday. The city is seeking to reclaim millions in lost revenue that it says resulted from chronic undercharging for water usage, sending retroactive bills to customers, some for thousands of dollars. One woman said she received a bill for $100,000, which water officials said was probably a mistake. The Department of Public Works commissioner, Michael Thoreson, said the department also has mistakenly overcharged some residents. . Amid widespread confusion about problems with the water billing, the City Council voted Monday to audit the department. Patrick Quinn, a member of the city Water Commission, which governs water rates, said most of those meters have probably been malfunctioning for at least five years and some for more than a decade, suggesting deep management problems in the department.

N.J. toilet paper companies to donate rolls to Newark after Mayor Booker's budget cuts -  After Newark Mayor Cory Booker announced last week that the cash-strapped city would have to cut back on everything — including toilet paper — two New Jersey companies are coming to the rescue, ready to help clean up a messy situation in the state’s largest city. Marcal Manufacturing, based in Elmwood Park, and, which makes designer toilet paper and is based in Margate, said they will donate a few hundred rolls to city employees in order to keep City Hall sanitary.

Brookings: U.S. Metro Areas Need Exports Push - The Obama administration wants to double U.S. exports in five years. But most of the nation’s metropolitan areas aren’t properly equipped to ramp up export sales, says a new Brookings Institution report. Metro areas need a “re-education” about the value of exports, said Bruce Katz, who authored the report  “There’s a weird disconnect in this country,” Katz said in an interview. In other major exporting nations, “there really is a natural translation of national policy to metro implications.”Like many other studies, the Brookings report to be released Monday says exports can be a key source of U.S. growth and job creation. And it concludes that the federal government needs to push harder on negotiations around exchange rates, trade agreements and enforcement of existing trade laws. But it also offers recommendations specific to local and regional concerns:

The Muni-Bond Debt Bomb - State and local borrowing, once thought of as a way to finance essential infrastructure, has mutated into a source of constant abuse. Like homeowners before the housing bubble burst, states and cities have gorged on debt, extended repayment times, and used devious means to avoid limits on borrowing—all in order to finance risky projects and kick fiscal problems down the road. Though the country’s economic troubles have helped expose some of these unwise practices, the downturn has brought not reform but yet more abuse. Even as Tea Party protesters and taxpayer groups revolt against excessive government spending and taxes, they are paying too little attention to the gigantic state and local debt bomb. If it can’t be defused, we’re all at risk.

The Collapse of East Hampton: How One of the Country's Priciest Towns Went Broke - Beneath the surface of East Hampton Town's tranquil facade this summer are rumbling aftershocks provoked by what a recent grand jury report called "a complete collapse of fiscal management." Property owners are burdened by a two-year tax increase of almost 50 percent for village residents; severe municipal service cuts are expected; and some of the jewels in East Hampton's crown, its public facilities and open space, are being pried out and put up for sale or lease. The question that has townspeople, and visitors who get a whiff of the corpse of East Hampton's flush days, so flummoxed is how a municipality that reaps the property taxes of some of the country's most valuable real estate could go from solvency in 2003, with a $4.3 million surplus, to a crisis mode with a deficit that preliminary tallies estimate to be at least $31 million, and perhaps millions more.

Orange County schools looking for tax payers to bail them out - Orange County schools have been buoyed over the past two years with $120 million in federal stimulus money. But that's about to run out. School Board Chairman Joie Cadle says her district is looking at a $90 million deficit, and 2011 will bring some painful cuts in that Fall if a new revenue stream isn't approved. Cadle says 900 teachers are currently funded through federal stimulus money that is set to run out.  Tuesday the Orange County School Board is set to hear public comments and then vote on a 1 mill increase . If approved, a referendum will be added to the November ballot, and the increase would be in the fiscal year 2011-2012 if approved. Ultimately, the increase would cost the average home owner $130 per year for about 4 years, and bring in $85 million a year for the district.

Local School Boards Tackle Difficult Budget Deficits - TAMPA BAY - School boards in Hillsborough and Pinellas counties are scheduled to meet today. Both are scheduled to tackle projected budget deficits for the upcoming fiscal year. The school board in Hillsborough County is set to hold the first of two public hearings at 3 p.m. today on its $2.8 billion budget plan. School leaders are looking at an estimated $41 million dollar shortfall. In Pinellas County, the school board is scheduled to hold the first of two public hearings on its $1.3 billion budget at 5 p.m. School leaders are facing an $18 million budget deficit. A furlough for school employees is no longer being discussed. There is also a hearing on class size set for this afternoon.

Vote on Detroit Public Schools to be discussed by City Council, again - For the third time in three weeks, the Detroit City Council did not vote to place a question on the November ballot proposing mayoral authority over Detroit Public Schools, extending the passionate, contentious public debate for at least a few more days.DPS "needs to be radically changed," Brown said. "Anybody that has a vested interest in kids should start lobbying ... in order to make that change." The 85,000-student school district is facing a deficit of about $363 million, has experienced about 130 school closures since 2005, lost half its enrollment in the last decade and last year, posted the worst scores among 18 large cities on a national standardized test

Bleak Forecast For Schools Budget - Hoping to fully fund the 2011-2012 school year budget, Fairfax County Public Schools staff presented an early budget proposal last week that would begin the process of reversing some of the cost-reduction measures recommended in recent budget talks. But School Board members say the necessary funding is not likely to be available. The Fairfax County Board of Supervisors is responsible for deciding the amount of county funding transferred to the school system each year. The school system then decides how this money is spent. If the 2010-2011 budget talks were any indication of how future discussions on the 2011-2012 budget would go, the school system can expect more cuts.

Fire Teachers; Hire Guns: The New Plan for National Security - This week’s civics lessons for America’s schoolchildren: Your education is a threat to national security.The connection between war spending and education budgets has been thrown into stark relief as Congress wrestles with the passage of a $33 billion supplemental war bill. To recap: the House tried to add $20 billion in new domestic spending to the bill, including $10 billion to save teachers’ jobs. But last Thursday, the Senate struck out the education assistance needed to save teacher jobs in the fall. Majority Leader Harry Reid has said that the Senate will have to look for other ways to pass education funding. Welcome to America’s New Plan for National Security!The U.S. war budget is already greater than the combined military spending of every nation on the planet. But never mind. Even as new evidence underscores the fact that our present war efforts are a dismal failure, Defense Secretary Robert Gates admirably wins the day with his warning that the $33 billion for ongoing operations in Afghanistan is needed before August to “avoid severe consequences”.

How Preschool Changes the Brain - While the economists cite a wide variety of research, their most impressive evidence consists of a few different studies that looked at the long-term effects of early childhood education. Let’s begin with the Perry Preschool Experiment, which consisted of 123 low income African-American children from Yspilanti, Michigan. (All the children had IQ scores between 75 and 85.) When the children were three years old, they were randomly assigned to either a treatment group, and given a high-quality preschool education, or to a control group, which received no preschool education at all. The subjects were then tracked over the ensuing decades, with the most recent analysis comparing the groups at the age of 40. The differences, even decades after the intervention, were stark: Adults assigned to the preschool program were 20 percent more likely to have graduated from high school and 19 percent less likely to have been arrested more than five times. They got much better grades, were more likely to remain married and were less dependent on welfare programs.

The Case for $320,000 Kindergarten Teachers -  How much do your kindergarten teacher and classmates affect the rest of your life?  Economists have generally thought that the answer was not much. Great teachers and early childhood programs can have a big short-term effect. But the impact tends to fade. By junior high and high school, children who had excellent early schooling do little better on tests than similar children who did not — which raises the demoralizing question of how much of a difference schools and teachers can make.  Early this year,As Raj Chetty, a Harvard economist, and five other researchers set out to fill this void. Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

College Students Hide Hunger, Homelessness (NPR) - For many college students and their families, rising tuition costs and a tough economy are presenting new challenges as college bills come in. This has led to a little-known but growing population of financially stressed students, who are facing hunger and sometimes even homelessness.This has led to a little-known but growing population of financially stressed students, who are facing hunger and sometimes even homelessness.  UCLA has created an Economic Crisis Response Team to try to identify financially strapped students and help keep them in school.

Unintended consequences damage student aid - You may remember some years ago there was a kickback scheme in student loan programs?  This lead to new regulations on student loan programs that increased reporting requirements: The result, we hear today, is less choice for students in Minnesota, where a state-run loan program is not exempt from the harsher reporting requirements. New federal laws protecting students from unscrupulous private loans have no place for an unusual loan program in Minnesota, called SELF. As a result, state officials say, its future is in jeopardy.

High unemployment and the education deficit - Last month’s report on U.S. employment growth brought no cheer to job-seekers with a high school education. In June 2010, the unemployment rate for adults 25 or older with a high school diploma was 10 percent. Whereas unemployment among college educated adults was 4.4 percent. (Overall unemployment was 9.5 percent.) Part of what’s making the unemployment number so high, aside from a dismal economy, is an education deficit. The idea of lining up shovel-ready jobs with stimulus money may sound good, but our economy is not a shoveling one. Instead, our economy is calling for a more educated workforce.The gap between the U.S. unemployment rate for Americans with high school diplomas and those with college degrees shot through the roof with the Great Recession (See figure 1). Because of this education deficit, the overall unemployment rate will not sink anytime soon.

How Much Money Will You Earn in Your Lifetime? - As you might expect, it goes by your level of education: Going by Census data available through 2008, an individual with a bachelor's degree would earn about three times as much money over their life than an individual who dropped out of high school, and a bit under twice what a high school graduate might earn. Meanwhile, an individual with just some college or an associates degree would earn double the lifetime income of a high school dropout.  Interestingly, a master's degree doesn't provide that much of a lifetime earnings premium over a basic bachelor's degree, nor does a PhD deliver much additional income over a master's degree.

Rural Kids and Elite Colleges - In recent items at The New York Times, Ross Douthat has written about lower class whites and the educational opportunities they're afforded. ...while most extracurricular activities increase your odds of admission to an elite school, holding a leadership role or winning awards in organizations like high school R.O.T.C., 4-H clubs and Future Farmers of America actually works against your chances. Consciously or unconsciously, the gatekeepers of elite education seem to incline against candidates who seem too stereotypically rural or right-wing or "Red America."An excerpt from Bruce Poch, the Dean of Admissions at Pomona College:The  reality of college recruitment until this time has been largely based upon school visits. Travel to airline hub cities means we will meet more kids, more heavily concentrated in fewer schools or areas where we may hold events.  Very rural, low population centers do get left out.  That isn't meant as a snub to those students, but it is an unfortunate reality that they will have less direct exposure to representatives from colleges.

The Real Science Gap - Brilliant advances and the industries they foster come from brilliant minds, and for generations the United States has produced or welcomed from abroad the bulk of the world’s best scientists, engineers, inventors and innovators. But now, troubling indicators suggest that — unlike the days when the nation’s best students flocked to the challenges of the space race, the war on cancer, the tech boom, and other frontiers of innovation — careers in science, engineering and technology hold less attraction for the most talented young Americans. With competitors rapidly increasing their own supplies of technically trained personnel and major American companies outsourcing some of their research work to lower-wage countries, an emerging threat to U.S. dominance becomes increasingly clear.

Universities Fail to Report Taxable Income, IRS Says (Bloomberg) -- Nonprofit colleges and universities may be failing to report the full extent of their taxable income to the Internal Revenue Service, according to Lois Lerner, the agency’s director of exempt organizations. The IRS found in a survey sent to 400 schools in October 2008 that about a third of the respondents aren’t filing forms detailing their taxable income even though many operate businesses unrelated to teaching and research. The survey led to the audit of Harvard University and more than 30 other colleges. Those schools that do file never pay taxes because they claim losses that wipe out any profits, Lerner said the survey found.

Pensions to eat up larger share of state budget - The line in the state budget pays for the pensions for state employees and public school teachers. It’s already eating up one of every 10 taxpayer dollars — and it’s going to get much worse in just a few years.Using data provided by state agencies, a Maine Center for Public Interest Reporting analysis shows within five to six years pension costs could be 20 percent of the budget — twice, for example, what the state gives to higher education, a system with 14 campuses, 50,000 students and almost 6,000 employees. “It's a ticking time bomb that the next governor will inherit and that people don’t understand well enough,” said Alan Caron, founder of Envision Maine, a nonpartisan Maine think tank. “There isn’t going to be enough money to do what we’re already committed to doing, much less doing more of what we should be doing,”

Districts' pension contributions cut - Pennsylvania school districts got some breathing room in their budgets on Friday by having their contribution rate to employees' pension system cut by a third. The Public School Employees' Retirement System voted 12-2 to cut the employers' contribution rate that taxpayers pay to 5.64 percent of payroll, which will lower this year's cost by $349 million.""While taxpayers will pay less, the pension system's liabilities still have to be paid. Rep. Glen Grell, R-Hampden Twp., one of the two pension board members casting "no" votes, said the lower payments into the system will force PSERS to liquidate $400 million in current investments to pay current benefits.

Pension crisis case of deja vu - In case you've forgotten, the Pennsylvania School Employees Retirement System deficit is $15.7 billion. The State Employees Retirement System deficit is $5.3 billion. That's right. We're talking $21 billion. Dreyfuss said that when someone retires, the money needed to pay the retiree should be in the pension plan. It's not. The state House of Representatives has proposed solving the crisis by stretching out repayment of the deficits over 30 years.

Public pensions put state, cities in crisis - The recent layoff of 80 police officers in Oakland could be the harbinger of things to come as government officials find that public employee pension deals made when the stock market was booming are helping bust their budgets today. "It's regrettable, but we had no choice," said City Council President Jane Brunner of the layoffs that were Oakland's response to a growing public pension crisis. Forced to make a $30.5 million budget cut - Brunner said that's more than the city's discretionary spending - Oakland had asked police officers to pay 9 percent of their salaries toward their pensions and accept a later retirement age for new hires." "This is not unique to Oakland," said Ron Cottingham, president of the Police Officers Research Association of California. "Stockton is having this happen. So is Sacramento."

Fort Worth council considers eliminating guaranteed pension for newer workers - City Council members are considering doing away with a guaranteed pension for newer employees as the council struggles to bring Fort Worth's spending in line with the drop in taxes. Assistant City Manager Karen Montgomery said the city would still have to deal with a big backlog in pension costs even if the council decides to cut benefits. But pensions have been a sacred cow among state and local governments, and few others have even discussed cutting them. By law, the city can't change the benefits that it's already paying retirees or those that it has promised to employees who have worked long enough to be vested in the pension system. Also, police and firefighter pensions are guaranteed under labor contracts. The city could be forced to pour tens of millions of dollars into the pension system over the next few years, and pension costs are a major contributor to Fort Worth's projected $73 million budget gap.

Ohio pensions: Time bomb for state, local governments - Since the average person spends many more years in retirement than in years past, there is a looming question of how to pay for it.  Most private sector employers have responded by dropping the traditional pension plan in favor of a 401(k) system, in addition to Social Security benefits. However, public employees still pay a determined amount into one of Ohio's five public pension funds throughout their working careers. Then they are guaranteed a pension for the rest of their life, the amount based on their earnings and years in public service.That guarantee comes at a price -- one that cash-poor state and local governments are struggling to pay for. Unless substantial changes aren't made to Ohio's pension systems, the funds will need to come from somewhere. For taxpayers, that could mean fewer government services, higher taxes or both. For retirees, it could mean working longer before they are eligible to retire, and lower payouts when they do.State law dictates each pension fund should plan for the worst.

New Jersey still underfunding its pension system - This year’s state budget process failed to address massive fiscal problems in the state’s pension system at a time when fewer workers are contributing, more are retiring — and one report says pension under-funding is many times worse than the state says.Two large public-employee unions, the New Jersey Education Association and the Policemen’s Benevolent Association, say the number of members retiring in the first six months of this year was much higher than previous estimates suggested. Meanwhile, the number of current public workers who pay into the fund has declined due to layoffs and other staff reductions.The state estimates its investments are underfunded by $46 billion. That’s the amount necessary to ensure the accounts yield enough to pay for existing and projected pension obligations. The unfunded liability was said to be $34 billion in December

Can NJ keep its pension promises? No way, many officials concede - The reality of New Jersey's pension system crisis is sinking in.The numbers are mind-numbing. As of June 2009, the state's pension systems faced unfunded liabilities of $45.8 billion. That number assumed an annual 8.25 percent return on investments, an actuarial standard that many experts are now declaring as unrealistic. In the past decade, the pension system averaged 2.56 percent a year, not nearly enough to keep pace with projected costs. More pessimistic assumptions about rates of return peg the pension system liability as high as $173.9 billion — not to mention some $55 billion in unfunded health care costs. Experts and officials have begun to say it more clearly: There is no way New Jersey will ever be able to pay for the promises it has made to current and retired workers.

Fretting Pension Costs, Maine May Move Government Workers to Social Security - Maine is one of seven states that have opted not to have their government employees participate in Social Security, preferring their own pensions instead. (The others are Alaska, Colorado, Louisiana, Massachusetts, Nevada, and Ohio. Most teachers in California, Illinois, and Texas are also outside Social Security.) But given the well-documented crisis facing public employee pensions (see Pew Center, ALEC, the Manhattan Institute, and the Institute for Truth in Accounting, in general for more on the overpromised benefits and underfunded liabilities), the New York Times reports that states may have their employees turn more to Social Security:

Washington Investigates Retirement Communities - We report on Wednesday that the federal government is increasingly scrutinizing a fast-growing sector of senior housing known as continuing-care retirement communities, or CCRCs. Developers aggressively built these communities during the boom, and concerns have mounted over what happens to residents when CCRCs run into financial distress.  We took an early look at two reports being released on Wednesday that cast light on some of the risks to the retirees who sign up for these communities. You can now view both of the reports online. A report by the Government Accountability Office urges state regulators to be vigilant in making sure seniors who live in financially struggling communities are protected.The Senate Special Committee on Aging, meanwhile, released the results Wednesday of its own investigation into CCRCs.  The committee found that segments of the CCRC industry are still on perilous financial footing. The committee’s report says seniors should consider retaining a lawyer to review the complex legal agreements that come with moving into a CCRC.

