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

Saturday, August 28, 2010

week ending Aug 28

Fed Assets Decline to $2.3 Trillion as Housing Securities Fall -- The Federal Reserve’s total assets fell to $2.3 trillion as its holdings of mortgage-backed securities declined.  Total assets declined by $12.7 billion, or 0.5 percent, in the week ended yesterday, according to today’s weekly balance- sheet release. The Fed’s holdings of mortgage-backed securities declined by $9.85 billion to $1.1 trillion. Holdings of federal agency securities declined by $709 million to $156.5 billion.  The Fed said earlier this month that as housing debt matures it will purchase new Treasury securities to maintain its total securities holdings at $2.05 trillion.  The central bank has purchased $8.93 billion of Treasuries under the plan, which is aimed at preventing money from being drained out of the financial system, since policy makers began the program on Aug. 17.  M2 money supply rose by $2 billion in the week ended Aug. 16, the Fed said. That left M2 growing at an annual rate of 2 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 26

Fed Split on Move to Bolster Sluggish Economy, by Jon Hilsenrath, WSJ: The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke's four-and-a-half year tenure as central bank chairman.  With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.  But it had big implications: Doing so would plunge the Fed back into the markets and might be a prelude to a future easing of monetary policy, moves that divided the men and women atop the central bank. At least seven of the 17 Fed officials gathered spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

WSJ: The FOMC Debate on Monetary Policy - Jon Hilsenrath at the WSJ discusses the debate at the August FOMC meeting: Fed Split on Move to Bolster Sluggish Economy. A few key points:

  • There is a clear split on the FOMC between those who want the Fed to be more aggressive - because of the high unemployment rate and low inflation - and those that want to take no further action.
  • Because of low mortgage rates and more refinancing, the NY Fed projected that the balance sheet would shrink by almost $400 billion by the end of 2011 if they Fed did nothing. Earlier this year the estimate was $200 billion.
  • According to Hilsenrath, Bernanke "is determined to avoid mistakes of past central bankers that created devastating bouts of deflation". And that probably means QE2 - it is probably just a matter of when and how long the FOMC waits.

"It is Time for Bernanke to Stake Out a Public Position" - Tim Duy emails a follow-up to an earlier post discussing dissent within the Fed at the last FOMC meeting. One part of the WSJ article reporting on the dissent says: The meeting was a case study in Mr. Bernanke's management style, which reflects his days as chairman of Princeton University's economics department when he had to manage a collection of argumentative academics with strong personalities and often divergent views. Mr. Bernanke encourages debate and disagreement, and then weighs in at the end with his own decision, which has helped him win loyalty at the Fed, even among those who disagree with him, several officials say.  Tim Duy responds: I understand why his colleagues appreciate Bernanke’s management style, and why the media likes to ooze quiet praise on that style, but shouldn’t he be showing some leadership in the public as well? After all, the Federal Reserve, last time I checked, was not a University economics department. It is not the same. As we like to say in academics, the disputes are bitter because so little is at stake. Not so for the Fed.

Hangover Theory At The Fed -  Krugman - This Jon Hilsenrath piece on the Fed is an impressive piece of reporting; it seems that somebody is talking out of school. And as Tim Duy says, it’s also depressing for anyone believing, as I do, that we’re sliding steadily into a long-run low-growth, high-unemployment trap, and that aggressive action by the Fed is urgent. But one more thing struck me: at least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble: Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.  I tried, in that old piece on hangover theorists, to explain what’s wrong with this view in general.

Inside the Fed - JON HILSENRATH has an interesting tick-tock on the internal debate within the Federal Open Market Committee leading up to and through the August meeting. The piece is already raising eyebrows among those in favour of additional Fed easing, largely due to passages like this one: At least seven of the 17 Fed officials gathered around the massive oval boardroom table spoke against the proposal [to maintain the size of the Fed's balance sheet rather than allow it to contract] or expressed reservations. Along with the recapitulations of the arguments of regional Fed presidents like Richard Fisher, Thomas Hoenig, and Narayana Kocherlakota, who are sceptical that the Fed can or should do more to boost the economy. I'm actually cheered by the piece, primarily due to this line, which came immediately after the quote above: At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move. More than that, it is clear that the FOMC's power centres backed the measure.

More thoughts on what to expect from the Fed - There is disagreement within the FOMC. How will it be resolved?  Yesterday the Wall Street Journal described an internal FOMC debate between those wanting more stimulus and those anxious about the Fed's already bloated balance sheet. The Journal reports that the decision at the last FOMC meeting to replace retiring MBS with long-term Treasuries represented a compromise between the two factions. That helps explain Federal Reserve Bank of Minneapolis President Narayana Kocherlakota's odd suggestion that markets misinterpreted the Fed's ever-so-slight monetary easing as a signal that the FOMC had big concerns about real economic activity going forward. I scratched my head when I first read Kocherlakota's remarks, since I had thought any surprise in the FOMC actions was that the FOMC seemed to be less worried than many private analysts. But if you believed, as Kocherlakota seems to, that the Fed has already done too much, his remarks might make more sense.

Monetary policy as asset prices - We have fallen into the habit of thinking of monetary policy as a (contingent) time-path of current and future interest rates. There is absolutely no reason why we cannot change our habits, and switch to thinking of monetary policy as a (contingent) time-path of current and future asset prices. By "we" here I mean not just "we economists", and "we central bankers", but also "we investors and consumers". I too am beginning to despair of (especially) US and ECB monetary policy. What makes my despair worse is my belief that it is not even ignorance that is preventing us escaping a trap of our own making. It is our habitual way of thinking about monetary policy. It limits what we can say about policy, and so limits how we can communicate policy, and so limits what commitments we can make about future policy, and limits what we think of as "conventional" vs. "unconventional" policy on which particular assets to buy and sell. The Fed is playing a losing hand in a card game, and won't change to a different game, where holding and playing the exact same cards could mean winning rather than losing.

Goldman Sachs's Hatzius Says Fed Will Move Toward More Stimulus:(Bloomberg) -- The Federal Reserve will probably ease monetary policy further as the U.S. economy weakens, said Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. “The Fed will eventually move to additional monetary stimulus via asset purchases or other unconventional measures,” Hatzius said in a radio interview today with Tom Keene on “Bloomberg Surveillance.” Should the Fed opt for more securities purchases, he said, there is “no point in doing anything less than” $1 trillion

The Taylor Rule And The “Bond Bubble” (Wonkish) - Paul Krugman - Here’s a thought for all those insisting that there’s a bond bubble: how unreasonable are current long-term interest rates given current macroeconomic forecasts? I mean, at this point almost everyone expects unemployment to stay high for years to come, and there’s every reason to expect low or even negative inflation for a long time too. Shouldn’t that imply that the Fed will keep short-term rates near zero for a long time? And shouldn’t that, in turn, mean that a low long-term rate is justified too? So I decided to do a little exercise: what 10-year interest rate would make sense given the CBO projection of unemployment and inflation over the next decade? (CBO also makes interest rate projections — but you’ll see in a minute why I want to roll my own.) What we need, first of all, is a Taylor rule. I decided to use the simplified Mankiw rule, which puts the same coefficient on core CPI inflation and unemployment. That is, it says that the Fed funds rate is a linear function of core CPI inflation minus the unemployment rate. Here’s what a scatterplot for 1988-2008 looks like:

Krugman reestimates the Mankiw rule - This scatterplot is from Paul Krugman.  x is the core inflation minus the unemployment rate.  y is the federal funds rate.  It uses data from 1988 to 2008. This graph is motivated by a version of the Taylor rule I once proposed.  Paul uses a different sample than I did, so he gets slightly different parameter values.  Nonetheless, I think Paul and I agree that this equation provides a reasonable first approximation to what they Fed will and should do in response to macroeconomic conditions.

I am Superman: The Federal Reserve Board and the Neverending Crisis - This article asserts that, in dealing with the 2007-2009 financial crisis, the Federal Reserve Bank (Fed) has placed its role as monetary agency and de facto steward of the market for U.S. Treasury debt ahead of its statutory responsibility for ensuring the soundness of the private banks. This is not to say that the Fed supplies whatever credit the government wants — at least not yet — but in terms of both the provision of credit to the private financial system and the price of this credit, the growing fiscal imbalances of the U.S. government seem to be playing an increasing role in Fed policy decisions. This paper explores some of the issues involved in recent Fed policy decisions and draws some preliminary conclusions as to the conflicts between the Fed’s role as central bank and also as prudential supervisor.

The Fed Is Running Low on Ammo - You may have noticed that the complexion of the U.S. economy has turned a bit sallow of late. The Federal Reserve definitely has. At its Aug. 10 meeting, the Federal Open Market Committee (FOMC) shifted attention away from its former concern—how to tighten a bit—and toward a new concern: how to loosen a bit. By central bank standards, this turnabout came at warp speed.  Chairman Ben Bernanke has told the world that the Fed is not out of ammunition. It still has easing options, should it need to deploy them. The good news is that he's right. The bad news is that the Fed has already spent its most powerful ammunition; only the weak stuff is left. Mr. Bernanke has mentioned three options in particular: expanding the Fed's balance sheet again, changing the now-famous "extended period" language in its statement, and lowering the interest rate paid on bank reserves. Let's examine each.

How Much Ammo Does the Fed Have Left? - Fed chairman Ben Bernanke needs your help. Bernanke is looking for a word that means longer than extended to tell people how long he plans to keep interest rates low. And what he is looking for is a word that means a really, really long time--really, really. Superextended. Overextended. Superduper-extended. So this is what the economic science of central banking has become? A bunch of ivy league phds sitting around playing a high stakes game of Mad Libs. That's one of the points Alan Blinder makes today in a very good editorial in the Wall Street Journal. Blinder's editorial is about the fact that the Fed by lowering short-term interest rates to nearly zero, and expanding its balance sheet by buying Treasury bonds and mortgage bonds and other assets has already used its main tools of rejuvenating the economy. Now it has to take the nontraditional routes. Blinder runs through what those moves could be, and raises some doubts about whether any of them will be all that successful. But one of the potential moves Blinder points to looks very promising. Plus, here at the Curious Capitalist we are devoted to giving Bernanke every helping hand we can. He was, after all, our Main Squeeze last year. So he's got that going for him. I don't think the reality is as dire as Blinder paints for the Fed and its ability to further stimulate the economy. Here's why:

A square Fed in a round Hole - The US Fed, along with central banks around the world, has already taken extraordinary steps to try to foster economic activity. It has cut interest rates to zero and promised to keep them low for an extended period. It has also purchased trillions of dollars in mortgage backed securities and Treasuries in order to push down long-term interest rates.  The big question it now confronts is whether it should engage in even more quantitative easing – printing more money and buying even more long-term securities – in a further attempt to kick-start the economy. The trouble is that many economists are beginning to worry that the US economy is so weak that it’s now ensnared in a liquidity trap, in which monetary policy stops working. A liquidity trap arises when people are so despondent about the economic outlook and the state of their own balance sheets that further cuts in interest rates no longer spur them to take on more risk. Banks are simply unwilling to lend more, companies resist investing more, and consumers can’t be persuaded to spend more. In this environment, monetary policy becomes ineffective – it’s like pushing on a string.

Fed unlikely to lower rate it pays on bank reserves -(Reuters) - Federal Reserve officials like to say they have plenty of tools left in their policy arsenal to deal with a weakening economy.Yet one such instrument seems to have been stashed away for good: the Fed's ability to lower the interest it pays on banks' excess reserves. Policymakers believe the potential costs of bringing the rate, currently at 0.25 percent, all the way to zero outweigh the minuscule stimulative benefits such a move might have on financial conditions. "It's kind of a dead-end policy, you can only do it once," James Bullard, president of the Federal Reserve Bank of St. Louis, told reporters "I don't think it would be particularly effective. Officials fear that money market funds could see a drying up of liquidity as happened during the financial meltdown.

DOES THE FED MATTER? - As a student of the Great Depression of the 1930s and the Great Japanese Stagnation of 1910-1930, Fed Chairman Ben Bernanke has acquired a deathly fear of deflation. Hence most observers including myself have discarded the possibility of any increase in US short term interest rates in 2010 and probably 2011. Renewed quantitative easing is a strong possibility. The Fed’s not going to raise the short rates it controls so long as the US economy is limping along in near recession, real estate prices are heading south and Bernanke thinks deflation is public enemy number one. Actually if Bernanke could he would lower the Fed funds rate further. But rates can’t go below zero. So that weapon of the central bank is useless. It’s a little disconcerting to have a Fed Chairman whose avowed goal is to debase the currency he is sworn to protect. But it may not matter. Bernanke is concerned with faltering US consumer led demand. But all the quantitative easing in the world won’t do much for the overleveraged American consumer. Bernanke, unlike his Chinese counterparts, can’t just order the banks to start lending all the reserves he has created.

Fed officials lose spots at Jackson Hole -Some Federal Reserve officials accustomed to an automatic invitation to the central bank's annual mountainside symposium in Jackson Hole, Wyo., came up empty-handed this year.  In recent years, the Federal Reserve Bank of Kansas City, which hosts the meeting, has welcomed the president and research director from the 11 other regional banks. For this year's conference, scheduled to start Thursday, each regional bank may only send one of the two officials. Also, unlike in previous years, the New York Fed's markets chief, currently Brian Sack, isn't invited.  The change will help foster debate and include more non-Fed attendees such as central bankers from abroad, said Diane Raley, a Kansas City Fed spokeswoman.  "In weighing the demand for participants outside of the Federal Reserve, this was seen as a way to continue representation from each reserve bank while opening some invitation slots to new or additional attendees,"

Anchors Away – Krugman - Something I wanted to put up before the Jackson Hole extravaganza: let’s watch and see how many Fed officials declare that expectations of future inflation are “well-anchored” (which is the favorite formulation). Because, you know, they’re not. Here’s a quick measure: the zero-coupon 5-year inflation swap, explained here. It looks like this: Some anchor.

FRB: Speech--Bernanke, The Economic Outlook and Monetary Policy--August 27, 2010

Rainbow In The Sky - Paul Krugman - Music to read Bernanke by.

Bernanke: The Economic Outlook and Monetary Policy - Excerpt: I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee's communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists--namely, that the FOMC increase its inflation goals. A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securities.  A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement. A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the "interest on excess reserves" rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero

El-Erian: How to read Bernanke’s speech - In his eagerly anticipated speech at Jackson Hole, Chairman Bernanke presented an assessment of recent economic developments, the outlook, and policy implications. In doing so, he sought to recalibrate how some markets/analysts interpreted recent Fed communications, and to convey the ability of Fed policy to minimize the risk of deflation, inflation and a double dip. What follows is a brief summary of the speech and some open questions.

Deconstructing Bernanke’s speech - Pretty disappointing, but with one silver lining.  We pretty much know where the ”Bernanke put” is, he drew a line at roughly 1% core inflation.  That means no more “depression economics.” Now for the speech: Maintaining price stability is also a central concern of policy. Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run. With inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly toward levels more consistent with the Committee’s objectives. Translation:  The Fed defines price stability as about 2% inflation, and it’s running around 1% (core inflation.)  Bernanke thinks that’s a bit lower than desirable.  But then there is also this:A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC.

Fed Watch: Driving Me Crazy - Today's speech by Federal Reserve Chairman Ben Bernanke contains one of those little inconsistencies that drives me nuts.  In his assessment of economy: The prospect of high unemployment for a long period of time remains a central concern of policy. .I was already beginning to view this as a throw away line, something that Bernanke feels he has to say but doesn't really intend to worry much about.  That sense was reinforced later in his speech: Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability. If in the current environment there is already disinflation and little or no conflict between the dual mandates, then why, why, WHY do we need to wait until conditions deteriorate and risk additional disinflation before monetary policymakers turn to the problem of high unemployment that Bernanke claims distresses him?

Clearing the air - A LITTLE while ago Ben Bernanke, the Federal Reserve chairman, called the economic outlook “unusually uncertain”. The Fed has lately been a source of a lot of that uncertainty. Its officials maintained an upbeat outlook for the economy as the news in recent months went from bad to worse, then on August 10 they seemed to abruptly embrace the opposite view by announcing new steps to stimulate the economy. Matters have not been helped by the public airing of divergent views from officials. Mr Bernanke cleared up a lot of the confusion with a long speech to the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming today. In a nutshell, Mr Bernanke said the economy has, indeed, underperformed, but it will get better. And if it doesn’t, the Fed will do more unconventional things. The same morning Mr Bernanke spoke, the Commerce Department was reporting that the economy grew at a miserable 1.6% annual rate in the second quarter, down from its initial estimate of 2.4%. The betting is that the current quarter won’t be much better. Mr Bernanke admits this is unexpected and disappointing, but it’s not a double dip.

Bernanke to Markets: Chill Out, We're Ready - Let’s face it: Economic growth has been disappointing. In a speech in Jackson Hole this morning, the Federal Reserve chairman, Ben S. Bernanke, talked about these concerns, played down worries about a “double dip” and explained what the Fed could do if things got appreciably worse. Here are the monetary policy options that Mr. Bernanke said were available should things get worse: A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities. A second policy option for the F.O.M.C. would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement. A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the I.O.E.R. rate, the “interest on excess reserves” rate. The I.O.E.R. rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. …

Bernanke Stands Ready - Fed Chair Ben Bernanke just addressed the annual Kansas City Fed economic symposium in Jackson Hole, WY.  After a detailed review of recent subpar U.S. economic performance, he discussed the pros and cons of more quantitative easing.   Rarely have other Fed chairs offered such insight into their thinking, but, based upon his extensive study of the Depression, Mr. Bernanke strongly believes that Fed transparency is essential to reviving markets.   So the Federal Open Market Committee stands ready to provide more quantitative easing at its September 21 meeting, if not before, if the economy continues to falter.   We are fortunate to have Mr. Bernanke's leadership in this crisis. Here are main takeaways.

Is Bernanke Worried about Deflation? - Bernanke made a speech this morning to other central bankers, economists and journalists at an annual forum in Jackson Hole. There were a number of key phrases Fed watchers were expecting to hear and, hopefully, not hear. And here's the tally. Bernanke used some variation of the work "slow" seven times.  So, as expected, Bernanke was trying to make the point that he believes the recovery is turning out to be weaker than expected. Here a piece from the conclusion of his speech: In sum, the pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction. Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.

Bernanke's Speech: A Big Tease - Ben Bernanke delivered a much anticipated speech today at the Jackson Hole Economic Symposium.  Many observers, myself included, were wondering if he would advocate a more aggressive role for monetary policy given the signs of weakening in the U.S. economy.  Instead, what he delivered was a big tease: he acknowledges three points made by advocates of more monetary easing, but then either ignores the implications of these points or argues against them. Let's look at the three points he acknowledges in turn.  First, he concedes that the low interest rates can reflect a weak economy rather than being a sign of loose monetary policy.  Second, he grants that the Fed can be effectively tightening monetary policy simply by being passive.  Consider the implications of these points.  First, if lower interest rates reflect economic weakness--though he mentions long-term interest rates recall they are the expectation of a bunch of short-term interest rates plus some term premium--then one implication is that the low federal funds rate may not be so accommodative after all. Given the state of the economy, maybe the 0%-0.25% range for the federal funds rate is not low enough.

Bernanke is neutral, with dovish tinges - The much awaited speech by Ben Bernanke at Jackson Hole was largely a holding operation. He did not deviate much, if at all, from the tone of the statement issued after the August meeting of the FOMC, which is understandable given that his policy committee contains several members who do not want the Fed chairman to offer any strong hints about further policy easing at this stage. . Picking over the details of what he said, he suggested that GDP growth would be moderate in the remainder of 2010, and would rise next year, with unemployment and capacity utilisation falling slightly in 2011. This implies that he expects GDP growth in 2011 to be somewhere around 2.5 per cent, just fractionally above the long term trend; and that in turn might imply a growth rate of around 1.5 to 2 per cent in the second half of 2010. This would be roughly the same as the GDP growth rate in Q2, which has just been revised downwards to 1.6 per cent.

Bernanke's Speech: Willing to Get "Unconventional" - Federal Reserve chief Ben Bernanke's much anticipated speech to the Kansas City Fed's Jackson Hole conference was fairly vague about Fed's future course—no surprise there— but was also quite frank about the fact that the economy appears more sluggish than it looked to be just a few months ago. This reality check comes on the same morning that the Commerce Department issued a downward revision to its second qurater GDP estimate, to a sluggish 1.6% rate. That's considerably lower than its first estimate a month ago, which said that GDP grew 2.6%, but it's also less of a downward revision than the markets had been expecting.  With that less-bad-news-is good-news as a backdrop, Bernanke spoke of the Fed's policy options in a sluggish world with low interest rates, miniscule inflation and a major headwind called Housing

The Fed’s Wait and See Policy is a Mistake - Federal Reserve Chair Ben Bernanke said the things he was expected to say in his speech today: The Fed’s actions to date helped to avoid an even worse crash of financial markets and the broader economy, the economy is recovering, but much more slowly than the Fed anticipated, and the Fed has additional steps it could take to combat the weakness in the economy. So why not take them? According to Bernanke: The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool. Given the forecasts to this point, all of which have been too rosy, I would place more weight on the downside, quite a bit more, but it’s not clear the Fed is doing this.

Invisible Cavalry To The Rescue! - I’ve written a lot about the invisible bond vigilantes who have terrorized policy makers, even though there’s no actual evidence for their existence. But after Ben Bernanke’s speech this morning, it seems to be that I should also start writing about the invisible cavalry, which is always about to come to our rescue, but somehow never arrives. Bernanke more or less admitted that the economic situation has developed not necessarily to America’s advantage, nothing like the growth he was predicting six months ago. But he argued that 2011 will be better, because … well, it was hard to see exactly why. He offered no major drivers of growth, just a general argument that businesses will invest more despite huge excess capacity, and consumers spend more despite still-huge debts and home prices that are likely to resume their decline. So: I guess this speech marked a small step toward QE2 and all that. But mainly the message was that just around the corner, there’s a rainbow in the sky. So I’m going to have another cup of coffee, but skip the pie (in the sky).

Really What Bernanke Said Is That He Doesn’t Have What It Takes To Fix The Economy - The most interesting part of Bernanke's speech to the KC Fed Symposium is where he discusses the FOMC's policy options, in the event that weakening conditions warrant more easing. And if you read it, the basic message is: Yeah, we have some options, and none of them is likely to work very well. In the following section, he highlights three key possibilities, and in each case he makes a very good point why they might not work. The bottom line: If youre hopes for a recovery hinge on the Fed, you should rethink that.

After Crises, Slow Income Growth and High Unemployment - Economists Vincent and Carmen Reinhart offer a grim tour of the economic landscape after financial crises — one plagued by slow economic growth and high unemployment — in the kickoff paper up for discussion at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole. “GDP growth and housing prices are significantly lower and unemployment significantly higher in the ten-year window following the crisis when compared to the decade that preceded it,” the authors conclude. They look at fifteen post-World War II financial crises in advanced and emerging economies and the three global crises that occurred in the 1930s, the 1970s and the latest financial crisis. The work builds on research Ms. Reinhart has conducted with Harvard University professor Kenneth Rogoff on the causes and consequences of centuries of financial shocks. The latest piece looks at the long-haul after the shock occurs.

Analysis: Bernanke paves the way for QE2 - Just some quick thoughts on Fed Chairman Ben Bernanke's speech today. Bernanke has a political problem on the FOMC. I believe this is why the recent FOMC discusssions were leaked to Jon Hilsenrath at the WSJ: Fed Split on Move to Bolster Sluggish Economy. Bernanke is saying the economy is weak but that he still expects growth to improve in 2011:  So it will take further disinflation or a weaker economy for the Fed to act. Bernanke discussed the when of QE2:  Under what conditions would the FOMC make further use of these or related policy tools? At this juncture, the Committee has not agreed on specific criteria or triggers for further action, but I can make two general observations.  First, the FOMC will strongly resist deviations from price stability in the downward direction. ... It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.

We need more QE to prevent another Great Depression: Round 2 - There is a widespread perception that quantitative easing is synonymous with increasing the money supply. But it is more than that. In 2006, the Bank of England began to pay interest on the reserves of commercial banks held at the Bank. QE, in conjunction with the payment of interest on reserves, allows the Bank to influence the short term interest rate and at the same time, to influence the prices of long term assets. This new flexibility is the key to understanding how to prevent inflation without creating another Great Depression. Critics of QE argue that it does not create jobs and that it will cause inflation. They are wrong on both counts. QE is a new tool that should become a permanent feature of monetary policy even after the UK economy recovers from the current recession.

Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar - Hussman - A week ago, the Federal Reserve initiated a new program of "quantitative easing" (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.  To understand how currencies fluctuate, it's helpful to understand two forms of "parity" that operate in the foreign exchange markets.  1) Purchasing Power Parity (PPP): 2) Interest Rate Parity

Queasing over Quantitative Easing, Part III - A common occurrence for me is a friend coming to me and saying, “How can the government borrow so much?  It doesn’t make sense.  Why do they spend money on this and not on me?”  I understand the paradox of thrift, but I don’t agree with it.  One reason is that because it is a paradox, ordinary people will react badly to actions of the government that they can’t do themselves.  Second, when the government or central bank does it, it seems like a form of theft, because no one should get something for nothing, and it degrades the ordinary person’s view of the honesty of the Government or Central Bank.  Third, what the money gets used for is viewed as a waste by some. This consideration of the basic sense of fairness among average people should not be discounted by policymakers, nor the fear engendered when policymakers take such actions.  It is how average people think.  If you remember my review of the book Priceless, you might realize that people often act out of a sense of fairness, not out of economic interest.  When you think about the Paradox of Thrift through that prism, it is plain why government action doesn’t work — many people do nothing different when the government/central bank is making bold moves, because they are less certain about the future because the powers that be are dishonest in their view.

Cancer & Desperation of QE2 - The American public has never been no nervous, perhaps fearful of something dreadful and imminent. The global monetary system is crumbling. The typical stimulus has failed to jumpstart the USEconomy. The 20 months of near 0% short-term official interest rate has failed to revive the moribund US housing market. The phony FASB accounting rules has failed to accomplish anything except a stay of execution for the big US banks, which do not lend much. In fact, the US banks are largely dead entities showing enough life for to receive USGovt largesse aid. Witness the failure of the US financial sector. Witness the climax chapter of failure for the Fascist Business Model. The US banker brain trust, which possesses only a modicum of economic wisdom, analytic prowess, or foresight, finds itself in a desperate corner. Their talk of an Exit Strategy in the last several months was summarily dismissed as nonsense, propaganda, and wishful thinking by the Jackass here on a consistent irrefutable basis. The US Federal Reserve is ready to embark on the second round of Quantitative Easing. The monetization of US$-based bonds of many types will be done on a second initiative, on cue. Here is the irony, the stupidity, the insanity, the recklessness, the tragedy. What failed, they will do again, maybe even bigger! At risk is global confidence and trust, hardly a zero cost item.

Citi Says QE2 Would Be End-Game For The USD - These are not the hyperbolic ramblings of various fringe blogs who have been claiming this for over a year, these are the non-hyperbolic ruminations of Steven Englander, until recently head FX strategist at Barclays, and recently at Citi:"A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures

More Debate on QE - Yves Smith - The Jackson Hole conference starting today is expected to include a talk by Ben Bernanke on the benefits and costs of further monetary easing, which in ZIRP-land means quantitative easing. Gavyn Davies put up a good short list of arguments made against QE at the Financial Times, and most do not look terribly persuasive. One which I found interesting was: “QE will weaken the Fed’s balance sheet, and undermine confidence in the institution.” This was a very powerful argument in Japan in the 1990s, which reduced the amount of quantitative easing which the BoJ was willing to undertake. If the Fed simply buys Treasuries, it is hard to see how this weakens the balance sheet, I think Davies is missing a part of the dynamic here. The intensity of the battle over Bernanke’s reappointment and the partial victory for the Audit the Fed movement are tangible signs that the Fed’s aggressive action during the crisis has led to a hard pushback from Congress. Part of it may be deserved loss of faith in an organization that utterly failed to see the crisis coming and refused to exercise any control over banks; another may be that Congress recognizes full well that the Fed was acting as an extralegal, off-balance-sheet funding vehicle for the Treasury, meaning a route for circumventing normal budgetary processes.

Video: Former IMF Economist Says Fed Isn’t Superman - WSJ - The former chief economist of the International Monetary Fund, Raghuram Rajan, tells MarketWatch's Greg Robb the Federal Reserve can't be expected to be a Superman in times of economic trouble

Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says – (Bloomberg) -- Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund’s former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed.  Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says.  “Low rates are not a free lunch, but people are acting as though they are,”  “There will be pressure on central banks to follow an expansionary monetary policy, and I worry that one can see the benefits, but what people inadequately appreciate are the downsides.”  He and Rajan will have the chance to make their case at the Fed’s annual symposium in Jackson Hole, Wyoming, this week.

Making It Up - Krugman - According to Bloomberg, Raghuram Rajan is now getting specific: he wants Bernanke to raise the Fed funds rate by 200 basis points in the face of 9.5 percent unemployment and inflation under 1 percent. Let me try to explain what bothers me about this sort of thing, aside from the fact that it would be an utter disaster for the economy: it’s the way Rajan — and many other economists — seem to be making up new doctrines on the fly to justify their policy prejudices. I’m all in favor of innovative thinking. But my view is that what you say about policy at any given time should be based on some kind of model — and furthermore, you should be willing to apply the same model to other situations, not make it a one-off used to justify what you happen to favor right now. My writing on policy in this crisis has been based on the same model of macroeconomic policy I use in normal times; it’s just that the situation is different.

Not the time for rate hikes - EARLIER this week I briefly mentioned Raghuram Rajan's odd suggestion that the Fed should, sometime soon, raise its benchmark interest rate by up to two percentage points. This declaration led to many raised eyebrows, prompting Mr Rajan to explain his view in more detail. I have a lot of respect for Mr Rajan. In 2005, he presciently and courageously warned of the financial trouble brewing, and his new book "Fault Lines" provides a solid analysis of the real threats to the global economy. But this interest rate argument is just a mess. It's a little strange on multiple levels. He says things like, "the Keynesian answer to the problem of continued unemployment seems to be to give corporations an interest rate subsidy to offset the additional burden caused by excessively high wages", as if there weren't a long and detailed body of economic literature on monetary policy detailing the channels through which it operates. And he then explains his view by analogising interest rate subsidies to energy subsidies, which is odd given that the economists he's engaging don't need analogies to grasp the workings of monetary policy.

Superfreakymacroeconomics - The following post is a sort of response to Raghuram Rajan’s recent post at Freakonomics: If you are a college econ teacher, you’ve had this experience.  You explain how an expansionary monetary policy can boost AD.  A student raises his hand: “But isn’t low interest rates just like the government providing a subsidy to borrowers?  And aren’t government subsidies bad?” The student is so far off base you wonder how you are going to fix things with a short answer.  But let’s try anyway.

The Fed's Balance Sheet, Deflation, Etc.  I've been puzzling over two key current policy questions: (i) Does a change in the maturity structure of the assets held by the Fed matter? (ii) Is sustained deflation possible in the United States in the near future? In answer to the first question, I'm beginning to think that the answer is yes, and I'll explain why. For the second question, I've explained before (here and here) why I think the answer is no. I'll expand and modify that view here. Let's start with the current composition of the Fed's balance sheet, posted here. On the asset side, of a total of $2.3 trillion, $780 billion are US Treasuries, $157 Billion are agency securities (Fannie Mae and Freddie Mac obligations), $1.113 trillion are mortgage-backed securities (MBS, backed by conforming loans), and the remaining $250 billion is what remains of the emergency credit programs instituted after the Lehman Brothers failure plus assets acquired from Bear Stearns and AIG. These asset holdings are financed, on the liabilities side, by $947 billion in currency outstanding, $1.039 in reserve balances, with the largest component of the remainder (something more than $300 billion) being primarily deposits of the US Treasury with the Fed. If we compare the current Fed balance sheet to what it was on January 2, 2008, what's the difference?

We're Still In A Paradox Of Thrift World - Krugman - This morning Bloomberg has a story about how business investment — which was one of the few sources of strength lately — is flagging. Why? Because of concerns about overall economic growth. This should serve as a reminder that we’re still very much in a paradox of thrift world. In normal times, we believe that more saving, private or public, leads to more investment, because it frees up funds. But for that story to work, you have to have some channel through which higher savings increase the incentive to invest. And the way it works in practice, in good times, is that higher savings allow the Fed to cut interest rates, making capital cheaper, and hence on to investment.But right now we’re up against the zero lower bound so this normal channel doesn’t work.. That’s why fiscal austerity is such a terrible idea: no only does it raise unemployment, it actually makes us poorer in the long run.

Kocherlakota: There Is Just Nothing We Can Do - Paul Krugman is too kind to his intellectual opponents. Yes, I wrote that. Here’s what Kocherlakota said in a speech after the meeting: Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.. The Fed most certainly has the means to transform construction workers into manufacturing workers. Its called inflation expectations, which in turn influence the real interest rate.There is no activity which is possible and yet still unprofitable at some real interest rate. I don’t mean this in a tautological “sufficiently low real interest rate” sense. A profitable real interest rate can be calculated. Lets crunch the numbers.

The Real Problem with Kocherlakota’s Speech - There has been a lot of chatter around the blogosphere about Narayana Kocherlakota’s speech in Michigan last week, and seeing as I am trying to catch up on news, I think that is a good a place as any to start. First, here is the whole speech, so that you can read it if you would like. The big focus, especially among left-leaning commentators, has of course been Kocherlakota’s comments on the unemployment situation. The only troubling thing to me about a monetary policymaking body discussing unemployment is the fact that it is happening at all.  I think the error in Kocherlakota’s thinking stems from this quote: Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers. This is wildly baffling. Not only does Kocherlakota make the forecast above — i.e. we will not be hitting any of our targets (nominal or otherwise) any time soon — he also states that he believes that money has been easy. That implies that monetary policy has zero effect on the economy, any time. He also identifies that low rates for an extended period of time are a sign of monetary failure, but does so in a future-orientation. .

Do Umbrellas Cause Rain? - In a recent speech Minneapolis Fed President Narayana Kocherlakota argues that low interest rates could ultimately be dangerous in that they could lead to deflation. His argument seems bizarre to me. I’ll go through it piece by piece. Monetary policy does affect the real return on safe investments over short periods of time. But over the long run, money is, as we economists like to say, neutral. I’ll agree to that, although I shall subsequently quibble with his definition of “neutral.” This means that no matter what the inflation rate is and no matter what the FOMC does, the real return on safe short-term investments averages about 1-2 percent over the long run. Not necessarily true. (The long-run real return on safe short-term investments depends on a lot of things besides what the FOMC does, and we can’t say a priori that it will remain in that range.) But I’ll accept it for the sake of argument....

Kocherlakota loose money and deflation - Minneapolis Fed President and famous economist Narayan Kocherlakota made my jaw drop with this argument Long-run monetary neutrality is an uncontroversial, simple, but nonetheless profound proposition. In particular, it implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent. Kocherlakota asserts that expansionary monetary policy will eventually cause deflation. This is very odd. My honest opinion is that he wants to argue for a higher target federal funds rate and he’s decided to present every argument that supports that proposal even if it is half baked, unbaked or negabaked (frozen ?). However, I can’t resist trying to make sense of the argument (after the jump I try and fail).

Bang-Bang: Kocherlakota on Deflation - Andy Harless corrects Kocherlakota’s thinking on deflation. Andy has the story right though I’d like to walk through the results of the “pure model” perspective that Kocherlakota seems to be speaking from. There is nothing wrong with the basic reasoning, as I see it, its just how Kocherlakota employs it. Kocherlakota suggests that the superneutrality of money implies that a low Fed Funds rate will lead to permanent deflation. This is true in a frictionless world with perfect information.  A permanently low funds rate combined with a constant real rate of return would imply deflation. It is also the case that the Fed choosing a permanently low funds rate would cause the deflation to come about. The question is: how do we get to deflation from here.   You actually wind up with what’s known as a bang-bang solution. That’s where the economy instantly jumps to a new equilibrium path.

Why "everyone" should be forced to take Intro Economics - The reason is not what you are expecting. It's because maybe if he had been forced to take Intro Economics, the 12th President of the Federal Reserve Bank of Minneapolis, who holds a PhD in Economics from the University of Chicago, who is a specialist in money and macro, who has a CV that creams mine 100 times over, would not be making mistakes like this. (H/T Andy Harless via Scott Sumner). "To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation." That could be interpreted two ways: a wrong way, and maybe, just maybe, a right way. "When real returns are normalized, inflationary expectations could well be negative, and there may still be a considerable amount of structural unemployment. If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation." Nope. He definitely meant it the wrong way. I never did understand how the Fed makes decisions. But if the President of the Minneapolis Fed, and people like him, have any sort of power over monetary policy, we ( OK, Americans especially, but probably Canadians too, getting caught by the implosion) are so totally screwed.

Nick Rowe Loses It: Krugman - “In this case, I agree with Kocherlakota, that the market has it wrong. As Kocherlakota argued, most of our monetary models tell us that, if the Fed maintains a constant nominal interest rate target forever, that will essentially determine the inflation rate, by way of the Fisher relation.”Oh Christ. Oh Christ. Oh Christ. SW interprets Kocherlakota the same way I do, and thinks he’s right. Oh Christ. [...] Oh Christ. Central banks can’t keep the price level and inflation rate determinate by pegging the nominal (or even real) rate of interest forever. We’ve known that was wrong at least since Wicksell’s cumulative process. I assumed that everyone (except a few hopeless lefties and funny money guys) knew that was wrong. Nobody’s monetary model tells us that (except a few hopeless Post Keynesian types, who are at least logically consistent, because they assume very sticky prices that don’t respond to AD at all). Oh Christ. [...] This is much worse than Cochrane getting Say’s Law wrong. Say’s Law is very nearly right, and very few people understand precisely why say’s Law is wrong, and that it’s money, and only money, and not any other asset, that makes Say’s Law wrong. I give up. This isn’t New Monetarism. It’s got nothing to do with Monetarism at all. It’s the exact opposite of Monetarism. Somebody resurrect Milton Friedman." Yup.

"You guys in the US are so screwed" - I JUMPED on Minneapolis Fed President Narayana Kocherlakota for his remark, in a recent speech, that: Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy. Monetary economists have seized on a different comment in the speech: To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation. And they're seriously, almost comically, outraged. That is, it would be funny if it weren't so serious an issue. Scott Sumner is relatively restrained: Kocherlakota is obviously far brighter than I am...But money is a specialized field and I just don’t have much confidence that our decision-makers or the media people who shape the discussion are on top of this issue.   In his comments section, Canadian monetary economist Nick Rowe unloads:That speech by Narayana Kocherlakota is really disturbing. This guy is a top macroeconomist, and he totally f***s it up. I mean totally. It wasn’t just misspeaking, because he is quite clear the second time he makes the mistake.

Stephen Williamson: How to Get Worked Up Over Nothing: Suppose a cash-in-advance model with a representative consumer, period utility u(c), discount factor b, constant aggregate endowment y. c is consumption. The consumer needs cash to buy c each period. Suppose y is a fixed quantity of output received by a firm, which is sold for cash within the period, and then the cash is paid as a dividend to the consumer at the end of the period. Have the money stock grow at a constant rate m. The real interest rate is constant at 1/b - 1. The nominal interest rate is (1+m)/b - 1, and the inflation rate is m. Constant m implies a constant nominal interest rate and a constant inflation rate. If m < 0, there is deflation, and the nominal interest rate is sufficiently low to support the deflation. I can think of the instrument the central bank sets as either the money growth rate or the nominal interest rate - that part is irrelevant.... What's the problem?

Wonk City: More on Deflation and Interest Rates -  Stephen Williamson rides in to defend Kocherlakota: What [Krugman, Rowe, Thoma and Harless] are objecting to in Kocherlakota’s speech is one of the most innocuous things he said.... That’s not a big deal though. What’s the problem? Let me say again. There is absolutely nothing inaccurate about what Williamson is saying. It falls simply and elegantly out of our monetary models. The blogosphere is reacting with shock and despair because the conclusion doesn’t look anything like what they would expect to happen in the real world. In the real world if the Fed set a permanent low interest rate target all of our intuition, training and observations say that the result will be hyperinflation not deflation. The question is: How can we reconcile the two?  As is often the case the key difference is hidden in a seemingly innocuous turn-of-phrase. Williamson writes I can think of the instrument the central bank sets as either the money growth rate or the nominal interest rate – that part is irrelevant.

