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

Saturday, August 14, 2010

week ending Aug 14

Fed's Assets Little Changed; Bank Borrowing Lowest Since 2007 - The Federal Reserve’s balance sheet was little changed at $2.33 trillion during the past week as banks borrowed less from the Fed’s discount window than at any time since September 2007.  Total assets rose by $1.05 billion as of yesterday, according to today’s weekly balance-sheet release. The Fed’s holdings of mortgage-backed securities increased by $1.73 billion to $1.12 trillion. The Fed’s holding of federal agency securities were unchanged at $159.4 billion.  Borrowing from the Fed’s discount window fell $61 million to $1 million, the lowest since September 26, 2007, when there was no borrowing at the window. The Fed said this week that as housing debt matures, the central bank will purchase new Treasury securities to maintain its total securities holdings at $2.05 trillion. The Fed said it will purchase about $18 billion of Treasury securities in the next month to hit its target.

US Fed Total Discount Window Borrowings Wed $62.23 Billion -(Dow Jones)- Commercial bank borrowing from the U.S. Federal Reserve's discount lending window plummeted to its lowest level in more two years, the latest data show. Commercial bank borrowing from the Fed's discount window fell to just $1 million as of Wednesday. Average borrowing for the week fell to $14 million, a fraction of the $81 million it stood at in March of 2008, the central bank said in a report Thursday. The Fed's balance sheet grew slightly over the same time period. The central bank's asset holdings in the week ended Aug. 11 rose to $2.331 trillion from $ 2.330 trillion a week earlier, the Fed said in a report released Thursday. Total discount window borrowing fell to $62.23 billion on Wednesday from $ 63.77 billion a week earlier. Borrowing by commercial banks through the Fed's discount window dropped to $1 million from $62 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts rose to $3.174 trillion from $3.155 trillion in the previous week. Treasury held in custody on behalf of foreign official accounts as of Wednesday rose to $2.342 trillion from $2.326 trillion in the previous week. Holdings of agency securities rose to $832.74 billion from the prior week's $ 829.64 billion.

Fed Watch: Waiting for Nothing? - Incoming data give the Fed a green light to ease further. There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting. The public stance of Fed officials in recent weeks has tended to downplay the necessity for action at this juncture. This combination leaves the outcome of this week's FOMC meeting in doubt. My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact. There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of passive balance sheet contraction. I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.

FOMC Briefing: Downward Revision: Modest, Not "Appreciable" by former Fed governor Larry Meyer and former Fed economist Antulio Bomfim. - We have changed our call for the timing of exit from the near-zero funds rate policy, from mid-2011 to late 2011. The degree of revisions to the staff's and FOMC members' forecasts will determine whether the Committee just talks about easing options or acts. The Committee will have a robust discussion of easing options, and probably also of thresholds for a near-term action. Given our expectation that any downward revision to the forecast will not be "appreciable" and that the recovery is not "faltering," we do not anticipate either easing steps or changes to the policy guidance.

FOMC Chatter: Key Themes by former Fed governor Larry Meyer and former Fed economist Antulio Bomfim - The discussion by FOMC members during the intermeeting period focused on topics teed up at the June meeting: Is deflation risk rising? What are the options for easing? After the slowdown projected at the June meeting, are we close to the threshold for easing? During the intermeeting period, there were clear differences in opinions about the risk of deflation: Some thought that deflation risk was rising and was now an important consideration in their forecasts; others did not see much risk. While members generally agreed that the economy is still on track for a moderate recovery, a recurring theme was that risks to the outlook are tilted to the downside, and that the unemployment rate would be very high and inflation very low for some time. There was about as much discussion about exit strategy as easing options, but most of the discussion about easing focused on the view that this was not the time to do so.

US jobs data will encourage Fed to act - The US monthly employment data for July were not far off economists’ expectations, but they suggest that the labour market is now showing precious little improvement, and the initial reaction of markets was one of disappointment. The number of private sector jobs in the economy rose by just 71,000, which would normally be insufficient to keep unemployment from rising. However, the unemployment rate remained unchanged at 9.5 per cent, largely because the potential labour force is now falling as workers become discouraged about their prospects of finding work. All in all, this is a fairly gloomy picture for those seeking work in the US.Let us examine the numbers in a little more detail.

The FOMC Decides on a Minor Course Correction - Here’s the Press Release from today’s FOMC meeting. There’s nothing dramatic planned in terms of a change in policy, but there is a nod to the fact that the economy is recovering slower than anticipated, and a small change in policy to keep the balance sheet from contracting (a move that should help to keep long-term interest rates low). That is, the Fed will keep “securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities”:It’s something, and it indicates more awareness of the struggles the economy is having than some recent commentaries from FOMC members would suggest. But more aggressive action — an actual expansion of the balance sheet — is needed. In my view, the risks are asymmetric. That is, the potential costs of failing to expand the balance sheet to give the economy more help are much greater than the costs of expanding the balance sheet and then finding out the economy is doing better than expected.

Fed Sees Recovery Slowing - WSJ - The Federal Reserve, facing an economic recovery that it termed "more modest" than anticipated, said Tuesday it will stop shrinking its huge portfolio of securities by reinvesting the proceeds of maturing mortgages in U.S. Treasury debt.  The Fed move is largely symbolic and is unlikely to stimulate the economy significantly. But the shift in the management of its portfolio—and an accompanying statement—underscored Fed officials' concern about the vigor of the economic recovery. It also opens the door for bigger purchases of Treasurys or other securities should the economy falter or the risk of deflation grow, though the hurdle for such action remains high.

Fed To Buy More Treasury Debt - At 2:15 PM yesterday, the Federal Open Market Committee made a big symbolic move, announcing it would buy Treasury debt in the 2-year to 10-year range to keep its $2 trillion of securities holdings constant. Otherwise, the portfolio of agency and mortgage-backed debt would have run off at $10 billion to $20 billion a month as homeowners prepay mortgages. Although that would have been a miniscule tightening of monetary policy, the Fed acted to support economic recovery. It is also the first step toward future inflation. The Fed is already bumping into its self-imposed limit on purchasing no more than 35% of any Treasury issue. With no signs of major deficit reduction from Congress yet, the Fed may have to buy a lot more Treasury debt in 2011 and beyond.

Fed Brings Out the Medium-Sized Guns - The Federal Open Market Committee has  released a statement from its latest meeting, once again saying that interest rates will stay “exceptionally low” for an “extended period.” It also noted that the recovery had indeed slowed. More controversially, the committee said it would maintain the Fed’s unusually expansive balance sheet by “reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.” In other words, rather than letting some of the Fed’s more aggressive policy initiatives end as planned, the committee decided to keep pumping money into the economy by investing in longer-maturity debt. The move caught some economists by surprise.

Monetary policy: Small stuff | The Economist - ONE of the most hotly anticipated Federal Open Market Committee statements has just come out, and it doesn't fail to disappoint. After acknowledging that recovery has slowed and, "is likely to be more modest in the near term than had been anticipated", the Fed opts to: [M]aintain the target range for the federal funds rate at 0 to 1/4 percent and To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.There are several things going on here. In the first paragraph, little has been changed. The Fed is keeping the "extended rate" language to which Kansas City Fed president and inflation hawk Tom Hoenig objects, and which St. Louis Fed president and deflation hawk Jim Bullard recently said might increase the risk of a Japanese-style deflationary trap.

Fed Looks to Spur Growth by Buying Government Debt - Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities, making their first attempt to bolster growth since March 2009 to keep the slowing U.S. economy from relapsing into recession.  “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

The Focal-Point Fed - Krugman - The FOMC has spoken. What’s my reaction? The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging. What the FOMC announced was a slight change in policy: rather than allowing its balance sheet to shrink as the mortgage-backed securities it owns mature, it will maintain the balance sheet’s size by reinvesting the proceeds in long-term government bonds. Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee.  And it’s a very strange decision, if you think about it. Presumably there’s some optimal size of the Fed’s balance sheet, given the state and prospects of the economy. What are the odds that the optimal size of that balance sheet is precisely the size it’s currently at? Bear in mind that the Fed’s current balance sheet reflects the legacy of policies undertaken when both fear of a complete meltdown and the expected pace of recovery once that fear abated were very different from what they are now. So why freeze the size of the balance sheet right where it is? The answer is that it was, literally, the least the Fed could do.

Fed Reverses Exit Plans, Sets $2 Trillion Floor for Holdings - The Federal Reserve reversed plans to exit from aggressive monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. Central bankers meeting yesterday adopted a $2.05 trillion floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. Treasuries surged and stocks pared losses as some investors judged the decision opened the door to a resumption of large-scale asset purchases.  “The Fed is cognizant the recovery has lost some momentum and it is still willing to intervene,” said Paul Ballew, a former Fed economist and a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio. “We always thought the exit strategy would be challenging. If you’re at the Fed, it’s proven to be more problematic than what you thought.”

"Quantitative Neutrality" - People are struggling with a name for the Fed's action today. I've seen QE 1.5 and variations, but perhaps the best comes from Asha Bangalore at Northern Trust who called it Quantitative Neutrality (QN), see: Fed Moves from "QE" to "QN" The Fed's goal (according to the technical note from the NY Fed) is to "maintain the face value of outright holdings of domestic securities" at approximately $2.054 trillion. The red line on this graph is the amount of outright holdings on the Fed's balance sheet. The dashed line is the new target level. This is about $17 billion below the peak of a few weeks ago. The outright holdings were expected to fall by about $200 billion by the end of 2011 (some have estimated as high as $400 billion), and that would represent tightening in the face of high unemployment and below target inflation.

Fed Signals Continued Willingness to Throw Money at Flagging Economy - Yves Smith -Some Fedwatchers were proven incorrect when the Fed inched towards a renewal of QE today by stepping up to buy Treasuries to offset shrinkage of its balance sheet due to principal runoff on the MBS it bought last year. The staff apparently favors renewed QE, due to the signs of faltering economic activity; the Board, by contrast, is more hawkish, and also concerned re the efficacy of resumption of QE (both due to the limited impact it has had, plus possible unwelcome side effects. For instance, if the dollar were to decay significantly as a result, which would in theory have a positive effects on our trade balance, the immediate impact of higher oil prices could more than offset any benefit). The problem, of course, is that with the Fed having failed to clean up bank balance sheets, all these efforts to throw money at the economy look an awful lot like pushing on a string.

Punxsutawney Fed Keeps Rates So Low They Barely Cast a Shadow - So the Fed Groundhog came out of his hole at 2:15 pm today, sniffed the air, took a glance at the data and decided that there will be 6 more months of kitchen-sink policy.  He certainly signaled a continuation of economic winter.The Fed Funds target rate will remain at 0 to .25% and the Mortgage Backed Securities/Treasuries eating contest will continue apace. Below is the full text of the statement.  For fun, note how badly they wanted to use the "D" word (deflation) but how deftly they restrained

Fed Takes a Baby Step, But That’s All it is -Reaction in the blogosphere is relatively neutral toward the Fed’s move to prevent its huge balance sheet from shrinking. The central bank says it will reinvest proceeds from expiring MBS into long-term Treasurys, which should help keep mortgage rates low.It’s a move that garnered a somewhat positive reaction in the stock market, as the Dow finished down only 54, well-off its session lows. But many market watchers believe the Fed could’ve done more this time around to propel the economy:

A View from Japan on Fed’s Latest Move - Is the Fed making the same mistakes Japan did when it comes to quantitative easing?  Asia economist Richard Jerram says the Fed’s move Tuesday to reinvest maturing bonds rather than absorbing the cash reminds him of the “incremental policy shifts” the Bank of Japan made over the last decade that failed to convince markets of the bank’s intentions. “There are echoes of BOJ policy from 2001-04 in the Fed’s move. The BOJ made repeated incremental policy shifts, but struggled to explain why they were necessary or how they would affect financial markets or the real economy. There is a worryingly similar lack of clarity from the Fed,” Jerram writes in a note Wednesday morning Tokyo time. Jerram figures maintaining the size of the Fed’s expanded balance sheet in this way might not have much of an impact on the economy anyway.

Fed Inaction - I figured I’d comment on the Fed’s inaction today as a result of the FOMC meeting. Here are some quotes: The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period This has, of course, been the Fed’s position since the big crash in late ’08. As I have argued, and have tried to provide reasonable evidence for; low rates for an extended period — contrary to being a sign of accommodative policy — is a sign of monetary failure. Since I’ve been fairly vocal on this point in various venues (especially on Twitter), I won’t belabor the point.In any case, the “big policy announcement” was that the Fed is going to shift its profits from MBS sales into US Treasuries. Thus, it will freeze its balance sheet at the current levels

FOMC Statement, August 8 - Today's FOMC statement has some news in it.. There is a recognition of the somewhat more gloomy news on the real side. Thus, the Fed will for the time being keep the size of its balance sheet constant. They could have been more aggressive, and made moves to purchase more assets - MBS, Treasuries, or agency securities. They could have announced that they would sell off MBS and agency securities, or that they would reduce the average maturity of Treasuries on the Fed's balance sheet to something resembling what it was in the past. Relative to the other possibilities, what the Fed will actually do is a somewhat modest middle road. The interpretation of this move is that the Fed wants to be active in responding to real events in the economy, but has some concerns about further intervention through private asset purchases.

Fed Statement Following August Meeting - The following is the full statement following the Feds August meeting.

Parsing the Fed: How the Statement Changed - The Fed’s statement following the August meeting included a downgraded assessment of the economy and added a new tweak to the central bank’s strategy for managing its more than $2 trillion balance sheet. (Read the full August statement.)

Redacted Version of the August 2010 FOMC Statement

NY Fed to Buy $18 Billion of Treasurys in Reinvestment Program - The announcement by the New York Fed Wednesday comes after Tuesday’s gathering of the Federal Open Market Committee. There, policy makers announced their intention to keep the Fed balance sheet from shrinking, saying they would reinvest the proceeds of maturing mortgage securities back into the Treasury market, seeking to keep the central bank’s holdings right around $2 trillion. The Fed’s action has been attended by controversy, with many in financial markets seeing it as insufficient in the face of an economic recovery that appears to be sputtering out. The $18 billion the New York Fed will put into Treasurys will come from the proceeds of mortgage securities now on the New York Fed’s books. It will announce its next round of purchases on Sept. 13

N.Y. Fed Details Reinvestment Program - The New York Fed announced Tuesday the technical details of its soon-to-start effort to keep the central bank’s portfolio fixed around current levels. The announcement by the New York Fed follows the release of the Federal Open Market Committee policy statement. In that document the Fed lowered its assessment of the economy’s current state. And while it kept interest rates fixed at essentially 0%, its signature move was to say “to help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”

FT Alphaville » What the Fed can’t buy - So the Federal Reserve will be buying more US Treasuries, using run-off proceeds to do so. According to its release, the Fed plans to buy longer-dated USTs in the two-year to 10-year segment. But the central bank still won’t be buying more than 35 per cent of any single issue. And since it’s already gone through QEasing I, back in 2009, it’s more limited in its choices this time around. The below chart, from RBC Capital Markets is useful: Anyway, as for the actual economic impact of the Fed’s QE lite. RBC’s rate strategist Michael Cloherty (formerly of the BofA parish) reckons not much:

The maturity structure on The Fed's balance sheet may become problematic - In their most recent meeting, Fed officials decided to keep the maturity structure of their assets more or less intact instead of shifting to assets with shorter maturities. Ray Stone, managing director at Stone & McCarthy Research, thinks this is the wrong move and may expose the Fed to interest rate risk in the future because of its massive variable rate liabilities. Consequently, the Fed may develop funding problems and difficulties in raising interest rates in the future, said Stone. Currently, the maturity of the Fed's assets and liabilities are mismatched. The average maturity of their Treasuries (part of their assets) is near 7 years. Meanwhile, they are paying interest on the excess reserves (part of their liabilities), which has zero maturity and will go up as interest rates rise.

The FOMC’s Action - Truth is that, while rates were lowered and bank reserves were created, money growth over the past year has remained moderate–perhaps too moderate for the circumstances. Faster money growth has been needed.It’s been said that you can lead a horse to water, but you can’t make him drink. (Reserve creation has not led to sufficient money creation.) If so, the proper solution isn’t to take the water away. It’s been said you can’t push on a string. The proper solution to that isn’t to pull the string in the opposite direction. In general, if the correct policy isn’t working well, an opposite and indirect policy isn’t the likely solution.The FOMC’s decision to limit the shrinkage of its balance sheet is modest indeed since allowing any shrinkage is, in effect, a tightening of monetary policy. They didn’t adopt easy money; just less tight money.

Ever so slightly less contractionary - What is the significance of yesterday's statement from the FOMC? Here's what the Fed said, accompanied by my running commentary: FOMC. Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. JDH. You don't say ([1], [2], [3]). FOMC. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. JDH. I take that to mean that the Fed does not share Paul Krugman's fear of outright deflation. They must be persuaded that they have ample firepower, should the need arise later, to persuade the public that they're really, really not going to tolerate deflation. Notwithstanding, the ongoing downward slide in inflationary expectations is far from the optimal policy at the moment.

Monetary policy: The day after | The Economist - READERS won't be surprised to hear me express disappointment with the Fed's decision. I'm not alone in my dismay. Markets continue to swoon in the wake of the decision; American indexes opened off around 2%. Commodity prices are sinking as well, in response to signs from around the globe that economic activity is likely to slow through the end of 2010. This morning, Census reported a significant increase in America's trade deficit, up from $42 billion in May to $50 billion in June, as exports declined slightly while imports increased. Fed activity won't help; the news that a new round of quantitative easing isn't immediately forthcoming boosted the dollar.

Editorial - When the Fed Speaks - NYTimes - It was a statement of the obvious heard around the world. The Federal Reserve policy committee said on Tuesday that the economy had slowed recently and was not expected to improve anytime soon. Together with evidence of slower growth in China and Europe, the “news” sparked a global sell-off in stocks on Wednesday. At the same time, prominent private forecasts for growth in the second quarter were revised downward from a preliminary reading of 2.4 percent in the United States to less than 2 percent.  No one should have been surprised by the obstacles to growth cited by the Fed — high unemployment, modest income gains, lower housing wealth and tight credit. Nor was it a surprise that the Fed pledged to keep interest rates low, given the faltering economy. None of those measures add up to much of a boost, if any, because the Fed is not providing new stimulus. Rather, it is simply promising to not tighten the spigot prematurely.

Paralysis at the Fed, by Paul Krugman - Ten years ago, one of America’s leading economists delivered a stinging critique of the Bank of Japan, Japan’s equivalent of the Federal Reserve, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” With only a few changes in wording, the critique applies to the Fed today.  At the time, the Bank of Japan faced a situation broadly similar to that facing the Fed now...short-term interest rates — the usual tool of monetary policy — were near zero and could go no lower. And the Bank of Japan used that fact as an excuse to do no more. That was malfeasance, declared the eminent U.S. economist: “Far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He rebuked officials hiding “behind minor institutional or technical difficulties in order to avoid taking action.” Who was that tough-talking economist? Ben Bernanke... So why is the Bernanke Fed being just as passive now as the Bank of Japan was a decade ago?

The Fed gives up on tightening - The bigger picture, however, is one of the Fed largely having run out of ammunition. Most of what it’s doing now is symbolic: the real national response, as Mohamed El-Erian says, needs to come from the government rather than the central bank, and needs to be structural rather than monetary in nature. Given today’s decision, though, we can at least assume that any moves from the White House to try to bolster the national economy will be met with the strong support of Ben Bernanke.

Thomas Hoenig, Top Fed Official, Warns Fed Risks Repeating Past Mistakes -  Nine of the 10 policy makers in the Federal Reserve voted to send a message Tuesday that the economic recovery is weakening and needs further stimulus to ensure that the nation recovers from the worst economic downturn since the Great Depression. The Fed will continue to keep the main interest rate near zero; it will reinvest the proceeds from maturing mortgage-backed securities and Fannie Mae and Freddie Mac debt into Treasuries; and will "continue to monitor" the recovery to ensure it doesn't slow down further. But one official disagreed. The economy doesn't need further stimulus, Federal Reserve Bank of Kansas City President Thomas M. Hoenig said. Rather than worry about juicing an economy mired in slow recovery, we should take note that the economy is recovering and instead be wary of repeating the mistakes of the past. It's like 2003 all over again, according to Hoenig.

Fed’s Hoenig: Rates Need to Rise The U.S. economy is recovering and the Federal Reserve needs to raise interest rates, lest it leave in place a policy that will only fuel future financial imbalances, Federal Reserve Bank of Kansas City President Thomas Hoenig said Friday.  “We need to get off of the emergency rate of zero, move rates up slowly and deliberately,” which will bring policy in better alignment “with the economy’s slow, deliberate recovery,” the official said. While the markets may like the current stance of monetary policy, Hoenig said “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut.” Hoenig’s remarks — they came from the text of a speech to be delivered Friday before a meeting with the community in Lincoln, Neb. — came on the heels of his latest dissent against the consensus view of the Fed.

Queasing over Quantitative Easing - The world’s largest hedge fund, the Federal Reserve, is trying to decide whether it should expand its operations.  Unlike most hedge funds, the Federal Reserve has a big advantage in that it can fund itself cheaply, and for the most part, at its own discretion. I think quantitative easing is a mistake; I also think it does not help matters much.  It transfers resources from creditors to debtors in a funky way.  That is not the right way to go if you want a country to grow.  (Which, contrary to the received wisdom, would mean that raising short term rates would be better for the US and Japanese economies than engaging in quantitative easing.  There would be short-term pain, but there will be pain regardless of how this policy is conducted.) There is no free lunch.  Any action that seems to cost nothing on the part of the Fed or the Federal Government will have no long-term effect on the economy.  Quantitative easing is one of those comforting fairy tales that is a fraud, whether intentionally so, or not.

Will QE work? - Here is a new paper from the Kansas City Fed, by Taeyoung Doh, summarized by the Fed bulletin as such: Doh uses a preferred-habitat model that explicitly considers the zero bound for nominal interest rates.  His analysis suggests that purchasing assets on a large scale can effectively lower long-term interest rates.  Furthermore, when heightened risk aversion disrupts the activities of arbitrageurs, policymakers may lower long-term rates more effectively through asset purchases than through communicating their intentions to lower expected path of future short-term rates. I hold the default belief that such policies could prove effective today.  There's also the broader point that QE can work by stimulating AD, without having to push around long rates very much.

QUANTITATIVE EASING: “THE GREATEST MONETARY NON-EVENT” - The topic of quantitative easing (QE) has rapidly become the most important discussion in the investment world.  As deflation becomes the obvious risk and the economic recovery looks increasingly weak investors are again looking to the Fed to save their skin from a Japan style deflationary recession.  The irony here is so thick you could choke on it, however, like some sort of sick masochist, investors continue to return to the trough of the Federal Reserve so they can gorge on half-truths and misguided policy responses. JJ Lando a bond trader at Goldman Sachs has eloquently described QE:“In QE, aside from its usual record keeping activities, the Fed converts overnight reserves into treasuries, forcing the private sector out of its savings and into cash. This is just a large-scale version of the coupon-passes it needed to do all along. Again, they force people out of treasuries and into cash and reserves.” Some investors prefer to call it “money printing” or “stimulative monetary policy”.  Both are misleading and the latter is particularly misleading in the current market environment.  First of all, the Fed doesn’t actually “print” anything when it initiates its QE policy.  The Fed simply electronically swaps an asset with the private sector.  In most cases it swaps deposits with an interest bearing asset.  They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe.  It is merely an asset swap.

The Fed didn't announce QE2 - Rebecca Wilder - Fortune published an op-ed piece by Keith R. McCullough at Hedgeye. He argues that QE2 is the doomsday scenario for "markets". I'd like to point out the following (mostly because this is a common mistake): what the Fed announced is NOT QE2. Furthermore, the Fed's been considering investing options for months now, why the shock and awe treatment from markets? Here are the FOMC's announced investment intentions:...the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.The Fed announcement is NOT a second version of quantitative easing (QE2). Quantitative easing is a "super" policy response, where the Fed grows its balance through reserve creation and the purchase of (usually) government assets. The Fed is reinvesting the principal of maturing securities into longer-dated Treasuries from reserves already created. Therefore, the Fed is simply shifting the asset side of the balance sheet toward a Treasury-only portfolio. Reinvesting maturing Treasuries is regular practice for the Fed. No new quantitative easing.

Beyond the zero lower bound on nominal interest rates - How can monetary policy overcome the zero lower bound on interest rates? With the threat of deflation looming, attention is once again focused on monetary policy. Many economists have made suggestions through which negative interest rates can be applied to bank reserves and consumer accounts. The primary hurdle appears to be the ability of banks and consumers to hold currency which would be protected against negative nominal interest rates (NNIR), defeating their efficacy and diluting transmission to the real economy.This column explores the possibility of negative nominal interest rates, arguing that, for it to work, all reserve nations must agree to protect against using foreign currencies as an alternative means of exchange.

NY Fed Paper: Central Bank Loans Should Undercut Market Rates in Crises - Central banks should lend at far more generous terms during moments of market-based illiquidity than when banks simply need money to cover a shortfall of their reserves, a paper published by the Federal Reserve Bank of New York says. Whereas central banks should lend at above-market rates and accept only top-quality collateral in the latter case, they should undercut going market rates and accept “collateral of suspect quality” when faced with a systemic crisis, concluded Bank of International Settlements researchers Stephen Cecchetti and Piti Disyatat. Their paper, which focused on the Fed’s responses to the financial crises of 2007 and 2008, was published in a special edition of the New York Fed’s Economic Policy Review, a volume that included various articles on central bank liquidity tools and regulatory reform.

What does $1.25 trillion buy you? - What impact did the Federal Reserves $1.25 trillion LSAP (large-scale asset purchase) intervention in the mortgage backed securities market have? A new Boston Fed paper investigates: Our analysis yields three main findings. First, the announcement of the LSAP program led to significant reductions in interest rates for borrowers almost immediately…Second, the Fed’s initial announcement led to an immediate and large increase in borrower activity in the primary loan market. The records show an increase of approximately 300 percent in the number of borrowers shopping for refinance mortgages… this increase in shopping activity translated into a 150-250 percent increase in the number of applications and subsequent originations….Third, the initial LSAP announcement generated a significant shift in the characteristics of borrowers. In particular, refinancing activity became highly skewed toward borrowers with high credit scores

Monetary policy in a time of deleveraging -- The U.S. economy is on the edge of the cliff, threatening to plunge back into ruinous recession, but the worst part is that Washington won't do anything to stop it.  The shame is that the Federal Reserve, the White House and Congress know they have a duty to act decisively, but they can't or won't under the mistaken notion that they've already done too much.  We were sicker than they thought, but instead of increasing the dosage or looking for a better medicine, they've declared us to be cured. Well, not cured, exactly, but as healthy as we're going to get. We'll just have to live with the nagging cough, the constant pain and the bleeding gums. Honestly, once you get used to it, you'll barely even notice 8% unemployment and falling living standards.

Does the Money Multiplier Exist? The Federal Reserve Board’s Seth B. Carpenter and Selva Demiralp have a great paper out on the economics of bank reserves (hat tip FT Alphaville and Pragmatic Capitalism). The question: Does the Money Multiplier Exist? The short answer: yes, but only as an ex-post accounting identity!  Let me break the argument down for you in layman’s terms. Once upon a time economists believed there was this thing called the market for loanable funds. According to this theory, a central bank controlled the creation of credit by increasing or decreasing the supply of reserves or loanable funds available to depositary institutions.  So, for example, if the Federal Reserve sold Treasury bonds to a primary dealer – say Kidder, Peabody to use a now extinct and uncontroversial example -  in exchange for money, the supply of loanable funds would shrink. This would, in theory, decrease available credit and cool off an overheated economy.  According to this theory, the reverse would also be true, namely that the Fed’s buying assets with money it printed out of thin air would increase the supply of credit.

Policy road less traveled leaves markets lost - (Reuters) - The Federal Reserve's renewed push toward monetary easing was meant to offer some clarity on its likely policy path. But by pulling the U.S. central bank even deeper into uncharted territory, the Fed's announcement on Tuesday has inadvertently heightened uncertainty in financial markets.How effective will the unorthodox policies prove? What will the Fed do next? Will it bolster its Treasury bond purchases and, if so, how aggressively? What does the Fed know that we don't? All of these questions were swirling around on Wednesday as Fed watchers tried to make sense of what is arguably the central bank's most important policy announcement since it first signaled the intention to buy assets in late 2008. "People are more uncertain about how the committee views the outlook and how worried they are," said Laurence Meyer, a former Fed board governor now at Macroeconomic Advisors. "And they're really uncertain about what's going to happen at the next meeting."

Inside the Fed's brain - SINCE the Federal Reserve's latest policy announcement, the Dow has declined over 3%, the dollar has strengthened against the euro by over 3%, and the yield on 5-year inflation-protected Treasuries briefly turned negative. Meanwhile, new trade data indicated that second quarter GDP growth is likely to be revised down, perhaps significantly, and the latest data on initial jobless claims show the figures hitting a six-month high and threatening to rise above 500,000 a week. The FT's Gavyn Davies says that those looking for a more expansionary monetary policy should nevertheless be pleased: I suspect that yesterday’s decision was a good litmus test of where Fed opinion would stand if the US economy continues to weaken in the next few months. If (and only if) that happens, it now seems that the centre of gravity on the FOMC would probably be to increase QE further, though when this might happen, and by how much, are issues which were certainly not settled yesterday

Poole: Fed Bond Buying Won’t Help - More bond buying from the Federal Reserve won’t help the U.S. economy, because purchases can’t remedy the main problem plaguing the U.S., which is fiscal and regulatory uncertainty, former St. Louis Federal Reserve President William Poole said.While the Fed buying more debt will bring rates down, it won’t inspire spending and lending given uncertainties in the U.S. ranging from tax cuts to health care reforms. Poole, who retired from the regional bank in 2008 after a 10-year stint, has been opposed to the Fed’s buying Treasurys and mortgages since policymakers first started dropping hints in early 2009 they might do so. Buying Treasurys to pin rates was unwise, Poole said, as it put the central bank in the position of financing the federal deficit by printing money. At the time, he preferred that the Fed let the expansion in money work its way through the economy.

Scrap the Dual Mandate - I’m not an expert on the history of the dual mandate, but I would venture a guess that it was the result of a grand bargain in which “price stability” came from the “hawkish” right, and “unemployment” came from the “dovish” left. The nature of the Fed’s dual mandate is such that it allows the central bank to wiggle out of nearly any situation if finds itself in with little consequence. Since the Fed is aiming at two diametrically opposed targets at once (price stability and full employment), it has large discretion upon which it can draw to justify its policy actions.  Is unemployment 9.5% with core CPI inflation falling below 1% and future expected inflation well below target as well? Well, that’s price stability! How about persistent inflation rates bordering on double-digits while employment booms? Pat yourselves on the back guys! In reality, and much to the chagrin of leftists everywhere, the modern Fed (1980′s+) has mostly erred on the side of price stability, which in the recent context has meant 5% NGDP growth with a rough average of 3% real growth and 2% inflation. This has allowed for a NAIRU of around 4-5% for the United States as a whole

What Will Happen If the Fed Stops Paying Interest on Reserves? - All in all, we get a mild economic stimulus at the price of some substantial disruptions to the financial system. On my list of priorities, when the two are in conflict, the convenience of a smoothly functioning financial system comes far below the need to create jobs and resist deflation, so if eliminating interest on reserves were the only monetary stimulus option on the table, I would support it. But it’s not the only option. Perhaps if the money the Fed saves from not paying interest on reserves were to be devoted to a well-targeted fiscal stimulus, this option would be more attractive. But that isn’t likely to happen. I won’t say I’m against eliminating interest on reserves, but I’m not particularly in favor of it. Better to do more asset purchases. Much better (in conjunction with asset purchases as necessary) to announce retroactively extrapolated nominal GDP or price level targets. But is any of this going to happen?

The Non-Relationship Between Interest Rates and the Money Supply, Part 2 - This post is a bit less about Presidents than usual, but its a follow-up to last week's post on the non-relationship between the money supply and interest rates. (That post appeared both at the Presimetrics and Angry Bear blogs. In that post, I noted that the Federal Reserve tends to move the money supply monthly and seasonally with no corresponding change in the fed funds rate. For example, the Fed will increase the money supply in December to make sure there's adequate money in circulation for the Christmas shopping season, and yet interest rates don't move at all.  This week, I want to expand on that, and point out that I wasn't entirely accurate. There actually is a relationship between interest rates and the money supply, but its not the the one taught in textbooks

Desperately Seeking Confirmation of Federal Reserve Board of Governors Nominees - Paul Krugman observes that based on Ben Bernanke’s academic writings about monetary policy in Japan, Ben Bernanke should be having the Federal Reserve set an aggressive inflation target and catch up to the price level trend: This, it seems to me, is exactly what the Fed should do. But it’s not happening. Tim Duy observes: That said, despite Fedspeak that appears resistant to further easing, the press has been fueling speculation that more easing – albeit largely symbolic – is imminent. From where does this chatter emanate, other that unnamed sources? Perhaps from high ranking staff. Word on the street is that Fed staff are increasingly frustrated with the lack of action from leadership. Why exactly is Bernanke showing such deference to the more hawkish elements? Bernanke may be suffering from a fit of amnesia. Or maybe Bernanke is an ideologue who wants the economy to suffer long enough to produce a more conservative congress. Or maybe Bernanke is a smart economist who’s also an inept manager. Or maybe Bernanke simply knows he’s outvoted on the current Open Market Committee. Who knows? But in all cases, the solution is the same. The President needs to get his nominees to the Federal Reserve Board

The Price Stability Trap - Krugman - There’s an important new paper from the IMF about inflation in the face of Prolonged Large Output Gaps — yes, PLOGs. You can think of it as a careful, multi-country version of the quick-and-dirty analysis of US experience I did recently, with an assist from Tim Duy. What the analysis shows is that prolonged periods of economic weakness are, with almost no exceptions, associated with falling inflation rates.The analysis also suggests something else, however: as the inflation rate goes toward zero, it seems to become “sticky”: in the modern world, rapid deflation doesn’t happen, and in fact slight positive inflation often persists in the face of an obviously depressed economy:  The authors discuss several possible explanations, but it does seem as if downward nominal rigidity is playing a role. And this raises the specter what I think of as the price stability trap: suppose that it’s early 2012, the US unemployment rate is around 10 percent, and core inflation is running at 0.3 percent. The Fed should be moving heaven and earth to do something about the economy — but what you see instead is many people at the Fed, especially at the regional banks, saying “Look, we don’t have actual deflation, or anyway not much, so we’re achieving price stability. What’s the problem?”

Inflation Targeting When the Natural Interest Rate is Negative - When the natural interest rate is negative, since it’s impossible to cut nominal interest rates much below zero, the only way to get back to normal is to create an expectation of inflation. If the nominal interest rate is zero and the inflation rate is positive, then the real interest rate is negative; thus it is possible, with a sufficient amount of expected inflation, to set the real interest rate down to the negative natural rate. But how can that inflation be achieved? Wicksell argues that prices rise when the actual interest rate falls below the natural rate, but in order for that to happen, prices must already be expected to rise. Can a central bank pull itself up by its own bootstraps?The answer is almost certainly yes, since nearly everyone agrees that a sufficiently reckless central bank will always be able to produce a high inflation rate. (Imagine the Fed buying up the entire national debt, along with all the private sector’s offerings of commercial paper, mortgages, corporate bonds, and so on. Eventually, there will be inflation.) The problem is that it is hard to estimate in advance how aggressive monetary policy needs to be in order to produce the needed expectation of inflation.

John Williams: Times That Try Our Souls - A few months back, John, you said, "if you strangle liquidity you always contract an economy and deliberately or not, liquidity is being strangled, resulting in sharp declines in consumer credit, commercial and industrial loans." Does this mean it would spur more economic growth if banks actually started lending? John Williams: It sure wouldn't hurt. We're still seeing contractions in liquidity, and that's adjusted for inflation. In real terms, M3 money supply is down almost 8% year-over-year. It's the sharpest fall in the post -World War II era. It's not so much the depth of the decline in the liquidity or the duration, but the fact that the liquidity turns negative year-over-year that signals the economy turning down.

Stoneleigh takes on John Williams: Deflation it is - There's an interesting interview at The Energy Report with John Williams of Shadow Stats ( John Williams: Times That Try Our Souls ), which I wanted to discuss because, while there are many aspects are we would agree with, there are other glaring differences with how The Automatic Earth sees the future unfold. Mr Williams' prediction is hyperinflation, although, like us, he is predicting a great depression. One major distinction between TAE's view and that of many inflationists is the definition of inflation. It is clear from the interview that Mr. Williams' definition is increasing prices. Readers of TAE will know that our definition is a monetary one - an increase in the supply of money, credit and velocity thereof relative to available goods and services. We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept. Prices changes are lagging indicators of changes in the money supply, complicated by other factors, both globally and locally. For instance, global wage arbitrage has been a major factor driving prices down in recent years, despite a tremendous credit expansion.

From Disinflation to Deflation? - It's a schizophrenic world. On one side, there are lots of people worried about hyperinflation [0], despite forward looking indicators of inflation signalling quiescence [1] and actual price indicators going downward. On the other are those who actually look at the data, and then conjoin their observations with information on the tremendous slack in the economy, and say that rapid inflation is unlikely. So while all eyes are on this Friday's CPI release, I assert that we don't really have to wait to find out the trajectory of inflation. In this post, I will highlight the fact that over certain horizons, we already have deflation; and for certain segments of the population, inflation has been at zero for a year already.First, consider standard indicators. The core CPI and core PCE deflator inflation rates are still positive.

Risk of U.S. deflation is rising: Pimco (Reuters) - The United States faces a rising risk of deflation that could bolster prices of safe-haven U.S. government bonds, while hurting the prices of real estate and stocks, the world's biggest bond fund management company said on Tuesday. The prices of five-year through 10-year Treasuries could initially rise, Pacific Investment Management Co said. Against the backdrop of a deflation risk, "it is likely the Federal Reserve will have no choice but to keep rates on hold for a very long period," Scott Mather, head of global portfolio management with Pimco, wrote in an article on the company's website.

US economy 'on the road to deflation', warns Pimco boss El-Erian - Mohamed El-Erian, the head the world's largest bond fund, has said the United States faces a one in four chance of suffering deflation and a double-dip recession. "I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario," Mr El-Erian, chief executive officer at Pacific Investment Management Co. (Pimco), told reporters in Tokyo on Thursday. "If you wonder how meaningful 25pc is, ask yourself the following question: if I offered you that I would drive you back to work, but there's a one in four chance that I get into a big accident, would you come with me?" Mr El-Erian, who helps manage more than $1 trillion in assets, warned that action needed be taken quickly to prevent a economic slowdown. Mr El-Erian said that downward pressure on prices – translating into a rise in real borrowing costs – was already encouraging companies to accumulate cash "in a way that was unthinkable just two years ago", while individuals were being driven to save. "On the road to deflation, which is what the United States is on today ... policy becomes less effective," he said.

Why Bernanke is right to fret about deflation -  Just seven days ago, a summer rally in equities was under way and investors were playing down speculation that the US Federal Reserve might start buying bonds once again. Since then, the combination of the Fed’s decision to roll over maturing bonds into Treasuries, gloomy economic data in the US, eurozone and China, and a lower growth forecast from the Bank of England have killed the market recovery.More importantly, they have also raised the spectre of deflation, or falling prices. Investors in index-linked bonds are yet to price in deflation. But inflation expectations are tumbling. In the US, the break-even rate, calculated from Treasury bond prices, suggests inflation will average 1.69 per cent over the next 10 years, down sharply on the week and far below the 2.44 per cent of April. In Germany, it is just 1.5 per cent.It is worth considering what a deflationary world would look like for investors, if only to understand why Ben Bernanke, the Fed’s chairman, is so keen to avoid it. The best example is Japan, still mired in deflation two decades after its extraordinary property and stock market bubbles burst.

Buffett Shortens Bond-Holding Duration After Inflation Warning (Bloomberg) -- Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher. Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter.

US May Suffer Japan-Style Deflation, Schroder Says (Bloomberg) -- The U.S. is no longer an engine for the global economy and may suffer deflation sometime in the next three years, said Genji Tsukatani, head of fixed income at the Japanese unit of Schroder Investment Management Ltd. Ten-year Treasury yields slid to a 16-month low after the Federal Reserve said yesterday the U.S. economic recovery will be “more modest” than previously anticipated. The spread between yields on U.S. and Japanese 10-year debt is at the narrowest since May 2009. “The aftereffects of the credit bubble along with the aging population mean it’s possible that the U.S. will slip into deflation” in the next three years, said Tsukatani, whose company manages about $211 billion in assets globally. “If real interest rates fall in the U.S., it’s likely to drag down those in Japan.”

Inflation or Deflation? "Yes," Says Chris Martenson, Who Sees 'Stagflation' Coming- The Federal Reserve will announce it’s latest interest rate decision on Tuesday. Few are expecting the central bank to raise rates. Instead the attention, as it has been over the last year-plus, will be focused on the Federal Reserve’s wording. Will they signal another round of quantitative easing based on fears of deflation? Yet many reading this must be thinking: What deflation? The price of gasoline, food, healthcare, education are all getting more expensive.Ask Chris Martenson, inflation or deflation? The economic researcher responds, “Yes!” “We’re seeing inflation in some areas and deflation in others,” he tells Tech Ticker in this clip. “We have powerful deflationary forces in play right now. It’s been well balanced, so far, by what the Fed has done.”

Should We Brace for Deflation Now? - Mark Thoma - The NY Times Room for Debate asks: How likely is prospect of deflation, given the latest economic indicators? Has the American economy experienced sustained deflation, aside from the 1930s (if not, is that because there's something particular about the U.S. economy that make deflation less of a threat)? What's the way out? Here's my response. There are also responses from Tyler Cowen, Simon Johnson, Heather Boushey, and Brad DeLong.