Catfood Commission’s Social Security “Expert” Alice Rivlin Makes A Huge Blunder - Alice Rivlin’s latest opinion piece on Social Security, “The Right Reason for Saving Social Security,” makes the case for why she and the other members of the Catfood Commission are the wrong people for the job. First, from whom does Social Security need “saving,” other than from her and other self-proclaimed deficit hawks?    Rivlin acknowledges that the program can pay all benefits in full and on time for more than a quarter of a century and after that, in the unlikely event that Congress has not then acted, it could still pay three-quarters of all scheduled benefits for the foreseeable future and beyond.   Notwithstanding these facts, she argues that “The right reason for saving [sic] Social Security is to reassure all Americans.”

Social Security Coalition Kicks Off By Pointing Out Myths - Today, a coalition of 50 organizations dedicated to ensuring no benefit cuts to Social Security launched in Washington. The coalition, including top labor unions, progressive groups like and Democracy for America, and a host of others, released seven principles that will guide their policy prescriptions (text & vide0)

Neel Kashkari, TARP Guru, Supports Cutting Entitlements, Citing 'Me-First' Attitude Of Beneficiaries - Remember Neel Kashkari? Back during the financial crisis, Kashkari sat at the U.S. Treasury's Office of Financial Stability, where he was in charge of implementing the Troubled Asset Relief Program -- the fancy name for a wheelbarrow full of $700 billion in taxpayer money that went to revive the do-not-resuscitate banks of the world, which is exactly what those banks asked the government to do. Well, the whole experience made Kashkari terribly, terribly sad! So he went out into the woods to build himself a Cabin Of Emotions, where he could grieve over the fact that Washington, DC had lost the lustrous glamour that attracted him in the first place -- during the Iran-Contra hearings. But since then, he was rescued from his doldrums by bond giant PIMCO, where he became its managing director of investment management. Now he's on the op-ed pages of the Washington Post, with a message for the olds: STOP BEING SO "ME-FIRST" and let us cut your entitlements!

"No more 'me first' mentality on entitlements - While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do. [B]ailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness. The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us....If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research.

Priceless: Treasury’s TARP Architect for Bailing Out Banks Says Elderly Should Sacrifice to Save Free Enterprise - I don’t know who is stupider: Is it Neel Kashkari, Bush Treasury’s former architect and Obama’s administrator of the TARP plan for purchasing toxic bank assets, who today lectured the elderly on why they should accept cuts in Social Security and Medicare because shared sacrifice is the way to save American free enterprise? Or is it the Washington Post publishers and editors who think that running Kashkari’s offensive and fact-free op ed will help in their relentlessly dishonest crusade to convince Congress that the way to save America is to slash the nation’s most important and successful safety net programs? Looks like a tie.

Americans Cut Back on Visits to Doctor - Insured Americans are using fewer medical services, raising questions about whether patients are consuming less health care as they pick up a greater share of the costs. The drop in usage is showing up as health-care companies report financial results. Insurers, lab-testing companies, hospitals and doctor-billing concerns say that patient visits, drug prescriptions and procedures were down in the second quarter from year-ago levels.  "People just aren't using health-care like they have," "Utilization is lower than we expected, and it's unusual."Continued weak demand could eventually put downward pressure on spiralling health-care costs, a long-sought goal of policy makers. It could also force insurers to lower premiums.  The new trend comes amid a broader drop in health-care use as more Americans lose their jobs and their health insurance. Such cutbacks have happened before in recessions, but the drop seems to be more pronounced this time, industry analysts say.

The case for Medicaid reform - For those who haven’t had their fill of the Medicaid reform discussion, the full results of the UVa surgical outcomes study have been published in the online edition of Annals of Surgery. (I ask everyone who has had their fill for forgiveness.) There are a couple of points that keep coming up in the comments and in responses from other bloggers, so I want to spend at least one post addressing them.Austin Frakt writes that, contrary to my expressions of concern, he is quite open-minded to the possibility that outcomes with Medicaid are poorer than those of the uninsured (and especially those with private insurance). He remains reasonably skeptical that studies like the Virginia one adequately control for the poor social and health status of the Medicaid population:

Does Medicaid Kill? - Several people have written to ask what I think of this piece by Avik Roy on Medicaid outcomes, which discusses a study indicating that people on Medicaid do worse than people with no insurance at all.  I suspect that many of them were hoping to catch me in a bit of hypocrisy, as I rushed to support the study with the findings that undercut the rationale for national healthcare.  And indeed, if you think these are right, you should be horrified by PPACA, which got more than half of its coverage boost by putting people into a program that will kill some of them before their time. What do I think?  This is not actually a surprising new finding; it turns up off and on in the literature on insurance and health care outcomes.  I'm glad that Roy blogged the study, but I'm skeptical that this reflects the relative benefits of Medicaid, for the same reasons that I outlined in regard to studies of the uninsured.  Unobserved variable bias is incredibly hard to combat in these studies. 

County Health Care Services May Need Life Support - The Board of Supervisors Tuesday warned that severe cuts to health care services were likely unless state and federal officials provide needed funds to the county. "You can't ignore Los Angeles County and expect that nobody else will pay the price," said Supervisor Zev Yaroslavsky. "When we sneeze, the rest of the state catches cold." Yaroslavsky warned that the state would suffer if the county -- which he estimated manages about a third of the state's healthcare load -- starts shutting down hospitals and reducing services. The federal healthcare system could not withstand a failure in California, he said.

Improving Home-Care Services, Creating Jobs - Most Americans, even if they have jobs themselves, care about those who can’t find jobs. Recent polls report that a strong majority consider it a higher priority to help the unemployed than to reduce the federal deficit.Most Americans also care about the well-being of the most vulnerable members of our community – individuals with disabilities, the frail elderly and children growing up in poverty. That’s why we have programs like Medicaid, Medicare and Head Start. Unfortunately, many states, unable to raise the revenue they need, are cutting spending on such programs.  Maybe we could improve home-care services by providing more federal support for jobs in this sector of the economy. At least two specific proposals along these lines, based on very different designs, have been put forward.

HEALTH CARE Thoughts: IRS resources - National Taxpayer Advocate Nina Olson is reported to be unhappy about the major IRS role in the new health care regime. Olsen believes the IRS is already overworked (she used “overtaxed” in her annual report issued this month, a great pun) and needs more money and time in order to do the job.  “Obamacare” (PPACA) requires the IRS to create an entirely new enforcement and penalty system, while the Service struggles to deal with such programs as the new home buyers credit, not to mention the regular work burying the agency. Estimates of resource needs vary, and nothing is very concrete yet, but certainly a substantial increase in manpower and infrastructure will be necessary, very soon (and the IRS never moves very fast). Then it gets worse.

Warren Pollock Warns Of Emergency Drug Shortage As EMTs Told To Go To "Alternate Protocols" Warren Pollock reports on a rather troubling development which we can only attribute to various cost cutting measures by near-bankrupt states, as anything beyond that would be far too macabre even for us. It appears that "several drugs are in severe shortfall, drugs used to treat emergency patients that might be transported by ambulance to emergency rooms, the drugs include heart attack drugs, epinephrine, lidocain, as well as drugs used to treat shock and other conditions. These emergency care drugs are now in shortfall with alternate protocols going out to emergency services in various parts of the nation. This means that if you need emergency services, the drugs you rely upon to save your life may not be there." As WEP asks, "where have these drugs gone? It is unrealistic to suggest that a whole variety of emergency treatment drugs would go missing from the inventory all at the same time, and areas around the country all at the same time." Pollock highlights the states of TN, PA and CA may have already seen the incorporation of the "alternate protocol." Once again, we hope this is merely an interim shortage and not a widespread effort to impair the traditional operation of emergency technicians across the country.

Doctors will flee Medicare`s low payments, onerous rules - The exodus of doctors from Medicare and likely from private practice altogether -- is accelerating. The signs are undeniable: A 2008 poll by an independent Medicare commission found that 28 percent of seniors had trouble finding a primary care doctor, up from 24 percent the year before. In Texas, only 38 percent of primary-care doctors will take new Medicare patients. The Mayo Clinic is opting out of Medicare in several locations because the low payment rates don`t allow the organization to provide the quality care its culture demands. One financial planner reported that well over half of his physician clients have asked him to restructure their finances so they can retire in 2013 -- the year before the main provisions of the new health overhaul law take effect. Doctors are on the front lines of ObamaCare`s changes. The legislation requires more than $500 billion in cuts to Medicare to fund new entitlement spending, including a 21 percent cut in physician payments. Congress just postponed the cut until December, but in January, it will be 30 percent. Every delay adds tens of billions of dollars to the cost of a permanent fix.

A Conversation About Health Reform - Maxine Udall - For starters, during the conversation over lunch last week, I opined that paying physicians a salary rather than by piecework would do much to shift incentives away from "more is always and everywhere better," which almost certainly accounts for some of the reason that the US spends twice as much per capita on health as any other developed country (for which we obtain worse population health indicators than any other developed country). The former PA, now B-School prof, responded with an argument akin to those I have become accustomed to hearing from investment bankers and CEO's of large corporations. "How can we expect them to stay up all night with a sick patient, if they're on salary?" he asked. One possible answer to my colleague's question is: we'll pay nurses to stay up all night with sick patients. They've been doing it for years. I have nurse friends who actually become so invested in caring for a sick patient that they will stay on after their shift is over if the patient is in crisis. Last time I checked, they do this without receiving a bonus or even a particularly high salary in compensation for it.

In Haiti, a Lesson for U.S. Healthcare … The sudden availability in Haiti of free high-quality care from foreign doctors put enormous competitive pressure on the private local doctors, who had already been working under difficult conditions. Watching this situation unfold, I found myself wondering if the same would happen to private medical services back in the United States were our government to suddenly provide high-quality, low-cost health care.  In the beginning, of course, those with immediate injuries were treated first. But even after the earthquake victims had been taken care of, lines more than a quarter-mile long still formed at the hospital entrance. There were mothers carrying babies with swollen bellies, prematurely old men and women with waterlogged legs and labored breathing, people with painful sores and lots of people coughing. These were Haitians who’d had no access to medical care in a long time and who suddenly saw hope in a hospital full of foreign doctors eager to help at no charge.  This humanitarian aid came with a downside though: it caused many of Haiti’s local private clinics to lose business.

Facing Steep Odds, 128 House Democrats Revive the Public Option - Four months after President Barack Obama enacted the Affordable Care And Patient Protection Act, House Democrats have revived a top liberal priority that was eliminated from the sweeping health care law in the latter stages of a grueling year-long debate: the public option.Armed with a new line of attack aimed at soothing deficit fears, Democratic Reps. Lynn Woolsey (Calif.), Jan Schakowsky (Ill.) and Pete Stark (Calif.) last Thursday unveiled a bill that would offer consumers the choice of a “robust” government-run insurance plan alongside the private plans in the law’s exchanges. The Congressional Budget Office projects that the bill, which has gained 128 co-sponsors, will reduce the federal deficit by $68 billion between 2014 and 2020.  “As the deficit continues to grow, so does the need for a program that can save billions of dollars and improve health care while doing it,”  “We are introducing the public option now so it will be available as a ready-made offset or deficit reducer in this or the next Congress.”

Dispatch from Massachusetts: The Individual Mandate Is Working - In Massachusetts, the individual mandate requiring state residents to buy health insurance is working. Yet, a similar requirement remains among the more controversial elements of the new national health reform law. Opponents of the mandate resent being required to purchase a product they may not want. Proponents claim that the mandate is necessary to prevent an unraveling of the broader set of reforms in the law. But will it work? It is in Massachusetts, and that should give reform advocates some confidence. First of all, what does it mean for the mandate to "work?" The purpose of the mandate is to counter a potential threat to health insurers’ stability when they are required to accept all comers, even those with preexisting conditions. If individuals have access to insurance coverage whenever they please but are not required to have it all year, some will choose to enroll only when sick and then drop coverage when healthy. If too many people were to do just that, then insurers would be on the hook for more health care expenses than they could cover with collected premiums.

Fallen Soldiers' Families Denied Cash as Insurers Profit - “You can hold the money in the account for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue. Lohman, 52, left the money untouched for six months after her son’s August 2008 death. “It’s like you’re paying me off because my child was killed,” she says. “It was a consolation prize that I didn’t want.” It was being held in Prudential’s general corporate account, earning investment income for the insurer. Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds, according to regulatory filings.

The weight watchers -BETWEEN 1986 and 2008, the obesity rate in Massachusetts jumped from less than 10 percent to more than 20 percent. Thirty percent of the state’s children are either overweight or obese. Should public policy respond to our expanding waistlines with benign neglect, traditional taxes and regulation, or sophisticated psychology? Benign neglect is the policy preference of libertarians who argue that what we eat is our own business and that there’s a lot to like about a steak or a sundae. Whoever said that we all had to maximize our life expectancy or health?  I share the libertarian faith in personal freedom, but there are good reasons for public health-related interventions. People don’t bear the full costs of illnesses, which drain the public coffers and impose hardship on friends and relatives. .

Is Child Nutrition Reauthorization moving or stalling? - Senate Majority Leader Harry Reid (D-NV) and Senator Blanche Lincoln (D-AR) this week said they wanted lawmakers to approve a bill reauthorizing child nutrition programs before the August recess.   U.S. Food Policy's coverage this Spring noted that the Lincoln bill is less ambitious than legislation the White House had proposed earlier.  For example, the Senate bill includes just six cents per meal increase in the federal reimbursement to local programs for providing a school lunch.  Yet, even this weaker and politically more palatable child nutrition reauthorization failed to make the list of three bills highlighted as priorities by leading Democratic legislators, which probably made advocates wonder if any child nutrition legislation would pass at all.

Local food trend helps more folks eat fresh fruits, veggies - The "local" movement — buying and eating food produced locally rather than shipped from thousands of miles away — has been gaining steam with the steady growth of farmers markets and a phenomenon called community-supported agriculture. CSA members purchase shares of a farmer's crop for the season. The government doesn't track the numbers, but Local Harvest, a nationwide directory of small farms, farmers markets and other local food sources, estimates that tens of thousands of American families belong to CSAs, and supply trails demand. The number registered with Local Harvest alone indicates how quickly CSAs have multiplied over the past decade: The directory's listing has increased from 374 farms in 2000 to 3,660 today.

No friends? It's worse for your health than being fat -  Having good social relationships — friends, marriage or children — may be every bit as important to a healthy lifespan as quitting smoking, losing weight or taking certain medications, U.S. researchers reported on Tuesday. People with strong social relationships were 50 percent less likely to die early than people without such support, the team at Brigham Young University in Utah found.They suggest that policymakers look at ways to help people maintain social relationships as a way of keeping the population healthy.Having low levels of social interaction was equivalent to being an alcoholic, was more harmful than not exercising and was twice as harmful as obesity

Of two minds: Listener brain patterns mirror those of the speaker - A new study from Princeton University reports that a female student of lead investigator, Uri Hasson, can project her own brain activity onto another person, forcing the person's neural activity to closely mirror that in her own brain. The process is otherwise known as speech. There have been many functional brain imaging studies involving language, but never before have researchers examined both the speaker's and the listener's brains while they are communicating to see what is happening inside each brain. The researchers found that when the two people communicate, neural activity over wide regions of their brains becomes almost synchronous, with the listener's brain activity patterns mirroring those sweeping through the speaker's brain, albeit with a short lag of about one second. If the listener, however, fails to comprehend what the speaker is trying to communicate, their brain patterns decouple.

Delawares Drinking Water at Risk: - Decades of spills and accidents have delivered hundreds of thousands of gallons of oil, refining chemicals and plastic residues onto fields that drain toward the run. In 2006, a federally mandated investigation at nearby Delaware City Refinery found benzene trickling into Dragon Run from its bottom, along with other gasoline additives. Levels of benzene, a known carcinogen, had reached 50 percent of the concentration in some samples that would make the water off-limits for drinking.  "It used to be better and cleaner," Wilmoth said. "Now a lot of people are afraid to even go and catch any fish. They say not to eat this or that. Everyone is sort of scared about the river. The only people who aren't afraid are temporary workers, immigrants.

A problem with pig poop energy mandates (PPEM) Sometimes they are unrealistic: A North Carolina program to turn pig waste into power has failed to produce results, meaning a state mandate to generate potentially thousands of megawatts of electricity from swine waste might not be met by a deadline two years from now.As part of state energy law, electric power companies are required to generate nearly 0.1 percent of North Carolina's total retail electricity sales from swine waste by 2012.But in the three years since a voluntary pilot program started, no registered swine farms have produced electricity. ... In 2007, a state law banned construction of new lagoons and created a program in which power companies would pay for electricity generated by methane emitted from the waste.

Exploring Algae as Fuel - Foreign genes are being spliced into algae and native genes are being tweaked. Different strains of algae are pitted against one another in survival-of-the-fittest contests in an effort to accelerate the evolution of fast-growing, hardy strains. The goal is nothing less than to create superalgae, highly efficient at converting sunlight and carbon dioxide into lipids and oils that can be sent to a refinery and made into diesel or jet fuel. “We’ve probably engineered over 4,000 strains,” said Mike Mendez, a co-founder and vice president for technology at Sapphire Energy, the owner of the laboratory. “My whole goal here at Sapphire is to domesticate algae, to make it a crop.

U.S. Food Waste Worth More Than Offshore Drilling - MORE energy is wasted in the perfectly edible food discarded by people in the US each year than is available in oil and gas reserves off the nation's coastlines.Recent estimates suggest that 16 per cent of the energy consumed in the US is used to produce food. Yet at least 25 per cent of food is wasted each year. Michael Webber and Amanda Cuellar at the Center for International Energy and Environmental Policy at the University of Texas at Austin calculate that this is the equivalent of about 2150 trillion kilojoules lost each year. That's more than could be gained from many popular strategies to improve energy efficiency. It is also more than projections for how much energy the US could produce by making ethanol biofuel from grains.