Inflation And Interest Dynamics - Krugman - Brad DeLong and Mark Thoma continue to suffer from dropped-jaw syndrome over the fact that (1) a Federal Reserve bank president believes that low interest rates lead to deflation (2) economists who think they’re being sophisticated are actually defending him. I don’t really believe that a clearer explanation of what’s wrong with the Kocherlakota view will change anyone’s mind But let’s give it a try, anyway. So let’s look at it this way: instead of thinking of the Fed as setting the interest rate forever — which we’ve known since Wicksell it can’t do — think of it as following some kind of Taylor rule, in which the short-term interest rate depends positively on inflation and, maybe, negatively on the unemployment rate. This is feasible, as long as the coefficient on inflation is bigger than one. Now suppose that it changes the rule, so as to set either a higher or a lower interest rate at any given level of inflation. What will happen to inflation and interest rates over time?

New Keynesian Models - Mark Thoma tells us here why he thinks "economists rejected flexible price models." Of course, the models were never "rejected," but New Keynsians have been very successful with central bankers, and in shaping the research program in macroeconomics for the last 10 years or more. This really has nothing to do with empirical evidence. Smets-Wouters and Christiano-Eichenbaum-Evans medium-scale models fit the data, but there are so many bells and whistles and shocks in these models that this seems no more than data description. New Keynesian economics is succesful, because Mike Woodford has been a brilliant salesman. The approach is sold as a synthesis, meant to be inoffensive to the hard-core Prescott RBC people and to old-school Keynesians alike. Nobody's human capital depreciates with the adoption of the New Keynesian synthesis, and policymakers can keep doing what they have been doing, with Mike's seal of approval. An expansion of these ideas, and a description of the alternative can be found here, in a piece I wrote with Randy Wright for the St. Louis Fed Review, and here, in our forthcoming Handbook of Monetary Economics chapter. Both are a little on the long side, but you can pick and choose.

Lessons from the Kocherlakota Controversy - In a speech last week the President of the Minneapolis Fed, Narayana Kocherlakota, made the following rather startling claim: Long-run monetary neutrality implies that if the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative....To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation. The proposition that a commitment by the Fed to maintain a low nominal interest rate indefinitely must lead to deflation (rather than accelerating inflation) defies common sense, economic intuition, and the monetarist models of an earlier generation. This was was pointed out forcefully and in short order by Andy Harless, Nick Rowe, Robert Waldmann, Scott Sumner, Mark Thoma, Ryan Avent, Brad DeLong, Karl Smith, Paul Krugman and many other notables.  But Kocherlakota was not without his defenders. Stephen Williamson and Jesus Fernandez-Villaverde both argued that his claim was innocuous and completely consistent with modern monetary economics. And indeed it is, in the following sense: the modern theory is based on equilibrium analysis, and the only equilibrium consistent with a persistently low nominal interest rate is one in which there is a stable and low level of deflation. If one accepts the equilibrium methodology as being descriptively valid in this context, one is led quite naturally to Kocherlakota's corner.  But while Williamson and Fernandez-Villaverde interpret the consistency of Kocherlakota's claim with the modern theory as a vindication of the claim, others might be tempted to view it as an indictment of the theory.

Would More Accountability Help the Fed? - The presidents of the twelve regional Federal Reserve banks serve concurrent five year terms, and all twelve district bank presidents will come up for reappointment in February of 2011. Reappointment will be up to the Board of Directors in each district.The problem with this process is that there is little accountability to residents of the district. When it comes time to consider reappointment, the Board of Directors should ask themselves whether the Fed president has represented the interests of the district in his or her votes on monetary policy. If not, the Fed president should be replaced. However, that sort of scrutiny is unlikely to occur, and as far as I can tell this will largely be a rubber stamp process. Presidents may voluntarily step down and be replaced, but being forced out by the Board is unlikely.

Why Won't the Fed Inflate? - Kevin Drum has a roundup of commentary from many smart commentators I admire.  They're hardly alone; everyone hates the Fed!  Why won't they get us out of this mess? Here's one possibility: because many of the people who are now complaining that they are too tight, are the same ones who until very recently were loudly complaining that they were too loose during the last recession.  There's been a pretty vibrant cottage industry in placing the  blame for the housing bubble squarely on the frail shoulders of one Alan Greenspan.  He is a convenient villain for liberals, who hate his politics, and conservatives, who hate the sort of technocratic institution he represents.  Blaming Alan Greenspan allows liberals to dodge uncomfortable questions about the unintended consequences of government intervention, and conservatives to dodge uncomfortable questions about whether free markets can produce really, really bad outcomes.

What standard monetary theory says about the relation between nominal interest rates and inflation - I want to distinguish two cases. In the first case the central bank pegs the time-path of the money supply. The money supply is exogenous. The nominal interest rate is endogenous. Standard monetary theory says that a permanent 1 percentage point increase in the growth rate of the money supply will (in the long run) cause both the nominal interest rate and the rate of inflation to rise by 1 percentage point. The Fisher relation holds as a long-run equilibrium relationship. The real interest rate is unaffected by monetary policy in the long run. In the second case the central bank pegs the time-path of the nominal rate of interest. The nominal interest rate is exogenous. The money supply is endogenous. Start in equilibrium (never mind how we got there). Standard monetary theory says that if the central bank pegs the time-path of the nominal interest rate permanently 1 percentage point higher, this will cause the price level, and the rate of inflation, and the stock of money, to fall without limit. The Fisher relation will not hold, because there is no process that will bring us to a new long run equilibrium. The real interest rate will rise without limit.

Inflation Fear Mongering - Our graph shows the interest rate on 10-year Treasuries from April 1, 2009 to now. Notice a bit of interest rate volatility with rates at times climbing to around 4 percent but the current interest rate being near 2.6 percent.  Scott Lanman and Simon Kennedy report that Raghuram Rajan is arguing for tight monetary policy. Paul Krugman rightfully ridicules this policy recommendation but he lets this particular line go untouched: Between June 3 and June 8, 2009, yields on 10-year Treasuries rose to 3.88 percent from 3.54 percent after the smallest drop in U.S. payrolls in eight months. Why do we care that interest rates rose by 34 basis points in a week over a year ago in light of the fact that the interest rate on 10-year Treasury bills is now done around 2.6 percent?

Interest Rates 'May Hit 8%' By 2012 Says Think Tank - An influential think tank has warned that interest rates may have to rise to 8% to combat rampant inflation.  The warning comes from the Policy Exchange, whose chief economist, Andrew Lilico, argues an economic recovery will unleash a wave of money. Doctor Lilico believes a double-dip recession is likely, which would then be followed by a boom. He argues that the US and UK monetary authorities will respond to this by printing more money. Doctor Lilico says in a research note: "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation." The Bank has already pumped £200bn into the economy under quantitative easing to help stimulate demand.

Slack Could Lead to Sharper Inflation Decline - Inflation could fall much further in the next year, thanks to the enormous slack that built up in the U.S. economy during recession, two professors say in a paper that will be presented this morning at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole this morning. Harvard University’s James Stock and Princeton’s Mark Watson — two respected econometricians known for teasing meaning out of heaps of statistical data — project that the Federal Reserve’s favored measure of inflation could fall by 0.8 percentage points by the second quarter of 2011 from its 2010 second quarter rate of 1.5%, based on relationships they’ve drawn from past recessionary cycles.Some measures of inflation are already below the Fed’s unofficial target of 1.5% to 2%. A decline to near zero, if it materialized, would likely be greeted with alarm at the Fed and would give officials added incentive to take new steps to forestall such a move. Fed Chairman Ben Bernanke said at the same conference today that the Fed is on guard against further disinflation.

An interview with Stoneleigh - the case for deflation - Firstly, I would say that the energy prices that currently seem stubbornly high should fall substantially as the speculative premium evaporates and demand falls on a resumption of the credit crunch. The sucker rally that has spawned all the talk of green shoots is essentially over in my opinion. The result should be a reversal of a number of trends that depend on the ebb and flow of liquidity - we should see stock markets and commodity prices fall, a significant resurgence in the US dollar and a large contraction of credit. The scale of the reversal should be substantial, as should its effects on energy demand. Demand is not what one wants, but what one is ready, willing and able to pay for, and in a severe credit crunch the capacity to pay for supplies of most things will be severely reduced.

Deflation: How low will they go? | The Economist - IN PARTS of the world—emerging markets and highly indebted European nations—the yields on government debt are disconcertingly high. Rates in those economies reflect fears of rapid inflation or debt default. In other economies the pundits have been warning of inflation or debt panics to come, but markets stubbornly refuse to play along. Yields on debt in America, Germany, and Japan are at rock-bottom levels, despite big recent increases in government borrowing, associated with the financial crisis and recession. The yield on the 10-year Treasury is currently at 3.67%. Some banks are advertising 30-year mortgage loans around 4%. The yield on 5-year inflation-protected Treasuries recently went negative for a short period of time. Longer duration TIPS are pointing toward inflation below 2% for the foreseeable future. Is this reasonable? Could the fundamentals possibly justify these low yields? A new print piece suggests there's a chance they might.

Financial Experts And Investors Spooked About The Possible Return Of Deflation - Rising job losses and “unusual uncertainty” within the economy have prompted the Federal Reserve and other major financial institutions to slash growth projections for the rest of 2010, leaving Americans worried about the possibility of a dreaded “double-dip” recession. But it’s another “D” word that currently has investors spooked—deflation. With mortgage rates at record lows and Treasury rates at their lowest since March 2009—when the S&P dropped all the way to its ominous 666 bottom—the markets aren’t just hedging against the possibility of deflation; they’re expecting it.

Chicago Fed: Economic activity rebounded in July - From the Chicago Fed: Index shows economic activity rebounded in July Led by improvements in production-related indicators, the Chicago Fed National Activity Index returned to its historical average of zero in July, up from –0.70 in June. Three of the four broad categories of indicators that make up the index improved from June, but only the production and income category made a positive contribution to the index in July. The index’s three-month moving average, CFNAI-MA3, edged lower to –0.17 in July from –0.12 in June. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Fed’s Evans: Economy In ‘Extremely Modest’ Recovery -The pace of recovery from the worst economic meltdown since the Great Depression is “slower than we had hoped for,” Evans said. He acknowledged that although the risk of a double dip is higher than it was six months ago, it is “not the most likely outcome.”Recent economic figures point to a faltering economy, including surprisingly weak housing data, released after Evans’ remarks Tuesday to the Indianapolis Neighborhood Housing Partnership. In recent weeks, investors have also become increasingly worried about the ailing job market. August’s unemployment rate stood at 9.5%. Evans said he sees unemployment falling to a still troubling 8% next year. When the economy is doing well, the jobless rate should be around 5%, he said.

US economy is slowing more than the Fed has recognised - Admittedly, some decline in the growth rate was always inevitable at this stage of the cycle, because the large boosts to growth stemming from the upswing in inventories and from fiscal stimulus were certain to lose momentum about now. But the pick up in more sustainable sources of growth, notably consumers’ expenditure and capital investment, has so far been more anaemic than I had hoped, and the improvement in the labour market may be going into reverse. The Fed may soon be forced to confront the choice they most wanted to avoid, which is whether to extend quantitative easing, instead of allowing their programmes of unconventional easing to lapse, as they fervently hoped earlier this year.

A Wake-Up Call for Policymakers? - More bad news about the economy. New home sales were at a record low during July: And durable goods orders also came in well below expectations: New orders for manufactured durable goods in July increased $0.6 billion or 0.3 percent to $193.0 billion, the U.S. Census Bureau announced today. This increase followed two consecutive monthly decreases including a 0.1 percent June decrease. Excluding transportation, new orders decreased 3.8 percent.I wonder if the people at the Fed who are standing in the way of more help for the economy will revise their belief that the recovery is underway and, although it is proceeding slower than they'd like to see, nothing needs to be done, nothing more can be done, to help? I doubt they will, instead they'll find a way to fit this into the narrative they want to believe in. I'd ask a similar question about Congress, fiscal policy is likely to be more effective than monetary policy in a severe recession, but I gave up on them long ago.

This Is Not a Recovery, by Paul Krugman What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned. But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.  The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising... Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.  All of this is obvious. Yet policy makers are in denial.

Goldman: "Forecasters Need To Cut GDP Estimates A Lot Further" - We estimate that the Commerce Department will announce on Friday that real GDP grew just 1.1% (annualized) in the second quarter.A slowdown around the middle of the year has long seemed likely given the dependence of GDP growth since mid-2009 on the boost from the inventory cycle and fiscal policy.  Over the last four quarters, the swing from inventory liquidation to accumulation has contributed 1.9 percentage points to real GDP growth, and overall fiscal policy—federal, state, and local—has contributed a little over 1 percentage point to real final demand growth.  These two numbers are additive, which implies that almost all of the 3.2% growth in real GDP over the past year was due to temporary factors, and that final demand excluding the impact of fiscal policy grew by less than ½% over the past year.

Fiscal austerity is undermining growth – the evidence is mounting - Remember what we were told a few months ago – that business and households were so terrified of higher future tax burdens associated with the budget deficits that they were not investing or spending and so governments were killing economic growth? This led to the deficit terrorists arguing (shouting) that the fiscal stimulus that governments had implemented to save their economies from the threat of a depression were actually undermining growth and that fiscal austerity was the key to growth. Accordingly, governments have increasingly been implementing or promising to implement so-called fiscal consolidation strategies because they have fallen prey to the austerity proponents. As the fiscal stimulus has waned across the world growth is slowing and there is now a real danger of a double-dip recession. In nations that have introduced formal austerity programs the evidence is now mounting … it damages growth and undermines business and household confidence. It has exactly the opposite effect to that predicted by the deficit terrorists which is no news to anyone who understands anything about how the economy works. The victims – the poor and disadvantaged …. AGAIN!

Consumer Metrics Institute Growth Index - For the past several months, the Consumer Metrics Institute's Daily Growth Index has been one of the most interesting data series I follow, and I recommend bookmarking the Institute's website. Their page of frequently asked questions is an excellent introduction to the service. The charts below focus on the 'Trailing Quarter' Growth Index, which is computed as a 91-day moving average for the year-over-year growth/contraction of the Weighted Composite Index, an index that tracks near real-time consumer behavior in a wide range of consumption categories. The Growth Index is a calculated metric that smooths the volatility and gives a better sense of expansions and contractions in consumption. The 91-day period is useful for comparison with key quarterly metrics such as GDP. Since the consumer accounts for over two-thirds of the US economy, one would expect that a well-crafted index of consumer behavior would serve as a leading indicator. As the chart suggests, during the five-year history of the index, it has generally lived up to that expectation.

How low can we fall this fall? - Just after I wrote a few days ago on the Consumer Metrics Institute's latest batch of graphs and data, I saw that Doug Short had had the same idea, and even added a number of his own great graphs using the CMI data. I decided to do a follow-up on the topic, because this may well be the most important set of economic indicators we have available to us when it comes to what's going to happen between now and 2011, as well as beyond. (Do note, once again, that CMI bases its data exclusively on the 70% of US GDP driven by consumers.) Allow me to start off with what Doug Short has to show and tell. That is, after this little detail, which Short has had no time to incorporate yet either: The CMI Current Growth Index Values table indicates a further deterioration in the 91-day Trailing Index from last Friday's -5.06%. Today it stands at -5.25%:

U.S. Economy Slowed to 1.6% Pace in 2nd Quarter - Economic statistics released Friday offered the clearest sign yet that the recovery, already acknowledged to be sauntering, had slowed to a crawl. The government lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth in the three-month period was 2.4 percent.  The revision is a significant slowdownfrom the annual rate of 3.7 percent in the first quarter and 5 percent in the last three months of 2009.  The news came at the end of a week that showed the economic retrenchment that began in the second quarter has spilled over into the summer. Existing home sales in July were down to their lowest level in a decade, and sales of new homes last month were at their lowest level since the government began tracking such data in 1963. Orders for large factory goods, excluding the volatile transportation sector, dropped in July, indicating that recovery in the manufacturing sector was also stalling.

GDP revised down - The Bureau of Economic Analysis, which last month had estimated that U.S. real GDP had grown at a 2.4% annual rate during the second quarter, today revised that estimate down to a 1.6% annual rate. But the revision isn't quite as discouraging as it might sound. For one thing, much of the revision down in GDP growth came from a downward revision in the estimated extent of inventory restocking during the quarter. Thus, whereas last month's numbers implied that real final sales grew at a 1.3% annual rate during the second quarter, today's estimate is that real final sales grew at a 1.0% annual rate-- not a very radical revision as far as the fundamentals are concerned.The other important revision was that the growth in imports, which had already been an implausibly large drag on second quarter growth, is now estimated to have been an even bigger drag than at first claimed. Whatever the explanation for that is, our Federal Reserve Chairman does not expect it to be repeated:

Q2 real GDP revised down to 1.6% annualized growth rate - From the BEA: Gross Domestic Product, 2nd quarter 2010 (second estimate) The following table shows the changes from the advance release (this is the Contributions to Percent Change in Real Gross Domestic Product). The largest downward revisions were to the change in private inventories, imports, and non-residential structure investment. Personal consumption expenditures and investment in Equipment and software were revised up.

REAL GDP - With the downward revision of second quarter real GDP growth from a 2.4% growth rate reported in the advance report to 1.6% reported in the first revision, real GDP in the first year of recovery now appears to be 3%. The major revision was in the trade sector that was reported here when the June trade data was released. Real imports rose at a 32.4% annual rate while real exports jumped at a 9.1% annual rate. As a consequence while real gross domestic purchases grew at a 4.9% rate, an improvement from the 3.9% rate in the first quarter, real final sales of domestic product only grew at a 1.0% rate versus a 1.1% in the first quarter. Probably the main reason real GDP growth was stronger than most expected was the strength of government which grew at a 9.1% rate versus a 1.8% rate in the first quarter.This surge was driven by defense spending that rose at a 7.3% rate. Defense procurement is always higly volatile and does not imply anything for future growth.

John Williams on the Revised GDP Number  John Williams' comments on the GDP number were short and to the point. I am still not on board with his hyperinflation forecast preferring to stick with a pernicious stagflation, although what he sees is certainly possible, as is a Japan style deflation. That is what 'fiat' is all about.  John Williams of ShadowStats: Economic Data Will Get Much Worse. The kindest thing I can say about a stock market that rallies on the "stronger than expected" news that annualized growth in second-quarter GDP was revised from 2.4% to just 1.6%, instead of to the expected 1.4% (keep in mind those numbers are quarterly growth rates raised to the fourth power), or that gyrates over meaningless swings in seasonally-distorted weekly new unemployment claims, is that it is irrational, unstable and terribly dangerous.

Pimco's El-Erian Says Economic Data `Alarming,' New Stimulus May Not Work (Bloomberg) -- U.S. economic data are “alarming,” signaling the recovery is losing momentum, Mohamed A. El-Erian, Pacific Investment Management Co.’s chief executive officer, wrote in an opinion piece in the Washington Post.  Unemployment is high, consumer credit is shrinking and small companies are having trouble obtaining bank lines of credit, wrote El-Erian, who is also co-chief investment officer at Pimco, which runs the world’s largest bond fund. Increased government spending and additional debt purchases from the Federal Reserve are unlikely to spur a rebound, he wrote.  “Throughout the summer, data signals have become more alarming,” wrote El-Erian,  “Current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery.”

Roubini Says Q3 Growth in U.S. to Be `Well Below’ 1% (Bloomberg) -- Nouriel Roubini, the New York University economist who predicted the global financial crisis, said U.S. growth will be “well below” 1 percent in the third quarter and put the odds of a renewed recession at 40 percent.  Roubini, chairman of Roubini Global Economics LLC, said his forecast assumes the government will lower its estimate for growth in the second quarter to an annual rate of 1.2 percent “at best.”  “All the growth tailwinds of the first half of the year become headwinds in the second half,” he said in an e-mail message, including the government’s $814-billion stimulus plan, hiring for the census, and incentives such the cash-for-clunkers program and tax credits for first-time home buyers.  In the best scenario, he said he expects an “anemic, sub- par, below-trend U for many years given the need and process of deleveraging” by households, governments and the financial system.

3rd Quarter GDP Likely Negative, Recession Never Ended - Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008.The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

Chances of Double Dip Now Over 40%: Roubini - The chances of a double-dip recession are now more than 40 percent and policymakers have options to stimulate the economy, Nouriel Roubini of Roubini Global Economics told CNBC Thursday. Second-quarter gross domestic product growth will be revised down to an a annual rate of 1.2 percent from an initial reading of 2.4 percent, Roubini said, adding that any improvement recently was due to inventory adjustments. Roubini, who is often referred to as "Dr. Doom," also said that a "series of tailwinds in the first half of the year ... are going to be essentially headwinds" in the second half. The fiscal stimulus will become a drag on growth in the second half of the year, inventory adjustment will have run their course, and there won't be a favorable comparison with the "awful" first half of 2009, Roubini said.

U.S. Economy Contracting Again, No Recovery, Rosenberg Says – The U.S. economy is contracting again, a sign that the recession never really ended, and the unemployment rate will exceed 10 percent, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc., a wealth management company, in Toronto. Second-quarter growth “looks as though it’s going to be revised down. We just had the Fed cut its forecast,” Rosenberg said today, citing recent economic indicators.  “We’re really building in something that’s negative for the third quarter,” he said. “My sense is the (economy) will contract in the fourth quarter as well.”  He is forecasting the yield on the U.S. Treasury’s 30-year bond will fall to “2 to 2.5 percent.”  The unemployment rate will “probably pierce the old cycle high of just over 10 percent,” said Rosenberg, who in November said the jobless rate could reach 12 percent. A month earlier, unemployment was 10.1 percent, a 26-year high, according to Labor Department data.

Economist Shiller Sees Potential for 'Double Dip' Recession - With the U.S. economic recovery losing steam, the chances of a second phase of a slowdown are increasing, according to a leading economist. Speaking in The Wall Street Journal's The Big Interview show, Robert Shiller, professor of economics at Yale University, said he thought the second dip down of a so-called double-dip recession "may be imminent." Earlier this month, he told the Wall Street Journal he thought the chance of a double-dip recession, which he noted is a rare event, was greater than 50%. Mr. Shiller now suspects that when the National Bureau of Economic Research eventually looks back at the data, the third quarter of 2010 might mark the beginning of the second dip of the recession.

US economy enters double dip recession - Millions of Americans remain unemployed, US bankruptcies have reached a five year high, China slashed US bond holdings by the largest amount to date and US home sales have plummeted to the lowest level on record.  What does this mean for America? Roger Hanwehr, the managing director of ArcXeon Investments argued that the US is in the midst of a double digit recession. “We have a jobless, growthless, synthetic recovery characterized by uncertainty of the markets and no improvement in the underlying macroeconomic weaknesses that lead to the crisis of 2008,” said Hanwehr. He argued that the US is worse off today than it was two years ago. Accumulated debt is up; millions have been spent on bailouts and wars, interest is accumulating, the dollar is weak, industrial output is down and consumers are not spending in the economy.

Economy Caught in Depression, Not Recession: Rosenberg - (video ) Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday....But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.  Rosenberg calls current economic conditions "a depression, and not just some garden-variety recession," and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered "euphoric response."

Dave Rosenberg — Are You Kidding Me? - Gluskin Sheff economist David Rosenberg replaced the R-word with the D-word.  The "current economic malaise" is a "depression, and not just some garden-variety recession," said Rosenberg in a note to clients today, as reported by CNBC. The best quote comes from his newsletter Breakfast With Dave"So let's get this straight. Mortgage rates have tumbled nearly 100 basis points in the past year to a record low of 4.42% for the 30-year rate, yet existing home sales collapse a record 27% MoM to an all time low (data only back to 1999 for total sales) of 3.83 million units at an annual rate? Are you kidding me?" I know who's been kidding who because I write about them all the time. If you're a regular reader of DOTE, nobody's fooling you. I've got a video of Rosenberg from Bloomberg TV. There was never a dull moment this past week. Every day was chock full of terrible news.  It's in times like these that you really get to know who's who. During the Good Times, everybody thinks they're a genius. But during the Bad Times, you have the opportunity to separate the wheat from the chaff. You have the chance to figure out who is being honest, both with themselves and you, and who is full of shit.

Just "What If" We Enter a 1 per cent per Year Growth Period? The Dow Jones Industrial Average would plunge by 60 percent, to less than 4000. The average price of a home would fall by nearly 50 percent, from $184,000 to about $100,000. The economic carnage would make the Great Recession seem gentle, upending families, devastating communities, and transforming America for generations. That's the outer edge of a "Japanification" scenario painted by economists at Bank of America Merrill Lynch, meantto examine what would happen if the U.S. economy got stuck in a deep rut like the Japanese economy did in the 1990s. It's an unlikely outcome, yet a weakening U.S. recovery has sent economists back to their textbooks to study the world's most famous "zombie economy." And there are some unnerving similarities between Japan then and America now. Both countries experienced a real-estate bubble fueled by greedy speculators and complicit banks providing the funds. In each case, the bust came quickly, leaving banks, investors, and consumers with steep losses that would take years to absorb. And both wipeouts challenged policymakers hoping to jump-start the economy by pulling conventional levers.

Who You Gonna Bet On? - Krugman -  That was the title of this Business Week article a few months ago. The tone made it pretty clear that if you had any sense, you’d ignore the bearded academic and go with the market wizard: If [Krugman] makes you want to head for the hills with your shotgun and turnip seeds, consider another view, expressed the week prior at the London School of Economics. The speaker was not a decorated academic with visions of 1873, he was a profit seeker, pure and simple: John Paulson, the hedge-fund manager “We’re in the middle of a sustained recovery in the U.S.,” Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.” No mention of a third depression. So, how’s it going? Wanna bet that there won’t be a piece saying that maybe professors know something that traders don’t?

How An Even Slower Recovery Would Feel - It is getting scary again. After some improvement in the data over the spring and early summer, the recent news is describing an economy growing below 2%. While technically not a double-dip recession, the recovery could be so weak it will feel like another downturn. That is because sub-2% growth in real gross domestic product won’t reverse any of the drags on the economy–and it will threaten a main support to recent growth: capital spending. In a 2% economy, job seekers won’t find much work, workers won’t get big pay raises. Financial markets will stay on pins and needles. Policymakers will remain stymied and politicians will rant. To be sure, those trends sound familiar. The new twist is that Wednesday’s data suggest the cloudy outlook is curtailing spending on business equipment. New orders for non-defense capital goods excluding aircraft plunged 8.0% in July, wiping out the gains of the previous two months. If new bookings fall again in August, be afraid.

Durable Goods: Ending the Myth of Recovery -- A very bad report – 8% drop in non-defense, non-aircraft in durable good orders. Overall the orders were up 0.3% in the face of a consensus estimate of 2.5%. This is the final nail – of four – putting to rest the myth of a recovery.

  • Housing is not rebounding – I have been writing on the housing Depression since February of 2007; the math has not changed in that time and there will be no stability in prices and a real world bottom until 2013. Scratch one source of employment, which accounted for 40% of new job creation between 2002 and 2007.
  • Public agencies are contracting – at the state, federal and local level. Government hiring has sustained overall employment numbers for several years and it is now reversing.
  • Hospital admissions and medial treatments are down in the face of a recession and lower than forecast Medicare and Medicaid reimbursement rates.  Scratch source number three of job creation.
  • Durable goods are in the tank. Factories are not buying more equipment, which means they are not hiring.  Scratch exports and manufacturing as the fourth source of hiring.

Analysis: Dollar becomes funding currency as yields tumble… (Reuters) - The dollar is quickly becoming a funding currency for purchases of higher yielding assets as U.S. Treasury yields slump and the U.S. economic outlook remains uncertain. While the dollar is still far from surpassing the Japanese yen and the Swiss franc as the world's funding currency of choice, investors are no longer rushing to buy the greenback as a safe haven any time trouble erupts worldwide. While not inherently bad for the dollar, being a funding currency is a sign of investors' disenchantment in U.S. economic growth and return potential. In time, countries with funding units face difficulty attracting foreign investment, further eroding economic prospects and the attractiveness of their currency.

Funding Carry Trade w/ $, Currency of the Doomed - It is common knowledge by now that next to nothing is going right in the US economy. America's various debt orgies have brought it little but additional misery. Deficit lovers thought they could revive this wasteland by borrowing even more humongous amounts to cure ills caused by borrowing too much in the first place.  As if we needed even more proof of the descent of this economic wasteland comes even more news of its pointless existence. Briefly, the "carry trade" is one of the most basic plays in foreign exchange. One borrows in a currency charging lower interest--the "funding currency"--and lends in a currency yielding higher. In the past, nearly zero-yield Swiss francs and Japanese yen were the favourite funding currencies of foreign exchange traders. However, a comatose US economy has meant policymakers keeping similarly low interest rates Stateside. Voila! The dollar is now becoming a funding currency of choice. Not only is it yielding next to nothing, but limited expectations of the US escaping the ambit of its self-inflicted and wholly deserved financial ruin mean many are willing to use the dollar as a cheap and stably moribund funding currency.

How We Get Through This Mess – Mauldin - Long-time readers know that I think we are in for an extended period of slow growth, high and sticky unemployment, and volatile markets punctuated by more frequent recessions. That is what you get when you have a deleveraging environment resulting from a credit crisis. Bottom line? It is going to be a tough environment for the next 6-8 years. That is just what happens when you have a deleveraging / balance sheet / deflationary / end of the Debt Supercycle recession. It is what it is, and no amount of wishing or finger pointing can change the facts.

The True Natonal Debt -When I read Paul Krugman and the other Keynesian boneheads saying that our debt is not a problem, they quote figures about our debt of $13.3 trillion versus our GDP of $14.6 trillion not being so bad. That is only 91% of GDP. They point to World War II when our national debt reached 120% of GDP. They say everything worked out after that. Well lets analyze that comparison for just a second. In 1945, Europe, Russia and Asia lay in ruins.  We rebuilt Europe and Asia. Our GDP soared, as our National Debt declined from $269 billion in 1946 to $255 billion in 1951, remaining below $300 billion until 1963. Today our reported National Debt is $13.362 TRILLION. This is the first big lie. There are two entities named Fannie Mae and Freddie Mac that happen to be 80% owned by the US government. Anyone who thinks these two companies can operate without the backing of the US Government are delusional. The US taxpayer is on the hook for these two disastrously run companies.  Their debt is our debt.

Mullen: National Debt is a Security Threat - The national debt is the single biggest threat to national security, according to Adm. Mike Mullen, chairman of the Joint Chiefs of Staff. Tax payers will be paying around $600 billion in interest on the national debt by 2012, the chairman told students and local leaders in Detroit. “That’s one year’s worth of defense budget,” he said, adding that the Pentagon needs to cut back on spending. “We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”

Guessing the Trigger Point for a U.S. Debt Crisis -Leading authorities in the United States, including the Congressional Budget Office, use the term unsustainable to describe the long-term fiscal outlook. By the year 2080, spending on entitlements alone could exceed total federal tax revenues. In the very long run (meaning from the year 2035 through 2080), the problem is primarily one of excess costs in health care, meaning the tendency for health spending to grow faster than the rest of GDP. However, in the medium run, meaning from 2010 through 2035, the aging of the U.S. population is the dominant factor. This paper explores the possibility of the U.S. experiencing a debt crisis in the medium run, meaning somewhere between 2015 and 2035. It is impossible to state precisely the trigger point for a crisis. At best, we can make guesses about some of the key parameters.

Banks Back Switch To Renminbi For Trade - A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China. HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency. We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.” HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies. The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future. The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

Bill Gross Takes Backseat to Real Big Money -- Reading Bill Gross’s latest musings makes one nostalgic for the days when words from big bond-fund managers actually mattered. We in the media like to point out that Gross runs the biggest bond fund at Pacific Investment Management Co. He did, until China created a portfolio of sorts totaling $2.5 trillion. As the assets of China’s State Administration of Foreign Exchange, or SAFE, grow, it’s making Pimco’s $239 billion Total Return Fund look like chump change.  It’s a SAFE world; we just live in it. Expect SAFE’s mushrooming influence to create new jobs around the globe. Remember the Federal Reserve watchers who got so much ink in the 1980s and 1990s? Welcome to the world of the SAFE watcher.  Cracking the thinking inside the world’s biggest bond portfolio isn’t easy. How, when and where China invests its vast savings is a closely held state secret. And global markets will never be the same as debt-sellers bypass the likes of Gross and go right to the source: China.

Enron Accounting" Has Bankrupted America: U.S. Deficit Really $202 Trillion, Kotlikoff Says - The Congressional Budget Office (CBO) forecasts the U.S. budget deficit will hit $1.3 trillion this year. An astronomical figure, to be sure, but that’s lower than was projected in March. It’s also less than last year’s record $1.41 trillion deficit, which was close to 10% of GDP.  But the situation is actually much, much worse, according to Boston University economics professor Laurence Kotlikoff. “Forget the official debt,” he tells Aaron in this clip. The “real” deficit - including non-budgetary items like unfunded liabilities of Medicare, Medicaid, Social Security and the defense budget - is actually $202 trillion, the professor and author calculates; or 15 times the “official" numbers

Deep holes in American pockets shock Chinese observers - China is indeed a country where great changes are taking place. Yet as an outsider to the US, I find that recent events there have been equally shocking to the Chinese people. The US financial crisis is not yet fully subsided, and concerns are now being raised about US debt. Many US cities and states are dangerously at risk of bankruptcy. According to the news from the US Treasury, the US federal government debt has reached a record $13 trillion, equivalent to 90 percent of the current total US GDP per year. The possibility of bankruptcy among local governments, such as Los Angeles and Detroit, is rising steeply.

America no longer needs Chinese money, for now - The cacophony of voices in Beijing questioning or mocking the credit-worthiness of the US is now deafening, from premier Wen Jiabao on down. The results are in any case manifest: US Treasury data show that China has cut its holdings of Treasury debt by roughly $100bn (£65bn) over the past year to $844bn. [China] is building strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana. Where this expansion runs into political barriers, they are funding projects – such as a $10bn loan to Petrobras for the deepwater oil off Brazil. Where all else fails, they are buying equities. All of this recyles China's reserve surplus away from US debt. So it is a good thing that US citizens have stepped into the breach, investing a record $185bn into bonds funds this year (ICI data). JP Morgan describes this as "extraordinary prejudice", evidence of irrational fear. Or perhaps JP Morgan has an extraordinary prejudice against bonds, arguably the shrewdest asset in a world where fiscal stimulus is being withdrawn before the rest of the economy has reached "escape velocity". The inventory cycle is ebbing, manufacturing has tipped over, the workforce is still shrinking, and the economy is sliding into a deflationary rut.

The bond "bubble", and why we should be worried about it - In one important sense, there is a "bubble" in US government bonds, and we should be worried about it. There is always something normative in saying that the price of something is above the fundamental value, so that people are paying "too high" a price, more than they "should", more than its "real value". I want to make that normative element explicit. If the US and world economy were operating as it should be, with expected and actual inflation higher than it is, expected and actual real growth higher than it is, and the expected and actual return to investment in real assets higher and safer than it is, the price of government bonds would be lower than it is. And the price of real assets (like houses) would be higher than it is. If we define the "fundamental" value of an asset as the price that asset would have if all markets, not just the market for that asset, were in long-run equilibrium (and with inflation at target), then bond prices are above their fundamental values. And if we define "bubble" as a price above that fundamental value, then bond prices are a bubble.

Treasuries: Bubble or Accurate Reflection of Slow Growth? - Sean over at Dead Cats Bouncing details: While another economic crash landing remains unlikely given the inventory and corporate funding backdrop, there won't be much room for policy error either politically or at the Fed in coming months. Monthly headline US CPI has now fallen for three consecutive months, which has only happened a handful of times since the data series began in 1947. If you take the rough and ready rule that a 10 year government bond yield should equal the long term growth rate plus the long term inflation rate, then it's clear that a near 2.5% 10 year Treasury yield is pricing in a grim growth scenario.

Is there a government bond bubble? - Here is a symposium over at The Economist:

It is better labeled a bubble in government spending (Viral Acharya)
No, there is a shortage of safe assets (Ricardo Caballero)
Bond yields are probably appropriately low (Stephen King)
Probably not, but approach low-probability risks carefully (Tyler Cowen)
Yes, and it's huge (Laurence Kotlikoff)
It's possible, but there is not enough evidence to be sure (Paul Seabright)
No, growth and deflation concerns have grown sharply (John Makin)
Current adjustments will reduce the risk of a repricing shock (Harold James)

What about perpetual TIPS? - Eddy Elfenbein thinks the time is right for the U.S. government to issue perpetual bonds: I say let’s float some Treasury perpetuities… say that these perpetuities aren’t callable for the next, say, 50 years. We could even call them “Obama Bonds.” I wouldn’t be surprised if we could lock-in 4%. I wouldn’t be surprised either. Perpetual bonds are extremely convex, and investors like that. And of course there’s no reinvestment risk. But the really valuable new instrument, I think, would be perpetual TIPS. Each one would pay a coupon of, say, $10 a month, indexed to inflation. If that 4% yield on nominal perpetual bonds is split into 2% time value of money and 2% expected inflation, then you’d expect one of these bonds, paying $120 per year in 2010 dollars forever, to cost about $6,000.

Should we listen to El-Erian? - I’m not entirely clear why Matt Yglesias has suddenly come over all bah-humbug at the presence of Mohamed El-Erian on the Washington Post op-ed page: The oversimple answer to the question is that El-Erian controls over $1 trillion in assets: if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache. If you care what the bond vigilantes might be thinking, then you can probably get a pretty good sense of it by reading El-Erian’s frequent op-eds. A better answer is that there simply isn’t a clash between what’s good for the global economy and what’s good for Pimco, which is overwhelmingly a long-only investment house. Pimco’s long-term health is a function of there being a strong global economy which generates lots of savings for Pimco to manage. If you’re running a few million or even a few billion dollars, then you can significantly grow your assets under management by taking bold bets which pay off. If you’re running a trillion dollars, that’s no longer the case.

Interest Rates Are Falling Without Strong Foreign Demand For Treasuries - According to this story by Floyd Norris in today's New York Times......domestic investors purchased more Treasuries than did overseas ones — including foreign governments — in 2009 and again in the first half of this year. Those purchases came as government borrowing rose to pay for bailouts and recession-related spending. The figures exclude Treasury securities owned by the Federal Reserve or other United States government agencies. As a result, Fed purchases and sales are not counted. Deficit hawks and austerians should be worried that this change could become common knowledge.  Foreign buying of U.S. debt is one of the things that seems to concern voters the most about deficits and federal borrowing.  What will happen if they find out that the amount of federal debt owned by foreign investors is falling?

A bank run in reverse - Then Monday morning, you go to open the doors -- you're the bank manager in this analogy, I'm picturing you as Jimmy Stewart -- and there's a huge mob waiting outside. They're angry and agitated and you can sense the collective panic. They won't take "no" for an answer.But these aren't your account holders and they're not clamoring to make withdrawals. These are new would-be depositors and they've brought their money with them -- huge wads and bags full of the stuff. They're insisting, demanding that you take their cash and put it somewhere safe. Lest you think this is an unadulterated Good Thing, remember how bank balance sheets work. New deposits aren't just cash on hand, they're also liabilities, expenses. Depositors are people to whom you owe interest. You know there's no way you could accommodate all of these people, no way you could afford to take all of their money and pay the 3 percent interest you've been advertising.

When Wall Street Rules, We Get Wall Street Rules - The middle class is getting whacked by the Great Recession. Fifteen million people are out of work, another 9 million workers can only find part-time jobs, and millions more have given up looking for work altogether. Those lucky enough to be employed are unlikely to see any substantial wage gains for years to come.  Millions of homeowners are facing the loss of their home and more than ten million are underwater in their mortgage. Most of the huge baby boom cohort is approaching retirement with little other than Social Security to support them, now that the collapse of the housing bubble has destroyed their home equity and much of the rest of their savings. This pain is infuriating for two reasons. First, this was an entirely preventable disaster. The housing bubble was easy to see. Competent economists had long warned of its dangers. The second reason why the current situation is infuriating is that we know how to get the economy out of this mess. We just need to boost demand. This can be done either with much more government stimulus, more aggressive monetary policy from the Fed, or pushing the dollar down to boost exports.