After the Tape: What’s Really Going on With CPI? - Deflation? Apparently not in the consumer-price index, which posted its first increase in four months in July. Yet that may be a somewhat misleading result. Consumer prices rose by 0.3% in July from June, the Labor Department said on Friday, the first increase since March, owed largely to a rebound in energy prices last month. Yet energy prices are notoriously volatile; oil prices, for example, have already dropped by about 7% this month. And food prices, another volatile component which declined in July, may well rebound in August amid drought conditions in Russia that have pushed up prices on wheat and other crops. To better gauge underlying inflationary pressures, economists like to focus on the core CPI that excludes food and energy costs.  But even the core index has its issues. Its behavior is partly a quirk of how housing costs, which make up about 40% of the core CPI, are calculated. Instead of using mortgage costs as a proxy for shelter costs, the Labor Department estimates what homeowners would pay to rent their house. In other words, rent prices have a heavy hand in the CPI. Shelter costs posted a 0.1% gain in July, also the sixth consecutive increase.

How Soon Will We Face Deflation? » (DeLong) In the post-WWII United States, the rate of inflation has a very clear tendency to fall whenever the unemployment rate rises above 7%: When the unemployment rate has been above 8%, the average fall in the annual CPI inflation rate over the next two years has been 4.5 percentage points. Our current annual inflation rate is about 1%.  Does this mean that two years from now we can expect our annual inflation rate to be -3.5%--that we can expect fairly rapid deflation? The odds are very low. Patterns that apply to times when prices have always been rising cannot be extrapolated to inflation rates below zero. Firms are very loathe to cut nominal wage rates, and if nominal wages do not fall then firms cannot on average cut prices by more than 2% per year or so without facing bankruptcy. Does this mean that two years from now we can expect our annual wage inflation rate to still be between 0% and 2%? That is certainly the way to bet.

Deflation and negative TIPS yields - In one of those classic understated TBI headlines, Vincent Fernando today says that “Actually You Should Panic” if TIPS yields go positive. His argument: “if TIPS yields hadn’t fallen to where they are now, then we’d truly have something to worry about — Deflation.” The problem is, Fernando’s math doesn’t add up. Expected annualized inflation, over the next five years, is equal to the yield on 5-year government bonds, minus the yield on 5-year TIPS. The 5-year Treasury bond is currently yielding 1.47%, so if the 5-year TIPS yield is slightly negative, that puts expected inflation at about 1.5%. On the other hand, if the 5-year TIPS yield were up at 0.5%, then that would put expected inflation at 1%. Which does not count as Deflation, and is certainly nothing to Panic about. Of course, it is a bit more complicated than that. For one thing, we’re talking about average inflation over five years, which given that inflation rates tend to bounce around a bit, might well mean a brief amount of time in negative territory. But that, again, isn’t the kind of deflation to panic about

Why We Need An Inflation Target - Krugman - Look at the lower left-hand corner: the real interest rate on 5-year inflation-protected securities is now negative. In other words, prospects for other investments are so poor that some investors prefer a safe asset that doesn’t quite keep up with inflation. Yet to maintain employment, we need to sustain spending, one way or another. One way is to have the government take advantage of its low financing costs to spend on useful things; but the deficit peacocks in Congress are blocking that solution. Another is to get real interest rates low enough to get the private sector spending; but that, as we can see, means that the real interest rate on medium-term government debt has to be negative. The only way you can do that is by having the Fed credibly promise to deliver significant inflation. Oh, and the invisible bond vigilantes continue their invisible attack: nominal 10-year bonds at 2.71%.

Chart of the day: TIPS yields - Paul Krugman notes today that 5-year TIPS are trading with a negative real yield, which prompted me — with the help of the great Frank Tantillo — to navigate the Fed’s data download program to generate this. (Bigger version here.) Both 5-year and 10-year TIPS yields are trading at or near their all-time lows right now (the chart only goes up to the close of business yesterday, and yields have fallen again today). I’m a bit stumped, however, on what exactly this means. The last time that TIPS yields dropped below zero, the cited reason was “investor speculation that inflation will quicken as the U.S. economy slows”. But that doesn’t seem to be the case right now, with the 5-year Treasury at 1.44% and the 10-year at 2.71%. So what’s going on? Scott Grannis has his own ideas, which don’t bode well for the medium-term future of the economy as a whole:

Are low interest rates bad for the economy? -There are plenty of reasons to not like low interest rates. For one thing, they help cause asset bubbles. For another, they hurt people and organizations—like seniors and non-profits—that depend on funding from fixed-income investments. For a third, they penalize people who are trying to do the financially responsible thing and save. But Michaelson comes at this from an entirely different angle: he says that low interest rates are part of the reason companies are sitting on cash instead of investing. He says they're part of the reason we're not seeing more job creation.Here's the core of his argument: Banks are able to make adequate returns by borrowing at near-zero rates and investing almost risk free and without effort in longer-term government debt, federal government-guaranteed debt, or in relatively riskless investment-grade debt—all at 3% to 4%. They have little incentive to go out and make loans to job-creating businesses that might have a higher yield but entail significant risk and effort... Paying higher rates to attract deposits will force banks to look for lending opportunities beyond government type credits.

This Week's FOMC Statement, Escape Velocity and Velocity of Money - Kalpa - Many are questioning whether the Fed is doing enough these days. But respected William Poole said that if he were at the FOMC table Tuesday, his view would be to “do no harm.” What ended up happening this week was fairly insignificant, so might meet with Poole's approval, I'd suspect. For an official definition of velocity of money ..... Rate of spending, or turnover of money-in other words, how many times a dollar is spent in a given period of time. The more money turns over, the faster velocity is said to be. Velocity is a factor in the Federal Reserve Board's management of Monetary Policy because an increase in velocity may obviate the need for a stimulative increase in the money supply. Conversely, a decline in velocity might reflect dampened economic growth, even if the money supply holds steady. As for me, I've grown very weary of the quibbling amongst the economists and bloggers about stimulus and austerity. I'm tired of the attempts to discredit Rogoff and Reinhart's work.

San Francisco Fed Paper Warns Odds of Recession Rising - The risk the U.S. economy could fall back into recession is on the rise. A new report from the Federal Reserve Bank of San Francisco warns the economic outlook “is likely to deteriorate progressively starting sometime next summer.” Over the shorter run, the paper, written by Travis Berge and Oscar Jorda, argues the odds of falling into recession are relatively low. But over the next two years it appears the odds are only slightly better than even that an already-tepid recovery will continue. The paper, published Monday, arrives just ahead of a potentially drama-filled Federal Reserve monetary-policy meeting. For many months now, market participants have gone into these gatherings fairly confident of the outcome, expecting policy makers to stick to their zero% interest rate stance amid pledges to keep interest rates low for an “extended period.”

Future Recession Risks, Economic Letter, SF Fed: By now, there is little disagreement that the Great Recession, as the last recession is often called, ended sometime in the summer of 2009 (see Jordà 2010), even though the National Bureau of Economic Research (NBER) has yet to formally announce the date of the trough in economic activity that marks the beginning of the current expansion phase. Intriguingly, just as we seemed to be leaving the recession behind, talk of a double dip became increasingly loud. ... A quick look at the number of Google searches and news items for the term "double-dip recession" reveals no activity prior to August 29, 2009, but a dramatic increase in search volume since then, especially in the past two months. Such concern is likely motivated by a string of poor economic news. ... It is understandable that the NBER has hesitated to call the end of the recession. This spate of bad news has prompted a heated policy debate pitting those eager to mop up the gush of public debt generated by the recession and the fiscal stimulus package designed to counter it against those who would prefer to douse the glowing recession embers with another round of stimulus. ... In this Economic Letter, we calculate the likelihood that the economy will fall back into recession during the next two years. ...

Economists in Philly Fed Survey More Pessimistic - A closely watched poll of economists conducted by the Federal Reserve Bank of Philadelphia saw analysts downgrade their estimates of future growth and hiring levels, as well as inflation rates, although the forecasters still put low odds on another contraction in growth. The Philadelphia Fed’s Survey of Professional Forecasters, released Friday, saw a big cut in the estimate for third quarter growth. Analysts now expect to see a 2.3% gain for the period, from the 3.3% increase expected the prior quarter. The fourth quarter is seen up at 2.8%, matching the same prediction from three months ago. The survey found economists expecting 2010 gross domestic product to grow by 2.9%, down from last quarter’s estimate of a 3.3% gain, while 2011 is seen up by 2.7%–it had been estimated at a 3.1% gain–and 2012 is seen rising 3.6%, a touch higher than the last forecast of 3.2%. The diminished outlook for the economy has also raised the chances something worse could happen.

The Dallas Fed Reminds That The Economy Is Doing Much Worse Than In The Administration's Worst Nightmare- The Dallas Fed has released an economic paper titled "Keynes' Wet Dream"... just joking - the real titles is - "Can The Nation Stimulate Its Way to Prosperity" in which the author concludes wisely: "While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it’s unclear exactly how large this boost has been. What is clear is that stimulus funds have exacerbated near-term fiscal imbalances." Mm hmm. More taxpayer capital well-spent. Yet in the paper is contained the following chart which we hadn't seen in a while, and which says all one needs to know about not only the real benefits from the stimulus (as opposed to those limited strictly to Wall Street), but also is the best grade card of the Obama administration's economic "prowess" to date.

Shiller Sees Significant Likelihood Of Double Dip (podcast) There's more than a 50% chance the economy is heading for a double dip recession. And noted economist and author Robert Shiller tells MarketWatch News Break that the Federal Reserve may now lack the power to end the gloom and doom. Shiller now wants Washington to pass a new job-creating stimulus package.

Multiple equilibria - When people ask me whether I think a double-dip is likely to occur within the next year or two, I say no, I think it is unlikely. But perhaps what I ought to say is that I think that over the next year or two people will behave as though they believe a double-dip recession is unlikely. If people behave in that fashion, then a double-dip recession is all but certain not to occur. But then I have to ask myself: do I think that people will behave as though they believe a double-dip recession is unlikely? And suddenly I become less sure of myself. Individuals and firms are likely to act in very different ways given a 40% chance of near-term economic contraction relative to a 10% chance. In the former case, they're less likely to invest and hire, more likely to hoard cash, and so on. New graduates may opt to live at home rather than rent their own place. Firms may try to get more life out of existing equipment, or cut their cleaning service, or ask employees to forego expected raises. The problem, of course, is that all of these behaviours increase the odds of recession. Expectations become self-fulfilling.

15 Economic Statistics That Just Keep Getting Worse - A little over a week ago, U.S. Treasury Secretary Timothy Geithner penned an article for the New York Times entitled “Welcome To The Recovery” in which he touted the great strides that the U.S. economy was making.  But with unemployment still dangerously high and with foreclosures and personal bankruptcies continuing to set all-time records, should we really be talking about a “recovery”?  The truth is that the numbers don’t lie, and statistic after statistic shows that the economic fundamentals continue to get progressively worse.  The U.S. government can continue to try to pump up with economy with more debt, but the reality is that there is not going to be a legitimate “recovery” until consumer spending rebounds.  Consumer spending makes up the vast majority of U.S. GDP.  But without good jobs, consumers are not going to be able to spend money. The following are 15 key economic statistics that just keep getting worse and which reveal the horrific economic plight in which we now find ourselves….

Shiller sees double-dip if jobs aren’t created – The U.S. economy has a "significant likelihood" of entering a double-dip recession if the government doesn't step in to help the unemployed, economist Robert Shiller told MarketWatch News Break on Wednesday. The Yale University professor and author of the best-selling book "Irrational Exuberance" pinned the probability of a double-dip recession at more than a 50-50.  Shiller pointed to the nation's stubbornly-high unemployment as a root cause of lingering economic woes. And with the Federal Reserve running out of bullets to fight a second recession, he urged Congress to join the battle and focus on putting people back to work.  "Beyond the Fed, I'd like to see the government take a renewed stimulus package focused on creating jobs [and] on activities that involve a lot of people," Shiller said. Listen to Shiller interview.

Economic Purgatory: 2% GDP - Stu, who I would describe as grudgingly bullish on the economy, takes the other side of John Mauldin’s position regarding the Muddle Through economy. Stu’s thesis: 2% GDP is unsustainable, and the economy must either break out higher or fade lower. It cannot muddle along at 2% indefinitely. Why? Stu sums it up thusly: Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP. At 200, the jumbo liner will stall. At 2% GDP, the economy stalls, and will fall into a recession. So the captain of the plane must increase thrust and fly faster, or lose altitude and land. The economy, according to Stu, behaves the same way. There are virtuous and vicious cycles, and 2% is a form of economic purgatory. It is not encouraging enough to get corporations to ramp up CapEx spending in anticipation of more growth and opportunity. It will not create enough jobs to stimulate domestic retail sales and other beneficial actions.

Trade Gap Puts Market in a Crashtastic Mood - Ucchhh. They sure didn't like that Trade Deficit number or the Fed's statement yesterday, once they got around to parsing it overnight. Let's talk trade deficit for a second, because it was simply so awful that almost no one in the mainstream was ready for it.  The implications of this number will work their way into GDP calculations and recalculations and the end result will not be pretty.Here's Reuters: The trade deficit widened a surprising 18.8 percent in June on a surge of consumer goods from China and other suppliers, suggesting second-quarter economic growth was much weaker than previously thought.The monthly trade gap totaled $49.9 billion, the highest since October 2008, the Commerce Department reported on Wednesday, as U.S. exports stumbled a bit. Great.  So now what? Well, now they'll be revising Q1 GDP drastically lower and chopping Q2 GDP down to a nub.

Second-Quarter Growth Looking Even Worse - The U.S. trade deficit widened in June, and the new numbers released this morning indicate that second-quarter growth was even more anemic than the originally reported 2.4% annual rate. Last week, updated figures on inventories indicated that gross-domestic-product growth in the second quarter would be revised lower — to around 1.7%. Today’s data on trade suggest the revised figure may be closer to 1%, or even as low as 0.3%. The goods deficit in the trade report came in at $62.032 billion, compared to the $58.2 billion estimated in the first GDP reading for second quarter. That has led most economists to pull down their estimates for the revision.

2nd Quarter G.D.P. May Be Revised Even Lower - The government’s preliminary estimate for economic growth in the second quarter is likely to be revised substantially lower. This preliminary estimate of gross domestic product growth, which was released on July 30, reported that the nation’s output grew at an annual rate of 2.4 percent in the spring. This tepid growth was nothing to write home about, since it was a big step downward from growth rates in the previous two quarters. (The economy grew at an annual rate of 3.7 percent in the first quarter of the year, and 5 percent in the last quarter of 2009.) But even that 2.4 percent annual rate is now looking too rosy. Many of the inputs that government economists use to estimate G.D.P. each quarter are rough estimates based on incomplete data. Slowly, more complete data are rolling in. As we noted last week, more complete data on the inventory component of G.D.P. shows that the overall growth rate was worse than expected.

From 2.4% To 1.1% And Dropping - Q2 GDP Gets Closer To Reality With Each Passing Day - As we pointed out earlier today, today's latest deterioration in yet another overoptimistic assumption by the BEA, in the form of the balance of trade, means that the next GDP revision will likely be sub 1%, and may ostensibly drop to negative, confirming that the double dip, at least for NBER purposes, started sometime between April and June. Confirming our skepticism is JPM's Michael Feroli who now believes that real Q2 GDP is trending at a 1.1% rate, less than half the official 2.4%, which, as readers will recall was expected by a battery of Ph.D.-clad optimists to come out to 2.7%. Less than two weeks after the announcement, it becomes clear that the world's "smartest" economists were off by 60%. And we are confident this is not the end of the downward revisions.

A proportional response - HERE'S the way these things typically work. A deep recession is usually followed by a rapid recovery. From 1934 to 1936, the American economy grew by 10.9%, 8.9%, and 13.0% per year, respectively. From 1983 to 1985, annual growth came in at 4.5%, 7.2%, and 4.1%. For now, it seems the American economy will struggle to grow by 3% in the first full calendar year after the recession. Still, growth of any sort typically ends up producing some employment growth, and so rapid recoveries from deep recessions usually produce a lot of employment growth: Employment sprang back by 3.5% in the 12 months following the end of the deep 1981-82 downturn. When the economy started growing again in March 1933 the employment bounceback was springier still. No such turnaround has emerged this time. The American economy has seen downturns this severe and recoveries this jobless but never the one on top of the other. The chart at right makes the point. This is uncharted territory for the American economy.

Editorial - As the Economy Slows ... - NYTimes - The economic news — on growth, consumers, housing and manufacturing — was bad enough before the jobs report for July, released last Friday. The report leaves no doubt that a slowdown is well under way. The odds of renewed recession remain uncomfortably high.  And yet, the response from Washington has been inadequate, at best, with Democratic initiatives too timid and Republicans bent on obstruction. Case in point: Another 131,000 jobs were lost in July, according to the latest employment report, and job loss in June was revised to 221,000, from 125,000. The unemployment rate held steady, at 9.5 percent, but that is only because 181,000 people quit looking for work last month.  Such “missing workers,” those who either have dropped out or have never entered the labor force since the recession began, now number 3.9 million. That’s on top of 14.6 million officially unemployed and 8.5 million who are working part time but need full-time jobs.

Goldman Sachs economists: No double dip (probably) - The economics research team at Goldman Sachs has done excellent work over the past few years; they were among the most prescient forecasters in seeing the economic damage that the housing bust and credit crisis would wreak. So their analysis is worth a particularly close read. What to make of their latest research note? It is something of a glass half-full, glass half-empty story. Here are excerpts from the report, by Ed McKelvey, issued Thursday. Make your own call on whether to view this take on the U.S. economic outlook as fundamentally optimistic or pessimistic. "We think a double dip [recession] has a meaningful probability--25 to 30% in our estimation--but it is not in our base case. A big reason for this judgment is that several key components of private-sector activity have already fallen to levels that are quite low relative to historical averages or underlying fundamentals."

Eric Sprott: "We Are Now Paying For The Funeral Of Keynesian Theory" - Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally.

Gary Shilling Sees 10 Years of Low Growth + Rising Unemployment - A new WSJ/NBC poll shows 64% of Americans believe the economy hasn't hit bottom, up from 53% in January. And about two-thirds say President Obama has fallen short on handling the economy and the budget deficit. Obama's "big mistake was over-promising in a situation where it was very difficult for anyone to deliver," says Gary Shillling. "They obviously didn't understand the depth of the problem," The real problem, Shilling says, is the deleveraging process. Given the decades it took for the leverage to build up, it's folly to think the deleveraging process can be quick and painless, he says. "It isn't just that 2008 was a bad dream from which we've awoken and it's back to business as usual." Indeed, Shilling says Americans are right to believe the economy hasn't bottomed yet; in fact, he says we're just at the beginning of a prolonged period of economic malaise.

US 'Virtually Certain' to Fall Into A New Recession: Rosenberg - The US economy is almost certainly headed back into a double dip recession, and economists aren't seeing it because they're using "the old rules of thumb" that don't apply this time, well-known economist David Rosenberg told CNBC. Consumers' focus on shedding debt rather than spending will prevent the economy from growing and bring a halt to the recovery, said Rosenberg, a former Merrill Lynch economist who now works at Gluskin Sheff, an advisory firm based in Toronto.  "The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now," he said. "I think that it's almost a foregone conclusion, a virtual certainty."

The Rise of the Permabears The central question dividing economists these days is whether Western governments should spend more to ward off a potential second recession or retrench to hold down their ballooning debts to restore confidence among investors. But Albert Edwards, an investment strategist in London for the French bank Société Générale, considers the debate a waste of time. To be specific, he forecasts a “bloody, deep recession” that produces a stock market collapse of at least 60 percent, followed by years of inflation of 20 percent to 30 percent as the persistent printing of money by central banks desperate to improve the situation sends prices soaring. Mr. Edwards’s sandals and chuckling demeanor belie his reputation as perhaps the City of London’s best-known permabear — a species that has long flourished on the outer margins of the financial industry but rarely inside mainstream banks.  That is no longer true.  With the shocking financial crisis of 2008 still fresh in people’s minds, and gloom-spinning economists like Nouriel Roubini having achieved pop culture status

The view from Dr Doom - THE ECONOMIST had tea with Nouriel Roubini: (video) He doesn't disappoint, warning that developed economies risk slowing to a "stall speed".

Temporary recession or the end of growth?- Everyone agrees: our economy is sick. The inescapable symptoms include declines in consumer spending and consumer confidence, together with a contraction of international trade and available credit. Add a collapse in real estate values and carnage in the automotive and airline industries and the picture looks grim indeed.  But why are both the U.S. economy and the larger global economy ailing? Among the mainstream media, world leaders, and America’s economists-in-chief there is near-unanimity of opinion: these recent troubles are primarily due to a combination of bad real estate loans and poor regulation of financial markets. This is the Conventional Diagnosis. If it is correct, then the treatment for our economic malady logically includes heavy doses of bailout money for beleaguered financial institutions, mortgage lenders, and car companies; better regulation of derivatives and futures markets; and stimulus programs to jumpstart consumer spending. All of these measures have been tried—and found wanting. Is the diagnosis therefore fundamentally flawed? The metaphor needs no belaboring: we all know that tragedy can result from a doctor’s misreading of symptoms, mistaking one disease for another.

The Queasy Season - Here are some truths which I believe to be self-evident: that the USA has been running on fumes since the beginning of the 21st century. That you can't get something for nothing, and attempts to do so always end in tears. That massive expenditures of energy produce equivalent globs of entropy - which you can translate to "bad ju-ju" or the tendency of whatever can go wrong to go wrong. That because we're unwilling to re-scale and reform the things we do, nature is about to do it for us. That America has transformed itself from a nation of earnest, muscular, upright citizens to a land of overfed barbarous morons ruled by grifters. That what has been economics is about to turn dangerously political.The greatest loss of the last decade was not in 401-Ks or manufacturing jobs or foreclosed houses, but the rule of law. Without genuine rule of law, anything goes and nothing matters. As a consequence of that, finally, everything goes.

America Is A 'Bankrupt Mickey Mouse Economy' - America is a "Mickey Mouse economy" that is technically bankrupt, according to Jochen Wermuth of Wermuth Asset Management. "America today looks like Russia in 1998. Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy," Wermuth told CNBC. The comments followed news that the Fed was extending its quantitative easing program following what the Federal Open Market Committee (FOMC) described as a fall in the pace of growth in output and employment. The Fed has spent the past three years on a route of aggressive rate cuts and purchases of trillions in various securities but it is running out of measures it can take,.Wermuth is a fund manager heavily invested in Russia and says if the same International Monetary Fund (IMF) team that managed the financial crisis in the former super power in 1998 now turned up at the US Treasury, they would withdraw support for current US policy immediately.

U.S. Is Bankrupt and We Don't Even Know It - Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.  What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy. Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.” But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

Things fall apart - slowly - Actually, it isn't all that slow, because a decade ago, all of this would have been largely unthinkable. The problem is that we don't see the gradual decline and fall - we are only vaguely aware that some things aren't quite what they used to be, and our progressive narrative tells us that they will soon be much better. But the problem is that's not necessarily true - there's little evidence for it. Even the most optimistic economists (and I don't recommend the most optimistic economists ;-)) have to admit our long term economic problems are extremely pressing. Add in resource depletion and climate change, both of which we know are major drivers both of economic decline and other kinds - more natural disasters, more struggle over natural resources, less excess to cushion our choices, and what we are experiencing is decline, steady, inexorable, and very hard to pull out of.

Watch out for the federal debt freight train - David Stockman - The federal deficit is no longer an abstract long-term problem; it's a financially critical freight train hurtling down the track at alarming speed. Here's a dramatic way to look at it: Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.  Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running! This time is markedly different in terms of the business-cycle impact on the budget. During the past three quarters of "recovery" -- with real growth of 5.0%, 3.7%, and 2.4%, respectively -- nominal GDP growth has averaged only about 4%. This is steeply below the figure for past cycles when we had 7-10% nominal GDP growth due to higher real growth and much higher inflation.

Fed Leads America “To The Brink Of Collapse” - When even the New York Times and CNN are admitting that the United States faces not only a double-dip recession but potentially a new great depression, any alarm bells that have not been rung should now be sounding loudly. Following in the footsteps of the New York Times’ David Krugman, who in June wrote that the United States had entered a third depression similar to the Long Depression of the 19th century, CNN Money carried an article yesterday brazenly entitled, Is this finally the economic collapse?. The piece, written by Keith R. McCullough, points out that the Fed’s announcement that it will start buying Treasury debt, is a “crossing the Rubicon” moment and “could lead the country to the brink of collapse”.“Crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It’s a point from which it’s almost impossible to return,” states the article, adding that the market has not responded to quantitative easing so to engage in more of the same would be completely futile.

Japan debt safer than U.S. debt: China economist -(Reuters) – China has been buying record amounts of Japanese government debt because it is less risky than U.S. debt, at least in the short term, a Chinese government economist said on Wednesday.Investing in Japanese bonds is safer because so much of the country's debt is held domestically, and the yen is on course to strengthen further, said Zhang Ming, an economist with the Chinese Academy of Social Sciences, a top government think-tank."Even though the difference in yields is big, China has been abandoning U.S. debt and picking up Japanese debt. This definitely shows that it believes the risks of U.S. debt far exceed those of Japanese debt," Zhang said in a report issued by his research institute. The report was issued a day after the Federal Reserve said it would buy more U.S. government debt in a form of mild quantitative easing to counter economic weakness.

Dollar slides vs yen as Fed tries to stabilize US (AP) -  The dollar tumbled to a 15-year low Wednesday versus the Japanese yen after the Federal Reserve said it expected a weaker U.S. recovery and took steps to support the economy. The dollar surged against most other currencies around the world, however, with investors still seeking access to one of the world's favorite places to park funds, short-term U.S. Treasurys, as economic reports and forecasts Wednesday from the U.S. to Asia to the U.K. suggested a slowdown in the world recovery. The euro, which is used by 16 European countries, fell below $1.30 for the first time this month. In late New York trading, it was worth $1.2882 compared with $1.3196 late Tuesday, while the British pound receded to $1.5672 from $1.5881. Yields on U.S. government debt tumbled as investors poured into Treasurys, which they consider super-safe purchases.

The Military Holds the Dollar Up - My assessment is that 90% of the value of the U.S. dollar comes from the U.S. military. After we had our satellite systems in place, Cheney said “deficits don’t matter.” The US debt and deficit financing is no longer a debt system. It is a global taxation system. Global treasuries and sovereign wealth funds, central banks and a variety of large institutions buy Treasury securities or hold dollars not because there is economic value behind them or because these financial assets are sound fiscally or in terms of credit. They buy them because if they don’t buy them, their current holdings will drop in value faster (that is given their current holdings, they are better off with a managed fall that a precipitous one) and because they are forced to — both in terms of trade agreements — and because they have a gun at their head. If they don’t buy, they and their population will be subject to a wide variety of demonstrations of physical and financial force that will result in loss of life.

‘Breaking the Buck’ Was Close for Many Money Funds - At least 36 of the 100-largest U.S. prime money-market funds had to be propped up in order to survive the financial crisis, according to a report from Moody's Investors Service. From August 2007 to December 2009, at least 20 firms that manage such funds in the U.S. and Europe pumped more than $12 billion combined into their funds, according to the Moody's Corp. unit. The lifelines included purchases of troubled securities and capital contributions. Without that help, the battered money-market funds would have "broken the buck," or fallen below the $1-a-share net asset value typically maintained by the funds, Prime funds invest in securities issued by corporations, the government and government-sponsored enterprises such as Fannie Mae.

By Pulling The Economy Back From The Cliff, Lawmakers Also Reduced The Deficit -In their report, How We Ended the Great Recession, Economists Alan Blinder and Mark Zandi estimates the effects of the financial and fiscal policies enacted since the crisis began in 2008 on the economy. Their conclusion is that had the combined financial and fiscal policies not been enacted, “GDP in 2010 would be about 6.5 percent lower, payroll employment would be less by some 8.5 million jobs, and the nation would be experiencing deflation.” However, one tidbit in the report that has received little notice is that by acting, Congress actually reduced our potential deficit problem. Given the policy steps taken, Blinder and Zandi estimate that by the end of the 2010 fiscal year, the federal budget deficit will be $1.4 trillion and it will fall to $1.15 trillion in fiscal year 2011 and $900 billion in fiscal year 2012.  However, had Congress done nothing, the deficit would have ballooned even higher, hitting over $2 trillion by the end of the 2010 fiscal year, $2.6 trillion in fiscal year 2011, and $2.25 trillion in fiscal year 2012. That’s right, doing nothing would have meant that the 2012 federal budget deficit would likely be over 2.5 times as large as taking the steps we took

Ezra Klein - Reinhart: "This is not something that policymakers can undo quickly." - In their book “This Time is Different,” Carmen Reinhart and Kenneth Rogoff construct the richest and most detailed history of financial crises that anyone has developed. Their data set covers 66 countries, five continents and eight centuries, and gives them an unparalleled ability to see patterns and predictors among different types of crashes. And see them they do. I spoke to Reinhart on Wednesday about the speed of the recovery, why financial crises are different from normal recessions and what, if anything, can be done. An edited transcript follows.

Debt and growth revisited - Reinhart Rogoff - With the advanced economies at a critical juncture, some economists are urging more fiscal stimulus while others argue that raising debt levels will stunt growth. This column presents the Reinhart-Rogoff findings on the relationship between debt and growth based on data from 44 countries over 200 years with a focus on the debt-growth link during high-debt episodes.

Rogoff and Reinhart strike back - It doesn't say this exactly, but my sense is that Carmen Reinhart and Kenneth Rogoff's latest paper on debt is something of a response to Paul Krugman's critique of their last paper on debt. In short, they find, and have previously found, that growth dampens when debt hits 90 percent of GDP. Krugman and others have responded that with so few data points, and America's situation and position being so different from most of those data points, that you can't really draw any conclusions. I'd say Reinhart and Rogoff's strongest response comes in this paragraph: Only about 2% of the observations are at debt-GDP levels at or above 120% – and that includes the aforementioned cases. If debt levels above 90% are indeed as benign as some suggest, one might have expected to see a higher incidence of these over the long course of history. Certainly our read of the evidence, as underscored by the central theme of our 2009 book, hardly suggests that politicians are universally too cautious in accumulating high debt levels. Quite the contrary, far too often they take undue risks with debt build-ups, relying implicitly perhaps on the fact these risks often take a very long time to materialise. If debt-to-GDP levels over 90% are so benign, then generations of politicians must have been overlooking proverbial money on the street.

Reinhart And Rogoff Are Confusing Me - Krugman - So R-R have a new article in Vox that, they say, aims to “clarify matters”. I don’t feel clarified. The original paper on debt and growth presented a stark correlation between high debt and low growth, and seemed to say that this was a causal relationship. In practice, the article has been widely used to claim that there’s a red line of 90 percent in the public debt to GDP ratio that one crosses at one’s peril. Skeptics like me quickly questioned the causal interpretation of the correlation. We pointed out that in the case of the United States, highlighted in the original paper, the debt-growth correlation came entirely from the immediate postwar years, when growth was low thanks to postwar demobilization. We pointed out that other episodes of high debt and low growth, like Japan since the late 1990s, were arguably cases in which causation ran from collapsing growth to debt rather than the other way around.But R-R don’t offer any response to that question.

Rogoff and Reinhart Analysis Has Major Flaw - The debt vs GDP analysis by Ken Rogoff and Carmen Reinhart as summarised by Business Insider (here) has a major flaw. What were the growth rates enjoyed as countries increased their debt through each zone and what happens to growth as debt was decreased through each zone? As debt is increasing it contributes to demand, as it stops growing (and then even more as it is repaid) it takes away from demand (and GDP). Until Ken Rogoff and Carmen Reinhart provide the dynamic analysis of increasing debt and decreasing debt through each of their Debt to GDP ranges the analysis very interesting and progresses the knowledge base but is not supportive of any conclusions based on a direct causal relationship between debt and GDP. The real cause of lower GDP is likely to be the reaction to high debt. When debt stops growing and starts being reduced, GDP growth is lower than it otherwise would be, irrespective of the actual level of debt. This is so obvious - just ask yourself how much you spend when you are increasing debt, how much you spend when you just stop increasing debt and pay the interest and then how much you spend when you are saving/repaying debt.

Reinhart and Rogoff: There’s No There There - Here’s the core problem with Reinhart and Rogoff’s claim that public debt levels above 90% of GDP cause reduced growth: it’s all correlation and no mechanism. It epitomizes the worst aspects of empirical economics, searching tirelessly for statistical regularities, but not the mechanisms that might underlie them. Because economic contexts are highly diverse, often singular, it’s the processes at work, not generalizations about outcomes, that economics has the power to elucidate. Sorry to be so abstract. The R&R dataset, as the authors proudly explain, encompasses 44 countries over two centuries. We’ve got Finland, Spain, Japan and the US, Thailand, Mexico and Colombia. We’ve got the aftermath of the American Revolution against England and WWII, banking crises under the gold standard, the third world debt crisis of 1982. It’s all there in one hopper, ready to be crunched. I would convert to Rosicrucianism before I would embrace the belief that a single statistical relationship captures all these places and times.

The limits of government debt statistics - The Economist finds some interesting common ground between Larry Kotlikoff, who thinks that America’s fiscal situation is worse than Greece’s, and Jamie Galbraith, who thinks that it’s really nothing to worry about:In some ways, these unconventional thinkers resemble each other more than the less striking birds in-between. Neither thinks that official debt figures mean all that much. Neither thinks the government’s balance-sheet can be understood on its own, without reference to what the other spouse is up to. Messrs Galbraith and Kotlikoff both worry above all about the distributional effects of taxing and spending. Mr Kotlikoff fears that fiscal entitlements allow the elderly to make outsize claims on the young. He denounces “gerontocracy” and “fiscal child abuse”. Mr Galbraith fears that in the name of fiscal restraint, taxpayers will shirk their responsibility to the country’s most vulnerable citizens, who rely on public pensions and health care. For both, then, the chief fiscal danger is inequity not insolvency, as normally understood. The question is not whether the government can pay its bills, but who pays what, when.

U.S. Investors Regain Majority Holding of Treasuries  - For the first time since the start of the financial crisis in August 2007, U.S. investors own more Treasuries than foreign holders. Mutual funds, households and banks have boosted the domestic share of the $8.18 trillion in tradable U.S. debt to 50.2 percent as of May, according to the most recent Treasury Department data. The last time holdings were as high, Federal Reserve Chairman Ben S. Bernanke cut interest rates for the first time between scheduled policy meetings as losses in subprime mortgages spurred a flight from riskier assets.  Demand for Treasuries from U.S. investors is climbing as consumer spending and incomes stagnate and the savings rate reaches the highest level in almost 18 years -- 6.4 percent in June. The retrenchment by individuals, as well as banks buying government bonds instead of increasing lending, is driving yields lower as President Barack Obama’s administration borrows record sums to finance an unprecedented budget deficit.“Americans are consuming less and saving more,”  “That causes an increase in savings and deposits, which end up being invested in government securities.”

The Meaning Of 2.71 - Krugman - As of right now, the 10-year bond rate is 2.71 percent. As you can see from the chart above, this puts it back where it was in the early spring of 2009 — higher than it was during the Oh-my-God-we’re-all-gonna-die period of winter 2008-2009, but lower than anything else we’ve seen for decades. As it happens, interest rates are also now lower than they were when the big debate over fiscal policy and its interest-rate effects began. For those who don’t remember or don’t know, this started with the claim that government borrowing would send rates soaring, crowding out private investment, and that this would abort the recovery. I tried at the time to point out that this reflected a failure to understand basic macroeconomics; but as usual, made no headway with the culprits. Said culprits then claimed that rising interest rates in the months following, rather than reflecting improved expectations about the economy, confirmed their view.  Later they changed their stance, claiming that the real problem was rising debt threatening solvency, and that America was going to be Greece any day now.

Confusions about the multiplier < 1 - I've been having discussions with some associates about what it means when a measured short-run multiplier is positive yet less than one.  It is occasionally suggested that a multiplier less than one means that fiscal policy is necessarily a bad idea, but I don't see it that way. Keep in mind there is no a priori argument that the government purchases "don't count," even though sometimes they don't produce much value ex post.  And the borrowed dollar isn't "taken out" of the economy in a meaningful way.  It can come from abroad or it can accelerate velocity, at least potentially.Let's say the multiplier is 1.0.  That typically means a dollar is spent on a road (or whatever), which is in the plus one column.  There is some crowding out of private investment but not usually one hundred percent.  Let's say that's minus 30 cents.  The spending on the road, and road workers, has some positive second-order effects.  Let's say those are plus thirty cents per dollar. In that particular case, the multiplier ends up as equal to one and that is net, all things considered

The great false choice, stimulus or austerity - The debate on the need for further fiscal stimulus or quicker retrenchment has become too ideological, and too extreme. Underneath it, however, there is more agreement on the basics than may be apparent at first blush. Indeed, despite the warring comments that have appeared in these pages, there is actually no necessary conflict between restoring fiscal sustainability and maintaining support for the recovery. Despite rising fears of a double-dip recession in both the US and UK in recent days, the basic facts remain unchallenged. Government debt in advanced Group of 20 countries will reach 115 per cent of gross domestic product by 2015 – almost 40 percentage points above pre-crisis levels. Some commentators look at these numbers and question the earlier fiscal stimulus. But only a 10th of this new debt is attributable to those attempts to boost their economies. The vast majority is due to the recession, and related revenue losses. No one believes that budgets should have been cut to offset this revenue loss. Indeed, allowing deficits to increase put a floor under what otherwise would have been a calamitous collapse in demand.

The Myth of Idle Recovery Dollars - The White House -We were awfully surprised to hear Rep. Boehner come out for killing jobs en masse in his own state and district by stopping the Recovery Act on last Sunday’s news shows.  Though we’re sure he didn’t know it, the Congressman is advocating to kill the expansion of the Butler County Community Health Center and bring some of the twenty-five highway projects across the district to a grinding halt.  Across the state of Ohio, he said that approximately 4 million working families should get an unexpected cut in their paycheck as the Making Work Pay tax credit disappears, unemployed workers should go without unemployment benefits, and major Ohio road projects like the US-33 Nelsonville Bypass project and the Cleveland Innerbelt Modernization project should be stalled or stopped.  Oh, and some of the more than 100 clean energy Recovery projects employing workers across the state should be shut down.

Comparing CBO and White House Budget Forecasts - Did you ever wonder how well the White House's Office of Management and Budget and the Congressional Budget Office are at forecasting where the U.S. budget deficit will go?  The reason we're asking that question today is because the OMB has once again estimated just how much in the red the Obama administration's spending will put the U.S. in 2010: 1.471 trillion U.S. dollars.  That's up considerably from the $1.3 trillion projected deficit the Obama administration had been forecasting for 2010 as recently as April 2010. But isn't as bad as the $1.6 trillion more than what they thought they would collect in taxes that they thought they would burn through back in January 2010.  Meanwhile, we see that the OMB's third figure on the year is almost right on target with the $1.5 trillion deficit the Congressional Budget Office projected just once, back in March 2010.

The Last Thing You Will Ever Need to Read On Spending, Taxes and Health Care - Jennifer Pollom has a long piece up at Economics 21, which argues that long term spending, not taxes are the problem. By my reading Pollom makes three big points

  • Revenues, even after accounting for the Bush tax cuts, are not that far out of line with historical norms.
  • Spending on the other hand is growing like gangbusters
  • The core of the spending problem is Health Care

Pollum also makes some important comparisons, noting for example that tackling spending growth without touching entitlements would require either scrapping the military or scrapping the entire rest of the government. In fact, even the latter wouldn’t completely do the trick. Here core argument is essentially correct but there are some important caveats to be made.  First, Pollum, like just about everyone else, leans heavily on this set of graphs.You see that last date over there in the right-hand corner. If you squint you can make it out. It says 2080. That’s 70 years from now. I know what you are thinking. However, I have to keep making this point: a whole lot can happen in 70 years.

"Run Government Like a Business" = Deficit Spending - We're used to that line by now. Ross Perot—one of the more prominent people who got rich due to government contracts—used it, Carly Fiorina and Meg Whitman are using it (while desperately hoping you don't pay attention to how they ran Lucent/HP or eBay), and Aaron Sorkin even had Charles Grodin say it in Dave, if only to establish his Sensible Centrist cred. So how are businesses running their debt-laden firms? Ask the WSJ and ye shall receive: U.S. corporations have taken full advantage of low interest rates, going on a bond-issuing binge that has left them with tons of cash, which they appear to be holding largely as insurance against a new bout of financial turmoil, rather than spending on new hires. Nonfinancial companies were sitting on about $8.4 trillion in cash as of the end of March, or about 7% of all company assets, the highest level since 1963.

The case for the U.S. government to get more involved in the economy -  Some folks say the Obama administration's pro-reform, pro-tax agenda toward health care, the financial sector, and the Bush tax cuts are scaring businesses away from making new hires or taking on new big investments.  Spiegel had the opposite take. Siemens, which engineers and sells equipment for the new green economy (among a thousand other things), needs assurances that the government will take more action to tip the scales toward clean energy. Spiegel mentioned three key areas where Washington's failure to act had created uncertainty. First, the failure of the climate change bill means the country could go years without a carbon price (FLASHCARD here) to advantage clean tech. Second, he lamented the absence of a national renewable energy standard (FLASHCARD here). Third, he expressed concern about the future of the wind turbine investment tax credit, which expires in 2011. 

Six Essential Questions About The Deficit... -Fiscal expert  Stan Collender points out that the bond market is not demanding deficit reduction -- in fact, quite the opposite. So where is the Washington establishment's obsession with the deficit coming from? Whose interests does it serve?