Union Pacific's CEO Young Says U.S. Congress Discouraging Rail Investment - Union Pacific Corp.’s chief executive officer said U.S. lawmakers are discouraging needed investment even as federal transit authorities call for $77.7 billion in rail- and bus-system improvements. Congressional legislation now in committee would increase government oversight of mergers and allow shippers to challenge rates. The measures are making it hard for rail companies to plan, Chief Executive Officer Jim Young said yesterday in a telephone interview. In addition, he said the government’s push for high-speed passenger rail service distracts from the more pressing concerns for freight.  Rail and bus systems nationwide need billions of dollars in improvements to reach good condition, the Federal Transit Administration said July 21 in a report

More roadside chargers needed for electric cars — The auto industry calls it range anxiety: Drivers want electric cars but worry they won't have enough juice to make long trips. After all, what good is going green if you get stranded with a dead battery? It's a fear that automakers must overcome as they push to sell more battery-powered cars. So government and business are taking steps to reassure drivers by building up the nation's network of electric charging stations.

Recovery Strains Electricity Grid - Electricity demand is rising once again as the world recovers from the worst economic slowdown in decades. A return to levels of demand unseen since early 2008 spells problems for many countries that failed to make adequate preparations for the predictable follow-up to the sharpest decline in energy consumption on record.Large swathes of the developing world and, more surprisingly, several advanced economies are suffering. In the developed world, many problems stem from ageing metropolitan power grids that for decades have been jerry-built to handle rising electricity demand. A recent power cut affecting several major cities in the eastern US and central Canada is the latest example.

Wind Drives Growing Use of Batteries - The rapid growth of wind farms, whose output is hard to schedule reliably or even predict, has the nation’s electricity providers scrambling to develop energy storage to ensure stability and improve profits.  As the wind installations multiply, companies have found themselves dumping energy late at night, adjusting the blades so they do not catch the wind, because there is no demand for the power. And grid operators, accustomed to meeting demand by adjusting supplies, are now struggling to maintain stability as supplies fluctuate.  On the cutting edge of a potential solution is Hawaii, where state officials want 70 percent of energy needs to be met by renewable sources like the wind, sun or biomass by 2030. A major problem is that it is impossible for generators on the islands to export surpluses to neighboring companies or to import power when the wind towers are becalmed.

Wind industry dismayed as Dems scale back energy plans - Senate Democrats ditched a plan to cap greenhouse gas emissions and instead laid out plans for a narrow bill that would address the Gulf oil spill include some energy efficiency measures.  Also dropped from the bill outlined by Senate Majority Leader Harry Reid, D-Nevada, was a renewable electricity mandate sought by the wind-power industry. “A refusal to pass” the mandate “is an attack on every American worker and consumer,” said Denise Bode, CEO of the American Wind Energy Association. Wind power installations this year have dropped by 54 percent and 69 percent from 2008 and 2009 levels, according to the organization.

Fight Gears Up on Biomass -There is evidently no form of energy, including renewable energy, that lacks opposition. A big spat right now centers on biomass power plants. Biomass is a broad category that encompasses everything from burning whole trees to burning leftover wood chips, agricultural residues or household garbage. The focus of the argument is currently in Massachusetts, where state regulators are considering raising the bar for biomass plants. Supporters say that cutting down trees to make electricity is carbon-neutral, because the trees will regrow and absorb carbon dioxide from the air. But a recent study suggests that the trees will take years to do that, offering little short-term help. (The same argument can be made about solar cells; manufacturing them involves releasing carbon dioxide, then takes some time to break even before yielding a net benefit in decreased carbon dioxide emissions.) Biomass is a favored form of renewable energy because its generation can be reliably scheduled; the wind and sun can merely be predicted, and not always very well, leading to a need for extensive storage.

Fossil Fuel Subsidies Are 12 Times Support for Renewables, Study Shows - Global subsidies for fossil fuels dwarf support given to renewable energy sources such as wind and solar power and biofuels, Bloomberg New Energy Finance said. Governments last year gave $43 billion to $46 billion of support to renewable energy through tax credits, guaranteed electricity prices known as feed-in tariffs and alternative energy credits, the London-based research group said today in a statement. That compares with the $557 billion that the International Energy Agency last month said was spent to subsidize fossil fuels in 2008. “One of the reasons the clean energy sector is starved of funding is because mainstream investors worry that renewable energy only works with direct government support,” said Michael Liebreich, chief executive of New Energy Finance. “This analysis shows that the global direct subsidy for fossil fuels is around ten times the subsidy for renewables.”

NDP sets a bad power precedent  - By pushing the agreed mercury cap back four years to 2014 — beyond the next election — the NDP judged it could avert the backlash that would have been triggered by steep power rate hikes.  Three years after the passage of the Environmental Goals and Sustainable Prosperity Act and an agreement to meet the national standard for mercury emissions from coal-fired power plants, the mercurial NDP government has turned on a dime. The "dime" was the higher power rates forecasted by Nova Scotia Power to offset the cost of burning cleaner fuel to comply with the law.After meeting privately this month with business, community, environmental and university groups, government determined the public would happily accept higher levels of the neuro-poison for several more years in exchange for lower power bills next year.

Liability for Scrapping Yucca Mountain Could Run In the Billions - Eleven years after the government pledged to begin storing nuclear waste for commercial nuclear plants, the Department of Energy decided to scrap its planned repository at Yucca Mountain, Nevada — leaving the Justice Department with dozens of lawsuits on its hands....Michael Hertz, Deputy Assistant Attorney General for the Justice Department’s Civil Division, told lawmakers on the House Budget Committee Tuesday that the government may be liable for billions of dollars if it doesn’t follow through on its promise to build a disposal site to store nuclear waste.“DOE’s most recent estimate of potential liability … was as much as $13.1 billion,” Hertz said. “This estimate does not fully account for the government’s defenses or the possibility that plaintiffs will not be able to prove the full extent of their claims, and they were created before the administration’s 2009 announcement that it would not proceed to build a repository at Yucca Mountain.”

Doomsday shelters making a comeback - Hodge bought into the first of a proposed nationwide group of 20 fortified, underground shelters — the Vivos shelter network — that are intended to protect those inside for up to a year from catastrophes such as a nuclear attack, killer asteroids or tsunamis, according to the project's developers.There are signs that underground shelters, almost-forgotten relics of the Cold War era, are making a comeback. The Vivos network, which offers partial ownerships similar to a timeshare in underground shelter communities, is one of several ventures touting escape from a surface-level calamity.

Climate Uncertainties Tied to Economies of US States: California, Pacific Northwest and Colorado Achieve Positive Net Impacts; Other States Languish - A climate-change study at Sandia National Laboratories that models the near-term effects of declining rainfall in each of the 48 U.S. continental states makes clear the economic toll that could occur unless an appropriate amount of initial investment -- a kind of upfront insurance payment -- is made to forestall much larger economic problems down the road.The Sandia study uses probability techniques familiar to insurance companies. Tables place dollar estimates on the effects of climate change in the absence of mitigation or other policy initiatives over the 2010-2050 time period.The analysis is based upon results delivered by a variety of computational models reported by the Intergovernmental Panel on Climate Change's Fourth Assessment Report. From those, the Sandia report estimates the range of precipitation conditions -- from lows to highs -- that could occur across the states. The study then presents the consequence of those levels of precipitation on the states' economies.

Researchers Calculate the Cost of CO2 Emissions, Call for Carbon Tax - Two Rice University researchers are calling on policymakers to encourage the transition from coal-based electricity production to a system based on natural gas through a carbon tax. Brito and Curl argue that there are three important unresolved questions in the current debate on the reduction of carbon dioxide emissions: "First, what is the range of prices on carbon dioxide emissions that will be necessary to achieve the desired reductions? Second, should electrical generators and transport fuels be regulated jointly or separately? Third, should the restrictions be in the form of a quantity limit such as cap and trade or in the form of a carbon tax?" The authors calculated the cost of CO2 emissions by modeling the transition from coal-based electricity generation to a system based on natural gas. Replacing coal generators with natural gas, they believe, "is the most economical way to achieve a target of reducing carbon dioxide emissions by 20 percent."

The Price Of Political Paralysis - If you are still paying attention, you will see prescriptive policy analyses everywhere you look. Such views specify what we need to do to fix the economy & the coming fiscal crisis. Each analysis assumes, as it must, that strong, bipartisan political policies will be defined & implemented in the future. None of the people offering these prescriptions are willing to admit that our political system is irrevocably broken. They must pretend—do they know they are fooling themselves?—that strong, concerted political action is still possible in the United States. During the first half of Obama's presidency, the Congress barely squeaked out financial reform that did not reform, health care reform that did not bend the disastrous cost curve, and a huge fiscal stimulus that did not stimulate. This is why I was so confident that regulating CO2 emissionsto fix the climate would be postponed indefinitely—it was.

Who Cooked the Planet?, by Paul Krugman - So why didn’t climate-change legislation get through the Senate? First of all, we didn’t fail to act because of legitimate doubts about the science. Every piece of valid evidence ... points to a continuing, and quite possibly accelerating, rise in global temperatures.  Did reasonable concerns about the economic impact of climate legislation block action? No. ... All serious estimates suggest that we could phase in limits on greenhouse gas emissions with at most a small impact on the economy’s growth rate. If you want to understand opposition to climate action, follow the money. The economy as a whole wouldn’t be significantly hurt if we put a price on carbon, but certain industries — above all, the coal and oil industries — would. And those industries have mounted a huge disinformation campaign to protect their bottom lines. Look at the scientists who question the consensus on climate change; look at the organizations pushing fake scandals; look at the think tanks claiming that any effort to limit emissions would cripple the economy. Again and again, you’ll find that they’re on the receiving end of a pipeline of funding that starts with big energy companies

Friedman on climate inaction: We’re Gonna Be Sorry - For any first time visitors here because of Tom Friedman’s column in the Sunday NY Times, “We’re Gonna Be Sorry,” you might start with “An Introduction to Climate Progress.” When I first heard on Thursday that Senate Democrats were abandoning the effort to pass an energy/climate bill that would begin to cap greenhouse gases that cause global warming and promote renewable energy that could diminish our addiction to oil, I remembered something that Joe Romm, the blogger, once said: The best thing about improvements in health care is that all the climate-change deniers are now going to live long enough to see how wrong they were.We’ll always have gallows humor!For some reason, the NYT is home to a large fraction of the U.S. opinion columnists who get global warming.   Nicholas Kristof had a terrific piece last week, “Our Beaker Is Starting to Boil,” on global warming and the work of David Breashears to document “stunning declines in glaciers on the roof of the world.” Yes, Kristof cited, too –  but Kristof and Friedman and Krugman don’t care about global warming because they read this blog, they read this blog because they care about global warming. 

Why is the Obama Administration Blaming Environmentalists for Its Failures? - Michael Perelman is puzzled by the administration's attempt to blame environmentalists for the failure of climate change legislation: Politico reports that the Obama folk blame the Greens for the failure of its energy bill because it was THEIR responsibility to lobby...  So, here is the story: misinformed Greens voted for Obama for change, but the change was that it was the responsibility of the Greens to create the change.Of course, the White House needs a strong grassroots movement to fight powerful interests, but it also has the responsibility to lead that movement rather than make deals with those whom the grass roots people oppose. ...Here's the part of the story linked above the raised Michael's ire:...The blame game has already begun. One exasperated administration official on Thursday lambasted the environmentalists – led by the Environmental Defense Fund – for failing to effectively lobby GOP senators. “They didn’t deliver a single Republican,” the official told Politico. “They spent like $100 million and they weren’t able to get a single Republican convert on the bill.”

Four Ways to Kill a Climate Bill - IF President Obama and Congress had announced that no financial reform legislation would pass unless Goldman Sachs agreed to the bill, we would conclude our leaders had been standing in the Washington sun too long. Yet when it came to addressing climate change, that is precisely the course the president and Congress took. Lacking support from those most responsible for the problem, they have given up on passing a major climate bill this year.  It’s true that passing legislation to rebuild our fossil fuel-based economy was always going to be a momentous challenge. Senators and representatives feel in their bones (and campaign accounts) the interests of utilities and the coal and oil industries. Even well-intentioned members of Congress struggle to balance the competing needs of energy-intensive industries, coal workers and American families.

Obama Administration Threatens Veto on Any Bill Blocking EPA Carbon Regulations - This is pretty good news. It’s important to note that the death of climate legislation does not mean the death of carbon regulation. It just moves it into a new phase, where the EPA takes the lead. And the Administration will protect that privilege: President Barack Obama would veto legislation suspending the EPA’s plans to write new climate change rules, a White House official said Friday. Coal-state Democrats, led by Sen. Jay Rockefeller (W. Va.), Reps. Rick Boucher (Va.) and Nick Rahall (W. Va), are trying to limit the federal government’s ability to control greenhouse gases from power plants. All those lawmakers who want Congress and not “unelected bureaucrats” to determine climate policy had their chance, and failed. So now, it’s the EPA’s turn. And I’ll bet energy interests aren’t going to like what they come up with as much as they like the opportunity to deal with a captured Congress.

The Blame Game…Soon, we will likely see the worst case scenario come to pass in the name of “preventing climate change”, and that is to have a command-driven regulatory agency dish out quotas and make peripheral tweaks to existing regulations in order to look like they’re doing something productive. It is unlikely that climate legislation will pass the Senate in this Congress or the next…and that is a tragedy. I place the blame squarely on Republicans; centrist and conservative alike. I tend to think that Democrats gave a lot on this issue…and I grant them that even though their preference for centralized solutions to environmental problems are oftentimes wrong on the merits.To be sure, cap and trade was not my most preferred solution, which is a carbon tax…which was never even close to the table due to the Republicans’ successful campaign against the word “tax”. A carbon consumption tax would have been the most efficient, least intrusive way in which to deal with whatever specter of environmental degradation exists

Making Sense of the Climate Impasse - All signs suggest that the planet is still hurtling headlong toward climatic disaster. ... Yet still we fail to act.  There are several reasons for this... First, the economic challenge of controlling human-induced climate change is truly complex. Human-induced climate change stems from two principal sources of emissions...: fossil-fuel use for energy and agriculture (including deforestation...). Changing the world’s energy and agricultural systems is no small matter. The second major challenge in addressing climate change is the complexity of the science...This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it. This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion.

Ross Douthat's case against cap-and-trade - I prefer to call it a carbon tax, while admitting the two are sometimes equivalent.  Here is Ross's key passage: Spending 1 percent of our G.D.P. as a hedge against catastrophe might make sense; spending the same amount without any prospect of actually getting that insurance policy seems like idealistic folly. And so far, when it comes to actual mechanisms whereby Waxman-Markey becomes a model for the developing world, all I’ve heard from the left are neoconservative-style arguments about how “if the world’s leading power leads, everyone else will follow,” and visions of a carbon trade war between the West and China. Neither seems persuasive. That's a strong argument, but the case for a carbon tax remains threefold:

Billionaire polluter David Koch: Global warming is good for you - One of the wealthiest men in the world, Koch has used his billions for decades to promote the extremist, anti-regulatory, right-wing political groups like Americans for Prosperity that now organize under the Tea Party banner. “I’ve never been to a tea-party event,” Koch told reporter Andrew Goldman, even though he hosted AFP’s “Defending the American Dream” tea-party hoopla in Washington, D.C., last year.Fueled by his fear that the greenhouse gas pollution generated by Koch Industries might be limited by government regulation, Koch promotes a fantasy about benefits of a changing climate: Koch says he’s not sure if global warming is caused by human activities, and at any rate, he sees the heating up of the planet as good news. Lengthened growing seasons in the northern hemisphere, he says, will make up for any trauma caused by the slow migration of people away from disappearing coastlines. “The Earth will be able to support enormously more people because a far greater land area will be available to produce food,” he says.

Eliot Spitzer: Two Crises Wasted - As we all now know, a crisis is a terrible thing to waste, and here we have wasted two of them. The momentum for change will now fade into the haze of a long, hot summer. Many Americans hoped that the BP leak would finally focus us on generating an energy/climate policy that would deal simultaneously with global warming and our dependence on fossil fuels. That hope has now totally disappeared. Senate Majority Leader Harry Reid announced the end of meaningful reform in the energy arena, and the politics after the midterm elections will make that issue even less palatable.

A Push for Action on Renewables -With a cap on carbon dioxide an apparent nonstarter in the Senate these days, some clean energy and climate advocates have shifted their sights to a scaled-back but still ambitious goal: passage of a national renewable electricity standard. Such a law would require utility companies to produce a set amount of electricity from renewable sources by a certain date, spurring the development of clean sources like wind and solar and probably lowering overall emissions nationally. Perhaps most important, some argue that with a strong push by the president, such a measure could actually clear the high bar for passage of 60 votes in the Senate this fall.

Moscow May Break Heat Record as Russia's Heartland Burns, Drownings Rise - Moscow is set to break a heat record for a second day running as wildfires rage across European Russia, burning entire villages to the ground in some regions.  The temperature soared to a record 37.4 degrees Celsius (99.3 Fahrenheit) in Moscow yesterday, the hottest since records began 130 years ago. The capital is likely to get even hotter today, the All-Russian Research Institute for Hydrometeorological Information said on its website. The air temperature was 34.8 degrees as of 1:50 p.m.  Forest fires blazed in 282 spots across Russia as of 6:00 a.m., covering 52,060 hectares (about 129,000 acres), according to the Emergency Situations Ministry. In all, 575 wildfires were burning, including 34 in peat bogs drained during the Soviet era for agriculture, the ministry said on its website. Since the start of the fire season, 418,000 hectares have burned, the ministry said.

Russian farmers suffer 'catastrophe' in baking summer: 20% arable farm land affected- Russian farm owner Ilshat Gumerov stands in the middle of his fields under the mercilessly hot sun with a look of despair on his face. His 700-hectare land in the central Volga region of Tatarstan has not been touched by a drop of rain in weeks amid one of the severest heatwaves of the century in Russia. He already fears he has lost two thirds of his harvest. No rain has fallen since April in this largely Muslim region 800 kilometres east of Moscow while temperatures over the last weeks have jumped over 30 °C. And this after a bitter winter whose thaw destroyed winter crops.