$4.4 Trillion - WSJ Editorial - That's how much the US spending baseline has increased in 31 months. Speaking last Wednesday in Columbus, Ohio, President Obama asked, "How do we, over the long term, get control of our deficit?" Good question. Here's the answer suggested by last Thursday's semi-annual budget summary from the Congressional Budget Office: Stop spending so much. CBO's mid-year review largely reinforces the bad news we already knew—to wit, that spending has exploded since Democrats took over Congress in 2007, first with the acquiescence of George W. Bush and then into hyperdrive after Mr. Obama entered the White House. To appreciate the magnitude of this spending blowout, compare CBO's budget "baseline" estimate in January 2008 with the baseline it released Thursday. The baseline predicts future spending based on the law at the time. As the nearby chart shows, in a mere 31 months Congress has added more than $4.4 trillion to the 10-year spending baseline. The 2008 and 2009 numbers are actual spending, the others are estimates. As recently as 2005, total federal spending was only $2.47 trillion.

Bury Keynesian Voodoo Before It Can Bury Us All -  Initial claims for unemployment benefits surged to 500,000 in mid-August, a level more typical of a recession than a recovery. The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust.  Incredibly, some Keynesians who supported Barack Obama’s $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small. The notion that a much-larger U.S. stimulus would have been more successful isn’t backed up by evidence. Maybe there would be an argument if some countries were now booming because their stimulus packages were larger. Or if some previous U.S. administration had tried a bigger stimulus and had better luck.  The fact is, the U.S. stimulus was the largest among members of the Organization for Economic Cooperation and Development, and the biggest ever tried in the U.S.

Kevin "Dow 36,000" Hassett* Speaks on "Keynesian Economics" - From Bloomberg:The biggest Keynesian stimulus in U.S. history was a bust.  Incredibly, some Keynesians who supported Barack Obama's $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small.  Dr. Hassett continues by citing a 2002 study. I wish Dr. Hassett had quoted additional parts of the paper because a lot of subtleties were omitted in his "summary" of the paper. In any case, I'll quote some additional passages from the same study (it's also an IMF working paper, by the way) to heighten the reader's awareness of exactly how relevant -- or irrelevant -- Dr. Hassett's quote is to the current episode. I'd say there's slack in the U.S. economy. [1] I'd also conjecture that the US economy is pretty closed relative to the majority of other observations in the study. I think I heard there was an expenditure (as opposed to tax reduction) component in the ARRA. [2] And finally, I believe I have heard that current monetary policy is quite expansionary. [3] Apparently, Dr. Hassett was unaware that any of these conditions applied to the United States in 2009-10.

Alan Simpson: Social Security Is 'A Milk Cow With 310 Million Tits' - Alan Simpson should resign as co-chair of President Obama's deficit commission for sending an email to a leading women's rights advocate calling Social Security "a milk cow with 310 million tits!" a leading advocate of Social Security said Wednesday, arguing that Simpson's "disdain for the very program he claims he is trying to protect" makes him unfit for a leadership position on the panel, which is considering cuts to Social Security.  Social Security Works co-director Eric Kingson, in a statement released the day after the email became public, said that Simpson's "disdain for the very program he claims he is trying to protect" makes him unfit for a leadership position on the commission, which is considering cuts to Social Security.  "Alan Simpson's comments are offensive and sexist and clearly demonstrate that he is unfit to continue to lead the President's Fiscal Commission," he said. "His comments not only show his true view of women and older Americans but also his disdain for the very program he claims he is trying to protect - Social Security. Social Security Works is demanding that he resign immediately."

Is Alan Simpson Undermining the Deficit Commission? - Alan Simpson, the Republican co-chairman of President Obama’s deficit commission, apologized on Wednesday for comparing Social Security to “a milk cow with 310 million tits!” It was Simpson’s latest outburst, coming two months after he gave a profanity-laced interview in which he railed at liberal critics of the deficit commission. The new explosion prompted multiple calls for Simpson’s resignation, but it also rekindled concerns that the former Wyoming senator may be hurting chances for the bipartisan panel to agree on recommendations to reduce the deficit.  Simpson’s outburst came in a letter to Ashley Carson, executive director of the Older Women’s League, who had criticized him in a commentary at Huffington Post. “If you have some better suggestions about how to stabilize Social Security instead of just babbling into the vapors, let me know,’’ Simpson wrote to Carson on Monday. “And yes, I’ve made some plenty smart cracks about people on Social Security who milk it to the last degree. You know ‘em too. It’s the same with any system in America. We’ve reached a point now where it’s like a milk cow with 310 million tits! Call when you get honest work!”

Senator Simpson: He's Not Just Offensive, He's Ignorant - Former Wyoming Senator Alan Simpson, the co-chairman of President Obama's deficit commission, has sparked calls for his resignation after sending an offensive and sexist note to Ashley Carson, the executive director of the Older Women's League. While such calls are reasonable -- Simpson's comments were certainly more offensive than remarks that led to the resignation of other people from the Obama administration -- the Senator's determined ignorance about the basic facts on Social Security is an even more important reason for him to leave his position. I was also a recipient of one of Simpson's tirades. As was the case with the note he sent to Carson, Simpson attached a presentation prepared for the commission by Social Security's chief actuary. Simpson implied that this presentation had some especially eye-opening information that would lead Carson and me to give up our wrong-headed views on Social Security. While I opened the presentation with great expectations, I quickly discovered there was nothing in the presentation that would not already be known to anyone familiar with the annual Social Security trustees' report.

Simpson Apologizes to Critic - NYTimes - Alan K. Simpson, the Republican co-chairman of President Obama’s bipartisan fiscal commission, removed his “size 15 feet” from his mouth to apologize to a critic on Wednesday for a stinging letter in which he compared Social Security to “a milk cow with 310 million tits.” The apology came as some liberal groups and members of Congress who oppose any changes to Social Security benefits called on Mr. Obama to fire Mr. Simpson, a former senator from Wyoming long known for his irreverent and often biting remarks. But at the White House, Jennifer Psaki, the deputy communications director, said, “Alan Simpson has apologized and while we regret and do not condone his comments, we accept his apology and he will continue to serve.” The controversy stoked already heated opposition from the left to the panel Mr. Obama created to recommend by Dec. 1 ways to reduce the federal debt in the short term and the long. For the long term, changes to Social Security — to benefits and payroll taxes for future generations — are among the options.

Fire Alan Simpson - Krugman - I always thought that the deficit commission was a bad idea; it has only looked worse over time, as the buzz is that Democrats are caving in to Republicans, leaning ever further toward an all-cuts, no taxes solution, including a sharp rise in the retirement age. I’ve also had my eye on Alan Simpson, the supposedly grown-up Republican co-chair, who has been talking nonsense about Social Security from the get-go. At this point, though, Obama is on the spot: he has to fire Simpson, or turn the whole thing into a combination of farce and tragedy — the farce being the nature of the co-chair, the tragedy being that Democrats are so afraid of Republicans that nothing, absolutely nothing, will get them sanctioned. When you have a commission dedicated to the common good, and the co-chair dismisses Social Security as a “milk cow with 310 million tits,” you either have to get rid of him or admit that you’re completely, um, cowed by the right wing, that IOKIYAR rules completely.

"Everything is on the Table" at the Catfood Commission - I am not going to harp on the sexism or ageism in Simpson's '310 million tits' comment generally.  I want to examine what it, and some other developments inside and outside the Obama Deficit Commission reveal about a new openness in class warfare. What Simpson's comments revealed more broadly was a profound contempt for the lower 98%, those who might end up reliant in whole or even in part on Social Security. Because '310 million' takes in everybody, in Simpson's world anyone who ever did, is, or will ever rely on Social Security is just a Randite 'parasite' or at best 'dependent farm animal' and you can bet it is a long time since Simpson read Timothy 1:18: "For the scripture saith, Thou shalt not muzzle the ox that treadeth out the corn. And, The labourer is worthy of his reward." and clearly he glossed over the even more famous admonition "Honor thy Father and they Mother". For Simpson workers are suckling pigs and seniors are 'Greedy Geezers'.

President Obama, It’s Time to Can the Catfood Commission - Pete Peterson, the hedge fund billionaire who made his money by not paying his fair share of taxes, has pursued a decades-long quest to destroy Social Security and has pledged $1 billion to achieve that goal. So when President Obama announced he would convene his first “fiscal responsibility” summit on February 23, it didn’t bode well that Peterson was to be the keynote speaker. Peterson’s keynote spot was the worst kept secret in town; I knew about it because I had been on a conference call with about 40 representatives of various DC interest groups, many of whom had received written notice from the White House that Peterson was scheduled to headline the event. But nobody wanted to go on the record for fear of jeopardizing their relationship with the administration in its early days. So, FDL was the only media outlet that reported on Peterson’s close connection to a President who said that overhauling Social Security would be “a central part” of his administration’s efforts to contain federal spending.

Social Insurance Is a Good Idea - The neoliberal caucus, which includes the Pete Petersons, Alan Simpsons and Paul Ryans of this world, believe in incentives. Each one of us, at every moment, should have an unmistakable incentive to work as much as possible, save as much as possible, and do everything else to promote economic growth. Marginal tax rates should be rock-bottom, and no government program should shield us from the consequences of our failure to accumulate wealth. It is pure social darwinism. Their sworn enemy is social insurance, the idea that the members of a society would want to pool their risks and achieve a bedrock of security. This means opposition to any form of national health insurance, which pools our medical expense risk, Social Security, which pools retirement risk, and unemployment insurance, which pools labor market risk. We should be prepared, they say, to sink or swim on our own and not look to the “nanny state” to take care of us. I think it’s time for the other side, a.k.a. the forces of civilization and progress, to defend social insurance.

Contretemps at Cato — The intertubes and socialnets have been buzzing with news of big changes at the Cato Institute. First up, there was this piece in the New Yorker, about recent moves by the Koch brothers, who pay the bills, to push Cato more firmly into line with the Repubs and Tea Party, and against Obama. This piece marks the mainstreaming of the term “Kochtopus”, used by the Kochs’ opponents in intra-libertarian struggles to describe the network of organizations they fund. More striking was the simultaneous departure of Brink Lindsey and Will Wilkinson. Lindsey has been the leading proponent of a rapprochement between libertarians and (US-style) liberals, under the unfortunate portmanteau of “liberaltarianism”, and Wilkinson was similarly seen as being on the left of Cato.

6% of what! - Lifted from an e-mail from Dale Coberly regarding Social Security and the dangers of increasing 'costs' of helping our old folk live a bit above a level of destitution: ...that while SS will eventually cost 6% of GDP, this is not a lot of money for the basic needs of 25% of the population. Moreover, they will have paid for it themselves.  And that is what it is going to cost "us" in any case, however the money is arranged... that is what the old people will "eat." And the bread will be baked by "us." You can fool yourself with financial transactions, or you can take the money directly via a payroll "tax." At the end of the terms of distribution of goods and services to the elderly vs the "young," it will come out exactly the same. You would have to show that laundering the money through the financial markets will result in more production or a fairer distribution, and while the first is an article of religious faith with some people, there has been no evidence whatsoever to support it for the past eighty years. To put it in terms any might understand: Granny is going to consume 6% of what "we" produce. So what? (She produced a hell of a lot of what we consumed in her prime time.

Editorial - A Real Debate on Taxes - NYTimes - Americans need to hear a serious debate about how the country can meet the twin fiscal challenges of supporting the weak economy now and taming the budget deficit as things improve. That debate is not happening in Washington, and it is certainly not happening on the campaign trail.  The Republicans are insisting on extending each and every one of the tax cuts forever. It is impossible to square that demand with their calls to reduce the deficit, so they do not even try. President Obama is right when he says the country cannot afford to extend all of the tax cuts. He wants to let the tax cuts expire on the top 2 to 3 percent of American households and permanently extend them for everyone else. The problem is that a permanent extension of the so-called middle-class tax cuts is also unaffordable.

The Real Tax Gap: Paying for Unfunded Benefits - It’s worth starting with Medicare’s 2009 annual report. If one goes to page 69, it shows that last year Medicare’s actuaries were estimating a long-run deficit of $36 trillion in just Part A, which pays for hospitalization. This is equivalent to 2.8 percent of the gross domestic product in perpetuity.
On page 112 of the report, it shows that Medicare Part B, which pays for doctor’s visits, had a long run deficit of $37 trillion or 2.8 percent of GDP; that is, the amount of the program’s costs covered by general revenues over and above premiums paid by participants, which are capped by law at 25 percent of the program’s costs. (Originally, they were set at 50 percent.) Finally, on page 127 there is data for Medicare Part D, which pays for prescription drugs. This program was rammed into law by George W. Bush and a Republican Congress in 2003 despite the large deficits that were already projected for Parts A and B. The Republicans provided no dedicated funding for Part D and its long-term deficit was estimated at $15.5 trillion last year, or 1.2 percent of GDP.

Obama and Economic Team Discuss Strategy - NYTimes -“The discussion focused on recent data reports, global markets and economic growth,” said a White House statement afterward. “The economic team provided an update on the next steps to keep the economy growing, including assistance to small businesses and the extension of tax cuts to the middle class.”  The president also is considering an initiative that would match public and private investments in transportation infrastructure projects. He hinted at the idea repeatedly, without details, during a multicity trip last week before he left on vacation.  “We need 21st-century infrastructure — not just roads and bridges, but faster Internet access and high-speed rail — projects that can lead to hundreds of thousands of new, private sector jobs,” Mr. Obama said in Seattle.  Yet when Congress returns from its summer break in September, all such efforts will hit a wall of Republican opposition. In part, the White House statement about the vacationing president’s conference call was intended to signal to voters his continued engagement on economic matters, even as his options are limited.

House Republican Leader Slammed Obamanomics - This morning, in Cleveland, OH, House Republican Leader John Boehner (R-OH) slammed President Obama's economic policies and called for the resignation of Tim Geithner and Larry Summers.  Here's the video, and here are his prepared remarks.   He railed against "job-killing tax hikes," stimulus spending that "has gotten us nowhere," and "government run amok."   Boehner is right on about ending economic uncertainty, particularly about future tax rates and unsupportable levels of future public debt.   However, he sounded as if all of our problems began when President Obama was sworn in as president on January 20, 2009.  Our current suffering mostly arose from the Iraq War, Medicare Part D, and the very lax regulatory environment that allowed the financial crisis and the Gulf oil spill to occur, all courtesy of President George W. Bush and the Republicans.  As a republican I wish Boehner would just just up and pack his bags. I might not care for Obama but you're right so much of this stuff started when Bush was in office. I wish we had real leadership in the republican party because it sure doesnt come from him.

They Go or Obama Goes - The subject of housing foreclosures is inherently boring unless you happen to own a home being foreclosed, in which case your family's life has just been turned disastrously upside down. But few of the well-paid pundits on television are in such a position, and as a result the tragedy that has hit 4 million families in the past two years has received scant notice.There is no way that Obama can begin to seriously reverse this course without shedding the economic team led by the Clinton-era "experts" like Summers and Treasury Secretary Timothy Geithner who got us into this mess in the first place. They are spooked by one overwhelmingly crippling idea—don't rattle the financial titans whom we must rely on for investment. But when it comes to keeping people in their homes, it is precisely the big banks that must be rattled into doing the right thing.

Nobody Could Have Predicted -Krugman - One point I haven’t seen made about the troubles of the US economy is that the timing of recent growth tells you a lot about what was — and what wasn’t — wrong with economic policy. After all, we had more or less a consensus view about when the stimulus would kick in, and how much effect it would have. Here, for example, was Mark Zandi’s estimate:  Why did the peak impact of growth come in 2009, even though only part of the money had been spent? I explained all that a while back. And how did things actually turn out? Like this: It’s not a perfect correspondence, nor would you expect one — other factors, especially inventory swings, were bound to make the timing of actual growth different from that of stimulus. Still, the two pictures support the view that stimulus worked as long as it lasted, boosting the economy.  But the stimulus wasn’t nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010. So what was supposed to happen? The invisible cavalry were supposed to ride to the rescue.   And sure enough, the cavalry has not arrived.

Fiscal Austerity and “Third World America” - Simon Johnson - There are three main views of the financial crisis and the most recent recession. In the first two views, the debate over the fiscal deficit is quite separate from what happened in the crisis.  But in the third view, the financial crisis and likelihood of fiscal austeriry are closely linked. The first is that something went wrong with the financial plumbing central to the world’s economy. Failed plumbing is a serious business, of course — great real estate can be ruined by a burst pipe. But it’s a technical issue; nothing deeper is at stake. Clearly, “fix the plumbing” is Treasury Secretary Timothy Geithner’s interpretation of what we need to do – he insists that making the system safer just requires “capital, capital, capital.” Note, however, that the leading global experts on capital think that the Treasury’s specific approach is wrong-headed, not making progress and likely to lead us into great danger. The second view is that the financial system is more deeply broken.The first and second views are mutually exclusive – either our financial system is badly broken, or it is not and technical fixes will suffice. But a third view increasingly challenges the first view even more deeply, and may end up incorporating or subsuming the second view.

Angela And The Fifty Hoovers - Krugman - Via Mark Thoma, Dean Baker points out that real government consumption of goods and services — that’s government buying things, as opposed to cutting taxes or handing out checks — has risen more in “austerity” Germany than in the United States. Dean starts from 2008III, which is somewhat unorthodox; but his result is not, in fact, sensitive to the start date. What’s going on here? It’s basically the Fifty Herbert Hoovers problem. Because state and local governments can’t run persistent deficits, and because aid to those government was shortchanged, cutbacks at lower levels of government have undermined expansion at the federal level. Overall government purchases have actually grown more slowly than the economy’s potential output. So when people talk about Germany versus the US as austerity versus stimulus, you should ask, What austerity? What stimulus?

Monday at the Treasury  (Steve Waldman) First, let me confess right from the start, I had a great time. I pose as an outsider and a crank. But when summoned to the court, this jester puts on his bells. I am very, very angry at Treasury, and the administration it serves. But put me at a table with smart, articulate people who are willing to argue but who are otherwise pleasant towards me, and I will like them. One or two of the “senior Treasury officials” had the grace to be a bit creepy in their demeanor. But, cruelly, the rest were lively, thoughtful, and willing to engage as though we were equals. Occasionally, under attack, they expressed hints of frustration in their body language — the indignation of hardworking people unjustly accused. But they kept on in good spirits until their time was up. I like these people, and that renders me untrustworthy. Abstractly, I think some of them should be replaced and perhaps disgraced. But having chatted so cordially, I’m far less likely to take up pitchforks against them. Drawn to the Secretary’s conference room by curiosity, vanity, ambition, and conceit, I’ve been neutered a bit. There’s some irony to that, because some of the people I met with may have been neutered, in precisely the same way and to disastrous effect, by their own meetings and mentorings with the Robert Rubins and Jamie Dimons of the world.

Mike Konczal Goes to Treasury » On Monday I took part in a blogger meeting with several members of the Treasury Department. Alex Tabarrok has a writeup, as does Yves Smith and John Lounsbury has an extensive one as well.  It was a pretty casual meet and greet. There weren’t any presentations, nothing to be sold on. We went to questions immediately. Geithner is very smart and personable, and it was very useful to chat with Treasury officials on background over the strengths and weaknesses of the financial reform bill. Here are some of my notes from the meeting:

CBO: Stimulus raised GDP 1.7% to 4.5% in Q2 - From the Congressional Budget Office: Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from April 2010 Through June 2010. The effects of ARRA on output are expected to gradually diminish during the second half of 2010 and beyond. The effects of ARRA on employment and unemployment are expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.CBO estimates that in the second quarter of calendar year 2010, ARRA’s policies:

  • They raised real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent,
  • Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points,
  • Increased the number of people employed by between 1.4 million and 3.3 million, and
  • Increased the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have occurred otherwise.
  • CBO: Stimulus Lowers Jobless Rate By Up To 1.8 Points - A new report by the non-partisan Congressional Budget Office on the impact of the stimulus program estimated that the plan lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points.  The CBO report, released Tuesday on the same day as the White House released a report of its own on the effects of stimulus funding on innovation, uses economic models to ascertain the impact of the stimulus plan. It estimates that the plan, by lowering the jobless rate, increased the number of people employed by between 1.4 million and 3.3 million. The unemployment rate was 9.5% in July. Read the report in full here.

    An Increasingly Awkward Dance - Ever since the Recovery Act passed last February, Congressional Republicans who opposed this economic rescue plan have had to do an awkward dance around the truth.  After all, when you declare from the beginning that the Recovery Act won’t create a single job, you’re going to be forced to do a little two-step around the facts as week after week leading economists, the nation’s governors, and even your own constituents say otherwise.But yesterday, when Representative Boehner declared that “all this ‘stimulus’ spending has gotten us nowhere” on the same day the nonpartisan CBO said the program has created or saved as many as 3.3 million jobs nationwide and his own home state’s Department of Transportation said nearly 9,500 construction workers were on the job in July just on Ohio Recovery Act transportation projects alone… well, let’s just say that dance got a little more… awkward.  

    Balanced Budget Amendment a ‘Phony’ Solution to Deficit -- Having proven conclusively that they could not care less about balancing the budget when they are in power -- reserving their deficit concerns  solely for times when Democrats are in power -- Republicans are nevertheless hoping that their support for a balanced budget amendment (BBA) to the Constitution will fool people into thinking they are fiscally responsible on Election Day. But if they are, in fact, serious about amending the Constitution to require a balanced budget, it’s a terrible idea. It’s hard not to be cynical about the Republicans’ motives. They know that most Americans are justifiably concerned about the enormous budget deficit and rising debt levels. But Republicans also know that most Americans are opposed to cutting vital spending or raising taxes to close the deficit, so they don’t dare offer any meaningful program for actually balancing the budget. Republicans likely asked their pollsters what polled well and the pollsters pointed to a balanced budget amendment.

    2011-2012: Can You Spell Federal Budget Gridlock? - Matt Miller's column in today's The Washington Post has to make you ask, "What about the budget?" After two years of demands, recriminations, and demagoguery galore about the budget deficit, national debt, and fiscal policy in general, won't dramatic political changes like the ones pollsters are predicting will happen in this election inevitably lead to massive changes in what the federal government spends and taxes? Not a chance. Assuming there are no big changes between now and election day (that is over just 10 more weeks), Republicans either will have narrow majorities in one or both houses of Congress or the Democrats will have smaller majorities in the House and Senate than they have now.  In general, that's not a situation conducive to compromises, cooperation, and large changes.

    Who Rules America? You can’t open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land. Bloomberg peddled this line of bull last week:- Professor William Domhoff has updated his excellent study of wealth distribution in America and the results are just as sickening than they were in 2005! We looked at the uneven distribution of incomes when I wrote “The Crisis of Middle-Class America” earlier this month and I’ll re-post the main chart here as it’s important for the readers to get a fix on where they really are on the economic food chain.  When I talk about the need for more taxes, I’m generally (like our President) referring to the top 1%, the 1.4M people in this country who earn more than $393,000 a year - where 10% more tax ($40,000) may force them to skip a vacation vs. the alternative of taxing the bottom 90%, who earn $30,000 a year, which would force them to skip heat, food, clothing, etc. The chart above EXCLUDES capital gains, which are over 70% of the top 0.01%’s incomes so it grossly understates the situation but it does give you a clearer idea of what was going on in the lower brackets leading up to the crisis.  Go ahead, do the math – adding up the total wages of the bottom 90% against the total wages of the top 10% give you a real idea of what a “fair and just” system we’re participating in:

    Income distribution matters for effective fiscal policy - I read a brief report from the US Tax Policy Center – The Debate over Expiring Tax Cuts: What about the Deficit? – last week which raises broader questions than those it was addressing. I also note that Paul Krugman references them in his current New York Times column (published August 22, 2010) – Now That’s Rich. The point of my interest in these narratives is that I have been researching the distributional impacts of recession for a book I am writing. The issue also bears on the design of fiscal policy and how to maximise the benefits of a stimulus package. First, the notion of the tax cuts being an “expensive proposition” is firmly in the deficit-dove nomenclature. In terms of Modern Monetary Theory (MMT) such terminology is grossly misleading. The tax cuts just represent “numbers on a bit of paper” and the only issues that are important are the amount of purchasing power that is embodied in the tax cuts (or the reversal of them) and how it is distributed.

    Inequality and the High-End Bush Tax Cuts - As I’ve said before, from the standpoint of economic efficiency there’s a clear-cut case for letting the Bush tax cuts for people over $250,000 expire on schedule in December. Sunsetting the high-income tax cuts makes just as much sense from the standpoint of equity. Recent data from the Congressional Budget Office (CBO) show a stunning shift in income away from the middle class and towards the highest-income people in the country over the last three decades: In 1979, the middle fifth of Americans took home 16.5 percent of the nation’s total after-tax income. By 2007, after several decades of stagnant incomes in the middle and surging incomes at the top, the middle fifth’s share had dropped to 14.1 percent. Over the same period, the top 1 percent’s share more than doubled, from 7.5 percent of total after-tax income to 17.1 percent (see graph below). So by 2007, the top 1 percent had a bigger slice of the national income pie than the middle 20 percent.

    Now That’s Rich, by Paul Krugman -  We need to pinch pennies these days. Don’t you know we have a budget deficit? For months that has been the word from Republicans and conservative Democrats, who have rejected every suggestion that we do more to avoid deep cuts in public services and help the ailing economy. But these same politicians are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. What — you haven’t heard about this proposal? ... I’m talking about demands that we make all of the Bush tax cuts, not just those for the middle class, permanent. ... The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class — which is an expensive proposition in its own right — but to let those provisions benefiting only people with very high incomes expire on schedule. Republicans, with support from some conservative Democrats, want to keep the whole thing. And there’s a real chance that Republicans will get what they want. That’s a demonstration, if anyone needed one, that our political culture has become not just dysfunctional but deeply corrupt.

    Responding to Dr. Krugman’s column on tax cuts for the rich -  In his column yesterday, Dr. Paul Krugman argues for raising the top marginal income tax rates on January 1.  His polemic is useful because it encapsulates most of the Left’s arguments. Language trick #1: “We” (the government) should not “give money to the rich.” But these [Republicans] are eager to cut checks averaging $3 million each to the richest 120,000 people in the country. … And where would this $680 billion go?  Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. … How can this kind of giveaway be justified …? In this view of the world, revenues belong to the government and are allocated by policymakers as gifts to those who need or deserve them.  When you hear that “we cannot afford to cut taxes” and “we should not give tax cuts to ______,” you are hearing this philosophy. Like a family or a business, the government does not “pay for,” “finance,” or “afford,” its revenue stream or changes to it.  You pay for your spending or you finance your spending.  If your revenues are insufficient to meet your spending, then in all other contexts we say you cannot afford the amount you’re spending.  The same should be true for the government.

    Yes, $3 Million - Krugman - I gather that some people are claiming that my numbers in Monday’s column were wrong. They weren’t. The Tax Policy Center estimates (pdf) say that the budget cost of making all the Bush tax cuts permanent, as opposed to only the middle class cuts, is $680 billion over the next decade. It also says that 55 percent of the benefit flows to 120,000 taxpayers. That’s $374 billion divided by 120,000; TPC expresses it as a per year gain of $310,000, but it is more than $3 million per member of the top .1% over the course of the decade. So if you are reading some source claiming that I got it all wrong, you have just learned something about that source’s credibility.

    Deficit Fraud McConnell: Why Did Tax Cuts ‘All Of A Sudden Become Something We, Quote, Pay For?’ - Earlier this month, Reps. John Boehner (R-OH) and Mike Pence (R-IN) appeared on Meet the Press and were unable to explain their desire to extend the Bush tax cuts for the richest two percent of Americans with their rhetoric about deficit reduction. “Listen, what you’re trying to do is get into this Washington game and their funny accounting over there,” Boehner said, when asked if Republicans planned to pay for extending tax cuts for the rich. Today, Senate Minority Leader Mitch McConnell (R-KY) ran into the same trouble with MTP host David Gregory, and scoffed at the very notion of paying for tax cuts. “Why did it all of a sudden become something that we, quote, ‘pay for?’” McConnell asked

    Misrepresenting the Bush Tax Cuts, or the Return of Death Panels - The story goes that when Lyndon Johnson was losing his first congressional election he put out the word that his opponent was having sex with barnyard animals. An aide innocently warned Johnson that this wasn’t true. “Make the SOB deny it,” LBJ was said to have replied.    If you go to the Website of House Ways & Means Republicans, you will see this: Meanwhile, Fox Business is running a graphic that includes another one of these ominous digital clocks, this time counting down to what it calls “the largest tax hike ever.” All this drama is about the coming expiration of the Bush tax cuts, of course. But what else do these two allegations have in common? They are both utterly untrue.

    Responding to Podesta and Greenstein on the Looming Tax Increase - In today’s Financial Times, co-authors John Podesta and Robert Greenstein add their voices to those calling for higher marginal tax rates for the top two brackets. Unsurprisingly, Podesta and Greenstein claim that a tax increase on the wealthiest 2% won’t significantly slow economic growth and that the new tax revenue should be used for deficit reduction instead. We have discussed the importance of not increasing taxes right now in order to support the (feeble) economic recovery (see here and here). In our view, the spending side of the federal ledger deserves more attention. Recent CBO data shows that the new revenue from this sort of a tax increase would not meaningfully shift the long-term deficit outlook for the U.S. Why? Because spending is out of control.

    Tax Reform Tidbits - Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap.  That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended.  Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction.  Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it.  I think the right policy on the "Bush tax cuts" is to let them expire.  That is, after all, what the letter of the law intends. 

    Tax Jujitsu: Why Democrats Should Propose a "People's Tax Cut" - Republicans are calling the Democrat’s proposal to end the Bush tax cuts on the richest 3 percent a “tax increase,” and demagoging that it will hurt the economy and small business. This is baloney, to put it politely. Let me count the ways.... But by the time Democrats explain all this, it’s too late. The Republican furor over a “tax increase” has framed the debate. Republicans understand the art of tax demagoguery: Put the other side on the defensive by forcing them to explain why a “tax increase” is warranted and they lose regardless. So instead of playing defense, Democrats should go on the attack. Accuse Republicans of being shills for the rich. And don’t stop there. Do tax jujitsu. In addition to ending the Bush tax cut for the rich, put forward another proposal for growing the economy that cuts taxes on lower-income Americans

    Dealing with the Sunset of the Bush Tax Cuts (Part II in a series) - The Congressional Budget Office has published a report with its views on the economic impact of enacting legislation to extent some of the Bush tax cuts. The full report and summary are available here. The report provides 10-year projections--all with the caveat that forecasting economics is "subject to considerable uncertainty." It projects a relatively slow recovery from the recession, as is typical with financial crises, with unemployment staying relatively high until about 2014. The slow growth means lower revenues, though the CBO expects revenues to begin to recover in 2010--with a total of $2.1 trillion or 14.6% of GDP. But spending will be about $3.5 trillion (24% of GDP). That means a projected deficit for 2010 of $1.3 trillion, second only to 2009's deficit as a percentage of GDP (9.1% compared to 2009's 9.9%). That's using as a benchmark the tax laws as written--i.e., no additional "patch" for the alternative minimum tax (AMT) and no changes to the Bush tax cut sunset provisions, so that the Bush cuts expire as slated at the end of 2010.

    Dealing with the Sunset of the Bush Tax Cuts (Part III in a series)–considering the ill-advisedness of favoring capital income - Much of the argument in favor of reducing taxation on the income from capital is spurious.  It is a claim that by taxing returns from capital less heavily than returns from labor, those who receive those returns will invest them in new businesses, spurring entrepreneurship.  The returns from capital that are favored, however, are not closely correlated with reinvestments in businesses.  Most of the returns are those gained merely from secondary market trading and those increases in capital do not go to businesses but to other investors or financial institutions.  There is a special provision that taxes initial issuance corporate stock gains more favorably, but that is only a small piece of the capital gains preference.   In terms of the economy, it is highly likely that tax cuts for lower income taxpayers will be spent domestically and thus provide important impetus to economic growth at this point in the recession.  Tax cuts for the wealthy and owners of financial assets at the top of the distribution are much less likely to spur economic development--the wealthy are well known for utilizing tax shelters (legitimate and not so legitimate) and for moving assets offshore into tax haven jurisdictions (sometimes through illegitimate use of foreign banking secrecy laws to evade US taxation). 

    Dealing with the Sunset of the Bush Tax Cuts (Part IV in a series)--the Tax Relief Coalition - The Tax Relief Coalition--another of the myriad anti-tax groups comprised of Grover Norquist's group and those of similar ideology--is at it again with a letter to Congress urging the passage of new legislation to pass tax cuts to extend the temporary cuts enacted under the Bush administration. The group is spending millions lobby for its interests with the dubious claim that discontinuing tax cuts for the wealthiest Americans will hit small businesses the hardest.  Note that the coalition--formed of "trade associations, advocacy groups, and corporations"--calls itself favoring "pro-growth tax policies". But what it means is favoring tax cuts. It is arguable that tax cuts support economic growth--at best they are a second-rate stimulus compared to direct government spending on public and human infrastructure that provides long-term support for economic stability-- such as public transportation, public communication networks, development of alternative energy sources, education (K1-university), and basic research. These claims that the tax cuts help small businesses are at best dubious.

    Save the Making Work Pay Tax Credit but Narrow It - While Washington seems obsessed with the fate of the Bush tax cuts, it has paid little attention to a soon-to-expire Obama tax cut: the Making Work Pay credit (MWP). Like the 2001 and 2003 tax cuts, this credit, which was enacted as part of the 2009 stimulus, is also scheduled to expire at the end of this year. President Obama has proposed extending it through 2011. But Congress has been largely silent about what it plans to do, in part because extending the credit for another year would reduce federal revenues by more than $60 billion The fully-refundable MWP provides workers with a credit of 6.2 percent of earnings, up to $400 ($800 for married couples). The credit phases out at a rate of 2 percent of income over $75,000 ($150,000 if married). The credit was originally proposed as a worker subsidy based on individual earnings. As enacted, MWP follows the lead of almost every other provision in the tax code and is based on joint earnings in the case of couples. This year, the credit will deliver almost $60 billion.

    Save Jobs, Reform The Tax Code - Currently employers see taxes of 6.2% for Social Security and 1.45% for Medicare, as well as charges for unemployment insurance that vary by state. Wage-based taxes, together with health care costs, force labor-intensive businesses to shoulder a disproportionate share of the burden for the social programs that support the population, while businesses that rely on technology or offshore jobs are able to largely escape these costs. One solution is to scrap the payroll tax system and replace it with a new form of taxation that is based on a business' overall success in the market, rather than its employee headcount. The immediate impact of this would be to reduce the cost of hiring a new worker, while at the same time ensuring that high technology industries that employ few workers accept a larger share of the burden for social programs. It is important to recognize that the people who benefit from programs like unemployment insurance, Social Security and Medicare are not just workers--they are also consumers and, collectively, they create the demand that is essential for every business, regardless of the number of people on its payroll.

    Editorial - Now, the Reform Rules - NYTimes - The new financial regulatory reform is supposed to curb the predatory lending practices that led to the collapse of the mortgage market and have put millions of Americans at risk of losing their homes.  The Federal Reserve must now translate the legislative language into rules that will govern how brokers, lenders, appraisers and investors behave from now on. Given the Fed’s long history of putting the financial industry first and consumer protection second, Congress will need to keep a close eye on the rule-making process.

    The Sausage Making Begins. I’m Sure It Will Turn Out Swell. - It is well known that the effects of central clearing on the costs of bearing counterparty risk and on systemic risk depend crucially on the equilibrium configuration of the clearing industry.  For instance, netting benefits are maximized when clearing is concentrated into a small number of multi-product clearinghouses—and arguably into a single CCP.  But the failure of an immense CCP would have disastrous consequences for the stability of the financial system, and could set off a daisy chain of failures of other CCPs, with further damaging effects.  Moreover, the scale and scope of CCPs are almost certain to affect incentives, governance costs, and the effectiveness and accuracy of risk pricing.  So it is by no means obvious what is the structure of the clearing market that optimally trades off these competing considerations.

    Synergy Between Cato and Koch Industry Lobbyists on FinReg? - I’d highly recommend Jane Mayer’s New Yorker piece, Covert Operations: The billionaire brothers who are waging a war against Obama, about David and Charles Koch, lifelong libertarians that have quietly given more than a hundred million dollars to right-wing causes. In 1977, the Kochs provided the funds to launch the nation’s first libertarian think tank, the Cato Institute. According to the Center for Public Integrity, between 1986 and 1993 the Koch family gave eleven million dollars to the institute. Today, Cato has more than a hundred full-time employees, and its experts and policy papers are widely quoted and respected by the mainstream media. It describes itself as nonpartisan, and its scholars have at times been critical of both parties. But it has consistently pushed for corporate tax cuts, reductions in social services, and laissez-faire environmental policies. And here is David Koch talking about how they hold a serious amount of ideological control over the institutions they fund, which many believe to be the Tea Party infrastructure as well (my bold): David Koch has acknowledged that the family exerts tight ideological control. “If we’re going to give a lot of money, we’ll make darn sure they spend it in a way that goes along with our intent,” he told Doherty. “And if they make a wrong turn and start doing things we don’t agree with, we withdraw funding.”

    Disincentivizing greed - Financial reform is now the law of the land, and by reconfiguring the banking industry and siccing watchdogs on economic shenanigans, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is intended to help avoid another meltdown. The problem with nearly all attempts at financial reform, including this one, is that they try to prevent malfeasance either by changing the economic architecture, like erecting firewalls between financial sectors, or by mandating institutional curbs, like increasing reserves. But the new law gets at only proximate causes. The system malfunctioned because the human beings who ran it were greedy and saw a way to enrich themselves. That means that the recession from which we are still reeling was primarily a result of human nature, which the latest reforms don't begin to address.

    How financial reform will really work - Almost two years after the near collapse of the U.S. financial system, a sweeping reform package has finally been signed into law. Now the real work begins. Government officials are starting to staff a brand-new half-a-billion-dollar federal agency. Regulators are gearing up to conduct 67 studies and write 243 new rules. Wall Street lobbyists and consumer advocates are lining up to influence those watchdogs as the law is put into practice. And financial services companies are adjusting to -- or looking to work around -- the new rules.  But even amid the uncertainty, some things are clear. "Borrowers and investors are likely to benefit from a higher level of regulation, but at the end of the day we could all be paying more for credit," says Kathleen Engel, a professor at Suffolk University and a member of the Federal Reserve's consumer advisory board.  Read on to see how six major consumer and investor provisions could play out, and what the changes could mean for your finances in the years ahead.

    Woman Wall Street Hates Most Is Right for the Job - Before some in the financial industry and their capital cohorts continue their attacks on Warren, they would be well advised to consider some of Will Rogers’ sage advice that has stood the test of time: Lettin’ the cat out of the bag is a whole lot easier than puttin’ it back in. Earlier this month, an industry lobbyist said Warren couldn’t manage the Consumer Financial Protection Bureau in a fair and balanced way because she wants to protect ordinary Americans from bad financial products. In other words: Anyone who has been involved in consumer protection should be disqualified from heading an agency that was created to provide protection to consumers. Go figure.

    Dodd Questions Elizabeth Warren's Management Experience -- A Concern He's Never Raised Before - In questioning Elizabeth Warren's candidacy to lead a new Consumer Financial Protection Bureau, Senate Banking Committee Chairman Christopher Dodd has repeatedly asked whether Warren possesses the appropriate management experience to lead a large federal bureaucracy. But it's the first time Chairman Dodd has publicly raised such an issue when it came to evaluating presidential nominees to agency positions under the banking committee's purview. A review of transcripts from past confirmation hearings shows that Dodd has never questioned the management experience of nominees to head federal agencies his committee oversees. The heads of the Securities and Exchange Commission, Department of Housing and Urban Development, Federal Housing Administration, the Export-Import Bank and the National Credit Union Administration all survived hearings under Dodd's chairmanship without him once asking a question about the experience needed to guide their respective agencies.

    Dodd vs. Warren shows that government is broken - Alert the Elizabeth Warren media! We've known for at least a month that Sen. Chris Dodd, D-Conn., the lame-duck chairman of the Senate Banking and Finance Committee, isn't the biggest fan of the Harvard Law School bankruptcy expert whom progressives are championing for the job of director of the newly created Bureau for Consumer Financial Protection. Here's the latest news, from a lengthy American Banker interview with Dodd recapitulating the arduous legislative struggle for bank reform: He's still opposed. Dodd acknowledged he wanted FDIC Chairman Sheila Bair to consider heading the consumer bureau, but he confirmed that she is not interested.He also recognized that consumer groups were lobbying to have Harvard professor Elizabeth Warren head the agency, but he said she would have difficulty being confirmed. "If the administration goes through an eight-month debate over who is going to run this, you are going to do damage before you start," Dodd said.