Me And The Deficit - Krugman - At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014. Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs. So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

The Deficit Debate | Institute for New Economic Thinking - What case is there for reducing the budget deficit and public debt burden now? Will such actions save the economy from sharply reduced growth or will cutting government spending and/or raising taxes lead to a collapse of demand and a long period of Japanese style deflation and stagnation? Economists sharply disagree on what many are now calling “the austerity debate.” Some prominent economists (for example, INET Advisor Kenneth Rogoff) believe that cutting deficits and reducing debt is essential to inspire confidence in financial markets and to ensure that long-term economic growth is not damaged. Others (for example Paul Krugman and Robert Skidelsky, who spoke at INET’s inaugural conference) think that any attempt to reduce expenditures today will be self-defeating since it will further weaken the economy, lead to lower growth and reduced tax revenues in the future, and so greater deficits and debt in the end.

The Paul Ryan debates - I haven't followed the numerical specifics of his plan (see Krugman, McArdle, and Ezra), as I'm more interested in the general problem motivating the reform.  We all know that health care spending has to be restrained in some manner.  There are (at least) two approaches: 1. Have the federal government take a more active role in shutting down or limiting some reimbursements, based on efficacy studies ("death panels"). 2. Turn some or all of Medicare into a fixed voucher program and let individuals choose which set of restrictions they will accept from private suppliers ("grandma bangs on HMO door"). As I understand Ryan's approach, he is putting a great deal of emphasis on #2, whereas most Democrats favor #1.

Is policy uncertainty the problem? - Pete Boettke says "policy is the problem."  Ezra says he can't find evidence that policy is the problem. I hold the intermediate view that policy uncertainty is a problem but not the problem.  On one hand, policy uncertainty probably has been greatest for the health care sector, yet job growth in that sector has been relatively robust.  Furthermore, Obamacare may bring uncertainty, but part of the uncertainty is about whether employers can get away with dumping their workers onto the subsidized exchanges.  Arguably that should help hiring rather than hurt it. I would be more convinced by the uncertainty view if it were combined into a larger, coherent story, consistent with reported corporate profits being fairly high.

The debate is not about uncertainty, it’s about why - It is a common and poor framing of the question to ask whether uncertainty is causing our current economic woes. Just as the path of GDP is more volatile and difficult to forecast than in stable growth years, the path of individual firm sales is similarly more volatile and uncertain. More uncertainty will make households and businesses save more and invest and spend less. There is nothing controversial here. The debate is about the cause of uncertainty, and here I see a troubling correlation between what people think the current villain is and what their non-recession bugaboos are. The narratives struggling to tie the current economic woes to long-run stagnating wages, an undereducated workforce, and anything Democrats do strike me as a tenuous stretch and reflect our tendency to need a compelling narrative when easy explanations do not present themselves.

Guest Post: What Made America Great Is Now Killing Her! - Our political leaders are presently addressing what they perceive as an intractable cyclical recovery problem when in fact it is a structural problem that is secular in nature. Like generals fighting the last war with outdated perceptions, we face a new and daunting challenge. A challenge that needs to be addressed with the urgency and scope of a Marshall plan that saved Europe from the ravages of a different type of destruction. We need a modern US centric Marshall plan focused on growth, but orders of magnitude larger than the one in the 1940’s. A plan even more brash than Kennedy’s plan in the 60’s to put a man of the moon by the end of the decade. America needs to again think and act boldly. First however, we need to see the enemy. As the great philosopher Pogo said: “I saw the enemy and it was I”.

Robert Rubin Argues Against ‘Major’ Stimulus And For Deficit Reduction - Bob Rubin, the former Clinton administration Treasury Secretary and routine foil for many progressive-minded economists, argued on Sunday against a second "major" stimulus to revive the economy.  "I wouldn't do a major second stimulus because I think...we run a risk that it could be counterproductive in creating a lot of additional uncertainty and undermining confidence," Rubin said. "But at the same time -- and what I'm about to say is easy to say and very hard to do -- at the same time I would try over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future. And I would guess something like two years. So it wouldn't take effect right now, when the economy is still so vulnerable, but if you could do it and it was credible and people believed it and it was real, I think that could do a lot for confidence. The problem is that's very easy to say and very hard to do."

Greenspan, Rubin, and Herbert Hoover - Robert Reich - Herbert Hoover’s disciples are making noises even as America moves closer towards a double dip recession. Fed Chair Alan Greenspan tells the New York Times all the Bush tax cuts should expire as scheduled, even those that benefit the middle class and not the rich. His reason: the nation’s looming deficit requires it. On Sunday, former Treasury Secretary Robert Rubin, appearing on CNN, says any further effort to stimulus the economy would be “counter productive,” and that policy makers instead should craft a deficit-reduction plan. Greenspan is only partly wrong. The Bush tax cuts should expire for the top 2 percent of filers (those earning over $250,000) because they save rather than spend a large portion of their incomes, and we need all the spending we can get. Rubin is entirely wrong. As Friday’s jobs report shows, the gap between total private spending (consumers plus business plus net exports), on the one side, and the nation’s capacity to produce goods and services at or near full employment, on the other, is still a chasm. So government needs to do more spending now, in the short term, in order to get people back to work and the economy back on track

Advising Like It’s 1999 – Krugman - I’m saddened but not really surprised by Robert Rubin’s declaration that we don’t need more stimulus. It has seemed to me from early on in this crisis that Rubin and his disciples wanted to believe that this world crisis was something like the 1997-98 Asian crisis, and amenable to similar solutions. For what the Committee to Save The World did in the Asian crisis was … not much. Some emergency loans to ease liquidity problems, some declarations that they were highly confident, a bit of interest-rate cutting; and once the panic was over, things recovered pretty much on their own. I tried — Lord, how I tried — to get through the message that this wasn’t a safe bet, and that if the initial intervention wasn’t big enough it would be perceived as a failure, and there would be no second chance. Others made the same point. But we never did get through. And Rubin is still insisting that plan A was right.

America's Biggest Jobs Program -- the U.S. Military - Robert Reich -Over 1,400,000 Americans are now on active duty; another 833,000 are in the reserves, many full time. Another 1,600,000 Americans work in companies that supply the military with everything from weapons to utensils. (I’m not even including all the foreign contractors employing non-US citizens.) If we didn’t have this giant military jobs program, the U.S. unemployment rate would be over 11.5 percent today instead of 9.5 percent.And without our military jobs program personal incomes would be dropping faster. The Commerce Department reported Monday the only major metro areas where both net earnings and personal incomes rose last year were San Antonio, Texas, Virginia Beach, Virginia, and Washington, D.C. — because all three have high concentrations of military and federal jobs.This isn’t an argument for more military spending. Just the opposite. Having a giant undercover military jobs program is an insane way to keep Americans employed. It creates jobs we don’t need but we keep anyway because there’s no honest alternative. We don’t have an overt jobs program based on what’s really needed

Pentagon Plans Steps to Reduce Budget and Jobs - NYTimes - Defense Secretary Robert M. Gates said Monday that he would close a military command, restrict the use of outside contractors and reduce the number of generals and admirals across the armed forces as part of a broad effort to rein in Pentagon spending. Mr. Gates did not place a dollar figure on the total savings from the cutbacks, some of which are likely to be challenged by members of Congress intent on retaining jobs in their states and districts. But they appear to be Mr. Gates’s most concrete proposals to cut current spending as he tries to fend off calls from many Democrats for even deeper budget reductions, and they reflect his strategy of first trying to squeeze money out of the vast Pentagon bureaucracy.

Robert Gibbs attacks the fringe losers of the left –You may think that the reason you're dissatisfied with the Obama administration is because of substantive objections to their policies:  that they've done so little about crisis-level unemployment, foreclosures and widespread economic misery.  Or because of the White House's apparently endless devotion to Wall Street.  Or because the President has escalated a miserable, pointless and unwinnable war that is entering its ninth year.  Or because he has claimed the power to imprison people for life with no charges and to assassinate American citizens without due process, intensified the secrecy weapons and immunity instruments abused by his predecessor, and found all new ways of denying habeas corpus.  Or because he granted full-scale legal immunity to those who committed serious crimes in the last administration.  Or because he's failed to fulfill -- or affirmatively broken -- promises ranging from transparency to gay rights. But Robert Gibbs -- in one of the most petulant, self-pitying outbursts seen from a top political official in recent memory, half derived from a paranoid Richard Nixon rant and the other half from a Sean Hannity/Sarah Palin caricature of The Far Left -- is here to tell you that the real reason you're dissatisfied with the President is because you're a fringe, ideological, Leftist extremist ingrate who needs drug counseling:

Accountabilitiness - So let me see if I have this straight: The White House’s official spokesman criticizes “the professional left” for pointing out that Obama has broken his promises on the public option, Medicare drug reimportation and price negotiation, EFCA, DADT, closing Gitmo, restoring government transparency and respect for the Constitution, cleaning up Wall Street, challenging “the broken system in Washington” and, arguably, immigration and climate reform… and then tells us that Obama wants us to push for change and “hold him accountable”? Obama can’t have it both ways, trotting Gibbs out to brag about how much his boss wants progressives to hold him accountable… while simultaneously smearing everyone who’s tried to do so as irrational commie whiners.  Either he wants to hear what we have to say, or he doesn’t,

Grayson Calls for White House Spokesman Gibbs to be Fired (LOL Alert) - If all politicians were this entertaining, the public might start sitting up and taking notice of what happens in DC.

Late Night: Jane Hamsher on Obama’s Boys’ Club That Won’t Listen to Women Who Were Right - founder Jane Hamsher appeared on MSNBC this afternoon with host Cenk Uygur.   The topic for discussion was the evolving story that Christina Romer’s resignation as head of President Obama’s Council of Economic Advisers is symptomatic of a larger problem of women not being treated equally within the Obama administration.  Hamsher describes how, especially within the White House economic team, women who were right about the economic meltdown are ignored in favor of the men on the team who were “aggressively wrong” in making both the decisions that led to the disaster as well as current decisions that are not improving the situation sufficiently.  Romer joins a list that also includes Sheila Bair,  Elizabeth Warren and Brooksley Born among the women who were right about root causes of the disaster but were ignored. 

Ezra Klein - The problem with Larry Summers - Complaining about Larry Summers is a fairly popular pastime for White House staff, though the complaints are a bit subtler than people might imagine. They don't want Summers gone. They don't think his advice is bad, or his heart is in the wrong place. They don't even want him to stop dominating the meetings. They just don't think he's well-suited to running the meetings.The critique of Summers is very consistent, and it's really not about him or his vaunted arrogance. It's his position. Summers runs the National Economic Council, which is the body charged with coordinating the president's economic process. But Summers, for all his brilliance and charm, is not the guy you want running meetings and smoothing disagreements and making people feel included. Summers doesn't facilitate debates. He wins them. He wants to be the guy Obama listens to, not the guy who listens to everyone else, and to a large degree, he is.

Roles of the President’s White House economic advisors - I think I can instead add a little value by describing the different positions that make up the President’s economic team, and in particular by explaining the roles of the heads of the National Economic Council and the Council of Economic Advisers.  The NEC is run by Dr. Larry Summers, while Dr. Romer is the outgoing CEA Chair.Let’s begin with some formal organization that is broader than just the economic team.  Within the Executive Branch there is a bureaucratic structure called the White House Office (WHO) and another called the Executive Office of the President (EOP).  The White House Office is a subset of the EOP.  Most of the names you know and the people you see on TV and in the press labeled as “White House staff” work in the White House Office:

Bruce Bartlett: The NEC: An Unnecessary White House Organization -To the extent that there is any truth in the idea that Summers was a factor in Romer's departure, I think it was more an institutional problem than some sort of personal rivalry or whatever. The fact is that the NEC and CEA are institutional competitors within the White House and the NEC has over the years tended to snag more and more of the turf that once belonged to the CEA. One big difference that may sound trivial but is in fact critical is that the NEC director has an office in the West Wing while the CEA is over in the Old Executive Office Building. Although the physical distance is small, it makes a world of difference in terms of influence. Being in the West Wing means being in the loop continuously, while being in the OEOB means being a step behind, always playing catch-up, having less face-time with the president and other members of the senior staff and so on. Institutionally, the distance is very wide.

When did ‘more economic pain’ become a popular position in American politics? - There are economic problems that we can't do much about. An oil embargo from OPEC, for instance. Or an asteroid hitting Wall Street. But then there are economic problems we can do something about. Cities firing hundreds of thousands of workers is a problem we can do something about. It's a simple question of money: The recession has destroyed state revenues and most states can't run deficits. Luckily, the federal government can give states aid until unemployment falls back down to 6 percent. It could even give them aid in a form they have to pay back.  But Republicans are blocking state aid bills. This doesn't make a lot of sense, even on their own terms. On Sunday, John Boehner said, "I am not for raising taxes on the American people in a soft economy." That's fine: Tax rates are a part of the economy we can control, and Boehner sensibly doesn't want to let them become contractionary while we're in a recession. But that same thinking applies to state employees: No one should be for laying off hundreds of thousands of public-sector workers in a soft economy. This is something we can control; it's a contraction we can stop. We just ... aren't.

Democrats, Deficits, the "Middle Class" and the Bush Tax Cuts - Right now, Washington is in a debate over whether to extend the so-called "Bush" tax cuts for all taxpayers versus allowing them to expire on those taxpayers at the very top. Democrats claim that it's fiscally responsible to let the tax cuts expire for those at the top. For the past ten years, Democrats have painted a myth among a large fraction of the public that the Bush tax cuts only benefited the lucky few at the top of the income spectrum. It's simply not true. Some provisions in the Bush tax cuts may have been targeted at the very top (such as the changes to PEP and Pease and the estate tax along with the rate cuts at the very top), but trillions of dollars in tax relief went to those beneath the president's so-called "middle class cut-off" of $250,000. How do we know this? Even under Obama's plan for the expiring tax cuts that calls for only the top rates to go back up, $2.3 trillion would be added to the deficit over the next 10 years (relative to full expiration).

Economic Growth and the Bush Tax Cuts - In a detailed look at the Bush tax cuts in the current issue of Bloomberg Businessweek, Peter Coy writes:They were supposed to promote long-term growth by realigning incentives. On that score their legacy is hard to measure because there’s no way to know how the economy would have fared without them. Many companies instituted dividends to take advantage of the tax break, but whether that induced more investment is unclear. What’s indisputable is that deficits grew while the U.S. economy rumbled along in slow gear: Growth averaged 2.3 percent a year from the end of the 2001 recession through December 2007, at which point the economy tumbled into the worst downturn since the Great Depression. I agree there is no way to know for sure how the economy would have fared without the tax cuts. But the evidence we have does not suggest the cuts were especially good for growth.

Where does the Laffer Curve bend? - With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed. I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Let's start with the experts.

The Laffer Test (Somewhat Wonkish) - Krugman - The renewal of claims that tax cuts pay for themselves has led to a revival of discussion about an old question: how high do taxes have to be before further increases actually reduce revenue? So I thought it might be worth thinking about this question in terms of a simple model of labor supply. Think of an individual facing a marginal tax rate t; and think of the amount this individual produces as depending on effort, which in turn depends on how much of his or her income the individual gets to keep at the margin, i.e., 1-t. Then a little calculus will show that whether a tax hike increase raises or lowers revenue depends on whether the elasticity of effort with respect to earnings — the percentage change in effort from a 1 percent rise in 1-t, the after-tax return to effort — is less or more than (1-t)/t.An example may make the point clear.

How Obama wants to cut taxes on million-dollar incomes - What happens to people on seven-figure incomes when they pay lower taxes on their first $250,000 income, but higher taxes on the rest, as the Obama administration is proposing? It turns out that they end up paying fewer taxes altogether: $6,349 less per year, on average. (See Thoma, Klein, Marr.) This is definitely not what I would have expected. For households in the $200k to $500k range I can see that the benefits from the lower-income tax cuts might outweigh the costs from the higher-income tax hikes — but once you’re earning over $1 million, the vast majority of your income is subject to higher, not lower, taxes. And still you end up saving money with this bill! I’m sure there comes an income point — $2 million? $5 million? more? — where the Obama bill ends up being a net money-loser for the ultra-wealthy. But it would be good to publicize that point, and say that the bill being called a tax hike actually lowers taxes for everybody up to (say) $3 million a year, or whatever it is. That would surely make it harder to oppose, no?

The Bush tax plan vs. the Obama tax plan in one chart

The Bush Tax Cuts and Fiscal Responsibility - During this hot summer of fitful economic growth, high unemployment and an oil slick visible from space, Washington is obsessed with … deficits. The resurgence of this periodic fascination is not entirely surprising, given our historically large current deficits. According to the Congressional Budget Office, the 2010 deficit will come in at $1.3 trillion, almost 10 percent of our gross domestic product and, along with the deficit of 2009, the highest level since World War II. Imminent fiscal collapse has even become a theme for literary novelists  And the overextension of government is again a big theme; sales of Ayn Rand’s “Atlas Shrugged” are up sharply, Deficit fears do have a real foundation. But it is not, as some assume, simply that government spending is out of control. Our current deficits result from the recent financial crisis and recession, and they will recede as the economy recovers. But the federal government also faces a long-term, structural gap between its revenues and its spending commitments — a gap due to policies established decades ago.

Tax reform for the rich and ultra-rich - The fight on Capitol Hill over whether to extend the Bush tax cuts is about many things: deficit reduction, economic stimulus, supply-side ideology. But at its core is a simple question: who counts as rich? The Obama Administration’s answer is that you’re rich if you make more than two hundred thousand dollars a year as an individual or two hundred and fifty thousand dollars a year as a household, and therefore you should have your taxes raised. Conservatives suggest that this threshold is far too low, and argue that Obama would be taxing mostly small-business owners, or the people a Fox News host has referred to as “the so-called rich,” rather than fat plutocrats. You might think this isn’t really much of a debate. An annual income of two hundred and fifty thousand dollars puts you in the top three per cent of American households, and is more than four times the national median. You’re rich, and a small tax increase isn’t going to rock your world. Good luck convincing people of this, though. Judging from surveys of how Americans describe themselves, most of the privileged don’t feel all that privileged. Why is that? One reason is the American mythology of middle-classness.

A Gift the Wealthy Don’t Need - A central lesson of the Great Depression was that economies mired in deep downturns seldom recover quickly on their own. Yet in 2009, when economic stimulus legislation was proposed in Congress, many people insisted that the extra government spending would do no good. ... [S]timulus opponents — a group that includes most Republicans in Congress and sometimes a handful of Democrats — have gone on to advocate cutting existing programs, like food stamps and Medicare. They have repeatedly blocked extensions of long-term unemployment benefits. Most recently, they have joined European deficit hawks in calling for further spending cuts to prevent national insolvency — a threat that financial markets have discounted.  Now stimulus opponents want to extend the tax cuts of President George W. Bush — cuts that are scheduled to expire at year-end. Almost all professional economists believe that those cuts have already increased the national debt by hundreds of billions of dollars.  The Obama administration wants to eliminate the tax cuts for families earning at least $250,000 a year, and for individuals earning at least $200,000.

Study Looks at Tax Cut Lapse for Rich: As debate heats up over President Obama’s proposal to let the Bush tax cuts expire for the wealthy but to extend them for everyone else, a nonpartisan Congressional analysis circulated on Capitol Hill on Tuesday provides a look at the impact the plan would have on high-income taxpayers. Given the progressive nature of the federal income tax system, in which tax rates increase with income, even the richest households would continue to pay the four lower rates on up to the first $250,000 of their income, under the approach being pushed by Mr. Obama and Democratic leaders in Congress.  Taxpayers with income of more than $1 million for 2011 would still receive on average a tax cut of about $6,300 compared with what they would have paid under rates in effect until 2001, according to the analysis. That compares, however, with the roughly $100,000 average tax cut that households with more than $1 million in income would receive under current rates. .

Extending “Middle-Class” Tax Cuts Would Help Wealthy Even More, CBPP: Who stands to gain the most if Congress extends the middle-class Bush tax cuts:  a middle-income worker or a millionaire?  The millionaire (see graph).  That’s one more reason — on top of those listed here — why Congress shouldn’t add a trillion dollars in deficits and debt over the next decade by also extending the tax cuts exclusively for the richest 2 percent of families. The income tax operates as a staircase, not an elevator, so people who make $1 million a year don’t go directly to the top “floor” (i.e., to the top marginal tax rate, currently 35 percent) but instead take the “stairs,” paying tax on the first increment of taxable income at the bottom rate of 10 percent, paying tax on the next increment at 15 percent, and so on until reaching the top rate. In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family… [T]he bottom line is that the wealthy are going to benefit from the Bush tax cuts even if Congress lets the large tax cuts aimed exclusively at them to expire.

Time for Super Taxes for the Super Rich? - With the George Bush tax cuts about expire, the issue of what tax rate the upper class should pay has been on a lot of peoples' minds. The current issue of BusinessWeek looks at the widsom and folly of the Bush cuts. For a while it looked certain that tax breaks put in place for couples earning $250,000 or more under Bush would disappear. The Obama administration has said that it is for extending the tax cuts for those making less than that. But lately, more and more lawmakers are saying that even the richest Americans should get their tax breaks too. That's why I found James Surowiecki's column in this week's New Yorker timely and interesting. Surowiecki proposes not just reinstituting pre-Bush era tax rates on the rich, but going a step further and creating a super tax bracket for those making the mega bucks. Say 50% for those making $10 million or more. At a time when Washington and voters, if not the market, are growing increasingly worried about the deficit, I think the idea of a super tax rate for the super rich makes a lot of sense. Here's why:

Should We Be Leery of the Generosity of the Uber-Rich? -  Yves Smith - The press has been duly supportive of the successful effort by Bill Gates and Warren Buffet to get other mega-rich individuals to give away at least half their wealth to charity. But is this the unalloyed boon that it is presented as being? This Big Charity 2.0 has a very uncomfortable flavor of Masers of the Universe simply shifting their focus from commerce other arenas. How charitable is charity when it winds up being simply another mode of expression of power and prestige?  Now one can argue that this development is a reaction, perhaps overreaction, to the recent vogue of setting up foundations that operate at arm’s length from their benefactor.  While some may contend that these organizations can deviate from their benefactor’s intent over time, the same can just as easily take place once a philanthropocapitalist dies.

“Spinning” the VAT - I don’t mean putting a falsely-positive “spin” on the idea of a value-added tax–but rather: could the VAT be to tax policy what “spinning” has meant to the group fitness industry?A few weeks ago at a Brookings event featuring Congressman Paul Ryan (R-WI) speaking on his “Roadmap” plan, I made an analogy between effective strategies to reduce the budget deficit and effective ways to lose weight.  I argued that the problem with the Ryan plan was that it was like an “all diet but no exercise” approach, which would be unsustainable because it would make us feel deprived of the “sweets” (e.g., special-interest government spending) we want along with the good healthy food (e.g., our critical social insurance programs) we need.  (We’d end up binging and purging, is what I was thinking but didn’t get to elaborate on.) A week after the Ryan event, the New Republic’s Jonathan Chait made the same analogy in talking about supply-side ideology as it has been displayed recently in discussions about extending expiring tax cuts (the routinely expiring variety as well as the “mother” of all tax extenders, the Bush tax cuts):

Credit crunch consequences: three years after the crisis, what’s changed? -It was supposed to have been the day the world changed. The credit crunch "officially" began on 9 August 2007, and there were plenty ready to dance on the grave of capitalism and the free markets. But three years on, for all the hand-wringing, the economic upheaval and the promises of politicians, there is a whiff of business as usual in the air. The banks have returned to substantial profit, City bonuses are moving back to dizzying heights, international efforts for further co-operation have largely come unstuck, cranes are once more rising over the Square Mile and house prices are moving north. Many are beginning to question whether anything has really changed at all; others maintain that things have simply got worse, that the old hegemony has been reinforced rather than loosened, widening the disparity between the wealthy and the rest.

Podcast of 7/31 Interview of Yves Smith

Goldman Sachs could be largely unaffected by financial overhaul - As Wall Street scrambles to find the best and most profitable way to operate under the new financial reform law, Goldman Sachs Group Inc. — the firm that was expected to suffer the most under the legislation — could emerge practically unscathed. Right after Congress passed the regulatory overhaul bill last month, analysts estimated that as much as one-tenth of the preeminent investment bank's earnings could vanish because of new restrictions on activities targeted by the regulatory overhaul. More recently, however, top Goldman executives privately advised analysts that the bank did not expect the reform measure to cost it any revenue.  "The statement was perhaps surprising in its level of conviction,"  "but we've learned to take such judgments from GS very seriously."

Tough new global financial rules are a must - THE JOB OF re-regulating the financial system is only partly done. The United States has passed a bill, but new international rules remain to be written. As we have noted, nothing is more important to assuring financial stability than strong standards for bank capital -- the reserves institutions must set aside to maintain solvency in times of economic stress. The task of setting capital standards for global banks, and ensuring that they apply roughly equally around the world, falls to the representatives of leading nations who make up the Basel Committee on Banking Supervision, based in Switzerland. With its rules, known as Basel II, having been exposed as too lax, the Basel group has promised to produce tougher ones by November, when leaders of the world's 20 top economies meet in Seoul. The problem is that banks are trying to water down the forthcoming Basel III accords.

FDIC Adds Two New Divisions to Gear Up for Dodd-Frank Act -The Federal Deposit Insurance Corp. on Tuesday said it was creating two new divisions to change its structure as part of its implementation of the Dodd-Frank Act, creating an Office of Complex Financial Institutions and a Division of Depositor and Consumer Protection.The Office of Complex Financial Institutions (which the agency has assigned the acronym CFI) “will perform continuous review and oversight of bank holding companies with more than $100 billion in assets as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council,” the FDIC said. This division will also be in charge of using the FDIC’s new liquidation powers over “bank holding companies and non-bank financial companies that fail.” While the FDIC searches for a permanent director for this division, the office will be temporarily run by FDIC-veteran Art Murton, who heads the agency’s insurance and research division

FDIC, SEC Announce Open-Door Rulemaking For Wall Street Reform Law - Two federal financial regulatory agencies have each independently announced an unusual open-door process that will apply to the rulemaking needed to implement a sweeping financial regulatory overhaul. The Federal Deposit Insurance Corporation announced yesterday that the new process would allow the public to comment even before the agency drafts and proposes its regulatory reform rules and amendments in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FDIC also will publicly disclose meetings between senior FDIC officials and private sector individuals. The voluntary public disclosure policy will apply to meetings discussing how the FDIC should interpret or implement provisions of the Dodd-Frank Act that are subject to independent or joint rulemaking by the FDIC, according to the agency.

Elizabeth Warren, likely to head new consumer agency, provokes strong feelings - She's either the plain-spoken, supremely smart crusader for middle-class families that her supporters adore, or she's the power-hungry headline seeker her critics loathe, a fiery zealot disguised in professorial glasses and pastel cardigans.  But no one disputes that she's the most prominent and polarizing candidate to lead the new Bureau of Consumer Financial Protection. The idea for an independent federal agency to protect ordinary borrowers from abuses by lenders was largely Warren's idea, and Congress made it a reality as part of the legislation adopted last month to overhaul financial regulations. The bureau's director will be the most powerful new banking regulator in decades and the first with the exclusive mission of focusing on consumers.   Warren met Thursday at the White House with senior Obama advisers, but a presidential spokeswoman said no decision had been made. If Obama doesn't choose her, he risks infuriating his already-agitated liberal supporters who see Warren as the only logical candidate.

Chris Dodd, Top Democrat, Fights Against Elizabeth Warren - Despite the outpouring of support for bailout watchdog Elizabeth Warren's candidacy to lead a new consumer protection agency, one prominent Democrat continues to publicly stand in her way: Senate Banking Committee Chairman Christopher Dodd. The Connecticut Democrat, who has lambasted lenders for taking advantage of cash-strapped borrowers and bank regulators for their poor record in protecting consumers, led the effort to get the recently-enacted financial reform law through Congress. The agency it calls for -- a unit specifically charged with protecting borrowers from predatory lenders -- survived attacks by the financial services industry and Republicans. But now that the fight has shifted from the creation of the agency to who's going to lead it, Dodd's role seems to have reversed, say some financial reform advocates -- rather than fighting for the toughest possible advocate to fight for consumers and families, he's openly doubting the wisdom of that selection. And it's not clear whether the two have even had a meeting in the last year.

Why Clearninghouses Are a Maginot Line Against Systemic Risk - As discussed in ECONNED and on this blog, clearinghouses are not a solution to the systemic risk posed by credit default swaps, since there is no way to have a CDS counterparty post adequate margin and have the product be viable (to put it more simply, adequate margin make CDS uneconomic). So for CDS, the “derivative” that was and still is the biggest source of systemic risk, a clearninghouse merely serves as another TBTF entity. Warren Turbeville, in his post, The Murky Realm of (Derivatives) Clearing (cross posted from New Deal 2.0), raises further doubts about the conventional view that clearinghouses are a magic bullet for the counterparty risks posed by OTC derivatives. Matt Taibbi’s latest article in Rolling Stone appropriately characterized the financial reform act as neither an “FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise.” While generally describing the act as a “cop out,” he identified the Fed audit requirement and the Consumer Finance Protection Bureau as positive developments. But he viewed the requirement that many derivatives be cleared as “the biggest win of all.” Alas, Matt may have been too generous, or at least premature.

Uncertainty at the (CDS) margin - Newsflash! Agency specialising in credit ratings says credit derivatives might not factor in fundamentals properly. Compared to… err, credit ratings, perhaps. But Fitch Ratings did have some intriguing points to make about CDS margins on Wednesday. Timely ones too, as the Fed and FDIC explore using ‘market-based measures’ — such as credit spreads — to replace ratings in supervising bank capital rules. According to Fitch, you’d need to watch the margins being posted on CDS contracts first. Low margins on single-name CDS = high leverage by credit investors = price distortion in a crisis, the agency reckons. And that would increase systemic risk.

Crash of 2015 Won't Wait for Regulators to Rein In Wall Street - The financial system experiences a crisis “every five to seven years,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the Financial Crisis Inquiry Commission in January. By that measure, the next crash could come by 2015 -- years before new banking reforms are in place.  Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world’s banks until 2018 to comply with limits on how much they can borrow. Parts of the Volcker rule, a provision of the new Dodd-Frank Act that would force firms to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a dozen years.  The pace at which curbs on leverage are likely to be imposed on the industry contrasts with the speed at which banks including UBS AG and Morgan Stanley are hiring to ramp up trading activities.

Wall Street's "Perverse Incentive Structures" Guarantee Another Crisis, Says Bill Black (video) The Obama Administration says the recently signed Dodd-Frank Law, the biggest bank overhaul in decades, will ensure against another financial crisis.  William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City couldn’t disagree more. "They haven’t dealt with any of the fundamental perverse incentive structures that cause these recurrent, intensifying crises," he tells Tech Ticker. In other words, the incentive to take excessive short-term risk in exchange for a multi-million dollar bonus is still very much intact. "Your pay should be based on long term performance instead of short term results which are easy to gimmick through accounting," he says. Excessive pay on Wall Street, which Black says is the biggest culprit of the financial crisis, is just one reason we’re likely to witness another crisis in the not so distant future.

Gordon Gekko Reborn - Roubini - The “Greed is good” mentality is a regular feature of financial crises. But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s? Not really, because greed and amorality in financial markets have been common throughout the ages.Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will. The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end. To avoid such excesses, it is not enough to rely on better regulation and supervision,  Smart and greedy bankers and traders will always find ways to circumvent new rules;· CEOs and boards of directors of financial firms – let alone regulators and supervisors – cannot effectively monitor the risks and behaviors of thousands of separate profit and loss centers in a firm, as each trader and banker is a separate P&L with its own capital at risk;· CEOs and boards are themselves subject to major conflicts of interest, because they don’t represent the true interest of their firms’ ultimate shareholders.As a result, any reform of regulation and supervision will fail to control bubbles and excesses unless several other fundamental aspects of the financial system are changed.

Structured Notes Are Wall Street's `Next Bubble,' Whalen Says… Wall Street banks are creating the “next investment bubble” by selling opaque and unregulated structured notes to investors hunting for yield, according to Christopher Whalen, managing director of Institutional Risk Analytics. Using the same “loophole” that allowed over-the-counter sales of collateralized debt obligations and auction-rate securities, firms are pitching illiquid structured notes whose value is partly derived from bets on interest rates, Whalen wrote today in a report. Whalen, who predicted in March 2007 the collapse of the mortgage-backed securities market, said that these structured notes “promise enhanced yields that go well into double digits” and “often come with only minimal disclosure.”  “The only trouble is that the firms originating these ersatz securities, as with the case of auction-rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid,”

Blame the Victims of Market Falls - I’m listening to the webcast of a  hearing by the Commodity Futures Trading Commission and the Securities and Exchange Commission on the “flash crash,” and getting more and more upset. One even suggested that the solution was to bar retail investors from placing orders to sell at the market price, lest such orders hit a market unwilling or unable to handle them at reasonable prices.  Such an order should have a 3 percent range of allowed prices, so that the order would not be executed at an unreasonably low price, it was said.Give me a break.This could never have happened a decade or two ago. Then markets had market makers, who were required to maintain bid and ask prices.  There were primary markets that set prices.  Prices could plunge — see 1987 — but not like they can now without anything really happening other than a breakdown of Wall Street systems.

The end of free checking is nigh - With regulations set to come into affect limiting overdraft fees, the banking industry is already in the process of ending free checking. Here are some numbers that explain why:The typical checking account costs a bank $250 to $300 a year to maintain… If the account isn’t generating at least that much in revenue, it’s a loser.Overdrawn ATM and debit card transactions made up half of the $37 billion consumers paid last year in overdraft fees. The other half came from bounced checks and recurring electronic payments, which the new law doesn’t affect.  PNC, the bank with the greatest presence in the Cleveland market, said it expects to lose nearly $300 million a year in overdraft revenue. No. 2 KeyBank expects to lose $40 million a year.

The AIG Bailout Scandal - The government’s $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG’s collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand—moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.

U.S. bailouts benefited foreign firms, report says - The federal government's effort to stabilize the financial system in 2008 by flooding money into as many banks as possible resulted in a boon to many foreign firms and left the United States shouldering far more risk than governments that took a narrower approach, according to a new report by a panel overseeing the Treasury's $700 billion bailout fund.  Members of the Congressional Oversight Panel note that America's broad financial rescues had more impact internationally than the narrower bailout programs of other countries had on U.S. firms.  They cite as a case study the bailout of insurance giant American International Group. While the Treasury committed up to $70 billion to AIG through its Troubled Assets Relief Program, the report states, much of that money ended up in the coffers of foreign trading partners in France, Germany and other countries. The cash that the United States poured into AIG alone equaled twice what France spent on its total capital injection program, and half what Germany spent.

Crazy Economists Are Still Defending The Wall Street Bailout As The Recession Gets Worse - It is amazing that angry mobs have not risen up and chased all the economists out of the country. While the greed of the Wall Street gang provided the fuel for the bubble, the economists played an essential role as enablers. This was most directly true for economists in policymaking positions, like Alan Greenspan at the Fed. It was Greenspan's job to stop the housing bubble. A competent and honest Fed chair would have recognized the bubble by 2002 and taken whatever steps were necessary to rein it in. But the economists in policymaking positions are just the beginning. There are thousands of macroeconomists across the country, in government, academia and private industry who track the economy as a full-time job. It is actually a well-paid job, with many drawing six-figure salaries and big name types getting close to $1 million a year.

For G.M., a Subprime Solution -President Obama visited Detroit last week and declared: “We expect taxpayers will get back all the money my administration has invested in G.M.” The president’s comment came the same day that G.M.’s chief executive, Edward E. Whitacre Jr., avowed, “We don’t want to be known as Government Motors,” and told an industry conference, “If you liked our first-quarter financial results, stay tuned for our second-quarter financial results.” All this shilling has a subtext: General Motors is planning to file documents soon with the Securities and Exchange Commission to pursue an initial public offering this year. It has hardly been a secret, with Mr. Whitacre’s mentioning the prospect of an I.P.O. at nearly every turn. That helps explain the timing of General Motors’ biggest deal since it emerged from bankruptcy in July 2009. Two weeks ago, the company agreed to buy AmeriCredit, a subprime lender, for $3.5 billion. At the time, industry insiders whispered, not so quietly, that it was meant to dress up G.M.’s sales numbers before an I.P.O.

Married to the Clinton Mob - Out of respect for privacy, even concerning famous people, I wasn’t going to write about the marriage of Chelsea Clinton to a Goldman Sachs alum and budding hedge-fund hustler with the resources to buy a $4 million loft so soon after graduating from Stanford. Hopefully Marc Mezvinsky won’t follow in the footsteps of his financier father, “Fast-Talkin’ Eddie,” as they called him back in Iowa, a former Democratic House member who just completed a five-year federal sentence for dozens of fraud felonies.  Anyway, Chelsea also worked at a hedge fund, her mother dabbled in banking shenanigans in her Whitewater days and father Bill’s radical deregulation made it a lot easier for financial plunderers to stay on the right side of the law. So the Clintons and the Mezvinskys have a lot in common. I hope their children will do better, and I was going to simply wish them well until I read Tina Brown’s paean to power, “Why America Needed Chelsea’s Wedding,” in the trend-chasing Daily Beast, which she edits. 

Morgan Stanley, doing the Devil’s work? - The Sisters of Charity of Jesus and Mary, the Holy Faith Sisters and also the Irish Veterinary Benevolent Fund all seem to think so. As the Wall Street Journal reported on Wednesday, these religious sisters are leading a group of 88 investors who complain Morgan Stanley lost them at least €5m by mishandling the sale of “complex securities” at the height of the credit crisis. The bank is apparently declining to comment on the matter. While we await further details, readers might like to visit the Sisters of Charity website, if only to view what’s in store for MS if they don’t pony up! (Click ‘replay’ in the flash file below)

The anti-business president's pro-business recovery - This White House has "vilified industries," complains the U.S. Chamber of Commerce. America is burdened with "an anti-business president," moans the Weekly Standard. Would that all presidents were this anti-business: According to the St. Louis Federal Reserve, corporate profits hit $1.37 trillion in the first quarter -- an all-time high. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter and is up by 13 percent against 2009. And the Obama administration has cut taxes for small businesses and big ones alike. Maybe the president could be anti-me for a while. I could use the money.  The reality is that America's supposedly anti-business president has led an extremely pro-business recovery. The corporate community has recovered first, and best. That is the catch-22 of the recovery: Businesses will start hiring when the economy recovers. And the economy will start to recover when businesses start hiring.

Recession Costs Small Businesses $2 Trillion - Small businesses report losing an estimated $2 trillion in lost profits and asset valuation since the recession started in December 2007, according to a new study released by Barlow Research. That works out to an average loss of $253,000 for each of the eight million U.S. businesses with sales between $100,000 and $10 million. Larger companies have been less affected and are recovering more quickly according to the survey, which was fielded in July 2010. After showing guarded optimism in the first half of the year, pessimism has returned for an increasing number of small business owners. Only 35% indicated their financial condition was improving, down from 46% in the second quarter. When asked to estimate the chances that their company will survive the next year, 14% are less than 50% confident they will still be in business by August 2011.

Bear Stearns Portfolio Puts New York Fed in Foreclosure Quandary - The U.S. Federal Reserve is in the same boat as the banks now, dealing with a mortgage portfolio that’s riddled with deficiencies and delinquencies. The central bank’s NewYork branch has been saddled with a heap of souring loans from the assets it picked up to support the 2008 bailout of Bear Stearns. And now, as more and more of these loans – both residential and commercial – fall into default, the New York Fed is faced with a dilemma: to foreclose or not to foreclose. It’s a particularly sticky situation given the federal government’s deep-seated stance on preserving homeownership and abating the foreclosure crisis in both the residential and commercial sectors, and since tax dollars, some of which came from the very property owners in arrears, helped finance the wind-down of Bear Stearns.

Bad Mortgage Debts Continue to Bleed Home Loan Banks - Souring mortgage bonds that aren't backed by the government continued to cause heartburn for some of the Federal Home Loan Banks in the second quarter. Two banks reported second-quarter losses in part because of larger loss provisions for what are called private-label mortgage securities. In a sign of how losses have spread to the broader mortgage market from the subprime sector, the Indianapolis and Pittsburgh home-loan banks said they were expecting steeper losses on bonds backed by prime loans, or those to borrowers with good credit. Overall, the Federal Home Loan Banks reported $326 million in combined second-quarter net income, down 71% from a year earlier, according to preliminary earnings reports compiled by the Office of Finance for the FHLB system. The $797 million fall in net income from a year earlier resulted from larger provisions for credit losses and net losses on derivatives and hedging activities.

Bill Black: U.S. Using "Really Stupid Strategy" to Hide Bank Losses (video) 109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine’s Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, "well above the $15.33 billion prepaid assessments for all of 2010."  The situation is likely even worse than the FDIC portrays, "The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn’t have remotely enough funds to pay for it," he says. What the FDIC should really be doing, Black argues, is raise its assessments to better reflect the true state of the banking system. However, that would turn an already precarious position into crisis as it would cause more banks would fail. The other option, though not politically plausible, would be to ask the Treasury Department or Congress for more funds. Therefore, we’re left in our current situation. "That also means we’re following a Japanese type strategy of hiding the losses," he says. "This is a really stupid strategy and it’s ours."

"Waves of More Foreclosures" = More Bank Failures + Big Trouble for the FDIC (Tech Ticker video) t he U.S. housing market continues to send mix signals.  More homes continue to enter foreclosure but the number of homeowners carrying so-called “under water mortgages,” declined in the second quarter, reported Monday.  21.5% of homeowners owed more on their mortgage than their home was worth in the second quarter, that’s down from 23.3% in the first quarter and 23% a year ago.“There are a lot homes caught up in mortgage modifications,” explains Richard Suttmeier of, which he says results in a temporary stability in home prices.  The key word: temporary.   “There’s waves of more foreclosures coming in the housing market because very few of the HAMP modifications are becoming permanent,” he says.