From Fires to Fish, Heat Wave Batters Russia - Here is how extreme it has become: Oymyakon in Eastern Siberia is considered one of the coldest places on Earth, with winter temperatures dropping to as low as minus 90 degrees. On Thursday, the thermometer also read 90 degrees. Plus 90. In the evening.  Much of Russia has been reeling. Forest fires have erupted. Drought has ruined millions of acres of wheat. More than 2,000 people have died from drowning in rivers, reservoirs and elsewhere in July and June, often after seeking relief from the heat while intoxicated. In Moscow alone, the number of such deaths has tripled in comparison with last year, officials said.  All week long, temperatures have been soaring to records, and on Thursday, they reached a new high for Moscow, 100 degrees. July has been the hottest month since the city began taking such measurements under the czars, 130 years ago, officials said.

Chernobyl zone shows decline in biodiversity - The largest wildlife census of its kind conducted in Chernobyl has revealed that mammals are declining in the exclusion zone surrounding the nuclear power plant. The study aimed to establish the most reliable way to measure the impact on wildlife of contamination in the zone. It was based on almost four years of counting and studying animals there. "The truth is that these radiation contamination effects were so large as to be overwhelming"The scientists say that birds provide the best "quantitative measure" of these impacts.  They report their findings in the journal Ecological Indicators.

Warmer Climate Could Increase Release of Carbon Dioxide by Inland Lakes - Much organically bound carbon is deposited on inland lake bottoms. A portion remains in the sediment, sometimes for thousands of years, while the rest is largely broken down to carbon dioxide and methane, which are released into the atmosphere. Swedish researchers have shown that carbon retention by sediment is highly temperature-sensitive and that a warmer climate would result in increased carbon dioxide emissions to the atmosphere. To date, it has been unclear to what extent organic, carbon-containing material remains on lake bottoms, as opposed to being broken down. A group of researchers under the leadership of Professor Lars Tranvik at the Department of Limnology at Uppsala University has found a strong connection between the carbon dioxide production of lake sediment and bottom-water temperature.

U.S. faces climate-driven water shortages - As global warming accelerates, the world will become not only hotter, flatter, and more crowded but also thirsty, according to a new study that finds 70 percent of counties in the United States may face climate change-related risks to their water supplies by 2050. One-third of U.S. counties may find themselves at "high or extreme risk," according to the report prepared for the Natural Resources Defense Council by Tetra Tech, a California environmental consulting firm."It appears highly likely that climate change could have major impacts on the available precipitation and the sustainability of water withdrawals in future years under the business-as-usual scenario," the study’s authors conclude. "This calculation indicates the increase in risk that affected counties face that water demand will outstrip supplies, if no other remedial actions are taken.

In China, Pollution Worsens Despite New Efforts  — China, the world’s most prodigious emitter of greenhouse gas, continues to suffer the downsides of unbridled economic growth despite a raft of new environmental initiatives. The quality of air in Chinese cities is increasingly tainted by coal-burning power plants, grit from construction sites and exhaust from millions of new cars squeezing onto crowded roads, according to a government study issued this week. Other newly released figures show a jump in industrial accidents and an epidemic of pollution in waterways.

Is Urban Air Pollution in China Rising? - The New York Times claims that China's air pollution is growing worse due to increased motorization, construction, coal burning and general economic growth. But, their article didn't report any data trends. One way to measure air pollution is to use the API = air pollution index. Using Google, I went to the Chinese Environmental Ministry and found this daily data for Chinese major cities measuring ambient pollution. At least in Beijing this hot summer, there have been 0 API days above 150 and 150 is the threshold for "Lightly Polluted". I encourage you to look at the data for other cities. I must admit that I have an intellectual stake in this discussion. If you remember reading my 2010 Regional Science and Urban Economics paper on China , Zheng, Liu and I present evidence based on 35 major Chinese cities that several of them (including Beijing) have passed the EKC "turning point" and that we predict that further economic growth will DECREASE their air pollution.

Armageddon Wars: Overpopulation Vs. Global Warming - The analogy to global warming is obvious. Just as ingenuity came to the rescue in the past, allowing people to use resources more efficiently than they ever had before, it could do so again — providing us with ways to emit far less carbon for every dollar of gross domestic product. But I think there are two big reasons to doubt that we’re on another Ehrlich-Simon path when it comes to global warming.The first is basic economics. When the problem is resource scarcity, companies and individuals have a powerful incentive to become more efficient. It keeps their costs down..But global warming is different. The fact that carbon emissions are warming the planet doesn’t make it more expensive to produce those emissions. The second reason is the accumulation of evidence. Almost as soon as Mr. Ehrlich and Mr. Simon made their bet in 1980, Mr. Simon’s prediction started looking good.

Must-read Jeremy Grantham: Everything You Need to Know About Global Warming in 5 Minutes - Calls out the disinformers: “Have they no grandchildren?” -  Uber-hedge fund manager Jeremy Grantham, a self-described “die hard contrarian,” tells it like it is in his blunt 2Q 2010 letter:1) The amount of carbon dioxide (CO2) in the atmosphere, after at least several hundred thousand years of remaining within a constant range, started to rise with the advent of the Industrial Revolution.  It has increased by almost 40% and is rising each year.  This is certain and straightforward.2) One of the properties of CO2 is that it creates a greenhouse effect and, all other things being equal, an increase in its concentration in the atmosphere causes the Earth’s temperature to rise.  This is just physics.  (The amount of other greenhouse gases in the atmosphere, such as methane, has also risen steeply since industrialization, which has added to the impact of higher CO2 levels.)

Research says climate change undeniable - FT - The research, headed by the US National Oceans and Atmospheric Administration, is based on new data not available for the UN’s Intergovernmental Panel on Climate Change report of 2007, the target of attacks by sceptics in recent years.  Seven indicators were rising, he said. These were: air temperature over land, sea-surface temperature, marine air temperature, sea level, ocean heat, humidity, and tropospheric temperature in the “active-weather” layer of the atmosphere closest to the earth’s surface. Four indicators were declining: Arctic sea ice, glaciers, spring snow cover in the northern hemisphere, and stratospheric temperatures. Mr Stott said: “The whole of the climate system is acting in a way consistent with the effects of greenhouse gases.” “The fingerprints are clear,” he said. “The glaringly obvious explanation for this is warming from greenhouse gases.”

Snowcone Greenland: Not For The Faint of Heart - Greenland Ice Sheet melt -- July 28, 2008, vs. July 30, 2009

Greenland Ice Cap Melt Is Accelerating -A British research team studying the Greenland ice sheet has discovered evidence of a rapidly accelerating rate of melt. Dr Alun Hubbard, leading a team from the universities of Swansea and Aberystwyth said the ice sheet in their region had lowered six metres in just a month. The phenomenon is caused by surface melt, a vicious cycle in which melted ice brings about further thawing of the cap beneath it. As the ice turns to liquid, its surface reflectivity decreases, absorbing more of the heat from the sun, and accelerating the melt.

Cutting soot emissions best hope for saving Arctic ice - Soot from the burning of fossil fuels contributes far more to global warming than has been thought. But, unlike carbon dioxide (CO2), soot lingers only a few weeks in the air, so cutting emissions could have a significant and rapid impact on the climate.If soot emissions were eliminated, more than 1.5 million premature deaths from soot inhalation could be prevented worldwide each year, reports the Journal of Geophysical Research. According to a new study led by Mark Z. Jacobson of Stanford University in the US, the quickest, best way to slow the rapid melting of Arctic sea ice is to reduce soot emissions from the burning of fossil fuel, wood and dung.  His analysis shows that soot is second only to CO2 in contributing to global warming.

NOAA: Past Decade Warmest on Record...According to Scientists in 48 Countries. Earth has been growing warmer for more than fifty years. The 2009 State of the Climate report released today draws on data for 10 key climate indicators that all point to the same finding: the scientific evidence that our world is warming is unmistakable. More than 300 scientists from 160 research groups in 48 countries contributed to the report, which confirms that the past decade was the warmest on record and that the Earth has been growing warmer over the last 50 years. Based on comprehensive data from multiple sources, the report defines 10 measurable planet-wide features used to gauge global temperature changes. The relative movement of each of these indicators proves consistent with a warming world. Seven indicators are rising: air temperature over land, sea-surface temperature, air temperature over oceans, sea level, ocean heat, humidity and tropospheric temperature in the "active-weather" layer of the atmosphere closest to the Earth's surface. Three indicators are declining: Arctic sea ice, glaciers and spring snow cover in the Northern hemisphere.  The entire document is here.

After the hottest decade on record, it’s the hottest year on record, hottest week of all time in satellite record, and we may be at record low Arctic sea ice volume - But how about the world's heaviest hailstone? - FoxNews had me on twice for the big snowstorms (during the hottest winter on record), but no invitations during the record-smashing heat waves hitting the nation and world.  Go figure! It would appear we’ve set the all-time record high absolute temperature in the satellite dataset for the last week or two. NOAA’s annual State of the Climate Report for 2009 (video here) reports that “Past Decade Warmest on Record According to Scientists in 48 Countries“: Each of the last three decades has been much warmer than the decade before. At the time, the 1980s was the hottest decade on record. In the 1990s, every year was warmer than the average of the previous decade. The 2000s were warmer still.“The temperature increase of one degree Fahrenheit over the past 50 years may seem small, but it has already altered our planet,” said Deke Arndt, co-editor of the report and chief of the Climate Monitoring Branch of NOAA’s National Climatic Data Center. “Glaciers and sea ice are melting, heavy rainfall is intensifying and heat waves are more common. And, as the new report tells us, there is now evidence that over 90 percent of warming over the past 50 years has gone into our ocean.”

Population Research Presents a Sobering Prognosis - With 267 people being born every minute and 108 dying, the world’s population will top seven billion next year, a research group projects, while the ratio of working-age adults to support the elderly in developed countries declines precipitously because of lower birthrates and longer life spans. In a sobering assessment of those two trends, William P. Butz, president of the Population Reference Bureau, said that “chronically low birthrates in developed countries are beginning to challenge the health and financial security of the elderly” at the same time that “developing countries are adding over 80 million to the population each year and the poorest of those countries are adding 20 million, exacerbating poverty and threatening the environment.”

Plants at base of ocean food chain in decline, study finds…Microscopic phytoplankton that form the foundation of the marine food chain are declining, according to a new Canadian study that indicates that the ocean’s ecosystem and fisheries could be changing.Researchers at Dalhousie University conducted the first global study of the populations of these microscopic organisms in the past century and found the declines – averaging about 1 per cent a year, and approximately 40 per cent since 1950 – are correlated with increases in sea surface temperatures. The study, a three-year analysis, is being published Thursday in the journal Nature. Phytoplankton act as the grass of the ocean and form the base of the aquatic food chain. The organisms live at the surface of the water, and are the main source of food for zooplankton, which in turn form the diet of fish and other sea creatures that are eaten by the bigger fish, large whales and humans that occupy the top of the food chain. Phytoplankton are also major sources of oxygen to the atmosphere.

Nature Stunner: “Global warming blamed for 40% decline in the ocean’s phytoplankton” - "Microscopic life crucial to the marine food chain is dying out. The consequences could be catastrophic." -  Scientists may have found the most devastating impact yet of human-caused global warming — a 40% decline in phytoplankton since 1950 linked to the rise in ocean sea surface temperatures.  If confirmed, it may represent the single most important finding of the year in climate science. The headlines above are from an appropriately blunt article in The Independent about the new study in Nature, “Global phytoplankton decline over the past century” (subs. req’d).  Even the Wall Street Journal warned, “Vital Marine Plants in Steep Decline.”  Seth Borenstein of the AP explains, “plant plankton found in the world’s oceans  are crucial to much of life on Earth. They are the foundation of the bountiful marine food web, produce half the world’s oxygen and suck up harmful carbon dioxide.”

Plankton decline across oceans as waters warm - The amount of phytoplankton - tiny marine plants - in the top layers of the oceans has declined markedly over the last century, research suggests. Writing in the journal Nature, scientists say the decline appears to be linked to rising water temperatures.They made their finding by looking at records of the transparency of sea water, which is affected by the plants.The decline - about 1% per year - could be ecologically significant as plankton sit at the base of marine food chains. This is the first study to attempt a comprehensive global look at plankton changes over such a long time scale. "What we think is happening is that the oceans are becoming more stratified as the water warms,"

Eating the seed corn » This morning I came upon a paper in Nature whose abstract is as follows (emphasis added): In the oceans, ubiquitous microscopic phototrophs (phytoplankton) account for approximately half the production of organic matter on Earth. Analyses of satellite-derived phytoplankton concentration (available since 1979) have suggested decadal-scale fluctuations linked to climate forcing, but the length of this record is insufficient to resolve longer-term trends. Here we combine available ocean transparency measurements and in situ chlorophyll observations to estimate the time dependence of phytoplankton biomass at local, regional and global scales since 1899.We observe declines in eight out of ten ocean regions, and estimate a global rate of decline of ~1% of the global median per year. Our analyses further reveal interannual to decadal phytoplankton fluctuations superimposed on long-term trends. These fluctuations are strongly correlated with basin-scale climate indices, whereas long-term declining trends are related to increasing sea surface temperatures. We conclude that global phytoplankton concentration has declined over the past century; this decline will need to be considered in future studies of marine ecosystems, geochemical cycling, ocean circulation and fisheries

Phytoplankton Panic - Phytoplankton, the tiny little ocean creatures that generate a massive amount of the world's oxygen, form the base of the ocean food chain, and otherwise deserve to be nominated Hero of the World Economy, First Class, are apparently dying off.  The theory is that global warming is probably doing them in.  Michael O'Hare brings the doom.  Kevin Drum brings the gloom: So, anyway, as temperatures rise the plankton die. As plankton die, they suck up less carbon dioxide, thus warming the earth further. Which causes more plankton to die. Rinse and repeat. Oh, and along the way, all the fish die too. Or maybe not. But this sure seems like a risk that we should all be taking a whole lot more seriously than we are. Unfortunately, conservatives are busy pretending that misbehavior at East Anglia means that global warming is a hoax, the Chinese are too busy catching up with the Americans to take any of this seriously, and you and I are convinced that we can't possibly afford a C-note increase in our electric bills as the price of taking action. As a result, maybe the oceans will die. Sorry about that, kids, but fixing it would have cost 2% of GDP and we decided you'd rather have that than have an ocean. You can thank us later.

Warming, phytoplankton, and climate denialism - No doubt neither the latest climate report – the past decade was the warmest on record, and every indicator is moving in the direction predicted by analysis of anthropogenic global warming – nor the really, really scary paper in Nature about diminishing phytoplankton as a result of oceanic warming will suffice to open the closed minds of the climate denialists. They’ll just keep chanting “Climategate! Climategate! Climategate!” But we’re now at a state of knowledge where refusing to do something serious about global warming can only be called a policy of homicidal recklessness. Dying phytoplankton are a much bigger deal than the threat from a stray asteroid; too bad there’s no way to fire a nuclear missile at the problem, or the propeller-head faction among the libertarians might get interested.

How difficult is it to recover from dangerous levels of global warming? - Climate models provide compelling evidence that if greenhouse gas emissions continue at present rates, then key global temperature thresholds (such as the European Union limit of two degrees of warming since pre-industrial times) are very likely to be crossed in the next few decades. However, there is relatively little attention paid to whether, should a dangerous temperature level be exceeded, it is feasible for the global temperature to then return to safer levels in a usefully short time. We focus on the timescales needed to reduce atmospheric greenhouse gases and associated temperatures back below potentially dangerous thresholds, using a state-of-the-art general circulation model. This analysis is extended with a simple climate model to provide uncertainty bounds. We find that even for very large reductions in emissions, temperature reduction is likely to occur at a low rate. Policy-makers need to consider such very long recovery timescales implicit in the Earth system when formulating future emission pathways that have the potential to 'overshoot' particular atmospheric concentrations of greenhouse gases and, more importantly, related temperature levels that might be considered dangerous.

Arctic Ocean May Have Limited Ability to Absorb Carbon Dioxide - The Arctic Ocean may be reaching its limit as a carbon sink, suggests a new study.Some scientists had projected that, as sea ice cover receded and the ocean warmed, its waters could sop up increasing amounts of carbon dioxide. Removing the barrier between ocean and air, the reasoning went, would help provide a steady stream of CO2 to feed microbes in the surface waters.But the study, published yesterday in Science, says that water sampled in the Arctic Ocean's Canada Basin in 2008 showed higher levels of CO2 than scientists expected to find, except in areas still covered by sea ice. That implies that the microbe population hasn't expanded to gobble up the increased amount of CO2 entering surface waters from the air above.

UK Gov't Department of Energy and Climate Change Pathways 2050 report - We need a transformation of the UK economy to ensure secure low carbon energy supplies to 2050. We are committed to reducing greenhouse gas emissions in the UK by at least 80% by 2050, relative to 1990 levels. We face major choices about how to move to a secure, low carbon economy over this period. Should we do more to cut demand, or rely more on increasing and decarbonising the energy supply? How will we produce our electricity? Which technologies will we adopt? The analysis in the 2050 Pathways work presents a framework through which to consider some of the choices and trade-offs which we will have to make over the next forty years. It is system-wide, covering all parts of the economy and all greenhouse gas emissions released in the UK. It shows that it is possible for us to meet the 80% emissions reduction target in a range of ways, and allows people to explore the combinations of effort which meet the emissions target while matching energy supply and demand.

Richard Heinberg: Beyond the limits to growth - In 1972, the now-classic book Limits to Growth explored the consequences for Earth’s ecosystems of exponential growth in population, industrialization, pollution, food production, and resource depletion.1 That book, which still stands as the best-selling environmental title ever published, reported on the first attempts to use computers to model the likely interactions between trends in resources, consumption, and population. It summarized the first major scientific study to question the assumption that economic growth can and will continue more or less uninterrupted into the foreseeable future. In any case, the underlying premise of the book is irrefutable: At some point in time, humanity’s ever-increasing resource consumption will meet the very real limits of a planet with finite natural resources. We the co-authors of The Post Carbon Reader believe that this time has come.