    Corps’ Hissy Fit Works: SEC Move for Corporate Democracy Weakened - Yves Smith - Frankly, now that financial markets reform has moved from the Congressional shadowboxing stage to the arm-wrestling in smoke-filled room sort-out-the-details-that-matter stage, the retreat from public scrutiny has, of course, served as a cover for further watering down of measures that were not very strong to begin with. Yesterday we noted that major companies were outraged at the notion that major institutional shareholders might be able to propose board candidates. The argument in effect was that the odds were high that shareholders, a group that clearly can’t be trusted to make sound financial decisions, would immediately vote in a hedge fund or union stooge who would destroy the enterprise. The SEC was nevertheless expected to pass the measure on a party line vote. Well, we learn today that they did, with a wee wrinkle. They chose the weakest variant of the measure being contemplated, as the Financial Times noted on Tuesday

    Banks’ Self-Dealing Super-Charged Financial Crisis - Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.  Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses: They created fake demand.  A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged. The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs.

    Despite Reform, Banks Have Room for Risky Deals - When Congress passed a new financial regulation bill last month, it sought to prevent federally insured banks from making speculative bets using their own money. But that will not stop banks from making bets that some critics deem risky, even as the rules go into effect over the next few years.  That is because many such bets — on the direction of the stock market or the price of coal, for example — are done on behalf of clients. So, the banks say, they will continue to be allowable despite the new restrictions.  JPMorgan Chase and Goldman Sachs, for example, each lost more than $100 million on transactions handled for customers in the period from April to July. “You can use client activity as a cover for basically anything you are doing,” said Janet Tavakoli, who runs her own structured finance consulting firm. “It’s very problematic that losses like this are showing up. It’s a prime example of what the financial reform bill doesn’t address.”

    Guest Post: Derivatives Clearing – At the End of the Beginning - Yves here. We were skeptical of derivatives reform efforts as inadequate to deal with the product that needed to be reined in, credit default swaps, and subject to evisceration depending on how various details were sorted out. And if the types of contracts that wind up being covered are reasonably broad, the new derivatives clearinghouse is merely another too big to fail entity. Our concerns appear to be coming to pass. An SEC/CFTC roundtable exposes how little is being done about the next financial time bomb.The primary news to report from the roundtable is that there are indeed conflicts of interest and significant governance issues. Some of us have been writing about these issues for months, and it was perversely rewarding to hear that they are freely acknowledged by the industry. What remains to be resolved is the matter of what, if anything, can be done about it.

    Weak Financial Regulation Is Further Defanged - I sure hope somebody is going to notice the fine piece on the front page of Thursday's New York Times about how easy it is to get around the Volcker rule. Remember how the Obama team that came up with its reregulation proposals seemed to push Paul Volcker aside? The former Federal Reserve chairman was supposed to be running a committee on the subject for the president, but even he let it be known no one was talking to him much. Volcker was concerned that commercial banks were using insured depositor money to make risky investments and to drive huge bonuses -- and the Fed and the FDIC would be left picking up the pieces. The system should not be bearing that much risk, he wisely figured. And to be fair, he had long felt this way. After an earlier front page Times piece by Lou Uchitelle on Volcker's concerns, Obama suddenly embraced a limitation on such trading -- the Volcker rule. There were many Volcker photo ops. There would now be a ceiling on what trading could be done for the banks' proprietary accounts -- its own assets. No way, of course. The trouble is, banks have been trading for their own accounts to one degree or other for decades while making markets for their customers.

    Fed’s Hoenig: Too-Big-To-Fail Policies Disadvantage Community Banks -The too-big-to-fail policies that have propped up the nation’s largest banks are calling into question the outlook for the nation’s community banks, a central bank official said Monday.“Because the market perceived the largest banks as being too big to fail, they have had the advantage of running their business with a much greater level of leverage and a consistently lower cost of capital and debt,” Federal Reserve Bank of Kansas City President Thomas Hoenig said. Hoenig has been a persistent critic of policies he believes allows the nation’s largest banks, the top 20 of whom hold 80% of the nation’s total banking assets, to operate with the perception they will not be allowed to fail. He has said that financial market reform efforts are falling short in their effort to deal with this problem

    Road to safer banks runs through Basel - Sheila Bair - Of all the lessons learnt in the recent financial crisis, the most fundamental is this: excessive leverage was a pervasive problem that had disastrous consequences for our economy. When large banks and other financial institutions got into trouble, many of them did not have a sufficient equity cushion to weather the storm. This paved the way for major market disruptions, taxpayer bail-outs and massive contractions in credit.  Thankfully, the Basel Committee on Banking Supervision is now moving to correct the problem. Proposed reforms centre on three areas: weeding out hybrid instruments, which confuse debt and equity and weaken the capital structure; adding new capital buffers so deleveraging need not crush lending in a crisis; and placing higher capital charges on riskier derivatives and trading activities. Crucially, the reforms include an international leverage ratio. This would place a ceiling on overall leverage in good times and bad, while serving as a hard and fast reality check against too-thin capital cushions when models underestimate the risks. But even as the Basel reforms move toward ratification by leaders of the Group of 20 major economies this autumn, there are the inevitable calls to water them down. A number of industry representatives are claiming that stronger capital requirements will stifle lending, raise the cost of borrowing and derail the still-fragile economic recovery

    Regulating Finance: Killing Them Softly -A better alternative is to give regulators draconian power but over a smaller part of banks’ balance-sheets, so that the panic is contained. The Basel club of regulators proposes to do just that by taking a type of debt at the bottom of the pecking order (known, confusingly, as Tier 2 capital), and giving supervisors power to write it off or convert it into equity without triggering a default if a bank is in serious trouble. Here, they have done a good job of resisting the banking lobby and demonstrating that if put in place gradually, higher capital levels will only dent the economy a little now, and boost it in the long term. The final rules are due in November and will probably call for banks in normal times to carry core capital of at least 10% of risk-adjusted assets. This would be enough to absorb the losses most banks made during 2007-09 with a decent margin for error.

    FRB: New Credit Card Rules Effective August 22 - More new rules from the Federal Reserve mean more new credit card protections for you. Here are some key changes you should expect from your credit card company beginning on August 22, 2010:

    Banks Siding Against the Customer in Fraud Cases - Like most consumers, I had always assumed that banks and customers are united in wanting to curtail bank fraud. Unfortunately, I have learned that in fact bank fraud is a big and profitable business -- for the banks themselves; and that changes in electronic banking, combined with the power of lobbyists to sustain the status quo that is stacked against ordinary account holders, mean that if consumers' accounts are corrupted, they can face systemic stonewalling by the banks themselves -- and have little recourse. In 2005 I started to notice irregularities in a checking account I held with WaMu; but the irregularities were ambiguous. I sought at various times over the course of the next two years to go over all my statements -- but had trouble getting all my records from both online banking and from my branch itself.  I was certainly not as proactive as I should have been --  I also made the mistake of trusting the bank.

    They Still Don’t Get It - Elliot Spitzer - The art of the "big lie" is to repeat something often enough, and with a powerful enough megaphone, such that your distortions are not challenged. So it is with the Wall Street Journal's obsession with attacking and misrepresenting the multiple cases that I brought against both AIG and its former chairman and CEO, Hank Greenberg. By trying to rewrite the narrative of the economic cataclysm we have lived through, the deniers are attempting to challenge the common-sense conclusions that flow from an accurate understanding of history. They are desperately trying to protect a particularly rabid, and ultimately damaging, anti-regulatory philosophy that has dominated the past 30 years. They are trying to protect a broken and misguided understanding of how markets really function, a view now openly rejected even by such staunch free-market advocates as Judge Richard Posner and former Fed Chairman Alan Greenspan. Acknowledging the propriety of any government prosecutions of corporate wrongdoing would make impossible their current effort to push back against even the government's minimal responses to the financial crisis.  So, in view of the Journal's recent editorial, a few facts are in order

    We Are What We Read (I Think) - Maxine Udall - Mark Thoma sent me to Open Economics, where Kasey Dufresne provides English doctoral students' assessments of economics doctoral students' required reading: I was talking to some English PhD students today, and when the conversation turned to economics they were dismayed to learn that no one in “top” economics departments ever read Marx, much less understood any of his theories. Then I was caught off-guard when I was asked, “so what thinkers do most students in economics programs read?” The student just assumed that we must read someone. But as far as I can tell, and the answer I gave, was “none.” The training of economists in the “top” programs does not entail any reading of books. My first reaction was: top economics departments? You think this only applies to "top economics departments?" My second reaction was: you mean English PhD students understand Marx's theories? Could I get one of them to explain coherently the labor theory of value, please? My third reaction was: OK, so how much time have those English PhD candidates spent reading non-Marxist economics?

    The Real Activity Suspension Program, by Andy Harless: (Think of this as a guest post by the Cynic in me.) Americans got angry when the federal government tried to bail out banks by buying assets or taking capital positions. Whatever you may think of those bailout programs, they at least had the advantage that taxpayers were getting something in return for their money. There is another bank bailout program going on now – one that allows the federal government to recapitalize banks with public money, receive nothing at all in return, and somehow escape criticism for doing so. That bailout program is called the Recession. How does the Recession allow the government to bail out banks? With the recession going on, people are afraid to do anything risky with their assets, so they keep them deposited in banks, earning no interest. Banks can then invest these deposits in Treasury notes and credit the interest on those Treasury notes to their bottom line, thus improving their balance sheets. So the government pays to recapitalize banks while receiving nothing in return.

    The Continued Stealth Takeover of the Courts - Yves Smith - In case you’ve managed not to notice, the old saw, “the best government money can buy” increasingly applies to our legal system. In ECONNED, I describe briefly how a well funded “law and economics” movement which had corporate backing, including from the extreme right wing that was systematically trying to move America to the right, sought to incorporate ideas from neoclassical economics into the practice of law. It was seen as “off the wall” at the time, but has proven depressingly effective. A more obvious effort is simply to get judges in place that will deliver the verdicts you want. A Mother Jones article, “Permission to Encroach the Bench,” discusses how already big ticket battles over state supreme court seats are likely to rocket to a new level of priciness: For a down-ballot category that even well-intentioned voters pay little attention to, judicial races are astonishingly expensive. In 2004, $9.3 million was spent in the race for a single seat (pdf) on the Illinois Supreme Court.  In 2006, three candidates for chief justice in Alabama raised $8.2 million combined. But those sums could look paltry compared to the spending likely to be unleashed in the wake of the Supreme Court’s Citizens United ruling.

    Income Inequality and Financial Crises - David A. Moss, an economic and policy historian at the Harvard Business School, has spent years studying income inequality. While he has long believed that the growing disparity between the rich and poor was harmful to the people on the bottom, he says he hadn’t seen the risks to the world of finance, where many of the richest earn their great fortunes.  Now, as he studies the financial crisis of 2008, Mr. Moss says that even Wall Street may have something serious to fear from inequality — namely, another crisis. The possible connection between economic inequality and financial crises came to Mr. Moss about a year ago, when he was at his research center in Cambridge, Mass. A colleague suggested that he overlay two different graphs — one plotting financial regulation and bank failures, and the other charting trends in income inequality.  The timelines danced in sync with each other. Income disparities between rich and poor widened as government regulations eased and bank failures rose.

    Bubbles, Liquidity, and the Macroeconomy -The recent financial crisis has shown that financial frictions, such as asset bubbles and liquidity spirals, have important consequences, not only for the financial sector but also more generally for the macroeconomy. This forces economists to reevaluate firmly held beliefs about market efficiency, the appropriate regulation of financial markets, and approaches to macroeconomic policymaking. The subsequent paragraphs summarize my ongoing research in these domains.

    There Are Bubbles, And Then There Are Bubbles - Krugman - Consider the stock bubble of the late 1990s. But it never rose to the level of economic catastrophe.Then came the housing bubble, after which households suffered a capital loss of about $8 billion trillion [hey, a few zeroes more or less ... ]. Yes, they also suffered a big loss as stocks plunged — but that was because the housing bust, unlike the stock bust, had a huge impact on the financial system and the economy as a whole. What was the difference? First, a lot of financial institutions — which are highly leveraged — were holding securities whose value was highly sensitive to the state of the housing market. There was nothing comparable in the case of stocks. So the housing bust undermined the financial system in a way the stock bust never did.The moral for right now is that even if you believe that there are bubbles inflating or about to inflate, they’re only a big concern if they are leading to leveraged positions for key players. The alleged carry trade bubble sorta kinda mighta have met that criterion, although I never found the warnings all that persuasive. But other stuff — bubbles in BRIC equities, or gold, or whatever, don’t make the grade.

    Housing Bubble ? - Andrew Harless argues that there was no housing bubble ?!? Apparently it is now generally accepted that the rise in house prices was an aberrant bubble, justified only in the minds of irrational buyers who ignored the fundamentals and expected house prices to keep rising simply because they were already rising. But what were the fundamentals? Certainly, if one had foreseen today’s circumstances, it would have been clear that housing was not a good investment.This time I'm not convinced. You don't define bubble and don't respond to the alleged evidence that there was a housing bubble. Why was the relative price of housing in the 21st century so much higher than in the 20th (during which it was quite stable) ? Why was the ratio of price to rent so high ? Neither is easy to explain assuming 4% unemployment.  In effect you claim that, if policy makers agressively countered the recession and we were at full employment now then housing would have been a fine investment. So why did everyone with a brain and an open mind assert back in 2006 that there was a housing bubble (that is housing was a very bad long term investment) ?

    Prices as virtuous - Yves Smith, excerpted from her post Boston Fed’s New Excuse for Missing the Housing Bubble: NoneOfUscouddanode. This part caught my eye in addition to the critique: The problem is that mainstream economics sees prices as a virtuous. Everything can be solved by price. If there is some unbalance in the economy, it merely means prices need to rise or fall, the impediment must be stickiness or some other inefficiency that is preventing the magic price setting mechanism to do its magic work. Mainstream economists also believe that price mechanisms lead to optimal outcomes from a social welfare standpoint. There is a reason that this line of thinking. aka neoclassical economics, became dominant (and Keynsianism is merely a branch; Keynes himself believed economies were fundamentally unstable, while the neoclassical types believe that markets are always and every self correcting). It’s very favorable to the business community. (Note this is a simplification; ECONNED provides a long form treatment of this topic).

    TARP Take-Back - "We're not going to let Wall Street take the money and run," President Barack Obama told Americans last January. "We're going to pass this fee into law."  "This fee" is the Financial Crisis Responsibility Fee, a tax on banks designed to recover $90 billion over 10 years while reducing risk; it would shrink large banks and also fall harder on those with more debt, incentivizing lending over trading. Treasury staffers crafted the proposal in response to the TARP law's requirement that the government make up any shortfall in repayments.  President Obama announced the tax at his political low point last January, following Democratic defeats in Virginia and New Jersey. Health-care reform and financial reform were on the ropes. The move was seen by cynical observers as a cheap play for populist political appeal. Today, with financial reform made law, there is no sign the fee will ever become reality, or indeed that any new tax will be levied on the banks.

    Unofficial Problem Bank List increases to 840 institutions - Here is the unofficial problem bank list for August 27, 2010. Changes and comments from surferdude808:  The Unofficial Problem Bank List grew by more than five percent this week as the FDIC released its enforcement actions for July 2010. This week, there were 28 additions and 5 removals. Also, the list was updated to reflect assets as of the second quarter. For institutions on the list since the first quarter, aggregate assets declined by $13.9 billion. With these changes, the Unofficial Problem Bank List includes 840 institutions with aggregate assets of $410.3 billion.

    Fannie and Freddie acquitted - As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion. However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it. The proper question is not: What story is consistent with my general philosophy or worldview? The proper questions is: What story is consistent with the facts?

    Replacing Frannie with a new bond guarantee - Donna Borak has found an upcoming paper from Fed economists Wayne Passmore and Diana Hancock proposing a government backstop for asset-backed securities. This sounds very much like Gary Gorton’s paper back in May, which was a very bad idea back then, and is just as bad of an idea now. The Fed paper doesn’t go quite as far as Gorton, since it’s based more on an FDIC model where the insurance is paid for by the issuers. But the fundamental problem remains the same: from an investor perspective, the bonds would become risk-free. And we don’t want to create risk-free bonds: we want investors to price risk. If they think they’re buying risk-free paper, in fact what they’re doing is pushing risk out into the tails, where it can explode unpredictably and disastrously. There is something new and interesting here, though: the idea that this guarantee be used specifically for mortgage bonds, and specifically to replace Fannie and Freddie. So I’ll be very interested to read the paper, when it comes out.

    Fannie Mae and Freddie Mac's future - The administration took its first step toward resolving the final status of Fannie Mae and Freddie Mac with a big conference at the White House last week. In keeping with its housing policy to date, it seems intent on taking the worst possible course.  These mortgage giants have played an important role in making housing more affordable in the United States. Fannie Mae created the secondary market in mortgages when it was established as a government-owned company during the New Deal. Its willingness to buy mortgages from banks essentially created the basis for the 30-year fixed rate mortgage that is the standard today.  The virtue of the original Fannie Mae was that it was simple and cheap. It bought and held 30-year mortgages. It did not securitise them. This avoided the costs and risks associated with securitisation. At every step in the securitisation process, the financial industry expects to make money, and often lots of it, since salaries are so bloated. In addition to saving these costs, a public Fannie also had no incentive to engage in risky gambles to inflate profits.

    When Economic Policy Became Social Policy - The recent Treasury Department conference is further proof we will never get out of this housing mess until we are ready to face facts. Watching the Treasury conference on housing finance earlier this week, I was struck by the gloomy thought that we will never get out of this housing mess until we are ready to face facts. Treasury Secretary Tim Geithner’s remark that the demise of Fannie Mae and Freddie Mac was caused by their pursuit of short-term profits was not a constructive contribution to the resolution of the major issues before us. In reality, Fannie and Freddie were doomed by a badly designed government housing policy, and government efforts to disguise its responsibility with a false narrative will only make a solution more difficult.

    Notes from the sixth row - I took away four main points from Tuesday's Treasury-HUD GSE conference: Hints of reform. Treasury Secretary Timothy Geithner said that the administration supported fundamental GSE reform but with still a government guarantee for housing finance in some form. The GSE portfolios, however, would disappear. None of this is a surprise, but it was still novel.   Industry participants love government guarantees. Conference participants from industries involved with the financing and construction of homes assert that no American will ever buy a home again if the government does not provide a full credit guarantee against the financial market consequences of people defaulting on their mortgages. Blowback from the left. The administration is scared of its own shadow with respect to flak from the left—the White House staffer’s introductory remarks were an awkward ode to inclusion and conference guidelines such as time limits went out the window when advocates of affordable housing subsidies were speaking. Settle in; this is going to be a long process.

    Do We Need Fannie And Freddie? - The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) should be disbanded and reconstituted as a single government mortgage guarantee agency with no portfolio holdings and no private shareholders.  The Dodd-Frank Act did not deal with them, and that's fine, because Congress now understands that private investors are unnecessary to the process. Sallie Mae will no longer make money from government guaranteed loans. The Education Department will make all student loans directly, so no private sector middleman will skim a profit from that. This change in the law will save taxpayers $47 billion over the next decade. There does not need to be a middleman to skim a profit from mortgage guarantees either. There is no natural law saying that private investors should participate in government mortgage guarantees while the taxpayers absorb the losses. Fannie was only privatized during the Johnson administration as a revenue gimmick.

    Bill Gross: We Need Total Nationalization Of Housing, And I'm Not Just Talking My Book - Last week, Bill Gross raised plenty of eyebrows when he suggested that the government ought to totally nationalize housing finance, while dismissing the idea that the private sector could ever step up to the plate and replace Fannie and Freddie. Naturally Gross -- who as head of PIMCO is one of the biggest investors in mortgage-backed assets -- was dismissed for talking his book (a frequent charge). In his latest monthly letter he goes into more depth about his views, and denies that he's just taking the PIMCO line.The first key to his argument is that the private sector has failed when it comes to housing finance: I proposed a solution that recognized the necessity, not the desirability, of using government involvement, which would take the form of rolling FNMA, FHLMC, and other housing agencies into one giant agency – call it GNMA or the Government National Mortgage Association for lack of a more perfect acronym – and guaranteeing a majority of existing and future originations.

    Earth to Bill Gross: We Chickens Know You Are The Fox Minding the Henhouse - Yves Smith - Boy, when you think you’ve seen the worst in utterly shameless, self serving tripe, someone manages to outdo it. Admittedly, it’s awfully hard to beat Steve Schwarzmann’s recent one-two punch of utter canard wrapped in tasteless hyperbole, that of Obama proposals that private equity kingpins pay taxes on what is really the fruits of their labor like other working stiffs was a ” a “war… like when Hitler invaded Poland in 1939.” But no, Pimco’s Bill Gross bests Schwarzmann in making it clear to the great unwashed his unabashed belief that what is good for him is good, period. So get a load of this drivel in his current newsletter: ...Get a load of this…Bill Gross is making threats: Mr. Gross said Pimco would not invest in bundles of mortgages that lacked government insurance unless the borrowers had made down payments of 30 percent or more.

    Arnold Kling, on a roll - Here goes: Old consensus: we need Freddie and Fannie in order to make housing "affordable."  New consensus: we need them in order to "prevent further house price delclines," in other words, to make housing less affordable. It's the Goldilocks theory of home mortgage intervention.  Most of all, I am curious what is the underlying theory why few private investors would not, without the mortgage agencies, fund mortgages at the right price.  I would gladly write a series of blog posts examining those theories, as many of those same investors buy riskier assets, such as some equities.  Or is it simply an attempt to hold a finger in the dike? Our either real or supposed inability to do away with the mortgage agencies over a five-year time horizon is one of the major reasons to be a pessimist about the American economy today.  None of the underlying theories about these agencies, and why they are needed, are very good news for any of us.  And that is perhaps why those theories are not articulated very often.

    Fannie Mae and Freddie Mac's future - The administration took its first step toward resolving the final status of Fannie Mae and Freddie Mac with a big conference at the White House last week. In keeping with its housing policy to date, it seems intent on taking the worst possible course. These mortgage giants have played an important role in making housing more affordable in the United States. Fannie Mae created the secondary market in mortgages when it was established as a government-owned company during the New Deal. Its willingness to buy mortgages from banks essentially created the basis for the 30-year fixed rate mortgage that is the standard today.  The virtue of the original Fannie Mae was that it was simple and cheap. It bought and held 30-year mortgages. It did not securitise them. This avoided the costs and risks associated with securitisation. At every step in the securitisation process, the financial industry expects to make money, and often lots of it, since salaries are so bloated. In addition to saving these costs, a public Fannie also had no incentive to engage in risky gambles to inflate profits. Its senior management was paid civil servant wages, not the tens of millions that go each year to top Wall Street executives.

    Fannie and Freddie - The Exit Doors are Shut - From a purely political point of view, it’s a simple story.  Existing homeowners are a far more powerful force at the voting booth than potential owners, homebuyers, are.  It’s therefore very much in the interest of the incumbent government to keep home prices as high as it can.  Let them slide too much and you will pay for that at the next election.  For potential buyers, you can devise plans that lower interest rates and down payments, but that's all.  More affordability simply through lower prices is not on the political table. Still, in the "listening conference" on US housing policies - Fannie Mae and Freddie Mac in particular - that started this week, it's not voters who have the biggest say.  That is reserved for the financial industry, and how could it not be?  Not that the Obama administration has to hear the truth from the bankers anymore:  Washington has long since realized that truth.  Which is that without Fannie and Freddie and the 80% stake the US took in them in 2008, as well as the unlimited financial guarantee issued by Tim Geithner at the end of 2009, it's not just the housing industry that would instantly collapse.  The banking industry would, like a shadow, rapidly follow in its footsteps.

    An Autopsy of Fannie Mae and Freddie Mac - Here’s a last-minute option for summer reading material: An autopsy on Fannie Mae and Freddie Mac by their overseer, the Federal Housing Finance Agency. The report aims to inform the continuing debate in Washington about the future of the government’s role in housing finance. It’s not hard sledding, just 15 pages of bullet points and charts. And it does a good job of making a few key points: 1. Fannie and Freddie did not cause the housing bubble. 2. This was not for a lack of trying. The companies bought and guaranteed bad loans with reckless abandon. Their underwriting standards jumped off the same cliff as every other participant in the mortgage market.3. Importantly, the companies’ losses are mostly in their core business of guaranteeing loans, not in their investment portfolios. The guarantee business is the reason the companies were created. Fannie and Freddie buy loans from banks and other lenders, and then sell packages of those loans to investors with a promise to cover any losses. That pulls money into mortgage lending and helps hold down interest rates.

    Post-Mortgage Meltdown, Where Do We Go Now? - For more than 20 years, the mantra in Washington has been "more, not less" when it comes to Fannie Mae, Freddie Mac and the expansion of homeownership.  But in light of the financial crisis and Fannie and Freddie's near-collapse, policy leaders are also rethinking the government's role — and many Americans are starting to question whether homeownership is the only path to the American Dream. Fannie and Freddie function by buying, bundling and then stamping a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing, and it keeps consumers happy because it makes low, fixed-rate mortgages possible.  At least that how things were supposed to unfold. But the two mortgage finance giants "made astonishing mistakes,"

    Obama Housing Program Slowing To A Crawl While Homeowners Suffer - More than 18 months after President Barack Obama announced a $75 billion program to help three to four million homeowners avoid foreclosure, the administration's primary foreclosure-prevention initiative is slowing to a crawl. Less than 17,000 homeowners were offered temporary trial plans in July under the Home Affordable Modification Program to reduce their monthly mortgage payments, an 86 percent decrease from the same period last year, according to Treasury Department data released Friday. About 37,000 homeowners transitioned from trial plans into permanently-modified mortgages, which offer years of lower monthly payments thanks to cuts in the mortgage's interest rate and extensions to the life of the mortgage. It's the lowest figure since December, and a 28 percent decrease from June's total. More than 100,000 homeowners were bounced from the program, known as HAMP, last month as homeowners either fail to provide documentation verifying their situation, fall behind on their new, reduced payments. An average of 108,000 homeowners have been kicked out per month since March 1.

    GSEs' Foreclosure Pipelines Will Grow Well into 2011: S&P - Despite the continued efforts of mortgage giants Fannie Mae and Freddie Mac to find sustainable workouts for delinquent borrowers – and the fact that their loan modification activity has indeed increased significantly this year – the analysts at Standard & Poor’s (S&P) expect the GSEs’ foreclosure inventories to continue to swell. The two companies have each already completed about 40 percent more workout volume during the first half of 2010 than they did in all of 2009 by S&P’s estimates. Still, the ratings agency says annualized loan workout activity (as a percentage of existing delinquent loans) remains less than half at both institutions. In addition, S&P reports that foreclosure alternatives, such as short sales and deeds-in-lieu, have declined to about 15 percent of the workouts, compared with the low 20-percentile range of 2009. “We believe that the slow and arduous single loan-by-loan workout process, persistently weak national economic conditions, and high unemployment will likely lead to higher foreclosures, resulting in a foreclosure pipeline that we believe will continue to grow well into 2011,” S&P said in report issued last week

    Moving targets, US housing edition - If at first you don’t succeed . . . move the goal-posts. In the grand tradition of stimulus policy gone wrong, that seems to be just what the US Treasury has done in relation to its Hamp mortgage modification programme. Via Mike Konczal over at Rortybomb, who attended one of the blogger-meets at the Treasury last week: They are sticking by HAMP. The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical. Unofficially, of course, there were always those who knew Hamp would have the side effect of slowing or obscuring losses for banks. Indeed, the effect of mortgage modifications on bank results was what prompted FT Alphaville’s interest in the programme in the first place.

    Are the housing bailouts for banks or borrowers? -[T]he money that the government spends on a failed modification goes to banks, not homeowners. Typically, the government will have substituted an FHA insured mortgage for the original mortgage issued by a bank. This means that when a redefault takes place, the bank will have received most of the principle back on the loan, with the government incurring the loss on the redefault. The net result of this policy is that far more money is likely to be given to banks through the HAMP than to homeowners.-Dean Baker, Money for Failed Modifications Goes to Banks, Not Homeowners, CEPR What Dean Baker is pointing out is that the HAMP program looks suspiciously like a way for the banks to shed their bad loans and pile them up at the FHA. And since we know that the vast majority of FHA-eligible modifications are redefaulters, the FHA is going to need some serious capital injections via the US taxpayer. Baker’s statements about the mod programs being for the banks and not for the borrowers jives with what I have been saying about practically all the government housing bailout plans.

    Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a Ploy to Enrich Big Banks - The Treasury Department's plan to help struggling homeowners has been failing miserably for months. The program is poorly designed, has been poorly implemented and only a tiny percentage of borrowers eligible for help have actually received any meaningful assistance. The initiative lowers monthly payments for borrowers, but fails to reduce their overall debt burden, often increasing that burden, funneling money to banks that borrowers could have saved by simply renting a different home. But according to recent startling admissions from top Treasury officials, the mortgage plan was actually not really about helping borrowers at all. Instead, it was simply one element of a broader effort to pump money into big banks and shield them from losses on bad loans. That's right: Treasury openly admitted that its only serious program purporting to help ordinary citizens was actually a cynical move to help Wall Street megabanks.

    The cruelty of HAMP - Atrios, reading Steve Waldman on Treasury thinking, concludes that they are “truly awful people”: Conning homeowners by announcing a government program designed to help them when in fact it was designed to help the banksters is, in my world, “cruel.” It’s a powerful point, and it’s definitely one of those things which Treasury is only going to say off the record. Even when Waldman was told it on deep background, he characterized it as “surprisingly candid”. Treasury told Waldman — and told my group of bloggers, too — that HAMP, even if it was a failure, was a success. It might not have helped much in terms of its ostensible stated aim of permanently modifying millions of home loans. But it did help, in the words of Waldman, “it helped banks muddle through what might have been a fatal shock”. Was HAMP a bait-and-switch? Did Treasury know all along that it was likely to fail in its stated aim, but go ahead with it anyway because of its second-order effects? That seems to be the message they’re sending...

    The failure of HAMP - ProPublica’s Paul Kiel crunches the latest HAMP numbers, and gets Treasury’s Herb Allison on the record saying the kind of things which so upset Atrios and others: Allison put a positive spin on the fact that hundreds of thousands of homeowners have waited for several months for a final answer from their servicers. Homeowners in the trials have “benefited from lower payments … for many months” and from “having time to obtain other solutions to their needs,” he said. And that relief has come “at no cost to taxpayers.” Kiel also links to an older ProPublica piece, from May, which spells out exactly what the weakness is in this argument:

    David Dayen’s Portrait of HAMP Failures - David Dayen at FireDogLake is doing a great job with a series Portrait of HAMP Failure (Four Parts so far, Part One, Two, Three, Four.) The key is in the title of the first post: “It Makes Your Financial Situation Worse.” The power asymmetry between the banks and the borrowers is the most obvious problem. The borrowers should have disproportionately more power, as they are the ones who can walk or stop paying. The shame that comes from this is overwhelming, but it doesn’t have to be that way at all. What you are seeing in the aggregate isn’t speculators or hustlers but ordinary people who bought at the wrong time. That happens all the time, but the idea that the growth of a family should be collapsed for a decade, that the dynamic labor market needs to have bodies through on the gears as people can’t move or short sell to pursue new jobs and opportunities, that ownership looks indistinguishable from debtor’s prison is not only devastating for communities but also the macroeconomy.

    The Economy Is Getting Worse and Worse -- And No One's Doing a Thing About It - We know we live in hard times that are on the verge of getting harder, with 500,000 new claims for unemployment last week, a recent record. And here’s a statistic for you: 300,000. That’s the number of foreclosure filings every month for the past 17 months. This year, 1.9 million homes will be lost, down from 2 million last year. Is that progress? In July alone, 92,858 homes were repossessed. At the same time, the number of canceled mortgage modifications exceeded the number of successful ones. According to, last month, “the number of trial modification cancellations surged to 616,839, greatly outnumbering the 421,804 active permanent modifications." And don’t think this problem only affects those homeowners about to go homeless. According to the New York Times, Michael Feder, the chief executive of the real estate data firm Radar Logic, says we are all at risk.

    Foreclosure datapoint of the day - HAMP might not have helped lots of homeowners stay in their houses over the long term, but it did push back the point at which they got foreclosed on. To now. Here’s a graph from the latest report from Lender Processing Services: What you’re seeing here isn’t subprime dreck: it’s sensibly-underwritten conforming loans which were bought by Fannie and Freddie. Through 2009 and the first half of 2010, the rate at which those loans entered foreclosure proceedings was pretty steady. But as we enter the second half of 2010, there’s a huge spike, especially in the loans which have been delinquent for more than six months. That spike is loans which entered the HAMP modification process, but then got kicked out, for reasons good or bad. Without a successful permanent HAMP modification, foreclosure comes soon enough.

    Is housing the best way for low-income people to build wealth? - In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.

    Real Estate’s Gold Rush Seems Gone for Good - NYTimes - Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.  The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good.

    Housing in Ten Words “Housing Fades as a Means to Build Wealth, Analysts Say.” That’s the title of a New York Times article by David Streitfeld. I’ve been telling my friends for a decade that housing is a bad investment. These are real housing prices over the past century, based on data collected by Robert Shiller: Housing is generally a worse investment than either stocks or simple U.S. Treasury bonds. Then why do so many people think it’s such a great investment?

    1. Leverage. Let’s say inflation is 2% and housing returns 3% (1% real return). If you put 10% down, now your house is returning 30%, or a 28% real return; subtract a 6% fixed-rate mortgage, and you’re making about 22%
    2. Price illusion. People remember the nominal price they paid for their houses. When they sell them thirty years later, they look at the difference between the nominal purchase and sale prices and think they made a ton of money.
    3. Bubbles and optimism bias. Every now and then we have a huge bubble like the one at the right-hand end of the chart above.

    Number of Home Foreclosures Drops, but Risk of Delinquency Rises… The foreclosure crisis might have finally peaked in the first half of this year, but with the continued weakness in the economy and the recent deterioration of the housing market, the gains may prove fleeting.  For the first time since 2006, the number of loans in the process of foreclosure fell in the second quarter, the Mortgage Bankers Association said Thursday. Some other measures of delinquency also dropped.  But the group’s chief economist, Jay Brinkmann, said in a news briefing that it was premature to conclude the improvements would persist. “It’s more of a hope than anything at this point,” he said.

    One in 10 mortgage holders faces foreclosure -One in 10 American households with a mortgage was at risk of foreclosure this summer as the government's efforts to help have had little impact stemming the housing crisis.  About 9.9 percent of homeowners had missed at least one mortgage payment as of June 30, the Mortgage Bankers Association said Thursday.  That number, which is adjusted for seasonal factors, was down slightly from a record-high of more than 10 percent as of April 30.  In a worrisome sign, the number of homeowners starting to have problems with their mortgages rose after trending downward last year. The number of homes in the foreclosure process fell slightly, the first drop in four years.  More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.

    Nearly Two-Thirds of Delinquent Mortgages Untouched: Study - According to a new report from state attorneys general and bank supervisors from across the country, more than 60 percent of homeowners with seriously delinquent loans are still not involved in any form of loss mitigation with their servicer.  The ratio is disconcerting considering the group also found that one of servicers’ primary loss mitigation options today, loan modifications, are resulting in significant payment reductions with fewer redefaults. The State Foreclosure Prevention Working Group says loans modified in 2009 are 40 to 50 percent less likely to be seriously delinquent six months after modification than loans modified at the same time in 2008.  “This improvement in loan modification performance suggests that dire predictions of high redefault rates may not come true,” the group said in a paper released Tuesday. “This positive trend suggests that increased use of modifications resulting in significant payment reduction has succeeded in creating more sustainable loan modifications

    Foreclosures Fall, but Early Delinquencies Rise - The foreclosure crisis might have finally peaked in the first half of this year, but with the continued weakness in the economy and the recent deterioration of the housing market, the gains may prove fleeting.  For the first time since 2006, the number of loans in the process of foreclosure fell in the second quarter, the Mortgage Bankers Association said Thursday. Some other measures of delinquency also dropped.  But the group’s chief economist, Jay Brinkmann, said in a news briefing that it was premature to conclude the improvements would persist. “It’s more of a hope than anything at this point,” he said.  The problem is no longer high-interest subprime loans, many of which have worked their way out of the system. The critical area now is prime loans, where defaults are driven by stubbornly high unemployment.

    Procrastination on Foreclosures, Now 'Blatant,' May Backfire - By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that "the first loss is the best loss" — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults. It is becoming harder to blame legal or logistical bottlenecks, foreclosure analysts said. "All the excuses have been used up. This is blatant," Banks have filed fewer notices of default so far this year in California, the nation's biggest real estate market, than they did 2009 or 2008, according to data gathered by the company. Foreclosure default notices are now at their lowest level since the second quarter of 2007, when the percentage of seriously delinquent loans in the state was one-sixth what it is now.

    CoreLogic: 11 Million U.S. Properties with Negative Equity in Q2 - Note that the slight decline in homeowners with negative equity was mostly due to foreclosures. First American CoreLogic released the Q2 2010 negative equity report today.  CoreLogic reports that 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010. Foreclosures, rather than meaningful price appreciation, were the primary driver in the change in negative equity. An additional 2.4 million borrowers had less than five percent equity. Together, negative equity and near negative equity mortgages accounted for nearly 28 percent of all residential properties with a mortgage nationwide. This graph shows the negative equity and near negative equity by state.  Although the five states mentioned above have the largest percentage of homeowners underwater, 10 percent or more of homeowners with mortgages in 33 states and the D.C. have negative equity.

    Commercial Property Owners Choose to Default - Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans. Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

    It's Okay To Walk Away: Let's End The "Morality" Double-Standard On Mortgage Defaults - More and more commercial real-estate companies are doing what many indebted homeowners would like to do: Walk away from mortgages on properties that are now worth a lot less than they paid for them. Today's Wall Street Journal highlights three major developers - Macerich, Vornado Realty Trust and Simon Property Group - that have recently decided to default on mortgages.  When companies do this, no one bats an eye--it's just "smart business."When ordinary homeowners think about doing it, meanwhile, the mortgage industry and government begin moaning that a mortgage is more than a business contract. It's a social contract, in which homeowners have a "moral obligation" to pay.

    Ranks of Underwater Borrowers Decline, Thanks to Foreclosure - The number of Americans that owe more on their mortgages than their homes are worth declined during the second quarter of 2010, but not because home prices have improved. Instead, according to a new report, increased foreclosures have helped flush underwater borrowers out of the nation's housing markets. According to a report from information services provider CoreLogic released Thursday morning, 11 million — or 23% — of all residential properties with mortgages were in a negative equity position at the end of the second quarter.  The Q2 numbers are an improvement compared to the 11.2 million properties and 24% of mortgages identified as underwater at the end of the first quarter of this year.

    Housing Slide in US Threatens to Drag Economy Into Recession-- Housing led the U.S. out of seven of the last eight recessions. This time, it may kill the recovery.  Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.  “If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,”  “The housing market and the broader economy are closely intertwined.” Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

    Housing is magic - It must be, because what else explains this ridiculous optimism? In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade. With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

    Wells Fargo’s Odd Mortgage Essay Question - NYTimes - Besides asking for information about their family plans, which was paired with questions about plans to change the “property size,” Wells Fargo also requested that the letter include information that supported the fact that the property, in Glen Mills, Pa., would be their primary residence. The bank also asked them to include their commuting distances to work, as well as other properties that they may own in the area. The request for the so-called motivational letter was included in the bank’s mortgage commitment letter, which offered to approve their loan if they answered the bank’s questions and provided other documentation.

    Mortgage Refi Madness Packs Less Kick Than In The Past - Investors’ flight to the safety of Treasurys has triggered one positive for the outlook: A rush by homeowners to refinance their mortgages to free up cash or shorten loan maturity. But Americans are approaching refis with more sobriety than they showed during the refinancing madness of the early 2000s. Getting their finances in order is more important than using their homes as ATMs. But with the recovery so fragile, any help to consumer spending and confidence is a plus. Because mortgage rates follow Treasury yields, the flight to safety has pushed a 30-year fixed mortgage rate down to 4.42%, the lowest level since Freddie Mac began tracking rates in 1971. Homeowners who are credit-worthy and have equity in their homes are responding. According to the Mortgage Bankers’ Association, applications to refinance in mid-August have been rising since late April and stand at their highest level since mid-May 2009.