FHA Rolls Out Principal Reducing Refis for Underwater Borrowers - Nearly a quarter of U.S. homeowners with a mortgage owe more on the loan than their home is worth, and home prices are threatening to fall further and push even more borrowers underwater. The Federal Housing Administration (FHA), though, is throwing out a lifeline. Starting September 7, the federal agency will offer new FHA-insured mortgages to certain underwater, non-FHA borrowers who are current on their mortgage payments and whose lenders agree to write off at least 10 percent of the unpaid principal balance." Lenders are fantastically reluctant to write down mortgage principals. It would mean either they or their mortgage investors would have to eat the amount of debt that’s forgiven, and it could set a precedent that a loan contract is not a contract at all if the terms spelled out in black and white can be changed based on market nuances, such as a slump in real estate values

Manhattan Luxury Condos Embrace FHA in ‘Game Changer’ - Whitney Gollinger, marketing chief for a Manhattan condo building with an outdoor movie theater and panoramic city views, is highlighting a different amenity to spur sales: the financial backing of the federal government.  The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million.  “It’s a government seal of approval,” said Gollinger,“We need as many sales tools as we can have these days, and it’s one more tool.”

Housing Policy’s Third Rail - WHILE Congress toiled on the financial overhaul last spring, precious little was said about Fannie Mae and Freddie Mac, the mortgage finance companies that collapsed spectacularly two years ago.  Indeed, these wards of the state got just two mentions in the 1,500-page law known as Dodd-Frank: first, when it ordered the Treasury to produce a study on ending the taxpayer-owned status of the companies and, second, in a “sense of the Congress” passage stating that efforts to improve the nation’s mortgage credit system “would be incomplete without enactment of meaningful structural reforms” of Fannie and Freddie.  No kidding.

Freddie Mac requests $1.8B in aid after 2Q loss – Government-controlled mortgage buyer Freddie Mac is asking for $1.8 billion in additional federal aid after posting a larger loss in the second quarter. Freddie Mac said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. The company is required to pay a 10 percent annual dividend to the Treasury Department on money it has received from the government. That made up $1.3 billion of the company's second-quarter losses. The company lost $840 million, or 26 cents a share, in the same quarter last year.The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae from the brink of failure nearly two years ago. The new request means they have needed $148.2 billion to stay afloat, about $63.1 billion of which is being used by Freddie Mac.

Freddie Mac: $4.7 billion Loss, REO Inventory increases 79% YoY - Freddie Mac reported: "a net loss of $4.7 billion for the quarter ended June 30, 2010, compared to a net loss of $6.7 billion for the quarter ended March 31, 2010." and the FHFA requested another $1.8 billion from Treasury. Freddie Mac reported that their REO inventory increased 79% year over year, from 34,699 in Q2 2009 to 62,178 in Q2 2010. REO: Real Estate Owned.  See page 16 of the Second Quarter 2010 Financial Results Supplement This graph shows the rapid increase in REO. Note: last week I posted a graph of the Fannie Mae REO.

Fannie, Freddie, FHA REO Inventory Increases 13% in Q2 from Q1 2010 - The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased by 13% in Q2 2010 from Q1 2010. The REO inventory (lender Real Estate Owned) increased 74% compared to Q2 2009 (year-over-year comparison). This graph shows the REO inventory for Fannie, Freddie and FHA through Q2 2010. The REO inventory for the "Fs" has increased sharply over the last year, from 135,868 at the end of Q2 2009 to 236,338 at the end of Q2 2010. This is a new record for Fannie and Freddie; the FHA's REO inventory decreased slightly in Q2 2010.  Remember this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.

Representatives Convey and Kaptur Call on Geithner, Fannie, FHFA to Stop Efforts to Pursue Strategic Defaulters - Yves Smith - As we’ve noted on this blog, the Administration efforts to punish so-called strategic defaulters seem hopelessly misguided. First, it’s well nigh impossible to tell with simple screens who really could afford their house longer term (ie people who default suddenly, as opposed to wobble in and out of being current on their mortgage before folding, are likely to be anticipatory defaulters, who see their financial train wreck coming and decide to take action). Second, as a corollary, there’s a good reason banks just about never pursue defaulting borrowers on recourse mortgages for deficiency judgments: it’s a costly exercise and you can’t get blood from a turnip. Third, many borrowers have found it difficult if not impossible to reach servicers and get consistent responses as to whether they can work out a mod. Finally, true strategic defaulters have in all likelihood organized their affairs (most important, getting financial reserves out of banks and securities firms) so as to make the efforts to punish them ineffective. John Conyers and Marcy Captur are circulating the letter below among colleagues in Congress seeking support..

Can Treasury justify suing homeowners in default? - House Democrats John Conyers and Marcy Kaptur have put together a strong and compelling letter asking Tim Geithner and FHFA director Edward Demarco to put an end to the silly and counterproductive way in which Frannie have decided to start suing homeowners they consider to be strategic defaulters: “pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best,” they write. The letter also points out that a lot of the onus here will be on servicers to decide who counts as a strategic defaulter — and no one, inside or outside government, trusts the servicers. Other questions also seem to be open, for instance the proportion of received monies which will end up with Treasury as opposed to mortgage investors; the degree and way in which homeowners will be engaged prior to being sued; and the criteria which Frannie and the FHFA used when they decided to implement the policy.

REO Inventory including private-label RMBS - Earlier I posted a graph of Fannie, Freddie and FHA inventory (new record total in Q2). Economist Tom Lawler has added private-label RMBS REO in the following graph.  The private-label securities are the ones securitized by Wall Street. This was the worst of the worst securities. From Tom Lawler:  As the chart indicates, the SF REO inventory of “the F’s” has increased sharply since the end of 2008, while the SF REO inventory held in private-label RMBS has fallen considerably. This chart, of course, does NOT include anything close to all REO, as SF REO properties owned by banks, thrifts, credit unions, VA, USDA, finance companies, and “other” mortgage lenders/investors are not included.

Freddie Mac: 30 Year Mortgages Rates fall to series record low - From MarketWatch: Freddie Mac: Fixed-rate mortgages at record lows Freddie Mac said Thursday the 30-year fixed-rate mortgage average fell to record low of 4.44% with an average 0.7 point for the week ending Aug. 12. In the previous period, the average was 4.49% ...This graph shows the 30 year fixed rate mortgage interest rate based on the Freddie Mac survey since 1971. The decline in mortgage rates is related to the weak economy and falling Treasury yields. Rates will probably fall again this week with the Ten Year Treasury yield down to 2.7%.

Record low mortgage rates do little for demand (Reuters) - Home loan demand climbed last week but record low mortgage rates failed to light a fire in a market constrained by unemployment and tight lending practices. Mortgage purchase and refinancing applications rose by less than 1 percent in the first week of August, even as 30-year loan rates fell to 4.57 percent, the lowest in 20 years of record keeping by the Mortgage Bankers Association. This contract rate, which excludes added lender fees and points, was down from 4.60 percent the prior week and 5.38 percent a year ago, the industry group said on Wednesday.

Mortgage Modifications Aren't Working So Well - FT's Alphaville has a depressing assessment of the government's mortgage modification program, HAMP.  HAMP actually has worse redefault rates than other modification programs.  Apparently the government has not been focusing hard enough on total debt-to-income ratio; it has looked only at the mortgage payments.  That means that even post-modification, there are a lot of people who cannot afford their debt loads. What about principal reduction?  This has been the holy grail of many finance bloggers, and the government is now pushing harder for it.  But the column implies that there remain substantial barriers:  second mortgages, other consumer debt that make the total debt-load unsustainable, and our money-losing GSEs, which are probably not going to eagerly embrace anything that would further tank the value of their mortgage portfolios.  Meanwhile, the shadow inventory of housing remains huge, and will slow any recovery in the housing market.

Government to spend $3 billion to help homeowners -- The White House on Wednesday said it would spend up to an additional $3 billion to help distressed homeowners in the states with the highest unemployment rates to pay their mortgages. Eligible homeowners could receive no-interest loans up to $50,000 as long as 24 months. The new program is meant to prevent further home foreclosures in 17 states plus the District of Columbia. Most of those states have experienced a rash of foreclosures that have depressed the housing market and local economy.

HUD Offers Interest-Free Loans to Reduce Foreclosures The Obama administration will offer $1 billion in zero-interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas. The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers "in hard hit local areas" to make mortgage, tax and insurance payments for as long as two years, according to a statement released today. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement. The new loan program, funded under the Wall Street overhaul President Barack Obama signed into law last month, is part of a broader effort to aid unemployed homeowners.  The $2 billion in Treasury aid announced today doubles the amount already sent to housing agencies in states with unemployment rates at or above the national average during the past 12 months.

More Extend and Pretend: HUD Offers $1 Billion of Subprime Teaser Loans -- Yves Smith - The latest stunt from the Obama Administration on the housing front is a peculiar bit of theatrics at the margin. As Bloomberg reports: The Obama administration will offer $1 billion in zero-interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas. The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” The initiatives will help “a broad group of struggling borrowers across the country and in doing so further contribute to the administration’s efforts to stabilize housing markets and communities,” Yves here. When you read further, the measure is designed to target unemployed workers. So let’s parse this:

Feds rethink policies that encourage home ownership - Just how much should Uncle Sam do to help Americans buy their own homes? For 70 years — and for the last 15 in particular — the answer has been: Whatever it takes. Now, policymakers are pausing to reconsider. In the next few months, they'll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream. The rethink could mean a shake-up for a mortgage market addicted to government subsidies. "This process of figuring out the government's role is going to involve some hard choices," . "The moment you start changing the nature of what is guaranteed by the government, what is subsidized, you start to change the alignment of winners and losers. ... We took for granted that anyone could get a mortgage." Using guarantees and tax breaks, the government pushed homeownership past 69% in 2004. Then it all came crashing down.

Bill Gross Issues Ultimatum: GSEs Keep Government Guarantee Or Else- In an interview with the FT, Pimco's Bill Gross flatly warned the government, in advance the housing finance conference that will begin deciding the fate of the GSEs next Tuesday, that unless Fannie and Freddie bonds retain their government guarantees, he would cease purchasing GSE debt. On the other hand, Gross may have overplayed his card: he already took the government for the proverbial ride, loading up the flagship TRS fund with GSE debt in early 2009 and riding the surge higher for the entire year, then selling virtually everything: TRS has just 16% of its $234 billion in AUM in mortgage securities as per the latest Pimco Fund update. Nonetheless, the Newport Beach bond pundit's warning is a clear shot across the bow indicating just who is the primary force in GSE decision-making, right after the Treserve.

Nobody Invited Me - To the Administration's Panel on Housing Policy. Off hand, here is what I would say.

  • 1. Government support of secondary mortgage markets is the worst form of trickle-down economic policy. Many very wealthy people profit from it, and the benefits to low-income people are at best tiny.
  • 2. The benefits of home ownership to an individual can include better housing and disciplined saving. We ought to re-think how those benefits can be achieved.
  • 3. If mortgage interest rates were somewhat higher relative to other market interest rates, that would not be a bad thing. There is nothing wrong with steering a bit more capital into productive investment and a bit less into the housing market.
  • 4. The thirty-year fixed-rate mortgage may not be the optimal instrument these days. The market might eventually evolve toward something more like the Canadian five-year rollover mortgage.
  • 5. The housing finance lobby is a formidable and frightening force. The more the government stays involved in the mortgage market, the more active and effective this lobby will be.

Why Santelli is right, and wrong, about housing - In what Zero Hedge calls one of his top 3 rants of all time (beginning around 5:40 in this clip), CNBC’s Rick Santelli unloaded today on Steve Ricchiuto of Mizuho. The ultimate cause of the rant was a quote from Pimco’s Bill Gross, saying that he would only buy mortgages sans a government guarantee if first-time homebuyers were forced to make 30% down payments.The immediate cause of the rant, however, was Ricchiuto, who was proposing that the government solve the problem that people can’t refinance their homes. “They’ve got to go out and change the ability to refinance,” he said, prompting Santelli to ask why. When Ricchiuto responds that it’s “because the banks won’t do it”, Santelli’s rant arrives:

Just Mean - Felix Salmon points out the real problem behind the argument behind the rant on CNBC. You would have a financial crisis without the Fed underpinning of the housing market. At the same time, Bankers love the safety and absence of Risk of Fed underwriting of mortgages to the point that they will not enter the mortgage field without such underpinning. The housing market is already collapsing because of this financial demand from the Private sector. Rick Santelli insists that it should be allowed to collapse, and then allow it to resurrect on its own terms. Felix states it would only bring a collapse without any resurrection. It is time for the Fed to get tough, and insist that Banks hold a certain amount of housing mortgage debt–like they insist on Reserves–or banks lose their ability to borrow from the Fed or other Fed-underwritten banks. It is one of those rare Cases where a regulation could achieve the desirable End.

Bad Debts Rise as Bust Erodes Home Equity - During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back. The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.  Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.  The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.  “When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.” The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

Getting the housing market back on track - David Streitfeld’s NYT piece on home-equity defaults is so aggressively anecdotal, rather than quantitative, that he even says at one point that “the amount of bad home equity loan business during the boom is incalculable”. I really don’t think that’s true: a lot of very smart analysts have done a lot of pretty accurate work on that front. And Streitfeld himself belies the statement by including a pretty illuminating chart with his story. The key thing in this chart isn’t the drop from 2009 to 2010, which is a function of the fact that the 2010 data covers only the first quarter. Rather, it’s the fact that first mortgages actually account for a minority of home-loan write-offs, and that home equity lines have accounted for significantly more, in the way of write-offs, than second mortgages. Which brings me to the first of three op-eds that the NYT has published today on the subject of Frannie and the FHA.

Bank Friendly, Borrower Bashing New York Times Article on Home Equity Defaults - Yves Smith - Wow, the efforts to find and discredit strategic defaulters and other types of mortgage borrower reprobates appear to be picking up steam at the New York Times. Let’s be clear: there are not doubt more than a few people who bought more house than they could afford who had out of control spending habits. But there is a disturbing propensity in the media to find egregious cases and write them up, with the implication that they are representative. In fact, they are a tail end of behavior. It might be a pretty fat tail, but it would take a good deal of forensic work to get to the bottom of why people are defaulting.  For a lot of subprime and option ARM borrowers, whether they understood it or not, their out was supposed to be yet another refi, but the ATM of ever-rising housing prices was shut down. Many other homeowners are in trouble due to un and underemployment, or the big historical source of bankruptcies, medical emergencies.The reason my suspicions go up when I see an article like “Borrowers Refuse to Pay Billions in Home Equity Loans“as the title is that it clearly announces a point of view.

Fewer US Homeowners Underwater as California Home Prices Rise (Bloomberg) -- The percentage of U.S. homeowners who owe more than their properties are worth declined in the second quarter as tax credits boosted prices in California and foreclosures surged, real estate data provider said. The Seattle-based company found that 21.5 percent of homeowners were underwater on their mortgages, down from 23.3 percent in the first quarter and 23 percent a year earlier, according to a report today.The decline came as property prices in California were bolstered by state and federal benefits for homebuyers, Zillow said. Prices climbed from a year earlier in 28 percent of the markets tracked in California, the most populous state. They gained 5.5 percent in the Los Angeles area, 5.9 percent in San Francisco, and 7.3 percent in San Diego. “The double tax credits for some California homebuyers have certainly stimulated housing demand there and are partly responsible for the rapid -- and likely unsustainable -- rates of appreciation in many markets across the state,”

Florida Law Firms Subpoenaed Over Foreclosure Filing Practices - Attorney General Bill McCollum today announced his office has launched three new investigations into allegations of unfair and deceptive actions by Florida law firms handling foreclosure cases. The Attorney General’s Economic Crimes Division is investigating whether improper documentation may have been created and filed with Florida courts to speed up foreclosure processes, potentially without the knowledge or consent of the homeowners involved.

Foreclosure Activity Increases 4 Percent in July RealtyTrac® (, the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for July 2010, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 325,229 properties in July, a nearly 4 percent increase from the previous month but a nearly 10 percent decrease from July 2009. One in every 397 U.S. housing units received a foreclosure filing during the month. “July marked the 17th consecutive month with a foreclosure activity total exceeding 300,000,” said James J. Saccacio, chief executive officer of RealtyTrac. “Declines in new default notices, which were down on a year-over-year basis for the sixth straight month in July, have been offset by near-record levels of bank repossessions, which increased on a year-over-year basis for the eighth straight month.”

US banks seizing homes at record levels - Repossessions of houses and flats by major US banks is at close to an all-time high as the American housing market continues to struggle. Major US banks wrote off approximately $8bn (£5.1bn) on mortgages in the first three months of this year, on track to repeat – or even surpass - last year's full-year total of $31bn. The news could have severe implications for the wider financial market, given it was problems in the US housing market which triggered the credit crisis back in 2007. Fresh data shows that the number of US homes being repossessed due to mortgage arrears rose to 92,858 last month, up 9pc on June and up 6pc from the same month last year. The figure is just 1pc below the all-time high – recorded in May this year – and comes amid renewed concerns about the amount banks are writing-off in mortgage-related losses. Bank repossessions increased on a year-over-year basis in July for the eight straight month in a row. July marked the 17th consecutive month that foreclosure activity was above 300,000 mortgages.

Illinois foreclosures rise 33% in July - One in every 269 homes in Illinois received some sort of court filing related to the foreclosure of their home last month, making the state one of the worst in the nation for foreclosure activity. The 33 percent increase in foreclosure filings since June was the biggest monthly increase among the 10 states with the top foreclosure rates, RealtyTrac reported Thursday. A total of 19,602 Illinois homes received a filing, including 4,614 homes that were repossessed by banks. In a bad sign of what’s ahead for the local home market, another 8,491 homes received notices of default in July, the first step in the foreclosure process.

Nearly Half of Sellers Cut Prices - The number of price-reduced homes on the market increased 5.3 percent in July as compared to June, according to a monthly review of MLS-listed properties within 26 of the country’s largest housing markets conducted by the national online real estate brokerage ZipRealty. Although the number of price-reduced homes increased in July, the median price reduction across the 4500 cities and communities in 26 markets surveyed slightly declined from June, to $18,949. More than 45 percent of “for sale” homes in July included at least one price reduction — an increase of 2.67 percent compared to June. “For sale” prices dropped 2.04 percent — down to a median of $254,987 across the 26 markets surveyed.

Condos for less than the cost of a Corolla - The housing bust has made owning a home a lot more affordable -- but in some places, prices are extraordinary; you can buy a nice condo for less than the cost of a new family car. Some cities have dozens of attractive condominium listings selling for $50,000 or $25,000. There are some selling for less than a new Toyota Corolla. And these are not derelict hovels in crime-ridden communities: These homes are often in move-in condition and located in nice neighborhoods.   The housing bust has taken down the national median home price by about 23% since 2007, according to the National Association of Realtors (NAR). But condo have fallen even further, down about 25%. In Sacramento, Calif., condo prices have fallen 59% from what they averaged in 2007, according to NAR. Miami condo prices have plunged 65%, and in Las Vegas they are off 66%.  Prices of individual units are down even more. One condo in Deerfield Beach, Fla., that sold for $115,000 five years ago now lists for $25,000. That's a drop of nearly 80%.

The Other Mortgage Crisis - NYTimes - THE roots of the mortgage crisis are well known — overly aggressive lenders, overly optimistic borrowers and lax regulation of financial firms. But as policymakers search for a resolution, they need to recognize another critical aspect of the problem: today’s mortgages are designed for yesterday’s borrowers.  Until recently, most Americans paid for their homes through 30-year self-amortizing mortgages, in which interest and principal are paid at the same time. These work well as long as homeowners have stable, long-term jobs that enable them to regularly make their monthly payments. But these days such careers are increasingly scarce. Therefore, any effort to recover from the crisis must include more flexible mortgages that take today’s employment landscape, with its frequent job-hopping and episodic unemployment, into account.

`Buy and Bail' Homeowners Get Past Loan Restrictions - Real estate professionals call it “buy and bail,” acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s “underwater,” or worth less than the mortgage. It’s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.  The practice, which constitutes fraud if borrowers lie on loan applications, is continuing even after Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, beefed up standards to prevent it, according to brokers such as Collier and Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency. Whether driven by greed or desperation, the persistency of buy and bail underscores the lingering impact of the worst housing crash since the Great Depression.

The depth of negative equity and mortgage default decisions - Fed - A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home's value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the "double-trigger" theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.

Unaffordable housing and local employment growth - Boston Fed - High housing prices have caused concerns among policy makers as well as the public in many U.S. regions. There is a general belief that unaffordable housing could drive businesses away and thus impede job growth. However, there has been little empirical evidence that supports this view. In this paper, we clarify how housing affordability is linked to employment growth and why unaffordable housing could negatively affect employment growth. We empirically measure this effect using data on California municipalities and U.S. metropolitan areas and counties. It is argued that for various reasons a simple correlation between unaffordable housing and employment growth should not be interpreted as causal. We therefore develop some empirical strategies and employ statistical techniques to estimate the causal effect of unaffordable housing on employment growth. Our results provide consistent evidence that indeed unaffordable housing slows growth in local employment. We discuss policy implications of these findings.

Negative News Flow - Although not unexpected, the news flow is about to take a more negative tone starting with the existing home sales report on August 23rd. We've been discussing this for some time ... and I'd like to highlight just a few pieces of forthcoming data: The existing home sales report will show that sales collapsed in July (this is showing up in all the regional reports). The existing home months-of-supply will jump to double digits. House prices are probably falling again, although this might not show up in the repeat sales indexes until September or October (this data is released with a lag). On August 27th, the second estimate of Q2 GDP will be released. This will probably show a significant downward revision from the preliminary estimate of 2.4% annualized growth. The downward revision is due to lower construction spending than the BEA initially estimated, less contribution from inventory adjustments, and the June surge in exports.

Aging and U.S. Home Prices - From a new paper, the relationship between an aging U.S. population and future home prices: The paper investigates how ageing will affect asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing. [Emphasis mine]

Boomer Bust - As readers may know, I have used some pixels here and elsewhere exploring what I think is a very under-reported story — how demographics is playing into our current economic situation (making it worse, actually).  The interesting thing about demographics is that they are what they are, which is to say there’s generally no legislating them (unless you’re China, of course).  But let’s stipulate that we’re not heading down that road and, even if we did, it’s already too late to alter our current situation.  (Some of my previous posts surrounding demographics can be seen here, here, here, here and here, to cite but a handful.) This post will expound a bit on the Boomer theme with some chart porn that I think helps to drive home my point, and that I’ve not seen explored elsewhere.

U.S. Incomes Tumbled in 2009 - Personal income took a hit in most of the U.S. last year with the only gains coming from government support, according to new data from the Commerce Department. Income declined in 223 metro areas last year, increased in 134 and was unchanged in nine regions. Even though prices declined last year — down 0.2% from a year earlier as measured by the national price index for personal consumption expenditures — incomes fell even more. On average, personal income dropped 1.8% in 2009, following a 2.7% increase in 2007. In areas that saw gains, most of the increases came from the government in one way or another. In 77 of the 134 regions that saw incomes increase, the growth came from transfer receipts such as unemployment benefits or Social Security payments. In most of the remaining 57 metro areas, the gains were concentrated in the government sector, the Commerce Department said, including strong growth in military earnings. (see interactive table)

Consumer Spending Slows in July - U.S. consumers spent unevenly over the last year as weaker financial markets shifted consumer sentiment and spending, according to a recent report. MasterCard Advisors’ SpendingPulse said Thursday that retail sales, excluding auto, fell in July by a seasonally adjusted 0.9% from June, but grew by 1.4% over a year earlier. Excluding auto and gasoline, which tend to be more volatile and can skew results, sales in July grew 1% from a year earlier. SpendingPulse tracks national retail and service sales through MasterCard data combined with estimates for cash and check. Growth in July was well below the 3.5% in the previous three months, and the year-over-year growth slowed compared to the 6.5% average year-over-year growth rate for April through June.

Spending Slumps Even With Back-to-School Underway -- Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $62 per day during the week ending Aug. 8. Early August consumer spending trends trail 2009 and will need to surge to match last year's anemic back-to-school results.  Gallup's consumer spending measure averaged $68 per day in July compared with $67 per day in June. This is consistent with the "mixed" chain store sales reported in July and the consensus expectation of a 0.2% increase in retail sales, excluding auto sales, when the Commerce Department reports on Friday. More importantly, Gallup's weekly spending measure for the first week of August shows no improvement over that of the last week in July or that of the same week a year ago. In turn, this suggests that back-to-school sales are unlikely to substantially exceed last year's depressed levels. In fact, this week's comparable of a year ago was a big spending week, making for challenging sales comparables for many retailers this year.

Where Americans Are Spending More..Since the recession started in the fourth quarter of 2007, the common theme has been about Americans cutting back on their spending. But the latest numbers from the BEA show aggregate personal consumption expenditures are up 2.9%, or $285 billion.  So we must be spending more on something!So here is a table of winners: Some goods and services which have shown an increase in spending since 2007IV. Right there up at the top is America’s love affair with mobile devices, where spending has soared almost 17% since the recession started.  Also supporting my thesis of a communications boom–spending on wired, wireless, and cable services have risen by 5%.In addition, Americans still care about their pets, their children, their hair, and their guns. Of course, the data also shows a big gain in spending on education, healthcare, and housing, but it’s impossible to know how much of that increase is actually coming out of the pockets of households. So now let’s look at a table of losers: Selected categories of spending that have gone down.

Reuters University of Michigan's Consumer Sentiment increases slightly in August - From Reuters: Consumer Sentiment Edges Up in August, More Than Expected The slight pickup in sentiment follows a drop in July to the lowest level since November, the data from Thomson Reuters/University of Michigan's Surveys of Consumers showed.  The survey's preliminary August reading on the overall index on consumer sentiments rose to 69.6 from 67.8 in July. Consumer sentiment is a coincident indicator - and this is further evidence of a sluggish economy. Interesting - the survey's one-year inflation expectations increased to 2.8% even with very low measured inflation. This was a big story last month when consumer sentiment collapsed to the lowest level since late 2009. Even with the slight increase, this is still at the levels of late last year.

CEOs Less Confident in Recovery - Consumers aren’t the only ones growing less confident about the economy. A survey of U.S. chief executives conducted by the Young Presidents’ Organization found declining confidence over the outlook for sales and employment levels as well as the overall business climate compared to the group’s previous survey, released in April. The overall index slipped to 57.5 in July, from 61 in April. Any reading over 50 indicates optimism. The survey showed companies remain extremely reluctant to hire workers: nearly 62% said they didn’t expect their headcounts to have changed a year from now, while nearly 8.5% expected to cut more than 10% of their workers in that time. The percentage who expected to increase their staff by 10% or more, meanwhile, declined to 30% from 36% three months ago.

Obama Anti-Business? Think Again. - Newsweek - This White House has “vilified industries,” complains the Chamber of Commerce. America is burdened with “an anti-business president,” moans The Weekly Standard. Would that all presidents were this anti-business: according to the St. Louis Federal Reserve, corporate profits hit $1.37 trillion in the first quarter—an all-time high. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter, and is up by 13 percent against 2009. The Obama administration has dropped taxes for small businesses and big ones alike. Maybe the president could be anti-me for a while. I could use the money.The reality is that America’s supposedly anti-business president has led an extremely pro-business recovery. The corporate community has recovered first, and best. The populist tone that conservative magazines and business groups decry is partly in reaction to this: as corporate America’s position is getting better and better, the recovery is looking shakier and shakier.

Business cycles: No confidence | The Economist -THE National Federation of Independent Business has released results from its latest survey of small business owners, and the news isn't particularly encouraging. For a second consecutive month, the index of small business optimism posted a sharp decline. Most of the fall came from a big downgrade in expectations for the economy six months ahead: As the write-up of the survey notes: Seventy-three (73) percent of the owners report that the current period is not a good time to expand. Of those, 66 percent cite the weak economy as the main reason, but 18 percent cite the “political climate” as the source of uncertainty. Small businesses aren't the only ones losing confidence in the face of flagging growth expectations: A survey of U.S. chief executives conducted by the Young Presidents’ Organization found declining confidence over the outlook for sales and employment levels as well as the overall business climate compared to the group’s previous survey, released in April.

Current economic conditions (w/charts) Last week's new economics data were a mixed bag. But on balance I'd have to say I'm more discouraged than when the week began. July auto sales weren't so bad, edging up a bit (on a seasonally unadjusted basis) from both the previous month as well as July of 2009. The ISM manufacturing PMI index slid for the fifth consecutive month, standing at 55.5 for July. But as I keep reminding people, the consistent string of observations above 50 means that a plurality of managers have been reporting that each month this year was better than the previous month. But unfortunately, 'taint so. New home sales may have taken a turn for the worse, and pending home sales also look foreboding. But the biggest worry remains the 131,000 fewer Americans working in July. Even if you add back in the 143,000 lost temporary Census jobs, employment was only up by 12,000 jobs, very far below what is needed to keep up with growing population, let alone to make any progress in bringing the millions of unemployed Americans back to work.

“Tracking” the Economy - The fine folks at the Association of American Railroads are out with their latest edition of Rail Time Indicators. Total traffic (carloads plus intermodal) in July was about 11% higher than the dismal levels of a year ago, but remains about 10% below earlier years:The rebound has been weaker in carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos); they are up about 4% over 2009:And stronger in intermodal (think trailers and containers), which are up about 17%: (see charts)

A Snapshot of "Recovery Summer" - On 17 June 2010, the Obama administration officially kicked off "'Recovery Summer,' a six-week-long focus on the surge in Recovery Act infrastructure projects that will be underway across the country in the coming months – and the jobs they’ll create well into the fall and through the end of the year." We thought we'd focus our monthly analysis of the employment situation in the United States on how well the President's 2009 economic stimulus package, which provided the funding for these projects, is doing in creating or saving American jobs. Our first graph considers how the employment levels for teens (Age 16-19), young adults (Age 20-24) and everyone else (Age 25+) have changed since total employment levels in the United States peaked in November 2007 before entering into recession in December 2007.

Economy Lost Momentum While I Was Pulling Weeds - The post-mortems on the July employment report made me realize I’d missed the recovery.  While I was watching my garden grow, the U.S. economy “lost momentum,” according to every news report I read or heard over the weekend. One TV news moderator bemoaned the fact that businesses added 71,000 jobs in July compared with the 83,000 experts had expected -- as if an additional 12,000 jobs would have made the difference  Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.  What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.

U.S. Lost 131,000 Jobs as Governments Cut Back - With the departure of thousands of temporary Census workers and thousands more let go by state and local governments, businesses could not rescue the American labor market in July. Over all, the nation lost 131,000 jobs last month, according to the Department of Labor, which also said that June was far weaker than previously indicated.  Private employers added 71,000 jobs last month, but those figures were overtaken by the 143,000 cut as the Census wound down. It is also about half the number that economists say is needed to simply accommodate population growth, so the tepid job increases cannot begin to plug the hole created by the loss of more than eight million jobs during the recession. The unemployment rate, in fact, remained stuck at 9.5 percent in July.

Fewer Jobless Workers Per Opening in June - In June, there were fewer than five unemployed workers for each job opening, according to new Labor Department data. That is a less discouraging ratio than earlier this year, but the improvement may mainly be a result of workers who have given up looking for a job. The chart below shows the jobless worker/job opening ratio going back to 2000, the earliest year that the Labor Department keeps data on job openings. As of June, there were 4.98 workers per opening, compared with 5.09 the previous month. Both the number of job openings and the number of unemployed workers fell from May to June. The number of unemployed workers fell not because more people got jobs, but because hundreds of thousands of people dropped out of the labor force.

Weekly Initial Unemployment Claims increase, Highest since February - The DOL reports on weekly unemployment insurance claims: In the week ending Aug. 7, the advance figure for seasonally adjusted initial claims was 484,000, an increase of 2,000 from the previous week's revised figure of 482,000. The 4-week moving average was 473,500, an increase of 14,250 from the previous week's revised average of 459,250. This graph shows the 4-week moving average of weekly claims since January 2000. The four-week average of weekly unemployment claims increased this week by 14,250 to 473,500. The dashed line on the graph is the current 4-week average. The 4-week average of initial weekly claims is at the highest level since February, and suggests further weakness in the labor market.

For four out of five unemployed workers, there are no jobs -This morning the Bureau of Labor Statistics released the June report from the Job Openings and Labor Turnover Survey (JOLTS), showing that job openings held roughly steady in June (declining by 2,000), while downward revisions to earlier data reveal that there were 267,000 fewer jobs openings in May than previously reported. The total number of job openings in June was 2.9 million, while Current Population Survey data for that month shows that the total number of unemployed workers was 14.6 million. This means that the ratio of unemployed workers to job openings was 5.0-to-1, a slight improvement from the revised May ratio of 5.1-to-1. Importantly, this ratio does not measure the number of applicants for each job.  There may be throngs of applicants for every job posting, since job seekers apply for multiple jobs. The 5-to-1 ratio means that there is literally only one job opening for every five unemployed workers (that is, for every four out of five unemployed workers there simply are no jobs).

Why is there a boom in temporary hiring? - Trevor Frankel offers his thoughts: The part that most clearly indicates policy is the problem is the temp hiring. If businesses are hiring temps off the bottom of a recession, it means that they're seeing demand pick up but they're too uncertain to actually hire someone full time. This is usually followed by permanent hiring, but in this recovery, it has not been. The only obvious culprits here are a) higher required wages and healthcare costs (minimum wage, housing interventions and Obamacare are prime candidates here) and b) general lack of confidence in the economy and policy (the political climate in general is the prime candidate here). Here is some background: Temp hiring has been off the charts - temp jobs are up 20% year over year, while permanent private sector jobs are down 1%. (source)

Underemployment 28.4% for Ages 18 to 29, 18.4% in all Age Groups - Gallup Poll - Underemployment, as measured by Gallup, was 18.4% in July, essentially unchanged from 18.3% at the end of June and in mid-July. Underemployment peaked at 20.4% in April. Gallup's underemployment measure includes both Americans who are unemployed and those working part time but wanting full-time work. It is based on more than 17,000 phone interviews with U.S. adults aged 18 and older in the workforce, collected over a 30-day period and reported daily and weekly. Gallup's results are not seasonally adjusted, and tend to be a precursor of government reports by approximately two weeks.Americans aged 18 to 29 had easily the highest underemployment rate in July of any age group, at 28.4%, including 11.8% who were unemployed and 16.6% who were employed part time but wanted full-time work. Among all U.S. adults in the workforce, a higher percentage of women than of men are underemployed.

Teenage wasteland  - CASEY MULLIGAN has been saying for a long time that labour supply is the key to unemployment in the Great Recession. This was nearly impossible to take seriously during much of the downturn, given that millions of workers were losing their jobs and the ratio of unemployed to job openings soared. It probably would have been useful for Mr Mulligan to do a bit of "research" during this period, by, say, applying for jobs that don't involve the security of a tenured position in academia. But as the recession has turned to recovery and employment growth has continued to lag, supply-side issues have gotten more attention. Indeed, I've pointed out a number of brewing structural problems in labour markets. So have arch-Keynesians like Paul Krugman and Brad DeLong. Most of the reputable economists arguing for more demand-side action acknowledge that unemployment benefit extensions have probably added to the unemployment rate, if only by half a percentage point. The "extreme Keynesian" that Greg Mankiw wants to challenge looks to me like a strawperson.

The Lost Generation - An International Labor Organization’s report released today shows that young workers are among the worst-hit by the global recession. All in all, there are 620 million people aged 15 to 24 who want to work. 81 million are unemployed, the highest level and the greatest number since the ILO started keeping track 20 years ago. Globally, the youth unemployment rate hit 13 percent in 2009, up from 12 percent in 2007. The organization expects the youth unemployment rate to continue rising until 2011. Despite its relative wealth, the situation remains parlous for young workers in the United States as well. The unemployment rate is 26.5 percent for teenagers, and 15.7 percent for workers aged 20 to 24. The rate rises to a whopping 47.8 percent for black male teenagers, the demographic group with the highest jobless rate. Despite this, across the country, summer jobs programs for young people were slashed, as Congress failed to re-up federal funding provided in the Feb. 2009 stimulus bill.

Summer Employment All About Demand, by Tim Duy: Casey Mulligan offers a chart of the nonseasonally adjusted teenage employment data as proof that aggregate demand effects are not the dominate factor behind low employment. It is such a silly analysis that the instinct is to immediately dismiss it without comment. I see, however, that Greg Mankiw has anointed the Mulligan analysis as an important piece of evidence: Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased). That is no surprise: It is normal supply and demand in action. It really makes one understand why the public often dismisses academics as out of touch in their ivory towers. One has to imagine that neither Mulligan nor Mankiw ever held a real summer job. Nor, apparently, have they looked at any other nonseasonally adjusted data. Nor do they appear to have much understanding of the basic ebb and flow of US economic activity over the course of the year.

Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. In July 2010, the number of unemployed for 27 weeks or more declined slightly to 6.572 million (seasonally adjusted) from 6.751 million in June. It is possible that the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue. The less than 5 weeks category increased in July and is now at the highest level since January - and that is concerning.

Nothing 'Normal' About It - AFL-CIO President Trumka - So today we learned that we lost another 131,000 jobs last month, with an anemic 71,000 jobs created by the private sector and unemployment remaining at 9.5 percent. Last week we saw that economic growth slowed from 3.7 percent in the first quarter to 2.4 percent in the second quarter and personal consumption growth fell from 1.9 percent to 1.6 percent. Let's brush past the pain of joblessness and take the issue right to corporate terms: People who don't have jobs don't make good consumers. But business is unmoved. Nonfinancial companies are hoarding cash. They're sitting on a reported cash pile $1.8 trillion high, about a quarter more than at the start of the recession. But they're not hiring. One recent survey of CFOs says most don't expect unemployment to drop back to pre-recession levels until 2012 or later -- even though they foresee rising corporate earnings. Do we need more evidence America's jobs crisis is not going to be solved any time soon by the private sector?

Help wanted: only interns - Here is a frightening development from a macro economic standpoint. However, for CFOs, it frankly offers a shrewd opportunity to boost staff without destroying the budget.A CareerBuilder survey of more than 2,500 employers found that more than one-quarter (27 percent) plan to hire interns during the remainder of 2010 to help support workloads.Good for potential interns. Here's the scary part. Look who is applying for these internships.According to CareerBuilder, nearly one-quarter (23 percent) of employers report they are seeing experienced workers, those with more than 10 years experience. Even more astounding, employers are reporting that workers age 50 or older are applying for internships at their organizations.This underscores how critical the employment problem has become in this country.

Labor Force Loses Half a Million Women in last 3 Months - I discovered something disconcerting in poking around the Bureau of Labor Statistics website this morning.  Between April and July of this year, according to BLS stats, over 1% of the women in the labor force have left it (red oval in graph above).  This is larger than the fall in the female "labor force participation rate" last year as a result of the great recession (blue circle), and so far there is no sign of the fall slowing down. Labor force participation is defined as the fraction of women who are either employed or looking for work.  I am looking specifically at women aged 25-54 (ie who would not normally be either in college or retired).  The exact numbers are as follows: at the peak before the recession really began to bite, in April 2009, 76.0 percent of women of this age range were in the labor force.  By December, this had fallen to a low of 75.2% (a drop of 0.8/76 = 1.05%).  It then recovered to 75.7% in April 2009, but has now fallen again to 74.8% (a drop of 0.9/75.7 = 1.19%) in just three months.

139,000 full-time Canadian jobs disappear - The labour market’s stunning rebound of recent months ground to a halt in July, as the economy lost a net 9,300 jobs and the unemployment rate edged back up to 8 per cent, according to data released from Statistics Canada on Friday.The unexpected drop marks the first decline in employment this year and comes after a near-record increase of more than 93,000 jobs in the previous month. The jobless rate rose unexpectedly from 7.9 per cent in June, when it had fallen below 8 per cent for the first time since early 2009. In July, employers slashed 139,000 full-time positions while adding almost 130,000 part-time jobs. The full-time losses included drops of more than 65,000 jobs in education services as many teachers, administrators and custodial staff shifted to part-time status at the end of the school year, and about 30,000 in finance, insurance, real estate and leasing, in part because the housing market is cooling across the country.

The Horror Show - NYTimes - The employment situation in the United States is much worse than even the dismal numbers from last week’s jobless report would indicate. The nation is facing a full-blown employment crisis and policy makers are not responding with anything like the sense of urgency that is needed. The employment data for July, released by the government on Friday, showed that private employers added just 71,000 jobs during the month and that the unemployment rate remained flat at 9.5 percent. But as bad as those numbers were, if you look beyond them you’ll see a horror show. Government workers were walking the plank from coast to coast. About 143,000 temporary Census workers were let go, and another 48,000 government employees at the budget-strapped state and local levels lost their jobs. But the worst news, with the most ominous long-term implications, was that the reason the unemployment rate was not higher was because 181,000 workers left the labor force.

Wages are Rising (Mind the Caveats) - Okay, here’s a little pinprick of light in an otherwise dark sky: wages are rising. It’s because we’re working longer hours, and because deflation looms over the economy like a goblin, but, hey, a gain’s a gain these days. At least, that’s what the Department of Labor is saying. “Real” wages, as in earnings adjusted for inflation, in July were up 0.2% from June, as an increase in the workweek offset a decline in hourly wages. Average weekly earnings are up 2% from the recent low hit in October 2009.On the year, hourly earnings are up 0.4% and weekly earnings are up 1.6%, a function of the fact that we’re all working longer hours.The picture’s a little dimmer for the “production and nonsupervisory” workers. Average weekly earnings were flat, and average hourly earnings were down. So unless there are more managers than workers these days, seems like the vast majority of us went nowhere. Although, for the year, the gains are a little better than the overall numbers.