A cure for the energy crisis - Fort Lupton is home to a handful of the more than 35,000 drilling operations in the U.S. seeking to extract natural gas from shale rock thousands of metres underground. Like Canada’s oil sands, this gas was once thought too difficult to extract—shale is far less porous than the sandstone and other types of rock from which natural gas is normally harvested. But new drilling techniques are opening up this vast energy supply. There’s thought to be about 14.4 trillion cubic metres of gas available in western Europe, or enough to meet the continent’s needs for about 30 years. The U.S. has a potential supply that could last up to 100 years, and the International Energy Agency estimates that China has a further 26 trillion cubic metres of undeveloped shale gas reserves.With so much available, major energy companies around the world are racing to start drilling. As Markham’s tap water demonstrates, this carries some big environmental risks, but the upside is too great to ignore.

E.P.A. Weighs Risks of Hydraulic Fracturing for Natural Gas… — The streams of people came to the public meeting here armed with stories of yellowed and foul-smelling well water, deformed livestock, poisoned fish and itchy skin. One resident invoked the 1968 zombie thriller “Night of the Living Dead,” which, as it happens, was filmed just an hour away from this southwestern corner of Pennsylvania. The culprit, these people argued, was hydraulic fracturing, a method of extracting natural gas that involves blasting underground rock with a cocktail of water, sand and chemicals.  Gas companies countered that the horror stories described in Pennsylvania and at other meetings held recently in Texas and Colorado are either fictions or not the companies’ fault. More regulation, the industry warned, would kill jobs and stifle production of gas, which the companies consider a clean-burning fuel the nation desperately needs.

Pipeline leaks more than 800,000 gallons of oil into Michigan waterways, endangering wildlife (AP) — Crews were working Tuesday to contain and clean up more than 800,000 gallons of oil that poured into a creek and flowed into the Kalamazoo River in southern Michigan, coating birds and fish.Authorities in Battle Creek and Emmett Township warned residents about the strong odor from the oil, which leaked Monday from a 30-inch pipeline built in 1969 that carries about 8 million gallons of oil per day from Griffith, Ind., to Sarnia, Ontario. Crews waded in oily water as they worked to stop the oil's advance downstream. Oil-covered Canada geese walked along the banks of the Kalamazoo River, and photos showed dead fish floating in the spill. The Kalamazoo River eventually flows into Lake Michigan, but officials didn't expect the oil to reach the lake.

U.S. Rep. Schauer: Oil spill near Battle Creek largest in Midwest history - As much as 1 million gallons of oil may have leaked into the Kalamazoo River near Battle Creek in what could be one of the largest oil spills in Midwest history, officials say. U.S. Rep Mark Schauer, D-Battle Creek, called it the "largest oil spill in the history of the Midwest" in a description to President Barack Obama this afternoon prior to a conference call with the media. "According to EPA officials, this is the largest oil spill ever in the Midwest," he said. "The EPA is estimating 1 million gallons (spilled). ... This feels like déjÀ vu all over again with regard to what happened in the Gulf."

Fallout from Enbridge oil spill spreads  -- As Enbridge Inc. scrambled Wednesday to get a damaged section of oil pipeline in Michigan back into service, it said it will also move to deal with concerns from opponents of its proposed Northern Gateway pipeline to the British Columbia coast. The Calgary-based company said Wednesday it will be days before it can get the section of the line in Michigan back into service as it begins to assess the cause of the rupture and cleans up crude fouling a river.“We’re just now starting to pull down the oil to gain access to the pipe and we’re going to be working closely with federal regulators to insure that we’ve accurately cut out and examined that pipe,” Enbridge CEO Pat Daniel told a news conference in Battle Creek, Mich. The company will also look at any pressure restrictions it may require before a restart, he said.

BP Defines Deviancy Down - The national press stuffs a big story today on a massive new oil spill in the Kalamazoo River. Size, of course, is all about context. And unfortunately for the Michiganders affected by it, it comes in the wake of the gargantuan BP oil spill in the Gulf, which dumped 94 million to 184 million gallons of crude into the Gulf of Mexico over three months (assuming it’s stopped for good).The Kalamazoo River spill is “just” a million gallons. But that makes it the sixth biggest spill in U.S. in the last forty-plus years, if this Reuters list is complete.The New York Times stuffs it on A13 and briefed it yesterday. The Wall Street Journal dropped a sentence in its “What’s News” box yesterday and briefs it on A4 today, which is unfortunate because it has a much longer story online, if you can find it. That’s not good enough, folks.

Government logs show delays in report of Michigan oil spill - What did Enbridge Energy Partners know about crude oil spilling from a ruptured pipe in west Michigan? And when did the energy company -- and its Canadian parent, Enbridge Inc. -- realize it had a potential disaster seeping into the Kalamazoo River? Rep. Mark Schauer, member of a House subcommittee that oversees the nation's network of oil and gas pipelines, said the panel is launching an investigation to answer those questions. Schauer, a Battle Creek Democrat who lives 15 miles from the spill, continued his verbal assault on Enbridge on Friday, saying it failed to promptly report the leak to federal authorities, delaying their response.

North Dakota group worries about pipeline steel - A North Dakota environmental group wants government regulators to investigate whether a Canadian company used faulty steel in the construction of a pipeline that moves crude oil from Canada through six states. Dickinson-based Dakota Resource Council says TransCanada Corp.'s Keystone pipeline used steel from a supplier that has had problems with steel in other pipelines.

How the Gulf of Mexico became the nation's 'toilet bowl' (CNN video) Perhaps nowhere is the protracted death of the Gulf Coast more apparent than in Pointe-Aux-Chenes, Louisiana, and other indigenous bayou communities where, decades before the BP oil disaster, the marsh started disintegrating and environmental problems washed in from as far away as North Dakota and New York. The Gulf of Mexico became, in effect, the United States' toilet bowl -- known for its seasonal "dead zones," high erosion rates, dirty industry, ingrained poverty and, now, for the biggest oil disaster in the history of the country. Compare that legacy on the Gulf Coast with the East Coast, with its wealth, and the West, with its more-sterling record of environmental stewardship.

From 'static kill' to 'bottom kill’: next steps in Gulf… With the operation to permanently seal the runaway well at the center of the Gulf oil spill set to begin as early as the week after next, relief efforts are already casting an eye to the longer-term future to determine "how clean is clean" and when they will begin to draw down resources. A coordinated effort to clean up residual oil left standing in marshes and beaches will continue through September, said retired Coast Guard Adm. Thad Allen, who is overseeing the federal effort, in a press briefing Monday.This week BP and Coast Guard officials are preparing what they call a “bottom kill” – the permanent sealing of the runaway Macondo well through one of the two relief wells drilled 13,000 feet below the seafloor. According to Allen, BP will deposit through the relief well a combination of drilling mud, cement, liquids, and nitrogen to stop the flow of oil – perhaps as early as Aug. 7.

Gulf Officials Optimistic That Cement Will Kill Well -Engineers for the company are preparing to pump heavy drilling mud and then cement into the Macondo well early this week, potentially killing it for good — or at least offering critical clues about any unknown leaks that still have to be plugged. The effort, known as a static kill, comes just over 100 days after the well blew out, spewing as much as five million barrels of oil into the gulf in the largest oil spill ever in American waters. Attempts to control the well have been marked by repeated failures and disappointments, but officials have become increasingly buoyant in their public comments in the last two weeks, since technicians managed to install a tight-fitting cap that stopped oil from leaking into the gulf.

BP's `Kill' Start May Be Delayed Due to Storm Debris -BP Plc’s next attempt to more fully seal its Macondo well in the Gulf of Mexico was delayed by a day so the company can remove debris from a relief well.  The “static kill” procedure, in which mud will be pumped into the well, may start Aug. 3 rather than Aug. 2, National Incident Commander Thad Allen told reporters on a call yesterday. Tropical Storm Bonnie, which entered the Gulf on July 23, caused some of the sediment along the sidewalls of the relief wellbore to fall inside. BP must remove the debris before running a well casing.

BP's Deepwater Horizon - Static Top Kill vs. Bottom Kill: Weighing the Risks -A permanent solution to the BP Macondo blowout in the Gulf of Mexico may be achieved soon but there are risks. Admiral Thad Allen announced on Monday, July 26 that a static top kill would be attempted on August 2. The schedule may be accelerated to July 31 or August 1 according to an announcement today (July 29). The sealing cap has successfully stopped the flow of oil and gas from the well and the pressure continues to build slowly. Temperature at the wellhead has not increased, and seeps near the well are mostly nitrogen and biogenic methane unrelated to leakage. BP Senior Vice President Kent Wells’ technical update on July 21 explained these findings and showed how the well will be killed.

BP's Hayward Replaced by Dudley -- Given New Job in Russia Interesting to be up at midnight to see CNN International journalists reading the Press Release that Tony Hayward will be axed from BP, well, sort of-- along with golden parachute and "his life back." Yep, He'll be in charge of operations in Russia.

Incoming BP CEO: Time for ‘scaleback’ in cleanup - BP's incoming CEO said Friday that it's time for a "scaleback" of the massive effort to clean up the Gulf of Mexico oil spill, but stressed the commitment to make things right is the same as ever.Tens of thousands of people — many of them idled fishermen — have been involved in the cleanup, but more than two weeks after the leak was stopped there is relatively little oil on the surface, leaving less work for oil skimmers to do. Bob Dudley, who heads BP's oil spill recovery and will take over as CEO in October, said it's "not too soon for a scaleback" in the cleanup, and in areas where there is no oil, "you probably don't need to see people in hazmat suits on the beach."

BP Oil Spill: Clean-Up Crews Can't Find Crude in the Gulf - For 86 days, oil spewed into the Gulf of Mexico from BP's damaged well, dumping some 200 million gallons of crude into sensitive ecosystems. BP and the federal government have amassed an army to clean the oil up, but there's one problem -- they're having trouble finding it. At its peak last month, the oil slick was the size of Kansas, but it has been rapidly shrinking, now down to the size of New Hampshire. Today, ABC News surveyed a marsh area and found none, and even on a flight out to the rig site Sunday with the Coast Guard, there was no oil to be seen.

Gulf oil spill: Smaller oil slicks harder to find but seen as good sign - With the BP oil well sealed for 11 days, federal officials said Monday that much of the surface oil had broken up into thousands of small patches that were proving difficult to hunt down and clean up.Coast Guard Rear Adm. Paul Zukunft, the federal on-scene coordinator, said the development was "actually a good news story pertaining to this oil spill."Tempering the good news, however, are concerns about the effect of massive plumes of oil that had been discovered beneath the ocean surface since the April 20 explosion of the Deepwater Horizon rig. In late May and early June, researchers from the University of Georgia found one of these plumes to be about 15 miles long, 5 miles wide and 300 feet thick, at depths of 2,300 to 4,200 feet.

Federal Government Covering Up Severity of Gulf Oil Spill? - Yves Smith - It looks as if Team Obama has reverted to form. In a repeat of its perfromance post the financial crisis, it appears to believe that no problem cannot be solved by PR, which puts it in league with the perps. (CNN video embedded)

Oil causes 2,200 Gulf beach closings, warnings - Gulf beaches from Louisiana to the Florida Panhandle have been closed or slapped with health warnings nearly 10 times more often this summer than last because of oil from BP's massive deepwater leak, according to a report Wednesday by a national environmental group. While many beaches were spared, more than 2,200 closings, health advisories or notices were issued by state or local authorities through Tuesday because of oil from the nearly three-month-long spill. That compared with 237 closings and advisories in the same period last year, mainly due to bacteria or viruses in the water, according to the Natural Resources Defense Council's annual survey of beach water quality.

BP Oil Is Dissipating, Easing Threat to East Coast -Oil from BP Plc’s record spill in the Gulf of Mexico is biodegrading quickly, probably eliminating the risk that crude will go around Florida and hit the U.S. East Coast, the National Oceanic and Atmospheric Administration said.  Oil has been dissipating through evaporation since BP stopped the flow from its Macondo well off the coast of Louisiana on July 15, NOAA Administrator Jane Lubchenco told reporters yesterday on a conference call. Crude that’s dispersed into the sea is being gobbled up by bacteria, she said.

Researchers link undersea oil plumes to BP spill - Through a chemical fingerprinting process, University of South Florida researchers say they have definitively linked clouds of underwater oil in the northern Gulf of Mexico to BP's runaway Deepwater Horizon well -- the first direct scientific link between the subsurface oil clouds commonly known as "plumes" and the BP oil spill, USF officials said Friday. Until now, scientists had circumstantial evidence, but lacked that definitive scientific link. The announcement came on the same day that the National Oceanic and Atmospheric Administration announced that its researchers have confirmed the existence of the subsea plumes at depths of 3,300 to 4,300 feet below the surface of the Gulf. NOAA said its detection equipment also implicated the BP well in the plumes' creation. Together, the two studies confirm what in the early days of the spill was denied by BP and viewed skeptically by NOAA's chief -- that much of the crude that gushed from the Deepwater Horizon well stayed beneath the surface of the water.

Many Gulf of Mexico oil rig relocation decisions have yet to be made Diamond Offshore Drilling's Ocean Confidence, a semi-submersible deepwater rig, is slowly making its two-month 7,000-mile voyage to the waters of the Congo. Meanwhile, Diamond's Ocean Endeavor, still in the Gulf of Mexico, is being readied for its tow to the Egyptian Mediterranean. Together, the departures have come to symbolize the potentially devastating impact to the oil industry from the Obama administration's six-month moratorium on deepwater drilling in the Gulf."We're clearly seeing the rigs start to leave," Rep. Steve Scalise, R-Jefferson, said Wednesday at a news conference in front of the Capitol marking 100 days

Lift 'reckless' oil drilling ban, Gulf residents plead  – President Barack Obama's "reckless" moratorium on deepwater drilling in the Gulf of Mexico is suffocating small businesses and destroying livelihoods, lawmakers and residents said Tuesday.  "The decision to stop energy exploration in the Gulf of Mexico appears to have been made in an uninformed manner that borders recklessness," Democratic Senator Mary Landrieu told the small business committee, which she chairs."It has increased our risk to the environment, it has increased our national security risk, it has increased the risks to job security. It must be reversed now."

‘Greenwashing’ no longer enough for businesses - For more than a decade, BP had flooded the media with advertisements showing solar panels, windmills and waving fields of grass without a drop of oil in sight. It changed its name, KFC-style, from British Petroleum to BP to de-emphasize its claim to fame: hydrocarbons. The company adopted a stylized green sun as its logo and rolled out the slogan "Beyond Petroleum."  But when the company's Deepwater Horizon offshore well began blowing tens of thousands of barrels of crude into the Gulf of Mexico each day, no outlay of advertising dollars could change the cold, hard facts: The company that had cultivated the greenest image in the oil industry still derived more than 99 percent of its revenues from gas and petroleum.

BP Fights U.S. Government, Oil-Spill Victims Over Venue for Gulf Lawsuit - BP Plc, the U.S. and plaintiffs who filed hundreds of lawsuits seeking billions of dollars for damages stemming from the largest oil spill in U.S. history are fighting over where the cases should be heard first.  A panel of federal judges in Boise, Idaho, is to hear arguments today on which city will host spill suits, including wrongful-death claims by families of workers killed in the April explosion of the Deepwater Horizon rig. Claims include losses of revenue by Gulf Coast businesses and securities claims by holders of U.S. shares in the London-based energy company.  The government wants the cases consolidated in New Orleans, in the state where many of those damaged by the oil spill live. BP prefers Houston, where BP has its U.S. headquarters.  “It all comes down to which judge the panel thinks has the intellectual firepower, experience and the docket space to handle a huge case like this,”The judge they choose to preside over the BP cases will make crucial legal rulings on what evidence can be used and which laws applied.

Be the One – To Reveal Sleazy Corporate Ties - Calling on always-effective star power, BP and other big oil companies are using celebrities and two seemingly well-meaning front groups, America's WETLAND Foundation and Women of the Storm, to hammer home the message that we the taxpayers - not they the polluters - should pay for the Gulf Coast debacle. Actress and New Orleans resident Sandra Bullock, who has become the face of the Restore the Gulf Campaign, has now severed her involvement with it after learning of the connections.

The Final Lesson of BP - Robert Reich -It doesn’t seem to matter BP was responsible for the worst environmental disaster in American history. Consumers worldwide – including Americans – continue to slurp up its oil. But wait a minute. If BP emerges from this debacle fatter and happier than anyone imagined a few months ago, whatever happened to the idea of corporate accountability? Does this mean any giant corporation can wreak havoc and then get back to business as usual?If we want corporations to act differently, we have to force them to do so through laws that are fully enforced and through penalties higher than the economic benefits of thwarting the laws.Here’s the real outrage: In the wake of the BP spill, essentially no laws have been changed – not even a ridiculously low cap on damages private parties can collect from oil companies. Senate Republican leaders said Wednesday they wouldn’t support a bill retroactively removing the liability cap; and not even Democrats Mary Landrieu (D-La) and Mark Begich (D-Alaska) will support it. 

A Critical Examination of Matt Simmons’ Claims on the Deepwater Spill - Matt Simmons, author of Twilight in the Desert, has long been one of the most famous and influential voices on the subject of peak oil. After the release of his book, Simmons rose to fame as Saudi Arabian oil production declined and global oil prices skyrocketed.However, Simmons has lately been making hyperbolic claims related to the deepwater spill in the Gulf of Mexico. Based on the scenarios Simmons has outlined, he argues for responses such as using a nuclear explosion to seal the well and evacuating 20 million people from the Gulf Coast. Extraordinary responses such as these would impact a great many people, so The Oil Drum staff felt that a critical look at some of Simmons’ claims was in order.