    Mortgage Fraud Is on the Rise Again - New data suggests that mortgage fraud—which got tougher to pull off after the collapse of the U.S. real estate market—is returning in a big way.  Data prepared for The Wall Street Journal by research firm CoreLogic, examining about seven million home loans made by hundreds of lenders, show that losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.   The figures are a fraction of the mortgage market, but the increase is sharp. CoreLogic, which tracks fraud only by mortgage value, examines about 7 million loans each year using a proprietary computer program that detects discrepancies in loan documents and predicts the likelihood of fraud. The real losses to banks won't be known for several years when banks are forced to write off the value of the loans' value.

    Mansion squatters return in a big way - He's the Eastside real-estate agent who, two months ago while prepping for an open house to sell a $3.3 million mansion in Kirkland, was stunned to find that complete strangers had moved in and were staking a tortured legal claim to the foreclosed property. The squatters story went national. It was an apt symbol of the housing meltdown. At the time, I wrote that "mansion squatting" might be the "most naked expression yet of what the crash was all about — the lure of something for nothing."Von der Burg says that while the mansion-squatting story may have been entertaining — it ended when police retook control of the house for the bank that owned it — it cost his client, a bank, $35,000 in legal fees and bills for locksmiths, security and cleanup. So count him as not amused that this week, the same team of squatters apparently attempted to stake claims to three new mansions on the Eastside — including a $2.2 million, 5,000-square-foot Craftsman in Bellevue for which von der Burg is, once again, the listing agent. "These people need to be stopped," he said. "How long are we going to let this go on?"

    Portrait of California Foreclosures - An important and empirically robust new study belies the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.  The typical California home in foreclosure is a very modest 1,500-square-foot, 2- to 3-bedroom house in the Central Valley or Inland Empire, refinanced in 2005 or 2006 by a Latino family.  The average home value at the time of the loan was about $400,000, considerably less than the $500,000 median home price statewide.   At today’s prices, that average California foreclosure property is likely to be worth between $200,000 and $300,000.   Fewer than half of mortgages in foreclosure were purchase loans.  Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes.  Essentially half of all foreclosures in California involve Hispanics, roughly in the same proportion that subprime mortgages were given out in the years prior to the crisis.  Thus, the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.

    MBA: Mortgage refinance activity increases, Purchase activity flat - The MBA reports: Mortgage Refinance Applications Continue to Increase as Rates Decrease  The Refinance Index increased 5.7 percent from the previous week and is at its highest level since May 1, 2009. The seasonally adjusted Purchase Index increased 0.6 percent from one week earlier. “The volume of refi applications last week was up 26% over their level four weeks ago. Mortgage rates dropped to their lowest level in the survey, going back to 1990, as incoming data continue to indicate that economic growth has slowed,” The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.55 percent from 4.60 percent, with points decreasing to 0.89 from .92 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans. This was the lowest 30-year contract rate ever recorded in the survey.

    Lawler: Existing Home Sales: “Consensus” vs. Likely - Given the various state/local MLS sales reports available for July, it seems INCREDIBLY likely that existing home sales last month were down a boatload from June’s pace. Every local realtor report I’ve seen showed a drop in sales from a year ago, with most showing YOY sales declines over 20%, and some reporting sales declines of over 40% from a year ago. (See last page for “raw” data) Yet amazingly the “consensus” forecast for existing home sales in July calls for a SAAR of 4.65-4.66 million, which would be down just 9.3-9.5% from last July’s seasonally adjusted pace. Of course, since this July had one fewer business day than last July, that would imply a larger YOY decline in unadjusted sales, but only to about 10.5-10.7%.  With so many state and/or local MLS publicly reporting YOY sales declines massively higher than that, how can the “consensus” be as high as it is?

    Home Sales Plunge In July - Economists and forecasters were predicting an awful 13% decline in existing home sales for July, to 4.65 million units.  This, we were told solemnly, would be the worst since 2009. In hindsight, those making the predictions seem to have been the sort of wild-eyed optimists whose sunny belief in the strength of the housing market got us into this mess in the first place.  The actual figure for home sales, according to the National Association of Realtors, was 3.83 million--a 27% decline.  The last time single-family home sales were this low, Bill Clinton was president, "This is How We Do It" was topping the Billboard charts, and our nation was grieving over a recent terrorist attack--in Oklahoma City.

    Existing home sales plunge 27.2% in July  (MarketWatch) - The sale of existing U.S. homes sank 27.2% in July - the biggest one-month drop ever - largely because of the phase-out of a federal tax credit, according to an industry trade group. The National Association of Realtors said existing-home sales fell to a seasonally adjusted annual rate of 3.83 million in July from a revised 5.26 million the month before. Sales of single-family homes fell to the lowest rate in 15 years. Inventories of unsold homes rose 2.5% to 3.98 million in July, representing a 12.5-month supply, the highest level since at least 1999. The median sales price edged up 0.7% in the past year to $182,600 in July, the NAR said

    BBC News – US existing home sales plunge 27% in July - Sales of existing homes in the US plunged 27.2% in July compared with June to their lowest level in more than 10 years, figures suggest. Home sales completed in the month stood at an annualised rate of 3.83 million, according to the National Association of Realtors (NAR). The main reason for the drop was the end of tax credits designed to boost sales, the body said. The NAR presents monthly sales figures as an annualised rate. This represents what the total number of sales for a year would be if the relative pace for that month were maintained for 12 consecutive months.  Home sales in July were at their lowest level since the NAR began collating its existing homes sales figures in 1999, and were 25% lower than in the same month a year earlier.

    Existing Home Sales Swan Dive - Sales of existing homes plunged 27.2 percent in July, down to their lowest level since the National Association of Realtors began keeping track over a decade ago. To put this in better context: Much of the decline can be explained by the expiration of the home buyer’s tax credit, which probably pulled some home purchases forward that might have otherwise occurred in July or later. Beyond the dent this is going to put in the housing component of gross domestic product, economists are probably worrying about what kind of effect the soft housing market might have on consumer behavior. Fewer housing purchases mean fewer purchases of housing-related consumer products. A weak housing market also means that consumers might feel poorer and therefore be less likely to spend in general even if their incomes rise. This phenomenon is known as the wealth effect.

    America stops buying homes - Earlier this month, talking about a housing market unsupported by Uncle Sam’s billions, I said that “the entire housing-finance business in the U.S. would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical.” What I didn’t realize was that we were plunging towards that state of affairs even with the vigorous and active involvement of Fannie Mae and Freddie Mac. The National Association of Realtors said sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest level since May 1995. This number is the lowest that the NAR has ever reported, and I can see why it spooked the markets, sending 10-year Treasuries breaking through the 2.5% level: we’re seeing less housing market activity now than we were even during the depths of the crisis. According to the NAR, there were 4.94 million existing homes sold in 2007, 4.34 million sold in 2008, and 4.57 million sold in 2009. The latest annualized number in that series, for July 2010, is just 3.37 million. That’s a 26% fall from last year’s rate.

    Existing Home Sales lowest since 1996, 12.5 months of supply - The NAR reports: July Existing-Home Sales Fall as Expected but Prices Rise Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in July 2010 (3.83 million SAAR) were 27.2% lower than last month, and were 25.5% lower than July 2009 (5.14 million SAAR). The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 3.98 million in July from 3.89 million in June. The all time record high was 4.58 million homes for sale in July 2008. The last graph shows the 'months of supply' metric. Months of supply increased to 12.5 months in July from 8.9 months in June. A normal market has under 6 months of supply, so this is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will start declining.

    What trouble looks like - THERE is no getting around the terrible, terrible existing home sales report that came out this morning. A bad figure was expected in the wake of the housing tax credit's expiration, and a bad figure is what markets got. Sales fell to an annual rate under 4 million in July, hitting the lowest level since 1996. But here is the ugliest figure you'll see today. I've said it before, and I'll say it again: the biggest policy failure of the recession, on the part of either administration or Congress, was the inability to put in place measures to meaningfully address the crisis in housing markets.

    Widespread Fear Freezes Housing Market - You have to wonder sometimes what they’re smoking over there at the National Association of Realtors. On Tuesday, the self-proclaimed “voice for real estate” released its “existing home sales” figures for July. They were gruesome. Sales were down 27 percent from the previous month, and down 26 percent from a year ago. Annualized, the July sales figures would translate into fewer than 3.9 million homes sold this year — a staggeringly low figure. (The record high occurred in 2005, when more than seven million houses were sold.)  The months-to-sale number was depressingly high; the Realtors group reported that it now takes more than a year to sell a typical house, compared with six months in a normal market. The amount of inventory is high.  Yet here was Lawrence Yun, the association’s chief economist, trying to turn lemons into lemonade: “Given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs,” he said in a news release.

    Existing Home Inventory decreases 1.9% Year-over-Year - Earlier the NAR released the existing home sales data for July; here are a couple more graphs ...
    The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.  Although inventory increased from June 2010 to July 2010, inventory decreased 1.9% YoY in July. The slight year-over-year decline is probably because some sellers put their homes on the market in the Spring hoping to take advantage of the home buyer tax credit.  This level of inventory is especially bad news because the reported inventory is already historically very high, and the 12.5 months of supply in July is far above normal. The following graph shows the relationship between supply and house prices (using Case-Shiller). This graph show months of supply (through July 2010) and the annualized change in the Case-Shiller Composite 20 house price index (through May 2010). Below 6 months of supply (blue line) house prices are typically rising (black line).Above 6 or 7 months of supply, house prices are usually falling. This isn't perfect - it is just a guideline.

    First-time Buyers Sink Below Pre-Credit Levels - Last month, first-time homebuyers’ share of the housing market fell lower than it has been since 2008 when the first-time version of the homebuyer tax credit took effect. First-time homebuyers accounted for only 39.1 percent of the home purchase market last month, down from a peak of 48.2 percent as recently as March In 2009, first-time buyers comprised an unprecedented 47 percent of the market, most likely due to the federal tax credit and historic affordability, The previous high was 44 percent in 1991. “The end of the tax credit has clearly had an effect,” “First-time homebuyer participation is continuing to drop. We expect a further decline in first-time homebuyer activity, perhaps reaching as low as 30-35 percent of the market by the fall months.”

    Sales of U.S. New Homes Dropped to Record Low in July (Bloomberg) -- Sales of U.S. new homes unexpectedly dropped in July to the lowest level on record, signaling that even with cheaper prices and reduced borrowing costs the housing market is retreating. Purchases fell 12 percent from June to an annual pace of 276,000, the weakest since data began in 1963, figures from the Commerce Department showed today in Washington. The median price of $204,000 was the lowest since late 2003. A lack of jobs is hurting American’s confidence, leading to a plunge in home demand that threatens to undermine the economic recovery that began a year ago. Builders are also competing with mounting foreclosures that is forcing down property values. “Home sales are going to remain in the dumps until probably pretty much the end of next year,” “We’re going to be talking about the foreclosure overhang for more than a year.”

    Another Record Low for HousingNew-home sales were at their lowest level in July since the government began keeping track in 1963. This follows a comparably terrible report on Tuesday on existing-home sales.  As with existing-home sales, new-home sales were probably depressed in July by the expiration of the home buyer’s tax credit. It’s now looking increasingly as though residential investment will be a strong drag on economic growth in the third quarter. As a result of the housing and durable goods reports on Wednesday, Macroeconomic Advisers, a respected forecaster, has lowered its third-quarter gross domestic product estimate to an annual rate of 1.7 percent. On Tuesday, its forecast was  2.1 percent. Again, to put this in perspective:

    New Home Sales decline to Record Low in July - The Census Bureau reports New Home Sales in July were at a seasonally adjusted annual rate (SAAR) of 276 thousand. This is an decrease from the record low of 315 thousand in June (revised down from 330 thousand). The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted or annualized). Note the Red columns for 2010. In July 2010, 25 thousand new homes were sold (NSA). This is a new record low for July. The previous record low for the month of July was 31 thousand in 1982; the record high was 117 thousand in July 2005. The second graph shows New Home Sales vs. recessions for the last 47 years. Months of supply increased to 9.1 in July from 8.0 in June. 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).The final graph shows new home inventory.  The 276 thousand annual sales rate for July is the all time record low (May was revised up a little). This was another very weak report. New home sales are important for the economy and jobs - and this indicates that residential investment will be a sharp drag on GDP in Q3.

    Sudden stop - HERE is your unpleasant housing market chart of the day, courtesy of Calculated Risk. That figure is a seasonally adjusted annual rate. We have actual monthly numbers. In July of 2005, nearly 120,000 new homes were sold. By July of 2010, sales had fallen almost 90%, to 25,000. This follows on yesterday's dismal figures for existing home sales. When one takes into account that sales aren't spread evenly around the country—most are taking place in tighter markets experiencing job growth—it becomes clear that in some metropolitan areas housing markets have all but shut down. And this despite 30-year mortgage rates around 4%.

    Home Sales at Lowest Level in More Than a Decade - The National Association of Realtors said Tuesday that the seasonally adjusted annual sales rate of 3.83 million was 25.5 percent below the level of July a year ago.  July was the first month that buyers could not qualify for a tax credit of up to $8,000, so analysts were expecting weak results. But their consensus called for a decline of about 13 percent.  Jennifer H. Lee, senior economist for BMO Capital Markets, called the numbers “truly gut-wrenching.”  Those on the front lines of real estate describe an absolute standoff between buyers and sellers.  “What few buyers are out there circle a listing like a vulture, waiting from the day of its debut until it’s left for dead, contacting us only after it has left the market to ask what it sold for and whether it’s taking backup offers,”Mr. Kelman noted that what made the sales drop “even more breathtaking” was that it was happening in July, a month when demand typically peaks.

    The Plunge in July New Home Sales Was Not Due to the Expiration of the Tax Credit - In an article reporting on the plunge in new home sales reported for July, the NYT wrongly told readers that "July was the first month that home buyers could no longer qualify for a tax credit of as much as $8,000, which analysts said may have contributed to the decline." The end of the tax credit was a major factor in the plunge in existing home sales reported on Tuesday, but not the drop in new home sales. The existing homes series refers to the closings on existing home sales. These sales were typically contracted 6-8 weeks earlier. While the homes that were closed in June likely qualified for the homebuyers tax credit, this would not be true of the existing homes that closed in July. However the new home sales refer to contracts signed for selling new homes. May, not July, was the first month in which contracts would not qualify for the tax credit.

    Home Sales: Distressing Gap - This is something I've been tracking for years ... this graph shows existing home sales (left axis) and new home sales (right axis) through July. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due partially to distressed sales). Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The two spikes in existing home sales were due primarily to the first time homebuyer tax credit (the initial credit last year, followed by the extension to April 30th / close by June 30th). There were also two smaller bumps for new home sales related to the tax credit.

    Burning Down the House; New Home Sales Consensus 330K, Actual 276K, a Record Low; Nationwide, Zero New Homes Sold Above 750K - I failed to comment yesterday on the huge miss by economists on consensus new home sales, but Rosenberg has some nice comments today in Breakfast with Dave: Burning Down the House Once again, the consensus was fooled. It was looking for 330k on new home sales for July and instead they sank to a record low of 276k units at an annual rate. And, just to add insult to injury, June was revised down, to 315k from 330k. Just as resales undercut the 2009 depressed low by 15%, new home sales have done so by 19%. Imagine that even with mortgage rates down 100 basis points in the past year to historic lows, not to mention at least eight different government programs to spur homeownership, home sales have undercut the recession lows by double-digits.Nearly 1 in 4 of the population with a mortgage are “upside down” and as a result are now prisoners in their own home. We have over five million homeowners now either in the foreclosure process or seriously delinquent. The government’s HAMP program was supposed to bail out between 3 and 4 million distressed homeowners and instead we have only had a success rate of fewer than half a million.

    Chart of the Day: Housing Prices Since WWII - In what Matt Yglesias calls "the department of stuff people are wrong about," the New York Times reports the following: In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners once again said they believed prices would rise about 10 percent a year for the next decade.With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up. “People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale. That chart at the bottom of this post, constructed from Case-Shiller data, shows the reality: home prices have actually been pretty steady over time. In fact, if you look at a fifty-year period after World War II, home prices were absolutely steady. In 1947 the Case-Shiller index stood at 110, and in 1997, adjusted for inflation, it stood at 110 again. So here's the question: why do people think that home price appreciation is a law of nature, when it so clearly isn't? Here are a few theories:

    Chart Of The Day: The Housing Bubble Has Not Fully Deflated - Daniel Indiviglio at The Atlantic comments on this chart of housing prices going all the way back to 1890: This is a pretty fascinating picture. First, it shows just how incredibly absurd the housing boom was. Beginning in the 1940s, inflation-adjusted homes prices have settled around the 110 value according to the Case-Shiller index. Yet, the index value exceeded 200 in 2006. Prices began a descent when housing collapsed, but as of May the index remained well above the natural value of 110. Eyeing the chart, the value looks to have hit around 147 in May. For it to drop back down to 110, home prices would have to decline another 25%. That’s still a pretty long way to fall. What this chart does show us, though, is that the housing market that existed from the late 1990s until 2007/08 was an historical anomaly, and anyone expecting a return to those days is fooling themselves

    .MBA Q2 2010: 14.42% of Mortgage Loans Delinquent or in Foreclosure - The MBA reports that 14.42 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q2 2010 (seasonally adjusted). This is down slightly from the record 14.69 percent in Q1 2010. From the MBA: Delinquencies and Foreclosure Starts Decrease in Latest MBA National Delinquency Survey  The delinquency rate for mortgage loans on one-to-four-unit residential properties dropped to a seasonally adjusted rate of 9.85 percent of all loans outstanding as of the end of the second quarter of 2010, The percentage of loans in the foreclosure process at the end of the second quarter was 4.57 percent. Loans 30 days delinquent increased to 3.51%, and this is about the same levels as in Q4 2008 (slightly below the peak of 3.77% in Q1 2009).  Delinquent loans decreased in all other buckets - especially in the 90+ day bucket.  The second graph shows the delinquency rate by state (red is seriously delinquent: 90+ days or in foreclosure, blue is delinquent less than 90 days).

    Prices drop, but hopes never do - NOT EVEN a 30 percent drop in housing prices can shake the idea that prices always go up. Economists Karl Case and Robert Shiller regularly ask new home buyers about what they think will happen to housing prices over the next 10 years. Amazingly, in the 2010 round of the survey, new buyers in Boston reported that they expected housing prices to rise by about 12 percent per year over the next decade, which is almost as unrealistic as the 13-percent-per-year growth buyers expected in 2005. Wildly optimistic beliefs about house price appreciation encourage unwise purchases and help justify mistaken policies that prod Americans to bet borrowed money on housing. If inflation runs at 2.4 percent over the next decade — the average estimate in the Livingston forecaster survey — then Boston buyers are basically predicting that, over the next decade, real housing prices will grow by more than 9 percent per year in real terms.

    Does the Recovery Depend on Housing? - The Room for Debate asks: Can the economy recover without a turn-around in home sales? Many say that job improvement has to come first, but the bad news on housing sales has put a new gloom on expectations of a recovery. Does the housing market have to lead the way out of the hole? If so, why? The 800 word version of my response is below, but if you prefer, the edited, less wordy 400 word version, it is here along with responses from Jennifer H. Lee, Jeffrey Frankel, Patrick Newport, and Dean Baker [all responses]. Among other things, I wish I'd talked more about employment:

    After Housing Bubble, the Dark Side of Homeowner Dreams - TIME - Homeownership has let us down. For generations, Americans believed that owning a home was an axiomatic good. Our political leaders hammered home the point. Franklin Roosevelt held that a country of homeowners was "unconquerable." Homeownership could even, in the words of George H.W. Bush's Secretary of Housing and Urban Development (HUD), Jack Kemp, "save babies, save children, save families and save America." A house with a front lawn and a picket fence wasn't just a nice place to live or a risk-free investment; it was a way to transform a nation. No wonder leaders of all political stripes wanted to spend more than $100 billion a year on subsidies and tax breaks to encourage people to buy.  But the dark side of homeownership is now all too apparent: foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values, a nation in which families have $6 trillion less in housing wealth than they did just three years ago.

    More Negative News Flow Coming - Just a reminder ... in addition to the existing home sales report this morning, there is more negative news coming. First, as I noted in the existing home inventory post, the months-of-supply will probably stay in double digits for some time and anything over 7 or 8 months of supply will put downward pressure on house prices. However it will take some time for reported house prices to start declining.  On Friday, the second estimate of Q2 GDP will be released. In the advance release, the BEA reported real GDP increased at a 2.4% annualized rate in Q2. The consensus is for a downward revision to 1.3% real annualized growth. And next week, the ISM manufacturing index will be released - and this will probably continue to decline based on the regional manufacturing reports  And next Friday, the August employment report will be released. I expect another weak report - and I expect the unemployment rate to start ticking up. Also I think the European situation is starting to heat up again with bond spreads widening to the May crisis levels for both Greece and Ireland.

    Household leverage: US versus UK - Earlier this week I compared household saving rates across the US, UK, Canada, and Germany. The financial circumstances of US and UK households are very similar despite their diverging saving rates over the last two quarters (see saving rate chart here): leverage is high. In the UK, household leverage peaked above that of the US at 161% of personal disposable income in Q1 2008, having fallen to 149% by Q1 2010. Furthermore, recent deleveraging by UK households has occurred through income gains, rather than paying down debt: spanning the period Q2 2009 to Q1 2010, the UK household stock of loans increased 1.2%, while disposable income grew 3.1% (you can download the data here). Given the remaining leverage on balance, the divergence in household saving rates across the US and UK is probably not sustainable. The UK household saving rate is likely to increase, or at the very minimum, hold steady. The problem is: that according to the sectoral balances approach, it's impossible for the government and the private sector to increase saving simultaneously unless the UK is running epic current account surpluses (it's not).

    Household Debt as a Percent of Disposable Income

    When Economic Recessions Become "Social Recessions" - At some point, economic recessions trigger social recessions.  Individual expectations and behaviors slowly gather the momentum to change cultural values, social relations, and the way entire generations think about key issues such as opportunity, security, prosperity, government, family, and the relative importance of money in life. Those of us who know people who experienced the Great Depression have some glimmerings of how social recessions change people's attitudes and values.  Two examples come to mind:  My grandmother had small savings accounts in multiple banks; clearly, she didn't trust the idea of having one's nest egg in one bank.  And my uncle said that just having a job with a steady paycheck after World War II seemed like heaven. But we don't need to turn back the clock 65 years to view a social recession; there is a real-time one playing out in the world's second largest economy:  Japan.

    Credit Card Companies Jack Up Rates Despite Flagging Economy, Super Low Funding Costs - Yves Smith - The banks giveth and the banks taketh away, big time.This chart from a Wall Street Journal article on credit card interest rates says a great deal:Even though banks are getting all kinds of bennies from the Fed and regulators, such as a nice steep yield curve and lots of regulatory forbearance (econ-speak for extend and pretend), they are still out to extract a pound of flesh from the retail borrower. Since that has been a core element of their business model for the last decade, it is probably not so surprising that they are loath to give that practice up.Now some will argue, correctly, that consumers need to delever. But guess what? They are paring debt levels, including credit cards. The number of open accounts has fallen by over 20% since the peak, as has the balance outstanding (over 6%). And not all of this has been voluntary. Banks have been shutting accounts and cutting credit lines. But (drumroll) increasing interest rates, particularly when the banks are getting very sizeable subsidies, means that more of the money consumers pay to credit card companies goes to interest, less to reducing principal

    Credit Cards Are Exception to Lower Consumer Rates -New credit-card rules that took effect Sunday limit banks' ability to charge penalty fees. They come on top of rule changes earlier this year restricting issuers' ability to adjust rates on the fly. Issuers responded by pushing card rates to their highest level in nine years. In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to research firm Synovate, a unit of Aegis Group PLC. That was the highest level since 2001. Those figures look especially stark when measuring the gap between the prime rate—the benchmark against which card rates are set—and average credit-card rates. The current difference of 11.45 percentage points is the largest in at least 22 years, Synovate estimates. By comparison, the spread between 10-year Treasurys and a standard 30-year fixed-rate mortgage is just 1.93 percentage points, near historical averages, according to mortgage-data provider HSH Associates.

    Credit Card Rates Keep Rising : The average interest rate on credit-card debt recently hit 14.7 percent — the highest level since 2001, the WSJ reports this morning. The news is particularly striking because interest rates on almost everything else — mortgages, savings accounts, etc. — are near historic lows. The gap between credit card rates and the prime rate is the biggest it's been in at least 22 years. And the Fed's policy of superlow interest rates allows the banks themselves to borrow money at an interest rate that is close to zero, which has been a boon to bank profits. The banks explain the high credit-card rates by citing new federal rules that limit them from charging penalty fees, and restrict their ability to adjust rates on the fly. And a higher percentage of credit-card borrowers are failing to repay their debt, which also leads to higher rates.

    Credit Card Debt Drops to Lowest Level in 8 Years - The amount consumers owed on their credit cards in this year's second quarter dropped to the lowest level in more than eight years as cardholders continued to pay off balances in the uncertain economy. The average combined debt for bank-issued credit cards — like those with a MasterCard or Visa logo — fell to $4,951 in the three months ended June 30, down more than 13 percent from $5,719 in the same period a year ago, according to TransUnion. The credit reporting agency said it was the first three-month period during which card debt fell below $5,000 since the first quarter of 2002.

    Debt’s Deadly Grip  - IT’S one of the toughest lessons an investor has to learn: while the value of assets can plummet posthaste, it takes forever to shrink the debt that was used to buy them. Last week, this harsh truth was made clear yet again, in a report on consumers’ financial well-being by the Federal Reserve Bank of New York. The first of a Fed series to be published quarterly on household debt and credit, the 38-page report shows just how tapped out the consumer remains three years after the borrowing bubble burst.  To be sure, the data indicates that consumers are doing what they can to kick their debt habits. But the process is slow.  For example, total consumer debt stood at $11.7 trillion on June 30, down just 6.5 percent from its peak in the third quarter of 2008. The number of open credit card accounts was down considerably — 23.2 percent — from the highs reached during the second quarter of 2008, while mortgage obligations have fallen 6.4 percent from the peak that was seen almost two years ago.

    Associated Press Interactive: AP Economic Stress Index

    College Savings Take A Hit (CNN Money video) Higher unemployment is one of the reasons why parents are saving less for college, Fortune's Colin Barr says.

    Let them eat credit - By most counts, the U.S. economy started growing in the middle of last year. For many Americans, though, it does not feel as if the Great Recession has ended—unemployment and underemployment are still alarmingly high, and job growth is weak. Many causes have been suggested for both the economic collapse and mediocre recovery, but one that is hardly ever mentioned is income inequality. This is a mistake. Growing income inequality in the United States and the policy responses it has spawned have done tremendous damage to our economy. And because we continue to ignore this underlying problem, the risks of our policies leading to another calamity will not go away, no matter what we do to reform the financial sector. Since 1968, income inequality has been steadily increasing in the United States.  I refer to a more worrying everyday phenomenon that confronts most Americans, the disparity in income growth rates between a manager at the local supermarket and the typical factory worker or office assistant.

    For America's Middle Class, the Hits Just Keep on Coming - A lot of ink and pixels have been spilled this week over the ICI's report that equity mutual funds suffered net withdrawals totaling over $33 billion in the first seven months of 2010. Myriad reasons were cited for the trend, including a mistrust of stocks, the flash crash and an aging population. Perhaps the biggest reason of all hasn't gotten enough attention: Americans are making due with less and don't have the money to put into stock funds, and many are taking money out of their investments to pay for basic necessities like food, clothing and shelter. With wages stagnant for those who still have a job "a lot of people are having to tap into their nest egg to keep their living standards going," says Damien Hoffman, co-founder of WallStCheatSheet. "A lot of people are living out of principal. There's no other way to get around that."

    The Great Deleveraging Lie - You can’t open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land. Bloomberg peddled this line of bull last week: One has to wonder whether the mainstream media and the clueless pundits on CNBC actually believe the crap they are peddling or whether this is a concerted effort to convince the masses that they have done enough and should start spending. Total credit market debt peaked at $52.9 trillion in the 1st quarter of 2009. It is currently at $52.1 trillion. The GREAT DE-LEVERAGING of the United States has chopped our total debt by 1.5%. Move along. No more to see here. Time to go to the mall.

    Lies, damned lies, and equity mutual fund statistics - The lead story in Sunday’s NYT was by Graham Bowley, and it was quite alarming: Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year…The story was picked up by Josh Brown, who said that in fact things were even worse than Bowley made them appear.. The people are making withdrawals from their portfolios because they are starving for cash.  Except, it’s not remotely as simple as that. On the same day that Bowley’s article appeared on the east coast, Tom Petruno was writing a very different article for the LA Times: In the first half of this year, redemptions of stock funds by people who needed or wanted their money were large enough to nearly offset the $724 billion in gross purchases by new buyers. What’s going on here? Are mutual fund flows negative, as Bowley has it, or positive, as Petruno has it? The fact is that Petruno is much closer to the truth, and Bowley seems to have cherry-picked the worst number he could find. And Brown doesn’t seem to be right at all.

    Capital Investment Slowdown in US Signals Reluctance to Hire (Bloomberg) -- A slowdown in U.S. business investment may soon hit the job market, further hindering a recovery in the world’s largest economy.  Capital spending, one of the few bright spots in the recovery, declined in July, according to Commerce Department figures released yesterday in Washington. Sales of new homes fell to the lowest level since data began in 1963, another report from the same agency showed, indicating a lack of jobs is crippling housing. Employers are reluctant to take on more staff until they see more evidence of durable growth, keeping unemployment near a 26-year high and holding back the consumer spending that makes up 70 percent of the economy. A Labor Department report next week may show that private payrolls failed to grow in August for the first time in eight months, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.  “If capital spending does weaken further, then that raises some concerns about labor demand and whether firms want to increase hires,”

    "Who Creates Jobs? Small vs. Large vs. Young" - Those who argue that "small businesses create the most jobs" have it partly right, but they also destroy the most jobs so that the net contribution of small firms isn't so clear.  What is the relationship between firm size and job growth? It turns out the age of a firm is important independent of size. The paper finds that "once we add controls for firm age, we find no systematic relationship between net growth rates and firm size. The paper does find, however, that conditional on survival, young firms (who tend to be small) grow faster than older firms. Thus, there is a sort of risk-return tradeoff. Startups, who tend to be small, do grow fastest if they survive, but they also have high rates of failure and job destruction.

    Size doesn’t matter, but age does - In addition to “widespread homeownership is awesome”, another long-standing popular myth of the American economy could turn out to be wrong. A new paper from three researchers, two at the US census bureau and an economist at the University of Maryland, challenges the notion that small businesses create the most jobs. Instead they find that it’s the age of the firm, not the size, that really matters. From the abstract (our emphasis): .. our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. Previously, the authors write, small businesses were thought to contribute disproportionately to job-creation because most start-ups happen to be small. But in fact, small businesses older than 10 years aren’t anything special, and follow roughly the same patterns as larger firms:

    Young Firms, Not Small Ones, Are the Engines of Job Growth - Small businesses are the engines of job growth. So the conventional wisdom goes. A new paper challenges this view, arguing instead that start-ups and other young firms are the disproportionate source of new jobs. From the abstract: Using data from the Census Bureau Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues regarding the role of firm size and growth that have been at the core of this ongoing debate (such as the role of regression to the mean). We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an “up or out” dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.

    U.S. restaurants starved for business - With consumers and businesses keeping a lid on expenses, more and more small and mid-size restaurants are throwing in their dish towels and closing up shop. Southern California lost nearly a thousand more restaurants than it gained during the 12 months that ended in March, representing a net 2% drop that was twice the national average, according to the New York research firm NPD Group. Nearly all the closings were among independently owned restaurants: small, family businesses that just couldn't hold on as customers held back. Earlier in the year restaurants reported modest increases in business, but the jumps in sales were too little too late for many.

    10 Leading Retailers Close Stores; Exodus of Small Retailers Amidst Signs of "Free Rent"; 700,000 Drop Cable TV Subscriptions -  Signs of weak consumer discretionary spending are popping up in multiple places. For example Subscriber growth suddenly stops for cable TV industry The number of cable subscribers dropped by 711,000, according to market research firm SNL Kagan, with six out of eight cable providers reporting their worst quarterly subscriber losses to date. The Toledo Blade comments 'Free rent' signs of trouble: But these days all along the Monroe Street-Talmadge Avenue corridor - the Toledo area's crown jewel of commercial real estate - times are tough. "For Lease" signs have proliferated on Monroe from Sylvania Avenue past Talmadge to the Target shopping plaza. Some of the signs feature a shocking indicator of hard times: "Free rent." Daily Finance reports 10 Big Retailers Closing Stores Both Saks (SKS) and Abercrombie & Fitch (ANF) said they were closing stores in several parts of the country. Meanwhile, other stores like the struggling Blockbuster video rental chain, continue to slash stores by the dozens. American Apparel (APP), which is close to defaulting on its loans, just may be next.

    For Workers Who Find Jobs, Lower Wages - Of the 6.9 million workers who lost jobs during the recession that they’d held for at least three years, only about half were reemployed by January 2010. And 55% of those who did find work were earning less than before. The findings, released Thursday, are part of the Labor Department’s report on worker displacement from 2007 to 2009. Displaced workers are those who left a job or were let go because their company closed, there wasn’t enough work to do or their position was abolished. The report highlights the lasting effects of the latest economic downturn. Not only is unemployment likely to remain high, but those workers who do manage to find jobs are often coping with lower salaries. “We have found that these earnings losses stick to these workers for a while,” said Till Marco von Wachter, a Columbia University economist who has studied the long-term salary effects of job displacement. But that doesn’t mean all of those workers who accepted lower wages will suffer lower pay in the long run. “It depends, of course, always on the worker. The more enterprising, willing to move, willing to retrain…the less likely their earnings loss is to last,” Mr. von Wachter said.

    Energy Department defends use of stimulus dollars The Energy Department official overseeing the agency’s distribution of billions of dollars in stimulus funding on Friday struck back at critics who say DOE is moving too slowly. Matt Rogers — who advises Energy Secretary Steven Chu on stimulus spending — took to DOE’s blog Friday afternoon to make the case that stimulus funding has created tens of thousands of jobs. “Sometimes the media is quick to criticize the pace of Recovery Act spending in the energy sector. Here’s a key fact that is often overlooked: more than 90 percent of the Department of Energy’s $32 billion in Recovery Act funds has been allocated to clean energy projects around the country, creating tens of thousands of direct jobs and even more along the supply chain” he wrote. The department’s inspector general recently issued a pair of reports that gave mixed reviews on the pace of spending under the stimulus. One report this month found that DOE has distributed about $2.7 billion of $3.2 billion in energy efficiency and conservation block grants provided in last year’s stimulus. Yet grant recipients had used only 8.4 percent of the $3.2 billion after more than a year.

    Joblessness in America: A stickier problem | The Economist…THE economy stopped shrinking a year ago, but America’s unemployment problem is as big as ever. The official jobless rate was 9.5% in July, and would be higher still had many people not given up searching for work. Some 45% of the unemployed have been out of a job for more than six months—the highest proportion since the 1930s. And judging by the recent rise in applications for unemployment benefits, the situation may soon get worse rather than better.  Why is joblessness still so high? The prevailing view among policymakers is that unemployment is a painful reflection of the economy’s weakness. Americans are out of work because the slump was deep and the recovery has been lacklustre. Stronger demand will eventually solve the problem.  The main point of contention is whether policymakers should try to speed up that process with yet more fiscal or monetary stimulus.

    The Manufacturing Fallacy - In mid-1960’s Great Britain, Nicholas Kaldor, the world-class Cambridge economist and an influential adviser to the Labour Party, raised an alarm over “deindustrialization.” His argument was that an ongoing shift of value added from manufacturing to services was harmful, because manufactures were technologically progressive, whereas services were not. Kaldor’s argument was based on the erroneous premise that services were technologically stagnant. This view no doubt reflected a casual empiricism based on the mom-and-pop shops and small post offices that English dons saw when going outside their Oxbridge colleges. But it was clearly at odds with the massive technical changes sweeping across the retail sector, and eventually the communications industry, which soon produced Fedex, faxes, mobile phones, and the Internet. In fact, the dubious notion that we should select economic activities based on their presumed technical innovativeness has been carried even further, in support of the argument that we should favor semiconductor chips over potato chips.

    Identifying Cyclical vs. Structural Unemployment: A Guide for Slate Writers, by Brad DeLong: Over at Slate, James Ledbetter says that he cannot referee between the two gangs of economists warring over the causes of high unemployment. But he is wrong. He can. Here is how: Suppose that you have not cyclical unemployment generated by a collapse in aggregate demand but structural unemployment generated by mismatch, suppose you have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. Suppose--this is Berkeley, after all--that we were in a nice equilibrium in which some workers were baristas making lattes and other workers were yoga instructors teaching classes and that all of a sudden we have had a big shift in demand: that consumers decide that they want few moments of wired, frenetic caffeination and more moments of inner peace. What would we expect to find happening?

    FT Alphaville » The debate over US unemployment - Brad DeLong has waded into the debate over whether US unemployment is cyclical or structural. For structural unemployment, he says, you tend to see a mismatch: one sector can be “depressed with idle excess labour” while another is “booming with rising wages and prices.” So where does America stand today? And what has happened by sector?

    • Employment in logging and mining has risen by 11 thousand
    • Employment in construction has fallen by 2.1 million
    • Employment in manufacturing has shrunk by 2.4 million
    • Employment in wholesale trade has fallen by 437 thousand
    • Employment in retail trade has fallen by 912 thousand
    • Employment in transportation and warehousing is down by 333 thousand
    • Employment in publishing, except internet is down by 147 thousand
    • Employment in motion picture and sound recording is down by 34 thousan
    • Employment in broadcasting, except internet is down by 41 thousand
    • Employment in telecommunications is down by 54 thousand
    • Employment in financial activities is down by 921 thousand
    • Employment in professional and business services is down by 1.3 million
    • Employment in educational services is up by 197 thousand
    • Employment in health care is up by 789 thousand
    • Employment in leisure and hospitality is down by 467 thousand
    • Employment in other serivces is down by 32 thousand
    • Employment by the federal government is down by 330 thousand
    • Employment by state and local governments is down by 127 thousand.

    Therefore? I see employment growth in (a) internet, (b) health care, and (c) logging and mining. I see employment declines everywhere else. That does not look like a story of “mismatch” unemployment–in which demand shifts in a direction that the existing labor force cannot cope with, and the result is structural unemployment in declining sectors and occupations and boom times and rising wages and prices in those sectors and occupations to which demand has shifted. That does not look like that at all.

    Spending vs. PSST - Mark Thoma articulates the conventional view. It's useful to break down the economy into four major sectors -- households, businesses, government, and the foreign sector......looking to housing to lead the recovery is likely to lead to disappointment....Business investment does not provide much hope either ... ...So there's very little besides government that can provide the needed boost to the economy in the immediate future.  The problem with the conventional view is that it is focused on spending, as measured by GDP. As Mark points out, this consists of spending by households, businesses, government, and the foreign sector. Everything seems to follow logically from that. My alternative is to say that economic activity = PSST, meaning patterns of sustainable specialization and trade. GDP is one indicator that you can use to measure PSST, but it is not the best indicator.

    Intel CEO: U.S. Faces Looming Tech Decline - Otellini's remarks during dinner at the Technology Policy Institute's Aspen Forum here amounted to a warning to the administration officials and assorted Capitol Hill aides in the audience: Unless government policies are altered, he predicted, "the next big thing will not be invented here. Jobs will not be created here." The U.S. legal environment has become so hostile to business, Otellini said, that there is likely to be "an inevitable erosion and shift of wealth, much like we're seeing today in Europe--this is the bitter truth."Not long ago, Otellini said, "our research centers were without peer. No country was more attractive for start-up capital... We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case."

    The Knowledge Worker Myth vs Blue Collar Reality - Once more demonstrating that you don't have to look far for IPE-relevant material, I came across this featured story on Yahoo!'s front page yesterday. There it was staring me in the face: a pretty damning indictment of what I've been taught all my life. Like me, you probably grew up in a generation that disdained blue collar work. That is, work which actually involves physical exertion and being good with one's hands has been frowned upon. It is not that these biases were made up on our own; our parents also had a role in drumming in the message that "manual labour" was something dirty. Hence, many of you are also of a generation told that lawyers, bankers, businessmen, and the like had it made. The white collar life was supposed to promise the land of milk and honey.Certainly, academia has had an interest in propagating this story since it provides fodder for ensuring a steady stream of tuition-paying students in law, commerce, and business. Various American commentators like former Fed Chairman Alan Greenspan have constructed an entire narrative out of "knowledge workers." In recent times, that has meant training to be a software engineer or some other lofty position that makes the most of conceptualizing abstract ideas and similarly high-faluting rhetoric. The truth, though, is much less compelling. Take America (please). Not only are there scores of unemployed college graduates there, but wages of college graduates have been on a downward trend since 2000. So much for the college myth.The aforementioned Reuters article rubs it in further by pointing out that, actually, the skills which are most in demand worldwide are not those requiring fancy college degrees but fairly "mundane" blue-collar certification:

    Displaced Workers Summary - BLS - From January 2007 through December 2009, 6.9 million workers were displaced from jobs they had held for at least 3 years, the U.S. Bureau of Labor Statistics reported today. This was nearly twice as many as were displaced for the survey period covering January 2005 to December 2007. In January 2010, about half of displaced workers were reemployed, down from about two-thirds for the prior survey in January 2008. The more recent period includes the  recession that began in December 2007. In contrast, the prior survey covered a period of employment growth and declining unemployment.