Worker Productivity in U.S. Unexpectedly Declined (Bloomberg) -- The productivity of U.S. workers unexpectedly fell in the second quarter, indicating companies may redouble efforts to contain costs as the recovery unfolds. The measure of employee output per hour decreased at a 0.9 percent annual rate, the first drop since the end of 2008, Labor Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News projected a 0.1 percent gain. Labor costs rose at a 0.2 percent pace, less than estimated. The figures show the world’s largest economy lost momentum heading into the second year of the recovery, one reason why companies are holding the line on employment and pay. Flagging growth and a slow jobs recovery have fueled investor expectations that Federal Reserve policy makers will announce efforts to spur the economy after meeting today

The rise of the unemployable underclass - David Leonhardt’s latest column is full of interesting employment datapoints. Among them: In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.  Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.  The mancession is over: “male employment has risen by almost one million this year, while female employment has fallen by 300,000″.  The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession. Maybe we really are all middle class now: there’s the unemployed at the bottom of the pile, and the plutocratic elite at the top, with the overwhelming majority sitting in between, doing OK but hardly great. The problem is that persistent unemployment at or around 10% is unacceptable in the U.S. Leonhardt is right that Euro-style safety nets aren’t particularly innovative, but they do at least keep people housed and clothed and fed and living outside poverty — reasonable expectations for anybody to have, I think, in the richest country in the world.

unemployed = 21st century draft horse? -  Most unskilled workers in fact benefited hugely from the Industrial Revolution, but not all: “there was a type of employee at the beginning of the Industrial Revolution whose job and livelihood largely vanished in the early twentieth century. This was the horse. The population of working horses actually peaked in England long after the Industrial Revolution, in 1901, when 3.25 million were at work. Though they had been replaced by rail for long-distance haulage and by steam engines for driving machinery, they still plowed fields, hauled wagons and carriages short distances, pulled boats on the canals, toiled in the pits, and carried armies into battle. But the arrival of the internal combustion engine in the late nineteenth century rapidly displaced these workers, so that by 1924 there were fewer than two million. There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.”

Jobless and Staying That Way -Americans have almost always taken growth for granted. Recessions kick in, financial crises erupt, yet these events have generally been thought of as the exception, a temporary departure from an otherwise steady upward progression.  But as expectations for the recovery diminish daily and joblessness shows no sign of easing — as the jobs report on Friday showed — a different view is taking hold. And with it, comes implications for policymaking.  The “new normal,” as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector. Stocks and bonds yield paltry returns, with better opportunities available for investors overseas.  If that sounds like the last three years, it should. Bill Gross and Mohamed El-Erian, who run the world’s largest bond fund, Pimco, and coined the phrase in this context, think the new normal has already begun and will last at least another three to five years.

Unemployed Man Reacts To Gingrich’s Accusation That ‘Welfare’ Is Making Him Lazy: I Paid Into It For 35 Years - Time and time again, conservatives have claimed that extending unemployment benefits for the unemployed is breeding laziness and lack of productivity. Newt Gingrich was the latest to adopt this meme. Writing in an e-mail to supporters, Gingrich cited a Wall Street Journal story where unemployed 52-year-old mechanic Michael Hatchell explained that he couldn’t afford to take jobs that wouldn’t pay enough to take care of his family. Gingrich claimed “welfare” was keeping Hatchell from working.  Last night, Hatchell and his wife Sarah appeared on MSNBC’s Countdown With Keith Olbermann to explain his family’s circumstances in his own words. ... He took offense at Gingrich’s use of the word “welfare” to slur his taking of unemployment insurance, pointing out that he worked for 35 years, paying into unemployment insurance, and that he was simply taking money out of a fund that he worked hard to pay into:

The '99ers' Share Their Stories (PBS Newshour) Editor's Note: Last month, Congress extended federal unemployment benefits for people who had been out of work up to 99 weeks. But for the millions of Americans who have been jobless longer than that -- the "99ers" -- there will be no more checks coming.  Tonight on the NewsHour, Paul Solman talks to 99ers, and to economists who disagree over whether the government should extend their unemployment benefits even longer. In reporting this story, we received letters from dozens of 99ers talking about their experiences. We've posted nine of them, anonymously, below.

Long Term Joblessness Takes Emotional, Spiritual Toll on '99ers' (Video)

Confessions of a Class Worrier - Robert Reich- The decline of America’s middle class can be charted directly. In the three decades after World War II, the median wage (smack in the middle) grew rapidly, right along with productivity gains. Even as late as 1980, the richest 1 percent of Americans received only about 9 percent of the nation’s total income.But starting in the 1980s — and increasingly since then — the economy has made the rich far richer without doing squat for the vast middle. The median hourly wage has barely grown, if you take inflation into account. Indeed, it dropped in the last so-called “recovery” between 2001 and 2007. And health-care and pension benefits have declined; we’ve gone from defined-benefit pensions to do-it-yourself pensions, while health insurance premiums, deductibles, and co-payments have skyrocketed. Meanwhile, the rich have been getting a larger and larger portion of total income. From 9 percent in 1980, the top 1 percent’s take has increased to 23.5 percent in 2007. CEOs who in the 1970s took home 40 times the compensation of average workers now rake in 350 times.

Tier 5: Sen. Stabenow Introduces Bill To Help The 99ers - Sen. Debbie Stabenow (D-Mich.) introduced a bill Wednesday that would provide extra weeks of benefits to people who've reached the end of their unemployment insurance lifelines. The measure would provide 20 extra weeks of unemployment benefits and extend a tax credit for businesses that hire workers who've been unemployed for 60 days or longer.  "Across our state, more than 35,000 people who have lost their jobs have also exhausted their unemployment insurance benefits," said Stabenow in a statement. "I know that these men and women want to work and have been trying their best to find jobs in this difficult economy." Through June and much of July, the Senate was locked in an epic struggle just to reauthorize existing benefits for people who've been out of work for longer than six months. A study by the San Francisco Federal Reserve found that the extended benefits "have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate."

Employers and Credit Scores: An Update - A couple of weeks ago I blogged about an uptick in employers using credit scores as part of their background checks for new employees. Greg Fisher of, who's no fan of credit scores, emails to say that "consumer reporting agencies all state that they do not provide credit scores for employment screening" and suggests I make a clarification. Done! But let's dig a little deeper. According to a post on Fisher's site, "TransUnion does not provide a credit score for employment screening purposes." Another agency concurs: "ChoicePoint does not offer credit scores for purposes of employment-related background checks." Excellent. But wait. It turns out this doesn't mean that agencies don't provide credit checking services to employers. Lester S. Rosen, a lawyer and president of Employment Screening Resources, clarifies:

Some Firms Struggle to Fill Jobs Despite High Unemployment … - With a 9.5% jobless rate and some 15 million Americans looking for work, many employers are inundated with applicants. But a surprising number say they are getting an underwhelming response, and many are having trouble filling open positions. Employers and economists point to several explanations. Extending jobless benefits to 99 weeks gives the unemployed less incentive to search out new work. Millions of homeowners are unable to move for a job because the real-estate collapse leaves them owing more on their homes than they are worth. The job market itself also has changed. During the crisis, companies slashed millions of middle-skill, middle-wage jobs. That has created a glut of people who can't qualify for highly skilled jobs but have a hard time adjusting to low-pay, unskilled work like the food servers that Pilot Flying J seeks for its truck stops.

Plenty of jobs, not enough workers? -The Wall Street Journal reports that even with unemployment at 9.5%, employers are having trouble finding workers: Sounds puzzling. Unless you read the rest of the story. The truck stop job, it turns out, pays minimum wage. The airline job requires you to move to Dubai. And the machine shop company pays only $13/hour but requires people with very specific skills. When they set up a ten-week training course of their own, they got plenty of applicants and 16 out of 24 graduated. But apparently we've gotten to the point where blue collar employers are barely willing to invest even ten weeks in training new workers for high-skill entry level positions. There seems to be a common disconnect in stories like this.

Beveridge Curve Vs Matching Function II - David Altig has convinced the Wall Street Journal that hiring in the USA is low given the vacancy rate. The basic fact is "Since the economy bottomed out in mid-2009, the number of job openings has risen more than twice as fast as actual hires," I remain totally unconvinced. I'm not convinced by the basic claim of fact. Basically I am certainly not convinced that there is anything unusual going on. My sense is that this always happens early in an expansion *and* that there is always alarm about a shift in the Beveridge curve, and many rude things are said about the unemployed.The WSJ reported the ratio of *the rate of change* of the vacancy rate to *the rate of change* in the hiring rate. Under standard assumptions (and I do mean absolutely standard in the literature), if nothing odd were going on (and I do mean nothing at all) one would expect the rate of change of hiring to be half of the rate of change of vacancies.

State of business - THIS week, The Economist features a Leader and a Briefing on the revival of enthusiasm for industrial policy: In rich countries four main forces are driving the revival of industrial policy. First is the weak state of the world economy. Governments are under pressure to reduce unemployment and stimulate growth: support for chosen industries is a way of saving jobs and helping local firms fight foreign competitors. Second, some countries, such as America and Britain, want to rebalance their economies away from finance and property. Along with older manufacturing, clean technology is emerging as a favourite direction. Third, emergency use of industrial-policy tools leads to demands for more. Mr Obama has responded to complaints that only big companies such as General Motors and AIG, an insurer, have enjoyed the state’s largesse by setting up a $30 billion small-business lending fund. Fourth, rich countries are responding to the apparently successful policies of fast-growing economies, notably China and South Korea.

The S-word - I’VE been hearing the S-word a lot lately. Unemployment is stubbornly sticking above 9%, despite the government’s attempts to lower it. Meanwhile the Fed has pumped lots of money into the economy and maintained zero interest rates. Unless the Fed changes its policy, which is unlikely with high unemployment, high inflation seems inevitable. It suggests stagflation is our future. The recovery is tepid, demand is weak and there still exists uncertainty. All these factors contribute to high unemployment because they translate into a private sector not creating jobs. But blaming unemployment on these factors alone suggests there is scope for traditional policy to lower employment to pre-crisis levels: for example, a Keynesian-style fiscal expansion to boost demand via government spending. My mentor in graduate school, Ned Phelps, cautions this weekend that Americans should be wary of such remedies as a magic cure-all.

How to jump-start American manufacturing - Since the Great Recession began in December 2007, America has lost 16 percent of its manufacturing payroll jobs. While there has been a slight uptick in manufacturing jobs in the last seven months, only 11.7 million Americans work in this sector, down from 17.3 million 10 years ago. That's barely 9 percent of total U.S. nonfarm payroll jobs. More Americans now work in the leisure and hospitality industry.  Yet manufacturing remains important. Manufacturing firms have long accounted for an outsize share of U.S. capital investment, research and development, and exporting. Productivity growth -- the only source of sustainable increases in standards of living -- has long been faster in manufacturing than in services. As we recover from the global financial crisis, America's economy needs to be rebalanced away from consumption demand and toward capital investment and exports. Manufacturing can play a key role in this process.

The Roadmap To A High-Speed Recovery - High speed rail is just one solution—we will need many more if we are going to encourage our cities to become more densely developed, more innovative, and more economically vibrant. But we won’t find solutions if our pundits, politicians, and business leaders are still caught up in parochial arguments about debt and deficits, and how to bring back the housing industry. We can’t neglect the present, but we also have to think beyond it. If we keep spending on the old economy and our old ways of consumption and living, a new, post-industrial society may still emerge, but it will take longer to do so and it may not be one that most Americans will want to live in.

Michal Kalecki – The Political Aspects of Full Employment - billy blog -Anyway, several readers have asked me whether I am familiar with the 1943 article by Polish economist Michal KaleckiThe Political Aspects of Full Employment. The I dealt with Kalecki’s arguments extensively in one of the chapters of my PhD. Also in 1999, I specifically published a peer-reviewed article arguing that the concerns raised by Kalecki about the opposition that the captains of industry would raise if any government tried to maintain full employment are not binding on a modern Job Guarantee scheme. You can read a working paper version of that article for free – The Job Guarantee and inflation control. So I thought I might write a blog about what I think of Kalecki’s argument given that it is often raised by progressives as a case against effective fiscal intervention.

For Those With Jobs, a Recession With Some Benefits - NYTimes - Unemployment has been concentrated among a surprisingly small number of people, given how deep the recession has been. The nation’s pool of jobless workers has not been constantly changing. Instead, it’s been relatively stable — mostly because the hiring rate of new workers plunged in 2008 and still has not recovered. The drop in hiring has actually been steeper than the rise in layoffs. Compare the current slump with that of the early 1980s, which was similar in severity. Over the course of 1980, 18.1 percent of the labor force was unemployed at some point. In 2008, the first year of this slump, only 13.2 percent was, according to the Labor Department’s most up-to-date data. That number surely rose in 2009, but it is unlikely to have come close to the 1982 peak of 22 percent. If anything, the slowdown of the recovery in the last few months has made the recession even more concentrated. It has put off the day when the job market will be strong enough to re-employ many of the long-term jobless. But inflation has fallen to zero, which helps the purchasing power of everyone fortunate enough to have a job.

What's the actual problem in the labor market? - David Leonhardt has a very good piece which presents some relevant facts about unemployment.  Felix Salmon summarizes one part of the piece as follows: In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982. Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up. Also from Felix: The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession. To those observations I would add that corporate profits are doing fairly well. Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy. 

The compensationless recovery - Rebecca Wilder- New York Times David Leonhardt argues that real wages are rising, so those resilient workers that remain employed will benefit from the bounce-back in "effective pay". The problem with this insight is twofold: first, the expansion phase of real hourly compensation, a broader measure of total earnings, is falling; and second, sitting atop a mountain of consumer and mortgage debt, the aggregate economy cannot afford a compensationless recovery.  The referenced "real wages" are the real average hourly earnings figures for production and nonsupervisory workers, 80% of the total nonfarm payroll. The broader measure of total earnings is real hourly compensation (see Table A and get the data from the Fred database). Real hourly compensation measures compensation for all workers, including wages, 401k contributions, stock options, tips, and self-employed business owner compensation. (You can see a comparison of the earnings/compensation series in Exhibit 1 here.) Here's how I see it: the problem is not that real hourly compensation is falling during the the recovery, per se, it's that real hourly compensation is falling during the recovery of a balance sheet recession.

Glass Half Empty - Forgive me for pointing to the rather formidable darkness surrounding the silver linings. My colleague David Leonhardt offered a characteristically intelligent and intriguing column yesterday, noting that unemployment in the Great Recession has been visited upon a narrower band of Americans than in the (very deep) recession of the early 1980s. And he notes that a goodly swath of the middle portion of the country, a broken field run from the Dakotas and Minnesota to Texas, gives the appearance of pulling out of the worst of the recession. And last week various analysts noted hopefully that the number of Americans working part time because they could not find full-time work had dropped. (Unfortunately, the number of workers who appear to have given up looking for work altogether continues to grow as well.) But there is much evidence suggesting that the reach of this Great Recession remains broad, that glimmers of hope are tenuous and that the pain, alas, is hardly at an end.

The big picture - I HAVE been focused on the dynamics of the current business cycle and the risks in doing too little to support recovery. It is worth remembering that America's economic difficulties go deeper than the current weak recovery. Consider the chart below, which captures non-farm employment since 1939: That's six decades of steady increase, followed by a decade-long plateau. And over that last decade, the American population has grown by over 30 million people. Some of that labour force growth is offset by increased retirements as the population ages. But not nearly enough for zero net employment growth to be an acceptable outcome. Sadly, it's not Washington's intense focus on addressing long-term employment issues that's keeping it from crafting an adequate response to the cyclical challenge.

Federal Salaries Soaring Above Private Sector - For those fortunate enough to have a job in this tough economy, there's a growing gap in salary between government employees and those who work for private companies.  While many Americans have suffered pay cuts or job losses, one group is bucking the trend: federal workers, CBS News Investigative Correspondent Sharyl Attkisson reports. A USA Today analysis finds that federal employees have gotten bigger pay and benefit increases than private employees for nine years straight.  "It made me think, man, I should be a federal employee," one woman said on the streets of the capital.  Federal salaries have grown 33 percent faster than inflation. Their pay and benefits averaged $123,049 in 2009, up 36.9 percent since 2000. Private workers averaged $61,051, up just 8.8 percent during the same time.

Federal Workers Earn Twice Private Sector Counterparts? - Continuing a meme that won’t go away, USA Today has a story headlined “Federal workers earning double their private counterparts.” There’s a lot to unpack here.First, federal workers do get a great deal in terms of annual salary and benefit bumps.  It helps that the federal cost-of-living index has long exceeded real inflation.  Second, the doubling over the last decade in the gap.  Third, that federal workers “earned average pay and benefits of $123,049 in 2009.”  That’s just staggering.   Even when you take out the $41,791 in “benefits,” the $81,258 average salary is very generous.  And implausible.   For 2009, that’s just a little more than the base pay for a GS-13, Step 5.  Which, even for the DC area, is a very senior civil servant.  Even factoring in an average geographic locality adjustment, say, Miami’s 15.9%, we’re talking GS-12, Step 4.     And federal pay is capped on the high end by law to ensure civil servants make less than Congressmen.   For 2009, that was $155,500.

When Will Financial Armageddon Begin? - For confirmation the economy is rolling over, look no further than the awful jobs report from the government last Friday.  The Bureau of Labor Statistics (BLS) reported July payrolls fell 131,000.  To add insult to injury, the June jobs number was revised downward.  The economy lost 221,000 jobs which is considerably more than the 125,000 the government reported last month.   You want more confirmation the economy is in the tank?  Also, last week, the government revealed a record 40.8 million Americans are now on food stamps.  More budget woes can be seen at the state level.  Congress just passed an emergency aid package worth $26 billion to save teachers’ jobs around the country.  States are facing $200 billion in shortfalls in the coming months.  California is one of the worst, with a $19 billion budget hole to fill and a $500 billion in underfunded pensions .  Commercial and residential real estate is still losing value, and set to take another plunge.  

The Jobs Emergency - Washington’s latest answer to the worst jobs crisis since the Great Depression is $26 billion in aid to state and local governments. This still leaves the states and locales more than $62 billion in the hole this fiscal year. And because every state except Vermont has to balance its budget, the likely result is 600,000 to 700,000 more state and local jobs vanishing over the next 12 months (including private contractors and other businesses that depend on state and local governments) according to the Center on Budget and Policy Priorities. Say goodbye to even more of the teachers, firefighters, sanitary workers, and police officers we depend on.In July alone, state and local employment dropped 48,000. Not counting temporary census workers, the federal government shed 11,000. So with private payrolls increasing a paltry 71,000, July’s overall increase in payrolls was just 12,000.12,000 new jobs in July — when 125,000 are needed monthly just to keep up with population growth, when more than 15 million Americans are out of work, and when more than a half million more state and local jobs are on the chopping block.

Northeast of Silicon Valley, recession's effects are magnified - Like Riverside and San Bernardino counties, the inland area that includes San Joaquin, Alameda and Contra Costa counties became bedroom communities for workers priced out of real estate markets closer to the coast. And just like the Inland Empire, the area was among the hardest hit by the economic downturn as buyers lost homes to foreclosure and prices plummeted.  But other factors have compounded the northern inland region's misery. The financial crisis erased thousands of the area's banking and financial services jobs. The housing slowdown crippled dozens of manufacturers that made building supplies there. And the closure in April of California's only auto plant, in Fremont, snowballed into the shutdown of dozens of inland suppliers and the disappearance of tens of thousands of jobs. Though some economists have predicted the technology-rich Bay Area would lead the state out of the downturn, Jeff Michael, an economist with the University of the Pacific at Stockton, says its inland areas will be among the last to recover

Recession Geography - My column this week mentions some of the geographical patterns in the Great Recession. For much more detail, check out the following graphic put together by Amanda Cox of The Times:  Mark Zandi, chief economist of Moody’s Analytics, offered this summary by e-mail: The recovery began about a year ago in generally smaller manufacturing and agricultural centers in the Midwest and South. These are also areas that did not suffer as much in the housing bust. Indianapolis and Omaha are good examples. Tech centers turned the corner the corner late last year and early this.  Austin,  San Jose, Seattle and Boston are examples. Financial centers have been doing a bit better since the beginning of the year, including Charlotte, Dallas and to a lesser degree NYC and San Francisco. Most recently, there are some signs of life (or at least stability) in tourist destinations such as Orlando and Phoenix. The housing bust areas remain the weakest economies, including much of Florida, Nevada, Arizona and Central Valley of California. I’m beginning to look out for areas that might be double-dipping; none so far, although there may be a few areas when the July becomes available.

Gov't. Employment Ranges From 38% in D.C. to 12% in Ohio-- Seventeen percent of U.S. workers say they work for federal, state, or local government, ranging from 38% in Washington, D.C., to 12% in Ohio. More than a quarter of workers in Washington, D.C., Alaska, Virginia, and Maryland work for government, as do upwards of 15% in the vast majority of states. The findings reflect interviews with 98,755 adults, employed full time or part time, conducted Jan. 2-June 30, 2010, as part of Gallup Daily tracking. Gallup asks employed Americans first if they work for the government, then whether they work for federal, state, or local government.The five states with the highest percentage of government workers also have the highest percentage of federal workers, which is much of what sets them apart from the rest of the nation.The U.S. Postal Service is the nation's top federal employer, according to the Bureau of Labor Statistics, accounting for 23% of government jobs across the country

House Clears $26.1 Billion State-Aid Package, Dems Slam GOP Obstructionism - The House passed a bill Tuesday afternoon providing $26.1 billion to cash-strapped state governments, and preventing roughly 161,000 teachers and 158,000 public works employees from being laid off. The vote was 247-161. President Obama has already signed the bill into law.Democratic leadership has been under tremendous pressure to pass legislation before the start of the school year policy-wise, and before the November elections politics-wise. "The frustration of course has been that the Republicans have a two-step strategy: First of all, obstruct anything from getting better, and then point out that things aren't getting better," said Rep. Barney Frank (D-Mass.). "I mean the bill that's being passed today, if it were passed a month ago, we wouldn't have had the job loss report last week and I think they're fine with that."

House sends $26 billion state aid bill to Obama:-- House lawmakers voted to approve $26 billion in aid to states on Tuesday during a rare one-day summer session called by Democratic leaders. The vote was 247-161. Democrats said the election-year bill would save the jobs of nearly 320,000 teachers and other workers; Republicans derided the bill as a giveaway to liberal interests. President Barack Obama has said he'll promptly sign the bill,

Ezra Klein - House passes state aid bill -- but is it enough? The House passed legislation giving states $26 billion for Medicaid and teachers today. The Senate had already passed the legislation, so now it's off to the president's desk.The end product has, after three months of negotiations and compromises, less than half the $50 billion-plus the House originally wanted. Moderate Senate Republicans forced the legislation to be deficit neutral, so the bill shifts money around rather than injecting new money into an economy that needs it. One of the offsets was a $12 billion cut to the food stamp program. And though the bill will help, it will not do enough. "In fiscal year 2011, state budget gaps are about $121 billion, and by the time the fiscal year is over, they could exceed $140 billion," says Jon Shure, deputy director of the State Fiscal Project at the Center for Budget and Policy Priorities. This will close less than a sixth of the gap. Passing it is an accomplishment for Democrats, but they will also be blamed for the consequences of its inadequacy -- despite the fact that the bill's size is the result of Republican demands.

John Schmitt: The Wage Penalty for State and Local Government Employees - State and local government budgets are under severe strain. Rather than blame the recession, which has simultaneously slashed tax revenues and increased the demand for social services, some conservatives have argued that excessive pay for public employees is the real cause of the financial woes. Several recent reports in the media have reinforced this view by emphasizing that, on average, government employees earn more than workers in the private sector. The problem with these analyses is that state and local government workers have much higher levels of formal education and are older (and therefore generally more experienced) than workers in the private sector. When state and local government employees are compared to private-sector workers with similar characteristics, state and local workers actually earn 4 percent less, on average, than their private-sector counterparts. This paper examines the wage penalty for working in the state-and-local sector. Report - PDF | Flash

Why Public Employees Are The New Welfare Queens -Friday’s New York Times had a column about the “coming class war,” focusing on the fact that retirement packages for public employees seem to be a lot more generous than the ones for private employees. This is not a new discussion. Experts and think-tanks have been churning out research on the topic for years. But, thanks in part to the recession, the pension gap has become a major political controversy.Conservatives say that excessive public employee pensions exemplify the greed of unions (which sought these generous benefits for public employees) and inefficiency of government (which agreed to pay them). If local and state governments are struggling financially, these conservatives say, they should figure out some way to reduce or revoke those promised benefits, rather than come to Washington and beg for help from the taxpayers. The Senate Republican Policy Committee sums up the right’s mantra succinctly: “No state bailouts should be contemplated until the wages and pensions of public sector employees are brought into line.”

Are Those Horrible, Sometimes Unionized, State and Local Employees Overpaid? Apparently Not -  Yves Smith - I generally refrain from reproducing significant parts of another commentator’s work, but a Paul Krugman post debunking the depiction of state and municipal employees as welfare queens merits more attention than a mere link. Krugman points to a paper by Jonathan Schmidt, who has parsed the data on private v. public sector worker pay level, concludes that the factoid that critics like to point to, that public workers are on average, better paid (by 13%, to be exact), is misleading, Why? Government workers are older and better educated (how many government jobs are the analogous to minimum wage Wal-Mart greeters, for instance?). When you adjust for greater age and experience, public sector workers are lower paid than their private sector counterparts, by 4%

America Goes Dark, by Paul Krugman - The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno. Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel. And a nation that once prized education  is now cutting back. Teachers are being laid off; programs are being canceled. And all signs point to even more cuts ahead. But Washington is providing only a trickle of help, In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble they’re choosing the latter.

Colorado Springs and the Dark Streetlights - The Difference Between "Can't" and "Won't" - I have railed recently against bailouts of our individual states and cities, trying to explain the concept of fiscal responsibility, and that every community has choices to make about what it values. If you've read a major paper lately, you've hear about the city of Colorado Springs, where citizens have elected to make major cutbacks in spending and thus, in services received.Now, I applaud the citizens of Colorado Springs - that's their prerogative.  If they don't want to pay for these services, they don't have to - this was EXACTLY my point.  If you don't want to pay, THEN you have to make cuts.  Similarly, if you can't pay, then you have to make cuts - or those offering the services need to make compromises. It was today's Op-Ed from none other than Paul Krugman which set me off.  Now, again, I don't have a PhD in economics, or a Nobel Prize, but hopefully Krugman and Kartik Athreya will not write me off because of that.  Now, since Krugman's piece is titled "America Goes Dark," I'm going to focus on the implications for Colorado Springs, which he is clearly referring to.

The liberal-conservative consensus against massive cuts in infrastructure & the welfare state - Yesterday, in "Turning out the lights on civilization", I piggy-backed on Glenn Greenwald's observation about recent cut-backs in local spending on basic infrastructure--schools, roads, police, streelights. At the same time, however, it's important to keep in mind that it's not individual conservative voters who want to do these things.  The organized conservative political movement is highly unrepresentative of the views of the broader range of conservative citizens--as well aptly demonstrated by the large numbers of Tea Partiers fiercely clinging to their Medicare benefits last year, even as they denounced 1990s-style Heritage Foundation "Health Care Reform" as "socialist".

Highway 101 repairs may be delayed - California’s $19.1 billion deficit and past-due budget could defer or delay dozens of highway projects across the state, including $99 million to repair portions of Highway 101 in Ventura County, Caltrans announced Wednesday. Funding for transportation projects worth more than $2.1 billion that are contingent on the approval of the state budget — now 42 days past a July 1 deadline — might either be deferred or delayed, Caltrans Director Cindy McKim said in a conference call."

Calif. borrows from budget to build new death row - Despite California's $19 billion budget deficit, Gov. Arnold Schwarzenegger's administration said Wednesday it will borrow nearly $65 million from the state's cash-strapped general fund to begin building a new 1,152-bed death row at San Quentin State Prison. Legislators and social services organizations have stalled the bonds that would usually pay for construction by suing Schwarzenegger over several of his budget vetoes last year. Palmer said the administration is confident the governor's veto authority will be upheld by the California Supreme Court, which is scheduled to hear arguments Sept. 8. Legal debate aside, opponents of the death row expansion said it is foolish to take money from the general fund, which pays for ongoing state operations, when the state hasn't decided how to deal with its budget deficit.

Californians' income drops $40b - Government statisticians have put a number on Californians' paycheck pain last year: about $40 billion.The federal Bureau of Economic Analysis said personal incomes of Golden State workers fell by that amount in 2009 compared with the previous year -- the state's first year-to-year decline since World War II. In the Sacramento region, income was off about $800 million.The bureau said 2009 income statewide totaled $1.56 trillion, down about 2.5% from $1.6 trillion in 2008. The 2009 level also came in just under the 2007 total.California's decline was one- third more than the national 1.8% personal income drop, reflecting the relative intensity of the state's recession.

Tax revenue down; state could see broad budget cuts later this year — Across-the-board cuts in state spending are all but certain this year despite $540 million in federal aid approved by Congress earlier this week. Gov. Chris Gregoire said Thursday that tax collections in June and July were about $125 million below projections.  And she expects the state revenue forecast next month will predict more declines ahead. The governor is telling state agencies to prepare for cuts of between 4 and 7 percent, which at the high end could mean whacking up to $500 million from the state budget between October and the end of the fiscal year next June. "This recession is unlike anything any of us have experienced. The worst in 80 years. It's pouring down rain, so we have exhausted our rainy-day fund,"

Virginia Puts A Stop To Funding Stop Signs - Forget the expansion of Richmond Highway, Virginia can no longer afford to pay for stop signs, speed humps, traffic circles and other measures used to slow vehicle traffic in Fairfax County’s residential neighborhoods. The Virginia Department of Transportation will no longer be funding the local "traffic calming" program, according to local transportation officials.  As of July 1, approximately $366,000 is left to address "traffic calming" projects currently in the pipeline. It appears at least 24 requested projects – including those that are currently being studied – will not be funded, said Kathy Ichter, director of Fairfax County’s Department of Transportation.

Housing Crisis Reaches Full Boil In East Point; 62 Injured - Thirty thousand people turned out in East Point on Wednesday seeking applications for government-subsidized housing, and their confusion and frustration, combined with the summer heat, led to a chaotic mob scene that left 62 people injured.  At the Tri-Cities Plaza Shopping Center, emergency vehicles passed each other, transporting 20 people to hospitals. Medical and police command posts were set up on scene. East Point police wore riot gear. Officers from four other agencies supported them. Yet no arrests were made. All of this resulted from people attempting to obtain Section 8 housing applications and, against long odds, later securing vouchers for affordable residences. Some waited in line for two days for the applications.

In Oakland, Private Force May Be Hired for Security - In the wake of the city’s laying off 80 police officers last month, Chinatown is leading a new trend in the crime-ridden city: an increase in privately financed public safety. Mr. Chan has asked every business owner to install a street-facing camera. A new Chinatown security force, perhaps staffed by armed guards, could be on the streets as soon as next month, he said. The layoffs, which helped close a budget deficit of more than $30 million, eliminated a community-policing program that assigned officers to walk their beats and attend neighborhood meetings. Now some residents are pooling resources to restore a law-enforcement presence. The affluent Montclair District in the Oakland Hills and the Kings Estates neighborhood in East Oakland are also looking into private patrols.

Reinventing the city - Our cities play a vital role in the quest to achieve global ecological sustainability. They are the largest contributors to greenhouse gases and climate change. However, if we can achieve sustainable construction and use of urban infrastructure, our cities could become a critical leverage point in global efforts to drastically reduce emissions and avoid the social and economic costs associated with climate change, as well as enhance energy security and resilience in the face of high fossil energy prices. The world’s urban centers already account for close to 80 percent of CO2 emissions. In the next three decades, the global population will continue to grow and become ever more urban. Booz & Company analysis conducted for this report shows that under business-as-usual (BAU) assumptions, $350 trillion will be spent on urban infrastructure and usage during this period. This huge expenditure either can cause the ecological impact of our cities to become even more pronounced or can be a tremendous opportunity to reduce that impact.

Morgan Stanley Group's $11 Billion From Chicago Meters Makes Taxpayers Cry - Chicago drivers will pay a Morgan Stanley-led partnership at least $11.6 billion to park at city meters over the next 75 years, 10 times what Mayor Richard Daley got when he leased the system to investors in 2008.  Morgan Stanley, Abu Dhabi Investment Authority and Allianz Capital Partners may earn a profit of $9.58 billion before interest, taxes and depreciation, according to documents for a $500 million private note sale by their Chicago Parking Meters LLC venture. That is equivalent to 80 cents per dollar of projected revenue. Standard Parking Corp., which runs 30,000 spaces at the city’s O’Hare and Midway airports, earned 4.84 cents on that basis last year, data compiled by Bloomberg show.  The deal illustrates how Wall Street banks, recipients of more than $300 billion in taxpayer bailouts in the worst credit collapse since the Great Depression, are profiting from helping states and cities close record recession-induced deficits by selling bonds and leasing public properties. Chicago gave up billions of dollars in revenue when it announced in 2008 that it leased Morgan Stanley its 36,000 parking meters, the third- largest U.S. system, for $1.15 billion to balance its budget

CPS reserve fund depleted to balance budget For the first time since 1995 Chicago Public Schools must empty its reserve fund to balance its proposed 2011 budget of $6.4 billion, CPS officials said.Ron Huberman, chief executive officer for the nation’s third largest school district -- 409,000 students and 675 schools -- recently met with the media to discuss his proposed budget.  CPS’ budget is larger than the $6.3 billion Chicago Budget Director Eugene Munin estimated in July for 2011. This year’s proposed CPS budget is $400 million more than last year.  Currently, CPS has $190 million in its reserve fund and last year it had $311 million. In the interim the district plans to implement an unspecified line of credit, which it plans to repay within a year. State law prohibits the district from using any lines of credit to balance the budget.

More than 1700 School-Based Positions Cut in CPS Budget Plan - Chicago Public Schools is unveiling a $6.4 billion budget plan for the upcoming school year. And to help balance that budget, CPS officials estimate more than 1,700 school-based positions will be eliminated. Those positions include high school teachers, custodians, clerks and teaching assistants. The city's teachers union has filed a lawsuit to prevent some of those layoffs. School chief Ron Huberman says he's willing to hear suggestions from the teachers union that would avoid layoffs, but time is running out."

Daley Defends CPS Decision To Deplete A Reserve Fund - Mayor Daley on Tuesday defended the decision by his handpicked Chicago Public Schools team to deplete a reserve fund piggybank, jeopardizing the system’s bond rating.  With state funding lagging and the Chicago Teachers Union refusing to forfeit a four percent pay raise, Daley said Schools CEO Ron Huberman had no choice but to take the reserve fund down to zero to erase a $370 million budget shortfall.  “It isn’t Ron [Huberman] and the president of the school board. It’s the state saying, ‘We’re not gonna fund this.’ ... .If you’re supposed to get $10 and you only get $1, what do you do?” the mayor said.

Survey: 80 percent of districts will have fewer teachers this fall - Eighty percent of school districts will open doors this year with fewer teachers due to state aid cuts, defeated budgets and other factors, according to a New Jersey Schools Boards Association survey released Monday. One out of six districts said they had to reduce teaching staff by more than 10 percent. One out of three said they lost 6 to 10 percent of their teachers. Almost half said they lost up to 5 percent of last year’s staffing levels.The school board association’s survey was taken May 25 through June 29, just as many districts were grappling with defeated school budgets and steep drops in aid. In two rounds of cuts since February, Governor Chris Christie slashed a total of $1.3 billion in aid to districts for last year and the coming school year. He blamed the cuts largely on the end of one-shot federal stimulus money.

Unpaid taxes posing a big threat to local school districts - Call it a sign of the times. A study published this morning by our partners at the Dayton Daily News says that many school districts are seeing their tax revenue slip away because many of us aren't paying our taxes. The investigation found that more than $87 million in unpaid property taxes were owed in Montgomery County as of this past June. Two-thirds of the delinquent taxes owed in the county--$59 million--are on real estate within the Dayton Public School district. The report also said that the unpaid taxes are taking tolls on a wide range of local governments as well as libraries and county agencies. Despite a 4.9 mill operating levy that passed in 2008, the district lost $19 million from unpaid taxes last year.

Denver Schools Get Whacked -- Gretchen Morgenson of the New York Times is single-handedly resurrecting the Gray Lady's reputation as a muckraker of the first order. Having already blown a big hole in the side of Goldman Sachs with her December, 2009 story exposing its crooked deal with hedge fund king John Paulson, Morgenson this week took an ax to Colorado's Democratic Senator Michael Bennet, uncovering a Jefferson-County style scam he helped perpetrate on the Denver School system on behalf of several Wall Street banks (including primarily JeffCo villain JP Morgan Chase) while acting as Denver's school superintendent years ago.

Schoolteachers Driving Cadillacs - Krugman - Jonathan Chait Cohn tells us that public-sector employees are the new welfare queens. Quite: any time you try to talk about the fiscal plight of state and local government, you get spittle-flecked denunciations of unions and their crazy pay packages. So, how much truth is there to this? State and local employees are paid more, on average, than private-sector workers — about 13 percent more, according to this analysis by John Schmitt. But as Schmitt shows, that’s an apples and oranges comparison: state and local workers are much better educated and somewhat older than private-sector workers, and once you correct for that the comparison actually seems to go the other way. I think the easy way to think about this is to realize that about half of state and local workers are teachers and academic administrators — which means that they’re college-educated, at minimum. And think about it: how many ambitious young people do you know saying, “My goal in life is to become a high school teacher — that would put me on easy street”?

Obama: Education is economic issue - President Barack Obama added a college-educated workforce to his list of things he wants to be made in America.  In a speech Monday at the University of Texas in Austin, Obama cast reforming higher education as integral to helping the economy recover from “a body blow” and grow stronger in the future. Though critics say he should be focusing on jobs, Obama declared, “Education is an economic issue.”  “The single most important thing we can do is to make sure that we’ve got a world class education system for everybody,” the president said. “That is a pre-requisite for everybody.”

Higher Ed Watch update - Higher Ed Watch reports: The student loan company Nelnet announced late Friday afternoon that it has reached "an agreement in principle" to settle a Federal False Claims lawsuit filed against the corporation and five other lenders that engaged in a scheme to bilk taxpayers by systematically overcharging the government for subsidy payments on federal loans they made to students. The lawsuit, brought by by Jon Oberg, the former Department of Education researcher who uncovered the 9.5 student loan scandal, has sought the return of approximately $1 billion to the government in overpayments these lenders improperly received.

College: Easy Money - According to Philip Babcock and Mindy Marks, college students' weekly study time fell by 40% between 1961 and 2003.  The research is forthcoming in the Review of Economics and Statistics, but here's a very readable popularization.  Their basic findings: In 1961, the average full-time student at a four-year college in the United States studied about twenty four hours per week, while his modern counterpart puts in only fourteen hours per week--a whopping ten-hour decline... [T]he trend... is not explained by differences in the wording of survey questions, is clearly visible across a dozen separate data sets, and does not appear to be driven by changes in the composition of the college-going population over time. Study time fell for students from all demographic subgroups, for students who worked and those who did not, within every major, and at four-year colleges of every type, degree structure, and level of selectivity. Interesting details:[N]ot only [are] college students are studying less than they used to, but... the vast majority of the time they once devoted to studying is now being allocated to leisure activities, rather than paid work.

Student-Loan Debt Surpasses Credit Cards - Consumers now owe more on their student loans than their credit cards.Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today — both federal and private — total some $829.785 billion, according to Mark Kantrowitz, publisher of and  “The growth in education debt outstanding is like cooking a lobster,” Mr. Kantrowitz says. “The increase in total student debt occurs slowly but steadily, so by the time you notice that the water is boiling, you’re already cooked.” By his math, there is $605.6 billion in federal student loans outstanding and $167.8 billion in private student loans outstanding. He estimates that $300 billion in federal student loan debts have been incurred in the last four years.

Student Loan Debt Outpaces Credit Card Debt - Credit cards are no longer the largest source of debt for Americans -- according to the Wall Street Journal, student loans have taken the crown.  The Journal reports: Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today -- both federal and private -- total some $829.785 billion,The change is due in part to Americans paying down credit card debt and increased credit card regulations, according to the Journal. The Student Aid and Fiscal Responsibility Act, passed in March, promises to regulate the student loan industry by omitting private lenders in hopes of saving the government and the taxpayer money.  Still, many struggle under the weight of student loans -- and there's no easy out. As the San Francisco Chronicle reports, bankruptcy is not an automatic option:

Student Loans Now Greater Than Credit Card Debt -Total outstanding student loan debt now exceeds credit card debt, as reported yesterday in the Wall Street Journal which in turn elaborated on a web article by Mark Kantrowitz, publisher of Revolving consumer credit according to the Federal Reserve is $826 billion. Kantrowitz calculates outstanding student loan debt at almost $830 billion. The Federal Reserve does not separately report student loan debt--and why not? Instead, the Federal Reserve rolls student loan debt into nonrevolving debt along with auto loans and other installment loans. Thus, Kantrowitz has to rely on other sources. Credit card debt actually has been declining, an unprecedented fact historically, and is off almost 14% from its 2008 high of $958 billion. Other forms of credit have been tight and hard to obtain. In contrast, Kantrowitz's numbers suggest student loan debt has been increasing. All of these facts suggest more questions than answers for me.

American families are digging deep to pay for college - In the wake of the housing bust and a sagging economy, American families are scrambling to pay for college, according to the latest research from Sallie Mae, which was conducted by Gallup. With the cost of private universities now topping $35,000 for tuition, fees, room and board each year, Americans are tapping retirement accounts, asking extended family members to help out with college costs and keeping kids at home for the first few years of school to cut down on living expenses. One worrisome trend: Parents who took money from their retirement accounts withdrew an average of $8,554 in 2010 compared to $5,318 in 2009. To pay for college, families are also borrowing more heavily from traditional sources including financial aid. And usage of 529 college savings plans is on the rise. "The findings of Sallie Mae’s study are different from another study conducted by Country Financial which shows that fewer Americans think college is a good investment.

Putting Our Brains on Hold - The latest dismal news on the leadership front comes from the College Board, which tells us that the U.S., once the world’s leader in the percentage of young people with college degrees, has fallen to 12th among 36 developed nations.  At a time when a college education is needed more than ever to establish and maintain a middle-class standard of living, America’s young people are moving in exactly the wrong direction. A well-educated population also is crucially important if the U.S. is to succeed in an increasingly competitive global environment.  But instead of exercising the appropriate mental muscles, we’re allowing ourselves to become a nation of nitwits, obsessed with the comings and goings of Lindsay Lohan and increasingly oblivious to crucially important societal issues that are all but screaming for attention.