Conservatism’s Death Gusher - The issue is death — death gushing at ten thousand pounds per square inch from a mile below the sea, tens of thousands of barrels of death a day. . Many, perhaps a majority, of the Gulf residents affected are conservatives, strong right-wing Republicans, following extremist Governors Bobby Jindal and Haley Barbour. What those conservatives are not saying, and may be incapable of seeing, is that conservatism itself is largely responsible for what happened, and that conservatism is a continuing disaster for conservatives who live along the Gulf. Conservatism is an ideology of death. ... It was conservative laissez-faire free market ideology... Cost-benefit analysis only looks at monetary costs versus benefits, case by case, not at the risk of massive death of the kind that has been gushing out of the Gulf.  Death, in itself, even at that scale, is not a “cost.” Only an outflow of money is a “cost.” This is what follows from conservative laissez-faire market ideology, an ideology that continues to sanction death on a Gulf scale. ...

BP Said Negligence May Be Found in Cause of Oil Spill, Texas Letter Shows - A BP Plc lawyer said evidence would show that an April explosion and oil spill in the Gulf of Mexico were the result of gross negligence, Texas officials said in a letter that didn’t say who committed the alleged negligence.  Governor Rick Perry and Attorney General Greg Abbott said in the July 22 letter that BP didn’t attempt to take advantage of a cap on damages under the Oil Pollution Act because gross negligence would make that irrelevant. The letter was addressed to Doug Suttles, chief operating officer for exploration and production, and Jack Lynch, a general counsel.

U.S. readies criminal probe of oil spill-report (Reuters) - Several U.S. government agencies are preparing a criminal probe of at least three companies involved in the massive oil spill in the Gulf of Mexico, though it could take more than a year before any charges are filed, the Washington Post reported on Wednesday.BP Plc, Transocean Ltd and Halliburton Co are the initial targets of the wide-ranging probe, which aims "to examine whether their cozy relations with federal regulators contributed to the oil disaster in the Gulf of Mexico," the newspaper said, citing law enforcement and other sources. The federal government is assembling in New Orleans a "BP squad" composed of officials from the Environmental Protection Agency, the U.S. Coast Guard and other agencies to look into "whether company officials made false statements to regulators, obstructed justice, or falsified test results for devices such as the rig's failed blowout preventer."

BP oil spill to cost U.S. taxpayer almost $10 billion (Reuters) - Oil giant BP said it plans to offset the entire cost of its Gulf of Mexico oil spill against its tax bill, reducing future contributions to U.S. tax coffers by almost $10 billion. BP took a pretax provision of $32.2 billion in its accounts for the period, for the cost of capping the well, cleaning up the spill, compensating victims and paying government fines. However, the net impact on BP's bottom line will only be $22 billion, with the company recording a $10 billion tax credit, most of which will be borne by the U.S. taxpayer, a spokesman said

Oil spewing from wellhead in Louisiana marsh -Adding insult to the Gulf's injury, an oil wellhead ruptured and is spewing oil into a Louisiana marsh, officials said Tuesday. The oil is shooting up 20 feet into the marsh area, the office of Plaquemines Parish President Billy Nungesser said. The well is in inland waterways on the border of Plaquemines and Jefferson parishes, about 65 miles south of New Orleans, and in a marsh area not accessible by road.

Second Gulf spill spreads -A separate spill has spread to cover about six square miles in the US Gulf of Mexico as oil continues to shoot as much as 100 feet into the air from a damaged wellhead. Crews have laid about 10,500 feet of containment boom and 3000 feet of sorbent boom around the spill. More than 150 people and 31 boats are responding, according to the US Coast Guard. There is no estimate of the flow rate from the well, a Coast Guard spokeswoman said. The spill started when the dredge barge Captain Buford Berry, which was being pulled by tug Pere Ana C, hit the C-177 installation in about six feet of water in Barataria Bay off Louisiana around 1 am local time Tuesday

Crews work to cap new La. oil leak near Gulf – Oil, natural gas and water are still spewing from an abandoned well hit by a barge on a Louisiana waterway near the Gulf of Mexico.Coast Guard Capt. John Arenstam says a wild well company is working on a plan to shut down the well, which is north of Barataria Bay and has been leaking since early Tuesday.Authorities had already been working there to avoid contamination from the much larger BP oil spill in the Gulf. Arenstam expects the company to present its shutdown plan at some point Wednesday.It's not clear how much oil has spewed from the damaged wellhead but local officials say it's a minuscule amount compared to the BP spill.

Gulf of Mexico Has Long Been a Sink of Pollution - The BP oil spill has sent millions of barrels gushing into the Gulf of Mexico, focusing international attention on America’s third coast and prompting questions about whether it will ever fully recover from the spill. Now that the oil on the surface appears to be dissipating, the notion of a recovery from the spill, repeated by politicians, strikes some here as short-sighted. The gulf had been suffering for decades before the explosion of the Deepwater Horizon rig on April 20. “There’s a tremendous amount of outrage with the oil spill, and rightfully so,” said Felicia Coleman, director of Florida State University’s Coastal and Marine Laboratory. “But where’s the outrage at the thousands and millions of little cuts we’ve made on a daily basis?”  The gulf is one of the most diverse ecosystems in the hemisphere. But like no other American body of water, the gulf bears the environmental consequences of the country’s economic pursuits and appetites, including oil and corn.

BP Disaster Regnites California’s Anti-Drilling Fervor -What a difference an oil spill makes. Californians, whose dislike of offshore drilling dates back to the Santa Barbara spill of 1969, had begun to see virtue in new sources of oil as gasoline prices soared in 2008, polls showed. That year, for the first time since 2000, when the first poll of the state’s environmental attitudes was taken by the Public Policy Institute of California, a majority — albeit a bare one, 51 percent — was willing to allow more drilling off the California coast. The majority was about the same in 2009, and opposition dwindled to 43 percent. The latest poll, however, shows the opposition snapping back after the offshore oil disaster in the Gulf of Mexico. In the institute’s survey this month of 2,502 Californians, 57 percent opposed new offshore drilling; the proportion supporting drilling dropped to 36 percent, down 15 percentage points from 2009 levels.

US House Votes to End Deepwater Drilling Moratorium - The U.S. House of Representatives Friday voted to end the federal moratorium on deepwater drilling for oil companies that meet new federal safety requirements. The proposal to end the moratorium was an amendment to a pending energy bill the House was poised to vote on. The moratorium will not end unless the Senate also votes to terminate it and President Barack Obama signs the legislation into law. The fate of the proposal in the Senate is uncertain.

Hagens: U.S. addicted to energy, debt - In spite of what you might have heard, the planet may never run out of oil. Fat lot of good that'll do when it takes a barrel's worth of energy to get a barrel of oil out of the ground. And we've long since used all of the easy-to-extract oil, says Nate Hagens, speaking Tuesday night at Kansas Wesleyan University on how communities can learn to adapt to declining resources, energy included. Hagens is a former vice president for both Lehman Bros. and Salomon Bros. investment firms but quit that career several years ago and last week completed his Ph.D. in natural resources studies at the University of Vermont.  Until recently, he was also editor of, a website dealing with global energy supply.

Oil Giant Fined for Shipping Sludge to Ivory Coast - A Dutch court on Friday imposed the maximum fine of 1 million Euros, or $1.28 million, on the oil trading company Trafigura for illegally exporting highly toxic sludge that ended up dumped in Ivory Coast. The stinking waste was eventually linked to the deaths of 16 people and thousands of illnesses in 2006. The court also found the company guilty of covering up the hazardous nature of the waste when it first tried to unload its unusually toxic slops, which included high levels of caustic soda, sulfur compounds and hydrogen sulfide, in the port of Amsterdam. The nauseating sludge was pumped back on board after the company balked at treatment costs, and the ship, the Probo Koala, left with its load. The ship then headed to Ivory Coast, where the sludge was dumped in several areas of Abidjan, the capital.

Nigerians angry at oil pollution double standards - Nigeria's Niger Delta is one of the most oil-polluted places on the planet with more than 6,800 recorded oil spills, accounting for anywhere from 9 million to 13 million barrels of oil spilled, according to activist groups. But occurring over the 50 years since oil production began in the Delta, this environmental disaster has never received the attention that is now being paid to the oil-spill catastrophe hitting the U.S. Gulf coast. "The whole world is trembling and even the president of America had to do a personal visit to the site. The U.S. will have put serious measures in place to stop such situations happening in the future," said Ken Tebe -- a local environmental activist who is visibly shaken by what he regards as a double standard. "It's funny because we've been dealing with this problem for 50 years. I even heard BP will pay $20 billion in damages (for the U.S. spill). When will such hope come to the Niger Delta?" Tebe asked.

US expert: China oil spill far bigger than stated - China's worst known oil spill is dozens of times larger than the government has reported — bigger than the famous Exxon Valdez spill two decades ago — and some of the oil was dumped deliberately to avoid further disaster, an American expert said Friday. China's government has said 1,500 tons (461,790 gallons) of oil spilled after a pipeline exploded two weeks ago near the northeastern city of Dalian, sending 100-foot- (30-meter-) high flames raging for hours near one of the country's key strategic oil reserves. Such public estimates stopped within a few days of the spill.But Rick Steiner, a former University of Alaska marine conservation specialist, estimated 60,000 tons (18.47 million gallons) to 90,000 tons (27.70 million gallons) of oil actually spilled into the Yellow Sea.It's enormous. That's at least as large as the official estimate of the Exxon Valdez disaster" in Alaska, he told The Associated Press. The size of the offshore area affected by the spill is likely more than 400 square miles (1,000 square kilometers), he added.

Analysis: BP spill seeps into Norway's Arctic drilling debate (Reuters) - Norway's decades-old political consensus on offshore drilling is under attack in the wake of the BP oil spill, just as it covets new riches in the Arctic. The powerful oil industry says it needs to tap resources off the Arctic archipelagoes of Lofoten and Vesteraalen and in a huge, recently demarcated Barents Sea border region with Russia to continue Norway's oil boom amid dwindling North Sea output.  But, emboldened by the Gulf of Mexico well blowout, Norwegian environmentalists seek to grab the upper hand in a battle they feel they have long been loosing.

Mexico Gets Aggressive On Oil And Gas - Petroleos Mexicanos (PEMEX), the Mexican National oil company, has set a goal of keeping oil production level at 2.5 million barrels per day through 2012, and then increase production to as high as 2.8 million barrels per day in 2013. PEMEX plans to award more than a dozen contracts by the end of 2010 to meet these goals.  Mexico's proven oil reserves are approximately 14 billion barrels. The country produced 2.6 million barrels per day of crude oil in May 2010, with condensate and natural gas liquids production bringing the total up to 3 million barrels per day. Mexico is dependent on oil exports, and they represent 15% of the country's total export earnings. Also, approximately 40% of government revenues are directly or indirectly dependent on oil revenues.     The Cantarell oil field, located in the Gulf of Campeche, is the world's poster child for peak oil. This field's oil production peaked at 2.12 million barrels per day in 2004, and has fallen off steadily since then. In 2009, Cantarell produced only 630,000 barrels per day, down 38% from the previous year.

Alberta gas shortage spreads to B.C. - A gasoline shortage at some Shell stations has spread from Alberta to southeastern B.C. Shell said it doesn't know how many service stations have run dry, nor how long it will take to get fuel to them. Several stations, starting in Alberta and now in B.C., are out of gas and have been for at least a week. Calgary and other places east of the Rockies hit empty last week, and the drought has spread to the B.C. communities of Nelson, Creston, Trail and several others. Shell acknowledges it has a supply problem, and that station owners have had to turn customers away.

Steve Mohr's Thesis: Projection of World Fossil Fuel Production with Supply and Demand Interactions - Steve Mohr is a young man who recently received his Ph. D. in Chemical Engineering at the University of Newcastle in Australia. His Ph. D. thesis is titled Projection of World Fossil Fuel Production with Supply and Demand Interactions. We published an article of Steve's earlier, called Forecasting Coal Production Until 2010.  In his thesis, Steve makes projections of future oil, coal, and natural gas production, using approaches he developed that consider both supply and demand for each of these three fuels. He makes these estimates assuming three levels of reserves: low estimate, best estimate, and high estimate. In his analysis, natural gas is the fuel that offers the biggest future potential for energy supply, not coal. Below the fold, Steve provides a summary of his thesis.

Lloyd's 360° Risk Insight Sustainable Energy Security Newsletter "Peak Oil presents the world with a risk management problem of tremendous complexity."

Is peak oil imminent? - I have just read an article by Brendan Coffey with the title "Has peak oil arrived?" The short answer is "no" since OPEC has ordered its members to shut in production in order to keep up prices. Until the world economy picks up, there will still be a surplus of oil available. Peak oil has not so much to do with recoverable oil in the ground, as Mr Coffey says, but rather that, as demand increases, a point is reached where production can no longer meet demand. Oil reserves can exist but if they are not produced in a timely fashion--development projects are delayed or not carried out for one reason or another--then peak oil can be reached.

Krugman, Output Gaps, and Oil Prices - Paul Krugman had a post the other day with the following picture: Of which he says: I show an index of eurozone real GDP, from Eurostat, with 2007 fourth quarter...and So a huge gap has opened up between a reasonable estimate of potential output and actual output. To look at this more closely, let's go global.  Neither the boom or the crash were primarily European phenomena, but rather due to global trends in debt, leverage, etc.  Repeating Krugman's exercise for the IMF's global GDP numbers, I first constructed this index for world GDP at constant prices, normalized to the last quarter of 2007 being 100. If we now look at global oil production in a similar way (in the interests of time, I took the BP data for global production, set 2007 = 100, and put it on the above graph), we get this: You can see that, following the 2000 tech crash, oil production was flat for a couple of years, then rapidly accelerated in line with global GDP growth.  However, in 2004, we hit the infamous plateau in global oil production, which then increased very little between 2004 and 2008 (after which it fell in the great recession).

The End of Capitalism? Part 2A. Capitalism and Ecological Limits - Alex Knight was questioned about the End of Capitalism Theory, which states that the global capitalist system is breaking down due to ecological and social limits to growth and that a paradigm shift toward a non-capitalist future is underway. AK: This is such an important question, and it’s vital to think and talk about the crisis in this way, with a view toward history. It’s not immediately obvious why this crisis began and why, two years later, it’s not getting better. Making sense of this is challenging. Especially since knowledge of economics has become so enclosed within academic and professional channels where it’s off-limits to the majority of the population. Even progressive intellectuals, who aim to translate and explain the crisis to regular folks, too often fall into the trap of accepting elite explanations as the starting point

China invests 40 billion dollars in Iran oil, gas - Iran’s main economic partner China has invested around 40 billion dollars in the Islamic republic’s oil and gas sector, a senior Iranian official said on Saturday.  Deputy Oil Minister Hossein Noqrehkar Shirazi also said that Teheran’s oil exports to China fell by 30 percent in the first six months of 2010 compared with the corresponding period last year. ‘The volume (of Chinese investment) in upstream projects is 29 billion dollars,’ Noqrehkar Shirazi told Mehr news agency, adding that Beijing had signed contracts worth another 10 billion dollars in petrochemicals, refineries and oil and gas pipeline projects.  He said China has also put forward proposals to participate in building seven new refineries in Iran.

China’s energy consumption a zero-sum game - It wasn’t sheer coincidence that last year marked two pivotal events in the world’s vehicle industry. In 2009, China became the largest car market in the world, while in the same year there were four million fewer vehicles on the road in the United States. In a world where the supply of economically viable oil has peaked, or is, at best, growing marginally, driving has suddenly become a zero-sum game. That means that if millions of new drivers are about to get on the road in China, then somehow millions of other drivers will have to get off somewhere else. Last year, that’s exactly what happened in America for the first time since World War II. And unless T. Boone Pickens is miraculously able to convert the American vehicle stock to natural gas–powered engines, some 40 million other vehicles in the U.S. will similarly be taking the exit lane over the next decade.

Placing the 2006/08 Commodity Price Boom into Perspective -The 2006-08 commodity price boom was one of the longest and broadest of the post-WWII period. The price boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices (see figure). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers. ... Starting in the mid-2000s, however, most commodity prices reversed their downward course, eventually leading to an unprecedented commodity price boom.

How communist is China, anyway? - General Motors sold more cars in China than in the United States in the first half of 2010, and China now accounts for one-quarter of the company's global sales. That seems like a lot of capitalism for a country that calls itself communist. How communist is China, really? Not very. Since the end of the Cultural Revolution in 1976, China has all but abandoned the tenets of classical marxism, including collective ownership of the means of production. Nowadays, just about everything is at least partly privatized. Whereas the Chinese Communist Party under Chairman Mao owned every factory and farm in the nation, the economy is now a patchwork of public and private businesses. Schools can also be state-run or private. Entitlements have also been cut way back. That said, the Chinese government still controls major aspects of the economy and society.

Just how risky are China's housing markets? (VoxEU) China is experiencing spectacularly fast growth – so fast that many fear it is driven by a bubble – a property bubble to be precise. Recent memories of what happened when the US housing market bubble burst make the possibility of a Chinese housing bubble a critical concern for the world economy. So, is there a bubble or is it simply hot air?

China's Banks Said to See Risks in Loans - Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.  About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.  Commission Chairman Liu Mingkang said this week borrowing by the so-called local government financing vehicles may threaten the banking industry. The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.