    Jobs ... but low pay - While a lack of jobs is arguably the biggest problem facing the labor market, another major concern is the quality of the jobs that are being created. The Figure presents the five fastest growing occupations between 2006 and 2009 and shows that all but one of them pays below the median income in May 2009 of $15.95 an hour.  The two fastest-growing occupations, home health care and food preparation and serving, pay closer to the federal minimum wage of $7.25 per hour than the median wage. A food preparation worker’s typical wage of $8.28 an hour would earn an annual salary of $16,560, based on a typical 2,000-hour work year: That salary is just below the 2009 poverty threshold for a family of three. Warehouse stock clerks, another fast-growing occupation, would earn slightly more than $20,000 per year.

    Maybe it isn't China - IN THE early postwar decades, the American economy grew at a healthy clip, and the growth was broad-based. While college enrolment was increasing rapidly, millions of Americans, including many without a college education, earned a middle class wage by working in manufacturing. In recent decades, rising inequality and the stagnation of middle class earnings have generated a wave of nostalgia for the postwar economy, and for manufacturing employment in particular. If only America hadn't lost its manufacturing edge, thanks to strong dollar policies and China's aggressive export subsidies (so the thinking goes), all would be well. The problem with this is that American manufacturing output has grown steadily (aside from cyclical ups and downs) for the past half century.

    Conservative Economist: 'Find the Unemployed and Hire Them', by Derek Thompson: Let's put this gently: economist Kevin Hassett is no Keynesian.  Hassett, the director of economic-policy studies at the American Enterprise Institute and an economic adviser to Sen. John McCain, recent attacked President Obama's economic plan as "voodoo economics"... But when I got him on the phone to talk about the unemployment crisis, he struck a different tone. ... The problem, he said, was that Obama's stimulus was not direct enough.  With the Recovery Act, the White House eschewed direct hiring and aimed instead to raise overall economic output in the hope that more activity would lead to more demand. "My idea is simpler. Find the unemployed and hire them."  If the government had spent the stimulus hiring people directly, we could have supported 23 million jobs, Hassett claimed. Hiring millions of unemployed workers directly into government organizations that already exist -- such as the military and the Army Corps of Engineers -- would be a much more efficient use of government funds.

    Workers' comp crisis may be costly - A growing insolvency crisis in workers' compensation insurance, born from years of lax oversight by state regulators, is threatening to leave thousands of small businesses owing $600 million or more to New York insurance pools they trusted to pay claims from workplace death and injury. Already, the little-publicized crisis has forced otherwise stable companies to lay off workers and curtail hiring plans during a critical point in the state's economic recovery. And at some point, taxpayers could be forced to pick up the tab for whatever can't be recovered through lawsuits or other means.

    Weekly initial unemployment claims decline, 4-week average highest since Nov 2009 - The DOL reports on weekly unemployment insurance claimsIn the week ending Aug. 21, the advance figure for seasonally adjusted initial claims was 473,000, a decrease of 31,000 from the previous week's revised figure of 504,000. The 4-week moving average was 486,750, an increase of 3,250 from the previous week's revised average of 483,500. This graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 3,250 to 486,750. This is the highest level since November 2009.

    Estimate of Decennial Census impact on August payroll employment: minus 116,000 - The Census Bureau released the weekly payroll data for the week ending August 14th this week (ht Bob_in_MA). 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. The Census Bureau releases the actual number with the employment report. 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 200,346 for the week ending July 17th to 83,955 for the week ending August 14th.  So my estimate for the impact of the Census on August payroll employment is minus 116 thousand (this will probably be close).

    With Loss of COBRA Subsidy, Newly Unemployed Face Tripling of Insurance Costs - The change has gone little-noticed, both by the press and by the laid-off persons impacted by it. But a popular stimulus provision, the federal subsidy of COBRA benefits, expired for newly unemployed workers as of the first day of June. That means, for the average worker who has lost her job since May 31, the cost of COBRA has tripled. COBRA gives workers the option of buying into their old health-care plan when they lose their job.  As part of the American Recovery and Reinvestment Act, or the 2009 stimulus, Congress subsidized this coverage, given the massive number and economic hardship of laid-off workers. The subsidy paid for 65 percent of health-care premiums for up to 15 months, meaning an average enrollee paid less than $3,000 a year. For the Davises, under COBRA, coverage might have been a manageable $400 a month. When Davis looked into enrolling her husband and herself, she found it would cost more than $1,100 a month — leaving the family just a few hundred dollars for the mortgage, utilities, gas and food.

    Shock: Unemployed people care more about finding jobs than global warming - Is “thinking green” an economic luxury?  Intuition implies that it may be, but so far there’s been little empirical evidence on the subject. Two economists recently changed that: using data from Google keyword searches between 2004 and 2010, Matthew E. Kahn and Matthew J. Kotchen found that “higher unemployment rates within a state decrease internet search activity for global warming, but increase search activity for unemployment. Based on this revealed preference for interest in global warming, therefore, it appears that recessions crowd out concern for the environment…” The authors also used recent survey data to analyze the link between unemployment and climate-change denial, concluding that “an increase in a state’s unemployment rate is associated with a decrease in the probability that residents think global warming is happening, and with a reduction in the certainty of those who think it is. Higher unemployment rates are also associated with views that we should do less with respect to policies designed to reduce global warming.”

    States May Contend With Budget Gaps Through Next Year, US Treasurers Say (Bloomberg) -- U.S. states will confront budget deficits through next year even as tax revenue rebounds after a slide of 15 months, triggered by the longest recession in seven decades, according to treasurers from around the country.  Tax collections are showing signs of improving, though not by enough to prevent the need for further cuts in state spending, the officials said, speaking in individual interviews while at a meeting of the National Association of State Treasurers in Williamsburg, Virginia.  State tax revenue rose 2.5 percent during the first three months of this year, marking the first increase since the third quarter of 2008, the Nelson A. Rockefeller Institute of Government in Albany, New York, said last month in a study.

    Can Oregon downsize state government? - Despite years of talk by Democrats and Republicans about the need to control spending, farm out work to private businesses and make government finances more transparent, the opposite has occurred. Rather than becoming leaner, the state work force increased by 7.1 percent since 2005 -- outpacing Oregon's population growth. The number of top state employees earning more than $100,000 a year more than doubled during the past decade. Lawmakers took no action on an urgent call by the governor to start paring government by eliminating dozens of boards. This Thursday, Oregon leaders will get an update of the state's revenue outlook. State economists have already alerted Gov. Ted Kulongoski that the news isn't good, with projected revenues down by as much as $1 billion since the Legislature finished writing the 2009-11 budget in June 2009. The shortfall for 2011-13 is expected to be at least $2.7 billion.

    'Our state is $120.6 billion short!' - Illinois is bankrupt. By now that should not come as a surprise. In fact, you've seen so many headlines about Illinois' financial woes that you might even find the subject boring. But it won't be so boring when the impact hits you -- and your planned retirement. Maybe if we all took a simple and honest look at the problems facing the state, we could gather some consensus about what must be done. What services and benefits do we need and want from the state, and are we willing to pay for them? Instead, we go on as usual in the governor's race with each candidate decrying the other's plans for taxes and spending.  I've got news for you: Both candidates are missing the problem by a mile. That's not just my opinion. It's the financial analysis of the nonprofit Institute for Truth in Accounting

    Georgia's tax scheme no longer generates enough for all the state services - Georgians angered by teacher layoffs, state offices on furlough and jolting tuition increases should prepare for more than five years of the same, warns budget experts, because the state is in the clutches of a structural deficit. Months after the economy entered recovery mode, state tax collections continued to fall. Only in the last two months have collections bottomed out and begun to rise. A July report by Georgia State University put the term "structural deficit" on the tongues of legislators and state candidates. Slowly, voters across the state are hearing it, too.

    Major Metropolitan Area Sales Tax Rates - General sales taxes levied by state, county and city governments in the United States vary greatly, even among major metropolitan areas. For purposes of this analysis, "major metropolitan areas" are those with populations greater than 200,000 individuals, of which there are 107 in the United States. The 25 metropolitan areas with the highest combined sales tax rates—state rate plus county rate plus city rate—are shown in Table 1. Two Alabama cities, Montgomery and Birmingham, have the highest combined sales tax rates in the nation. Until recently Chicago had that distinction, but Cook County lowered its rate by 0.5%, effective July 1, 2010. Unsurprisingly, none of the highest-taxing cities are located in the five states that levy no state-level tax: Alaska, Delaware, Montana, New Hampshire and Oregon. But some of these high-taxing cities have a zero rate at either the county or city level. In four cities—St. Louis, Memphis, Nashville and New York City—there is no county-level sales tax; and in eight cities—Oakland, Fremont, Seattle, San Francisco, San Jose, New Orleans, Baton Rouge, and Fresno—there's no city-level tax.

    Minneapolis will pay $165,000 to zombies - The Minneapolis city attorney's office has decided to pay seven zombies and their attorney $165,000. The payout, approved by the City Council on Friday, settles a federal lawsuit the seven filed after they were arrested and jailed for two days for dressing up like zombies in downtown Minneapolis on July 22, 2006, to protest "mindless" consumerism. When arrested at the intersection of Hennepin Avenue and 6th Street N., most of them had thick white powder and fake blood on their faces and dark makeup around their eyes. They were walking in a stiff, lurching fashion and carrying four bags of sound equipment to amplify music from an iPod when they were arrested by police who said they were carrying equipment that simulated "weapons of mass destruction." However, they were never charged with any crime.

    Colorado gov. says pot fees helping budget deficit - Gov. Bill Ritter is using $9 million from medical marijuana registrations to help the state meet a $60 million fiscal emergency. The state anticipates ending the year with 150,000 applicants for medical marijuana cards, up from 41,000 in 2009. A marijuana card costs $90 per year. Backers of medical marijuana legislation in a number of states and cities have touted revenue from possible taxes and other fees as a selling point at a time of tight fiscal funding.

    Philadelphia Demands License Fee and Taxes from Bloggers - Philadelphia bloggers were dispatched letters informing them that they owe $300 for a [lifetime] privilege license [or $50 per year for an annual license], plus taxes on any profits they made. Even if, as with Sean Barry, that profit is $11 over two years.[...] Even though small-time bloggers aren't exactly raking in the dough, the city requires privilege licenses for any business engaged in any "activity for profit," says tax attorney Michael Mandale of Center City law firm Mandale Kaufmann. This applies "whether or not they earned a profit during the preceding year," he adds.

    High-tech carts will tell on Cleveland residents who don’t recycle … and they face $100 fine - It would be a stretch to say that Big Brother will hang out in Clevelanders' trash cans, but the city plans to sort through curbside trash to make sure residents are recycling -- and fine them $100 if they don't.  The move is part of a high-tech collection system the city will roll out next year with new trash and recycling carts embedded with radio frequency identification chips and bar codes. The chip-embedded carts are just starting to catch on elsewhere. The Washington, D.C. suburb of Alexandria, Va., earlier this year announced it would issue carts to check whether people are recycling.  Some cities in England have used the high-tech trash carts for several years to weigh how much garbage people throw out. People are charged extra for exceeding allotted limits.

    Facing Budget Gaps, Cities Sell Parking, Airports, Zoo - Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.  About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland's RBS Global Banking & Markets. Those assets have a market value of about $45 billion—more than ten times the $4 billion or so two years ago. Hundreds more deals are being considered, analysts say. The deals illustrate the increasingly tight financial squeeze gripping communities. Many are using asset sales to balance budgets ravaged by declines in tax revenues and unfunded pensions. In recent congressional testimony, billionaire investor Warren Buffett said he worried about how municipalities will pay for public workers' retirement and health benefits and suggested that the federal government may ultimately be compelled to bail out states.

    Hard Pressed, Cities Take Ax to Once-Sacrosanct Firehouses… Fire departments around the nation are cutting jobs, closing firehouses and increasingly resorting to “rolling brownouts” in which they shut different fire companies on different days as the economic downturn forces many cities and towns to make deep cuts that are slowing their responses to fires and other emergencies.  Philadelphia began rolling brownouts this month, joining cities from Baltimore to Sacramento that now shut some units every day. San Jose, Calif., laid off 49 firefighters last month. And Lawrence, Mass., north of Boston, has laid off firefighters and shut down half of its six firehouses, forcing the city to rely on help from neighboring departments each time a fire goes to a second alarm.  Fire chiefs and union officials alike say it is the first time they have seen such deep cuts in so many parts of the country. “I’ve never seen it so widespread,” said Harold A. Schaitberger, the general president of the International Association of Fire Fighters.

    Budget cuts keep police in some cities from answering calls  - Tightening the budgetary belt has police departments across the country cutting back on the serve part of to "protect and serve". For instance, in Tulsa, Oklahoma officers will no longer investigate larceny, fraud or car theft cases. In Norton, Massachusetts, the police department's web site tells people to expect delays or no response to non-priority calls and in Oakland, California, the loss of officers has led to a don't call us, we might call you approach to the public. Oakland police are asking people to file reports online in cases such as theft, vandalism, identity theft and even violations of court ordered custody.

    Cutbacks force police to curtail calls for some crimes - Budget cuts are forcing police around the country to stop responding to fraud, burglary and theft calls as officers focus limited resources on violent crime. Cutbacks in such places as Oakland, Tulsa and Norton, Mass. have forced police to tell residents to file their own reports — online or in writing — for break-ins and other lesser crimes. "If you come home to find your house burglarized and you call, we're not coming," said Oakland Police spokeswoman Holly Joshi. The city laid off 80 officers from its force of 687 last month and the department can't respond to burglary, vandalism, and identity theft. "It's amazing. It's a big change for us."

    Right to Bear Arms Becomes Necessity - From Future Pundit - Ashtabula County, Ohio with a population of about 100,000 has just one patrol car available for routine police patrol. This county has the largest land area of any county in Ohio. A few towns in it have separate police departments. But the county is still mostly covered by sheriffs – not covered as the case may be. JEFFERSON — In the ongoing financial crisis in Ashtabula County, the Sheriff’s Department has been cut from 112 to 49 deputies. With deputies assigned to transport prisoners, serve warrants and other duties, only one patrol car is assigned to patrol the entire county of 720 square miles. Come Peak Oil, what’s life going to be like? You can look at the most hard-up places now to see your future. The county can’t afford to keep most of its criminals in jail. The Ashtabula County Jail has confined as many as 140 prisoners. It now houses only 30 because of reductions in the staff of corrections officers. All told, 700 accused criminals are on a waiting list to serve time in the jail. The sheriff says he’s able to keep murderers locked up at least. A local judge has advised the good people of Ashtabula County to arm themselves.

    GOP candidate: Use prisons as ‘welfare dorms’ - Republican candidate for governor Carl Paladino said he would transform some New York prisons into dormitories for welfare recipients, where they could work in state-sponsored jobs, get employment training and take lessons in "personal hygiene." Paladino, a wealthy Buffalo real estate developer popular with many tea party activists, isn't saying the state should jail poor people: The program would be voluntary.

    Carl Paladino Will Teach Poor People to Stop Being So Dirty -- Daily Intel - Real-estate millionaire Carl Paladino, the somewhat surging Republican gubernatorial primary opponent to the party-backed Rick Lazio, has some interesting ideas about how to reform the welfare system, including an optional program in which welfare recipients would go live in converted prisons while they work for the state. Welfare recipients already need to work to earn their checks, but this system comes with some extra perks. Prison guards "would be retrained to work as counselors" who will apparently teach these uncivilized poor people how to smell and look like normal people. We'll teach them personal hygiene ... the personal things they don't get when they come from dysfunctional homes," Paladino said. We don't know, are poor people even capable of learning personal hygiene? Or is their universal lack of personal hygiene something more innate, maybe derived from the same genetic deformities that made them poor? It may be a challenge, is all we're saying. Hopefully at least one poor person will have personal hygiene and they can help instruct the others in their native poor-people tongue.

    Private prisons: The perverse incentives of private prisons - Mother Jones reporter Suzy Khimm, writing at Ezra Klein's spot, observes that the portion of Arizona's prison population now residing in privately owned and operated facilities is 20% and growing. "Nationally," Ms Khimm notes, "there's been a similar surge in private prison construction as the inmate population has tripled between 1987 and 2007: Inmates in private prisons now account for 9% of the total US prison population, up from 6% in 2000." Should we welcome this development? The dominant argument for private prisons is that they will save taxpayers money, as for-profit owners have an incentive to seek efficiencies bureaucrats overseeing government institutions lack. Anyway, that's the theory. According to the Arizona Republic, the reality is that private prisons in the Grand Canyon State so far cost more on a per-prisoner basis than do public institutions. Some experts contend that firms in the prison business reap profits by billing government for rather more than their initial lowball estimates while scrimping in ways that may make prisons less secure.

    Possible prison job cuts --The state of Texas faces an $18 billion budget deficit, and as state lawmakers struggle to balance that budget, one agency argues the most recently proposed cuts will directly impact public safety. Every state agency has been asked to come up with a plan to cut 10 to 15% of their budget if necessary. For the Texas Department of Criminal Justice, that would mean laying off more than 7,300 workers - including many in Amarillo. "Anytime we look at scaling back on our programs, the impact that we start to see is that risidivism is affected. We have inmates that start coming back to prison in greater numbers, which means they are committing more crimes," Michelle Lyons, TDCJ spokeswoman said. "We have to make those cuts everywhere else and they are very, very painful because they are coming from programs that do a lot of good, that are absolutely essential to the state of Texas,"

    Texas $7.8 Billion Municipal Note Is Biggest in Six Years as Deficit Looms (Bloomberg) -- Texas plans to borrow $7.8 billion to pay for schools in its largest short-term note sale in six years as the second-most populous U.S. state contends with a deficit as large as $18 billion.  The state raised the size of its one-year note sale 42 percent from the $5.5 billion sold in 2009. Sales-tax revenue declined $1.6 billion below projections and year-end cash balances fell $3.6 billion below year-earlier estimates, according to a June 2010 report from Comptroller Susan Combs, whose office is overseeing the issue. Texas, which may face an $18 billion deficit in the 2012- 2013 fiscal years, beginning Sept. 1, 2011, isn’t likely to be penalized by higher borrowing costs given its reputation for conservative financial management, said Chris Nicholl, who manages about $4 billion in short-term assets at BNY Mellon.

    Property values in LA County drop $18 billion from 2009 - The assessed values of properties in Los Angeles County dropped for the second year in a row, falling about $19 billion to just over $1 trillion, county Assessor Robert Quon said Tuesday.  The further reduction in overall assessed value should give additional property tax breaks to many homeowners, especially those who bought at the peak of the real estate market in 2007.  Specific information on property taxes was due out later this month or next as the assessor's office analyzes the numbers.  The overall decline in assessed valuation, which impacts the amount of revenue schools and other government agencies receive, means most areas of the county will see less revenue.

    California Delays $2.9 Billion School, County Payments Amid Budget Impasse (Bloomberg) -- California will delay paying $2.9 billion of subsidies to schools and counties in September, a month earlier than projected, to save cash amid an impasse that has left the state without a budget for 54 days. The state’s top financial officials -- the controller, treasurer and finance director -- told lawmakers today that the 90-day deferrals need to start next month instead of October to make sure there’s enough money to pay bondholders. The amount is in addition to $3.2 billion the state pushed back in July.

    California's Inland Empire Kids Sink Deeper Into Poverty - The indicators are coming in thick and fast: One in five San Bernardino County children live in poverty, compared to one in six or 16% before the recession began. An epidemic of hunger grips Riverside County where 17 percent of children live in poverty. A growing number of children don’t eat at all when they go home. With the recession children’s health, psychological and social service needs have increased dramatically. Homelessness among Inland children is growing. In the Inland Empire 34% of African American children live in poor families. Put in more stark terms, out of 606,325 San Bernardino County children 20 percent live below the federal poverty line. About 8 percent of children lives in extreme poverty, which means their families have an income of less than one-half of the federal poverty threshold. These are some of the grim findings from a flurry of new reports on child poverty.

    California school funding delay could force districts into short-term borrowing - The state's budget impasse is forcing some schools to seek loans to pay their bills as they start the school year. To help the state meet debt and pension obligations, state officials decided Monday to start delaying school payments of $2.5 billion a month in September instead of October, as originally planned. "It's not good news," "With the deferral and extended delay of the state budget, there are heightened concerns with districts for cash flow.  Business officials from county districts will discuss their financial needs Friday. Some districts will likely seek short-term loans to pay their expenses and the county may establish its own loan pool for those with poor credit ratings, he said. The money would be repaid when districts get their state money.

    Suburban schools question Quinn's tax swap call - Suburban school officials are a little leery of Gov. Pat Quinn's call to link an income tax hike and property tax cuts. While they welcomed the idea of property tax relief, they also expressed concerns about becoming even more dependent on state funding, as Illinois remains more than $774 million behind in payments to schools for the 2009-10 academic year.  "The difficulty is that we have become very accustomed to local property taxes being the most stable form of revenue that districts have," Elgin Area School District U-46 spokesman Tony Sanders said. Quinn, a Chicago Democrat, has proposed a 1 percentage-point tax increase, to 4 percent. The hike is estimated to generate an additional $2.8 billion, money he wants set aside for schools.

    Organization Helps Homeless Children Prepare For School -  (news video) Organizers say this school year alone, there are more than 3,200 homeless students enrolled in Charlotte-Mecklenburg Schools. That number's risen about 20 percent each year, for the past five years. "Almost virtually every school in the district has homeless children and then we have schools that combine a large number of homeless children with a high poverty rate," said executive director Annabelle Suddreth. The numbers are stacked against homeless children from the get-go. Suddreth adds that nationwide, it's estimated only 25 percent of them will graduate.

    Louisiana: $1.8. Billion for Schools Lost to Katrina - The Obama administration will give New Orleans $1.8 billion in a lump-sum reimbursement for schools that were damaged or destroyed in the flooding after Hurricane Katrina, Senator Mary L. Landrieu, a Democrat, announced Wednesday. The settlement will pay for 87 school campuses in the city to replace the 127 that existed before Katrina. The public education system in New Orleans was in the first stages of a radical overhaul before the storm, with the creation of a state-run Recovery School District in addition to the pre-existing Orleans Parish School Board. Over three-fifths of the city’s students now attend charter schools. A spokeswoman for the Federal Emergency Management Agency did not confirm the figure but said that a major announcement would come later in the week.

    The creeping threat of backdoor privatization - It has come to this: Parents are now being asked to send their children to school with their own toilet paper. And not just toilet paper, but all sorts of basic items that schools themselves used to provide for kids. It's all part of a disturbing trend, highlighted by the New York Times last week, of cash-strapped public schools -- their budgets eviscerated by state cutbacks -- shifting more and more financial responsibility onto parents. Privatization meant transferring responsibility for entire programs or functions to the private sector. But with the drastic budget cuts that states have been forced to make, responsibility for public services and programs is literally being forced into private hands one roll of toilet paper at a time. We've entered the era of backdoor privatization.

    A Different Way of Ranking Colleges - The new guide to colleges is part of Washington Monthly’s continuing effort to build better college rankings. The biggest flaw with the famous U.S. News & World Report ranking is that it largely rewards colleges that enroll highly qualified (and, typically, affluent) students, regardless of how much those students learn while on campus. Washington Monthly instead tries reward those colleges that do a good job educating students. The methodology is far from perfect, because the data needed to build a really good ranking doesn’t exist. But I find Washington Monthly’s approach more interesting than virtually any other ranking out there. It relies in significant part on a comparison between a college’s actual graduation rate and the graduation rate that would be predicted by the students’ economic backgrounds. The No. 1 university this year is the University of California, San Diego, and the No. 1 liberal arts college is Morehouse, in Georgia.The magazine has also identified the 200 colleges with the worst record of graduating students.

    What Is It About 20-Somethings? In a Word, Debt - The cover story from this past Sunday’s New York Times Magazine explored the proposition that the 20s represent a distinct developmental stage of life. Young people in this age range, the theory goes, are not quite adults but are rather going through an "emerging adulthood" characterized by intense self-focus and less certainty about the future, coupled with great optimism. Such feelings, say some neuroscientists, correspond to what's going on with our brains, which is still maturing. This suggests it might be a good thing that young people are taking longer to reach certain “milestones” typically associated with adulthood; "...completing school, leaving home, becoming financially independent, marrying and having a child."  Dramatic changes in what it costs to reach "adult" milestones are forcing our nation’s youth to take their time. As detailed in the 2008 Demos report, The Economic State of Young America, a combination of declining incomes, growing debt, and the high cost of education, homeownership and health care, are conspiring to make this generation the first to not surpass the living standards of their parents.

    A letter to my students, by Michael O'Hare: Welcome to Berkeley, probably still the best public university in the world. Meet your classmates, the best group of partners you can find anywhere. The percentages for grades on exams, papers, etc. in my courses always add up to 110% because that’s what I’ve learned to expect from you, over twenty years in the best job in the world.That’s the good news. The bad news is that you have been the victims of a terrible swindle, denied an inheritance you deserve by contract and by your merits. And you aren’t the only ones; victims of this ripoff include the students who were on your left and on your right in high school but didn’t get into Cal, a whole generation stiffed by mine. This letter is an apology, and more usefully, perhaps a signal to start demanding what’s been taken from you so you can pass it on with interest. Swindle–what happened? Well, before you were born, Californians now dead or in nursing homes made a remarkable deal with the future. (Not from California? Keep reading, lots of this applies to you, with variations.)

    No room for reading - I was talking to some English PhD students today, and when the conversation turned to economics they were dismayed to learn that no one in “top” economics departments ever read Marx, much less understood any of his theories. Then I was caught off-guard when I was asked, “so what thinkers do most students in economics programs read?” But as far as I can tell, and the answer I gave, was “none.” The training of economists in the “top” programs does not entail any reading of books.But the English PhD students’ surprised reactions to that reality reminded me of how incredibly bizarre this current situation is. Neoclassical economists are trying to completely divorce economic theory from all ethics, philosophy, literary theory, history,  social theory, political theory, etc. What is scary to me is that these students of economics, who are trained not to read about anything but mathematics, are the ones who go in to government, business, policy research, and have the authority to shape policies and influence debates. No wonder our economy is in such a mess.

    Health Overhaul Could Threaten Student Health Plans…Colleges and universities say that some rules in the new health law could keep them from offering low-cost, limited-benefit student insurance policies, and they're seeking federal authority to continue offering them.  Their request drew immediate fire from critics, however, who say that student health plans should be held to the same standards that other insurance is. Among other things, the colleges want clarification that they won't have to offer the policies to non-students.  Without a number of changes, it may be impossible to continue to offer student health plans, says a letter that the American Council on Education sent Aug. 12 to Health and Human Services Secretary Kathleen Sebelius, signed by 12 other trade associations that represent colleges.

    Even State Pensions Aren't Safe Anymore (NPR Audio) Though many current state workers believe their pension plans are protected from cuts, three states are moving forward with reductions in cost-of-living adjustments. It establishes a precedent that concerns many current and future retirees. Guest host Rachel Martin talks with Keith Brainard, research director for the National Association of State Retirement Administrators, and Stephen Pincus, a Pittsburgh lawyer representing retirees in a legal fight over benefits.West of I-95, lawmakers and state workers in three states are locked in a debate over public pension funds. At issue: whether a worker's benefits are protected from cuts. Lawmakers in Colorado, Minnesota and South Dakota have passed laws that reduce cost of living increases - increases that were promised to state workers.

    3,090 Retired Teachers And Administrators Receive Pensions In Excess of $100,000 from CalSTRS - They're all listed here. The information below was obtained under the Freedom of Information Act from the California State Teachers Retirement System (CalSTRS). This list may be be updated periodically with more pensioners as more data is obtained.

    9,111 Retired California Government Workers Receive Pensions In Excess Of $100,000 from CalPERS - They're all listed here. The information below was obtained under the Freedom of Information Actfrom the California Public Employees Retirement System (CalPERS). This list may be be updated periodically with more pensioners as more data is obtained. 

    Arnold Schwarzenegger: Public Pensions and Our Fiscal Future…(see charts) As former Speaker of the State Assembly and San Francisco Mayor Willie Brown pointed out earlier this year in the San Francisco Chronicle, roughly 80 cents of every government dollar in California goes to employee compensation and benefits. Those costs have been rising fast. Spending on California's state employees over the past decade rose at nearly three times the rate our revenues grew, crowding out programs of great importance to our citizens. Neglected priorities include higher education, environmental protection, parks and recreation, and more. Much bigger increases in employee costs are on the horizon. Thanks to huge unfunded pension and retirement health-care promises granted by past governments, and also to deceptive pension-fund accounting that understated liabilities and overstated future investment returns, California is now saddled with $550 billion of retirement debt.

    Illinois Pension May Sell $3 Billion of Assets to Pay Benefits (Bloomberg) -- Illinois’s Teachers Retirement System may sell $3 billion of investments to pay for benefits this year because the state can’t make its contributions to the fund, a spokesman said. The pension plan sold $200 million of assets in July and $290 million in August, Dave Urbanek, spokesman for the $33 billion fund, said in a phone interview. “We understand from the comptroller that there is no money to pay us,” said Urbanek. “If we don’t get a state contribution, we will have to sell more.” The fund was forced to sell assets last year, too, as it awaited a state contribution. That payment came after Illinois issued $3.47 billion of taxable bonds to fund its pension contribution in January. The plan to sell assets was reported earlier by Crain’s Chicago Business.

    Pensions targeted for budget woes - "We are in the midst of the most severe financial crisis in recent memory," White said. Speaking of the report that the Illinois is Broke Committee recently completed, White said, "We found the state spending $3 for every $2 it took in." And White stressed that the blame for the state's budget woes was largely due to a problem familiar to many taxpayers across the nation: public sector pension expenses. "They have not been funded appropriately for decades," he said. Martin said the cumulative Illinois pension and health care liability was approximately $130 billion. Or it could actually be worse, Martin noted. Some business scholars have claimed that, depending on which accounting method is employed, the real liability could be as high as $200 billion.

    Corporate optimism datapoint of the day - Randall Forsyth reports on the magical math of corporate defined-benefit pension plans: Fitch’s analysts find the mean assumed return for corporate pension plans in 2008 and 2009 was 8%. That’s with an allocation to fixed-income assets of 34% of the total. Obviously, there’s no way that fixed-income assets can return 8% going forwards from here. There’s also little sign that pension plans are reducing their fixed-income exposure. And I can’t imagine that fund managers genuinely believe that long-term stock returns are going to be somewhere in the teens.

    Nortel Pensioners Say They Face Destitution No one would want to see their monthly pension chopped by a third but that’s exactly what’s facing some former employees at the bankrupt, scandal-ridden telecom firm Nortel. The Toronto-based communications company will liquidate its pension accounts at the end of next month and the plan is only about 64% funded. The Ontario government stepped in this year to guarantee the first $1,000 of monthly payouts for each of the 11,000 employees who worked in that province. About 12,000 others in Alberta, Quebec and Nova Scotia are out in the cold and could find themselves facing poverty, says former Nortel employee Ken Lyons.

    Will Social Security Reform Cut Benefits? -  That’s highly unlikely.  It’s more likely that reform will simply cut the rate of growth in benefits. Social Security reformers have often thought about reform in terms of the annual benefits they want to give people.  The complication with this approach is that it ignores the enormous increase in the number of years that benefits have been paid as people retire much earlier and live longer than they did when Social Security was first created.   That’s why it helps to focus on lifetime benefits—how much will be paid over a normal lifespan—rather than just looking at the annual benefit.  That way, reformers can get a better sense of how much they want total benefits to rise and, for a given cost, the tradeoff involved as more years of retirement support reduce the level of annual benefits payable.      Fortunately, CBO’s July 2010 report on Social Security Reform Options helps put a focus on lifetime benefits by showing how much they would grow with no reform and under various reforms that adjust benefits. 

    The Problem of Early Retirement - I have a short piece in the New York Times about those who draw Social Security benefits before the "normal" retirement age--traditionally age 65, raised in 1983 to 66 this year, and rising to 67. However, in the early 1960s Congress allowed people to begin drawing lower benefits as early as age 62. These days, two thirds or more of those on Social Security begin drawing benefits well before the normal retirement age.The point of my article is that raising the normal retirement age is no panacea for Social Security's financial problems. In fact, it really makes no difference when people retire because benefits are actuarially adjusted so that theoretically everyone gets the same lifetime benefits. Indeed, benefits continue to rise 8% per year past the normal retirement age because of something called the delayed retirement credit. Therefore, if the goal is to improve Social Security's finances, raising the normal retirement age won't do much good because 62 has become the de facto normal retirement age. We will have to raise the early retirement age if we want to save money this way.

    "Tit Man" Alan Simpson Makes An Ass of Himself -- Women's Groups Call for Resignation - The flamboyant (some would say plain nutty) co-chair of President Obama's Fiscal Commission, Former Republican Senator Alan Simpson of Wyoming, who became an instant You-Tube star earlier this summer with a rant against senior citizens, is at it again big-time.Evidently smarting mightily -- and mighty belatedly -- from an April 27th Huffington Post blog by Ashley Carson, Executive Director of the Older Women's League (OWL), Simpson fired off an email Monday. He accused Carson of lying and "babbling into the vapors about disgusting attempts at ageism and sexism and all the rest of that crap." Piling on the sexist rhetoric, he then instructed her to read a graph which "I hope you are able to discern if you are any good at reading graphs."Declining to address whether or not he accepts his own Social Security benefit (he's pushing 80), Simpson saves the best for last: "And yes, I've made some plenty smart cracks about people on Social Security who milk it to the last degree. You know 'em too. It's the same with any system in America. We've reached a point now where it's like a milk cow with 310 million tits! Call when you get honest work!"

    Social Security Cuts Threaten to Hurt Low-Income Americans more… After running a surplus for years and building up a sizable trust fund, Social Security now runs in the red. Though the program is far from bankrupt, more money is pouring out than going in. Economists project that the trust fund will be emptied by 2037. From there, opinions diverge on how far into debt the program will fall if nothing is done.  "Social Security is not in immediate trouble. There's been a lot of exaggeration of that problem," says Alice Rivlin, senior fellow at the Brookings Institution and a member of the deficit commission. "It is not on a solid basis for the long run, however. The sooner we act, the less we have to do." The problem is, there's no consensus on what form that action should take. And many of the most commonly discussed tactics for stemming the flow of red ink would disproportionately impact lower-income Americans, the segment of the population that depends on Social Security the most. One idea that comes up frequently is raising the retirement age.

    No Bailout Needed for Social Security - CBPP - To correct some recent stories suggesting that Social Security faces deep and immediate financial problems, a new report from our colleague Kathy Ruffing outlines the program’s outlook over the short and long term. Here’s the summary: In recent months, a few commentators have sounded an alarm about the recession’s impact on Social Security’s near-term prospects, which may lead some people to think that the program faces financial problems in the next several years. Fortunately, that is not the case. Social Security continues to run annual surpluses and remains capable of paying scheduled benefits in full for nearly three decades. The deep recession has indisputably affected the Social Security system’s finances, as is visible in the latest projections by the Social Security trustees and by the independent Congressional Budget Office. But both organizations estimate that, under current trends, the program can continue to pay full benefits from the trust funds until 2037. Thus, Social Security faces no immediate threat.

    Birth Rates Drop Amid Faltering Economy - NPR's Robert Siegel talks to Mark Mather, an associate vice president of the Population Reference Bureau, about the link between the recession and declining birth rates in some areas of the U.S. A Pew Research Center report this spring found a 1.6 percent decline in births between 2007 and 2008. The report looked at data from 25 states for 2008.

    U.S. Births decline in 2009 - From the National Center for Health Statistics: Births, Marriages, Divorces, and Deaths: Provisional Data for 2009 The NCHS reports that U.S. births declined to 4.136 million in 2009, from 4.247 million in 2008. The birth rate declined to 13.5 from 13.9 in 2008 (births per 1000 total population). Here is a long term graph of annual U.S. births through 2009 ...Births have declined for two consecutive years, and are now 4.2% below the peak in 2007. I suspect certain segments of the population were under stress before the recession started - like construction workers - and even more families were in distress in 2008 and 2009. Of course it takes 9 months to have a baby, so families in distress in 2009 probably put off having babies in 2010 too. Notice that the number of births started declining a number of years before the Great Depression started. Many families in the 1920s were under severe stress long before the economy collapsed. By 1933 births were down by almost 23% from the early '20s levels.

    A Medicare voucher plan I could support - I’ve narrowly critiqued Representative Paul Ryan’s Medicare voucher plan on the grounds that it is too similar to an expansion of the Medicare Advantage (MA) program, which itself is more costly per beneficiary than traditional fee-for-service (FFS) Medicare. The basis for my understanding of Rep. Ryan’s plan is his own staff, with whom I’ve spoken. The basis for my understanding of MA is my own career studying and publishing on it. So, I’m quite confident in my ability to accurately compare the two and draw policy conclusions. However, I like to be constructive, and there is a Medicare voucher program I would support, but it must include at least all the elements I list below. Rep. Ryan’s does not. I would, by the way, also support expansion of FFS Medicare under certain conditions as well. How can I simultaneously support annihilating FFS Medicare and expanding it? It’s easy. I support whatever demonstrably works. Read the rest and you’ll see what I mean.

    More physicians refusing to take new Medicare patients The national health care reform law, which was was designed to provide insurance coverage and access to physicians to more Americans, has no provision to help a group already having difficulty finding doctors to treat them – senior citizens. According to a report from Cigna Government Services, which processes Medicare claims in North Carolina and 17 other states, more than 80 physicians in North Carolina have opted out of Medicare in the past year. That's in addition to the 100 physicians statewide who stopped seeing Medicare patients in 2008, the report states. Even more practices have stopped accepting new Medicare patients. Family Medical Associates of Raleigh, for example, decided three years ago to accept Medicare payments only from existing patients.

    Oklahoma's top court calls bill on Medicaid unconstitutional - A bill designed to bring in millions of dollars for the state's Medicaid program is unconstitutional, the Oklahoma Supreme Court ruled Tuesday.The justices said in an order that House Bill 2437 violated a ban on the passage of revenue bills during the last five days of a legislative session. The court also held that the bill failed to secure three-fourths legislative approval or be submitted to a vote of the people. The court on Monday heard oral arguments on a challenge of the measure brought by state Insurance Commissioner Kim Holland.  "With this decision, my department accomplished all we set out to achieve - to ensure that we adhere to the constitution and laws of our state," Holland said

    Children's Hospitals plans to cut up to 250 jobs- Children's Hospitals and Clinics of Minnesota is planning to eliminate 200 to 250 jobs by mid-November. The provider — with campuses in Minneapolis and St. Paul — said Wednesday the down economy is forcing more children to rely on Medicaid. But it says cuts in Medicaid have taken a serious toll. Children's says it's the largest pediatric care provider in Minnesota, while Medicaid is the single largest insurer of children in the state. It says Children's Medicaid population has grown to 44 percent in the past year, but Medicaid pays providers only about 80 percent of their costs. Children's says it lost $43 million treating Medicaid patients last year alone. Children's says the job cuts will be achieved through a combination of not filling open positions, early retirements and some layoffs. It also plans to consolidate some programs.

    Letter: Ind. health care overhaul costs $3.16B - Indiana's human services chief and insurance commissioner warn in a letter posted online Wednesday that the federal health care overhaul will cost the state more than previously estimated and stress its outdated welfare eligibility system. Family and Social Services Administration Secretary Anne Murphy and acting Insurance Commissioner Stephen Robertson sent Gov. Mitch Daniels a letter estimating the overhaul now will cost Indiana at least $3.16 billion over the next 10 years, and possibly as much as $3.81 billion. The new estimates are $235 million higher that a previous estimate in May.