Signs Of Decay In America - In Putting our brains on hold, New York Times columnist Bob Herbert decries the poor state of educational achievement in America. A College Board study indicates that the U.S. ranks 12th among developed nations in the percentage of those between 25 and 34 years old with college degrees. Slightly more than 40% have college degrees, and we rank behind Canada, South Korea, Russia, Japan, New Zealand, Ireland, Norway, Israel, France, Belgium and Australia. Herbert refers to us as a "nation of nitwits" more interested in Lindsay Lohan or Lady Gaga than the fact that we have an epidemic of ignorance in America. I agree, but would also add that this outcome is a natural byproduct of our Consumer Society. Herbert wonders why we don't do something about it. Personally, I don't think a highly educated citizenry is thought to be in the best interests of the clowns elites who run this country. And if you're a young person, why would you want to rack up a huge amount of debt to pay hyperinflated college tuition if you're just going to end up working at Starbucks anyway (or not working at all, and living with your parents.) In a slightly older item, American ranks dead last in health care when measured against a small set of developed countries.

Teachers' pension fund needs aid, Oklahoma official says Legislators next year cannot avoid looking at ways to shore up the retirement fund for Oklahoma public schoolteachers, which is one of the most underfunded plans in the nation, state Treasurer Scott Meacham said Wednesday. The pension fund as of June 30 totaled about $8.3 billion. During the last fiscal year its pension plan was funded to 49.8 percent, meaning it has a $9.5 billion unfunded liability. Most experts prefer pension plans to be funded at 80 percent.

Ohio public retirement systems refuse to release records to newspapers analyzing benefits and possible abuses -- The state's public employee retirement systems have refused to disclose details of contributions and benefits of their 400,000 recipients, even as two of the funds seek millions in taxpayer money to stay afloat. The Plain Dealer and seven other Ohio newspapers, cooperating as members of the Ohio News Organization, asked for the information to analyze possible flaws or abuses in the pension system before the state legislature votes on having the public cover more costs. All five pension systems declined the request, saying disclosure would violate the privacy of the members, even though the papers asked the systems to withhold names, addresses and any information that would identify individuals.

The Problem with Pensions - Mauldin - A report just out from the Center for Policy Analysis indicates that state and local pension funds are drastically underfunded.I first wrote about public pension problems in 2003, suggesting that pensions would soon be underfunded by $2 trillion, as a long-term secular bear market would dampen returns. Turns out that I am once again proven to be a wild-eyed optimist. Quoting from the executive summary: “Many state and local government pension plans’ liabilities are calculated using discount rates that are not commensurate with the risk they may pose to taxpayers. Accounting standards allow pension funds to calculate their liabilities using a discount rate comparable to the expected rate of return on the funds’ assets. This typically high discount rate tends to reduce the size of a pension plan’s accrued liabilities. However, pensioners have a durable legal claim to receive their benefits and consequently, it is more appropriate to use a lower discount rate in calculating the plans’ accrued liabilities.

Public Pension Shortfalls: Don’t Forget Braindead Economists - As noted below, the NYT declared class war against school teachers and custodians, arguing that the public must focus on taking away their pensions. The prior note left out a very important point -- if the economists who make projections knew arithmetic, then the pension funds would not be facing these huge shortfalls. These "experts," all of whom draw high salaries in their working careers and much higher pensions than public employees (think of people like Harvard Professor Martin Feldstein, Boston University Professor Lawrence Kotlikoff, and Steve Goss the Chief Actuary for Social Security), all asserted that stocks would average 7.0 percent real returns even when the market was at its bubble peaks. If the market had performed as they had projected, then these pension funds would be just fine today. In short, the biggest problem with these pension funds is that they listened to the country's leading economic experts in planning for the future. Unfortunately, the workers and the taxpayers will pay for the incompetence of the experts. The experts themselves are protected. 

The End of Retirement as We Know It - "I don't know if it's ever going to be realistic that everyone saves enough to spend the last third of their life on vacation." That quote is from Allison Schrager, and it's my favorite line in my newest column for the magazine. The column is on the equity premium, why it might not be realistic to expect such high returns from the stock market in the future--and what that implies for our retirement savings if this turns out to be the case.It was nice that a combination of rising life expectancy and broader pension coverage allowed a large segment of American workers to take what amounted to a multi-decade vacation.  (Though this was never quite as widespread as people now "remember").  But this was never going to be sustainable.  Retirement experts typically say that retirees should shoot for 75-90% of their working income in retirement (the theory being that some expenses fall, but other expenses rise, and you don't need to save for retirement when you're already retired).

In weak economy, more people are filing early for Social Security - In one of the most striking fallouts from the bad economy, Social Security is facing a rare shortfall this year as more people opt to collect payments before their full retirement age. Adding to the strain on the trust are reduced tax collections due to unemployment levels hovering at 9.5 percent.  More people filed for Social Security in 2009 -- 2.74 million -- than in any year in history, and there was a marked increase in the number receiving reduced benefits because they filed ahead of their full retirement age. The increase came as the Social Security retirement age rose last year from 65 to 66.  Nearly 72 percent of men who filed opted for early benefits in 2009, up from 58 percent the previous year. More women also filed for early benefits -- 74.7 percent in 2009 compared with 64.2 percent the previous year.

The Washington Post Tries New Tactic in Campaign to Cut Social Security - The Washington Post adopted a new tactic in its ongoing campaign to cut Social Security benefits, highlighting a relatively trivial amount of mispayments or fraud, leading readers to believe that the program has major administrative problems. The Post devoted a major news story to a GAO report that found "1,500 federal workers might have received improper or fraudulent Social Security payments in the past several years."There are just under 8 million people who receive disability benefits. Summing over 4 years would give approximately 30 million disability years of benefits. The GAO report identifying 1,500 federal workers who received benefits would imply 3,000 per years of improper benefits, assuming an average of 2 years of benefits per worker. This is equal to 0.01 percent of the beneficiaries of the program. A mistake of this magnitude would warrant little or no attention in a newspaper reporting issues that affected people's lives in any way. However, it is not surprising that it would get substantial attention in a newspaper like the Post, which is on a campaign to cut Social Security and freely uses its news section to advance this agenda.

Social Security Madness - Paul Krugman - Has the Washington Post gone mad? asks Dean Baker, reading the Post’s latest editorial on Social Security. The answer is no: it has been mad all along.Dean points out, correctly, that the Post’s argument here is: “In the future, Social Security might have to cut benefits. To prevent these possible future benefit cuts, we must cut future benefits.”But this isn’t new — the same argument was rolled out in 2005.A lot of the Beltway establishment has a thing about Social Security — in a way, by the way, they don’t have a thing about Medicare, which is a vastly more important long-run problem. No matter how much you talk logic or numbers, they’re obsessed with the idea that Social Security must be cut; as I wrote back when, somewhere back in the 90s talking tough on Social Security became a badge of seriousness, and facts just can’t make a dent in that social convention

That Joke About Intergenerational Equity - The Washington Post and most of the important people in Washington want the United States to be like Kazakhstan. Unfortunately, this is not another Borat movie, this is about the central focus of economic policy in the United States today.  Kazakhstan has a debt-to-GDP ratio of just 14.2 percent, one of the lowest in the world. By other measures, Kazakhstan doesn't score so well. Its per-capita income is $11,800, just over one-fourth as much as the United States. Life expectancy for the people of Kazakhstan is just 68.2 years, putting it behind countries like Iraq and Honduras. By most measures, Kazakhstan looks like a rather unappealing place, but factors like the health and wealth of the population don't matter to the policy elite in Washington. They care about budget deficits and debt, and by that standard Kazakhstan is golden.If there were ever any doubt about the absurdity of Washington economic policy debates, it was eliminated with the release of the 2010 Social Security and Medicare Trustees reports.

Social Security Finances - Krugman - How should we think about Social Security? It’s a government program supported by a dedicated tax; like other such programs, like the highway fund, it can bank surpluses in years when the dedicated tax yields more revenue than the program’s costs, and use those banked funds to cover shortfalls in other years. Of course, it’s also part of the general federal budget. This means that Congress always has the option either of undedicating the revenue from the payroll tax (or seizing the trust fund, which is basically undedicating past revenues), or of topping up Social Security by adding more funds. However, either of these options would amount to a political earthquake; so the program’s independent financing has real significance as a practical matter. So there are two ways to look at Social Security. You can view it as a stand alone program, in which case payroll tax revenues and the trust fund accumulated out of those revenues are at the center of the story; or you can view it as just part of the federal budget, in which case the relative size of retirement benefits and payroll tax receipts has no special significance — benefits are just one federal expenditure, payroll taxes just one source of federal revenue.

On-budget vs "Unified Budget": Where Social Security Fits. - If I had to pick out the two biggest sources of confusion about Social Security finance it would have to be one, the relation of the Trust Funds to Public Debt and two, the relation of Social Security surplus/deficits to Budget Scoring. At Angry Bear we have discussed the equation Debt Held by the Public + Intragovernmental Holdings = Public Debt enough that most regular readers probably get it. So today I want to lay out some definitions and explanations of 'on-budget' directly from the source.

Social Security: A Small Problem That Still Grows Bigger Over TimeThe Trustees’ reports on the status of the Social Security and Medicare programs came out last week, and the reports underscore two “big picture” points: 1. Of the two programs, Medicare faces much larger fiscal challenges than does Social Security, because Medicare has both demographic factors and rising per capita health costs working against it; and 2. If health care reform is to significantly help the outlook for Medicare, some tough choices prescribed in the reform bill and in the rest of current law will have to be followed through on. Let me put aside point #2 for now.  It’s a point the Concord Coalition has made before regarding health care reform, underscored by CBO’s long-term outlook report as well, in the difference between their “extended baseline” (not so scary) scenario versus their “alternative” (very scary) scenario.

The myth of the Social Security system's financial shortfall - The annual report of the Social Security Trustees is the sort of rich compendium of facts and analysis that has something for everybody, like the Bible. This year's report, which came out Thursday, is no exception. Within minutes of its release, some analysts were claiming that it projected a "shortfall" for Social Security this year of $41 billion. Before we get to the bogus math behind that statement — which doesn't actually appear in the report — let's look at the encouraging findings by the agency's trustees, who include the secretaries of Labor, the Treasury, and Health and Human Services.

Social Security at 75: Crisis Is More Myth Than Fact -I admit that I have a strong personal connection, having served in the Social Security Administration, and knowing that this policy, which has helped three generations of Americans, is one of my grandfather's proudest legacies. My celebration is tempered by great concern. There are falsehoods and ill-informed distortions unleashed against Social Security by those who seek political gain. Their goal is to create a climate of fear around the future of Social Security. Repeatedly, they tell us that the program is bankrupting the country, paying out more than it takes in, will be made insolvent by retiring "baby boomers," and thus unavailable to for future generations.

Live Long And Prosper -Krugman - But actually it’s the other way around. And the fact that, to a growing extent, the less prosperous don’t live as long has important implications. You see, the buzz increasingly suggests that the catfood deficit commission will call for a rise in the age at which people can collect full Social Security — justified by rising life expectancy. This is a really terrible idea, for at least three reasons.

  • 1. The retirement age has already been increased to 66, and is scheduled to rise to 67. So any further increase would mean pushing retirement back to unprecedented ages. Yes, a lot of people live to 70; how many of them are really able, easily, to work that late into life?
  • 2. While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.
  • 3. Finally, disparities in life expectancy have been rising sharply, with much smaller gains for disadvantaged socioeconomic groups and/or those with less education than the average. Yet these are precisely the people who depend most on Social Security.

Social Security: A Minor Fiscal Issue - Krugman - Given the apocalyptic rhetoric we’re hearing, once again, about Social Security finances, it comes as something of a shock — even to me — to look at the actual projections in the latest Trustees’ Report. OASDI is projected to rise from 4.8 percent of GDP now to about 6 percent of GDP in 2030, and level off. That’s not trivial — but it’s not huge either. But now I understand why the usual suspects are reviving the old switcheroo on how you think about Social Security, in which surpluses don’t count but deficits do. It’s because when you adopt either consistent view — either Social Security as a standalone budget, or as part of an integrated federal budget — it just doesn’t look like a big deal. And that’s not an acceptable answer for people who really, really want a crisis.

Fun With Mortality Tables - Paul Krugman - Hoo boy, if Social Security is the big thing in the next few months — which is starting to look possible — it’s going to be like old times again, shooting down all the usual fallacies one more time. So: one thing you’re going to hear is something along the lines of, “In 1950 life expectancy was only 68 years, so hardly anyone was collecting Social Security; now it’s 78 years — the problem is obvious”. Does anyone know what’s wrong with this? That’s right: a life expectancy of 68 years doesn’t mean that a lot of people toddle along then suddenly keel over over after threescore and eight birthdays. Mostly it meant much higher child mortality than we have now, which has no relevance one way or the other to Social Security.Much more to the point is the number of years people could expect to live after reaching 65: 14 years in 1950, 18.5 years now. Not so impressive a change, is it? And the retirement age is already 66 for my cohort, and scheduled to rise to 67 on current law.

Social Security Benefits and Maximum Contribution Base: Probably No Increase for 2011 - The BLS reported this morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 213.898 in July. This means it is very likely there will no change to Social Security Benefits and the Maximum Contribution Base again this year. Here is an explanation ...The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U.This graph shows CPI-W over the last ten years. The red lines are the Q3 average of CPI-W for each year. The COLA adjustment is based on the increase from Q3 of one year from the highest previous Q3 average. So a 2.3% increase was announced in 2007 for 2008, and a 5.8% increase was announced in 2008 for 2009.In Q3 2009, CPI-W was lower than in Q3 2008, so there was no change in benefits for 2010.

Social Security Coalition: Don’t Cut It- Your Call | Radio Segment - Over 100 state and national organizations representing over 50 million Americans has formed the Strengthen Social Security coalition to send a strong message to politicians who are on a mission to cut Social Security benefits: Don't mess with it. Despite what you're hearing from Democratic and Republican deficit hawks and President Obama's Commission on Fiscal Responsibility and Reform, Social Security doesn't add one penny to the deficit. It shouldn't even be part of the deficit conversation. "Social Security has not contributed to the deficit up to this point and will not up through 2037," says Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities, a non-profit organization that works on federal and state fiscal policies and public programs affecting low- and moderate-income Americans

House liberals warn Obama they’ll oppose Social Security cuts - House liberals are pressuring President Obama’s debt commission to avoid cuts to Social Security benefits as it seeks ways to right the nation’s fiscal ship. In a letter to the panel’s chairmen, the Congressional Progressive Caucus on Thursday threatened to oppose any recommendations that “cut or diminish Social Security in any way.”With 82 members, the progressive caucus can wield significant influence on the Democratic agenda, although previous threats to oppose healthcare legislation that did not include a public insurance option were not followed through. Many Democrats have questioned claims by Republicans and some economists that the Social Security system is in crisis.

The Risks of Retirement Communities - WSJ - Increasing numbers of older Americans are seeking out the security and comfort of a continuing-care retirement community. But a new report from the federal Government Accountability Office warns that such assurances often come at a steep price and "considerable risk."  So-called CCRCs—which typically offer fine dining, health clubs and on-site long-term care—have grown in popularity along with the aging of the population, particularly among the upper-middle class and affluent, and are now a multibillion-dollar industry. At least 745,000 older adults live in such communities, according to the American Association of Homes and Services for the Aging. And those numbers are expected to rise as baby boomers near their 70s.  Now, though, some high-profile blowups are demonstrating that CCRCs need to be treated by consumers as a major investment and not just a place to live. The economic downturn is making it tougher for potential new residents to sell their existing homes and fill openings in new and expanded communities, which are generally regulated by state governments. As a result, low occupancy levels are challenging the industry's financial models.

Fun With Paul Ryan and the Washington Post, by Dean Baker: The Washington Post really really hates Social Security. They hate Medicare almost as much. Therefore they are willing to give its critics space to say almost anything against the program (the real cause of September 11th) no matter how much they have to twist reality to make their case. Today, Republican Representative Paul Ryan stepped up to the plate. The Post felt the need to give him an op-ed column after Paul Krugman cruelly subjected Mr. Ryan's "Roadmap for America's Future" to a serious analysis last week. This violated the long accepted practice in elite Washington circles of not holding proponents of Social Security and Medicare cuts/privatization accountable for the things they say. It is therefore understandable the Post would quickly give a coveted op-ed slot to Mr. Ryan to make amends for such a grievous breach of protocol. The rest of us may not have the power to invent the facts that would be needed to push our policies, but that doesn't mean we can't have fun. Let's count the inaccuracies in Mr. Ryan's piece.

And Even on Medicare, It’s Not Yet “Mission Accomplished” - A few days ago I wrote about the Trustees’ report and the relatively light (but growing) work we need to do on the Social Security program to get it to self-sustainability–assuming the goal of having Social Security income adequately cover Social Security costs.  (Note to touchy readers:  my answer is not to eliminate the costs nor to immediately raise the income.) My boss, Bob Bixby, took on the larger task of deciphering what the Trustees’ report tells us about the future of Medicare.  In his post on Concord’s “The Tabulation” blog, he explains:Good news comes and goes rather quickly in the 2010 Medicare Trustees’ Report. It begins with the optimistic news that Medicare’s finances have improved substantially as a result of this year’s health care reform bill, the Affordable Care Act (ACA). However, the report then goes on to explain in great detail why this apparently good news is probably not as good as it sounds.

Economic Science Fiction - Maxine Udall - Most people would give up their beach house in exchange for better health and a longer life. Few people would knowingly give up better health or a longer life for a beach house. That alone tells you they are not equivalent, morally or otherwise.  Health care is special because humans are special. Most humans concede this. (Martians, Ferengi, and Gorn, most likely would not). Health producing goods and services have a special status in their roles as inputs to human health and wealth and human capital that is different from a beach house. Health is different because it enables humans to be productive, which benefits all of us. Health care is different because in some necessary amount and mix it is a necessary prerequisite to human individual flourishing, to the pursuit of life, liberty and some semblance of happiness.

Medical Care Prices Fell for First Time in 35 Years - Then again, maybe the deflationary apocalypse really is upon us: For the first time in 35 years, the one sector of the economy always guaranteed to get more expensive suddenly became a bit cheaper in July. According to a report released today by the Labor Department, consumer prices over all grew 0.3 percent in July, on a seasonally adjusted basis.  The medical care index, however, fell 0.1 percent in July, after three and a half decades of constant increases. To understand why this is such a big deal, let’s chart prior trends in health care costs. The first graph below shows the index value for all consumer items and for medical care alone. (The values shown refer to prices relative to their levels in 1982-84, which is set to an index benchmark of 100.)

Health Care, Uncertainty and Morality - In last week’s post I discussed Kenneth Arrow’s exploration of whether special characteristics set health care apart from other commodities — whether it had a “moral dimension.” ... He concluded that virtually all the special features of the medical care industry — the role of nonprofit institutions; the expectation that physicians ... would always put the interests of their patients above their own self-interest; professional licensing and many other forms of government regulation — could “be explained as social adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.” This uncertainty has several aspects. First, physicians may not agree on the medical condition causing the symptoms the patient presents. Second, even if physicians agree in their diagnoses, they often do not agree on the efficacy of alternative responses... Third, information on both the diagnosis of and the likely consequences of treatment are asymmetrically allocated between the sell-side (providers) and the buy-side (patients) of the health care market

Despite Scandal, Former UnitedHealth CEO was Ninth Best Paid CEO of the Decade -A little while ago, the Wall Street Journal reported on the highest paid US corporate CEOs of the past decade.  One name stood out for those interested in  health care: Dr William W McGuire, the former CEO of giant health care insurance company/ managed care organization UnitedHealth Group.  Dr McGuire was number 9 on the list, with a total realized compensation of $469,300,000.   We started discussing the disconnect between Dr McGuire's corpulent pay and his company's failure to uphold its stated ideals back in 2005, when he was reported to have received more than $124 million to lead a company which championed "affordable" health care.  Later, it turned out that much of Dr McGuire's compensation came in the form of back-dated stock-options, and the resulting scandal was followed by his resignation.  Later, Dr McGuire was forced to give back some the options.  The final settlement of the fiasco cost UnitedHealth $895 million, and Dr McGuire $30 million and the cancellation of 3.6 million stock options.

Study Puts Cost of Medical Errors At $19.5 Billion - Medical errors and the problems they cause — including bed sores, post-op infections and implant or device complications — cost the U.S. economy $19.5 billion in 2008, according to a study released today.The study, commissioned by the Society of Actuaries and carried out by the actuarial and consulting firm Milliman, is based on insurance claims data. The cost estimate includes medical costs, costs associated with increased mortality rate and lost productivity, and covers what the authors describe as a conservative estimate of 1.5 million measurable errors. The report estimates the errors caused more than 2,500 avoidable deaths and over 10 million lost days of work.

New superbugs spreading from South Asia: study - Plastic surgery patients have carried a new class of superbugs resistant to almost all antibiotics from South Asia to Britain and they could spread worldwide, researchers reported Wednesday. Many hospital infections that were already difficult to treat have become even more impervious to drugs thanks to a recently discovered gene that can jump across different species of bacteria. This so-called NDM-1 gene was first identified last year by Cardiff University's Timothy Walsh in two types of bacteria -- Klebsiella pneumoniae and Escherichia coli -- in a Swedish patient admitted to hospital in India. Worryingly, the new NDM-1 bacteria are resistant even to carbapenems, a group of antibiotics often reserved as a last resort for emergency treatment for multi-drug resistant bugs

Are you ready for a world without antibiotics? - The era of antibiotics is coming to a close. In just a couple of generations, what once appeared to be miracle medicines have been beaten into ineffectiveness by the bacteria they were designed to knock out. Once, scientists hailed the end of infectious diseases. Now, the post-antibiotic apocalypse is within sight. Hyperbole? Unfortunately not. The highly serious journal Lancet Infectious Diseases yesterday posed the question itself over a paper revealing the rapid spread of multi-drug-resistant bacteria. "Is this the end of antibiotics?" it asked. Doctors and scientists have not been complacent, but the paper by Professor Tim Walsh and colleagues takes the anxiety to a new level. Last September, Walsh published details of a gene he had discovered, called NDM 1, which passes easily between types of bacteria called enterobacteriaceae such as E. coli and Klebsiella pneumoniae and makes them resistant to almost all of the powerful, last-line group of antibiotics called carbapenems. Yesterday's paper revealed that NDM 1 is widespread in India and has arrived here as a result of global travel and medical tourism for, among other things, transplants,

The toxicology of homicide offenders and victims: - ISSUES: The toxicology of homicide offenders and victims, and homicide as a cause of death among psychoactive substance users. APPROACH: Review of the toxicology of homicide, and homicide as a cause of death among psychoactive substance users. KEY FINDINGS: A half or more of offenders are intoxicated by a psychoactive substance at the time of the homicide, with alcohol the most commonly reported substance. Levels of substances among victims are comparable with those seen among perpetrators. Among both offenders and victims, levels of substances far exceed population use. Among substance users, homicide specific mortality rates of substance users far exceed population rates. Reducing rates of alcohol and other drug consumption, at national and individual levels, can be expected to substantially reduce rates of, and risk for, homicide. CONCLUSIONS AND IMPLICATIONS: Psychoactive substances are strongly associated with homicide. One of the major societal benefits that can be derived from active attempts to reduce alcohol and other drug use are reductions in homicide rates.

Brain responds same to acute and chronic sleep loss - Researchers at the University of Wisconsin-Madison have found that five nights of restricted sleep--four hours a night--affect the brain in a way similar to that seen after acute total sleep deprivation. Even relatively mild sleep restriction for several nights can affect an individual's ability to perform cognitive tasks," Cirelli says. "For instance, recent studies in humans have shown that 5 days with only 4 h of sleep/night result in cumulative deficits in vigilance and cognition, and these deficits do not fully recover after one night of sleep, even if 10 hours in bed are allowed. Sleep restriction can also increase resistance to insulin, leading to a risk of diabetes." Cirelli and her team kept rats awake 20 hours a day over five days while continuously recording the animals' brain waves with a sophisticated EEG as they were asleep and awake. The EEGs measured slow wave activity (SWA), the best marker of an individual's need to sleep as well as the intensity of sleep that follows a period of wakefulness. "Slow-wave activity reflects the fact that sleep is regulated by homeostasis: in general, the longer we stay awake, the higher is SWA in the subsequent sleep. We knew that this was true after acute total sleep deprivation (for instance when we stay up all night); now we found that this is also true after chronic sleep restriction. " Cirelli notes..

Girls Hit Puberty at Younger Ages - New research adds further evidence that girls are entering puberty at younger and younger ages, with implications for their physical and mental health. By 8-years-old, more than 1-in-10 girls have already begun developing breasts, which marks the technical start of puberty for girls, according to a new study published Monday in the journal Pediatrics. The findings varied by race. Among 7-year-olds, about 10% of whites, 15% of Hispanics and 23% of blacks have some breast tissue. Among 8-year-olds, the numbers grew to 18% of whites, almost a third of Hispanics and half of blacks.The researchers, from the University of Cincinnati College of Medicine, Mount Sinai School of Medicine in New York and Kaiser Permanente in San Francisco, were surprised by how early the onset of puberty was in the study, which looked at 1,239 girls.

Our personalities may be set as early as 1st grade - Our personalities stay pretty much the same throughout our lives, from our early childhood years to after we're over the hill, according to a new study. The results show personality traits observed in children as young as first graders are a strong predictor of adult behavior.  "We remain recognizably the same person," said study author Christopher Nave, a doctoral candidate at the University of California, Riverside. "This speaks to the importance of understanding personality because it does follow us wherever we go across time and contexts."

The Personality Paradox - There’s an interesting new paper in Biological Psychiatry on the genetic variations underlying human personality. The study relied on a standard inventory of temperaments – novelty-seeking, harm avoidance, reward dependence and persistence – as measured in 5,117 Australian adults. What did the scientists find? Mostly nothing. The vast genetic search came up empty: Participants’ scores on Harm Avoidance, Novelty Seeking, Reward Dependence, and Persistence were tested for association with 1,252,387 genetic markers. We also performed gene-based association tests and biological pathway analyses. No genetic variants that significantly contribute to personality variation were identified, while our sample provides over 90% power to detect variants that explain only 1% of the trait variance. This indicates that individual common genetic variants of this size or greater do not contribute to personality trait variation, which has important implications regarding the genetic architecture of personality and the evolutionary mechanisms by which heritable variation is maintained.

Scientists find sea sponges share human genes - Mankind may be descended from apes but Australian scientists have found proof of links much closer to the sea floor, with a study revealing that sea sponges share almost 70 percent of human genes. Genetic sequencing of sea sponges from the World Heritage-listed Great Barrier Reef showed the ancient marine animal shared many of its genes with humans, including a large number typically associated with disease and cancer.

Brainless slime mould makes decisions like humans - Businesses use this tactic all the time – an extremely expensive option is used to make mid-range ones suddenly seem like attractive buys. The strategy only works because humans like to compare our options, rather than paying attention to their absolute values. But if that’s the case, we’re not alone in our folly. Other animals, from birds to bees, make choices in the same way. Now, Tanya Latty and Madeleine Beekman from the University of Sydney, have found the same style of decision-making in a creature that’s completely unlike any of these animals – the slime mould, Physarum polycephalum. It’s a single-celled, amoeba-like creature that doesn’t have a brain.These results strongly suggest that, like humans, Physarum doesn’t attach any intrinsic value to the options that are available to it. Instead, it compares its alternatives. Add something new into the mix, and its decisions change.

Ship of Fools: Why Transhumanism is the Best Bet to Prevent the Extinction of Civilization - Transhumanism is the thesis that we can and ought to use technology to alter and improve human biology.1 Some likely targets for the technological makeover of human nature include making ourselves smarter, happier, longer-lived and more virtuous. I want to explore the objection that transhumanism is an ill-advised experiment because it puts us at unnecessary risk. My reply will be that creating posthumans is our best bet for avoiding harm. In a nutshell, the argument is that even though creating posthumans may be a very dangerous social experiment, it is even more dangerous not to attempt it: technological advances mean that there is a high probability that a human-only future will end in extinction.

Mankind must abandon earth or face extinction: Hawking - Mankind's only chance of long-term survival lies in colonising space, as humans drain Earth of resources and face a terrifying array of new threats, warned British scientist Stephen Hawking on Monday. "The human race shouldn't have all its eggs in one basket, or on one planet," the renowned astrophysicist told the website Big Think, a forum which airs ideas on many subjects from experts. "Our only chance of long-term survival is not to remain inward looking on planet Earth, but to spread out into space," he added. He warned that the human race was likely to face an increased number of events that threaten its very existence, as the Cuban missile crisis did in 1962. The Cold War showdown saw the United States and Soviet Union in a confrontation over Soviet missiles deployed in Cuba, near US shores, and brought the world to the brink of nuclear war.

Green machine: Don't burn plant waste, bury it -- biochar - When it comes to using plant waste to mitigate climate change, most people think of turning it into ethanol or biodiesel for use as a fuel. But a new study suggests we may have more to gain by converting plant material into biochar, a type of charcoal, and burying it in farmers' fields. Biochar is produced by heating plant waste in an oxygen-free environment, a process known as pyrolysis. This also yields syngas – a mix of carbon monoxide and hydrogen – plus a small amount of oil. Both can be burned as fuels. Typically, up to 60 per cent of the plant's carbon ends up as biochar. When buried, this can lock the carbon away for thousands of years if necessary. The pyrolysis itself releases no carbon dioxide into the air. The new study was the work of James Amonette at the Pacific Northwest National Laboratory in Richland, Washington, and colleagues. It centres on a computer model they developed to compare the carbon emissions that would be saved by converting the world's available supplies of plant waste into either biofuel or biochar.

Gee Whiz: Human Urine Is Shown to Be an Effective Agricultural Fertilizer - Scientific American - "It is totally possible to use human urine as a fertilizer instead of industrial fertilizer," says Heinonen-Tanski, whose research group has also used urine to cultivate cucumbers, cabbage and tomatoes. Recycling urine as fertilizer could not only make agriculture and wastewater treatment more sustainable in industrialized countries, the researchers say, but also bolster food production and improve sanitation in developing countries. Urine is chock full of nitrogen, potassium and phosphorus, which are the nutrients plants need to thrive—and the main ingredients in common mineral fertilizers. There is, of course, a steady supply of this man-made plant food: an adult on a typical Western diet urinates about 500 liters a year, enough to fill three standard bathtubs. And despite the gross-out potential, urine is practically sterile when it leaves the body, Heinonen-Tanski pointed out. Unlike feces, which can carry bacteria like salmonella and E. coli, urine poses no health risks—astronauts on the International Space Station even drink the stuff—after it's purified.

Bio-Bug: Car Run On Human Waste Is Launched - The Bio-Bug has been converted by a team of British engineers to be powered by biogas, which is produced from human waste at sewage works across the country. They believe the car is a viable alternative to electric vehicles. Excrement flushed down the lavatories of just 70 homes is enough to power the car for 10,000 miles - the equivalent of one average motoring year. This conversion technology has been used in the past but the Bio-Bug is Britain's first car to run on methane gas without its performance being reduced.  It can power a conventional two litre VW Beetle convertible to 114mph.

Cattle 'cloned from dead animals' -  Some of the cattle cloned to boost food production in the US have been created from the cells of dead animals, according to a US cloning company. Farmers say it is being done because it is only possible to tell that the animal's meat is of exceptionally high quality by inspecting its carcass. US scientists are using a variety of techniques to assess which animals have exceptional qualities. These attributes include meat quality, productivity or longevity.

Cloned cows' milk scare: don't worry. Unless they're nuclear cows, you're perfectly safe – Telegraph - Why this sudden panic over milk from cloned cows? Or, rather, from their offspring. We report, along with The Daily Mail and The Guardian, that a British farmer has been selling milk from cows which were born to cloned parents. It’s illegal, so maybe it’s worth a note somewhere in the middle of the paper, but the Mail put it on their front page, while we’ve been running it on the homepage of our website all morning, as have The Guardian. What is it that is getting people so exercised?Presumably – although none of the reports quite comes out and says this, or refutes it – it’s because people are scared that milk from these animals will, in some way, be toxic.Now. How likely is this? In short, not very. A cloned animal should be genetically identical to the parent, excepting mutation, unless it has been genetically modified.

US confidence in clone food - There are concerns that the offspring of cloned animals have entered the food chain in the UK, but how are attitudes different in the US? The authorities in the US have been investigating the safety of cloned meat and milk since 2001, when it was first floated as an idea for commercial use to improve the quality of herds.Meat and milk producers were asked to observe a voluntary moratorium until the Food and Drug Administration was able to check the health issues posed by cloned animals.The US National Academy of Sciences released a report in 2002 suggesting food from cloned animals was safe. By 2008, the FDA was able to issue its guidance on the subject.  It concluded: "Meat and milk from clones of cattle, swine, and goats, and the offspring of clones from any species traditionally consumed as food, are as safe to eat as food from conventionally bred animals."

National flood insurance program $18 billion in the red - The federal government's program to protect coastal residents from nature's devastation has coughed up more than $8 billion over the past 15 years for more than 150,000 troubled properties that have filed multiple claims for storm damage.Because of the problem caused by repetitive losses, 1 percent of properties account for between 25 and 30 percent of the claims it pays. The number of "repetitive loss" homes more than doubled in the past 15 years. What's more, the devastation wrought by Hurricanes Katrina and Rita in 2005 has left the program deeply in debt with little or no hope of stemming the tide of red ink. Hemorrhaging $200 million a year, the National Flood Insurance Program now owes the Department of Treasury more than $18 billion - money an April report from the Government Accountability Office says the program is unlikely to be able to pay back.

As the green economy grows, the 'dirty rich' are fading - Hopes for a pivotal BP-driven eco-moment -- remember President Obama's call in June for a new "national mission" to get America off fossil fuels? -- have dissipated, seemingly confirming the common view that powerful energy firms, and corporate America more broadly, stand as the sworn enemies of any bold new environmental rules and that they have the clout to get their way.  Except that old view is no longer quite right. In fact, big business is more divided on energy and the environment than ever before, and the growing rift reflects major power shifts in the economy. On one side are business leaders and shareholders who derive their wealth from resource extraction, fossil-fuel-based power generation and energy-intensive manufacturing -- they are the "dirty rich." On the other are business leaders who run knowledge or service companies that generate very little pollution -- the "clean rich."

U.S. electricity blackouts skyrocketing - Experts on the nation's electricity system point to a frighteningly steep increase in non-disaster-related outages affecting at least 50,000 consumers. During the past two decades, such blackouts have increased 124 percent -- up from 41 blackouts between 1991 and 1995, to 92 between 2001 and 2005, according to research at the University of Minnesota. In the most recently analyzed data available, utilities reported 36 such outages in 2006 alone.  "It's hard to imagine how anyone could believe that -- in the United States -- we should learn to cope with blackouts," said University of Minnesota Professor Massoud Amin, a leading expert on the U.S. electricity grid.  Amin supports construction of a nationwide "smart grid" that would avert blackouts and save billions of dollars in wasted electricity.

BrightSource to build largest concentrating solar power plant - Brightsource Energy Inc., an Oakland, California-based developer of utility-scale solar thermal power plants, announced that the California Energy Commission’s (CEC) siting committee recommended approval of what will be the world’s largest solar energy project.  The project, called the Ivanpah Solar Energy Generating System (ISEGS), consists of a three-plant, 392-megawatt solar electric generating system located in California’s Mojave Desert.  After a 30-day comment period passes, the final permits allowing the commencement of construction will most likely be issued.  Additionally, Brightsource Inc. has received a conditional commitment from the U.S. Department of Energy for $1.37 billion in loan guarantees to fund the project. The electric power that the plants generate will be contracted to two utility companies, Pacific Gas & Electric Co. and Southern California Edison Co., under separate long-term contracts that will deliver more than 2,600 megawatts of electric power.

Flywheel power grid storage project gets DOE loan - Beacon Power on Monday said it has closed a $43 million loan guarantee with the Department of Energy for a project to use flywheels to buffer 20 megawatts of power on the grid. The loan covers 62.5 percent of the estimated $69 million needed to construct the flywheel storage plant in Stephentown, N.Y. The New York Energy Research and Development Authority is also providing $2 million in funding for the plant which is now under construction. Once done, Beacon Power said that the plant will be the only one of its kind in the world. Rather than use a large battery, it will use a network of flywheels to store electricity from the grid as kinetic energy and disperse it in quick bursts of up to 15 minutes. Right now, grid operators typically use natural gas power plants to maintain a balance between supply and demand and keep a steady frequency of 60 cycles per second. The Stephentown project, expected to be completed by the end of the first quarter next year, will be able to provide 10 percent of the frequency regulation services in New York needed on a typical day.

The Embodied Carbon In a Concrete Foundation - Is highly uncertain... Let's start with the amount of carbon that has to be emitted to produce and deliver a kilogram of concrete.  According to the Inventory of Carbon and Energy (ICE v1.6a), the embodied energy of concrete averages 2.9 MJ/Kg, but the standard deviation is 8.7 MJ/Kg, and the range in 122 studies worldwide goes from 0.07 to 92 MJ/Kg.  So it all depends, and the impact of any concrete project is highly variable based on luck of the draw: how energy efficient the local cement plants, limestone quarries, gravel mines, etc are, how close they are to the building site and each other, and so on. In any case, ICE reports a central value of 0.035 kg of carbon emissions per kg of concrete.  Let's work with that for a minute.

How Much Will a Carbon Tax Spur Innovation? - Ryan Avent speaks for everyone who has been to Europe -- or has familiarity with their carbon usage and transportation policy -- and points out that Europe's transportation sector is hugely different from ours: Clearly that's not the case. In general, Europeans do drive different automobiles, which tend to be smaller and more efficient. Some of these have been innovative enough in their design to generate raised eyebrows from American tourists (see: the Smart car). In Europe, the scooter is far more popular and differentiated (the scooter with roof is a common sight). Bicycles are also more common and differentiated, and the institutional supports for cyclists are more highly developed (cycle superhighways are old news in Europe). And then there's public transport. From buses to trams to trains to high-speed rail, Europe is well ahead of America. When American transit systems go shopping for vehicles, they generally look to European manufacturers.

BBC News - Climate change talks 'backslide' at Bonn - Global climate change talks have moved backwards since last year, say negotiators from both rich and poor nations at discussions in Germany. The US envoy said some countries had "walked away" from commitments made at Copenhagen last year to contain greenhouse gas emissions. But the top UN climate official, Christiana Figueres, said progress had been made towards an eventual deal. Negotiators are working towards the next climate summit in November. There is one last preparatory meeting, in Tianjin, China, in October, to draft a negotiating text before the summit in Cancun, Mexico."At this point, I am very concerned," said chief US negotiator Jonathan Pershing at the conclusion of a week of talks in Bonn.

Post-Copenhagen quest for global warming accord stuck in reverse - With 3-1/2 months left before a United Nations climate summit in Cancun, Mexico, the spade work ahead of the meeting seems to be turning up more boulders than a New England plow.Last week, negotiators from 194 countries met in Bonn, Germany, and made little progress in any of six broad areas covered by a join-if-you-like plan that emerged from last December’s climate negotiations in Copenhagen. Instead, it appears that the most significant progress on some issues will take place outside the UN process, where key countries are working to set up a “quick-start” adaptation fund for developing countries and approaches to increase efforts to combat deforestation.

Study: 60% of species recovery plans identify global warming as extinction threat - A scientific review of federal endangered species recovery plans finds that scientists are increasingly identifying global warming as an extinction threat but government agencies have yet to respond with any national strategy. The lack of recovery plan guidance from the U.S. Fish and Wildlife Service has led to inconsistent efforts to save species that scientists say are most threatened by global warming.

Think this summer is hot? Get used to it -This summer's stifling, deadly heat along the Eastern Seaboard and Deep South could be a preview of summers to come over the next few decades, according to a report about global warming to be published Wednesday by the National Wildlife Federation and the Asthma and Allergy Foundation of America. In fact, according to NWF climate scientist Amanda Staudt, the summer of 2010 might actually be considered mild compared with the typical summers in the future. "We all think this summer is miserable, but it's nothing compared to what's in store for us," she says. The East just sweltered through one of its hottest Julys on record, the National Oceanic and Atmospheric Administration reported Monday. Every state from Maine to Florida endured one its top-10 warmest Julys since records began in 1880. Two states, Delaware and Rhode Island, had their hottest July ever.

Dust Bowl 2: Drought detective predicts drier future for American Southwest - If you're one of the tens of millions of people who live in the southwestern United States, get ready for drier weather. That's the message from Richard Seager, a climate scientist at Columbia University's Lamont-Doherty Earth Observatory. The American Southwest, says Seager, is soon likely to experience a "permanent drought" condition on par with the Dust Bowl of the 1930s. That rather frightening prediction is the most likely scenario for the region, given the global warming now underway. "It is a matter of simple thermodynamics," says Seager. "The region will face a considerable increase in aridity over the coming decade."

NASA reports hottest January-July on record, says that 2010 is “likely” to be warmest year on record and July is “What Global Warming Looks Like” - WMO: "Unprecedented sequence of extreme weather events ... matches IPCC projections of more frequent and more intense extreme weather events due to global warming." - Both NASA and the World Meteorological Organization both have excellent posts I’m going to excerpt at length.  The first, from NASA’s Goddard Institute for Space Studies website, is titled July 2010 — What Global Warming Looks Like.  The second, from the World Meteorological Organization, is titled: Unprecedented sequence of extreme weather events

First They Came For The Climate Scientists - Krugman - Everyone knows that the American right has problems with science that yields conclusions it doesn’t like. Climate science — which says that we face a huge global externality that requires not just government intervention, but coordinated international action (black helicopters!) has been the target of a sustained, and unfortunately largely successful, attempt to damage its credibility. But it doesn’t stop there. We should not forget that much of the right is deeply hostile to the theory of evolution. And now there’s a new one (to me, anyway; maybe it’s been out there all along): it turns out that, according to Conservapedia, the theory of relativity is a liberal plot. Update: Tom Tomorrow emails me to tell me about today’s comic.