China's bad debt risks mount after stimulus splurge  - About 23 per cent of the 7.66 trillion yuan ($1.3 trillion) that Chinese banks have lent to local government financing vehicles are at serious risk of default, according to the New Century Weekly.The Chinese-language magazine, run by, said the China Banking Regulatory Commission disclosed the estimate at a meeting with banks last week.A CBRC official said it was not convenient for him to comment on the report.According to the initial results of a CBRC investigation, only 27 per cent of the local government projects are generating enough cash flow to pay off the loans

China Banks Resigned To Defaults - In most countries, the revelation that local governments would default on a fifth of their bank loans would be greeted with alarm. In China, however, the news came as a pleasant surprise.“The fact that nearly 80 per cent of those projects have at least some capacity to service their debt is quite amazing,” said Qu Hongbin, chief China economist at HSBC.Analysts said that their working assumption had been that a minimum of 30 per cent of the total Rmb7,700bn ($1,100bn, €875m, £732m) bank lending to Chinese local governments was unlikely to be repaid. That made the 20 per cent estimate relatively good news, even if it was only a preliminary figure provided by the banks themselves before a more formal assessment by the banking regulator this year.Such a bleak outlook on local governments’ ability to service debt reflected the fact that many loans were handed out to projects that were never meant to make large profits

The PBoC can’t easily raise interest rates - A lot of people have asked me to write about the recently “leaked” CBRC report on dodgy local government debt.  Here is what the article in Monday’s Bloomberg had to say about it:Mainland banks may struggle to recoup about 23 per cent of the 7.7 trillion yuan (HK$8.81 trillion) they have loaned to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.About half of all loans need to be serviced by secondary sources including guarantors because the ventures cannot generate sufficient revenue, said the person, who declined to be identified as the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.Many analysts seemed to have been surprised by the report, and over the past few days we’ve seen a veritable flurry of “half-full’ interpretations of the numbers, but I would suggest, based on my pretty extensive experience in emerging markets, that we should assume the real problem is worse than the initial evaluation.  It almost always is.

In a tight spot - MICHAEL PETTIS typically has interesting (if often worrying) things to say about the Chinese economy. Like this, from a long post that's worth reading in its entirety:One of the problems with a severely repressed financial system, especially one with rapid credit expansion, is that there tends to be a huge amount of capital misallocation supported by borrowing, and in an increasing number of cases it is only the artificially-reduced borrowing costs that allow these investments to remain viable.  I worry that even if the PBoC wanted to raise rates, it would not be able to do so without exposing how dependent borrowers are on artificially cheap capital...[A]ny attempt to raise interest rates to levels high enough to reduce China’s investment misallocation and to allow households to raise their consumption levels would come, in the short term, with a massive rise in bankruptcies and in government debt levels...So interest rate policy has to choose between rising bankruptcies or rising misallocation of capital.  Even ignoring political pressures, this isn’t an easy choice.  And it will require a great deal of sympathy and cooperation from abroad.

Chinese Central Bank Outlines Plan To Ditch The Dollar As The Yuan's Peg - Hu Xiaolian, deputy governor at the Chinese central bank, has released a paper which suggests it's soon time for China to peg the yuan to a basket of foreign currencies, rather than the U.S. dollar alone. Hu Xiaolian: Compared with pegging to a single currency, the exchange rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner. It has two-way movements of exchange rate. The RMB exchange rate has been basically stable at an adaptive and balanced level though it may fluctuate in both ways against any particular single currency

I.M.F. Urges Changes From China - In its first annual review of the Chinese economy since 2006, the International Monetary Fund has pressed Beijing to bolster consumption and allow its currency to appreciate more rapidly.In its lengthy report, which was released Thursday, the I.M.F. applauded Beijing’s aggressive and speedy response to the global financial crisis, saying the government’s stimulus plan led to a robust recovery. But authors of the report urged Beijing to make additional changes that could help rebalance the global economy as well as China’s domestic economy, moving the country away from heavy reliance on exports and investments and toward more private consumption.

Plato’s Republic of China - AS EVERY bookseller knows, banning a publication only makes everyone want to read it. Since 2006 China has refused to publish the IMF’s annual staff report on the country. That has drummed up unusual interest in this year’s report, which has just seen the light of day.The countries that refuse to release their IMF check-up tend to be poor (Guyana), prickly (Saudi Arabia) or both (Myanmar). Indeed, a country’s reaction to an IMF consultation is almost as good an economic indicator as anything you can find in the report itself. Poor countries fear the fund and choose to suppress its conclusions; middling countries quarrel with it; rich countries ignore it.China’s report shows the country is firmly in the second camp, but not yet the last. The Chinese authorities still care enough about the fund’s opinions to make sure the report reflected their views, as well as the fund’s, before they agreed to release it.

China to Launch Credit Default Swaps in H2 - China will have its first creditdefault swap (CDS) products before the end of 2010, as regulators carefully review the credit derivative product. "We are now prudently facilitating the development of credit derivatives in China on the condition risk management is strengthened," Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors (NAFMII), told Xinhua.  "In designing our own credit derivatives, we will start with the simple products. Then we will look at more complex ones," Shi said, adding that the institutional and supervisory frameworks are in place for CDS's introduction.

Note to China: Economic Reform Doesn’t Produce Democracy - One of the most contentious issues in development is whether economic reform leads to democracy. The faith-in-reform crowd points to an economically vibrant South Korea shucking off a military dictatorship. Singapore’s continuing autocratic government is an example to the contrary. China is the big unanswered question: will decades of economic reform there eventually lead to democracy? Three International Monetary Fund economists now are weighing in with data on reforms from 150 countries between 1960 and 2004. For the economists, easing of regulation and government restrictions is synonymous with reform. The economists don’t look at measures of labor-market deregulation, so they sidestepped a controversy that ensnared the World Bank’s “Doing Business” report. Critics, including influential U.S. lawmakers, argued that report equated labor’s diminished power with reform. The bottom line, the IMF authors report, is that democratic rule is “significantly correlated with the adoption of economic reforms.” But the reverse isn’t true.

Pollution makes quarter of China water unusable: ministry… (Reuters) - Almost a quarter of China's surface water remains so polluted that it is unfit even for industrial use, while less than half of total supplies are drinkable, data from the environment watchdog showed on Monday.Inspectors from China's Ministry of Environmental Protection tested water samples from the country's major rivers and lakes in the first half of the year and declared just 49.3 percent to be safe for drinking, up from 48 percent last year, the ministry said in a notice posted on its website ( China classifies its water supplies using six grades, with the first three grades considered safe for drinking and bathing. Another 26.4 percent was said to be categories IV and V -- fit only for use in industry and agriculture -- leaving a total of 24.3 percent in category VI and unfit for any purpose.

China overtakes US as Brazil's largest investor - China, the world's largest holder of foreign exchange reserves, invested a total of US$20 billion in Brazil in the first half of this year, an amount ten times the total investment China made in the South American country before, the Washington Post reported. Thus, China has overtaken the U.S. as the largest investor of Brazil. In 2009, China ranked only 29th globally by investment in Brazil.In addition to building steel plants, auto plants and investing in telecom infrastructure in the South American country, China plans to invest in the country's agriculture sector, buying 600,000 Mu of land to plant soybean. Furthermore, China plans to assist Brazil carrying out an US$250-bln plan to explore and extract the country's rich offshore oil resources.

China invests heavily in Brazil, elsewhere in pursuit of political heft - The investments in Brazil reflect China's "going out" strategy, which seeks to guarantee natural resources for development purposes and to shield the country's state-owned enterprises from slower growth at home. Flush with more than $2 trillion in foreign exchange reserves, China has directed its state firms to scour the globe for opportunities.  As it does so, China is playing by its own rules, giving its firms an edge over U.S. and other multinational companies bound by internationally mandated restrictions intended to promote fair competition. In the first half of this year, China's investment in Brazil topped $20 billion, more than 10 times all of China's previous investment in the country. That puts China on track to be Brazil's No. 1 investor for 2010, compared with 29th in 2009. China's investments are also booming elsewhere -- from Peru, where one-third of the minerals sector is in Chinese hands, to Japan, where Chinese mergers and acquisitions quadrupled from 2008 to 2009.

A new day for Chinese workers - RECENTLY, we asked our economic experts at Economics by invitation whether the era of cheap Chinese labour is over. The consensus was that whether or not the end of the era has arrived, an important transition has seemingly begun, and the results are likely to be positive for China and the world as a whole.This week, The Economist explores the changing dynamics of China's labour markets in a Leader and Briefing. It's worth thinking about the potential impact on global markets of an ascendent Chinese consumer:Deflation is now a bigger threat than inflation. And with 47m workers unemployed in the OECD alone, labour is not holding back the global economy. What the world lacks is willing customers, not willing workers. Higher Chinese wages will have a similar effect to the stronger exchange rate that America has been calling for, shrinking China’s trade surplus and boosting its

China’s labour market: The next China | The Economist -THE angrier they become, the less intimidating they seem. The strikes, stoppages and suicides that have afflicted foreign factories on China’s coast in recent months have shaken the popular image of the country’s workers as docile, diligent and dirt cheap. America’s biggest labour federation, the AFL-CIO, blames imports from China for displacing millions of Americans from their jobs. But in June its president applauded the “courageous young auto workers” who waged a successful strike at a Honda plant in Foshan demanding higher wages.While foreign unions cheer, multinational companies fret. According to UNCTAD, foreigners have invested almost $500 billion in China’s capital stock. Their affiliates employ about 16m people in the country. For a decade this combination has dominated global manufacturing growth, dispatching ever cheaper goods from China’s ports. Of China’s 200 biggest exporters last year, 153 were firms with a foreign stake. But the recent unrest has put Chinese labour at odds with foreign capital.

Bangladesh garment workers riot over new wages  Thousands of Bangladeshi garment workers took to the streets, burning cars and blocking traffic in the capital Dhaka on Friday to protest against a government-announced wage hike that fell far short of their demands. Police officers said security forces used tear gas and batons Friday to disperse the protesters in central Dhaka, where dozens of garment factories are located.The angry workers broke into shuttered buildings and set furniture on fire in the heart of Dhaka Friday, the BBC reported. Officers said several people were injured. The officers spoke on condition of anonymity, citing local briefing rules.

India’s new dams threaten Pakistan’s farming sector - In the original treaty, India retained the right to construct hydro-electric power generating projects on the western rivers. Even though those rivers were allocated to Pakistan, the theory was that hydro-electric generation would not materially affect the flow of water. However, mindful of the fact that India could manipulate the timing of the flow of water, the original treaty restricted the amount of “live storage” – the water stored in a reservoir that can affect the river’s flow. Pakistan lost its single assurance that India would not manipulate the flow of water. And, now that it had the capability, India used it. To quote a recent article by John Briscoe, a former senior adviser to the World Bank who has worked on water issues on the subcontinent for 35 years: “This vulnerability was driven home when India chose to fill Baglihar exactly at the time when it would impose maximum harm on farmers in downstream Pakistan.”

Unable To Store, FCI Wants Food Grain Exported - Even as lakhs of Indians starve everyday, several tonnes of food grains continue to rot in godowns across the country. However, what is more shocking is the Food Corporation of India's (FCI) suggestion that the country export those food grains to neighbouring countries like Nepal and Bangladesh to avoid further wastage.  In India, the FCI is responsible for procurement and storage of food grain. According to an FCI note accessed by CNN-IBN, it suggests the government to export wheat to Bangladesh and Nepal at cheaper prices. It also wants more wheat and rice to be distributed through Public Distribution System in the country's 150 poorest districts.

US-Led Anti-Counterfeiting Trade Agreement is Vile - If anything else, you must admit that the Yanquis are persistent. The essence of the American concern is simple: with a modicum of effort online, it is not particularly difficult to "pirate" books, films, music, shows, and video games. For instance, the Recording Industry Association of America (RIAA) cites an Innovation Policy Institute study that claims losses to the recording industry amount to some $12.5 billion worldwide from physical and online music piracy. Aside from not being particularly keen on the apparently endless proliferation of song-and-dance bimbettes, gangsta rappers, and other exemplars of high American culture, a more serious concern of mine is the method behind these studies. For instance, the Innovation and Policy Institute makes some fairly heroic (and obviously self-supporting) assumptions. First, with very limited justification, they claim that 20% of those currently pirating music would pay for it without the benefit of justifying where this figure comes from. Second, they blithely assume that these would-be converts to legal downloads would be willing to pay an assumed "Legitimate World and U.S on-line price of $0.99 per downloaded song" (see table 2).

Russian Drought Raises Bondholder Risk on Rising Grain Price, Funding Need (Bloomberg) -- Russia’s worst drought in a decade will probably generate losses for bondholders as food prices rise and the government may be pushed to tap debt markets for funds to support farmers.High temperatures, which rose to a record 37.4 Celsius (99 Fahrenheit) yesterday in Moscow, have damaged 32 percent of land under cultivation and forced Russia to declare states of emergency in 23 regions. Grain prices may double this year because of the drought, according to the Grain Producers’ Union. Inflation may quicken to 8.1 percent by the end of December, compared with the government’s annual forecast of less than 6.5 percent, according to Yaroslav Lissovolik, Deutsche Bank AG’s head of research in Moscow

Nuclear Power Games - Saudi Arabia wants to go nuclear. Like many developing nations, the kingdom has seen its electricity demand soar in recent years—more than 8 percent annually—and is actively searching for alternatives to fossil fuels. Enter nuclear power: last month Saudi Arabia announced a joint initiative with Japan’s Toshiba and American firms the Shaw Group and Exelon to build and operate at least two nuclear power plants in the country. This comes on the heels of the establishment in April of the King Abdullah City for Nuclear and Renewable Energy, an organization to manage future energy sources.  Of course, Saudi Arabia’s hardly alone in the Middle East in its desire for nuclear power. But unlike its poorer neighbors, it’s got the money to see its plans to fruition. However, the country’s legendary secrecy about its internal workings has some analysts worried about its nuclear ambitions. Unlike, say, the United Arab Emirates—which is quite transparent about its own $40 billion nuclear-power program and has even signed a bilateral agreement on nuclear cooperation with the U.S.—Saudi Arabia is unlikely to follow suit and show all its cards.

Japan Seems Tolerant as Yen Rises - WSJ -The yen is strong. Business groups are complaining. Japanese policy makers are jawboning. The market’s buying none of it. Japan Finance Minister Yoshihiko Noda reminded reporters Friday that he’s watching markets closely. “My fundamental assessment is that (Japan’s) economy is gradually recovering,” Mr. Noda said at a news conference after a regular Cabinet meeting. “But as for markets, I am monitoring them carefully every day, although I wouldn’t comment on my feelings toward individual prices.” Shortly after that, the dollar hit an eight-month low of 86.25 yen. Mr. Noda, pressed again by repoerters later in the day, repeated his comments.  In that repetition, analysts see a certain amount of tolerance for the strong yen. “The chances of intervention appear to be slim,”  “We can’t call the yen’s currency rise as excessively sharp. It’s rather gradual,” so it’s hard to evoke G-7 stance against excessive volatility, he said.

Moody's Puts Iceland's Baa3 Rating On Outlook Negative, Next Stop - Junk, As Island Nation Continues Giving Banks the Finger - Just because the unpronounceable volcano did not do quite enough damage, and both Hekla and Katla are taking their sweet time, the Iceland Supreme Court recently ruled on the illegality of foreign FX-linked loans, and "Icesave" is still DOA, here is Moody's with a stern warning for the country to change its anti-Keynesian ways promptly or else. "Today's rating action was triggered by the recent Supreme Court ruling on the illegality of foreign-exchange-linked loans and government's continuing difficulties in achieving a resolution to its "Icesave" dispute with the UK and Dutch governments. Specifically, the Supreme Court ruling has the potential to cause substantial bank losses on foreign currency-denominated loans to domestic borrowers and may therefore require additional government support to the banking system. Moreover, a failure to resolve the "Icesave" dispute could lead the Nordic countries and the IMF to withhold future disbursements to the Icelandic government."

Euro zone economic sentiment rises to 28-month high (Reuters) - Euro zone economic sentiment rose strongly in July, buoyed by figures from Germany that point to a recovery as the currency area overcomes the sovereign debt crisis, but the outlook remains uncertain. The European Commission said its economic sentiment indicator for the 16-nation currency area rose to 101.3 in July, a 28-month high, from an upwardly revised 99.0 in June. Economists polled by Reuters expected the index to stay at 99.0. Economic morale is the latest in a string of indicators that have shown the currency area continues to recover from the worst economic crisis in decades, despite turbulence on its sovereign debt market and uncertainty about the health of banks.

Is the euro crisis over? - It is remarkable how sentiment has turned around on Europe from where we were less than three months ago. Back then, the euro was tanking, fears were escalating that the continent would suffer a series of sovereign debt defaults, and financial contagion raged out of control. My how things have changed. The governments of Spain and Portugal, the two countries (after Greece) that gave investors the most heartburn, have been successful at selling bonds on international markets, easing concerns about their solvency. The spreads between the yields on Spanish and Portuguese bonds and their benchmark German counterparts have narrowed, meaning investors see them as less risky than before. The euro has rebounded against the dollar. Growth is holding up better than many expected. So is it crisis over? Clearly Europe has come back from the brink of something potentially very ugly. But I wouldn't make the mistake of unfurling the “Mission Accomplished” banner just yet. That's because the European debt crisis was just an outgrowth of deep, underlying problems within the Eurozone – problems that have yet to be addressed.

Why I've been wrong about Europe -  I predicted a worse summer for the European economies than they seem to be experiencing; furthermore the euro is back up in the 1.30 range.  Why was I wrong?  I was believing those economies have more wage stickiness than they actually do.  These days I browse British, Irish, Spanish and German newspapers with reasonable frequency.  I am struck by how many accounts of falling nominal and real wages I see.  Outside of Germany, the proverbial cat hasn't quite bounced, but it seems to have hit the pavement. One theory is that most wages are actually fairly flexible, but we don't usually like to cut wages or have wages fall.  When needed, many wages can fall quite readily.  In other words, sometimes it is easier to cut wages by a lot than by a little. I hardly think the European economies, or the Euro, are in the clear.   But it's worth explicitly noting that so far my forecast has been off the track.

We had to burn the euro to save it The euro was conceived as a hard currency. Faced with a sovereign debt crisis that threatened to spread from Greece to at least Portugal and Spain, between March 25th and May 10th of this year the eurozone authorities progressively relinquished various constraints designed to maintain the ECB's solvency and detachment from fiscal policy. While the authorities' aim was to avoid a collapse of EMU as members unable to remain competitive and service their debts in euros seceded from the monetary union to reintroduce their own national currencies, the adjustments threaten to undermine the real value of the euro by weakening the ECB's balance sheet and setting precedents for similar accommodation in future. After this U-turn, investor perceptions of the euro may never be the same again – the euro may remain the currency of most EU states, but as a unit diminished in value and reputation.