    Colleges say new health law may imperil student policies - Colleges and universities say that some rules in the new health law could keep them from offering low-cost, limited-benefit student insurance policies, and they're seeking federal authority to continue offering them.  Their request drew immediate fire from critics, however, who say that student health plans should be held to the same standards that other insurance is. Among other things, the colleges want clarification that they won't have to offer the policies to non-students.  Without a number of changes, it may be impossible to continue to offer student health plans, says a letter that the American Council on Education sent Aug. 12 to Health and Human Services Secretary Kathleen Sebelius, signed by 12 other trade associations that represent colleges.

    Consumers Skeptical About Evidence-Based Health Care - We undertook focus groups, interviews, and an online survey with health care consumers as part of a recent project to assist purchasers in communicating more effectively about health care evidence and quality. Most of the consumers were ages 18–64; had health insurance through a current employer; and had taken part in making decisions about health insurance coverage for themselves, their spouse, or someone else. We found many of these consumers’ beliefs, values, and knowledge to be at odds with what policy makers prescribe as evidence-based health care. Few consumers understood terms such as "medical evidence" or "quality guidelines." Most believed that more care meant higher-quality, better care. The gaps in knowledge and misconceptions point to serious challenges in engaging consumers in evidence-based decision making.

    HEALTH CARE thoughts: Resident Rights versus Caregiver Rights - Resident care preferences regularly create all sorts of difficult issues though, including: Can white residents refuse care from black nurses and nurse aides? ( a common problem) Can female residents refuse care from male caregivers? (the courts say yes on privacy grounds) Can residents request care from specific employees (a latino requesting a latino)? Can residents request care from specific employees just because they like the employee? According to a recent federal court in an Indiana case, if a white resident requests "no blacks" and the facility accommodates (according to Indiana law) the facility has discriminated against the employee.  Keeping in mind the average nursing home resident is about 78 years old with multiple physical problems and some level of mental and emotional impairment, this creates just a great big mess, and the facility loses in every scenario. The unintended consequences of government regulation. Everyone suffers except the bureaucrats, and the lawyer who profit. Anyone got any solutions?

    Anthem Blue Cross is allowed to move ahead with rate hikes - California insurance regulators cleared the way Wednesday for Anthem Blue Cross to implement scaled-back rate hikes after a previous increase was canceled amid an uproar over its size. Anthem said it intends to put the new rates — averaging 14% and as high as 20% — into effect Oct. 1 for nearly 800,000 individual California policyholders. Regulators also allowed one of Anthem's nonprofit competitors, Blue Shield of California, to move ahead with rate increases — averaging 19% and as high as 29% — for 250,000 individual policyholders.

    India, the Rent-a-Womb Capital of the World - You can outsource just about any work to India these days, including making babies. Reproductive tourism in India is now a half-a-billion-dollar-a-year industry, with surrogacy services offered in 350 clinics across the country since it was legalized in 2002. The primary appeal of India is that it is cheap, hardly regulated, and relatively safe. Surrogacy can cost up to $100,000 in the United States, while many Indian clinics charge $22,000 or less. Very few questions are asked. Same-sex couples, single parents and even busy women who just don't have time to give birth are welcomed by doctors. As a bonus, many Indians speak English and Indian surrogate mothers are less likely to use illegal drugs. Plus medical standards in private hospitals are very high (not all good Indian doctors left in the brain drain).

    Lithium in the Water Supply and Our Preferences - Big Think on one of my favourite topics - changes in behaviour caused by mineral levels in the body: Communities with higher than average amounts of lithium in their drinking water had significantly lower suicide rates than communities with lower levels. Regions of Texas with lower lithium concentrations had an average suicide rate of 14.2 per 100,000 people, whereas those areas with naturally higher lithium levels had a dramatically lower suicide rate of 8.7 per 100,000.

    .Do pressures to publish increase scientists' bias? - The quality of scientific research may be suffering because academics are being increasingly pressured to produce 'publishable' results, a new study suggests. A large analysis of papers in all disciplines shows that researchers report more "positive" results for their experiments in US states where academics publish more frequently. The results are reported in the online, open-access journal PLoS ONE on April 21st, by Daniele Fanelli, of the University of Edinburgh. The condition of today's scientists is commonly described by the expression "publish or perish". Their careers are increasingly evaluated based on the sheer number of papers listed in their CVs, and by the number of citations received – a measure of scientific quality that is hotly debated. To secure jobs and funding, therefore, researchers must publish continuously.  "Scientists face an increasing conflict of interest, torn between the need to be accurate and objective and the need to keep their careers alive" says Fanelli, "while many studies have shown the deleterious effects of financial conflicts of interests in biomedical research, no one has looked at this much broader conflict, which might affect all fields".

    When Value Judgments Masquerade as Science - Strict constructionists argue that their analyses should confine themselves strictly to positive (that is, descriptive) analysis: identify who wins and who loses from a public policy, and how much, but leave judgments about the social merits of the policy to politicians. The most lucid treatment of this principled position can be found in William J. Baumol’s “Welfare Economics and the Theory of the State” (1965), a book that should be read by every graduate student in economics but, alas, is not. Formally, the world-renowned National Bureau of Economic Research, in Cambridge, Mass., follows this strict constructionist approach. The working papers on its Web site have this in common: None of them may offer a policy recommendation outright. It must be acknowledged, however, that a researcher’s political ideology or vested interest in a particular theory can still enter even ostensibly descriptive analysis by the data set chosen for the research; the mathematical transformations of raw data and the exclusion of so-called outlier data; the specific form of the mathematical equations posited for estimation; the estimation method used; the number of retrials in estimation to get what strikes the researcher as “plausible” results, and the manner in which final research findings are presented. This is so even among natural scientists discussing global warming. As the late medical journalist Victor Cohn once quoted a scientist, “I would not have seen it if I did not believe it.”

    U.S. Rejected Hen Vaccine Despite Success in Britain - Faced with a crisis more than a decade ago in which thousands of people were sickened from salmonella in infected eggs, farmers in Britain began vaccinating their hens against the bacteria. That simple but decisive step virtually wiped out the health threat. But when American regulators created new egg safety rules that went into effect last month, they declared that there was not enough evidence to conclude that vaccinating hens against salmonella would prevent people from getting sick. The Food and Drug Administration decided not to mandate vaccination of hens — a precaution that would cost less than a penny per a dozen eggs.

    The many sins of deregulation - The deregulated chickens have come home to roost. The Food and Drug Administration, the New York Times reported Wednesday, considered mandating the vaccination of chickens with anti-bacterial shots -- and decided against it. Instead, the vaccinations are merely recommended. In Britain, where such vaccinations have been required for egg vendors who wish to put an industry-standard label on their eggs, the incidence of salmonella in eggs has dropped 96 percent.  A diagram of our egg-safety bureaucracies could be presented as an illustration of the old question of whether the chicken or the egg comes first. The Agriculture Department oversees chickens and grades eggs for their quality. The FDA is responsible for the safety of eggs in their shells. The FDA inspects egg farms after an outbreak of egg-borne disease has been detected -- not before.  Nor is this mish-mash confined to eggs.

    NV Assembly GOP leader: consider tax on food (AP) - The Republican minority leader in the Nevada Assembly suggests voters be asked to impose a statewide sales tax on food to help fill a swelling budget deficit. Assemblyman Pete Goicoechea (Goh-gah-CHEE-ya) of Eureka said Monday on KRNV-TV's Nevada Newsmakers that he believes a proposed 2% tax on food sales should have been put to voters this fall.

    Food and farming: the hub of planetary transformation - I think what we're seeing with food prices, with spot shortages and commodities in various places around the world is just the beginning of a much larger situation. Fundamentally, what's happening is that as the cost of fossil fuels goes up, then the whole agricultural production system is affected because the whole system is dependent on fossil fuels for fertilizers for fuel, pesticides, and herbicides. The cost of all of these is going up, and we're just now reaching the point where, as the era of cheap fossil fuels ends, and as fossil fuels continue to become increasingly expensive, the entire global industrial agricultural system is going to collapse. We are seeing the very beginnings of that right now, and for most people, especially here in America, it seems very remote, but it will have tremendous impact here in this country within the next two or three years.

    Brazil's Agricultural Miracle: How To Feed The World - THE world is planting a vigorous new crop: “agro-pessimism”, or fear that mankind will not be able to feed itself except by wrecking the environment.  Brazil has followed more or less the opposite of the agro-pessimists’ prescription. For them, sustainability is the greatest virtue and is best achieved by encouraging small farms and organic practices. They frown on monocultures and chemical fertilisers. They like agricultural research but loathe genetically modified (GM) plants. They think it is more important for food to be sold on local than on international markets. Brazil’s farms are sustainable, too, thanks to abundant land and water. But they are many times the size even of American ones

    Peak wheat? - The ever-increasing bounty of agriculture has been with us as long as I can remember, but it may have finally hit the dreaded Peak, according to a new study published in CropScience by Robert Graybosch, a geneticist at the University of Nebraska and James Patterson, a geneticist at Oregon State University Genetic improvements have increased wheat yields about 1% each year since the late ’50s. But in 1984, several scientists noticed that the average yield improvement seemed to have slowed, in a sign that genetic gain was plateauing. Graybosch and Patterson then went back in and made a more detailed study, carefully analyzing the last 50 years of data collected by the Department of Agriculture. They found that ever since the early ’80s, genetic gain has continued to steadily drop. And now it appears to have come to a halt.

    Shortage of farms and water threatens grain output targets… The growing shortage of farmland and water resources may prevent China from achieving its ambitious grain output targets in the next decade, warned both officials and experts. Acute shortages of reserve farmland and water resources are now the main restraints for the country to ensure its food security, Zhang Ping, minister of the National Development and Reform Commission, said on Thursday while making a report to the top legislature.Facing a rising population, the central government plans to boost China's annual grain output to more than 550 million tons by 2020, an increase of 50 million tons over 2007.  By contrast, the cultivable land in the country sharply decreased from 130.04 million hectares in 1996 to 121.72 million hectares in 2008 due to rapid urbanization and natural disasters, figures from the National Bureau of Statistics show.

    There has been Rapid Growth in Energy use in the U.S. Food System – Kalpa - The USDA publication "Amber Waves" recently released a report well worth reading titled, "Fuel for Food: Energy Use in the U.S. Food System" ~ Population growth, higher per capita food expenditures, and greater reliance on energy-using technologies boosted food-related energy consumption in 1997 to 2002 ~ by Patrick Canning. Based upon the release, the NYT's wrote this article: Math Lessons for Locavores. In a nutshell......while total per capita U.S. energy consumption fell by 1 percent between 2002 and 2007, food-related per capita energy use grew nearly 8 percent as the food industry relied on more energy-intensive technologies to produce more food per capita for more people. It goes on to describe where the biggest growth was:To accommodate the foodservice industry’s growing demand for processing services, the food manufacturing industry added only 4,800 new food preparation jobs but substantially increased energy consumption. Between 1997 and 2002, food processors’ energy use (direct and embodied) grew 49 percent, a larger increase than any other segment of the food system.

    Get Ready For A Monster Battle Over Potash And The Future Of The Global Food Supply - The initial thinking, last Tuesday, was that only BHP Billiton had the heft to acquire Potash at a price well north of $30 billion. But then late last week it emerged that Chinese firm Sinochem might be interested, and given that the whole premise of acquiring Potash is that it's a bet on the next generation of Chinese demand (from industrial commodities, to higher end food products), this makes total sense. Whereas a year ago, the talk was all about securing oil rights for demand needs far in the future, suddenly the talk is all about food. John Durie at The Australian notes some of the big-picture  thinking: "That said, there is concern among fertiliser producers that the potash is controlled by two groups -- the Canadians on one hand, and the Belarus-Russian mob on the other. As with rare earths and China, any newcomer in potash will be welcomed as a break on a market stranglehold."

    Resource Wars: The Global Crisis Behind BHP Billiton's Bid For Potash Corp - Certainly, the usual arguments are wheeled out by the predator about diversification, synergies and the prospect of fatter profits, while the target company complains about the offer price being pitched too low. But behind the rhetoric is a bidding war that lays bare the global struggle for resources on a planet struggling with water and food shortages, overpopulation and pollution. And it highlights a question that overshadows the 21st century: how to provide enough food for a global population that is set to rise from 6.8 billion to more than 9 billion by 2050, according to the United Nations.Potash Corporation, based in Saskatchewan, is the biggest producer of potash, a key component of fertilisers used to maximise the supply of healthy crops. The company also makes nitrogen and phosphate, two other primary constituents of fertiliser products.

    Scientist: World’s helium being squandered -- The world is running out of helium, a resource that cannot be renewed, and supplies could run out in 25 to 30 years, a U.S. researcher says. Nobel-prize winning physicist Robert Richardson warns that the inert gas is being sold off far too cheaply -- so cheaply there is no incentive to recycle it -- and world supplies of the gas, a vital component of medical MRI scanners, spacecraft and rockets, could be gone in just decades, Britain's The Telegraph reported Monday. About 80 per cent of the world's reserves are in the U.S. Southwest at the U.S. National Helium Reserve in Amarillo, Texas, but a recently passed law has ruled the reserve must be sold off by 2015 regardless of market price, Britain's Independent said.

    Russia counts the cost of drought and wildfires - The extreme heatwave, which caused a severe drought and wildfires in Russia, might be over, but both officials and consumers are now busy calculating its cost and trying to work out its consequences.Russian deputy economy minister, Andrei Klepach, said earlier this week that the drought would take up to 0.8% off this year’s economic growth, “or maybe even more than that”.The 0.8% official figure equals 313bn roubles ($10.1bn, £6.6bn at the current exchange rate), but is smaller than the 1.0-1.5% range some experts have come up with recently.And it is not just about the annual economic growth rate being slower than expected.

    As Floods Go South, Pakistan Races to Keep a City Dry - Standing waist-deep in rushing waters, municipal workers struggled to fortify embankments protecting this city from floodwaters on Monday after a last warning was issued to residents to flee to higher ground.  As an old man recited the Koran near the course of the water, municipal administrator Habib Ahmed Kamboh directed workers here on the edge of town to place heavy rocks to strengthen the mud banks.  “The situation is dangerous,” he said. “The water is rising a foot every day and still rising. We will keep struggling.”  The struggle in Shadad Kot was part of focused attention on Sindh Province and Pakistan’s south as the floods that have torn through the length of the country for three weeks finally move toward the Arabian Sea.

    Time to blame climate change for extreme weather? - IT IS time to start asking the hard questions. Countless people in flood-stricken Pakistan have lost families and livelihoods. Who can they hold responsible and turn to for reparations? Less than a decade ago, these questions would have been dismissed outright. "Many scientists at the time said that you can never blame an individual weather event on climate change," says Myles Allen of the University of Oxford. But a small meeting of scientists in Colorado last week - organised by the US National Oceanic and Atmospheric Administration, the UK Foreign and Commonwealth Office and the UK Met Office's Hadley Centre, among others - suggests the tide is turning. The aim of the Attribution of Climate-Related Events workshop was to discuss what information is needed to determine the extent to which human-induced climate change can be blamed for extreme weather events - possibly even straight after they have happened.

    NASA/NOAA Study Finds El Niños are Growing Stronger - A relatively new type of El Niño, which has its warmest waters in the central-equatorial Pacific Ocean, rather than in the eastern-equatorial Pacific, is becoming more common and progressively stronger, according to a new study by NASA and NOAA. The research may improve our understanding of the relationship between El Niños and climate change, and has potentially significant implications for long-term weather forecasting.  They found the intensity of El Niños in the central Pacific has nearly doubled, with the most intense event occurring in 2009-2010. The scientists say the stronger El Niños help explain a steady rise in central Pacific sea surface temperatures observed over the past few decades in previous studies-a trend attributed by some to the effects of global warming. While Lee and McPhaden observed a rise in sea surface temperatures during El Niño years, no significant temperature increases were seen in years when ocean conditions were neutral, or when El Niño's cool water counterpart, La Niña, was present.

    Huge chunk of 3000-5000 year old ice shelf breaks off Ellesmere Island, August 18, 2010 - A large parcel of ice has fractured from a massive ice shelf on Ellesmere Island in Nunavut, marking the third known case of Arctic ice loss this summer alone. The chunk of ice, which scientists estimate is roughly the size of Bermuda, broke away from the Ward Hunt Ice Shelf on the island's northern coast around August 18, 2010, according to NASA satellite imagery. At 40 metres thick, the Ward Hunt Ice Shelf is estimated to be 3,000 to 5,000 years old, jutting off the island like an extension of the land. "The cracks are going right to the mainland, basically, right to Ellesmere Island," John England, a professor of earth and atmospheric sciences with the University of Alberta, told CBC News on Tuesday. "So, in the core of the ice shelf itself, the fracturing is occurring.

    Is the Ice in the Arctic Ocean Getting Thinner? — The extent of the sea ice in the Arctic will reach its annual minimum in September. Forecasts indicate that it will not be as low as in 2007, the year of the smallest area covered by sea ice since satellites started recording such data. Nevertheless, sea ice physicists at the Alfred Wegener Institute are concerned about the long-term equilibrium in the Arctic Ocean.  They have indications that the mass of sea ice is dwindling because its thickness is declining. To substantiate this, they are currently measuring the ice thickness north and east of Greenland using the research aircraft Polar 5. The objective of the roughly one-week campaign is to determine the export of sea ice from the Arctic. Around a third to half of the freshwater export from the Arctic Ocean takes place in this way -- a major drive factor in the global ocean current system.

    The Northwest and Northeast Passages are open. Northwest Passage opens for 4th year in a row, 4th time in recorded history -- The Northwest Passage--the legendary shipping route through ice-choked Canadian waters at the top of the world--melted free of ice last week, and is now open for navigation, according to satellite mosaics available from the National Snow and Ice Data Center and The University of Illinois Cryosphere Today. This summer marks the fourth consecutive year -- and fourth time in recorded history -- that the fabled passage has opened for navigation. Over the past four days, warm temperatures and southerly winds over Siberia have also led to intermittent opening of the Northeast Passage, the shipping route along the north coast of Russia through the Arctic Ocean. It is now possible to completely circumnavigate the Arctic Ocean in ice-free waters, and this will probably be the case for at least a month. This year marks the third consecutive year -- and the third time in recorded history -- that both the Northwest Passage and Northeast Passage have melted free, according to the National Snow and Ice Data Center. The Northeast Passage opened for the first time in recorded history in 2005, and the Northwest Passage in 2007. It now appears that the opening of one or both of these northern passages is the new norm

    Extent of Arctic Sea Ice, 8/20/10 (graphic map)

    A quantitative assessment of the scientific consensus on anthropogenic climate change - From the abstract to the paper: ... we use an extensive dataset of 1,372 climate researchers and their publication and citation data to show that (i) 97-98% of the climate researchers most actively publishing in the field support the tenets of ACC outlined by the Intergovernmental Panel on Climate Change, and (ii) the relative climate expertise and scientific prominence of the researchers unconvinced of ACC are substantially below that of the convinced researchers. Here are the key graphs from "Expert credibility in climate change," Proceedings of the National Academy of Sciences (2010). Note that UE denotes unconvinced; CE denotes convinced (by the thesis of anthropogenic climate change).

    Am I an activist for caring about my grandchildren's future? - "How did you become an activist?" I was surprised by the question. I never considered myself an activist. I am a slow-paced taciturn scientist from the Midwest US. Most of my relatives are pretty conservative. I can imagine attitudes at home toward "activists".I was about to protest the characterisation – but I had been arrested, more than once. And I had testified in defence of others who had broken the law. Sure, we only meant to draw attention to problems of continued fossil fuel addiction. But weren't there other ways to do that in a democracy? How had I been sucked into being an "activist?"My grandchildren had a lot to do with it. It happened step by step. First, in 2004, I broke a 15-year self-imposed effort to stay out of the media. I gave a public lecture, backed by scientific papers, showing the need to slow greenhouse gas emissions – and I criticised the Bush administration for its lack of appropriate policies. My grandchildren came into the talk only as props – holding 1-watt Christmas tree bulbs to help explain climate forcings.

    Time To Terminate Western Civilization Before It Terminates Us -This essay provides a brief overview of the dire nature of our predicaments with respect to fossil fuels. The primary consequences of our fossil-fuel addiction stem from two primary phenomena: peak oil and global climate change. The former spells the end of western civilization, which might come in time to prevent the extinction of our species at the hand of the latter. Global climate change threatens our species with extinction by mid-century is we do not terminate the industrial economy soon. Increasingly dire forecasts from extremely conservative sources keep stacking up. Governments refuse to act because they know growth of the industrial economy depends (almost solely) on consumption of fossil fuels. Global climate change and energy decline are similar in this respect: neither is characterized by a politically viable solution.

    All-out geoengineering still would not stop sea level rise: Mimicking volcanoes by throwing particles high into the sky. Maintaining a floating armada of mirrors in space. Burning plant and other organic waste to make charcoal and burying it—or burning it as fuel and burying the CO2 emissions. Even replanting trees. All have been mooted as potential methods of "geoengineering"—"deliberate large-scale manipulation of the planetary environment,"  The goal, of course, is to cool the planet by remove heat-trapping gases in the atmosphere or reflecting sunlight away. But rising temperatures is just one impact of our seemingly limitless emission of greenhouse gases, largely carbon dioxide, into the atmosphere. Arguably a more devastating consequence would be the rise of the seas as warmer waters expand and melting icecaps fill ocean basins higher, potentially swamping nations and the estimated 150 million people living within one meter of high tide. Can geoengineering hold back that tide?  That's what scientists attempted to assess with computer models in a paper published online August 23 in Proceedings of the National Academy of Sciences. In their words, "sea level rise by 2100 will likely be 30 centimeters higher than 2000 levels despite all but the most aggressive geoengineeering."

    Technology Review: Fossil Fuels Remain a Mainstay - Scientists generally agree that to limit global warming to less than 2.4 °C--and avoid the worst effects of climate change--greenhouse-gas emissions must be reduced 50 percent by 2050. But humanity is a long way from being weaned from the petroleum, natural gas, and coal whose use causes much of this pollution. In fact, global energy demand is expected to increase about 40 percent over the next two decades. By 2030, the use of petroleum, coal, and natural gas is expected to jump by 23 percent, 44 percent, and 37 percent, respectively. "You look at the world of renewables and you see a lot of progress, but they are not going to outpace the growing demand for energy,"

    Can the military lead the clean energy charge? - Aggressive new efforts are underway to end the U.S. military’s reliance on oil by catalyzing clean energy technology innovation and adoption. That is exactly the right approach to enhance the strategic and tactical capabilities of the armed forces, buttress national security, and help repower the economy, according to a recent report published by an elite group of more than a dozen retired generals and flag officers hailing from all branches of the U.S. military. “Continued over-reliance on fossil fuels will increase the risks to America’s future economic prosperity and will thereby diminish the military’s ability to meet the security challenges of the rapidly changing global strategic environment,” according to “Powering America’s Economy: Energy Innovation at the Crossroads of National Security Challenges,” a July report published by the CNA Military Advisory Board. America’s “energy business as usual is not a viable option,” the board concluded with blunt honesty befitting the group’s combined military experience.

    Wind Turbine Projects Run Into Resistance The United States military has found a new menace hiding here in the vast emptiness of the Mojave Desert in California: wind turbines.  Moving turbine blades can be indistinguishable from airplanes on many radar systems, and they can even cause blackout zones in which planes disappear from radar entirely. Clusters of wind turbines, which can reach as high as 400 feet, look very similar to storm activity on weather radar, making it harder for air traffic controllers to give accurate weather information to pilots. Although the military says no serious incidents have yet occurred because of the interference, the wind turbines pose an unacceptable risk to training, testing and national security in certain regions, Dr. Dorothy Robyn, deputy under secretary of defense, recently told a House Armed Services subcommittee.  Because of its concerns, the Defense Department has emerged as a formidable opponent of wind projects in direct conflict with another branch of the federal government, the Energy Department, which is spending billions of dollars on wind projects as part of President Obama’s broader effort to promote renewable energy.

    The Causes and Consequences of Environmentalism - When I was a graduate student at the University of Chicago, I was impressed by the fact that each of the senior faculty had a "research program". These ambitious fellows sought to answer a single question and took years crafting their papers. At the start of my career, I didn't imitate them. Instead, I engaged in some "hit and run" applied micro. I'd track down a data set, do something clever and write it up and move on. A wise move? In recent years, I have stumbled upon two big research questions. One concerns cities and climate change and examining both mitigation and adaptation issues. Climatopolis is the big "deliverable" from this research program. I have also been fascinated by the causes and consequences of environmentalism. On the consequences of environmentalism, here are 4 smart papers - paper #1 - paper #2  - paper #3 - paper #4

    If a country sinks beneath the sea, is it still a country? - Rising ocean levels brought about by climate change have created a flood of unprecedented legal questions for small island nations and their neighbors. Among them: If a country disappears, is it still a country? Does it keep its seat at the United Nations? Who controls its offshore mineral rights? Its shipping lanes? Its fish? And if entire populations are forced to relocate — as could be the case with citizens of the Maldives, Tuvalu, Kiribati and other small island states facing extinction — what citizenship, if any, can those displaced people claim? Until recently, such questions of sovereignty and human rights have been the domain of a scattered group of lawyers and academics. But now the Republic of the Marshall Islands — a Micronesian nation of 29 low-lying coral atolls in the North Pacific — is campaigning to stockpile a body of knowledge it hopes will turn international attention to vulnerable countries’ plights.

    Ocean acidification threatens entire marine food chains by Michael Searcy, Skeptical Science - Not all of the CO2 emitted by human industrial activities remains in the atmosphere.  Between 25% and 50% of these emissions over the industrial period have been absorbed by the world’s oceans, preventing atmospheric CO2 buildup from being much, much worse. But this atmospheric benefit comes at a considerable price. As ocean waters absorb CO2 they become more acidic.  This does not mean the oceans will become acid.  Ocean life can be sensitive to slight changes in pH levels, and any drop in pH is an increase in acidity, even in an alkaline environment. The acidity of global surface waters has increased by 30% in just the last 200 years.  This rate of acidification is projected through the end of the century to accelerate even further with potentially catastrophic impacts to marine ecosystems.

    Widespread Floating Plastic Debris Found in the Western North Atlantic Ocean - (Aug. 20, 2010) — Despite growing awareness of the problem of plastic pollution in the world's oceans, little solid scientific information existed to illustrate the nature and scope of the issue. Now, a team of researchers from Sea Education Association (SEA), Woods Hole Oceanographic Institution (WHOI), and the University of Hawaii (UH) published a study of plastic marine debris based on data collected over 22 years by undergraduate students in the latest issue of the journal Science. A previously undefined expanse of the western North Atlantic has been found to contain high concentrations of plastic debris, comparable to those observed in the region of the Pacific commonly referred to as the "Great Pacific Garbage Patch."

    Where Did All The Ocean Plastic Go? - Humans are dumping more plastic than ever, but not all of it is accumulating in the garbage patches of the Atlantic as expected, scientists reported. Of the millions of metric tons of plastic produced annually, an enormous proportion ends up as tiny debris in the open ocean. The currents loosely gather it together in vast, swirling ‘garbage patches’ near the surface.  But the amount of floating plastic accumulating in the Atlantic Ocean has remained curiously static over the last two decades, in spite of the fact that plastic waste by humans has increased significantly over the same timeframe, according to a new study published in the journal Science. “Surprisingly, over the 22-year period of the study (1986-2008) we did not observe an increase in the amount of plastic floating in the western Atlantic in the region where it is most highly concentrated,” said Kara Lavender Law of the Sea Education Association and lead author of the study.

    Citizens United aftershocks - What are the consequences of the Supreme Court's Citizens United decision allowing corporations "unlimited spending in pursuit of political ends"? The world of campaign finance is new, confusing -- and very alarming. Corporate groups are already using the ruling to raise lots of cash. Consider the recent work of a consortium of coal companies in West Virginia and Kentucky, including Massey Energy -- owner of the Upper Big Branch Mine where 29 miners were killed in April -- which is attempting to target "anti-coal" Democrats this fall.  In a letter to various coal concerns, Roger Nicholson, senior vice president and general counsel at International Coal Group, said, "With the recent Supreme Court ruling, we are in a position to be able to take corporate positions that were not previously available in allowing our voices to be heard. A number of coal industry representatives recently have been considering developing a 527 entity with the purpose of attempting to defeat anti-coal incumbents in select races, as well as elect pro-coal candidates running for certain open seats. We're requesting your consideration as to whether your company would be willing to meet to discuss a significant commitment to such an effort."

    BP Spill Panel Is Probing Rig Command Four Months After Blast - (Bloomberg) -- More than four months after the Gulf of Mexico rig explosion that killed 11 men and triggered a record oil spill, a U.S. investigative panel is still trying to find out who held ultimate authority aboard the vessel. Command of the Deepwater Horizon sometimes alternated between the ship’s captain and a drilling supervisor, Neil Cramond, a BP Plc executive who oversees the seaworthiness of rigs drilling wells for the company in the Gulf of Mexico, testified yesterday at a hearing in Houston. Transocean Ltd. owned the rig, which was leased to London-based BP.  Members of the U.S. Coast Guard-Interior Department panel focused questions during more than 10 hours of testimony yesterday on unraveling the chain of command aboard the $365 million rig before the April 20 blast. Coast Guard Captain Hung Nguyen, co-chairman of the panel, expressed surprise that anyone other than Transocean’s rig captain would ever be in command.

    Acrimony Behind the Scenes of Gulf Oil Spill - In fact the cofferdam, a 100-ton, four-story-high steel dome that the company had lowered to try to contain the flow of oil from its out-of-control well, had become clogged with icelike crystals and was rising in the water, full of flammable gas and oil. Had the dome hit one of the work ships, another inferno like the one that destroyed the Deepwater Horizon drilling rig might have resulted, with more lives lost. But eventually the engineers managed to maneuver it to safety. The official death of the now-notorious Macondo well in the Gulf of Mexico is expected after Labor Day, with the completion of a relief well. Whether the four-month effort to kill it was a remarkable feat of engineering performed under near-impossible circumstances or a stumbling exercise in trial and error that took longer than it should have will be debated for some time.

    New microbe discovered eating Gulf oil spill - A newly discovered type of oil-eating microbe is suddenly flourishing in the Gulf of Mexico. In a new report released on Tuesday scientists say they discovered the microbe while studying the underwater dispersion of millions of gallons of oil spilled into the Gulf following the explosion of BP's Deepwater Horizon drilling rig.They said the microbe works without seriously reducing the oxygen in the water, which they had feared. The new study was led by Terry Hazen at Lawrence Berkeley National Laboratory in Berkeley, Calif., and appears in the online journal Sciencexpress.

    I removed the BP greenwashing ads (again) - As an aside, that is (almost) amazing, that BP would be so stupid as to engage in advertising on progressive websites (which is what CSM does) and then retain the option to withdraw their advertising if they didn’t like what was written.  That leaves the distinct impression that they are advertising not merely to spread their corporate message — but to influence the websites, which ain’t gonna happen, most especially not with TP.  I say “almost” amazing because obviously, BP arguably has the most incompetent corporate leadership in the world when it comes to public relations (and drilling wells safely, for that matter).

    NOAA Claims Scientists Reviewed Controversial Report; The Scientists Say Otherwise - In responding to the growing furor over the public release of a scientifically dubious and overly rosy federal report about the fate of the oil that BP spilled in the Gulf of Mexico, NOAA director Jane Lubchenco has repeatedly fallen back on one particular line of defense -- that independent scientists had given it their stamp of approval.Back at the report's unveiling on August 4, Lubchenco spoke of a "peer review of the calculations that went into this by both other federal and non-federal scientists." On Thursday afternoon, she told reporters on a conference call: "The report and the calculations that went into it were reviewed by independent scientists." The scientists, she said, were listed at the end of the report.  But all the scientists on that list contacted by the Huffington Post for comment this week said the exact same thing: That although they provided some input to NOAA (the National Oceanic and Atmospheric Administration), they in no way reviewed the report, and could not vouch for it.

    Major study charts long-lasting oil plume in Gulf  - A 22-mile-long invisible mist of oil is meandering far below the surface of the Gulf of Mexico, where it will probably loiter for months or more, scientists reported Thursday in the first conclusive evidence of an underwater plume from the BP spill. The most worrisome part is the slow pace at which the oil is breaking down in the cold, 40-degree water, making it a long-lasting but unseen threat to vulnerable marine life, experts said.Earlier this month, top federal officials declared the oil in the spill was mostly "gone," and it is gone in the sense you can't see it. But the chemical ingredients of the oil persist more than a half-mile beneath the surface, researchers found. And the oil is degrading at one-tenth the pace at which it breaks down at the surface. That means "the plumes could stick around for quite a while,"

    Gulf Oil May Not Degrade for DECADES - As you might have heard, scientists are finding gigantic under oil plumes from the BP spill, including one that is more than 22 miles long, more than a mile wide and 650 feet deep. On Thursday, Dr. Ian MacDonald and and Dr. Lisa Suatoni testified to a Congressional subcommittee (video) that the oil will stay toxic, and will not degrade much further, for decades. MacDonald is an expert in deep-ocean extreme communities including natural hydrocarbon seeps, gas hydrates, and mud volcano systems, a former long-time NOAA scientist, and a professor of Biological Oceanography at Florida State University. Suatoni has a PhD in Ecology and Evolutionary Biology from Yale, and is Senior Scientist at the Natural Resources Defense Council's Oceans Program.

    Guest Post: Gulf Chemist Says Mercenaries Hired By BP Are Now Applying Toxic Dispersant – at Night and In an Uncontrolled Manner – Which BP Says It No Longer Uses - Bob Naman is an analytical chemist with almost 30 years in the field, based in Mobile, Alabama. When WKRG News 5 gave Naman samples of water from the Gulf of Mexico, Naman found oil contamination, and one of his samples actually exploded during testing due – he believes – to the presence of methane gas or Corexit, the dispersant that BP has been using in the Gulf: News But the story only starts there. A few days ago, Naman was sent a sample of water from Cotton Bayou, Alabama. Naman found 13.3 parts per million of the dispersant Corexit in the sample: That’s a little perlexing, given that Admiral Thad Allen said on August 9th that dispersants have not been used in the Gulf since mid-July:More imporantly, Naman told me that he found 2-butoxyethanol in the sample. BP and Nalco – the manufacturer of Corexit – have said that dispersant containing 2-butoxyethanol is no longer being sprayed in the Gulf, as the New York Times noted in June.

    Anne McClintock: Slow Violence in the Gulf and the BP Coverups - Three vanishing acts are being played out in the Gulf: the disappearing of the oil from the ocean surface by Corexit, the disappearing of the story by the media blockade, and the disappearing from view of the shadowy private contractors who are making a mint helping BP and the Coast Guard keep a cover on the clean-up. This triple vanishing trick, collectively choreographed by BP and sundry federal agencies, culminated on August 4th in a report released by NOAA that claimed 75% of the oil spill had been captured, burned, evaporated or broken down. The White House hailed the report as something to celebrate. Energy advisor Carol Browne announced: “the vast majority of the oil is gone.” A clamor of outrage immediately rose from the Gulf, as residents refused to dance the crisis-is-over, happy-feet dance. Hundreds of locals furiously insisted that they were still seeing masses of oil on ocean, beaches and marshes, and dead fish, dolphins, sharks, birds and other marine life washing ashore. Then on August 18th scientists from the Universities of Georgia and South Florida produced an open challenge to the White House report, asserting that 70% to 79% of the oil in the Gulf still remained in the water. Charles Hopkinson, a professor of marine science at the University of Georgia declared: “The idea that 75% of the oil is gone and of no concern to the environment is just absolutely incorrect.

    Guest Post: FDA Not Testing Gulf Seafood for Mercury, Arsenic or Other Heavy Metals Because “We Do Not Expect to See an Increase Based on this Spill” - Congressman Markey’s subcomittee held a hearing Thursday on seafood and the oil spill. Markey got the Food and Drug Administration to admit that fish are not being tested from oiled areas: The FDA also admitted that it is not testing for mercury, arsenic or other toxic heavy metals, because – wait for it – the FDA doesn’t expect to see an increase of these toxins from the oil spill: But in the real world: Crude oil contains such powerful cancer-causing chemicals as benzene, toluene, heavy metals and arsenic. As Bloomberg notes: “Oil is a complex mixture containing substances like benzene, heavy metals, arsenic, and polynuclear aromatic hydrocarbons — all known to cause human health problems such as cancer, birth defects or miscarriages,” said Kenneth Olden, founding dean of New York’s CUNY School of Public Health at Hunter College, who is monitoring a panel on possible delayed effects. *** Benzene, toluene, arsenic, heavy metals and many other components of crude oil … bioaccumulate.

    Here’s What’s Wrong With BP’s Trust Fund - First, the trust fund appears to be capped at $20 billion - contrary to what fund administrator Ken Feinberg has said was his understanding of BP's plans. Even worse, the $20 billion is to be drawn down not just by Feinberg-ordered payments to those suffering economic harm from the oil gusher, but by reimbursements for state and local response, natural resource harms and payments pursuant to class action and other civil action awards. Second, BP aims to make a subsidiary with no apparent assets other than Gulf oil leases the party responsible for paying all costs of the oil gusher. The company making payments to the trust fund is BP Exploration & Production, Inc., a wholly owned subsidiary of BP America Production, which in turn is a subsidiary of BP Company North America, which is a subsidiary of BP Corporation North America, a subsidiary of BP America, Inc., which is a subsidiary of the ultimate parent company BP p.l.c. Our research indicates that BP Exploration & Production, Inc. is involved only in Gulf of Mexico offshore oil and gas exploration and production. In other words, BP proposes to pay off its liabilities from the Gulf disaster exclusively with revenue from Gulf oil and gas production.

    Thousands Exposed To Shell's Toxic Waste In Brazil - Former workers at a Brazilian chemical plant operated by Anglo-Dutch oil giant Shell are relieved that a court has ordered the company to pay hundreds of millions of euros in compensation for their exposure to toxic substances. Workers at the plant suffered health problems including high blood pressure and cancer. The factory in the Paulinia district of São Paulo, founded by Shell in 1977 and later taken over by German chemical giant BASF, was closed down in 2002. The court ruled that Shell and BASF should help pay for the treatment of physical and mental health problems suffered by the ex-workers and their families.

    Drilling Ban in Gulf Costing Less Than Predicted - When the Obama administration called a halt to virtually all deepwater drilling activity in the Gulf of Mexico after the Deepwater Horizon blowout and fire in April, oil executives, economists and local officials complained that the six-month moratorium would cost thousands of jobs and billions of dollars in lost revenue.  Oil supply firms went to court to have the moratorium overturned, calling it illegal and warning that it would exacerbate the nation’s economic woes, lead to oil shortages and cause an exodus of drilling rigs from the gulf to other fields around the world. Two federal courts agreed.  Yet the worst of those forecasts has failed to materialize, as companies wait to see how long the moratorium will last before making critical decisions on spending cuts and layoffs. Unemployment claims related to the oil industry along the Gulf Coast have been in the hundreds, not the thousands, and while oil production from the gulf is down because of the drilling halt, supplies from the region are expected to rebound in future years.

    Black Stuff In A Green Land - WHEN Cairn Energy, a British petrochemicals company, this week announced the first firm indication of worthwhile oil deposits off Greenland’s coast, inhabitants of Nuuk, the island’s gritty capital, greeted the news with their customary equanimity. “That’s nice,” said a housewife less interested in the implications of a possible oil bonanza than in negotiating her country’s sole pedestrian crossing in the sleeting rain. Several hundred miles north in Baffin Bay, Greenpeace eco-warriors seeking to halt offshore oil exploration in the Arctic faced down a Danish warship. The government hotly contests Greenpeace’s claim that, because oil degrades far more slowly in freezing waters, a Mexican Gulf-style oil spill would mean calamity for the fragile environment. “Our safety standards are the highest in the world,” says Henrik Stendal, chief geologist at the Government Bureau of Minerals and Petroleum.

    Unbranded vs. Branded Gasoline: Is there a difference? - The process from refining to pipeline shipment to storage starts with a specific brand and ends with a mix of gasoline from several different producers. "All gasoline that comes out of refineries that has met governmental standards is then shipped via a pipeline where it is then put into a wholesale terminal of about 3 million gallons," said John Eichberger, vice president of government relations at NACS. From there the gasoline gets mixed with product from other refiners and then shipped through another pipeline to a storage facility. At that point, said John Eichberger, vice president of government relations at NACS, there is no way to tell which gasoline was produced by which refiner. "I don't think retailers in the US can say with certainty where their fuel comes from," said Lenard.