Global warming heats up a nuclear energy renaissance - Public and political acceptance of nuclear power as a logical large-scale alternative to fossil fuel is higher than it has been in a generation. Once mainly associated with mishaps like Three Mile Island and Chernobyl – not to mention bumbling nuclear plant worker Homer Simpson – the energy source now has support from 62 percent of Americans, a Gallup Poll found in March. That's the highest since Gallup began asking about the topic in 1994. Even former foes like Stewart Brand, founder of the Whole Earth Catalog and an alternative-energy crusader, and Mark Udall, a member of the Udall family Democratic political dynasty that has stewarded natural resources, are rethinking the nuclear energy option. They're influenced more by the immediately tangible environmental consequences of greenhouse gases than by possible radiation disasters.

Greenland Glacier Calves the Arctic's Largest  Ice Chunk in Nearly a Half-Century - One of the largest of Greenland's marine "outlet" glaciers (i.e. glaciers ending in the sea) has calved an enormous "ice island" that reportedly extends over 100 square miles.  Not since 1962, when a 250 square mile island was formed from the Ward Hunt Ice Shelf, has such a large area of ice been calved in the Arctic. We reported in Dramatic Ice Loss Spreads to Northwest Coast of Greenland (23 March 2010) that the region was losing much more ice in the area where the Petermann glacier is located.  "Our speculation is that some of the big glaciers in this region are sliding downhill faster and dumping more ice in the ocean," said John Wahr, a coauthor of Spread of ice mass loss into northwest Greenland observed by GRACE and GPS published in Geophysical Research Letters (19 March 2010).  Shfaqat Abbas Khan, lead author of the article, says: "If this activity in northwest Greenland continues and really accelerates some of the major glaciers in the area -- like the Humboldt Glacier and the Petermann Glacier -- Greenland's total ice loss could easily be increased by an additional 50 to 100 cubic kilometers (12 to 24 cubic miles) within a few years."

Ice island four times the size of Manhattan breaks off Greenland The new ice island, which broke off on Thursday, will enter a remote place called the Nares Strait, about 620 miles (1,000 km) south of the North Pole between Greenland and Canada. The ice island has an area of 100 square miles (260 square km) and a thickness up to half the height of the Empire State Building, said Andreas Muenchow, professor of ocean science and engineering at the University of Delaware. Muenchow said he had expected an ice chunk to break off from the Petermann Glacier, one of the two largest remaining ones in Greenland, because it had been growing in size for seven or eight years. But he did not expect it to be so large.  "The freshwater stored in this ice island could keep the Delaware or Hudson Rivers flowing for more than two years," said Muenchow, whose research in the area is supported by the National Science Foundation.

Greenland Glacier 4X Size of Manhattan Breaks Loose - A University of Delaware researcher reports that an “ice island” four times the size of Manhattan has calved from Greenland’s Petermann Glacier. The last time the Arctic lost such a large chunk of ice was in 1962. “In the early morning hours of August 5, 2010, an ice island four times the size of Manhattan was born in northern Greenland,” said Andreas Muenchow, associate professor of physical ocean science and engineering at the University of Delaware’s College of Earth, Ocean, and Environment. Muenchow’s research in Nares Strait, between Greenland and Canada, is supported by the National Science Foundation

Vast Ice 'Island' Breaks Free of Greenland Glacier - From NYT, a quote of researcher Jason Box: Petermann [glacier] is a sleeping giant that is slowly awakening. Removing flow resistance leads to flow acceleration... The coincidence of this area loss and a 30 square kilometer loss in 2008 with abnormal warmth this year, the setting of increasing sea surface temperatures and sea ice decline are all part of a climate warming pattern. Here's the graphic from the article: How big is this "ice island"? From Montreal Gazette: The biggest Arctic "ice island" to form in nearly 50 years -- a 250-square-kilometre behemoth described as four times the size of Manhattan -- has been discovered after a Canadian scientist scanning satellite images of northwest Greenland spotted a giant break in the famed Petermann Glacier.

Jeff Masters: July SSTs in the tropical Atlantic set a new record - Sea Surface Temperatures (SSTs) in the Atlantic's Main Development Region for hurricanes had their warmest July on record, according to an analysis I did of historical SST data from the UK Hadley Center. SST data goes back to 1850, though there is much missing data before 1910 and during WWI and WWII. SSTs in the Main Development Region (10° N to 20° N and 20° W to 80° W) were 1.33 °C above average during July, beating the previous record of 1.19 °C set in July 2005. July 2010 was the sixth straight record warm month in the tropical Atlantic, and had the third warmest anomaly of any month in history. The five warmest months in history for the tropical Atlantic have all occurred this year. As I explained in detail in a post on record February SSTs in the Atlantic, the Arctic Oscillation (AO) and its close cousin, the North Atlantic Oscillation (NAO), are largely to blame for the record SSTs, though global warming and Atlantic Multidecadal Oscillation (AMO) also play a role.

Observations of SST, heat flux and North Atlantic Ocean‐atmosphere interaction - The relationship between the observed North Atlantic atmosphere and the forcing of SST and heat flux is investigated using the lagged MCA analysis. The dominant heat flux forcing to the North Atlantic Oscillation is associated with the later summer horseshoe SST forcing. The horseshoe SST is generated largely by the surface heat flux, and then forces the early winter atmosphere through the release of oceanic heat flux into the atmosphere. Independent of the horseshoe SST, there is no significant heat flux forcing on the atmosphere with a lead of longer than 1 month.

Frozen jet stream links Pakistan floods, Russian fires - Raging wildfires in western Russia have reportedly doubled average daily death rates in Moscow. Diluvial rains over northern Pakistan are surging south – the UN reports that 6 million have been affected by the resulting floods. It now seems that these two apparently disconnected events have a common cause. They are linked to the heatwave that killed more than 60 in Japan, and the end of the warm spell in western Europe. The unusual weather in the US and Canada last month also has a similar cause. According to meteorologists monitoring the atmosphere above the northern hemisphere, unusual holding patterns in the jet stream are to blame. As a result, weather systems sat still. Temperatures rocketed and rainfall reached extremes.In recent weeks, meteorologists have noticed a change in the jet stream's normal pattern. Its waves normally shift east, dragging weather systems along with it. But in mid-July they ground to a halt, says Mike Blackburn of the University of Reading, UK (see diagram). There was a similar pattern over the US in late June

Jeff Masters: The Great Russian Heat Wave of 2010 - One of the most remarkable weather events of my lifetime is unfolding this summer in Russia, where an unprecedented heat wave has brought another day of 102°F heat to the nation's capital. At 3:30 pm local time today, the mercury hit 39°C (102.2°F) at Moscow's Domodedovo Airport. Moscow had never recorded a temperature exceeding 100°F prior to this year, and today marks the second time the city has beaten the 100°F mark. The first time was on July 29, when the Moscow observatory recorded 100.8°C and Baltschug, another official downtown Moscow weather site, hit an astonishing 102.2°F (39.0°C). Prior to this year, the hottest temperature in Moscow's history was 37.2°C (99°F), set in August 1920. The Moscow Observatory has now matched or exceeded this 1920 all-time record five times in the past eleven days, including today. The 2010 average July temperature in Moscow was 7.8°C (14°F) above normal, smashing the previous record for hottest July, set in 1938 (5.3°C above normal.) July 2010 also set the record for most July days in excess of 30°C--twenty-two. The previous record was 13 such days, set in July 1972. The past 24 days in a row have exceeded 30°C in Moscow, and there is no relief in sight--the latest forecast for Moscow calls for high temperatures near 100°F (37.8°C) for the next seven days.

Dense Smog Chokes Moscow as Wildfires Continue - Dense smog choked Moscow today, grounding planes and forcing residents to don thick multi-layered masks as smoke from peat and forest fires hung over the Russian capital.  The heat and smoke have entered almost every aspect of life. Smoke has penetrated the city's subway system, and The State Historical Museum on the city's mammoth Red Square closed down because it couldn't' stop its smoke alarms from going off. The cloud of smoke is so large it can even be seen from space. A record heat wave has gripped Moscow and the surrounding regions for weeks, killing at least 52 people and burning up an area of land roughly three times the size of the nation of Luxembourg, Bloomberg News reported. "All high-temperature records have been beaten, never has this country seen anything like this, and we simply have no experience of working in such conditions," Moscow emergency official Yury Besedin said on Friday, according to The Associated Press.

Russian fires, heat estimated to kill 15000, cost economy $15B - Russia's record heat wave may already have taken 15,000 lives and cost the economy $15 billion as fires and drought ravage the country. At least 7,000 people may have died in Moscow as a result of the heat, and the nationwide death toll is likely to be at least twice that figure, according to Jeff Masters, co-founder of Weather Underground, a 15-year-old Internet weather service that gathers information from around the world. "The Russian population affected by extreme heat is at least double the population of Moscow, and the death toll in Russia from the 2010 heat wave is probably at least 15,000, and may be much higher," Masters said late Monday on his blog.

Russian Meteorological Center: “There was nothing similar to this on the territory of Russia during the last one thousand years in regard to the heat.” - Masters: Over 15,000 likely dead in Russia, 17 nations comprising 19% of Earth's total land area set extreme heat records this year, July was "sixth straight record warm month in the tropical Atlantic" Caption:  “A comparison of August temperatures, the peak of the great European heat wave of 2003 (left) with July temperatures from the Great Russian Heat Wave of 2010 (right) reveals that this year’s heat wave is more intense and covers a wider area of Europe. Image credit: NOAA/ESRL” — Jeff Masters. Ria Novisti reports: Russia has recently seen the longest unprecedented heat wave for at least one thousand years, the head of the Russian Meteorological Center said on Monday…. “We have an ‘archive’ of abnormal weather situations stretching over a thousand years. It is possible to say there was nothing similar to this on the territory of Russia during the last one thousand years in regard to the heat,” Alexander Frolov said.

Climate 'linked to Moscow fires' - The UK Met Office said there are likely to be more extreme high temperatures in the future.Experts from the environmental group WWF Russia have also linked climate change and hot weather to raging wildfires around the Russian capital. Meteorologists say severe conditions may linger for several more days.  Jeff Knight, a climate variability scientist at the UK Met Office, attributed the situation in Moscow to a number of factors, among them greenhouse gas concentrations, which are steadily rising.The recent El Nino, a climate pattern that occurs across the tropical Pacific Ocean and affects weather around the world, and local weather patterns in Russia may have also contributed to this summer's abnormal conditions.

Climate Experts Agree: Global Warming Caused Russian Heat Wave - As Russia chokes from a heat wave of unprecedented ferocity, president Dmitry Medvedev has strengthened his call for the world’s leaders to take action to fight global warming pollution. The scientific community has warned for decades that burning coal and oil without limit would intensify heat waves, droughts, and floods. Now that the planet is at its hottest in recorded history, freak climate disasters are arriving with increasing frequency. Some scientists are now stating the obvious: Russia’s heat wave simply would not have happened without the influence of fossil fuel pollution on our atmosphere. University of Texas climate scientist Michael Tobis is “hazarding a guess” that “the Russian heat wave of 2010 is the first disaster unequivocally attributable to anthropogenic climate change”:

One quarter of Russian crops lost -One quarter of Russia's crops have been lost amid a record heatwave, President Dmitry Medvedev said on Thursday, warning that many farms were on the verge on bankruptcy.  "We have a very complicated situation because as a whole in the country around a quarter of the grain crops have been burned," Russian news agencies quoted him as saying in the southern town of Taganrog.  "Unfortunately many farms are on the verge of bankruptcy on account of the death of the harvest."  Russian Prime Minister Vladimir Putin earlier this week sliced the leading wheat producer's grain harvest forecast due to a record drought, saying it would produce 10 million tonnes less grain than planned.

Russia lost quarter of grain crop: Medvedev (Reuters) - Drought has destroyed a quarter of Russia's grain crop this year, President Dmitry Medvedev said on Thursday, pushing some farmers to the brink of bankruptcy and hurting Russia's bid to expand food exports.The disaster has led Russia to ban grain exports from Sunday, could shave one percentage point off growth in Russia's $1.3 trillion economy and stoke inflation as worried Russians stock up on food.But Medvedev said the export restrictions, designed to restrain domestic food prices, could be lifted before their December 31 expiry, if the harvest permitted. That contradicted Prime Minister Vladimir Putin assertion this week said that the ban could be extended into 2011. The export ban could allow the United States to take market share from the world's third largest exporter, threatening Russia's long-term ambition to diversify its economy from oil and win a bigger share on the global agricultural market.

Russia Wheat Ban May Slash Food Aid To Millions, Says WFP (Dow Jones)--Millions of the world's poorest people could go hungry because Russia's ban on wheat exports will reduce the amount of food aid delivered to developing countries, the World Food Programme warned Tuesday. The world's largest humanitarian food agency told Dow Jones Newswires it is seeking an exemption to Russia's ban on grain exports due to fears that surging prices may cut the amount of grain it can procure elsewhere. "Clearly we won't be able to feed as many people due to the higher prices," said Caroline Hurford, U.K. spokesman for the WFP. "We are looking for an exemption for all humanitarian aid." The WFP, the food aid branch of the United Nations, provided food for more than 100 million people in 73 countries during 2009, including those facing humanitarian crisis and conflicts. Over a third of the 2.6 million metric tons of food the WFP purchased in 2009 was wheat, the organization said, meaning any shortage of supply could affect millions.

Egypt in a fix over Russian wheat ban -As the world’s largest grain importer, Egypt eats heaps of Russian wheat. What does Moscow’s impending ban on exports mean for Egyptians and the country’s economic diet? So far Egyptian officials have played down its implications and said they have plenty of stocks in reserve, but the ban has the potential to affect two of Egypt’s biggest economic challenges: inflation and public debt. Wheat prices eased slightly in frenetic trading on Friday having hit their highest level since the 2007-08 food crisis the previous day, but the ban’s longer-term implications for supply and prices remain unclear. Trickily for Egypt, it will come into effect on August 15, once the holy month of Ramadan has begun, and that’s a time when food consumption surges.

Arab food gap crosses $180bn over past decade - Arab countries have reeled under a cumulative food gap of more than $180 billion (Dh660.6bn) over the past 10 years to emerge as the largest single farm importer despite their massive arable land potential, according to official figures. Except for fish, vegetable and other minor crops, Arab nations are suffering from a persistent shortage in all types of farm products and the gap has steadily worsened over the past two decades, showed the Khartoum-based Arab Organisation for Agricultural Development (AOAD). Wheat accounted for more than half the shortage, and a decision by Saudi Arabia, the largest Arab economy, to stop costly cultivation of wheat and rely solely on imports is expected to further upset that balance. Besides wheat, the Arab food gap is underscored in cereal, barley, sugar, cooking oil, corn, rice and poultry as the Arab World's self-sufficiency in some of these products does not exceed 50 per cent.

BBC News Video – Costly crop: Wheat prices soaring - The price of wheat could be on the rise again as the US Department of Agriculture is set to warn that global production is at its lowest level in three years.  Wheat prices have soared by nearly 70% since early June.

Is another food crisis coming? - Once again, jitters are spreading through the world of food. Wheat prices have surged a terrifying 50% since early June, the biggest jump in 30 years, according to HSBC. Droughts in Russia, Ukraine and Kazakhstan, which together account for 26% of world wheat exports, are leading to fears of tight supply and super-charging prices. Russia's government made matters worse by slapping a ban on wheat exports from mid-August. The sudden price spike has a scary déjà-vu feeling, that the world will return to the nosebleed agricultural prices and food riots witnessed during 2007-08. That would not only punish the poor, but also drag on the already uninspiring recovery from the Great Recession. The fact is, though, that the food crisis never really went away. We're suffering from three decades of neglect of agriculture, a period when the sector was starved of the resources and technology it needs to keep up with rising world demand.

Call to ban corn-based ethanol production - - China's biggest non-state oil enterprise urged the National Development and Reform Commission (NDRC) to impose a ban on using corn to produce ethanol fuel. Zhao Youshan, chairman of the Oil Flow Commission of the China General Chamber of Commerce, told the Beijing Times that they have submitted a letter to the NDRC in an attempt to ban corn-based ethanol production, because it has pushed up corn prices at home and turned China into a corn-importing country in the first half of this year from previously a corn-exporting country.China imported 78 million tons of corn in the first half because domestic corn prices were relatively higher.

Time to regulate volatile food markets - With the current extreme price increases for wheat, we are observing potentially the early stages of another global food-price crisis. Even if this does not evolve into something as dramatic as the crisis of 2007-08, when prices of major agricultural commodities from corn to rice shot up to record levels, triggering food riots from Bangladesh to Haiti, it is a stark indication of the perilous state of the world food market. Some lessons have been learned from 2008, but too little has been done to prevent future crises. In particular the malfunctioning of world grain markets has not been addressed – a failure now haunting world markets. The fixing of international food prices today is the result of three forces: expectations on future supply and demand; the growing role of speculators in commodity markets, and the importance of food prices for political stability in countries such as Egypt. Today, low-income countries and the poor are actually more vulnerable than before the last food crisis.  The rapid recent increase in the international wheat price underlines the stakes. Last week, September wheat futures showed the steepest increase since 2008.

The Food Bubble: How Wall Street Starved Millions and Got Away With It - While Goldman Sachs agreed to pay $550 million to resolve a civil fraud lawsuit filed by the SEC, Goldman has not been held accountable for many of its other questionable investment practices. A new article in Harper’s Magazine examines the role Goldman played in the food crisis of 2008 when the ranks of the world’s hungry increased by 250 million. We speak to Harper’s contributing editor Frederick Kaufman. [includes rush transcript]

India Asks, Should Food Be a Right for the Poor? - Landless and illiterate, drowned by debt, Mr. Bhuria and his ailing children have staggered into the hospital ward after falling through India’s social safety net. They should receive subsidized government food and cooking fuel. They do not. The older children should be enrolled in school and receiving a free daily lunch. They are not. And they are hardly alone: India’s eight poorest states have more people in poverty — an estimated 421 million — than Africa’s 26 poorest nations, one study recently reported. For the governing Indian National Congress Party, which has staked its political fortunes on appealing to the poor, this persistent inability to make government work for people like Mr. Bhuria has set off an ideological debate over a question that once would have been unthinkable in India: Should the country begin to unshackle the poor from the inefficient, decades-old government food distribution system and try something radical, like simply giving out food coupons, or cash?

The Food Assistance Debate in India - India’s seen a lot of economic growth over the past decade. But it’s still a very large and quite poor country, containing huge numbers of poor people. It’s become prosperous enough, however, that it seems like it should be possible to prevent widespread malnourishment from being a problem. Jim Yardley in the NYT looks at an ongoing debate between two different visions of how to do that. One, promoted by India’s traditional left, is “to create a constitutional right to food and expand the existing entitlement so that every Indian family would qualify for a monthly 77-pound bag of grain, sugar and kerosene.”Another would be to scrap the existing ineffective food support system and replace it with something more like America’s SNAP (”food stamps”), a system that would distribute either money or coupons rather than food, and then let poor people buy the food themselves.

Why is promising a right to food more politically appealing than delivering that food? -In India, the system that delivers subsidized food and fuel to the nation’s poor is badly broken. Many people who are supposed to receive the subsidized fuel and bags of grain do not, and “studies show that 70 percent of a roughly $12 billion budget is wasted, stolen, or absorbed by bureaucratic and transportation costs.” This is according to a recent NYT article by Jim Yardley, which frames the current debate about what should be done as a struggle within the ruling Indian National Congress Party between Sonia Gandhi and her “left-leaning social allies” on one side, and “many economists and market advocates” on the other. Sonia Gandhi wants to include a “right to food” in the Indian constitution, while expanding the reach of the existing distribution system to cover everyone, and increasing the level of benefits it provides.The economists and market advocates, on the other hand, are fed up and want to experiment with vouchers, food stamps, or cash instead of the notoriously leaky bags of grain.We’ve hosted many heated discussions on this blog about the “rights-based approach” to development (see the end of the post for a list).

One-fifth of Pakistan is under water - Obama admin triples number of helicopters sent for flood relief - Denizens of Washington DC are reeling from a catastrophic storm that knocked out power for 100,000, toppled trees, and flooded streets. Much of the Gulf Coast is under flood warnings, and the central United States is sweltering under 110-degree heat, following an early summer of record heat and rainfall across much of the United States. Severe weather fueled by global warming pollution is having an even more devastating impact around the world:

Pakistan's floods: is the worst still to come? - It is over two weeks since the floods began in Pakistan, and the rains are still falling. Already termed the worst flooding to hit Pakistan for 80 years, this deluge has affected millions of people, and so far over 1,600 have died.  With the impacts of the flooding likely to continue well after the flood waters have retreated, Nature examines the escalating humanitarian disaster.  It is weather, not climate, that is to blame, according to meteorologists. An unusual jet stream in the upper atmosphere from the north is intensifying rainfall in an area that is already in the midst of the summer monsoon (see animation showing the growing extent of the flood waters). "What sets this year apart from others is the intensity and localisation of the rainfall," says Ramesh Kumar, a meteorologist at the National Institute of Oceanography, Goa, India. "Four months of rainfall has fallen in just a couple of days."

Landslides strike Zhouqu County, China - Collected here are images of the landslide-affected area of northwestern China, part of a series of disasters in Asia caused by recent heavy rains. (41 photos total)

As world burns, CNN skeptic Chad Myers finally admits global warming ‘is caused by man’ - One of America’s most influential global warming skeptics, CNN meteorologist Chad Myers, has finally admitted that global warming is “caused by man.” Brad Johnson has the story.During the hottest year ever recorded, following the hottest decade ever recorded, Russia is burning under heat not seen for at least 1000 years. Heat waves have set records throughout the United States and throughout the world. A monsoon season of unprecedented intensity has displaced tens of millions of people across Asia, threatening the nuclear states of China, Pakistan, India, and North Korea. The largest iceberg to calve from Greenland in fifty years has added to its precipitous decline of ice mass since 1980. Decades ago, scientists predicted these consequences of burning fossil fuels and heating the planet. Yesterday, in what CNN anchor Rick Sanchez billed a “good, smart conversation,” Myers actually recognized the reality of a “consequential global warming caused by man,”

Daily Mail: “Global warming is real and deeply worrying” - "Greenland appears to be literally cracking up in front of our eyes" - The Daily Mail has become the latest previously ‘climate sceptic’ newspaper to shift its editorial line to acknowledge that climate change is “real and deeply worrying”. Yesterday the paper’s science editor, Michael Hanlon, who could previously be seen as the UK’s most influential ‘sceptic,’ writes:I have long been something of a climate-change sceptic, but my views in recent years have shifted. For me, the most convincing evidence that something worrying is going on lies right here in the Arctic.” After describing his trip to see the break up of a glacier in Greenland – somewhere he describes as “Global Warming Ground Zero” – Hanlon says:“So has this remarkable week changed my mind? I still believe climate change has probably been exaggerated, but after coming here it is impossible to maintain that nothing is going on.

World Population by Latitude/Longitude - Nice graph pair showing the world’s population distribution (circa 2000) by latitude & longitude.

Coal barons at industry retreat plot to indoctrinate children about wonders of coal - This past weekend, coal company executives convened for the annual West Virginia Coal Association meeting in White Sulphur Springs, WV. The event, which was closed to the public, was held at the lavish Greenbrier Resort, where an overnight stay can cost upwards of $6,000 (plus tax). One panelist at the meeting, state Senate Finance Chairman Walt Helmick, pointed out the exclusivity of the resort hotel: “I used to drive by the Greenbrier often when I was young, but I never had the money to come in because I’m a former coal miner.” During the event, over 100 attendees collaborated on issues from hiring industry lobbyists to fighting federal regulations. However, one of the biggest concerns on the minds of coal executives was how to ensure children would be taught an industry-friendly approach to coal issues in the classroom.

Global Coal Supplies: It Might Be Worse Than Anyone Thinks…In a new study published in the international journal Energy researchers Tadeusz W. Patzek and Gregory D. Croft suggest that actual historical coal production is a better indicator of the future trend of worldwide coal output than stated reserves which are notoriously unreliable. They note, for example, that the state of Illinois, despite its rank as second in reserves in the United States, has seen its production decline by half over the last 20 years. In the meantime Illinois' estimated recoverable reserves have actually increased from 32 billion tons to 34 billion tons between 1987 and 2006. They mention the work of David Rutledge at the California Institute of Technology who has detailed the sharp downward revisions in the official reserve estimates in recent decades and who believes ultimate production will fall far short of the current reserve estimates. The trajectory for reserves, Rutledge shows, has largely been down as planners include constraints both technical and practical such as coal in seams too thin to mine economically or the presence of a large city over a shallow coalfield. Rutledge also applies Hubbert Linearization to the production data to obtain a truly startling picture of ultimate future recoveries: 50 percent less than current forecasts.

Can Gas ‘Fracking’ Pollute Groundwater? Unlikely. - Forbes - Can hydraulic fracturing of oil and gas wells pollute groundwater? The anti-drilling crowd wants you to think so, and has convinced the Environmental Protection Agency to launch an investigation into fracking. Don’t believe them. The fracking process basically consists of injecting millions of gallons of water mixed with a wee amount of chemicals and tiny ceramic balls down a well at high pressure to break up stubborn rock formations and release the natural gas trapped inside. In recent years there’s been a handful of cases where groundwater in the proximity of fracked gas wells has allegedly been contaminated–some say by fracking chemicals, some say by gas infiltrating the water table through an improperly completed well. Oil and gas execs dismiss the concerns.

‘The Marcellus Gas Shale Play: Information for an Informed Citizenry’ – a talk by Professor Ingraffea - Professor Anthony Ingraffea, nationally recognized Cornell University researcher, spoke at the Vestal Library in Vestal, NY on Wednesday, March 31, 2010 at 7 PM. Residents concerned about natural gas drilling in New York State were invited to attend this talk at the first meeting of NY Residents Against Drilling (NYRAD). Professor Ingraffea has been a principal investigator on R&D projects from the National Science Foundation, NASA, FAA, Kodak, IBM, Schlumberger, and the Gas Research Institute. His research concentrates on computer simulation and physical testing of complex fracturing processes.  Watch all 3 parts of the video of Prof. Ingraffea's presentation, including questions and answers from the audience. Thanks to Essential Dissent , Binghamton, NY, for creating this video.

Technology Review: What's Holding Biofuels Back? - The already dismal outlook for cellulosic biofuels--a type of fuel made from sources such as grass and wood chips--just got worse. For the second year in a row, the U.S. Environmental Protection Agency will drastically cut the amount of cellulosic biofuels that oil companies are required to blend into their fuel stocks under its Renewable Fuels Standard. This year's mandate was supposed to be 100 million gallons of cellulosic biofuels, but that was reduced to 6.5 million. Last month, the EPA announced that it would lower the requirement in 2011, from 250 million to somewhere between five million and 17.1 million gallons. The EPA is doing this because not enough cellulosic biofuel is being produced to meet the targets. So far, no commercial plants have been built--just some small pilot and demonstration-scale plants.

Gulf of Mexico `Dead Zone' Grows as Spill Impact Is Studied…The Gulf of Mexico faces a renewed and enlarged threat to marine life: a low-oxygen “dead zone” about the size of Massachusetts, caused by chemical runoff into the Mississippi River that flows into the sea.  The dead zone, which occurs in Gulf waters in summer and is unrelated to BP Plc’s oil spill, covers an area twice as large as last year, according to a National Oceanic and Atmospheric Administration study released this week. The low-oxygen area this year is the fifth-largest since measurements began in 1985.  Aside from the dead zone, where shrimp and other sea life can’t survive, and the BP spill that dumped an estimated 4.1 million barrels of crude oil into the Gulf, there’s a looming threat of hurricanes. Meteorologists at the U.S. National Hurricane Center say a warming of the Atlantic indicates the storm season could be one of the most active on record.

BP Spill May Be Least of Gulf Woes as Farm Chemicals Invade, Wetlands Sink - Visit the Gulf of Mexico today and you’d hardly recognize it as the scene of what President Barack Obama called “the worst environmental disaster America has ever faced.” It’s as if scientists had conducted an insane experiment -- dumping about 4.9 million barrels of oil into the water -- and discovered its effect was in certain ways negligible.  Some 21 years after the Exxon Valdez disaster, globs of oil can still be found in Alaska’s Prince William Sound. Yet the Gulf may be scrubbing itself from the BP Plc spill: Sunshine is evaporating the oil, and bacteria are rapidly digesting it, Bloomberg Businessweek reports in its Aug. 16 edition.  Less crude has infiltrated vulnerable wetlands than was predicted. Documented fish and bird kills have been small, and most Gulf beaches remain pristine.

Minerals Service Had a Mandate to Produce Results - NYTimes - Now the gulf is reeling from the worst oil spill in United States history, after five million barrels of sludge escaped from a defiant mile-deep hole that BP finally cemented last week. Deep-water drilling has been temporarily banned. And the Minerals Management Service, the agency that led the way into the deep-water age, has been abolished, ridiculed as a pawn of the oil industry it was meant to oversee. The gulf office that Mr. Oynes ran for many years has drawn particular scorn. The causes of the spill remain unclear, but a number of the agency’s actions have drawn fire: it shortened safety and environmental reviews; overlooked flaws in the spill response plan; and ignored warnings that crucial pieces of emergency equipment, blowout preventers, were prone to fail. The story has gained a bacchanal gloss because agency employees in Louisiana and Colorado took meals, gifts and sporting trips paid for by the industry, and several Colorado officials had sex and used drugs with industry employees. But the agency’s culture was shaped by forces much bigger than small-time corruption. / Interactive graphics - Interactive timeline: BP oil spill disaster

Relief Well to Be Completed to Ensure That Spill Is Stopped Although tests of BP’s Macondo well in the Gulf of Mexico appear to show that it is fully sealed, the government said Friday that work on a relief well will continue to complete the job of permanently plugging the gusher.  “The relief well will be finished,” Thad W. Allen, the retired Coast Guard admiral who leads the spill response, said at a press briefing in Schriever, La. But he said BP and government scientists were still studying the test results to determine the precise procedures to be followed in completing the relief well.  Admiral Allen said that the tests showed that there was no “communication” in the Macondo well between the reservoir of oil and the surface. But he stopped short of declaring victory in the more than three-month effort to stem the leak.  He said that some oil — perhaps 1,000 barrels, according to BP estimates — was still trapped in the well.

BP well may already be permanently sealed: official  – BP's catastrophic well may already be permanently sealed and no further cementing necessary through a relief well, US spill chief Thad Allen said Thursday.  BP performed a static kill last week that suppressed the gushing oil with mud and blocked the main pipe with cement but was expected to conduct a final "bottom kill" operation to seal off the reservoir in the coming days. But Allen said tests were under way that could show that the remaining area that needs sealing -- the annulus between the well pipe and the outer well bore -- was already cemented during the static kill.

BP Links Compensation With Continued Oil Production In The Gulf - BP has managed to link the fate of its $20 billion oil spill victims compensation fund with its continued ability to pump oil from the Gulf of Mexico.  The voluntary trust agreement negotiated with the Department of Justice is not with the British-based multinational, or even with BP America, but with a fairly remote subsidiary, BP Exploration & Production Inc. (BPEC) -- a Delaware corporation that operates BP's Gulf oil leases. So if BP's drilling revenues from the Gulf suddenly vanished, so, presumably, would the compensation fund, said Tyson Slocum, director of Public Citizen's Energy Program. "This is a very advantageous agreement from BP's point of view," Slocum told the Huffington Post. "Because their big concern is that the Deepwater Horizon incident would result in sanctions that would significantly reduce BP's involvement in lucrative Gulf operations."

Gulf scientist: Justice Department is gagging me from studying oil spill - The Justice Department continues to impose stifling restrictions on independent scientists seeking to study the catastrophic effects of Gulf spill, according to one scientist. In an opinion piece at The Scientist, ecosystem biologist Linda Hooper-Bui explains her frustration with corporations and government bureaucracies, both of which have been preventing independent scientists like her from accessing the Gulf of Mexico. "I want to collect data to answer scientific questions absent a corporate or governmental agenda. I won't collect data specifically to support the government's lawsuit against BP nor will I collect data only to be used in BP's defense," says Hooper-Bui.  But doing so has been a difficult task. In May, a US Fish an Wildlife officer took away ant samples from some of Hooper-Bui's PhD students because their project had not been approved by Incident Command, a joint program of BP and federal agencies

BP Is Hiding Dead Animals to Avoid Fine of $50,000 Per Dead Animal (and the Bad Publicity) (videos) Jerry Cope and Charles Hambleton report: The numbers of birds, fish, turtles, and mammals killed by the use of Corexit will never be known as the evidence strongly suggests that BP worked with the Coast Guard, the Department of Homeland Security, the FAA, private security contractors, and local law enforcement, all of which cooperated to conceal the operations disposing of the animals from the media and the public. The majority of the disposal operations were carried out under cover of darkness. The areas along the beaches and coastal Islands where the dead animals were collected were closed off by the U.S. Coast Guard. On shore, private contractors and local law enforcement officials kept off limits the areas where the remains of the dead animals were dumped, mainly at the Magnolia Springs landfill by Waste Management where armed guards controlled access. The nearby weigh station where the Waste Management trucks passed through with their cargoes was also restricted by at least one sheriff's deputies in a patrol car, 24/7.

Dead Fish Are Washing Up Everywhere . . . Is It Due to BP Oil Spill and Dispersants? - Dead fish are washing up everywhere.  For example, numerous dead fish washed ashore in Massachusetts a couple of days ago: (video) Dead fish had washed up in New Jersey yesterday. Hundreds of thousands of dead fish washed up today in New Jersey, and even the birds wouldn't eat them: (video). And they have washed up in Mississippi as well. Scientists attribute the dead fish to low oxygen levels in the Gulf of Mexico. Indeed, scientists have been warning about this for months. For example, on May 16th, the New York Times wrote: The enormous plumes are depleting the oxygen dissolved in the gulf, worrying scientists, who fear that the oxygen level could eventually fall so low as to kill off much of the sea life near the plumes.

Nothing to see here, please keep moving - Either the assimilative capacity of the Gulf of Mexico is impressive, or something is amiss: Federal authorities say up to 1 million barrels of oil may still lie beneath the surface of the Gulf. White House environmental adviser Carol Browner said cleanup crews from the government and well owner BP fought to keep the oil out of beaches and coast marches, but what did reach shore "has to be cleaned up." "Some of it may continue to come on shore, the residual. It'll come on in tar balls and tar mats, and that can be cleaned up," Browner said. In addition, she said scientists are examining marine life in the Gulf, "and right now nobody is seeing anything of concern."

Florida – Much Worse Problems Than the Oil Spill - Media coverage of the oil spill’s effect on the Gulf focusing on tourist income lost by the waterfront towns – with footage of empty beaches, restaurants and T-shirt shops – dominates the news. Interviews with devastated business owners are heart rending. But they always end with references to somehow hanging on until “things get back to normal.” Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either. Projections suggest that Florida can expect oil all along its west coast, and possibly throughout the Keys and up the east coast as well. Yet even before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation awaiting a match. Oily beaches and dying wildlife are likely that match.

BP's Deepwater Oil Spill - The World Continues Drilling - One of the questions I was asked earlier in the spill was, "Do you expect other countries to stop drilling in deepwater locations, because of the oil spill?" My response was, "Maybe a bit, in a few locations, but in general I expect the drilling to continue." The world has so much equipment that uses oil as a fuel, and so little in the way of good substitutes, that it is really difficult for governments to decide to discontinue drilling. Furthermore, if an oil company has debt, it needs to continue drilling in order to repay its debt. Even if a company doesn't have debt, stockholders expect dividends (often to make payments under pension plans), and this need to pay dividends contributes to the need to continue deepwater drilling. Even government-owned companies are under pressure to keep drilling, because governments often use their share of oil revenue to fund social programs.

The Flow Has Slowed Through The Trans-Alaska Oil Pipeline - In its heyday in the 1980s, the pipeline carried as much as 2.1 million barrels of oil a day from America's largest oil field at Prudhoe Bay to the port of Valdez. Alaska was transformed into a petro state with an oil savings account worth $33.3 billion.Today, however, the pipeline is carrying only about 660,000 barrels of oil a day, and production from the North Slope's aging fields is set to steadily decline over the next decade.  What this means for the continued delivery of oil to the rest of the U.S. from Alaska is significant. Engineers have warned that the pipeline — the only means of delivery of North Slope oil — will develop potentially dangerous problems with corrosion and ice if flows drop below 500,000 barrels a day, as they are expected to within the next five to 10 years.

OIL PRICES SAY: 100% CHANCE OF A NEW RECESSION - No, that headline is not a typo.  This interesting fact comes to us courtesy of The Global Macro Investor: “Oil prices are always a precursor to recessions.  We hit the magic 100% YoY rise in November 2009 and went on to hit the third highest YoY% rise in the history of oil markets…“The magic 100% level in the YoY change in oil gives us a 100% chance of a recession in the succeeding twelve months.  This indicator suggests that ISM will fall to 40, or even 35, in the coming months before recovering…”

The U.S. Military Spends Trillions for Oil - The BP spill in the Gulf of Mexico has reminded Americans that the price at the pump is only a down payment; an honest calculation must include the contamination of our waters, land, and air. An innovative approach comes from Roger Stern, an economic geographer at Princeton University who in April published a peer-reviewed study on the cost of keeping aircraft carriers in the Persian Gulf from 1976 to 2007. Because carriers patrol the gulf for the explicit mission of securing oil shipments, Stern was on solid ground in attributing that cost to oil. He had found an excellent metric. He combed through the Defense Department's data -- which is not easy to do because the Pentagon does not disaggregate its expenditures by region or mission -- and came up with a total, over three decades, of $7.3 trillion. Yes, trillion.

Q1 set to lose its crown as peak oil demand season - The typical drop in world oil demand between the first and second quarters of the year is disappearing, and could even be reversed as the global market increasingly takes its cue from consumption trends in non-OECD countries, according to the International Energy Agency.The established seasonal pattern of oil demand has historically seen demand peak in the first quarter, when the rich countries of the OECD consume greater quantities of fuel for heating. Demand then normally falls away sharply in the second quarter, making this is a time when many refiners plan scheduled maintenance.But this pattern is being turned on its head, as the growing importance of non-OECD demand means that the very different consumption patterns in developing countries are now setting the tone for the wider global market, the IEA says in its August monthly oil market report.

Dirty fuels 'could follow' peak oil - Rising oil prices could lead to an increase in the use of 'dirty fuels' unless policy measures are taken to intervene, a leading scientist has said.  Writing in the forthcoming edition of Public Service Review: Science and Technology, Daniel Kammen, professor of energy at the University of California, warned that vast quantities of 'unconventional' oil resources could be exploited as crude oil reserves dwindle.  Kammen pointed to extraction techniques, such as from shale rock and the Fisher-Tropsch process – where coal is turned into oil – that could increase potential oil reserves substantially.  "The resource is an estimated 30 – 40 times larger than the oil resource we have exploited to date," Kammen said. "And, this resource comes with an increasingly larger energy and climate penalty per barrel: if a barrel of conventional crude has a climate impact of "1", then tar sands are about 1.3 times as bad per barrel, shale oil is more than 1.7 times as bad, and oil derived from coal more than twice as bad in life-cycle per barrel."

Oil reserves are plentiful, says Aramco chief -The head of Saudi Aramco has brushed aside 'peak oil' concerns, saying the world has plentiful supply of oil and gas, with a vast quantity of known reserves yet to be tapped and additional resources still to be discovered. Speaking at the Oxford Energy Forum, Saudi Aramco President and CEO Khalid A. Al-Falih said that off-and-on fears that the world's oil resources are about to be exhausted are baseless, according to a report by Saudi Press Agency. Al-Falih said geological evidence proved that the energy-hungry world can still bank on between 6 and 8 trillion barrels of conventional oil and natural gas liquids and about 7 trillion barrels of unconventional oil.

Millions of Barrels of Oil Safely Reach Port in Major Environmental Catastrophe - According to witnesses, the catastrophe began shortly after the tanker, which sailed unimpeded across the Gulf of Mexico, stopped safely at the harbor and made contact with oil company workers on the shore. Soon after, vast amounts of the black, toxic petroleum in the ship’s hold were unloaded at an alarming rate into special storage containers on the mainland. From there, experts confirmed, the oil will likely spread across the entire country’s infrastructure and commit unforetold damage to its lakes, streams, and air. “We’re looking at a crisis of cataclysmic proportions,” said Charles Hartsell, an environmental scientist at Tufts University. “In a matter of days, this oil may be refined into a lighter substance that, when burned as fuel in vehicles, homes, and businesses, will poison the earth’s atmosphere on a terrifying scale.” “Time is of the essence,” Hartsell added. “If this is allowed to continue, the health of every American could be put at risk.”

Homeland...It is now Empire Security - This article is another salvo in the military industrial complex war on the taxpayer to keep the pentagon rolling in money at the expense of the needs of society. It ignores Eisenhower’s observation about the opportunity costs of military spending using resources that would be better applied elsewhere and it refuses to adequately define the links between actual threats and expensive tactics described as “national interests” which are nothing to do with the “common defense”. One of the problems with military industrial complex planning: it starts with the same solutions for the past 70 years; World War II tactics, organization and equipment; apply them to unnecessary strategies which are disguised as “national interests” that must unquestioningly be assured, and never broach debate on the value of their solutions and alternatives.