Spain shines on stress test, Germany flunks- If the original purpose of the tests was to unlock interbank lending and head off an incipient credit crunch, the jury is still out. A report last week by the International Monetary Fund said eurozone lending had "nosedived" during the global crisis and "has yet to recover". The IMF said this was asphyxiating small business, which generates most job growth.  As analysts sift through the wealth of new detail from the tests, they are baffled by the chaotic criteria. "We have a ludicrous worst-case scenario that Greek house prices fall by 2pc in 2011: when you first read it you think their must be a typo," said David Owen from Jefferies Fixed Income. Austria's worst-case is a 2.7pc rise in house prices, or zero for Poland, and -2pc for Italy. Mr Owen said these assumptions would be demolished by a serious recession.

A test calibrated to fix the result - If you tried to test the safety of cars or children’s toys using the same method the European Union applied in its stress tests on banks, you would end up in jail. How so? Simply because the testing mechanism was calibrated to fix the result. The purpose of the exercise was to ensure that the only banks that failed it were those that would have to be restructured anyway. At the same time, the supposedly clever idea was to demonstrate to the outside world that the rest of the banking system remained sound. The purpose of this cynical exercise was to pretend that the EU was solving a problem, when in fact it was not.  It is too early to judge whether the ploy worked. But from the informed reaction on Friday night, I suspect not. Expectations were not very high. But the EU undershot the lowest of them.  There were three fundamental problems with those tests – and each one would have invalidated them. The first, and least serious of the three, is that the tests left out some important institutions, whose financial health is not entirely clear. One of those is KfW, the German state-owned institution that is legally not a bank but carries out bank-like functions – such as accumulating lots of toxic assets.

What me, worry? - Europe's "stress tests" were intended to gauge the ability of large banks to weather an economic storm. But the exams relied on some surprisingly docile economic assumptions. In some of the 20 countries that conducted the tests, regulators figured that property values would keep rising or hold steady in a worst-case economic scenario.In other cases, unemployment rates in a double-dip recession crept up by as little as 0.1 percentage point from the tests' so-called benchmark scenario, which is based on current economic conditions.In Austria, for instance, the recession scenario involved house prices rising two percent the first year and rising 2.7 percent the year after.  Here is further information.  What would a rational Bayesian say?  What would Will Wilkinson say? -- "My kingdom for a futarchy!"

Europe's illusion of financial strength - The stress test exercise turned out to what was expected – finely calibrated so that only those banks failed that needed to be restructured in any case; 7 banks failed, including 5 Cajas, one German and one Greek bank; total new capital need is only €3.5bn, an implausibly low sum; Morgan Stanley estimates that a pass rate of 7% would have result in 24 bank failures; the tests did not stress any sovereign defaults; there were some criticisms that the German banks did not disclosure the sovereign exposures; Spain celebrated the results, also because the Spanish tests were tougher than those of the others; Gerald Braunberger says the tests are useful, but the problem of a lack of capital still persists; Das Kapital criticises that the prevalence of hybrid capital invalidates the results; Wolfgang Munchau says the three weaknesses are the treatment of hybrid capital, the lack of sovereign default assumptions, and the exclusion of some of the most toxic banks; A troika of European Commission, ECB and IMF are visit Greece to pave the way for the second tranche of the loan; an FT editorial, meanwhile, makes a strong plea in support of the Basle committees’ new proposals to redefine the capital requirements.

Big Questions Need Answering After Stress Tests  A number of analysts still believe the big stress-test questions need to be answered despite the European Union attempting to draw a line in the sand.  “Even if concerns over counterparty risk were to subside in response to the test results, market participants would be unwise to assume the tests had demonstrated that the banking system was soundly-based and free from threats to its stability," Stephen Lewis, chief economist at Monument Securities, said. "No stress tests could, in principle, achieve that result," Lewis said. "Such tests only take account of what the erstwhile US Defense Secretary, Mr. Rumsfeld, used to call the 'known unknowns.' What usually causes damage, however, are the 'unknown unknowns,'" Lewis said.

Bank Stress Tests Aren't `Rigorous Enough,' Oppenheimer Says - Stress tests on European banks were not strict enough and regulators should have taken a broader look, according to Steve Bernstein, chief executive officer of Oppenheimer Investment Asia Ltd. “The test isn’t rigorous enough. As time goes on, there must be other banks that need to raise more capital,” Bernstein said in an interview in Hong Kong. “The fact that they only look at one part of the portfolio isn’t enough. The test should have looked at the banks’ investment portfolio as well.” European Union stress tests found that seven banks need to raise 3.5 billion euros ($4.5 billion) of capital.

Roubini: EU Stress Tests Criteria Not Realistic - The pan-European stress tests on the banking sector were not tough enough to reflect future worsening conditions for the continent's economy, Nouriel Roubini, economist and chairman of Roubini Global Economics, told CNBC Monday. European stress tests assumed a rise of 6 percent in unemployment, economic contraction of 3 percent on average and a 6 percent hike in market interest rates. Many analysts said the conditions were harsher than what they had anticipated."The assumptions made about economic growth, about sovereign risk are not realistic enough," said. Roubini, who was dubbed by the media "Dr. Doom" but prefers to be called "Dr. Realist."Plus, most of the sovereign risk was held in maturity books and the tests did not allow for a default, he added."

European banks: More stress ahead | The Economist - Whatever the merits of their recent stress tests, that ongoing flaw explains why Europe’s banks may still battle to finance themselves. Some firms are still being stigmatised, and have to borrow from the ECB even as American rivals have been weaned off public money. The unspoken assumption of the regulators’ stress tests, the results of which were announced on July 23rd, is that this is due to “one-off” problems: the risk that some governments in the euro zone might go bust and the perception that the murkier bits of the system, particularly unlisted banks in Spain and Germany, are hiding their risks. If reassured that banks have enough capital and are not fibbing, the logic goes, investors will start lending freely to them again. After all, the stress tests in America in 2009 helped restore confidence there. Judged on this basis, the tests get half marks (see article). They do not prove that banks could withstand another severe shock.

Moody's, S&P threaten Hungary with rating downgrade - Two top ratings agencies said on Friday they might downgrade Hungary's sovereign debt after its prime minister snubbed the IMF and rejected austerity measures in favour of a pro-growth policy. Moody's placed Hungary's Baa1 local and foreign currency government bond ratings on review, citing increased fiscal risks after the International Monetary Fund and the European Union suspended talks over their 20-billion-euro (US$25-billion) financing deal with Budapest at the weekend. Ratings agency S&P said later it had revised its outlook on Hungary to negative from stable, while affirming its BBB-/A-3 rating, which is already lower than Moody's.

Moody's Says Spain May Lose Aaa Rating; US Needs `Clear Plan' (Bloomberg) -- Spain will probably lose its Aaa credit rating after the country was put under review for possible downgrade in June, and the U.S. needs a “clear plan” to tackle its deficit, Moody’s Investors Service said. “Spain is very highly rated and I can’t say where that rating will end up, but it’s likely to go down a bit,” Steven A. Hess, senior credit officer at Moody’s, said in an interview in Sydney yesterday. In the U.S., slower growth may hinder government efforts to address the budget shortfall, he said.The Spanish government is trying to cut the third-largest budget deficit in the euro region while returning to growth after an almost two-year recession. Spain’s classification may be lowered as much as two grades, Moody’s analysts said June 30, citing “deteriorating” economic prospects and the challenges the government faces to achieve its fiscal targets

Spain's Housing Market Slide Adds to  Europe's Economic Troubles, PBS News Hour (video & transcript)

Howard Marks: It’s Greek to Me - Howard Marks of Oaktree’s latest follows, with an excerpt first: As I mentioned above, debt isn’t the problem, or the cause of the problem.  But it has been the facilitator.  In “The Long View” (January 9, 2009), I wrote (albeit without reference to Greece) about a strong uptrend over the last few decades in what I called “expansiveness”: Without credit – I think back to my pre-credit card college days of 45 years ago, for example – you couldn’t spend money you didn’t have.  Thus you couldn’t buy things you couldn’t afford.  Then the miracle of credit came along and it became easy to get in over your head. What would have happened if governments couldn’t finance deficits by issuing debt?  Greece would only have been able to pay the benefits it could afford.  Less pleasant, but perhaps healthier.

Greek Government Invokes Emergency Powers To End Truck Strike - In a very rare move, the Greek government Wednesday invoked a national emergency provision to force striking fuel-tanker drivers go back to work. The government announced it would issue the civil mobilization order, normally used in times of war or national disaster, and send letters to each of the truck drivers ordering them to report to duty. If they fail to comply, they could face criminal charges and up to five years of jail time. The drivers had been on strike for three days through Wednesday, protesting a government effort to open up their profession, which is part of the austerity package agreed by Greece in exchange for up to E100 billion in loans from the Eurozone and the IMF.

Greek stand-off intensifies as police fire tear gas at striking truck drivers - With fuel shortages stranding thousands of tourists and disrupting supplies of food and medicines nationwide, prime minister George Papandreou resorted to an emergency civil mobilisation order – legislation more typically employed at times of war or natural disaster – to end the walk-out.But hopes of a return to normality were dashed yesterday when riot police fired tear gas at thousands of truckers gathered outside the transport ministry.“The order is coming through to [drivers], but I have no idea how they are going to react to it,”The ruling socialists called for the mobilisation – the fourth time since the collapse of military rule in 1974 that such an order has been issued – as it became clear Greece was facing a public health crisis because of the strike. On islands, where fuel supplies have run out, tourists could be seen abandoning rented cars by the side of the road while yachts remained docked in harbours or drifted out to sea.

Too Cash-Strapped for a Boom: How Italy’s Permanent Crisis Saved It From the Downturn - Der Spiegel - In theory, Italy, with its huge public debt, should be one of the euro zone's problem children. In reality, the country has come through the current crisis relatively unscathed. Can the rest of Europe learn something from its southern neighbor?

The Belgian mess - In all the hubbub around Eurobank liquidity or solvency or whatever you thought it was, triggered by doubts about the ability of Greece and Spain to fund themselves, and possible sovereign defaults, one country, right at the heart of the EU, with a nasty problem, got largely overlooked. But not entirely: Tracy “Argus” Alloway of FT Alphaville managed to keep one of her innumerable beady eyes fixed firmly on Belgium. The two main horrors are budget (FT AV quoting research house Independent Strategy):Belgium is a mess. Its sovereign debt to GDP is 100%, up from a trough of 84% a few years ago, and its budget deficit is 5% of GDP. but most of all political risk: Unlike the Greeks, who seem to like being Greeks and being in Greece, Belgium is a country with a dearth of nationals proud to be Belgian and where growing swathes of the population want to be in another state of their own creation. This is not a good scenario for taking tough decisions on public debt at a national level and making the necessary political compromises…

Germany’s Missing Link: Consumer Spending - The stars are lining up for a strong recovery in Germany: a revival in world trade has lifted its dominant export sector; unemployment has come down rapidly; and business and household confidence are on the rise. Just add consumer spending, and Europe’s biggest economy will be firing on all cylinders. Oh yeah, that. German consumers, better known for their high savings rates than their propensity to spend, pulled back sharply in June, with retail sales down 0.9% on the month. The picture’s not all bad. Consumer spending had picked up smartly in May, and likely rose about 1% in the second quarter, on an annualized basis, according to J.P. Morgan. But the longer-trend doesn’t look good

IMF Approves $15.2 Billion Loan to Ukraine After Fiscal Adjustment Pledge - The International Monetary Fund approved a $15.2 billion, 2 1/2-year loan to Ukraine, which agreed to trim its budget deficit and raised natural gas prices to qualify for the funds. The Washington-based institution’s board of directors agreed to disburse $1.9 billion immediately, with subsequent payments subject to quarterly reviews.  “Ukraine is emerging from a difficult period during which the economy was severely hit by external shocks and exacerbated by domestic vulnerabilities,” John Lipsky, the fund’s first deputy managing director, said in a statement. “Authorities are committed to addressing existing imbalances and putting the economy on a path of durable growth, through important fiscal, energy, and financial sector reforms.”

Basel Committee Reaches Broad Agreement on Capital, Liquidity Reforms - International central bankers and regulators said Monday that they have reached “broad agreement” on the design of capital and liquidity reforms, and that they will finalize calibration and phase-in requirements at a meeting in September.In a press release after meetings in Switzerland Monday, the oversight body of the Basel Committee on Banking Supervision said that the agreement encompassed the definition of capital, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard.The officials added that they would finalize details of regulatory buffers before the end of the year. “The agreements reached today are a landmark achievement to strengthen banking-sector resilience in a manner that reflects the key lessons of the crisis,” said European Central Bank President and Chairman of the Group of Governors and Heads of Supervision Jean-Claude Trichet.

The euro: Weakness through strength | The Economist - LAST week, European Central Bank president Jean-Claude Trichet delivered a stemwinder of an op-ed in the Financial Times calling on all industrialised nations to begin fiscal consolidation. He began the piece with a rather unpersuasive piece of sleight of hand:The growth of public debt has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector. Because we avoided the catastrophic scenario of a financial meltdown, the third element does not represent a very significant volume of spending for most countries. But calculations by the European Central Bank show the volume of taxpayer risks earmarked to support the financial sphere, including all options – recapitalisation, guarantees, toxic assets etc – was as high as 27 per cent of gross domestic product. It is, remarkably, the same gigantic proportion on both sides of the Atlantic. This is more than a little misleading.

Europe's €30 Trillion Headache - European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to a new report by Standard & Poor's. The rating agency said banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other. "Banking sector woes are eroding sovereign credit-worthiness, which is in turn reducing the real and perceived capacity of governments to support weak banks," said S&P.  "The collective funding needs of Europe's banks are vast. The industry is much larger than America's or Asia's. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize (these) loans and which do not require balance sheet funding," said Scott Bugie, S&P's credit strategist. Total liabilities are €23 trillion for the eurozone and €8 trillion for the UK, Sweden, and Denmark.

Banks to prepare for eurozone exit scenarios - The most surprising story is the FT report that banks have started to prepare for a eurozone member states being forced to leave the euro.  The International Swaps and Derivative Association asked some of its members to form a group to consider what they may need to do if a eurozone state is ejected.  While those close with the process expect the likelihood of such an event as remote, the recent crisis prompted banks to question about its potential impact. A spokeswoman for the ISDA said the organisation had decided to establish a group to “explore the different scenarios in which a country may leave the eurozone and consider what legal and documentation issues could arise in each for the (over-the-counter) derivatives markets and what steps would be necessary in order to address them”. (Markets are prepare for the unthinkable is precisely the scenario the founding fathers of the Maastricht Treaty always wanted to avoid. Once those expectation get factored in, in the form of “scenario”, the construction becomes significantly more crisis prone )

Future generations will curse us for cutting in a slump - In 1937 Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” Jean-Claude Trichet, president of the European Central Bank, disagrees. Stripped of its jargon, his argument last Friday in the Financial Times is that fiscal retrenchment is needed to “consolidate recovery”. This has become the standard European – though not American – line. “Failure to address the deficit is the greatest danger we face,” said UK Treasury minister Lord Sassoon in the House of Lords on Monday, faithfully echoing the words of his master, chancellor George Osborne. But beyond vaguely referring to the need to restore “confidence”, none of the cutters can explain how reducing public spending when private spending is already depressed will “consolidate recovery”. The government, Keynes argued, is the only agency that can prevent total spending in the economy from falling below a full or acceptable employment level. If private spending is depressed, it can restore total spending to a reasonable level by adding to its own spending or reducing taxes. In doing so it will be adding to a deficit that is already the result of falling tax revenues and rising benefits due to the recession. The deficit, though, has the function of sustaining the level of total spending and output in the economy.

ECB interest rate policy and the “zero lower bound” - Since the start of the financial crisis, central banks across the world have cut interest rates substantially. In Japan, the US, the Eurozone and elsewhere, short-term interest rates controlled by the central bank are at or close to zero. Monetary policy during the global crisis entered unchartered territory. This column suggests that fear of a global recession may have led policymakers to cut rates more aggressively in order to prevent the need for negative interest rates.

BoE’s King Forecasts No Early Return to `Normal’ Rate Level – Bank of England Governor Mervyn King said there may be a “considerable” way to go before U.K. interest rates return to “normal” as policy makers debate when to start withdrawing emergency stimulus from the economy. “There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels,” King told lawmakers in London today. “I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word ‘normal.’”

Bank of England Takes First Step to Nationalizing consumer credit -  In Feeling Rich vs. Being Rich I took what I thought was dead, sarcastic aim at the desperation decision-making process in vogue at central banks and treasuries around the world. The really, really bad idea I proposed was nationalizing consumer credit. Logically -- or illogically, if you prefer -- if you endorse the concept of “Keynesian, good; Austrian, bad” then you will love the fact that the UK has just adopted my really bad proposal as official Bank of England policy, effective January 1, 2011. Or at least they’ve made a huge first step.On and after this day, banks will be able to submit virtually all forms of consumer credit (and bank to non-bank commercial credit) -- except credit cards -- as collateral for liquidity loans. Now here's the really cool part for you central-bank groupies: Individual loans may be pledged. There's no reason for the BOE to insist on bundles or securitized assets. If you make a single mortgage loan, you may immediately pledge it as collateral. It’s the same with car loans and virtually all other forms of credit. UK banks will become nothing more than the same mortgage brokers that participated in the collapse of 2008.

60000 Scottish public sector jobs could be axed - Ministers should be prepared to axe one in 10 public sector jobs — around 60,000 — to help Scotland weather the tightest budget squeeze in living memory. That is the key recommendation of the Independent Budget Review (IBR) group, set up by the Scottish Government to look at possible ways of dealing with an anticipated £42 billion budget cut over the next 16 years as the UK Government tackles the deficit. The IBR's report makes grim reading — proposing cuts and changes to some of the policies which have been hallmarks of devolution.

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