    Can we solve two problems at once - unemployment and preparing for power down? - While the politicians wring their hands and cry about how awful the jobs situation is, and as they contemplate a possible stimulus package, the real solution will evade them because they simply do not see the future. They are as lost as the neoclassical economists are in believing this economic ‘situation’ is temporary and that we will eventually get back to business as usual. That is we will eventually get back on the track to growth and prosperity. Not likely. There is really only one physically feasible solution. What is it? The model is simple and has been done before. From 1933 to 1942 the Civilian Conservation Corp (CCC) provided jobs for younger workers conserving natural resources (e.g. our national parks) in the US.  Over the next twenty years the US and the world will need to transition from an industrial agriculture model to one based on permaculture and more organic, labor intensive approaches to growing food. Oil is going to decline, meaning that diesel fuels to run tractors and combines will become increasingly costly. And natural gas, meaning fertilizers, will also go into decline. The era of agribusiness is coming to a close sooner than anybody might have imagined. And we are not prepared for what follows.

    Conflict with Iran: Economic Consequences of Alternative Scenarios [Excerpts from a much longer report] On June 10, 2010 Macroeconomic Advisers, with the cooperation of the Center for Strategic and International Studies (CSIS), held a symposium to consider the financial and economic consequences of a set of alternative scenarios related to the rising tension between the global community’s desire to steer Iran’s nuclear ambitions in a purely non-military direction through the use of economic sanctions and that country’s own goals. These rising tensions may give rise to significant disruptions to the flow of oil from the Gulf and threaten military conflict. This report summarizes the presentations from our panel of experts and includes the results of model simulations performed by Macroeconomic Advisers. We wish to thank CSIS, and our panelists including Anthony Cordesman of CSIS, Philip Verleger of PK Verleger Associates, and Michael Moran of Daiwa Capital Markets America for their significant contributions to this effort.We considered three scenarios

    Major reports point to oil supply turmoil and price volatility - Major energy reports published this year are pointing to a significant rise in the price of oil due to supply constraints sometime over the next three years – the only disagreement is how soon. So far 2010 has seen three international reports considering the future of oil production, demand and prices. These were published by high profile groups that command widespread respect – in turn, a collection of UK industrialists, the US military and a joint effort between Europe’s most recognized insurance company and a politically connected think-tank. Largely ignored by the media, and considered separately online as they came out, it is interesting to do a compare-and-contrast between documents produced for widely different audiences on each side of the Atlantic. In early February a group calling itself the UK Industry Taskforce on Peak Oil & Energy Security presented The Oil Crunch: a Wake-up Call for the UK Economy, an “independent, business-minded” view of a coming decline in oil production. Representing six UK companies the group called for immediate government action to help overcome potential economic turmoil relating to oil demand versus production (see graphic, left, from the report).

    Plotting the coming oil shock - I recently considered three major energy reports published so far in 2010 which take a number of different views on the issue: The Oil Crunch: a Wake-up Call for the UK Economy (published by UK Industry Taskforce on Peak Oil & Energy Security in February) that suggests oil is currently at or near peak and so output “cannot rise significantly above 92 million barrels per day;” The Joint Operating Environment 2010 (United States Joint Forces Command, published a little later in February), stating the world has vast reserves but has not invested enough to keep increasing supplies; Sustainable Energy Security: Strategic Risks and Opportunities for Business (published by insurers Lloyds with Chatham House, June), which manages to take both sides, stating: “Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand.” Three independent reports, one consistent prediction – the world will be entering into a period of oil supply turmoil sometime between the beginning of 2011 or 2013. These findings are based on subtlety different assumptions about oil production: it’s at peak, it’s underinvested, or that both are true. (There's more about this in my original post, of course.)

    Peak oil alarm revealed by secret official talks - Speculation that government ministers are far more concerned about a future supply crunch than they have admitted has been fuelled by the revelation that they are canvassing views from industry and the scientific community about "peak oil".  The Department of Energy and Climate Change (DECC) is also refusing to hand over policy documents about "peak oil" – the point at which oil production reaches its maximum and then declines – under the Freedom of Information (FoI) Act, despite releasing others in which it admits "secrecy around the topic is probably not good".  Experts say they have received a letter from David Mackay, chief scientific adviser to the DECC, asking for information and advice on peak oil amid a growing campaign from industrialists such as Sir Richard Branson for the government to put contingency plans in place to deal with any future crisis.

    Brazil Government Gives Go-Ahead For Huge Amazon Dam - Brazil's government has given the formal go-ahead for the building on a tributary of the Amazon of the world's third biggest hydroelectric dam. After several failed legal challenges, President Luiz Inacio Lula da Silva signed the contract for the Belo Monte dam with the Norte Energia consortium. Critics say the project will damage the local ecosystem and make homeless 50,000 mainly indigenous people.  But the government says it is crucial for development and will create jobs.

    Take A Deep Breath - Why The World Is Running Out Of Helium - It is the second-lightest element in the Universe, has the lowest boiling-point of any gas and is commonly used through the world to inflate party balloons.  But helium is also a non-renewable resource and the world's reserves of the precious gas are about to run out, a shortage that is likely to have far-reaching repercussions. Scientists have warned that the world's most commonly used inert gas is being depleted at an astonishing rate because of a law passed in the United States in 1996 which has effectively made helium too cheap to recycle. The law stipulates that the US National Helium Reserve, which is kept in a disused underground gas field near Amarillo, Texas - by far the biggest store of helium in the world - must all be sold off by 2015, irrespective of the market price.

    How Much Is Left? The Limits of Earth's Resources, Made Interactive - This Web-only article is a special rich-media presentation of the feature, "How Much Is Left?," which appears in the September 2010 issue of Scientific American. The presentation was created by Zemi media. Find all our other interactive offerings here.

    Good Intentions, Bad Policy - Perhaps the single most important policy-related insight in economics is that changes in policies lead to behavioral responses. More generous unemployment insurance leads to longer spells of unemployment; implicit government guarantees of financial institutions lead to too much risk-taking. Well-designed policies, like a congestion tax or carbon tax, can reduce social problems by getting the right sort of behavioral response; interventions that create an offsetting behavioral response can push the world in the wrong direction. The Jevons Paradox tells us that improvements in fuel efficiency can lead to more consumption of fuel, and its logic goes beyond tougher vehicle-emissions standards. It also suggests that low-tar cigarettes can increase the prevalence of lung cancer and that low-calorie snacks might actually make people fatter.

    Happy Days Are Not Here Again: Obama, China and the Coming Great Contraction - Happy Days are not coming any time soon to America -- and not to most of the world. This summer has convinced me that it is realistic -- not pessimistic or fatalistic -- to believe that we have reached the twilight of the oil-industrial age. A global reckoning is coming sooner than we would wish, and the US government and President Obama, sadly, are not stepping up to the leadership plate. Even the short run looks gloomy, and the slightly longer run -- the next twenty to third years -- could be a turning point in human history.

    Satyajit Das: Cross Dressing in Political Economy - While the Chinese have adopted Capitalism Chinese style, the West now flirts with Socialism Western style. Political positions are increasingly fluid, as evident from the fact that many public intellectuals, darling Libertarians and Conservatives, seem enthusiastic about the rise of China and its systems. The flux has been marked by the return of old fashioned political pamphlets, calls to arms for particular ideologies. Most are delivered via Internet blogs, T.V., chat shows, and the occasional tome, the soapbox and Hyde Park’s Speaker’s Corner now being otiose. In Capitalism 4.0, Anatole Kaletsky, an editor at the Times, former journalist at The Economist, and an economic consultant, argues that the global financial crisis is transforming capitalism. Capitalism 1.0 (the classical era of laissez-faire), Capitalism 2.0 (the Depression and the rise of government intervention) and Capitalism 3.0 (the stagflation of the 1970s and the rise of free-markets) will evolve into Capitalism 4.0. There are a few “X.1″ and “X.2″ interspersed in between. The new release entails a redefined relationship between markets and governments.

    Slowdown in China to hit prices, warns Rio - Commodities markets are entering a new age of volatility that could involve dips as low as those seen during the global financial crisis, says the chief executive of Rio Tinto, Tom Albanese. Mr Albanese predicted a sharp slowdown in China's trend GDP growth rate to between 6 and 7 per cent for the next decade, overlaid by "higher amplitude" financial market cycles associated with Western economies unwinding their deep imbalances. "We will see higher levels of volatility - higher highs, lower lows - as we saw over the past two years,"

    Even in China, Cheap Human Resources Are Becoming Scarce - The southern Chinese province of Guangdong, where countless factories turn out 'Made in China' products, is in the grip of industrial unrest. After several high-profile strikes in the auto industry this spring, every worker knows the bosses are on the run. They’ll do anything to retain workers: more meat for lunch, an afternoon break or a higher salary. Mr Verdoorn describes 2010 as a "nervy" year. He is already struggling with delays and foresees more trouble ahead, as staff shortages continue for factory bosses such as Mr Liu. A long-term reduction in China’s labour force due to aging is also beginning to bite. So there are fewer workers, and they are better educated and know what they’re worth: a decent wage. "Labour costs have doubled in recent months. Previously, you could talk to people, now they immediately go on strike. This form of blackmail is quite shocking but it achieves their goal. The workers win,"

    Highway jam enters its 9th day, spans 100km - BEIJING, Aug. 23 (Xinhuanet) --Traffic authorities were still struggling to cope with days-long congestion on a major national expressway, nine days after traffic slowed to a snail's pace, and nearby residents are profiting on the latest traffic snarl by overcharging drivers for food. Since August 14, thousands of Beijing-bound trucks have jammed the expressway again, and traffic has stretched for more than 100 kilometers between Beijing and Huai'an in Heibei Province, and Jining in Inner Mongolia Autonomous Region, China National Radio (CNR) reported Sunday. Small traffic accidents or broken-down cars are aggravating the jam, the report said. "Insufficient traffic capacity on the National Expressway 110 caused by maintenance construction since August 19 is the major cause of the congestion,"

    Chinese drivers stuck in epic traffic jam for nine days - Friday gridlock is painful enough, but try sitting in traffic for over a week. Unfortunate motorists heading northwest from Beijing to the Heibei province are currently trapped in a traffic jam to end all traffic jams, now entering its ninth day.  The congestion started with a spike in heavy cargo-bearing trucks on National Expressway 110 on Aug. 14, but a perfect storm of gridlock seemed to form as the days continued. Thanks to auto accidents, broken-down cars and highway construction, the traffic extends for more than 62 miles. How long is 62 miles? Picture a jam stretching from downtown Los Angeles to San Clemente, or from Brooklyn all the way to a point near the Pennsylvania border. If that doesn't sound painful enough already, the construction isn't scheduled to finish until Sept. 13. That means the traffic jam might last a month.  Xinhua reports on what caused the congestion, and how local merchants are capitalizing on the jam by selling overpriced food to frustrated drivers. The San Francisco Chronicle observes the jam would take three days to cross, from one end to the other. The Financial Times blog sees this as a sign of things to come for rapidly developing China. Yahoo News has posted photos of cars stuck in the jam. The Chinese news organization CCTV provides video footage, courtesy of CNN:

    Beijing District Releases Official Housing Vacancy Rates - Chaoyang District's housing vacancy figures are the first of its kind to be issued in China, amid growing fears of a property bubble. Beijing's largest district Chaoyang has issued figures showing that a total of 1.33 million square meters of residential space are vacant. Over half of the space has been empty for at least three years. Among the empty residences, villas and luxury apartments totaled 521,000 square meters, accounting for 39.2 percent of the total and 54.9 percent of homes have remained empty for over three years. Ordinary flats accounted for 18 percent of the empty residential space, according to the report.

    China closes factories as green deadline looms - An iron and steel mill lies idle after it was ordered to shut down for polluting the Xiangjiang river basin in Loudi, central China's Hunan province. China has ordered thousands of companies to close high-polluting plants, in what analysts say is a last-ditch effort by Beijing to meet environmental targets by year's end or risk embarrassment.  China, facing the risk of embarrassment if it misses a looming environmental deadline, has ordered thousands of companies to close high-polluting plants as its leadership vies to retool economic growth.

    China Turns To Asian Currencies To Ease Reliance On Greenback - China is increasingly looking to its neighbours' currencies to lessen its reliance on the US dollar, both for investment and trade. Slowing the pace at which it amasses US Treasurys, China has started buying more South Korean and Japanese government bonds. While the volumes involved are small compared to its holdings of US debt, the moves are helping to illuminate Beijing's strategy to diversify its vast foreign-exchange reserves and shows that it is willing to let smaller markets play a bigger role in its holdings. Yesterday, China added the Malaysian ringgit to a small group of currencies it allows to be traded directly against the yuan, a small but central part of its plan to increasingly use the yuan to settle trades throughout Asia.

    The Revaluation That Wasnt - On June 19, China made headlines by announcing that it was unmooring its currency somewhat from the dollar and letting it move in a “flexible” fashion. While Beijing warned against expecting big currency movements, the expectation globally was that the yuan would appreciate significantly against major currencies. Two months later that hasn’t turned out to be the case. The yuan appreciated at most about 1% against the dollar and is now trading at nearly the same rate as it did on the day before the currency announcement. (Overall, the yuan has appreciated by about 0.4% against the dollar.) Meanwhile, the dollar has depreciated against the euro and yen — which means that the yuan has fallen against both currencies too, giving Chinese exports a further competitive advantage. (The yuan has depreciated 3% against the euro and 6.4% against the yen over the last two months.)

    Global Imbalances: Good for the World? - You are a (small) open economy.  If you borrow, you are a net importer of goods and services--you run a trade deficit. You may want to run a trade deficit for a long time, but ultimately, creditors will expect you to pay back what you owe. To make good on your promises, you will have to run a trade surplus at some point in the future. (Alternatively, you may wish to default, but let me ignore this possibility for now). Setting the problem of default aside, the example above highlights a key property of what economists call an intertemporal budget constraint. Fancy words, but all it really means is that if you borrow today, you will have to pay back tomorrow. Applying the same principle to nations, it means that a trade deficit today will have to be matched by a trade surplus tomorrow.  This principle suggests that "imbalances" in a country's international trade account are expected to be "temporary" (kind of like the "temporary" income tax measure of 1913?). Sounds like good ol' common sense. And it probably applies to most countries. Except, maybe, for big and powerful economies, like the USA?

    U.S.-China Trade: How Long Will the U.S. Be China's Doormat? -Prior to the G-20 meeting in Toronto in late June, the Obama administration decided that the 20 leaders would mostly focus on Europe because "China had announced plans to allow the yuan to rise". Having personally railed against China's unfair trade practices for the better part of the last four years, including its outrageous 40% or so undervaluation of the yuan or renminbi, as I said back then, this was like being told to forget about a very bad hangover. The proof that this particular hangover continues, however, is that since China's promise to President Obama to let the renminbi float to its 'natural level', despite a pitifully low 0.8% rise against the dollar within the first two weeks after the promise was made, China has recently purposely pushed the yuan exchange rate back to its June level. At this rate, China will take longer to remedy its currency manipulation than it takes for Hell to freeze over.

    The last chance to avoid a global trade war - The world seems to be marching inexorably towards trade war. The US trade deficit is surging, for reasons that have nothing to do with domestic consumption and everything to do with policies and events abroad. In the months ahead, the US will be forced to choose either protection or soaring trade deficits with rising unemployment. It will almost certainly choose the former but if it overreacts, which is likely, it could unleash another round of global protectionism – which will especially hurt trade-surplus countries. . Five countries or regions have largely driven these imbalances in the past decade. Three of them – China, Germany and Japan – run huge trade surpluses on which they are dependent for domestic employment growth.Counterbalancing them have been the two trade-deficit champions – the US and trade-deficit Europe, dominated by Spain, Italy and Greece.  The financial crisis has undermined the precarious decade-long equilibrium between these blocs by forcing trade-deficit countries to reduce debt, especially household debt. As they do, the excess demand they provide to the rest of the world must decline. Trade-surplus countries, which depend heavily on this demand to absorb their excess capacity, have resisted this adjustment fiercely by trying to maintain or even increase their surpluses.They are succeeding

    The Shockingly High Cost Of Free Trade: 10 Reasons Why Globalism Is Bad For Middle Class Americans  Today, there are very few national figures that are dissenting from the politically-correct viewpoint that free trade is a good thing.  The vast majority of Republican politicians believe in free trade.  The vast majority of Democrats believe in free trade.  Barack Obama believes in free trade.  Nancy Pelosi believes in free trade.  Rush Limbaugh believes in free trade.  Glenn Beck believes in free trade.  In fact, just about anyone who goes on mainstream media and starts speaking out against free trade is immediately branded an idiot who does not understand the first thing about economics.  Well, there is just one problem.  All of this globalism and free trade is killing the American Dream and is destroying the American middle class.  But isn't being able to purchase products at the store for a much lower price a good thing?  If China can make clothing much cheaper than we can, then why shouldn't our clothes be made in their factories? Well, it turns out that free trade and low prices come with a shockingly high cost. The following are 10 reasons why globalism and free trade are really bad for middle class Americans....

    Washington Post Invents Debate Over “Free Trade” - The Washington Post has a front page article telling readers that the debate over the Korean "free trade" agreement is actually "a dispute over free trade itself." The Korean trade agreement is not in fact a "free trade" agreement. It does not free trade in many areas, for example it does little to reduce barriers to trade for highly paid professional services, like doctors and lawyers' services. The deal also increases some barriers to trade, most notably by increasing copyright and patent protection. The proponents of the deal use the term "free trade agreement," because "free" has a positive connotation which they hope will help sell the deal politically. They do not use the term because it is true.Similarly, it is absurd to claim that the United States is having a "dispute over free trade itself." There are no prominent public figures who support free trade. Genuine free trade would eliminate barriers to trade in all goods and services. In areas where these barriers are greatest, like health care, free trade could have an enormous impact in improving living standards and reducing inequality since prices in the United States are so far out of line with prices in the rest of the world.

    South Korea free trade pact back on U.S. agenda - For three years, since it was negotiated by the Bush administration, the free-trade agreement has languished in Congress. Now trade officials from both countries are trying to resolve the problems that have kept it bottled up, including a dispute over U.S. access to the South Korean auto market and restrictions on U.S. beef imposed after the mad cow scare several years ago. The agreement would eventually eliminate tariffs between the two countries. Because those levies are typically higher on the South Korean side, administration officials estimate the deal could mean more than $10 billion annually in increased U.S. exports to Seoul and tens of thousands of new U.S. jobs. South Koreans say they would benefit from lower prices -- some tariffs on food imports from the U.S. are as high as 40 percent -- and a more efficient flow of investment in and out of their country.

    Growth in a Buddhist Economy - Bhutan’s economy of agriculture and monastic life remained self-sufficient, poor, and isolated until recent decades, when a series of remarkable monarchs began to guide the country toward technological modernization (roads, power, modern health care, and education), international trade (notably with neighboring India), and political democracy.  What is incredible is the thoughtfulness with which Bhutan is approaching this process of change, and how Buddhist thinking guides that thoughtfulness. Bhutan is asking itself the question that everyone must ask: how can economic modernization be combined with cultural robustness and social well-being? In Bhutan, the economic challenge is not growth in gross national product, but in gross national happiness (GNH). I went to Bhutan to understand better how GNH is being applied. There is no formula, but, befitting the seriousness of the challenge and Bhutan’s deep tradition of Buddhist reflection, there is an active and important process of national deliberation. Therein lies the inspiration for all of us.

    Japan’s Consumer Prices Slide, Adding to Risk of Slower Growth (Bloomberg) -- Japan’s consumer prices fell for a 17th month and household spending rose less than forecast, driving stocks lower on concern that the nation’s economic recovery is faltering.  Consumer prices excluding fresh food declined 1.1 percent in July from a year earlier, the statistics bureau said today. Household spending rose 1.1 percent, lower than economists’ estimates for a 1.5 percent gain. The unemployment rate fell for the first time in six months, a separate report showed. “With the yen climbing and stocks breaking 9,000 we’re going to see downward pressure on consumer prices,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The government has been slow to respond to the yen, it needs to act in a decisive and swift manner.”

    Pressed to Act, Bank of Japan Sees Few Ways to Lift Demand - NYTimes - Copter cash may not yet be among the tools considered by the Japanese central bank in its quest to lift the country out of a long deflationary slump. But pressure is mounting on the Bank of Japan for more drastic action.  And recent signs of a Japanese recovery now seem to be fading: The economy grew an anemic 0.1 percent between April and June. Meanwhile, a strengthening yen, which hurts Japan by making its exports less competitive, has many people calling for the bank to further ease its monetary policy to shore up the economy — if not outright government intervention in currency markets.  But on Monday, hopes for decisive action were dashed when Prime Minister Naoto Kan and the governor of the Bank of Japan, Masaaki Shirakawa, opted not to hold a widely anticipated meeting, but instead engaged in a 15-minute phone call in which the two did little more than agree to “communicate closely with each other.”

    Japan's Finance Minister Threatens Yen Intervention to Halt "One-Sided Movement" - Japan's Finance minister is waving the "currency intervention flag" hoping to halt the Yen's rise. Given that markets do their best to apply pressure exactly where it is not wanted, this flag-waiving exercise practically guarantees intervention will follow. Will it do any good? Of course not. Moreover, one has to laugh at finance minister's proclamation that the Yen's move is "one-sided". Is there any other kind of move? Generally one cannot go left and right at the same time, can they? Please consider Noda Signals Japan’s Preparedness to Act on Currency

    Japan: All Talk, No Action on Levitating Yen - The yen reached a 15 year high overnight as the Japanese Finance minister’s efforts to talk the currency down appear to have backfired. From MarketWatch: Strong words against a strong yen from Japanese Finance Minister Yoshihiko Noda failed to prevent the Japanese unit from rising to fresh multiyear highs…. Noda said that recent currency moves are clearly one-sided and that disorderly moves can be harmful to economic stability, according to reports. But Noda declined to comment on currency-market intervention, which some investors clearly took as a sign that Japan wasn’t ready to back up strong words with direct market action….

    Beyond City Limits - The 21st century will not be dominated by America or China, Brazil or India, but by the city. In an age that appears increasingly unmanageable, cities rather than states are becoming the islands of governance on which the future world order will be built. This new world is not -- and will not be -- one global village, so much as a network of different ones.  Time, technology, and population growth have massively accelerated the advent of this new urbanized era. Already, more than half the world lives in cities, and the percentage is growing rapidly. But just 100 cities account for 30 percent of the world's economy, and almost all its innovation. Many are world capitals that have evolved and adapted through centuries of dominance: London, New York, Paris. New York City's economy alone is larger than 46 of sub-Saharan Africa's economies combined. Hong Kong receives more tourists annually than all of India. These cities are the engines of globalization, and their enduring vibrancy lies in money, knowledge, and stability. They are today's true Global Cities.

    Asia Slowdown to Have `Serious Negative Impact' on Europe, EU's Rehn Says (Bloomberg) -- Slower economic growth in China, India or other Asian economies would have a “serious negative impact” on Europe’s growth, the European Union’s economic chief said. Olli Rehn, the EU commissioner for economic and monetary affairs, said yesterday in a Bloomberg Television interview that a slowdown in the U.S. recovery and turmoil in the sovereign- debt markets also could cause concern in Europe.  Strengthening global growth helped Europe’s economy show the fastest expansion in four years in the second quarter after the Greek budget crisis earlier damped confidence in the euro currency and forced governments to step up deficit-cutting measures. Euro-area growth is likely to decelerate in the second half of the year as signs of a slowdown in the U.S. and China dim export prospects.

    Zapatero prepares further tough economic measures - Spain is preparing a new round of budget cuts and tax increases, including a new higher income tax band; the German economy is still roaring ahead, but the rest of the eurozone is losing momentum; some stress has returned to the bond markets, as Irish bond spreads are back close to the record levels in May; political Paris is full of rumours about a change at the Matignon – Michele Alliot-Marie is tipped to succeed Francois Fillon; European companies are increasingly turning to the US bond markets to raise cash; Germany’s SPD drops commitment to the increase in the pension age to 67; Le Monde, meanwhile, is fretting about the strong growth gap between France and Germany.

    How Many Times Can One Driver Fall Asleep At The Same Wheel (And Live)? - Watching the TV news here is Spain at the moment is often a rather discomforting and sad affair. The normal menu seems to consist of a constant stream of ministers who have to appear before the cameras and the public to explain something that they, in all fairness, don’t really understand themselves. And so it was on Saturday, as I tucked into my early morning breakast of sausage and beans (Catalan style) in the village near my mountain retreat, there in the background I could see the face of Spain’s Labour Minister Celestino Corbacho (photo above), giving details to the assembled press corps of the latest government decision to make another six month extension for the 426 euro monthly “exceptional” payment for those whose unemployment benefits have run out. Why there are so many unemployed in Spain, and why renewing this subsidy is now an almost permanent necessity (this is now the third time that this “temporary” means of support has been extended), or what the real prospects of creating enough jobs to start reducing the unemployment mountain any time in the foreseeable future, was not explained. Well, the future is not ours to see, so “que sera, sera”.

    Spain uses social security fund to prop up the bond market - Spain is putting all its eggs into one basket, and if it carries on like this, we may start to see a lot of Basques and Catalans crowding into one exit. The state pension fund – the €64bn Fondo de Reserva, known as the ‘hucha de las pensiones‘ – is buying Spanish sovereign debt at a vertiginous pace. The financial daily Cinco Dias reports that the share of the Fondo’s total portfolio invested in Spanish government bonds rose from below 50pc in 2007 to 76pc in 2009. The Social Security minister Octavio Granado said it will rise to 90pc by the end of this year. The Spanish government is also funnelling 90pc of its sickness fund into state bonds.

    The conservative counter-revolution - The conservative economic counter-revolution associated with the names of Ronald Reagan and Margaret Thatcher began some three decades ago. The Great Recession almost certainly marks its end. What follows will be something different, though how different it will is still unclear. This is a good opportunity to assess the broad economic consequences of that revolution. For the sake of simplicity, I focus on gross domestic product per head in the six biggest high-income economies: the US; Japan; Germany; the UK; France; and Italy. (I also use the Conference Board database. These data are in purchasing power parity (Elteto-Koves-Szulc (EKS) method).) There is much more to performance than GDP per head. These data ignore the distribution of income, which is of crucial importance, especially for the US, where a very large proportion of additional income seems to have accrued to the wealthiest. The data also ignore the underlying causes of changes in GDP per head: changes in output per hour, in hours per worker and in employment. Even so, they are revealing.

    Greece unemployment rate continues to rise - From the WSJ: Jobs Crisis Grows As Greece Falters Greece's gross domestic product contracted by 3.5% in the second quarter from a year earlier ... sending unemployment rates to above 12% of the work force ... The International Monetary Fund predicts the jobless rate will reach 14.8% by 2012. But some labor experts fear that before long, one in five Greek workers could be without jobs. And the 10-year Greece-to-German bond spread has continued to widen, hitting 848 bps on Friday - the highest level since the 963 bps during the May crisis. Note: The unemployment rate in Ireland is at 13.7% and rising ...

    Illegal immigration in Greece: Border burden | The Economist - GUARDING their nation’s frontiers has traditionally been an honourable task for Greeks. These days they are almost begging for foreign assistance. Greece’s borders have become the gateway of choice for the vast majority of people hoping to enter the European Union illegally, and the country is finding it difficult to cope. Of the 106,200 people detected trying to cross illegally into the European Union in 2009, almost three-quarters were stopped in Greece (see chart). Early data for 2010 suggest that, although absolute numbers are falling, Greece’s burden has risen further, to about 80% of the EU total, up from 50% three years ago. Compounding the problem is a rule that says undocumented immigrants found anywhere in the EU must be returned to their country of entry—usually Greece.

    Lack of skilled workers threatens recovery: Manpower (Reuters) - Workers with specialized skills like electricians, carpenters and welders are in critically short supply in many large economies, a shortfall that marks another obstacle to the global economic recovery, a research paper by Manpower Inc (MAN.N) concludes. "It becomes a real choke-point in future economic growth," Manpower Chief Executive Jeff Joerres said. "We believe strongly this is really an issue in the labor market." The global staffing and employment services company says employers, governments and trade groups need to collaborate on strategic migration policies that can alleviate such worker shortages. Skilled work is usually specific to a given location: the work cannot move, so the workers have to.The shortage of skilled workers is the No. 1 or No. 2 hiring challenge in six of the 10 biggest economies, Manpower found in a recent survey of 35,000 employers. Skilled trades were the top area of shortage in 10 of 17 European countries, according to the survey. While the short-term way to address to shortages is to embrace migration, the long-term solution is to change attitudes toward skilled trades, Manpower argues.

    Surprise: Now Moody's Says Austerity Could Make European Sovereign Credit WORSE - Remember when European nations were being pressured to adopt austerity measures in order to prevent their credit ratings from deteriorating due to rising government debt?  Well we've already been chronicling the initial challenges of the new regime (deficits still widening, unemployment rising, growth fading, tax collections poor, etc.) And now Moody's is concerned that austerity measures, ie. spending cuts, could actually destroy some European nations' credit ratings  Reuters: "Given the magnitude of the fiscal challenge and the need to sustain tight fiscal policy for several years, the risks to economic growth are clearly a downside risk for sovereign ratings," Moody's said in a report.

    S&P Cuts Ireland's Rating, Outlook Negative - From MarketWatch: S&P downgrades Ireland on financial sector cost The 10-year Ireland-to-German bond spread has risen to 318 bps, and is now above the peak during the European crisis in May. The peak in May was 306 bps. The 10-year Greece-to-German bond spread is now 885 bps, just below the peak level of 963 bps in May.

    Irish debt downgrade raises fears of international deflation spiral - The colossal expense of rescuing Ireland's troubled banking sector has hit the republic's international credit rating once again.Despite an apparently successful austerity programme and drive to reduce government borrowing, Standard & Poor's yesterday cut its credit rating on Irish sovereign debt by one notch, from AA to AA-. It reflects renewed concerns about the cost to the public finances of supporting failed banks and building societies. The news helped to push already unsettled international markets lower, as did disappointing news from the US real-estate sector, where new home sales dropped to an all-time low in July.

    Ireland And Spain, Revisited – Krugman - A couple of months back I asked, does fiscal austerity actually reassure markets? I noted there the curious case of Ireland, which embraced savage austerity early on; quite a few press reports declared that this had gained it the confidence of markets, but the actual numbers said otherwise. And I noted the contrast with Spain, which has been relatively slow and reluctant to embrace austerity, but has been treated no worse by investors. Since then, the contrast has grown even more striking. Here’s the 10-year bond yield for Ireland: And here’s the same for Spain: Now, this isn’t a clean experiment: Ireland had an even bigger bubble than Spain did, so you could say that’s the issue. But since austerians were claiming bond market approval as a sign of its policy success, it is worth pointing out that dutiful Ireland looks as if it’s entering a runaway debt spiral, while malingering Spain is looking considerably better.

    It pays to riot in Europe – Ireland must now pay more than Greece to borrow. Dublin has played by the book. It has taken pre-emptive steps to please the markets and the EU. It has done an IMF job without the IMF. Indeed, is has gone further than the IMF would have dared to go. It has imposed draconian austerity measures. The solidarity of the country has been remarkable. There have no riots, and no terrorist threats.  Yet as of today it is paying 5.48pc to borrow for ten years, or near 8pc in real terms once deflation is factored in. This is crippling and puts the country on an unsustainable debt trajectory if it lasts for long. Yet Greece is able to borrow from the EU at 5pc and from the IMF at a staggered rate far below that.

    Tough calls after bungee-jump recovery - Financial markets were jolted this week by the 27 per cent fall in existing US home sales in July to levels last seen almost 20 years ago. Although a drop was expected, a more ominous decline in home prices is looming again, along with more pronounced weakness in aggregate final demand. The US may be growing, but by barely more than 1 per cent per annum. With Europe and Japan little better, it now looks as though the bungee-jump economic recovery from last year’s abyss has lost its momentum. Against this background, the policy debate about how to escape from the debt crisis is about to become increasingly controversial. The US congressional election campaign will focus on whether to allow the Bush tax cuts for upper income earners to lapse, unprecedented UK public spending cuts will be grafted on to the bones of the government’s austerity plan and EU nations with sovereign debt woes are likely to face new turbulence. Slower The Federal Reserve recently voted to shift the composition of its balance sheet by buying more Treasuries, and the usually hawkish Bundesbank president, Axel Weber, acknowledged the ECB will have to keep open the emergency liquidity pipeline to European banks until 2011. Both institutions, and the Bank of England, are likely to consider more quantitative easing.

    Despite recovery, the credit crunch actually gets worse - This is a potentially alarming news. Frankfurter Allgemeine reports that eurozone banks grant fewer credit to companies. During July total credit to companies in the eurozone fell by 0.2% mom, and 1.3% yoy. M3 growth also remained weak – lower than expected – at 0.2%. The article said credit to companies is a late cycle indicator, but analysts had expected to see some modest recovery by now, and quotes one analyst that a turning point was not in sight. One distorting factor behind those numbers is the fact that some large companies have been raising finance on the market, rather than through their banks. The FT leads this morning with the news that the decision by two securities clearing houses to accept Spanish bonds as collateral has eased tensions in the Spanish banking sector. The decision led to an immediate volume in short-term loans of €160bn, mostly used by Spanish banks, which had recently met difficulties in raising money on the open  market. The article says that Caja Madrid became the first Spanish bank to join Eurex Repo, an electronic market attached to Eurex Clearing, which is controlled by Deutsche Börse, last month. Santander is a member of LCH.Clearnet, which is also offering Spanish clearing services.

    EU ratings at risk on economy, austerity - Moody's (Reuters) - Slow economic growth and austerity measures in European Union countries may have negative rating implications for some sovereign ratings, Moody's Investors Service said on Monday. "Given the magnitude of the fiscal challenge and the need to sustain tight fiscal policy for several years, the risks to economic growth are clearly a downside risk for sovereign ratings," Moody's said in a report. Moody's said it continues to monitor the impact of gross domestic product growth and government financial strength on European sovereigns as the deleveraging process unfolds. It noted that governments including Latvia, Lithuania, Hungary, Greece, Portugal and most recently Ireland have been downgraded over the past 24 months. Spain's Aaa rating was recently placed on review for possible downgrade, due to a poor growth outlook and its negative impact on government financial strength.

    Back to negative news on the economy - Global yields fall, as investors fear double-dip recession and further disinflation; yen reaches 15-year high; the persistent high level of US housing inventories suggests that a price decline is likely within a couple of months; the next ISM manufacturing survey is expected to show a US economy on the brink of recession; Gavyn Davies says says he is very concerned about a double-dip recession; Wolfgang Munchau says the next financial crisis will not be as big as the last one, but more dangerous because it will hit us in a weaker position; S&P cuts the sovereign credit rating for Ireland by one notch to AA-; CDU parliamentarians are unhappy with Merkel, and criticise lack of direction; Italy pays a much smaller percentage of its tax take on welfare compared to other European countries; Alan Beattie, meanwhile, argues in the FT that Greece should restructure, but not just yet.

    Stiglitz Says Europe at Risk of Double-Dip Recession (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits. “Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.  Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.

    The bond market crisis is returning - Is the crisis coming back? After the downgrading of Ireland by S&P, Irish sovereign bond spreads rose from 318bp to 344bp to level higher than before May, and even Greece spreads are now back at close to 10%, the level before the agreement on the EFSF. This means that the European rescue package have failed to calm down the market stress that triggered on those package in the first place.  There was further bad news from the US, where existing home sales declined by a record amount for July, giving rise to expectations of another decline in US house prices. As ever, Calculated Risk has the best coverage of this.  The Wall Street Journal says in a comment that even a downturn to annualised growth rates of under 2% will feel like a recession. It is getting scaring, was how the story started. In a 2% economy, there won’t be any job creation, or wage increases.  Back in Europe, Irish banks face tough times raising money after the S&P decision to downgrade Ireland’s sovereign debt. €30bn of government-guaranteed bank debt is due to roll over in September, Bloomberg writes, if the banks cannot refinance on the market, lenders might have to turn to the ECB, which would hurt Ireland’s market reputation, driving up yield spreads even further. 

    A wake-up call for bank lending standards -The subprime crisis and subsequent global crisis have brought bank finances firmly to public attention, with many calling for stronger regulation. This column argues that the subprime crisis offered a “wake-up call” for banks, prompting them to screen and monitor their corporate borrowers more carefully without the need for more regulation. This may have contributed to the subsequent reduction in corporate lending. Many people are now holding Germany up as proof that austerity is good.There are a number of reasons that’s foolish, among them the fact that Germany’s austerity policies have not yet begun — up to this point they’ve actually been quite Keynesian. But it’s also worth having some perspective on actual German performance to date. Here’s a chart:Everything you’ve been hearing is about that uptick at the end. But I’m not willing to declare an economy that has yet to recover to the pre-crisis level of GDP an economic miracle.

    German budget deficit jumps to 3.5 pct in 1st half — Germany's deficit rose sharply to 3.5 percent of economic output in the first half of 2010, putting it on track to break EU budget rules due to the costs of the global economic and financial crisis, official data showed Tuesday. Net borrowing for the first six months of the year came in at euro42.8 billion ($54.37 billion) — more than double the euro18.7 billion a year earlier, the Federal Statistical Office said. In 2009, the agency had reported a much smaller first-half deficit of 1.5 percent. At the current rate, Germany will this year overshoot the European Union limit for budget deficits to be no more than 3 percent of gross domestic product. Officials in July said the country expects this year's deficit to come in at 4.5 percent of GDP but that it would be back under the 3 percent mark by 2012.

    EU-US convergence ? — For quite some time, the US and the leading EU countries have been fairly comparable in terms of output per hour worked. The US has had higher output per person for two reasons: a relatively high employment/population ratio and very high average hours worked per person. The first of these is important because it raises the possibility that EU countries performing well on productivity measures are benefiting from the “Thatcher effect” . If low-skilled workers are excluded from employment, for example by restrictive macro policy, as in Thatcher’s case, or by labor market sclerosis, as claimed by critics of European institutions, then productivity measures are artificially boosted. This issue is now moot. As a result of the crisis, the US employment/population ratio has dropped sharply, to the point where the US is now little different from the EU. The difference in GDP per person between the US and leading European countries is driven primarily by differences in average hours worked by employed people.

    We have to get the ‘bond market vigilantes’ off our back – THE chief economist of Government think-tank the ESRI yesterday slammed "bond market vigilantes" for "beating up" Ireland by inflicting huge interest rates on the country's borrowings.  The comments from Professor John Fitzgerald (right) came days after the Government agreed to pay 5.38pc for 10-year borrowings, an interest rate 300 basis points higher than the German state pays. "I don't think EU surveillance is that important to us (in terms of managing the public finances)," Prof Fitzgerald told a conference of US and European politicians and business people. "What is more important to us is the bond market vigilantes -- they're an unlicensed police force.  "They may not be very rational but. . . the bond market vigilantes are out there beating us up and the only way we're going to get them off our back is by getting our house in order."

    Government Urged To Reveal 'True' National Debt Of £4.8 Trillion - The Institute of Economic Affairs (IEA) has calculated that the national debt is £4.8 trillion once state and public sector pension liabilities are included, or £78,000 for every person in the UK.The IEA raised its concerns after the latest public finances data from the Office for National Statistics (ONS) this week, which showed that the total debt, excluding bank bail-outs, is £816bn – itself a record high. However, the figures strip out the state's pension liabilities in a contravention of standard accounting practices.  Mark Littlewood, the IEA's director-general, said: "The latest official national debt figure is seriously misleading. Looming in the background are pension liabilities. These should be moved to the forefront.

    Intrigue at the IMF - THINGS are hotting up at the IMF, and it doesn’t have anything to do with bail-outs (or with the heat wave in Washington, DC). Instead, the chatter at the fund is about America’s decision to abstain in a routine vote on the size of the body’s executive board, news of which crept out into the world beyond 19th Street at the end of last week. This may sound arcane (and in a way it is), but it is something that could force the Fund’s members to make a more serious effort to ensure that the long-promised shift in decision-making power at the IMF towards big, fast-growing emerging economies (like China, India and Brazil) materialises. It has also laid bare the divisions which have been apparent for some time between America and big emerging countries on the one hand, and European countries on the other—but also the more subtle tensions between big European countries like Germany and France and smaller ones like Belgium and the Netherlands. In the world of governance reform at the IFIs—a worthy topic that is nonetheless usually about as exciting as a particularly portentous piece of art-house cinema—this is a big deal.