Modern cargo ships slow to the speed of the sailing clippers The world's largest cargo ships are travelling at lower speeds today than sailing clippers such as the Cutty Sark did more than 130 years ago. A combination of the recession and growing awareness in the shipping industry about climate change emissions encouraged many ship owners to adopt "slow steaming" to save fuel two years ago. This lowered speeds from the standard 25 knots to 20 knots, but many major companies have now taken this a stage further by adopting "super-slow steaming" at speeds of 12 knots (about 14mph). Travel times between the US and China, or between Australia and Europe, are now comparable to those of the great age of sail in the 19th century. American clippers reached 14 to 17 knots in the 1850s, with the fastest recording speeds of 22 knots or more. Maersk, the world's largest shipping line, with more than 600 ships, has adapted its giant marine diesel engines to travel at super-slow speeds without suffering damage. This reduces fuel consumption and greenhouse gas emissions by 30%. It is believed that the company has saved more than £65m on fuel since it began its go-slow.

Portugal Gives Itself a Clean-Energy Makeover - Five years ago, the leaders of this sun-scorched, wind-swept nation made a bet: To reduce Portugal’s dependence on imported fossil fuels, they embarked on an array of ambitious renewable energy projects — primarily harnessing the country’s wind and hydropower, but also its sunlight and ocean waves.  Today, Lisbon’s trendy bars, Porto’s factories and the Algarve’s glamorous resorts are powered substantially by clean energy. Nearly 45 percent of the electricity in Portugal’s grid will come from renewable sources this year, up from 17 percent just five years ago.  Land-based wind power — this year deemed “potentially competitive” with fossil fuels by the International Energy Agency in Paris — has expanded sevenfold in that time. And Portugal expects in 2011 to become the first country to inaugurate a national network of charging stations for electric cars.

IEA: China overtakes the United States as world’s largest energy user - Preliminary data from the International Energy Agency (IEA) indicate that China has become the largest energy consumer in the world, having overtaken the United States in the top spot. An IEA chart shows China using roughly 2.25 billion tons of oil last year, while the United States used roughly 2.2 billion tons of oil in 2009. China rose to its top ranking faster than expected because the country was much less affected by the global financial crisis than the United States. The IEA notes that China’s energy use would be even higher today had the government not made significant progress in reducing the energy intensity of the nation’s economy, that is, the amount of energy used per unit of output. China has also become one of the world’s leaders in renewable energy, particularly wind and solar energy, and is planning a major expansion of its nuclear power industry.

Solid refutation to IEA's analysis -Three weeks after the International Energy Agency (IEA) rushed to list China as the world's largest energy consumer, Chinese officials have come up with a solid rebuttal. The National Energy Administration and the National Bureau of Statistics on Wednesday conclusively proved, using both nations' officially released data, that China's total energy consumption was in fact 200 million tons of oil equivalent less than that of the United States in 2009.  The reason why Chinese officials are determined to counter the IEA's hasty analysis is more than obvious.  Though the country's per capita energy consumption last year was only one fifth that of the US, there is just no shortage of biased critics who cry foul over China's energy appetite.

In Crackdown on Energy Use, China to Shut 2,000 Factories- The Ministry of Industry and Information Technology quietly published a list late Sunday of 2,087 steel mills, cement works and other energy-intensive factories required to close by Sept. 30. Energy analysts described it as a significant step toward the country’s energy-efficiency goals, but not enough by itself to achieve them. Over the years, provincial and municipal officials have sometimes tried to block Beijing’s attempts to close aging factories in their jurisdictions.  These officials have particularly sought to protect older steel mills and other heavy industrial operations that frequently have thousands of employees and have sometimes provided workers with housing, athletic facilities and other benefits since the 1950s or 1960s.  To prevent such local obstruction this time, the ministry said in a statement on its Web site that the factories on its list would be barred from obtaining bank loans, export credits, business licenses and land. The ministry even warned that their electricity would be shut off, if necessary.

State Council think tank: GDP growth to hit 11% - China will enjoy a strong economic growth of around 10-11 percent, a leading government economist was quoted as saying Monday. "Provided that fiscal expenditures achieve their target this year, 2010 GDP growth should be about 10 to 11 percent," Zhang Yutai, head of the Development Research Center of the State Council, China's cabinet, was quoted as saying by the Shanghai Securities News. According to the National Bureau of Statistics (NBS), China's gross domestic product (GDP) increased by 9.1 percent in 2009 and by 9.6 percent in 2008, despite the financial crisis.

China Auto Sales May Rise to 16 Million, Group Says(Bloomberg) -- China’s auto sales may rise to 16 million this year, an auto makers’ group said, boosting its forecast from a previous estimate of 15 million. Vehicle sales will be higher than previously expected judging by deliveries in the first half of the year, Beijing- based Dong Yang, vice president of the China Association of Automobile Manufacturers, said in a phone interview today. The State Information Center also said in April auto sales may rise 17 percent to 16 million from a record 13.6 million last year. Even so, sales growth is slowing from 2009, when government incentives helped demand surge 46 percent, making China the world’s biggest automobile market. Wholesale passenger-car deliveries in July increased at the slowest pace in 16 months, the auto makers group reported yesterday. Monthly totals may begin shrinking from year-earlier levels as early as September, according to the Daiwa Institute of Research.

Chinese Annual Household Income Understated By Almost 10 Trillion RMB? - Credit Suisse has published a report that tries to quantify the scale of hidden, or unreported, income in China. The bank sponsored Professor Wang Xiaolu of the China Reform Foundation for this report, his second study of China’s grey income and income distribution. Professor Wang makes some startling and conclusions that if accurate have significant ramifications for how we should view China’s economic development, Chinese consumption activity (see Pettis today for his dim view of Chinese consumption; not sure he has seen this report) the possible existence of property bubbles, and the challenges the Chinese government faces in maintaining social stability. If his data is correct, it may also mean that many of the concerns about Chinese government debt are overblown, as the government has much greater potential than expected increase revenue in the future, through optimizing the tax code and tax collection. Prof. Wang estimates that the per-capita disposable income of urban Chinese households in 2008 should be Rmb32,154, 90% above the official data. Total hidden income could total Rmb9.3 tn, 30% of GDP, with about 63% of hidden income in the hands of the top 10% of urban households.

Hidden Income in China Boosts Income of Top 10%, Fueling Speculation, Social Strains - Yves Smith - An article at Caixin helps clear up a mystery that has plagued Western observers, including some readers of this blog: where is all the money that is stoking Chinese real estate speculation coming from? Accounts of individuals buying 3 or 5 apartments at prices way out of line with incomes with little in the way of leverage, then keeping them vacant, seems inconceivable on the scale at which it appears to be taking place. It appears that the richest cohort is more affluent that official data suggests, largely due to the fact that black economy is quite large and the top group is a disproportionate beneficiary. As Caixin tells us (via MarketWatch): An independent survey conducted by our institute concluded that the actual annual disposable income for the top 10% of all Chinese households with the highest incomes in 2008 was 139,000 yuan — more than three times the official estimate…

Behind Andy Xie’s China Housing Numbers – In a recent article, economist Andy Xie suggested we "Fear Empty Flats in China's Property Bubble ." In his attempt to make you "fear," Mr. Xie makes the silly claim that the vacancy rate in urban China is 25% - 30%. This subject arose in China out of what appears to be a false rumor about electricity usage, which Mr. Xie first cites. As a former analyst, long ago I learned to be wary of cited numbers and to look at the assumptions that go into them. The subject is important because China's housing market is repeatedly cited by shorts as one of the main reasons they believe equity markets will fall.  First, please keep in mind that recently China's Ministry of Urban Rural Development said more than half of China's total urban housing will be torn down in the next 20 years. Those who call China's housing market a "bubble" fail to mention that a huge percentage of China's existing housing stock is old and "pre-teardown."

China Property Prices Rise 10.3%, Least in Six Months – China’s property prices rose at the slowest pace in six months in July as the government cracked down on speculation to prevent asset bubbles. Prices in 70 major cities climbed 10.3 percent from a year earlier, the statistics bureau’s newspaper, China Information News, reported today. The value of sales fell 19.3 percent from a year earlier. Today’s data showing sales cooling faster than prices suggests the government will maintain real-estate curbs even as the economy slows

Beijing: Sky-high prices push foreigners to suburbs – A small community of expatriates has emerged in Beijing's growing northern suburbs attracted by low rents and spacious apartments. Among them is Peter Marvian, a 32-year-old English teacher from Canada, who rents an apartment in Huilongguan. "You tell Chinese people you live in Huilongguan and they give you that stare, because, a few years ago, it was considered undeveloped," said Marvian. Areas like Huilongguan and Tiantongyuan on Beijing's far north side were mostly rural a decade ago. Since the construction of the fifth and sixth ring roads and light rail lines 5 and 13, they have grown into major commuter suburbs that offer an affordable alternative to apartments in the city center.

A Tale of Two Chinas - Rich, poor. Urban, rural. East coast, western interior. The disparities in China's health-care market are striking for a country that values egalitarianism. Some critics even claim that China's current health-care crisis is more dramatic than the U.S. crisis, and when we dig into the figures (some of which are shown in Table 1), we can see validity in that claim. Reform efforts are underway in China, and in this article we explore the government's goals and the market opportunities that could be created as a result of those reform efforts.

Chinese Hospitals Are Battlegrounds of Discontent - NYT — Forget the calls by many Chinese patients for more honest, better-qualified doctors. What this city’s 27 public hospitals really needed, officials decided last month, was police officers And not just at the entrance, but as deputy administrators. The goal: to keep disgruntled patients and their relatives from attacking the doctors. The decision was quickly reversed after Chinese health experts assailed it, arguing that the police were public servants, not doctors’ personal bodyguards. But officials in this northeastern industrial hub of nearly eight million people had a point. Chinese hospitals are dangerous places to work. In 2006, the last year the Health Ministry published statistics on hospital violence, attacks by patients or their relatives injured more than 5,500 medical workers.

China Labor Cost Increases Setting the Bar for Other Economies - It’s been clear over the past few months that labor costs are going up in China. That’s now rippling to other manufacturing economies in Asia. So says Bruce Rockowitz, president Li & Fung Ltd., the bellwether Hong Kong based trading and logistics giant that is a major buyer of toys and clothes for the likes of Wal-Mart and Target. “Prices have gone up for us and our customers,” Mr. Rockowitz said “We’ve mitigated it by looking at Bangladesh, Vietnam, Indonesia,” he said. But labor and material costs are rising in those places, too. “Most of the countries, if not all, look to China for pricing direction. When China prices go up, most of the other countries follow suit… You are seeing issues on labor cost going up in other parts of the world other than China,” he said.

Copper Demand May Exceed Supply Next Year, Kamoo Says-- Copper demand may outstrip supply in 2011 for the first time in four years as China, the world’s biggest consumer, sustains purchases and as ore grades decline, Japan’s largest smelter said. “Supplies won’t catch up with demand next year and we expect there to be a deficit of 200,000 metric tons,” Hidenori Kamoo, general manager of the marketing department at Pan Pacific Copper Co., said in an interview yesterday. Copper, used in pipes, tubes and wires, faces a “deepening supply crunch” and record prices are highly likely in the next two years, Barclays Capital said in a report on July 27. Prices for immediate delivery will average $7,763 a ton next year as a market shortage widens, the bank said. The spot price in London has averaged $7,088 this year. “With few new large-scale mines on the horizon and stagnation at existing facilities, in our view, price direction will be upwards given the approach of multiyear deficits,” Barclays said. Demand will exceed supply this year by 132,000 tons and by 386,000 tons next year, the bank said.

Trade Deficit Explodes, by Tim Duy: In his recent NYT editorial, US Treasury Secretary Timothy Geithner proclaimed: Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand. I imagine that he must then be thrilled by today's trade report, which revealed the trade deficit swelled by $7.9 billion on the back of an explosion of imports. Analysts were quick to note that the new figures will contribute to another downward revision to the already disappointing Q2 GDP report: “The wider-than-expected trade gap points in itself points to a 0.4 percentage point downward revision to GDP growth, which needs to be added to the 0.8 percentage point estimated downward revision coming from construction and inventories.  I think you can argue a trade deficit reflects solid demand growth when the economy is operating near potential, or at least looks headed toward potential. I think such an analysis is ludicrous when unemployment hovers near double digits. Clearly, we have unused capacity. Yet no way to utilize it? Instead, I think the import surge reflects the deeply embedded structural imbalance in which US demand spending is increasingly satisfied with overseas production. 

US suffers widest trade gap in 20 months (AFP) - The trade gap grew at the fastest monthly pace on record to reach 49.9 billion dollars, threatening to erode already slow US economic growth. "This is spectacularly terrible," said Ian Shepherdson of High Frequency Economics, explaining that rising imports will eat into already anemic domestic growth as cash drains out of the economy. June's deficit surged past the 42-billion-dollar level seen in May, to become the largest trade gap since October 2008, in the depths of a brutal recession.

North American recovery wanes - Canada’s trade shortfall with the rest of the world grows unexpectedly in June and U.S. trade deficit swells The North American recovery slowed further in June as Canada’s trade shortfall with the rest of the world grew unexpectedly and the U.S. trade deficit swelled to the biggest gap since October of 2008. The Canadian trade deficit widened to $1.13-billion from $695-million in the previous month, according to data Statistics Canada released Wednesday. Exports fell 2.5 per cent in June to $33.5-billion as both prices and volumes slipped back. The decline followed six consecutive months of higher volumes as Canadian companies pushed into new markets and found ways to sell their goods even with a higher currency. Sales to the crucial U.S. market declined 1 per cent in June, largely due to energy products, shrinking Canada’s trade surplus with the world’s biggest economy to just over $3-billion. Exports to countries other than the United States fell 7 per cent, mostly because of a drop of more than 20 per cent in shipments to the European Union.

Ports wary of stunted holiday rush - The bad news for the ports of Los Angeles and Long Beach — part of a supply-chain infrastructure that employs dockworkers, truck drivers, railroad employees, warehouse and distribution center staffs and logistics experts — the big bump in holiday-season cargo jobs may not come this year. Consumers remain very cautious about the safety of their own jobs, and retailers are paying attention to those signals, experts said."Retailers are monitoring demand very closely and hoping to see increases in employment and other areas that will boost consumer confidence," said Jonathan Gold, vice president for supply chain and customs policy for the National Retail Federation.

Trade: A perfect storm - The Economist - I BRIEFLY mentioned the latest trade numbers in the previous post. They're worrying. America's trade deficit gapped out to $50 billion in June as exports sank by $2 billion from May to June while imports grew by $6 billion. America's trade balance worsened slightly against a number of its trading partners, but what's sure to make headlines is the deterioration against China. Exports to China were off slightly, but imports from China rose just over $4 billion from May to June. China drove this deterioration, which will figure into revisions to second quarter GDP and drag them downward. Meanwhile, on Monday, China reported its largest trade surplus, of $29 billion, since January of 2009.

China trade surplus soars as domestic demand flags – China's trade surplus surged unexpectedly in July to an 18-month high of $28.7 billion as exports beat forecasts, but a government-induced slowdown in investment took a toll on imports. Beijing is steering its super-loose monetary and fiscal policies back to normal after a record surge in credit last year to combat the global crisis. It has reined in lending to local authorities and mounted a drive against property speculation. Annual import growth moderated to 22.7 percent from 34.1 percent in June, well below forecasts of a 30 percent rise, providing clear evidence that the measures are biting.

Trading blows - AS CHINA'S exports have boomed over the past decade, it has begun to raise hackles in many countries. The most visible and recent manifestation of these tensions has, of course, been the largely political wrangling between America and China over its exchange-rate policy. But over the past couple of years, China has also been targeted in many formal trade disputes taken to the World Trade Organisation (WTO). Even more recently, it has begun to strike back, complaining against other countries nearly as often as they complain against it. Between January 1, 2009 and now, for instance, China has been targeted in 5 cases at the WTO, and it has in turn complained in another 4 instances. Given how China dominates the world’s discussion of all matters trade-related, it may come as a surprise to some how recent its visibility on the trade-dispute stage at the WTO is.

Trade data: China bears growl - Chinese trade data for July came as something of a disappointment for the markets. The growing trade surplus could also see pressure on China’s currency policy return. But perhaps more worrying is what the numbers say about China’s domestic demand. As usual, the jury’s out. But the bear’s are sharpening their claws. Long-term China bear Diana Choyleva at Lombard Research sees the latest figures as further evidence of serious trouble ahead. China’s cyclical story is turning from boom to bust, with negative implications for the rest of the world… Our estimates of China’s real GDP currently show that real domestic demand was flat in Q2 as the economy hit its cyclical constraints. The trade data for July, out today, not only confirm this picture, but suggest that domestic demand may already have started to slump in Q3. The last time imports contracted in China was around the time of the Lehman collapse, and lasted for 3 full quarters. The outlook, says Choyleva, looks increasingly bleak, not just for China, but for everyone:

Renminbi-Yen-Dollar Collision Course, by Tim Duy: Currency flows are potentially evolving in such a way as to keep international analysts glued to the news cycle. The story arguably begins with China's decision to allow greater currency flexibility, an event that was greeted by the financial press as a sign of China's economic maturity and a phenomenal win for the US Treasury. But the story just evolves in new and interesting directions. From the Wall Street Journal:A strong yen is giving Tokyo an awful headache. Beijing is adding to the problem. If things get worse, these old rivals could find themselves facing off in global currency markets.China has ramped up its stockpiling of yen this year, snapping up $5.3 billion worth of the currency in June, Japan's Ministry of Finance reported Monday. China has already bought $20 billion worth of yen financial assets this year, almost five times as much as it did in the previous five years combined. That's making the yen even stronger than it otherwise would be. Interestingly, to the extent that China makes a minor adjustment to the Dollar peg, authorities simply redirect some of those capital flows to Japan. Note that, arguably, Japan is the least capable of absorbing those flows. Seriously, Japan is the biggest basket case in the industrialized world (although US policymakers are sprinting to keep up).

Widening Chinese Trade Surplus Increases Pressure to Intervene - Yves Smith - In the 1980s, when unemployment hit 8%, Ronald Reagan’s administration was concerned and took steps to address the problem. One of the causes had been the 60% increase in the dollar versus the yen, which allowed the Japanese to make deep inroads into the US. One of the responses was the so-called Plaza Accord, in which the G-5 engaged in coordinated intervention to drive the dollar down. Narrowly, they succeeded too well, since the dollar overshot on the downside. More broadly, the measure was a partial remedy. China is an equally tough minded mercantilist, and has played the US adeptly thus far, managing to blunt the pressure from the US for it to allow its currency, the renminbi, to appreciate The announcement today, that China’s trade surplus reached a whopping $28.7 billion, 170% higher than its year-ago level and well above analysts’ estimates, is sure to increase pressure on China to Do Something about its currency. If China does not act, and the deficit next month is ugly, expect protectionist sabre rattling, and perhaps shots across the bow, like more imposition of targeted tariffs, to result.

America's real Asian trade problem - Looks like we're headed for another, repetitive round of U.S.-China bickering over Chinese exports. The U.S. trade deficit with China in June rose to $26 billion, the widest gap in nearly two years. Meanwhile, the reform of China's currency regime, announced by Beijing in June, has proven to be not much of a reform at all, since the value of the yuan against the greenback has barely budged since then. Lawmakers in Washington are sure to renew their calls for punitive action against China.But Washington is focused on the wrong issues in regard to U.S. trade with China, and for that matter, the rest of Asia. American policymakers should be much more worried about getting left out of the Asian trade story, and the potentially dangerous consequences that would have for the future of the U.S. economy. What do I mean? Asia is becoming much more economically integrated and intra-Asia trade is growing rapidly. Part of this is just a natural process – as the region gets wealthier, its firms are finding more and more customers at home. But the integration is also part of an active policy on the part of Asia's leadership. The continent is being bound together by a strong spirit of free trade.

Krugman vs. Reality (Reality Wins) - Here's what Paul Krugman had to say about the Great Recession a year ago: “When it comes to international trade, actually it’s not the Great Depression, it’s worse." Yes, he said that.Krugman's attempt on that occasion, in his column, and elsewhere to draw comparisons between the magnitude of the Great Depression and the recent recession and were absurd for myriad reasons then as they are now, as I noted at the time here, also more recently here and here.  Now the speculation is over and the extent of Krugman's misread is evident. As The Economist reports this week, global trade and global manufacturing are surging back:  As it turns out, there is nothing Depressing about current prospects in the global economy...unless, of course, you happen to be Paul Krugman.

Reframing Rebalancing - Raghuram Rajan has played an important role in keeping attention focused on global imbalances, but his solutions are hardly solutions at all. Differential savings rates, too low in the US and other deficit countries, too high in China and the other surplus countries, are primarily the consequence and not the cause of imbalances. I presented the evidence for this three years ago and see no reason to change my assessment. In any case, the surplus-deficit conundrum has been with us for more than a century, and historians have no trouble in identifying the problem. Deficit countries are uncompetitive; surplus countries have organized their economy to take maximum advantage of export opportunities. China’s main problem in rebalancing is not simply the structural difficulty of converting an export-oriented capital stock to one that serves the domestic market. This will be hard, but my rough reading of history is that it is a mistake to assume that capital is all clay and no putty

Geography And China's Surplus - Krugman- OK, I suppose I should react to this article about how geography, not the exchange rate, explains China’s surplus. Or maybe that’s not what it said. Frankly, I found the thing kind of a head-scratcher. Yes, the emergence of a huge core-periphery pattern has been a major theme in China’s takeoff, and that’s a gratifying vindication of some of my academic work; indeed, I’ve taken to using China as an illustration of “new economic geography” themes. But I don’t at all understand the logic of the author’s conclusion that this means we shouldn’t pressure China to end its currency manipulation. As far as I can tell, that just pops out of thin air.And one thing I think people don’t sufficiently realize: China has not been running large surpluses throughout its economic boom. On the contrary, those large surpluses are a relatively recent development:

Economics by invitation: Should governments take any steps to boost exports? | The Economist - What actions, if any, should countries with persistent current account deficits take to boost net exports? Is the use of any form of industrial policy ever justified? 5 economists respond

After catch-up -THE ECONOMIST is currently hosting a debate (not to be confused with our Economics by invitation discussion) on whether the "Chinese model" of development is superior to that in the west. It's quite good, and I encourage you to check it out. Reading it made me think of this recent post by Tim Lee. Riffing off an old (and good) Nation piece on the Chinese obsession with planning, Mr Lee says: China is going through roughly the same phase of technological development that the Western world passed through in the first half of the 20th century: the country has mastered the basics of industrialization and are reaping huge gains from economies of scale and a more educated workforce. The engineers and bureaucrats who are organizing ever-more-impressive feats of industrial production have, like their Western counterparts of a century ago, convinced themselves that a society can be planned in the same manner that a factory floor can be.

China Construction Bank Approved To Open Branch In Sydney (Xinhua) -- China's second largest bank, the China Construction Bank, said it has been approved by the Australian Prudential Regulation Authority to set up a branch in Sydney. The branch would be allowed to provide deposit services, loans, trade financing, foreign exchange trade and other commercial banking services, said a statement on the bank's website Thursday.The approval was given by the Australian regulator on Wednesday, the statement said, but gave no details on when services would be open. The Sydney branch would be the bank's ninth outlet abroad, after branches in Hong Kong, Singapore, Frankfurt, Johannesburg, Tokyo, Seoul, New York and Ho Chi Minh City.

Chinese banks reportedly facing wave of bad loans-- China's banks could see as much as 20% of their loans from state-controlled firms go bad, a report said Sunday, even as the nation's banking regulator said non-performing loans were on the decline. Recent stress tests conducted by the China Banking Regulatory Commission (CBRC) showed 20% of all outstanding loans to state-owned companies were "in trouble" as of the end of June, the Japanese business newspaper Nikkei reported, citing an unidentified CBRC official

The Mother Of All Bubbles - In the latest issue of  The Casey Report  Bud Conrad does a fantastic job analyzing the truth about Asia. Japan is a ticking demographic time bomb. The Chinese government has created the mother of all bubbles and when it pops, it will be felt around the world. The China miracle is not really a miracle. It is a debt financed bubble. Sound familiar? I picked out 4 charts from Bud’s article that paint the picture as clearly as possible. The chart below shows that compared to the real estate bubble in Japan during the late 1980s and the current bubble in China, the US housing bubble looks like a tiny speed bump. The US has 20% to 30% more downside to go. For those looking for a housing recovery, I’d like to point out that Japan’s housing market has fallen for 20 years with no recovery. Take a gander at home prices in China. Since the 2008 financial crisis, the Chinese housing market has skyrocketed 60%. There are now 65 million vacant housing units. The question is no longer whether there is a Chinese housing bubble, but when will it pop.

Peak Hypocrisy: Europe Threatens Japanese FX Intervention Would Not Be "Welcome" - In an apparent example of peak hypocrisy, a Eurozone official told Reuters today that "Forex intervention by Japanese authorities would not be welcome in Europe." Of course, when it was the Swiss National Bank and the BoE (confirmed) intervening, and the ECB (alleged) doing all they can to lower the value of their currencies it is all good, and Europe doesn't care that the JPY will appreciate. However, when others do the same, it's "not welcome." At least the Eurozone hypocrites qualified their statement by saying: "I doubt any sort of coordinated intervention will ever fly" - we will be sure to remind Hildebrand and Trichet of this, the next time they are trying to kill their respective currencies.

Currencies: All fall down - The Economist - THE Wall Street Journal recently noted: A strong yen is giving Tokyo an awful headache. Beijing is adding to the problem. If things get worse, these old rivals could find themselves facing off in global currency markets. China has ramped up its stockpiling of yen this year, snapping up $5.3 billion worth of the currency in June.  Tim Duy worries about what this means: Interestingly, to the extent that China makes a minor adjustment to the Dollar peg, authorities simply redirect some of those capital flows to Japan. Note that, arguably, Japan is the least capable of absorbing those flows. Michael Pettis puts it this way: The PBoC seems to be increasing its purchases of the yen, and that is causing the yen to rise. It is also causing very unwelcome weakness in the Japanese economy. Whenever people argue that the US wants and needs net Chinese investment in USG bonds, you should ask how that can possibly make sense when every country seems to be doing all it can to repel foreign capital inflows. Consumption, it's understood, that should be coming from surplus countries, particularly China. Unfortunately, as Mr Pettis also says, economists in Asia are increasingly worried that China's growth slowdown isn't happening in quite the controlled manner Chinese leaders would like you to believe.

National debt hits 190% of GDP at ¥900 trillion - The outstanding balance of the central government's debt reached a record high ¥904.08 trillion at the end of June amid massive bond issuances and declining tax revenue, Finance Ministry data showed Tuesday. It is the first time the debt balance, including government bonds and financing bills, has topped ¥900 trillion. Per capita debt came to around ¥7.10 million based on Japan's estimated population of about 127.42 million as of July 1. The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled ¥476 trillion

Japan govt's debt tops $10.49 trillion for first time - Japan's debt hit a record high of $10.54 trillion at the end of June amid massive government bond issuance and declining tax revenues, a data by the Finance Ministry has shown.It is the first time that the debt balance, including government bonds and financing bills, has exceeded $10.49 tril.Per-capita debt came to around $80,000 based on Japan's estimated population of about 127.42 million as of July 1. The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled $5.55 trillion.

Japan's Debt Is So High, It Doesn't Even Fit On The Charts  - Let this be a reminder that the ongoing popularity of the yen and JGB (Japanese Government Bonds) should throw a big fat wrench into any notion that any simplistic ideas about the size of a country's debt, and the strength of their national financial instruments. A brief paper on global sovereign debt crises by Silvio Contessi at the St. Louis Fed (.pdf) includes this lovely chart. As you can see, they had to especially elongate the chart, just so they could fit Japan on there.

In Japan, Living Large In Really Tiny Houses : NPR - The Japanese have long endured crowded cities and scarce living space, with homes so humble a scornful European official once branded them rabbit hutches.But in recent years, Japanese architects have turned necessity into virtue, vying to design unorthodox and visually stunning houses on remarkably narrow pieces of land. In the process, they are also redefining the rules of home design.  Few Americans would consider a parking-space-sized lot as an adequate site to build a house. But in Japan, homes are rising on odd parcels of land, some as tiny as 300 square feet.

One In Six People In Japan Are Now 'Poor' - While Tokyo, and Japan, may seem like the land of plenty, it is also home to millions living below the poverty line. AFP reports that the number is approaching an astonishing one in six, or more than 21 million people in a country of 128 million. These people earn less than half the median household income, or less than US$1,830 per month per four-person family. The worst affected are single women, the unemployed, and the elderly. Indeed, there has been an increase in crime by pensioners over recent years, possibly because they know that in prison, they will be taken care of. When Japan went through an economic transformation from the 1960s until the 1990s, life-time employment was commonplace. But after two decades of relative stagnation, the appeal of a job for life among a young generation that already has it all, and the desire of companies to offer it, has been lost.

Is the party about to end in Brazil? - Last year, Brazil's bourse soared 83% and in May, its stocks comprised an astounding one-sixth of emerging markets portfolios. In February, new Sao Paulo apartment sales surged 84% year-on-year; vehicle purchases rose 30% a month later. And as Greece imploded, Brazil's economy grew at a torrid 9% pace. What fueled this boom? Seven years of soaring soy and steel exports to China, which sparked a virtuous circle of new manufacturing jobs, retail businesses and brisk home sales on flush credit by Brazil's growing middle class. But unlike prior upticks, this one has had staying power for this massive country of 192 million. Prudent fiscal policies under union leader-turned-president Luiz Inácio Lula da Silva helped tame Brazil's sky-high inflation, interest rates and a wildly fluctuating currency. But there are signs that winds could shift, despite the fact that the country is beginning to prepare for its moment in the global spotlight with the 2016 Olympics.

History Versus Expectations in Sub-Saharan Africa - Ngozi Okonjo-Iweala believes that sub-Saharan Africa "is on the verge of joining the ranks" of the so-called BRIC nations:  What trillion dollar economy has grown faster than Brazil and India between 2000 and 2010 in nominal dollar terms and is projected by the IMF to grow faster than Brazil between 2010 and 2015? The answer may surprise you: it is Sub-Saharan Africa... She supports these claims with a wealth of data on recent trends in growth, inflation, exchange reserves, foreign direct investment flows, receipts from international tourism, spreading democratization, declining gender disparities, and improved security.

The brain drain: New evidence - voxeu -Some argue that the global competition for talented workers leads to a “brain drain” robbing poor countries of their brightest sparks and stifling development. Others suggest that the local economy can benefit through trade, investment, and knowledge transfer. This column argues that for developing countries with the largest high-skilled migration, neither is spot on – by far the biggest impact is on the migrants themselves.

BBC News – Greek economy shrinks a further 1.5% - The Greek economy shrank by a further 1.5% in the second quarter of the year, Greece's statistics agency has said.  That adds to 0.8% decline in GDP recorded for the first three months of the year, suggesting that the decline in the economy is speeding up. Greece's GDP has fallen 3.5% since this time last year.The country has been forced to bring in severe public spending cuts since it sparked a Europe-wide debt crisis earlier this year. Greece's statistics agency Elstat said the "significant reduction" in public spending had contributed to the deepening of the country's recession.

A hard slog ahead - FIGURES for Greece’s economic output in the second quarter, released yesterday, are pretty bleak: the country sank deeper into recession, contracting 1.5% during the quarter, making a total decline of 3.5% over the past year. This is in sharp contrast to the heady growth seen in some other European countries—most notably turbocharged Germany. Across the 16-country euro zone, as well as the broader 27-member European Union, growth averaged a perky 1% last quarter. But Greece’s decline, and the weak growth of just 0.2% in two other troubled peripheral economies—those of Spain and Portugal—make it justifiable to talk of a two-speed recovery.

Spanish Crisis Threatens Second Front as Catalonia Rates Rise…Prime Minister Jose Luis Rodriguez Zapatero may face a second front in his battle to contain Spain’s fiscal crisis as borrowing costs for the country’s regional governments climb.  Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Galicia, in the northwest, has asked to freeze payments of debt it owes the central government and the Madrid region postponed a bond sale last month.  Spain’s regions, which borrowed at similar rates to the central government before the global credit crisis started in 2007, are key players in Zapatero’s drive to get his budget in order and push down the country’s borrowing costs. They control around twice as much spending as the state, employ more than half of all public workers and piled on debt during the recession.

European Bond Spreads: Starting to rise again? - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Aug 11th): Atlanta Fed: Peripheral European bond spreads (over German bonds) narrowed between the June and August FOMC meetings, though they were rising over the past week. Between the June and August FOMC meetings, the 10-year Greece-to-German bond spread has narrowed by 50 basis points (bps) (from 8.01% to 7.51%) through August 10, though it has risen by 12 bps in the past week. Similarly, with other European peripherals’ spreads, Portugal’s is lower by 54 bps during the period, and Spain’s is lower by 37 bps, though both are up from the week prior.  As of today, the Greece-to-German spread has widened to 7.98% (peaked at over 8%) and the Ireland-to-German spread has increased to 2.88%. Note: The Atlanta Fed data is a couple days old. Nemo has links to the current data on the sidebar of his site.

European banks: Distinguishing the walking wounded from the living dead - On forbearance lending, bank bailouts, and distinguishing the walking wounded from the living dead. Bank bailouts have been controversial from the outset, with some commentators saying that they reward banks for making risky loans. This column investigates the idea of an asset buyback in which a special purpose vehicle buys bad loans from banks' balance sheets. It argues that these buybacks could be structured to avoid windfall gains.

Germany to profit from growth in emerging Asia - With a lack of peripheral European and US demand, global economic growth is likely to come from emerging Asia.German competitiveness against the US, Japan and the rest of Europe has improved substantially due to the weakening euro and low unit labour costs.German labour costs are nearly 10% lower than in the rest of Europe. Asia provides huge new markets for sophisticated German products. The passenger car density in China resembles that of Germany in the 1950s, with only 40 people out of 1,000 owning a car. In  2009 Asia was responsible for 40% of global capital spending, as much as America and Europe combined

German Debt Ratio May Rise To 90% Of GDP On Bank Bailout - Report --The bailout of Germany's banking sector may swell the country's public debt rate to 90% of gross domestic product, Die Zeit weekly newspaper reports Wednesday.The weekly based this estimate on a recent decision by Eurostat requiring Germany to include the balance sheets of public-owned bad banks--set up to help financial institutions offload toxic and non-strategic assets--into its overall debt ratio.State-owned WestLB AG bank has already offloaded EUR77 billion into such a rescue bank. Going by the Eurostat decision, EUR54 billion of WestLB's toxic assets transferred to the bad bank must be included in Germany's overall debt level.Finance ministry spokeswoman, Jeanette Schwamberger, said the "winding-down entity of WestLB has already been included in the government's recently published calculations of the debt level."In July, it forecast Germany's debt level will rise from 73.1% in 2009 to 79% of GDP in 2010, 80% in 2011, to 80.5% respectively in 2012 and 2013 before easing to 80% in 2014.Die Zeit said that if nationalized mortgage lender Hypo Real Estate is added to the equation, Germany's debt level could widen to 90%.

Irish debt under fire on fresh bank jitters - Ireland’s borrowing costs have begun flashing warning signs again on fears the full damage from the country’s banking crisis has yet to surface. Spreads on Irish 10-year bonds reached 297 basis points over German Bunds on Wednesday amid reports the European Central Bank (ECB) is intervening to shore up Irish debt, a reversal of the bank’s plans to withdraw emergency support. The euro fell almost three cents against the dollar from $1.32 to $1.29. Patrick Honohan, governor of Ireland’s central bank and a member of the ECB’s council, dismissed the bond jitters as yet another spasm by jumpy and emotional markets. "The spreads are a setback for our hopes of a narrowing to reflect the fiscal credibility of the country. I don’t look at them every day but at this level they are ridiculous,"

Debt woes sap Europe's big-dream investments - Deep in debt after decades of borrowing too much and still running big deficits from the recession, European countries are scaling back some of expensive building and high-speed transport projects that over the decades have given life on the continent much of its glitter and convenience. In particular, the dream of a connected high-speed rail network across Europe looks increasingly distant. Rail visionaries have envisioned a vast, unified network based on north-south and east-west axes, linking such cities as Lisbon to Kiev and London to Budapest, and expanding the extensive French and German rail systems to embrace more of the continent. But Portugal is freezing construction of its strand needed to tie it together, while Hungary is slashing train routes, not laying new ones.

Euro Rescue Fund Insufficient, Imbalances Must Be Addressed - IMK - The euro rescue fund is insufficient to safeguard stability of the euro zone and greater effort is needed to tackle foreign trade imbalances, a leading German economic think tank said Wednesday."The euro rescue fund has saved the European Monetary Union from a breakup in the acute crisis," the Duesseldorf-based research institute IMK said. "But as long as the core, structural problems of the monetary union don't get solved, the stability remains precarious: Weak member states such as Greece have little chance to generate high growth under the present conditions and as a result to reduce their sovereign debt."Strict austerity in Greece could increase the country's problems because it will dampen the tax revenue needed for consolidation, it warned.Once the rescue measures expire and if the euro-zone's fundamentals haven't improved, there "is a high risk in the medium term for such countries to become a target of speculative attacks

European Industrial Production Unexpectedly Declines - European industrial production unexpectedly declined in June, led by a drop in durable consumer goods such as furniture and home appliances. Output in the economy of the 16 nations that use the euro dropped 0.1 percent from May, when it increased 1.1 percent, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 0.6 percent, the median of 32 forecasts in a Bloomberg survey showed. From a year earlier, June output gained 8.2 percent. Europe’s economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Factory orders in the U.S., the world’s biggest economy, fell more than economists forecast in June, while China’s industrial output rose the least in 11 months. Still, European economic confidence rose to a two- year high in July and manufacturing growth accelerated.

Rebalancing the World Economy - There is a fair amount of agreement that the world economy is in need of rebalancing. Countries like Iceland, Greece, Spain and the United States overspent prior to the crisis, financing the spending with government or private borrowing, while countries like Germany, Japan and China supplied those countries goods even while financing their spending habits.  Simply put, the consensus now requires U.S. households to save more and Chinese households to spend more in order to achieve the necessary rebalancing.  Of course, it is simplistic to reduce global trade imbalances to a bilateral imbalance between two countries. But since this is how the popular debate is posed, it is useful to ask whether rectifying the imbalances is only a matter of American and Chinese households switching personalities.

IMF On the Road to Seoul G-20 (11-12 November) - IMF First Deputy Managing Director John Lipsky recently gave a speech in Seoul, South Korea, anticipating the upcoming G-20 summit to be held there towards the end of the year. (By tradition, the IMF managing director is European, while the second in command is American--something that needs reviewing if the IMF is to become a more participatory international financial institutions.) Anyway, what Lipsky said is very much in the US line of argument that it could have emanated from the lips of Tim Geithner or Larry Summers: short-term spending to spur growth, medium-term fiscal consolidation when recovery is underway, and rebalancing via greater demand in surplus countries:

Marriage Counseling for the G-20 and the IMF - – The relationship between the International Monetary Fund and the G-20 is symbiotic but conflicted. Like a long-married couple who habitually bicker and fight, the two can’t seem to live together – but they can’t live apart, either. The question of what to do about this relationship is coming to a head in advance of the November G-20 summit chaired by South Korea. Since the 1997-1998 crisis, Asian governments have sought to keep their distance from the Fund. The IMF’s crisis-prevention efforts begin with its country surveillance, as provided for by Article IV of its Articles of Agreement. The problem with these exercises is that they are regularly relegated to the “duly noted” bin: governments receive them, file them away, and go back to doing what they were doing before.

Global Youth Unemployment Reaches New High, Report Says - Youth unemployment across the world has climbed to a new high and is likely to climb further this year, a United Nations agency said Thursday, while warning of a “lost generation” as more young people give up the search for work.  The agency, the International Labor Organization, said in a report that of some 620 million young people ages 15 to 24 in the work force, about 81 million were unemployed at the end of 2009 — the highest level in two decades of record-keeping by the organization, which is based in Geneva.  The youth unemployment rate increased to 13 percent in 2009 from 11.9 percent in the last assessment in 2007.  “There’s never been an increase of this magnitude — both in terms of the rate and the level — since we’ve been tracking the data,” said Steven Kapsos, an economist with the organization. The agency forecast that the global youth unemployment rate would continue to increase through 2010, to 13.1 percent, as the effects of the economic downturn continue. It should then decline to 12.7 percent in 2011.

81 million young workers unemployed in 2009 - The global financial and economic crisis has spurred a record increase in youth unemployment according to a new report from the International Labour Organisation. This deeply important structural issue for the UK and many other labour markets is not confined to developed nations. In developing / emerging economies where 90 per cent of young people live, youth are more vulnerable to underemployment and absolute poverty. The ILO reports that 152 million young people, or about 28 percent of all the young workers in the world, worked in 2009 but remained in extreme poverty in households surviving on less than US$1.25 per person per day in 2008.  More here from the Guardian and here is a link to the ILO report on the problems of youth unemployment in the global economy. And a report on long-term youth unemployment in the UK from the Telegraph.

Millions face 25% cut in pensions as inflation rules for final salary schemes are changed - Plans to shake up final salary pension schemes will cut payouts by up to 25 per cent, it has been claimed. Financial experts warn that the coalition government’s decision to change the way benefits are calculated will prove a ‘nightmare for millions’. Under the coalition’s proposals - which are being imposed without consultation - pension scheme payments would no longer have to keep pace with the Retail Prices Index. Instead firms would be allowed to use the Consumer Prices Index, which is usually lower.

U.K. Consumer Sentiment Drops to Lowest Since Aftermath of 2009 GDP Plunge – U.K. consumer confidence dropped in July for a third month, plunging to the lowest since the aftermath of the economy’s worst quarterly contraction in three decades last year, Nationwide Building Society said. The index of sentiment slumped 7 points from the previous month to 56, the customer-owned lender said in an e-mailed statement today. The result was the lowest since April 2009. A measure of expectations for the economy fell 13 points to 76.  The biggest budget cuts since World War II and faster inflation have undermined consumer confidence. The Bank of England may cut its forecasts for economic growth today after the U.S. Federal Reserve reversed plans to exit from aggressive monetary stimulus in a bid to support the recovery.

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